SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to .
Commission file number 333-14495-02
PANDA INTERHOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2660917
(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)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act: None
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 x No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Park III of this
Form 10-K or any amendment to this Form 10-K [x].
Aggregate market value of voting stock held by non-affiliates of the
registrant is not reflected herein because all voting stock of the
registrant is owned by an affiliate thereof.
As of March 25, 1998, the registrant had 1,000 shares of Common Stock,
$.01 par value, issued and outstanding.
Documents Incorporated by Reference
None
TABLE OF CONTENTS
PART I
Page
Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management 27
Item 13. Certain Relationships and Related Transactions 28
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K. 28
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements other than statements of historical fact
included in this Annual Report on Form 10-K, including, without
limitation, statements regarding financial position, projects
under evaluation or development, construction or other budgets
and plans and objectives for future operations, are forward-
looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's
expectations ("Cautionary Statements") include the impact of
geopolitical occurrences world-wide; the results of financing
efforts; risks under contracts and swap agreements; changes in
laws and regulations; unforeseen engineering and mechanical or
technological difficulties; and other risks described in the
registrant's filings from time to time with the Securities and
Exchange Commission. All subsequent written and oral forward-
looking statements attributable to the Company or persons acting
on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
Item 1. Business
General
Panda Interholding Corporation (the "Company") is an
indirect wholly-owned subsidiary of Panda Energy International,
Inc., a Delaware corporation, ("PEII"), and was organized in
Delaware on July 1, 1996. The Company has been organized for the
purposes of working with PEII and its affiliates in (i) investing
in and holding direct and indirect interests in entities engaged
in the development, construction, ownership, operation and
management of electric generating facilities, sources of fuel,
pipelines and other infrastructure projects, (ii) the marketing
of electric power, thermal energy and fuel, and (iii) the
financing of any of the above, including the entering into of
indentures, contracts and other agreements entered into in
connection with the purposes described in clauses (i) and (ii)
above.
The principal executive offices of the Company are located
at 4100 Spring Valley Road, Suite 1001, Dallas, Texas 75244. The
telephone number at such offices is (972) 980-7159.
The Company operates in only one segment: electric power
generation. Financial information regarding the Company's
industry segment and domestic operations is set forth in the
financial statements hereto.
Strategy
The Company and its affiliates primarily are engaged in the
domestic and international development, acquisition,
construction, ownership and operation of electric power
generation facilities.
The principal business strategy of the Company and its
affiliates is to use their experience in evaluating, developing,
constructing, financing and managing electric power generation
facilities to provide low-cost electricity and electric
generating capacity. In addition, the Company believes that the
global trend of electricity market restructuring has created new
business opportunities for businesses like the Company. There is
a trend away from government-owned electricity systems toward
deregulated, competitive market structures, in both domestic and
international markets. Many countries have rewritten their laws
and regulations to allow foreign investment and private ownership
of electricity generation, transmission or distribution systems.
Some countries have been or are in the process of "privatizing"
their electricity systems by selling all or part of such systems
to private investors. As a result, the Company believes that
there is demand for both new and more efficiently operated
electric generating capacity in many regions around the world.
The Company and its affiliates therefore are continuously
engaged in the evaluation of opportunities for the development
and acquisition of additional domestic and international electric
power generation facilities. For example, the Company and its
affiliates currently are evaluating the development of various
merchant plant facilities in the United States. Such facilities,
if developed and constructed, could take advantage of cost
effective construction and new technology, as well as an ability
to sell power into markets with growing demand and aging supplies
of energy. Also, the People's Republic of China (the "PRC"),
Nepal, Brazil and Central America are current international
strategic target markets for the Company and its affiliates.
Substantial risks exist to the successful completion of any
domestic or international projects under development or being
considered for acquisition, including, as the case may be, those
relating to political risk, exchange rate risk, currency
inconvertibility, financing, governmental approvals, siting,
construction and permitting, as well as possible termination of
any applicable power sales agreement as a result of the failure
to meet certain construction milestones. No assurance can be
given that any projects being evaluated or developed by the
Company or any of its affiliates will be completed. Further, no
assurance can be given that any projects developed by PEII or
other affiliates of the Company would be contributed to the
Company's portfolio of projects, depending on the application of
various agreements among PEII and certain of its affiliates.
The major changes currently taking place in the independent
power producer industry are necessitating changes in the
financing capabilities of companies such as PEII (and its
affiliates), particularly in respect to the financing of larger
size projects and merchant plants. In this regard, PEII is
looking to reduce its costs of funds, find new sources of equity
capital and increase its financing flexibility. Accordingly,
PEII has commenced a strategic initiative whereby it is seeking
potential strategic partners to help address these issues.
Donaldson, Lufkin & Jenrette Securities Corporation has been
engaged by PEII to assist PEII in this search for strategic
partners. However, there can be no assurance that any transaction
with strategic partners will ever take place, or, in the event
any such transaction does take place, as to the nature or
structure thereof.
Plants in Operation
The Panda-Rosemary Facility
General. The Panda-Rosemary Facility (herein so called) is
a combined-cycle cogeneration facility located in Roanoke Rapids,
North Carolina, with a total electric generating capacity of
approximately 180 megawatts. A cogeneration facility produces
electric energy and forms of useful thermal energy (such as heat
or steam), used for industrial, commercial, heating or cooling
purposes through the sequential use of one or more energy inputs.
A properly designed and constructed cogeneration facility is able
to convert the energy contained in the input fuel source to
useful energy outputs more efficiently than plants employing what
was, historically, conventional utility electrical generation
technology. The Panda-Rosemary Facility uses natural gas as its
primary fuel input to produce electric energy for sale to
Virginia Electric Power Company ("VEPCO") and to produce useful
thermal energy in the form of steam and chilled water for sale to
The Bibb Company ("Bibb") pursuant to the Rosemary Steam
Agreement (herein so called). On February 18, 1997, Bibb
announced that it would sell the textile facility to WestPoint
Stevens, Inc. ("WestPoint"). The closing of the sale was
reported in the news media on February 21, 1997. The Rosemary
Steam Agreement cannot be assigned without the Panda-Rosemary
Partnership's consent, which has not been given as of the date
hereof. While there has been no resolution to this matter as of
the date hereof, it is assumed that (for purposes of discussion
herein only) the sale of the textile facility has closed and that
WestPoint is the purchasing party under the Rosemary Steam
Agreement and lessor under the Rosemary Site Lease (defined
below). The Panda-Rosemary Partnership has continued to sell
steam and chilled water to the purchaser in substantially the
same amounts as it sold prior to the announcement of the sale.
The Panda-Rosemary Facility uses No. 2 fuel oil as an
alternate fuel in the event gas supplies or transportation are
curtailed. The Panda-Rosemary Facility was designed and
constructed by Hawker Siddeley Power Engineering.
The Panda-Rosemary Facility began commercial operations in
December 1990. The Panda-Rosemary Facility is certified as a
Qualifying Facility ("QF") under PURPA (defined below) and thus
is exempt from rate regulation as an electric utility under
federal and state law, provided that it continues to meet the
applicable requirements of the Public Utility Regulatory Policies
Act of 1978 ("PURPA").
The Panda-Rosemary Facility is designed to be operated in a
combined-cycle mode. It uses natural gas or fuel oil to power two
General Electric combustion turbine generators, a GE Frame 6 and
a GE Frame 7, each fitted with a heat recovery steam generator
("HRSG"). The HRSGs use the reject heat from the combustion
turbines that might otherwise dissipate to produce steam which
drives a steam turbine generator. The combustion and steam
turbines generate electric energy for sale to VEPCO. When the
Panda-Rosemary Facility is being dispatched, some of the steam
produced by the HRSGs is sold and some is used in two absorption
chillers to supply chilled water. The combustion turbines use
natural gas as their primary fuel and can use No. 2 fuel oil as
an alternate fuel. When the facility is not being dispatched, two
auxiliary boilers are available to be used to produce steam for
direct use and to produce chilled water for use by the purchaser
under the Rosemary Steam Agreement. The design of the Panda-
Rosemary Facility permits flexible operation, including the
production of both electricity and a sufficient amount of thermal
energy to meet QF requirements, using either one or both of the
combustion turbine generators.
Sale of Capacity and Electricity. The Panda-Rosemary
Partnership (herein so called), is an indirect wholly owned
subsidiary of the Company which owns the Panda-Rosemary Facility.
It sells electric capacity and energy to VEPCO pursuant to a
Power Purchase and Operating Agreement (the "Rosemary Power
Purchase Agreement"). The Rosemary Power Purchase Agreement has
an initial term ending December 26, 2015, and may be extended for
periods of up to five years if the parties so agree.
VEPCO has the right to dispatch the Panda-Rosemary Facility
(i.e., require the Panda-Rosemary Facility to deliver
electricity) on a daily basis within certain guidelines and
design limits (which specify load levels, start-up and shutdown
times and minimum run times consistent with prudent utility
practice).
The Rosemary Power Purchase Agreement provides for two types
of payments: a capacity payment and an energy payment. The
capacity payment is a fixed charge required to be paid regardless
of whether the Panda-Rosemary Facility is dispatched, subject to
reductions under certain circumstances as described below.
Energy payments are calculated based on the actual electrical
output transmitted to VEPCO and are designed to compensate the
Panda-Rosemary Partnership for its cost of fuel and its variable
operations and maintenance expense.
Monthly capacity payments throughout the term of the
Rosemary Power Purchase Agreement are calculated by multiplying
the Panda-Rosemary Facility's "Dependable Capacity" by the
following rates: $11.654 per kilowatt per month through December
1998; $10.821 per kilowatt per month through December 2005; and
$8.321 per kilowatt per month through December 2015. The Panda-
Rosemary Facility's Dependable Capacity is currently 165
megawatts for the summer period and 198 megawatts for the winter
period, which are the maximum Dependable Capacity levels for
which capacity payments must be made under the Rosemary Power
Purchase Agreement. Dependable Capacity is determined by semi-
annual tests which may be requested by VEPCO. Capacity payments
may be reduced in certain circumstances.
Energy payments are calculated based on the actual
electrical output transmitted to VEPCO and are designed to
compensate the Panda-Rosemary Partnership for its cost of fuel
and its variable operations and maintenance expense.
The Panda-Rosemary Partnership is required to maintain the
Panda-Rosemary Facility as a QF. VEPCO may terminate the Rosemary
Power Purchase Agreement within one year after the loss of QF
certification if the Panda-Rosemary Partnership has not obtained
all necessary governmental or regulatory approvals for the
Rosemary Power Purchase Agreement to remain in effect and for
electricity to continue to be sold to VEPCO.
Steam and Chilled Water Sales. The Panda-Rosemary
Partnership sells steam and chilled water for use in its textile
manufacturing facility, located adjacent to the Panda-Rosemary
Facility, pursuant the Rosemary Steam Agreement. The Rosemary
Steam Agreement has an initial term that expires on December 26,
2015. Upon expiration of the initial term, the purchaser has the
option to (i) negotiate a 10-year extension of the Rosemary Steam
Agreement, (ii) purchase the Panda-Rosemary Facility with VEPCO's
consent or (iii) terminate the Rosemary Steam Agreement. The
purchaser is obligated to pay $1.00 per 1,000 pounds of steam for
the first 45,000 pounds of steam delivered in an hour and $2.50
per 1,000 pounds of steam for any additional quantities of steam
delivered in an hour. The purchaser is obligated to pay the
following fixed prices for chilled water: $0.035/ton/hour through
December 27, 2000; $0.04/ton/hour thereafter through December 27,
2005; $0.045/ton/hour thereafter through December 27, 2010; and
$0.05/ton/hour thereafter through December 27, 2015.
Site Lease. The 4.83 acre site on which the Panda-Rosemary
Facility is located is leased to the Panda-Rosemary Partnership
pursuant to a Real Property Lease and Easement Agreement (the
"Rosemary Site Lease") in exchange for a nominal yearly rental
payment. The initial term of the Rosemary Site Lease expires on
December 31, 2015 and is automatically extended on the same terms
and conditions for 10 years if the Rosemary Steam Agreement is
extended for an additional 10-year period. At the Panda-Rosemary
Partnership's option, the initial term of the Rosemary Site Lease
may also be extended on the same terms and conditions for a 10-
year term if the Panda-Rosemary Partnership gives the lessor two
years' notice prior to December 31, 2015 and for an additional 10-
year term if the Panda-Rosemary Partnership gives the lessor two
years' notice prior to December 31, 2025, regardless of whether
the Rosemary Steam Agreement is extended or terminated.
Gas Supply and Fuel Management. The Panda-Rosemary
Partnership purchases certain quantities of natural gas on a firm
basis from Natural Gas Clearinghouse ("NGC") pursuant to a Gas
Purchase Contract (the "Rosemary Gas Supply Agreement"). The
Rosemary Gas Supply Agreement is effective through November 30,
2005, and thereafter from month-to-month until terminated by
either NGC or the Panda-Rosemary Partnership. NGC has agreed to
deliver natural gas on a firm basis to the Panda-Rosemary
Partnership, at pipeline points near the Gulf of Mexico or (at
the Panda-Rosemary Partnership's request and using the Panda-
Rosemary Partnership's firm transportation arrangements) to the
Panda-Rosemary Pipeline, up to the total contract quantity under
the Firm Gas Transportation Agreements (as defined below), which
is currently the thermal equivalent of 3,075 Mcf (one "Mcf"
constitutes one thousand cubic feet of natural gas) of natural
gas per day. The firm natural gas supplied under the Rosemary Gas
Supply Agreement enables the Panda-Rosemary Partnership to have
adequate natural gas supplies available to meet its estimate of
the requirements for steam and chilled water under the Rosemary
Steam Agreement.
The price paid by the Panda-Rosemary Partnership for natural
gas delivered by NGC is generally equal to an indexed price
(based upon monthly market-price indices determined by reference
to the receipt points where NGC delivers gas to the Panda-
Rosemary Partnership) plus $0.04 per MMBtu (one "MMBtu"
constitutes one million British thermal units). If natural gas is
required in daily volumes that are greater than those included in
monthly estimates delivered to NGC, the price for the excess
volume required is equal to NGC's actual cost incurred in
acquiring such excess plus $0.04 per MMBtu. If the Panda-Rosemary
Partnership fails to purchase the amount included in monthly
estimates delivered to NGC, and such failure is not excused by
force majeure, the Panda-Rosemary Partnership must pay NGC, as
liquidated damages for such failure, $0.14 for each MMBtu of
natural gas not purchased below the monthly estimates delivered.
Gas Transportation. The Panda-Rosemary Partnership receives
firm transportation service that provides for delivery to the
Panda-Rosemary Pipeline of up to the thermal equivalent of 3,075
Mcf of natural gas per day.
The rates and most of the significant terms and conditions
of service under these firm gas transportation agreements, are
set forth in the respective pipeline's effective Federal Energy
Regulatory Commission ("FERC") gas tariff. These rates, terms
and conditions are subject to review, approval and modification
by FERC.
Panda-Rosemary Pipeline. The Panda-Rosemary Partnership
owns, and North Carolina Natural Gas Corporation ("NCNG")
operates and maintains for the Panda-Rosemary Partnership, the
Panda-Rosemary Pipeline (herein so called), which runs for 10.26
miles through portions of Halifax and Northampton Counties, North
Carolina. The Panda-Rosemary Pipeline is located under, over and
upon properties owned, in certain instances, by private
landowners and, in others, by the State of North Carolina or the
City of Roanoke Rapids, pursuant to easement agreements or
encroachment agreements. The Panda-Rosemary Pipeline terminates
on a 1.26-acre parcel in Pleasant Hill Township, Northampton
County, North Carolina, which is owned by the Panda-Rosemary
Partnership. The meter stations and certain appurtenant
facilities interconnecting the Panda-Rosemary Pipeline and
certain interstate pipeline facilities are located on this
parcel.
The Panda-Rosemary Partnership has entered into a Pipeline
Operating Agreement with NCNG (the "Pipeline Operating
Agreement"), pursuant to which NCNG has agreed to operate the
Panda-Rosemary Pipeline and provide certain natural gas balancing
services for the Panda-Rosemary Partnership's gas supplies. The
term of the Pipeline Operating Agreement continues until December
27, 2005, and may be extended for two additional periods of five
years each upon the agreement of the parties.
Fuel Oil. The Panda-Rosemary Facility was constructed with
the capability to operate on No. 2 fuel oil and is designed to
change fuel sources from natural gas to fuel oil and back without
interrupting the generation of electricity. The Panda-Rosemary
Facility currently has on-site storage for approximately 2.0
million gallons of fuel oil, a supply sufficient to operate the
Panda-Rosemary Facility at full load for approximately 168 hours.
The Panda-Rosemary Partnership purchases fuel oil on a spot-
market basis. Since the fuel oil suppliers either own their own
trucks or have contracts with local trucking firms for regional
truck delivery and the purchase price includes delivery to the
Panda-Rosemary Facility, the Panda-Rosemary Partnership does not
independently arrange trucking service from the terminals to the
Panda-Rosemary Facility.
Operations and Maintenance. The Panda-Rosemary Partnership
purchases operations and maintenance services for the Panda-
Rosemary Facility from Panda Global Services, Inc. pursuant to an
Operation and Maintenance Agreement (the "Rosemary O&M
Agreement") which expires on December 31, 2003. Under the
Rosemary O&M Agreement, Panda Global Services, Inc. is to be
paid a fixed monthly fee of approximately $140,000 per month
during 1998, with annual adjustments based on changes in the
consumer price index for subsequent years. In addition, the
agreement includes bonus and penalty provisions based on
maintenance of dependable capacity levels, availability of the
Panda-Rosemary Facility for dispatch and the achievement of
certain safety and training goals established by the Panda-
Rosemary Partnership.
The Panda-Brandywine Facility
General. The Panda-Brandywine Facility (herein so called)
is a combined-cycle cogeneration facility located in Brandywine,
Maryland (near Washington, D.C.), with a total electric
generating capacity of 230 megawatts. The Panda-Brandywine
Facility uses natural gas as its primary fuel input and No. 2
fuel oil as an alternative fuel in the event that gas supplies or
transportation are curtailed. The Panda-Brandywine Facility was
constructed by Raytheon Engineers and Constructors, Inc.
("Raytheon") pursuant to the Amended and Restated Turnkey
Cogeneration Facility Agreement between the Panda-Brandywine
Partnership (herein so called), an indirect wholly owned
subsidiary of the Company which owns the Panda-Brandywine
Facility, and Raytheon (the "Brandywine EPC Agreement").
Raytheon has met its performance guarantees and the requirements
for commercial operations and substantial completion under the
Brandywine EPC Agreement although the date on which commercial
operations was achieved is the subject of a dispute between the
Panda-Brandywine Partnership and Raytheon. The Company currently
believes that the total amount in dispute is approximately $1.0
million. Such amount, if owed, would be payable over time and
from cash flows from the operation of the Brandywine Facility
which may otherwise have been available for distributions.
Pursuant to a power purchase agreement (the "Brandywine Power
Purchase Agreement") entered into in 1991 and amended in 1994,
the Panda-Brandywine Partnership sells the capacity of, and
energy produced by, the Panda-Brandywine Facility to Potomac
Electric Power Company ("PEPCO"), a utility that serves the
District of Columbia and parts of Maryland. The Panda-Brandywine
Facility commenced commercial operations under the Brandywine
Power Purchase Agreement on October 31, 1996. The term of the
Brandywine Power Purchase Agreement will expire on October 30,
2021.
The Panda-Brandywine Facility is currently leased by the
Panda-Brandywine Partnership pursuant to the Brandywine Facility
Lease (herein so called). The initial term of the Brandywine
Facility Lease is 20 years. At the end of the initial lease term,
so long as no default or event of default shall have occurred and
be continuing under the Brandywine Facility Lease, the Panda-
Brandywine Partnership may renew the Brandywine Facility Lease
for two consecutive five-year terms. Alternatively, the Panda-
Brandywine Partnership may purchase the Panda-Brandywine Facility
at fair sales market value at the end of the initial lease term
or any renewal term. If the Panda-Brandywine Partnership does not
renew the Brandywine Facility Lease or purchase the Panda-
Brandywine Facility, it must surrender possession of the Panda-
Brandywine Facility.
The Panda-Brandywine Facility is certified as a QF under
PURPA and thus is exempt from rate regulation as an electric
utility under federal and state law, provided that, upon and
during commercial operations, it continues to meet the applicable
requirements of PURPA.
Operations and Maintenance. The Panda-Brandywine
Partnership purchases operations and maintenance services from
Ogden Brandywine Operations, Inc. ("Ogden Brandywine") pursuant
to an Operation and Maintenance Agreement (the "Brandywine O&M
Agreement"). The Brandywine O&M Agreement is effective until
October 31, 1999, and may be extended thereafter by agreement of
the parties.
Sale of Capacity, Electricity and Steam. The Panda-
Brandywine Partnership sells electric capacity and energy to
PEPCO pursuant to the Brandywine Power Purchase Agreement. The
Brandywine Power Purchase Agreement has an initial term that
expires in October 2021, 25 years from the commercial operations
date, and may be extended by agreement of the parties.
The Brandywine Power Purchase Agreement provides for two
payments: a capacity payment and an energy payment. The capacity
payment is a fixed charge to be paid regardless of whether the
Panda-Brandywine Facility is dispatched, subject to reduction in
certain circumstances. Monthly capacity payments throughout the
term of the Brandywine Power Purchase Agreement are based on the
Panda-Brandywine Facility's dependable capacity, the capacity
rate and other factors. The capacity rate is a fixed schedule of
payments for each of the 25 years of the initial term of the
Brandywine Power Purchase Agreement, ranging (in kilowatt hour
per month) from $13.74 in 1997 to $23.63 in 2014, subject to
various adjustments, and also is subject to certain modifications
thereto, as described in "Dispute With PEPCO Over Calculation of
Capacity Payments" below.
The energy payment is determined in accordance with a series
of formulas that reflect specified heat rates, hours of
synchronization and operation and a combination of fixed and
market prices for natural gas. The Brandywine Power Purchase
Agreement provides that the energy price will be increased to
compensate the Panda-Brandywine Partnership for its variable
costs of fuel oil if the gas supply is interrupted. In such
event, the Brandywine Power Purchase Agreement specifies a base
cost of oil, which is escalated at the annual rate of change
according to an oil index described therein.
The Panda-Brandywine Partnership has constructed a seven-
mile long electric transmission line to connect the Panda-
Brandywine Facility and the transmission facilities of PEPCO.
Consolidated Rail Corporation entered into an agreement with the
Panda-Brandywine partnership to provide transmission line
easements for a portion of the transmission line. The Panda-
Brandywine Partnership transferred ownership of the transmission
line to PEPCO on October 30, 1996.
The Panda-Brandywine Partnership sells steam to the
Brandywine Water Company pursuant to a Steam Sales Agreement
dated March 30, 1995 (the "Brandywine Steam Agreement").
Brandywine Water Company, which is an indirect wholly owned
subsidiary of the Company, uses the steam to generate distilled
water which is sold locally. This production and sale of thermal
energy allows the Panda-Brandywine Facility to achieve QF status.
The Brandywine Steam Agreement continues until October 31, 2021
and may be extended by agreement of the parties for additional
terms of five years.
Gas Supply and Fuel Management. The Panda-Brandywine
Partnership purchases both firm and interruptible natural gas
supply from Cogen Development Company ("CDC") pursuant to the Gas
Sales Agreement, dated March 30, 1995, between the Panda-
Brandywine Partnership and CDC (the "Brandywine Gas Agreement").
MCN Corporation, the parent corporation of CDC, has
unconditionally guaranteed the payment and performance
obligations of CDC under the Brandywine Gas Agreement. The
Brandywine Gas Agreement commenced October 31, 1996 and continues
until October 31, 2011, and thereafter is automatically renewed
for an additional two-year term unless terminated by either party
upon nine months' written notice.
CDC is obligated to sell and deliver to the Panda-Brandywine
Partnership, at receipt points along the pipeline system of
Columbia Gas, up to 24,240 MMBtu of natural gas per day on a firm
basis and up to 24,240 MMBtu of gas per day on an interruptible
basis. Gas delivered by CDC within the firm basis limit falls
within one of the three following categories: "Limited Dispatch
Gas," "Scheduled Dispatch Gas" or "Dispatchable Gas" (each as
defined in the Brandywine Gas Agreement).
The price for the natural gas delivered by CDC varies
dependent upon the category of the natural gas delivered.
Gas Transportation. The Panda-Brandywine Partnership
purchases firm natural gas transportation service from Columbia
Gas Transmission Corporation ("Columbia Gas") pursuant to an
Amended and Restated FTS Service Agreement (the "Columbia Gas FT
Agreement"). Service under the Columbia Gas FT Agreement
commenced on November 1, 1996 and continues until October 31,
2021, and year-to-year thereafter unless terminated by either
party upon six months' notice.
Columbia Gas is obligated to provide the Panda-Brandywine
Partnership with up to 24,240 Dekatherms ("Dth") per day of firm
natural gas transportation service from a receipt point near
Monclova, Ohio to an interconnection between the facilities of
Columbia Gas and Cove Point LNG Limited Partnership ("Cove
Point") in Loudoun County, Virginia. Columbia Gas provides the
firm transportation service pursuant to the terms of the Columbia
Gas FT Agreement rate schedule and the general terms and
conditions of Columbia Gas's effective FERC natural gas tariff.
The Panda-Brandywine Partnership purchases from Cove Point
firm natural gas transportation service to transport natural gas
delivered by Columbia Gas to the facilities of Cove Point
pursuant to a FTS Service Agreement (the "Cove Point FT
Agreement"). The Cove Point FT Agreement continues until October
31, 2021.
Cove Point is obligated to provide the Panda-Brandywine
Partnership with up to 24,000 Dth per day of firm natural gas
transportation service from an interconnection between the
facilities of Cove Point and Columbia Gas in Loudoun, Virginia to
an interconnection between the facilities of Cove Point and
Washington Gas Light Company ("WGL") in Charles County, Maryland.
Cove Point provides the firm transportation service pursuant to
the Cove Point FT Agreement, and the general terms and conditions
of its effective FERC natural gas tariff.
The Panda-Brandywine Partnership purchases from WGL natural
gas transportation, natural gas sales and natural gas balancing
services pursuant to a Gas Transportation and Supply Agreement
(the "WGL Agreement"). The WGL Agreement continues until
October 31, 2021, and thereafter will continue year-to-year
unless terminated by either party upon six months' written
notice.
WGL is obligated to provide the Panda-Brandywine Partnership
with firm transportation service, up to the quantity of natural
gas nominated for such service on a given day, from an
interconnection between the facilities of Cove Point and WGL in
Charles County, Maryland to the interconnection between the WGL
facilities and the Panda-Brandywine Facility, provided that WGL
only must use its best efforts to deliver transportation natural
gas to the Panda-Brandywine Facility when the pressure on the
Cove Point pipeline is less than 500 psig. During the months of
January, February and December of any calendar year, WGL may,
under certain circumstances, request that the Panda-Brandywine
Partnership release to WGL for its system use a quantity of
natural gas purchased by the Panda-Brandywine Partnership under
the Brandywine Gas Agreement and transported to the WGL system.
Fuel Oil. The Panda-Brandywine Facility was constructed
with the capability to operate on No. 2 fuel oil and has the
ability to change fuel sources from natural gas to fuel oil and
back without interrupting the generation of electricity. The
Panda-Brandywine Facility has on-site storage for approximately
two million gallons of fuel oil, a supply sufficient to operate
the Panda-Brandywine Facility at full load for approximately six
days. In accordance with the fuel management plan for the Panda-
Brandywine Facility, which the Panda-Brandywine Partnership
developed with the assistance of its fuel manager (CDC) and which
was approved by PEPCO, the Panda-Brandywine Partnership will
endeavor to enter into fuel oil supply and transportation
contracts by October 10 of each year that will have a duration
through the immediately succeeding winter season (November
through March).
The Panda-Brandywine Partnership has entered into a Sales
Agreement with Northridge Petroleum Corporation ("Northridge")
and related Storage Agreement with Stratus Terminals, Inc.
pursuant to which the Panda-Brandywine Partnership purchased and
maintains one million gallons of No. 2 fuel oil in storage tanks
located near Baltimore, Maryland. The respective terms of these
Agreements commenced December 1, 1997 and terminate February 28,
1999. The Panda-Brandywine Partnership has access to the stored
fuel oil at all times. Upon request of the Panda-Brandywine
Partnership, Northridge will use its best efforts to replenish
any fuel oil removed from the storage tank at market-based prices
plus additional storage charges. If Northridge is not able to
purchase the requested fuel oil within a specified time period,
the Panda-Brandywine Partnership may purchase such fuel oil from
another supplier.
The Panda-Brandywine Partnership has also entered into an
agreement (the "Hardesty Transportation Agreement") with Hardesty
& Son, Inc. ("Hardesty") pursuant to which the Panda-Brandywine
Partnership has rights to firm transportation of a minimum of 20
truckloads of fuel oil per day during the months of December
through February and ten truckloads of fuel oil per day during
the months of March through November. Hardesty will use its best
efforts to provide additional transportation upon the request of
the Panda-Brandywine Partnership. If Hardesty is unable to
provide such additional transportation when requested, the Panda-
Brandywine Partnership may use other means of delivery. The
Hardesty Transportation Agreement continues until October 1, 1998
and will automatically be renewed for successive one-year terms
unless terminated by either party.
Water. The Panda-Brandywine Partnership has entered into a
25-year Treated Effluent Water Purchase Agreement ("Water Supply
Agreement") with the County Commissioners of Charles County,
Maryland to purchase up to 2.7 million gallons per day of treated
effluent from a local sewage treatment plant. Treated effluent is
a byproduct of the sewage treatment process and is used as the
primary cooling water source for the Panda-Brandywine Facility's
cooling towers. The treated effluent is transported from the
sewage treatment plant to the Panda-Brandywine Facility by a
buried transmission pipeline that has the capacity to supply up
to 3.0 million gallons per day.
Dispute With PEPCO Over Calculation of Capacity Payments.
In late August 1996, the Panda-Brandywine Partnership and PEPCO
commenced discussions concerning commercial operation
requirements of the Panda-Brandywine Facility and conversion of
the construction loan to long-term financing. During these
discussions, two disagreements arose between the Panda-Brandywine
Partnership and PEPCO as to how capacity payments should be
calculated under the Brandywine Power Purchase Agreement.
The Panda-Brandywine Partnership has reached a tentative
agreement with PEPCO to make certain modifications to the
Brandywine Power Purchase Agreement, which modifications resolve
various outstanding issues as to the method of calculation of
capacity payments thereunder.
The first significant outstanding issue involved a
disagreement between the Panda-Brandywine Partnership and PEPCO
as to the date on which the yield to maturity on United States
Treasury Bonds with a maturity of 12 years ("12-year T-Bonds")
should be determined under a provision in the Brandywine Power
Purchase Agreement that requires capacity payments to be reduced
if such interest rate is less than 8%. Such provision states that
the interest rate of 12-year T-Bonds is to be determined, and
adjustments to capacity payments made, as of the date that the
interest rate for permanent financing for the Panda-Brandywine
Facility is designated pursuant to an executed commitment for
such financing. On October 6, 1994, the Panda-Brandywine
Partnership entered into a written commitment with General
Electric Capital Corporation ("GE Capital") with respect to
permanent financing for the Panda-Brandywine Facility, which
commitment designated an interest rate for such financing.
Accordingly, the Panda-Brandywine Partnership took the position
that October 6, 1994 should be the date used to determine the
interest rate of 12-year T-Bonds under the Brandywine Power
Purchase Agreement. The interest rate for 12-year T-Bonds on such
date was 7.94% per annum. PEPCO, on the other hand, took the
position that since the interest rate designated in such
commitment was a floating rate, the date to be used for
determining the interest rate of 12-year T-Bonds was the closing
date of the conversion of the Brandywine construction loan
facility to long-term financing in the form of a leveraged lease,
which occurred on December 18, 1996. The interest rate for 12-
year T-Bonds on such date was 6.36%.
The second significant outstanding issue involved a
disagreement between PEPCO and the Panda-Brandywine Partnership
as to the determination of PEPCO's system peak load, which is the
basis for certain reductions in capacity payments under the
Brandywine Power Purchase Agreement. Under such provision,
capacity payments are to be reduced, commencing in 2006, if
PEPCO's system peak load does not exceed 5,697 megawatts prior to
1998, and are reduced by a greater amount if PEPCO's system peak
load does not exceed such amount prior to 1999. PEPCO and
Baltimore Gas & Electric Company ("BG&E") had announced their
intention to merge during 1997 into a new entity to be known as
Constellation Energy Corporation ("Constellation"), and PEPCO had
asked the Panda-Brandywine Partnership to agree that peak load
under the Brandywine Power Purchase Agreement would be calculated
on the basis of the pre-merger PEPCO system and not the post-
merger Constellation system. Peak load based on the Constellation
system would have greatly exceeded 5,679 megawatts during 1997.
However, PEPCO's position was that the parties intended to use
the then existing PEPCO system in calculating peak load and that
the merger with BG&E should be disregarded for such purpose. The
Panda-Brandywine Partnership disagreed with such position. The
Brandywine Power Purchase Agreement does not contain any
provision requiring adjustments due to mergers or
reorganizations. It was the Panda-Brandywine Partnership's
position that Constellation, as the successor of PEPCO, would be
substituted for PEPCO under the Brandywine Power Purchase
Agreement and the Constellation system would be used to calculate
peak load. It is the Panda-Brandywine Partnership's current
understanding that the proposed merger between PEPCO and BG&E has
been terminated.
Under the agreement, the first issue discussed above was
resolved by adjusting the schedule for capacity payments to be
made by PEPCO to the Panda-Brandywine Partnership under the
Brandywine Power Purchase Agreement such that the amount of
capacity payments to be made during the first ten years following
the commencement of commercial operations (which occurred on
October 31, 1996) will be increased and the amount of capacity
payments to be made during the last fifteen years of the term of
the Brandywine Power Purchase Agreement (which expires on October
30, 2021) will be reduced. The agreement provides that PEPCO
will pay to the Panda-Brandywine Partnership within two business
days following the effective date of the settlement (as discussed
below) approximately $3.8 million, which represents the
difference between the previously scheduled capacity payments and
the capacity payments due under the agreement for the first nine
months of 1997.
The second issue discussed above was resolved by the
tentative agreement of both parties to base the peak load
adjustment on PEPCO's peak load.
In return for the resolution of the aforementioned
significant issues, PEPCO has agreed that the Panda-Brandywine
Partnership may acquire the exclusive right to broker (as defined
by FERC) capacity from the Panda-Brandywine Facility for resale,
up to certain specified amounts and for specified periods. PEPCO
will sell the capacity pursuant to its power sales tariff
currently on file with the FERC. The amount of released capacity
to be made available for brokering to the Panda-Brandywine
Partnership is 130 megawatts for the period January - May 1998,
200 megawatts for the period June 1998 - May 1999, and 100
megawatts for the period June 1999-May 2000. The Panda-
Brandywine Partnership will pay PEPCO $1.25/kilowatt/month for
the capacity released.
In addition, PEPCO has agreed to release to the Panda-
Brandywine Partnership on a periodic basis through the year 2002
the rights to sell energy for resale, which energy may or may not
be from the capacity released described above. Such releases
will be based upon PEPCO's projections of future facility
operations required to serve PEPCO's needs. Sales of energy not
related to released capacity will be subject to the availability
of the Panda-Brandywine Facility. Sales of energy outside the
Pennsylvania-New Jersey-Maryland Interconnection ("PJM Pool") not
related to released capacity will be on an interruptible basis in
accordance with PJM Pool rules and requirements.
In connection with sales of released energy, the Panda-
Brandywine Partnership may function as a power marketer or power
broker (in either case, as defined by FERC). If the Panda-
Brandywine Partnership elects to function as a power marketer, it
must become a member of the PJM Pool. In either case, the Panda-
Brandywine Partnership will be required to obtain all necessary
authorizations and approvals to engage in such transactions,
including any authorizations and approvals required by FERC. If
the Panda-Brandywine Partnership functions as a power marketer,
it will be required to pay PEPCO a base fee equal to two percent
of the Panda-Brandywine Partnership's gross revenues from each
sale of released energy, subject to an additional incentive
payment of up to 50% of the base fee based on the timing of
releases by PEPCO of blocks of energy available for resale by the
Panda-Brandywine Partnership.
If the Panda-Brandywine Partnership functions as a power
broker, it will be required to pay PEPCO a base fee, subject to
the incentive adjustment as described above, plus an additional
fee of one percent of the gross revenues from each sale. The PJM
Pool, not PEPCO, will supply transmission service. The agreement
also provides that PEPCO will enter into good faith negotiations
with the Panda-Brandywine Partnership prior to the end of the
year 2002 with respect to energy releases after 2002, although
neither party is obligated to enter into any such agreement
unless it is to their mutual economic benefit.
The agreement further provides that for purposes of
determining PEPCO's system peak load which is the basis for
reductions in capacity payments under the Brandywine Power
Purchase Agreement following any merger or other combination of
PEPCO with another utility, the actual peak load experienced by
the portion of the merged or combined company's system that
constituted the PEPCO system prior to such merger or combination
shall be used.
The agreement further provides that the Panda-Brandywine
Partnership will enter into good faith negotiations with PEPCO on
a buyout or buydown of the Brandywine Power Purchase Agreement in
a manner that maximizes and equitably shares the benefits of such
transaction between the parties, although neither party is
obligated to enter into any buyout or buydown agreement unless it
is to their mutual economic benefit.
The effectiveness of the agreement with PEPCO is subject to
the consent of the financing parties, including GE Capital, under
the long-term financing arrangements for the Panda-Brandywine
Facility. In this regard, the Panda-Brandywine Partnership has
commenced discussions with GE Capital and the other financing
parties concerning such consents, and has executed an agreement
in principle with GE Capital. Among other things, this agreement
in principle provides for (i) the re-allocation of lease payments
from the Panda-Brandywine Partnership to GE Capital in order to
match the revised capacity payments schedule with PEPCO, (ii) the
reimbursement to GE Capital by the Panda-Brandywine Partnership
of certain fees, and (iii) certain technical amendments to the
applicable financing documents. The closing of the agreement in
principle is subject to several conditions, including but not
limited to written consents from all other financing parties and
other applicable parties, receipt of legal opinions concerning
the tax and regulatory consequences of the transaction, and the
preparation of definitive legal documentation of the transaction
to the satisfaction of all parties involved.
To the Company's knowledge, no regulatory consents are
required in order for the agreement between PEPCO and the Panda-
Brandywine Partnership to take effect. There can be no assurance
that the requisite consents from GE Capital or the other
applicable financing parties can be obtained or that the
agreement with PEPCO will ever become effective.
Competition
The business of developing electric generating power plants
is intensely competitive. The Company and its affiliates compete
both domestically and internationally with other independent
power producers, including affiliates of utilities.
Development of new power generation projects in foreign
markets is difficult and expensive, and many competitors in these
foreign markets have significantly larger capital resources and
greater local market expertise than the Company. In addition, due
to increased competition in the United States, there has been an
increasing number of entrants into these foreign markets.
In the United States, over the past decade, developing
electric generating power plants has become a progressively more
difficult, expensive and competitive process. In recent years,
more of such transactions have been awarded through competitive
bidding. Increased competition also has lowered profit margins of
successful projects in the United States.
Regulatory Matters
Regulation of the Electric Power Industry in the United States
Projects of the Company located in the United States are
subject to complex and stringent energy, environmental and other
governmental laws and regulations at the federal, state and local
levels in connection with the development, ownership and
operation of its electricity generation facilities. Federal laws
and regulations govern transactions by electric and gas utility
companies, the types of fuel that may be utilized by an electric
generating facility, the type of energy that may be produced by
such a facility and the ownership of the facility. State utility
regulatory commissions must approve the rates and terms and
conditions under which public utilities sell electric power at
retail and, under certain circumstances, purchase electric power
from independent producers. Under certain circumstances where
specific exemptions are otherwise unavailable, state utility
regulatory commissions may have broad jurisdiction over non-
utility electric power generation facilities. Energy producing
projects located in the United States also are subject to
federal, state and local laws and administrative regulations
governing the emissions and other substances produced, discharged
or disposed of by a facility and the geographical location,
zoning, land use and operation of a facility. Applicable federal
environmental laws typically have state and local enforcement and
implementation provisions. These environmental laws and
regulations generally require that a variety of permits and other
approvals be obtained before the commencement of construction or
operation of an energy-producing facility and that the facility
then operate in compliance with those permits and approvals.
Federal and State Energy Regulation
PURPA. PURPA and the regulations promulgated thereunder
provide certain rate and regulatory incentives to an electric
generating facility that is a qualifying cogeneration or small
power production facility (a "QF" or "Qualifying Facility"). The
Panda-Rosemary Facility and the Panda-Brandywine Facility are
QFs. A cogeneration facility is a QF if it (i) sequentially
produces both electricity and useful thermal energy that is used
for industrial, commercial, heating or cooling purposes, (ii)
meets certain energy efficiency and operating standards when oil
or natural gas is used as a fuel source and (iii) is not more
than 50%-owned by an electric utility, electric utility holding
company or an entity or person owned by either or any combination
thereof.
Under PURPA and the regulations promulgated thereunder, QFs
receive two primary benefits. First, most types of QFs are exempt
from most provisions of the Public Utility Holding Company Act of
1935, as amended ("PUHCA"), and from most provisions of the
Federal Power Act, as amended (the "FPA"), while all QFs are
exempt from certain state laws relating to organizational, rate
and financial regulation. Second, regulations promulgated by the
FERC under PURPA require that (i) electric utilities purchase
electricity generated by QFs, construction of which commenced on
or after November 9, 1978, at a price based on the purchasing
utility's full "avoided costs" and (ii) the utilities sell
supplementary, back-up, maintenance and interruptible power to
the QFs on a just and reasonable and non-discriminatory basis.
PURPA and the regulations promulgated thereunder define "avoided
costs" as the "incremental costs to an electric utility of
electric energy or capacity or both which, but for the purchase
from the qualifying facility or qualifying facilities, such
utility would generate itself or purchase from another source."
Utilities may also purchase power from QFs at prices other than
"avoided costs" pursuant to negotiations as provided by FERC
regulations. Any merchant plant, if developed and constructed by
the Company in the United States probably would not qualify as a
QF, but nonetheless probably would be exempt from most provisions
of PUHCA by virtue of being an "exempt wholesale generator" "or
"EWG" (described hereinbelow).
The FERC's regulations also provide that if energy or
capacity is provided pursuant to a legally enforceable obligation
over a specified term, avoided costs may be determined, at the
option of the QF, either at the time the energy or capacity is
delivered or as calculated at the time the obligation is
incurred. The FERC's regulations further provide that, in the
case of rates based on estimates of avoided costs over the term
of a contract, the rates do not violate the FERC's rates if the
rates for such purchases differ from avoided costs at the time of
delivery.
In certain instances, payments based upon avoided costs
estimated at the time a contract is entered into have proven to
be greater than a utility's avoided costs at the time of
delivery. Many utilities have attempted to minimize the disparity
by implementing strategies designed to reduce avoided cost
payments under such contracts to levels that the utilities
believe will be more competitive in a short-term marginal cost
electric energy market. Such strategies include attempts to
renegotiate or buy out power purchase contracts with QFs. Some
utilities have sought rigorously to enforce the terms of such
contracts and to exercise their contractual termination rights if
the contracts are not strictly observed. In addition, some
utilities have engaged in litigation and regulatory action
against QFs to achieve these ends.
The FERC has refused to disturb QF contract rates on two
operating projects where estimates of a utility's avoided costs,
calculated at the time the contracts were signed, were higher
than the actual avoided costs at the time of delivery and the
contract rates were not challenged at the time the contracts were
signed and were not the subject of an ongoing challenge to the
state's avoided cost determination. New York State Electric & Gas
Corporation, 71 FERC 61,027, reconsideration denied, 72
FERC 61,067 (1995). This decision is currently the subject of a
complaint filed in the United States District Court for the
Northern District of New York.
Relying in part on the FERC's regulations, a federal court
of appeals has held that once a state commission has approved (by
final and nonappealable order) a QF contract rate as being
consistent with avoided costs, just, reasonable and prudently
incurred, any action or order by the state commission to
reconsider its approval or deny the pass-through of the QF's
charges to the utility's retail customers under purported state
authority is preempted by PURPA. Freehold Cogeneration Assocs.,
L.P. v. Board of Regulatory Comm'rs of New Jersey, 44 F.3d 1178
(3rd Cir.), cert. denied sub nom., Jersey Central Power & Light
Co. v. Freehold Cogeneration Assocs., L.P., 116 S. Ct. 68
(1995).
In Independent Energy Producers Assoc. v. California Public
Utilities Comm'n, 36 F.3d 848 (9th Cir. 1994), the U.S. Court of
Appeals for the Ninth Circuit held that states are not preempted
by PURPA from instituting a program that requires QFs to submit
operating data, to purchasing utilities for monitoring compliance
with QF status requirements, as long as the monitoring
requirements do not impose an undue burden on the QFs. However,
the same court determined that states and utilities are preempted
by federal law from taking action on their determination that a
QF is no longer in compliance with QF status requirements, other
than requesting that the FERC revoke the facility's QF status,
either by filing a request for revocation or by filing a petition
for a declaratory order that the facility is no longer a QF.
On May 29, 1996, VEPCO filed with the State Corporation
Commission of the Commonwealth of Virginia ("SCC") a request for
authorization to institute a formal QF status monitoring program.
On June 13, 1997, the SCC issued an order authorizing such a
monitoring program. The order states that the monitoring program
would apply to all QFs that have entered into power purchase
agreements with VEPCO. Under the program, QFs must submit to
VEPCO by July 1 of each year certain operational data from the
previous year and indicate significant changes from previous
years. VEPCO must report to the SCC by October 1 of each year
the results of VEPCO's QF compliance evaluation. VEPCO may seek
a declaration from the FERC that a QF does not qualify under the
FERC's rules.
The North Carolina Utilities Commission ("NCUC") has
disallowed the pass-through to VEPCO's North Carolina retail
rates of a portion of capacity payments VEPCO had been making to
several non-utility generation plants. The capacity payment rates
for the plants had been determined by an arbitrator and approved
by the SCC. The NCUC found that bids from a 1988 solicitation
(the "1988 VEPCO Solicitation") were available at the time the
contract was approved and should have been used, instead of
arbitration, to determine VEPCO's avoided costs. The NCUC ruled
that rates in excess of the rates derived from bids received in
the 1988 VEPCO Solicitation were therefore disallowed in VEPCO's
North Carolina retail rates. The North Carolina Supreme Court
upheld the NCUC's decision, saying that the NCUC had simply
disallowed rates above avoided costs. North Carolina Utilities
Comm'n v. North Carolina Power, 338 N.C 412, 450 S.E.2d 896
(1994). The United States Supreme Court declined to review that
decision.
While the Rosemary Power Purchase Agreement with VEPCO was
not specifically approved by the SCC, the SCC did approve the
1988 VEPCO Solicitation that resulted in the Rosemary Power
Purchase Agreement. Although the NCUC used the 1988 VEPCO
Solicitation to determine the avoided costs in the North Carolina
decision discussed above, there can be no assurance that it would
not disallow the pass-through of the Rosemary Power Purchase
Agreement rates, which arose from the 1988 VEPCO Solicitation. If
the NCUC were to disallow such pass-through, and if the courts
were to allow the decision to stand, the Company believes that
any such disallowance would affect only that portion of VEPCO's
rates allocated to its North Carolina retail customers. The
Brandywine Power Purchase Agreement has been approved by both the
Maryland and District of Columbia Public Service Commissions.
The Company endeavors to develop its U.S. projects, monitor
compliance by the U.S. projects with applicable regulations and
choose its customers in a manner which minimizes the risks of
losing QF status. Certain factors necessary to maintain QF status
are, however, subject to the risk of events outside the Company's
control. For example, loss of a thermal energy customer or
failure of a thermal energy customer to take required amounts of
thermal energy from a cogeneration facility that is a QF could
cause the facility to fail to satisfy the criteria required for
QF status regarding the level of useful thermal energy output.
Upon the occurrence of such an event, the Company would seek to
replace the thermal energy customer or find another use for the
thermal energy that meets PURPA's requirements, but no assurance
can be given that this would be possible.
If one of the U.S. projects which is a QF and in which the
Company has an interest should lose its status as a QF, such
project would no longer be entitled to the exemptions from PUHCA
and the FPA. This could subject the U.S. project to rate
regulation as a public utility under the FPA and state law and
could result in the Company or certain of its affiliates
inadvertently becoming a public utility holding company by owning
more than 10% of the voting securities of, or controlling, a
facility that would no longer be exempt from PUHCA. This could
cause all of the Company's remaining U.S. projects which are QFs
to lose their QF status, because QFs may not be controlled, or
more than 50%-owned, by public utility holding companies. Loss of
QF status could also trigger defaults under covenants to maintain
QF status in the Company's U.S. project power purchase
agreements, steam sales agreements and financing agreements and
result in termination, penalties or acceleration of indebtedness
under such agreements. A facility may lose its QF status on a
retroactive or a prospective basis.
If a U.S. project which is a QF were to lose its QF status
(because, for example, it lost its steam customer), the Company
and its affiliates could attempt to avoid holding company status
(and thereby protect the QF status of its other QF projects) on a
prospective basis by restructuring its interests in the U.S.
project. For instance, the Company could change its voting
interest in the entity owning the nonqualifying project to
nonvoting or limited partnership interests and sell the voting
interest to an individual or company which could tolerate the
lack of exemption from PUHCA, or by otherwise restructuring
ownership of the project so as not to become a holding company.
These actions, however, would require approval of the Securities
and Exchange Commission (the "SEC") or a no-action letter from
the SEC, and would result in a loss of control over the
nonqualifying project, could result in a reduced financial
interest therein and might result in a modification of the
operation and maintenance agreement relating to such project. A
reduced financial interest could result in a gain or loss on the
sale of the interest in such project, the removal of the
affiliate through which the ownership interest is held from the
consolidated income tax group or the consolidated financial
statements of the Company and its affiliates, or a change in the
results of operations of the Company and its affiliates. Loss of
QF status on a retroactive basis could lead to, among other
things, fines and penalties being levied against the Company and
its affiliates, and its subsidiaries and claims by utilities for
refund of payments previously made.
Under the Energy Policy Act of 1992 ("Energy Policy Act"), a
company engaged exclusively in the business of owning and/or
operating a facility used for the generation of electric energy
exclusively for sale at wholesale may be exempted from PUHCA as
an "exempt wholesale generator" or "EWG." An exempt wholesale
generator may not make retail sales of electricity in the U.S. If
a project can be qualified as an EWG under Section 32 of PUHCA it
will be exempt from PUHCA even if it does not qualify as a QF.
Therefore, if a QF in the Company's project portfolio were to
lose its QF status, the Company could apply to have the project
qualified as an EWG. However, assuming this changed status would
be permissible under the terms of the applicable power purchase
agreement, rate approval from FERC would be required. In
addition, the project would be required to cease selling
electricity to any retail customers (such as the thermal energy
customer) and could become subject to state regulation of sales
of thermal energy.
PUHCA. PUHCA provides that any corporation, partnership or
other entity or organized group that owns, controls or holds
power to vote 10% or more of the outstanding voting securities of
a "public utility company" or a company that is a "holding
company" of a public utility company is subject to regulation
under PUHCA, unless an exemption is established or an SEC order
declaring it not to be a holding company is granted. Registered
holding companies under PUHCA are required to limit their utility
operations to a single integrated utility system and to divest
any other operations not functionally related to the operation of
the utility system. In addition, a public utility company that is
a subsidiary of a registered holding company under PUHCA is
subject to financial and organizational regulation, including
approval by the SEC of certain of its financing transactions.
As discussed above, most types of QFs are exempt from most
of the provisions of PUHCA. A foreign utility company is also
exempt from most of the provisions of PUHCA if certain notice and
other requirements are satisfied.
FPA. Under the FPA, the FERC has exclusive rate-making
jurisdiction over wholesale sales of electricity and transmission
in interstate commerce. These rates may be determined on either a
cost-of-service basis or a market-based approach. If a QF in the
Company's project portfolio were to lose its QF status, the rates
set forth in the applicable power purchase agreement would have
to be filed with the FERC and would be subject to initial and
potentially subsequent reviews by the FERC under the FPA, which
could result in reductions to the rates.
Industry Restructuring Proposals. The United States
Congress is currently considering legislation to repeal PURPA
entirely, or at least to repeal the obligation of utilities to
purchase from QFs. There is strong Congressional support for
grandfathering contracts of existing QFs if such legislation is
passed, and also support for requiring utilities to conduct
competitive bidding for new electric generation if the PURPA
purchase obligation is eliminated.
The FERC and many state utility commissions are currently
studying a number of proposals to restructure the electric
utility industry in the United States to permit utility customers
to choose their utility supplier in a competitive electric energy
market. The FERC has issued a final rule requiring utilities to
offer wholesale customers and suppliers open access on their
transmission lines, on a basis comparable to the utilities' own
use of the lines. Although the rule (Order No. 888) is currently
the subject of a petition for review in the United States Court
of Appeals for the D.C. Circuit, many utilities have already
filed "open access" tariffs. The utilities contend that they
should recover from departing customers their fixed costs that
will be "stranded" if their wholesale customers choose new
electric power suppliers. These stranded costs include the
capacity costs utilities are required to pay under many QF
contracts, which the utilities view as excessive when compared
with current market prices for capacity. Many utilities are
therefore seeking ways to lower these contract prices or
terminate the contracts altogether, out of fear that their
shareholders will have to bear all or part of such "stranded"
costs. Some utilities have engaged in litigation against QFs to
achieve these ends. The FERC's rule allows full recovery of
"legitimate and verifiable" prudently incurred stranded costs at
the wholesale level. However, the FERC has jurisdiction over only
a small percentage of electric rates, and there is likely to be
litigation over whether wholesale stranded costs are "legitimate
and verifiable."
In addition to restructuring proposals being considered by
regulatory agencies, a number of bills have been introduced in
the U.S. Congress to promote electric utility restructuring and
deregulation of electric rates. These bills differ as to how and
to what extent a utility's "stranded" or "transition" costs would
be recoverable if current captive customers left the utility's
system. The existence of this legislation may increase the desire
of utilities to renegotiate, buy out or attempt to terminate
existing power purchase agreements containing prices that the
utilities believe will not be competitive in a short-term
marginal cost electric energy market. In addition, if electric
energy prices are deregulated, electric energy producers will
have to sell electric energy at competitive market prices. In
Virginia, a restructuring bill has passed the two houses of the
state legislature, and has been sent to the governor, whose
signature is required for such bill to become law.
State Regulations. State public utility commissions
("PUCs") have broad authority to regulate both the rates charged
by and financial activities of electric utilities, and to
promulgate regulations implementing PURPA. Since a power purchase
agreement will become a part of a utility's cost structure (and
therefore generally is reflected in its retail rates), power
purchase agreements from independent power producers are
potentially subject to the regulatory purview of PUCs,
particularly the process by which the utility has entered into
the power purchase agreements. If a PUC has approved the process
by which a utility secures its power supply, a PUC generally will
be inclined to allow a utility to "pass through" the expenses
associated with an independent power contract to the utility's
retail customers. Moreover, a federal court of appeals has held
in one instance that a PUC may not disallow the full
reimbursement to a utility for the purchase of electricity from a
QF once the PUC has approved the rates as consistent with the
requirements of PURPA. See Freehold Cogeneration Assocs., L.P. v.
Board of Regulatory Comm'rs of New Jersey, 44 F.3d 1178 (3rd
Cir.), cert. denied sub nom., Jersey Central Power and Light Co.
v. Freehold Cogeneration Assocs., L.P., 116 S. Ct. 68 (1995). In
addition, retail sales of electricity or thermal energy by an
independent power producer may be subject to PUC regulation,
depending on state law.
Independent power producers that are not QFs under PURPA are
considered to be public utilities in many states and are subject
to broad regulation by PUCs ranging from the requirement that
certificates of public convenience and necessity be obtained to
regulation of organizational, accounting, financial and other
corporate matters. However, sales of electricity at wholesale (as
are currently contemplated by the Company regarding merchant
plants which it might develop in the U.S.) are subject to the
exclusive regulatory jurisdiction of the FERC. In addition,
states may assert jurisdiction over the siting and construction
of such facilities, and over the issuance of securities and the
sale or other transfer of assets by these facilities that are not
QFs.
State PUCs also have jurisdiction over the transportation
and retail sale of natural gas by local distribution companies.
Each state's regulatory laws are somewhat different; however, all
generally require a local distribution company to obtain approval
from the PUC to provide services and construct facilities. The
rates of local distribution companies are usually subject to
continuing oversight by the PUC.
In the case of the Panda-Rosemary Facility, the Panda-
Rosemary Partnership is subject to a number of conditions imposed
by the North Carolina Utilities Commission ("NCUC") pursuant to a
Certificate of Public Convenience and Necessity ("CPCN"),
including that the Panda-Rosemary Facility and the Rosemary
Pipeline both be owned by the Panda-Rosemary Partnership, that
the Panda-Rosemary Partnership not transport gas for or sell or
deliver gas to any other entity, that all electricity generated
at the Panda-Rosemary Facility be sold to an electric utility and
that all thermal energy produced at the Panda-Rosemary Facility
be sold only to the textile mill to which steam and chilled water
from the Panda-Rosemary Facility are currently delivered. On
February 18, 1997, The Bibb Company ("Bibb") announced that it
would sell the textile mill to WestPoint Stevens, Inc.
("WestPoint"). The closing of the sale was reported in the news
media on February 21, 1997. If, in fact, Bibb is no longer the
owner of the textile mill, the Panda-Rosemary Partnership is
obligated to notify the NCUC and VEPCO and the NCUC could order
such further proceedings as it deemed appropriate, which
proceedings could result in revocation of the CPCN or the
imposition of other conditions.
Natural Gas Regulation. The Company has an indirect 100%
interest in and operates two natural gas-fired cogeneration
projects in the United States, one of which is owned and one of
which is under a long term lease financing arrangement. The cost
of natural gas (other than debt costs) is ordinarily the largest
expense of a gas-fired power project and is critical to the
project's economics. The risks associated with using natural gas
can include the need to arrange transportation of the gas across
great distances, including obtaining removal, export and import
authority if the gas is transported from Canada, the possibility
of interruption of the natural gas supply or transportation
(depending on the quality of the natural gas reserves purchased
or dedicated to the project, the financial and operating strength
of the gas supplier and whether firm or non-firm transportation
is purchased), and obligations to take a minimum quantity of gas
or pay for it (take-or-pay obligations).
Pursuant to the Natural Gas Act, the FERC has jurisdiction
over the transportation and storage of natural gas in interstate
commerce. With respect to most transactions that do not involve
the construction of pipeline facilities, regulatory authorization
can be obtained on a self-implementing basis. However, pipeline
rates for such services are subject to continuing FERC oversight.
Order No. 636, issued by the FERC in April 1992, mandated the
restructuring of interstate natural gas pipeline sales and
transportation services. The restructuring required by the rule
includes (i) the separation ("unbundling") of a pipeline's sales
and transportation services, (ii) the implementation of a
straight fixed-variable rate design methodology under which all
of a pipeline's fixed costs are recovered through its reservation
charge, (iii) the implementation of a capacity release mechanism
under which holders of firm transportation capacity on pipelines
can release that capacity for resale by the pipeline, and (iv)
the opportunity for pipelines to recover 100% of their prudently
incurred costs ("transition costs") associated with implementing
the restructuring mandated by the rule.
Environmental Regulations. The development, construction
and operation of power projects in the United States is subject
to extensive federal, state and local laws and regulations
adopted for the protection of the environment and to regulate
land use. The laws and regulations applicable to the Company and
its subsidiaries primarily involve the discharge of emissions
into the water and air and the use of water, but can also include
wetlands preservation, endangered species, waste disposal and
noise regulations. These laws and regulations in many cases
require a lengthy and complex process of obtaining licenses,
permits and approvals from federal, state and local agencies.
Noncompliance with environmental laws and regulations can
result in the imposition of civil or criminal fines or penalties.
In some instances, environmental laws also may impose clean-up or
other remedial obligations in the event of a release of
pollutants or contaminants into the environment. The following
federal laws are among the more significant environmental laws
that may apply to the Company and its domestic subsidiaries. In
most cases, analogous state laws also exist that may impose
similar, and in some cases more stringent, requirements on the
Company and its subsidiaries.
Clean Air Act. The Federal Clean Air Act, as amended (the
"Clean Air Act"), provides for the regulation, largely through
state implementation of federal requirements, of ambient air
quality and emissions of air pollutants from certain facilities
and operations. As originally enacted, the Clean Air Act set
guidelines for emissions standards for major pollutants (e.g.,
sulfur dioxide and nitrogen oxide) from new sources. The 1990
Clean Air Act Amendments tightened regulations on emissions from
existing sources, particularly previously exempted older power
plants.
Clean Water Act. The Federal Clean Water Act, as amended
(the "Clean Water Act"), also provides for the regulation,
largely through state implementation of federal requirements, of
the quality of surface waters and imposes limitations on
discharges to those waters from point sources, including certain
facilities and operations. The water quality standards
established under the Clean Water Act are used as the basis for
developing specific pollutant discharge limitations from point
sources. The discharge limitations are incorporated into permits
called National Pollutant Discharge Elimination System ("NPDES")
permits. The Clean Water Act also imposes requirements with
respect to the discharge of stormwater runoff from industrial
sites. Those requirements are implemented through state
stormwater discharge permits. The Clean Water Act also restricts
discharges of fill materials to wetlands.
Resource Conservation and Recovery Act. The Resource
Conservation and Recovery Act of 1976 ("RCRA") regulates the
generation, treatment, storage, handling, transportation and
disposal of solid and hazardous waste.
Comprehensive Environmental Response, Compensation, and
Liability Act. The Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA" or
"Superfund"), requires the remediation of sites from which there
has been a release or threatened release of hazardous substances
and authorizes the United States Environmental Protection Agency
to take any necessary response action at Superfund sites,
including ordering potentially responsible parties liable for the
release to take or pay for such actions. Potentially Responsible
Parties are broadly defined under CERCLA to include past and
present owners and operators of such sites, as well as
generators, arrangers and transporters of wastes sent to a site.
Foreign Regulations
Besides domestic projects, the Company and its affiliates
are engaged in the evaluation and development of international
electric power generation facilities. Each country and locality
has separate laws and regulations governing the siting,
permitting, ownership and power sales from electric power plants.
These laws and regulations are often quite different than those
in effect in the United States, and depending on the country, can
be complex and stringent in regard to the development, ownership
and operation of electric power plants.
In addition, energy producing projects located in foreign
countries often are subject to stringent environmental and land
use regulations as well. Based on current trends, the Company
expects that environmental and land use regulations affecting
electricity producing power plants located outside the U.S. will
likely become more stringent over time. This appears to be due
in part to a greater participation by local citizenry in the
monitoring and enforcement of environmental laws, better
enforcement of applicable environmental laws by the regulatory
agencies, and the adoption of more sophisticated environmental
requirements. If foreign environmental and land use regulations
were to change in the future, the Company and its affiliates will
have to take these changes into account in their efforts to
develop electricity producing power plants in foreign countries.
Such projects could become more difficult to evaluate, develop
and operate as a result.
Employees
At December 31, 1997, the Company and its subsidiaries had
no employees.
Robert W. Carter is Chairman of the Board, Chief Executive
Officer and also a director of the Company. Janice Carter is
Executive Vice President, Secretary and Treasurer of the Company,
and is married to Robert W. Carter. Otherwise, no family
relationships exist among the directors and executive officers of
the Company.
All executive officers of the Company are elected annually
by the Board of Directors of the Company to serve in such
capacities until their successors are duly elected and qualified.
Item 2. Properties.
The information regarding the properties of the Company is
set forth under Item 1. Business above and in the Notes to
Consolidated Financial Statements included in Part II hereof.
The Company's principal office, located at 4100 Spring Valley,
Suite 1001, Dallas, Texas 75244, is leased by PEII, which lease
expires May 2001.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings.
However, affiliates of the Company are claimants or defendants in
various legal proceedings which have arisen in the ordinary
course of business. The Company believes such claims and legal
actions, individually or in the aggregate, will not have a
material adverse effect on the business, financial condition or
results of operations of the Company and its subsidiaries, taken
as a whole.
NNW, Inc. Proceeding
On July 12, 1996, Panda Energy Corporation, an affiliate of
the Company ("PEC"), filed an action against NNW, Inc. ("NNW")
captioned Panda Energy Corporation v. NNW, Inc. f/k/a Nova
Northwest Inc. (No. 96-07151-C), in the District Court of Dallas
County, Texas (68th Judicial District). PEC's petition sought a
declaratory judgment that the NNW's cash flow participation
rights in PEC's credit agreement with NNW remain at 0.433% after
the restructuring of the Panda-Rosemary Partnership interest
pursuant to the terms of such credit agreement with NNW. The
parties settled this dispute in December 1997 pursuant to a
settlement agreement and mutual release of claims, the terms of
which are maintained as confidential pursuant to the provisions
of such agreement. PEC does not believe that the terms of this
settlement agreement and mutual release of claims will have a
material adverse effect on the business, financial condition or
results of operations of PEC and its subsidiaries, taken as a
whole or the Company and its subsidiaries, taken as a whole.
Heard Proceedings
PEC is a party to a lawsuit captioned Panda Energy
Corporation, Plaintiff v. Heard Energy Corporation, CLF Energia Y
Electricidad, S.A., Robert A. Wolf, Armin Alexander Budzinsky,
Edward R. Gwynn, Donald L. Kinney, Morgan Stanley & Co., Inc.,
Allstate Insurance Company, Allstate Life Insurance Company,
Entergy Corporation, Entergy Enterprises, Inc., Entergy Power,
Inc., Entergy Power Development Corporation, Anil Desai, Drs. IR.
Poerwanto P., and PT Panca Serodja Pradhana, Defendants, (No.
94-0672-J), District Court of Dallas County, Texas (191st
Judicial District). PEC initiated this litigation in April 1994
and alleges that defendants Wolf, Gwynn and Kinney, former PEC
employees, formed a competing company (Heard Energy Corporation)
and misappropriated certain of PEC's international power project
opportunities. PEC alleges that the other defendants knowingly
participated, collaborated and/or conspired in the
misappropriation. PEC alleges causes of action for
misappropriation, conspiracy, fraud, breach of contract, breach
of fiduciary duty and legal malpractice against one or more of
the defendants and alleges damages in an unspecified amount.
Defendant Morgan Stanley filed a counterclaim on September
14, 1995 against PEC, alleging that it had performed services for
PEC pursuant to an engagement agreement relating to the
Brandywine Project. PEC terminated the engagement agreement on
May 4, 1993. Morgan Stanley alleges that the services it
performed prior to such termination included assisting PEC in
obtaining certain regulatory approvals, preparing a draft
solicitation booklet and identifying potential project financing
sources, including GE Capital. Morgan Stanley further alleges
that PEC obtained financing from GE Capital after Morgan Stanley
was terminated, and that Morgan Stanley is entitled to a
"transaction fee," either pursuant to the engagement agreement or
based on the value of the services it allegedly performed, in an
amount of not less than $4.3 million, plus attorneys' fees and
interest.
Defendants Heard Energy Corporation, Wolf, Gwynn, Kinney and
Budzinsky (the "Heard Defendants") also filed a counterclaim
during November 1994 against PEC and a third-party claim against
Robert Carter and Janice Carter, alleging that PEC, Robert Carter
and Janice Carter negligently made misrepresentations of PEC's
lack of a continued interest in developing international power
projects. The Heard Defendants allege that they would not have
engaged in allegedly competing international power project
transactions but for these misrepresentations and that they
incurred damages in the amount of approximately $5.0 million as a
result of these misrepresentations, such damages allegedly
consisting of expenses incurred by Heard Energy Corporation,
certain portions of which allegedly are guaranteed by the
individual Heard Defendants. In both the counterclaim and the
third-party claim, the Heard Defendants further allege that PEC,
Robert Carter and Janice Carter violated a confidentiality order
relating to certain documents produced by the Heard Defendants
during the discovery phase of this action by misappropriating
confidential information in these documents for the purpose of
gaining a competitive advantage over Heard Energy Corporation.
The Heard Defendants seek $5.0 million in damages as well as
unspecified "exemplary" damages based on this alleged violation.
PEC believes that the Heard Defendants' discovery order claim is
not actionable as a claim for damages.
On March 15, 1996, all of the defendants filed motions for
summary judgment, and PEC filed motions for summary judgment with
respect to Morgan Stanley's counterclaim and the Heard
Defendants' counterclaim and third-party claim. By letter dated
April 30, 1996, the court advised all counsel that it intended to
grant the defendants' motions for summary judgment, indicating
that PEC could not show legally sufficient evidence of damages to
sustain its claims. This order was entered on June 19, 1996.
PEC has appealed the court's ruling. In light of the court's
ruling and pending the appeal, Morgan Stanley and the Heard
Defendants have dismissed without prejudice their counterclaims
and third-party claims, and PEC has agreed that any applicable
statutes of limitations or other time-based defenses will be
tolled during the pendency of the appeal.
The Company has been informed by PEC that PEC does not
believe that either the Morgan Stanley counterclaim or the Heard
Defendants' counterclaims and third-party claims will be refiled
unless and until the judgment dismissing PEC's claims against
those parties is reversed and remanded to the trial court by the
appellate court. In any event, PEC does not believe that these
counterclaims or third-party claims, if reasserted, have any
merit, nor does PEC believe that these claims, if eventually
decided adversely to PEC, would have a material adverse effect on
the business, financial condition or results of operations of PEC
and its subsidiaries, taken as a whole or the Company and its
subsidiaries, taken as a whole.
Brandywine Proceeding
On June 26, 1996, certain plaintiffs commenced a proceeding
against the Panda-Brandywine Partnership and one of its
contractors (as well as other subcontractors) captioned Jeannine
McConnell, McConnell Pool Service, Inc. and McConnell Fuel Oil,
Inc. v. Panda-Brandywine, L.P. and Flippo Construction (Case No.
CV 96-1344) in the Circuit Court for Charles County, Maryland. In
this proceeding, plaintiffs allege that in connection with the
construction of an effluent water pipeline, a contractor for the
Panda-Brandywine Partnership, Flippo Construction ("Flippo") (and
its subcontractors) and the Panda-Brandywine Partnership left
their easement and inadvertently trespassed on to plaintiffs'
property. While on plaintiffs' property, Flippo (and its
subcontractors) and the Panda-Brandywine Partnership allegedly
dug a deep and wide hole which extended onto the plaintiff's
property to locate a buried pipe. Plaintiffs allege that this
trespass damaged the property, decreased its fair market value
and resulted in loss of use thereof. Plaintiffs claim damages in
numerous counts that aggregate to $3.25 million in actual damages
against each defendant plus punitive damages aggregating $3.0
million against all defendants.
The Panda-Brandywine Partnership intends to vigorously
contest this proceeding. The Company does not believe that the
outcome of this proceeding will have any material adverse effect
on the business, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, or the Panda-
Brandywine Partnership. In the opinion of the Panda-Brandywine
Partnership and the Company, the contract between the Panda-
Brandywine Partnership and Flippo requires Flippo to hold the
Panda-Brandywine Partnership harmless for any activities relating
to the plaintiffs' property.
Florida Power Proceedings
In January 1995, Florida Power Corporation, a Florida
corporation ("Florida Power"), commenced a proceeding before the
Florida Public Service Commission against the Kathleen
Partnership, an affiliate of the Company, captioned In re:
Petition for Declaratory Statement Regarding Eligibility for
Standard Offer Contract and Payment Thereunder by Florida Power
Corporation, Case No. 950110-EI. Florida Power's petition sought
a declaratory statement that a power purchase agreement between
Panda-Kathleen, L.P., an affiliate of the Company (the "Kathleen
Partnership") and Florida Power, is not available to the Kathleen
Partnership because the Kathleen Partnership's proposed
cogeneration facility allegedly is not in compliance with the
Florida PSC's rules (because it may be capable of exceeding 75 MW
in electric generating capacity). Additionally, if the contract
is "available" to the Kathleen Partnership, Florida Power sought
a declaratory statement that it is only obligated to pay capacity
payments under the power purchase agreement relating to the
Kathleen Facility for a term of 20 years rather than for the
entire 30-year term of the power purchase agreement. The Kathleen
Partnership filed a cross-petition seeking a declaratory
statement that the milestone dates in the power purchase
agreement must be extended due to Florida Power's improper
actions and as a result of the delays in developing the Kathleen
Facility caused by Florida Power's petition and the ensuing
proceeding before the Florida PSC. The Kathleen Partnership filed
a motion to dismiss the proceeding based on lack of jurisdiction,
but that motion was denied by the Florida PSC. In February of
1996, the Florida PSC held a one-day hearing.
On May 20, 1996, the Florida PSC issued a decision granting
Florida Power's petition, and holding that the power purchase
agreement is not available to the Kathleen Facility as proposed
because it has an electric generating capacity in excess of 75 MW
and that Florida Power is only obligated to make capacity
payments under the power purchase agreement for 20 years. The
Florida PSC's decision also granted the Kathleen Partnership's
cross-petition insofar as it grants the Kathleen Partnership an
18-month extension to meet the construction commencement
milestone date and an 18-month extension to meet the commercial
operation milestone date. The Kathleen Partnership has appealed
the Florida PSC's order to the Florida Supreme Court and the
Florida Supreme Court upheld the decision. The Kathleen
Partnership filed a Writ of Certiorari with the Supreme Court of
the United States regarding this matter in February, 1998.
There are two actions related to this matter pending before
the Florida Supreme Court and the United States District Court
for the Middle District of Florida. The Company does not believe
that an adverse result in this case would have a material adverse
effect on the business, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole.
National Development and Research Corporation Proceeding
On October 14, 1997, Panda Global Energy Company, an
affiliate of the Company ("PGE"), commenced a proceeding in the
District Court of Dallas County, 101st Judicial District
captioned Panda Global Energy Company v. National Development and
Research Corporation and Robert E. Tang, Case No. 97-9315-E.
PGE's petition sought a declaratory judgment for the termination
of various agreements between PGE and National Development and
Research Corporation ("NDR") regarding the development of power
projects in the PRC. On December 9, 1997 NDR filed a counter-
claim against PGE and Robert W. Carter asserting that, among
other things, such agreements are still in effect and that NDR is
entitled to certain payments thereunder. This proceeding
currently is in the discovery stage. The Company does not
believe that an adverse result in this proceeding would have a
material adverse effect on the business, financial condition or
results of operations of PGE and its subsidiaries, taken as a
whole, or the Company and its subsidiaries, taken as a whole.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the Company's fiscal year ended
December 31, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters.
There is no established market for the Company's Common Stock,
$.01 par value, all of which is owned by PEC. The Company has
not paid cash dividends on shares of its capital stock since its
inception
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA
(in thousands, except ratios)
Presented below are selected consolidated financial data for the Company as
of and for each of the years in the five-year period ended December 31, 1997,
which have been derived from the Company's financial statements. The selected
financial data should be read in conjunction with the information contained
under the caption, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the notes thereto, included elsewhere herein.
<TABLE>
Year Ended December 31,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Revenue:
Electric capacity and $29,856 $30,664 $29,859 $32,273 $ 65,004
energy sales:
Steam and chilled water 618 650 473 503 624
sales
Interest income 365 603 895 1,228 1,528
Total revenue 30,839 31,917 31,227 34,004 67,156
Expenses:
Plant operating expenses 7,676 8,940 9,348 12,050 26,245
Development and 2,278 1,376 1,821 3,533 8,083
administrative expenses
Interest expense 11,066 11,018 11,716 14,303 31,011
Depreciation 4,282 4,208 4,210 5,532 11,575
Amortization - Debt 502 600 554 403 349
issuance costs
Amortization - 533 533 533 533 -
Partnership formation
costs
Total expenses 26,337 26,675 28,182 36,354 77,263
Income (loss) before
taxes and minority
interest 4,502 5,242 3,045 (2,350) (10,107)
Minority interest (5,474) (5,700) (5,048) (2,405) -
Provision for income
taxes - - - - -
Income (loss) before
extraordinary items (972) (458) (2,003) (4,755) (10,107)
Extraordinary loss,
net (1) - - - (21,336) -
Net loss $(972) $(458) $(2,003) $(26,091) $(10,107)
Other Data:
Ratio of earnings to
fixed charges(2) 1.39x 1.36x (2) (2) (2)
December 31,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and other current
assets $14,084 $15,538 $11,333 $27,092 $ 26,901
Power plant and
equipment (net) 93,815 94,893 216,794 262,672 253,935
Reserves and escrow
deposits, and other
assets 14,901 14,728 14,722 21,038 23,937
Total assets
$122,800 $125,159 $242,849 $310,802 $304,773
Current liabilities $11,252 $12,531 $18,457 $14,283 $11,823
Deferred revenue -- -- -- -- 8,943
Long-term debt
(including capital
lease obligation), less
current portion 98,454 106,343 234,608 322,011 329,983
Advances from Parent
Minority interest 34,479 35,588 36,836 15,387 5,010
Shareholder's deficit (21,385) (29,303) (47,052) (40,879) (50,986)
Total liabilities and
shareholder's deficit
$122,800 $125,159 $242,849 $310,802 $304,773
</TABLE>
Notes (in thousands):
(1) In 1996, there was an extraordinary loss from early extinguishment of
debt of $21,336.
(2) For purposes of computing the ratio of earnings to fixed charges,
earnings represent income (loss) before minority interest, taxes and
extraordinary items plus fixed charges exclusive of capitalized interest.
Fixed charges consist of interest expense, capitalized interest and
amortization of debt issuance costs. Earnings were insufficient to cover
fixed charges in 1995 by $2,748, in 1996 by $13,405 and in 1997 by $10,107.
In 1994, 1995 and 1996, fixed charges included capitalized interest of
$803, $5,793 and $11,055, respectively.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(Dollar amounts are in thousands unless otherwise noted)
General
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.
1997 compared to 1996
The Company incurred a net loss of $10,107 in 1997 on
revenues of $67,156 compared to net loss before minority interest
and extraordinary item of $2,350 on revenues of $34,004 during
1996. The increase in revenues in 1997 was primarily caused by
operations of the Brandywine Facility (which commenced on October
31, 1996) and by increased interest income, partially offset by a
decrease in revenues at the Rosemary Facility. The 1997 results
include operations of both the Rosemary and Brandywine
facilities, whereas the 1996 results include operations of the
Rosemary Facility for a full year and the Brandywine Facility for
the final two months of 1996. For 1997 and 1996, capacity
revenues for the Rosemary Facility were $25,361 and $27,204,
respectively, reflecting a contractual decrease of $1,843. Energy
revenues for the Rosemary Facility for 1997 and 1996 were $2,355
and $2,011, respectively. The increase in energy revenues for
the Rosemary Facility is attributable to higher dispatch hours at
that facility compared to 1996. During 1997, the Rosemary
Facility was dispatched 743 hours as compared to 636 hours in
1996. Capacity revenues and energy revenues from Potomac
Electric Power Company ("PEPCO") for the Brandywine Facility for
1997 were $21,612 and $11,905, respectively. The Brandywine
Facility was dispatched 3,552 hours during 1997. Capacity
revenues for the Brandywine Facility for 1997 were lower than
originally anticipated due to a disagreement with PEPCO over the
calculation of the capacity payments. As discussed in Note 8 to
the consolidated financial statements, the Company and PEPCO have
reached a tentative agreement under which PEPCO will pay
approximately $3.8 million to the Company for the retroactive
effect of higher capacity payments for the first nine months of
1997. In October 1997, PEPCO commenced increased capacity
payments to the Company under the terms of the tentative
agreement. The agreement is subject to the consent of the
financing parties. Additionally, the Company had energy revenues
of $3,771 from the sale of natural gas and fuel oil to other
purchasers in the 1997. Plant operating expenses, which included
fuel cost, operation and maintenance expense, insurance and
property taxes, increased to $26,245 (39% of revenues) in 1997
from $12,050 (35% of revenues) in 1996, primarily due to
commencement of operations at the Brandywine Facility and lower
margins obtained on the sale of natural gas and fuel oil to other
purchasers. Additionally, the 1996 plant operating expenses
included approximately $700 for the insurance deductible and
other non-covered costs relating to hurricane damage sustained in
September 1996 at the Rosemary Facility.
Project development and administrative expenses were $8,083
(12% of revenues) and $3,533 (10% of revenues) for 1997 and 1996,
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 $31,011 (46% of revenues) in
1997 from $14,302 (42% 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") 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 advances
from the Company's parent.
Depreciation, amortization of debt issue costs and
amortization of partnership formation costs amounted to $11,923
(18% of revenues) in 1997 and $6,468 (19% of revenues) in 1996.
The increase was primarily attributable to depreciation for the
Brandywine Facility in 1997.
For 1996, minority interest in net income was $2,405. 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.
For 1996, the Company incurred an extraordinary loss on
early extinguishment of debt of $21,336 as a result of 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.
As a result of the various factors discussed above, the
Company incurred net losses of $10,107 and $26,091 for 1997 and
1996, respectively.
1996 compared to 1995
The Company incurred a net loss before extraordinary item of
$4,755 in 1996 on revenues of $34,004, compared to a net loss of
$2,003 on revenues of $31,227 in 1995. The 9% increase in
revenues was primarily caused by the commencement of commercial
operations at the Brandywine Facility on October 31, 1996 and by
increased interest income. For 1996 and 1995, capacity revenues
were $27,204 in both periods and energy revenues were $5,070 and
$2,655, respectively. Capacity revenues for the Brandywine
Facility commenced in January 1997; accordingly, capacity
revenues for 1996 and 1995 relate only to the Rosemary Facility.
The increase in energy revenues is attributable to operations of
the Brandywine Facility for the last two months of 1996,
partially offset by a decrease in energy revenues at the Rosemary
Facility which resulted from lower dispatch hours at that
facility compared to 1995. During 1996, the Rosemary Facility
was dispatched 635 hours as compared to 2,224 hours in 1995,
resulting in a decrease in energy revenues from that facility of
$644. (The number of dispatched hours in 1995 was unusually
high, as explained below.) Plant operating expenses, which
included fuel cost, operation and maintenance expense, insurance
and property taxes related to the Rosemary Facility (and the
Brandywine Facility commencing October 31, 1996), increased from
$9,348 (30% of revenues) in 1995 to $12,050 (35% of revenues)
during the same period in 1996, primarily due to the inclusion of
the costs of operating the Brandywine Facility for two months in
1996. Because the Brandywine Facility earned no capacity
revenues during its period of operation in 1996, plant operating
expenses (and all other categories of expenses) were higher than
normal as a percentage of revenues. Another significant cause of
the increased plant operating expenses was the insurance
deductible and other non-covered costs of approximately $700
relating to hurricane damage sustained in September 1996 at the
Rosemary Facility as discussed below. Other factors contributing
to the increase in plant operating expenses at the Rosemary
Facility included additional scheduled maintenance costs and the
fuel cost increases relating to increased operation of the
auxiliary boiler for steam and chilled water production.
Project development and administrative expenses were $1,821
(6% of revenues) and $3,533 (10% of revenues) for 1995 and 1996,
respectively. The increase in 1996 was primarily attributable to
the commencement of commercial operations at the Brandywine
Facility on October 31, 1996.
Interest expense increased from $11,716 (38% of revenues) in
1995 to $14,303 (42% of revenues) in 1996 as a result of the
increase in outstanding indebtedness under a term loan which was
partially offset by the scheduled reduction in outstanding
indebtedness under the taxable revenue bonds issued in 1989 for
the Rosemary Facility, and as a result of the increase in
outstanding indebtedness from the issuance of the Rosemary Bonds
on July 31, 1996. 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 a
term loan on July 31, 1996. Additionally, commencement of
commercial operations at the Brandywine Facility resulted in the
recognition of interest expense on the related debt for the last
two months of 1996. Prior to commercial operations, interest on
the Brandywine debt was capitalized.
Depreciation, amortization of debt issue costs and
amortization of partnership formation costs increased from $5,297
(17% of revenues) in 1995 to $6,468 (19% of revenues) in 1996.
The increase was primarily attributable to the commencement of
commercial operations at the Brandywine Facility on October 31,
1996.
On September 6, 1996, a transformer and two switches at the
Rosemary Facility sustained damage from a hurricane. A
substitute transformer was temporarily installed pending repair
of the damaged transformer, which was substantially completed
during the first quarter of 1997. The Company estimated the
total cost to repair the Rosemary Facility (including substitute
transformer rental costs) at approximately $2,450, all of which
was covered by insurance except for deductible and certain non-
covered items in the amount of approximately $700. This event
did not have a material adverse effect on the Company's financial
condition or results of operations.
For 1996 and 1995, minority interest in net income was
$2,405 and $5,048, respectively. The decrease in 1996 was due to
lower net income (before minority interest and extraordinary
item) in the Rosemary Partnership and the acquisition on July 31,
1996 of the minority interest holder's limited partnership
interest as discussed below.
In connection with the issuance of the Rosemary Bonds and
advances from its parent, the Company refinanced the taxable
revenue bonds issued in 1989 for the Rosemary Facility and repaid
a term loan. The Company incurred an extraordinary loss of
$21,336 on the early extinguishment of these obligations.
Additionally, the Company acquired the minority interest holder's
limited partnership interest in the Rosemary Partnership for a
purchase price of approximately $34,256. As a result of this
acquisition, the Company owns 100% of the Rosemary Partnership.
The acquisition was accounted for using the purchase method of
accounting. The excess of minority interest over the purchase
price (approximately $3.8 million) was allocated to plant and
equipment.
As a result of the various factors discussed above, the
Company incurred net losses of $26,091 and $2,003 for 1996 and
1995 respectively.
1995 compared to 1994
The Company incurred a net loss of $2,003 on revenues of
$31,227 in 1995 compared to $458 on revenues of $31,917 in 1994.
The decrease in revenues was primarily the result of a scheduled
contractual decrease in capacity payments of $1,526, which was
partially offset by additional income generated due to an
increase in the number of hours the Rosemary Facility was
dispatched by VEPCO and an increase in interest income. The
Rosemary Facility was dispatched 2,224 hours in 1995 versus 764
hours in 1994, due primarily to forced outages at two VEPCO
generating plants that are not likely to be repeated. For 1995
and 1994, capacity revenues were $27,204 and $28,730 and energy
revenues were $2,655 and $1,934, respectively. For approximately
1,200 of the dispatch hours in 1995, the Rosemary Facility used
natural gas provided directly by VEPCO under a special fueling
arrangement provided for in the Rosemary Power Purchase
Agreement. The Rosemary Facility's margin on energy sales is
lower when VEPCO supplies natural gas for the Rosemary Facility
than when the Rosemary Facility is dispatched under normal energy
pricing terms. However, overall margins at the Rosemary Facility
are increased in such circumstances (relative to not operating at
all) by the ability to provide steam and chilled water from the
steam turbine offtake, which reduces the operating costs of the
auxiliary boilers.
Plant operating expenses, which included fuel cost,
operations and maintenance expense, insurance and property taxes
related to the Rosemary Facility, were $9,348 (30% of revenues)
in 1995 as compared to $8,940 (28% of revenues) in 1994,
primarily due to additional maintenance expenses and fuel related
costs incurred due to the increase in the number of hours the
Rosemary Facility was dispatched by VEPCO. Project development
and administrative expense increased from $1,376 (4% of revenues)
in 1994 to $1,821 (6% of revenues) in 1995 primarily due to
additional administrative expenses relating to construction of
the Brandywine Facility.
Interest expense was $11,716 (38% of revenues) in 1995
compared to $11,018 (35% of revenues) in 1994. The increase in
1995 was attributable to additional borrowings. Depreciation,
amortization of debt issue costs and amortization of partnership
formation costs were stable and collectively amounted to 17% of
revenues in 1995 and 1994.
In 1995, the Company incurred a net loss of $2,003 as
compared to a net loss of $458 in 1994. An allocation of $5,048
was made in 1995 for minority interest, a decrease of $652 from
1994 as a result of the overall decrease in net income of the
Rosemary Partnership.
Liquidity and Capital Resources
In 1997, the Company obtained cash from operations of the
Rosemary Facility and the Brandywine Facility. The Company
utilized this cash to service its debt obligations, make
distributions to its parent to fund project development efforts,
and for general and administrative expenses.
In 1996, the Company obtained cash from operations of the
Rosemary Facility, issuance of the Rosemary Bonds, advances from
its parent and borrowings under non-recourse project debt for the
Brandywine Facility. The Company utilized this cash to refinance
existing debt, fund development and construction of the
Brandywine Facility, service its debt obligations, and for
general and administrative expenses. Additionally, the Company
purchased the minority interest holder's remaining limited
partnership interest in Panda-Rosemary.
The principal future cash requirement of the Company will
be payment of its debt service obligations. The Company will rely
almost exclusively on cash generated by the project entities to
meet its cash requirements. The project entities' ability to
generate such cash will depend upon the financial performance of
the Rosemary Facility and the Brandywine Facility. The Company
currently believes that it will have sufficient liquidity from
the cash flows from the project entities, together with amounts
held in debt service reserves and other restricted cash reserves,
to satisfy its obligations. The Company's restricted cash
balances are available only for specific uses as stated in the
indentures, such as payment of debt service obligations, project
construction and overhaul, and are not available for general
corporate purposes.
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 1999 and 2006, the capacity payments for
the Rosemary Facility are scheduled to decrease by approximately
$1.8 million (7.1%) and $5.4 million (23.1%), respectively, based
on the facility's current capacity rating. 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.
Year 2000 Matters
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that
have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.
In 1998, the Company initiated a review of existing accounting
software to determine the impact of the Year 2000 Issue.
Although such review is still in process, management estimates
that the Year 2000 Issue will not pose significant operational
problems for its computer systems. All costs associated with
this conversion, which are not anticipated to be material, are
being expensed as incurred.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data filed
herewith begin on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The number of members of the Board of Directors of Company
has been set at two, but the number may be increased or decreased
by the Board of Directors or the stockholders. Directors of the
Company are elected annually and each elected director holds
office until a successor is elected. Robert W. Carter and Brian
G. Trueblood are the current directors of the Company. All
executive officers of the Company are elected annually by the
Board of Directors of the Company to serve in such capacities
until their respective successors are duly elected and qualified.
The Certificate of Incorporation of the Company provides
that the Company shall always have an individual serving as an
"Independent Director" who shall have the right to vote or
consent only on, and whose affirmative vote or consent shall be
required with respect to, any decision by the Company or the
Board of Directors of the Company to (i) file a bankruptcy
petition, make an assignment for the benefit of creditors, apply
for the appointment of a custodian, receiver or trustee for it or
its property, consent to the filing of such proceeding or admit
in writing to its inability to pay its debts generally as they
become due; (ii) commence the dissolution, liquidation,
consolidation, merger or sale of all or substantially all of its
assets; (iii) amend the Certificate of Incorporation to broaden
the purposes of the Company and in other respects; (iv) authorize
the Company to engage in any activity other than those set forth
in the Certificate of Incorporation, or (v) authorize any
subsidiary with an Independent Director to take any action set
forth in (i) through (iv). The Certificate of Incorporation of
the Company provides that the Independent Director shall be a
person who is not and has not been, for the five years preceding
his election, (i) a direct or indirect legal or beneficial owner
of the Company or its affiliates (or a member of the immediate
family of such owner), (ii) a creditor, supplier, officer,
director, promoter, underwriter, manager or contractor of the
Company or any of its affiliates (or a member of the immediate
family of any such officer or director) or (iii) a person (or a
member of the immediate family of a person) employed by the
Company or any of its affiliates or by any creditor, supplier,
employee, stockholder, officer, director, promoter, underwriter,
manager or contractor thereof. The Independent Director may,
however, serve in such capacity for other affiliates of the
Company. In March 1998, Brian G. Trueblood was elected as the
Independent Director of the Company.
The following table sets forth the names and ages of the
directors and the executive officers of the Company and their
positions with the Company. Since the formation of the Company,
each executive officer of the Company has held the same office(s)
with the Company that he or she has held with each other
corporation that is currently affiliated with the Company.
Name Age Position with the Issuer and the Company
Robert W. Carter 59 Director, Chairman of the Board and
Chief Executive Officer
Darol S. Lindloff 59 President
Janice Carter 55 Executive Vice President, Secretary and Treasurer
William C. Nordlund 43 Executive Vice President, Finance
Ralph T. Killian 51 Executive Vice President and
Operations Manager
Steven W. Crain 47 Senior Vice President, Business Development
Ted C. Hollon 47 Senior Vice President, Project Development
L. Stephen Rizzieri 42 Senior Vice President and General Counsel
Brian G. Trueblood 36 Independent Director
Robert W. Carter has been the Chairman of the Board and
Chief Executive Officer of PEII, an affiliate of the Company,
since January 1995. Mr. Carter has held similar chief executive
positions with PEC, also an affiliate of the Company, and its
subsidiaries since he founded PEC in 1982. Mr. Carter also is
President of Robert Carter Oil & Gas, Inc. (an oil and gas
exploration company), which he founded in 1980. From 1978 to
1980, Mr. Carter was Vice President of oil and gas lease sales
for Reserve Energy Corporation (an oil and gas exploration
company). From 1974 to 1978, he served as a marketing consultant
to Forward Products, Inc. (a petrochemical company). Mr. Carter
was Executive Vice President of Blasco Industries (a chemical and
textile manufacturer) from 1970 to 1974. He served as a sales
representative and sales manager for Olin Mathieson Chemical
Corporation (a petrochemical, pulp and paper company) from 1965
to 1970. From 1960 to 1965, he was a sales representative for
Inland, Mead Paper Company in Atlanta. Mr. Carter attended the
University of Georgia. Mr. Carter is married to Janice Carter.
Darol S. Lindloff was appointed President of PEII in
February 1997. Prior thereto, he served as Senior Vice President,
project Development of PEII from January 1996. He served as Vice
President of PEII from January 1993 to January 1996 in the
capacities of Business Development, Technical Director and
project Development. Mr. Lindloff served as Marketing Manager for
PEC from October 1989 until January 1993. From December 1987 to
October 1989, Mr. Lindloff established a regional office in
Dallas for Southwest Research Institute (a research and
development company) and served as Regional Director. From
January 1986 to December 1987, Mr. Lindloff worked on the
development of cogeneration facilities for Hawker Siddeley Power
Engineering, Inc. (a British engineering company). During 1984
and 1985, he worked in the development of cogeneration facilities
for Central & Southwest Corporation's subsidiary, C&SW Energy,
Inc. (an energy company). Mr. Lindloff graduated from
Southwestern University with a Bachelor of Science degree in
organic chemistry.
Janice Carter has been the Executive Vice President,
Secretary, Treasurer and a Director PEII since January 1995 and
has served in such capacities with PEC since its inception in
1982. From 1975 to 1980, Mrs. Carter was office manager of
Reserve Energy Corporation. From 1969 to 1972, Mrs. Carter worked
for University Computing, and from 1962 to 1968 she directed
administration for the engineering department of Otis
Engineering, a division of Halliburton International. Mrs. Carter
also serves as Vice President and Secretary/Treasurer of Robert
Carter Oil & Gas, Inc. Mrs. Carter attended Texas Tech
University. Mrs. Carter is married to Robert W. Carter.
William C. Nordlund has served as Executive Vice President,
Finance of PEII since February 1997. Prior thereto, he served as
Senior Vice President and General Counsel of PEII since August
1996, as Vice President and General Counsel of PEII since January
1995 and of PEC since January 1994. Mr. Nordlund was General
Counsel of PEC from April 1993 to January 1994. He was Senior
Vice President and General Counsel from August 1992 to April 1993
and Vice President and General Counsel from September 1991 to
August 1992 for The Oxford Energy Company, a developer of
independent power facilities. From July 1990 to September 1991,
Mr. Nordlund was an attorney with Constellation Holdings, Inc.,
an affiliate of Baltimore Gas & Electric Company which developed
independent power facilities. Prior to July 1990, he was a
partner in the law firm of Winston & Strawn in Chicago. Mr.
Nordlund earned a Bachelor of Arts degree from Vanderbilt
University, a Juris Doctor degree from Duke University and a
Master of Management degree from the J.L. Kellogg Graduate School
of Business at Northwestern University.
Ralph T. Killian served as Senior Vice President of PEII
since May 1994, and has been Executive Vice President and
Operations Manager since March 1998. Mr. Killian has overall
responsibility for asset management which includes operations &
maintenance, fuel, procurement and management, and power
marketing for facilities. Mr. Killian also leads a group
responsible for development of PEII's merchant plants in the
United States. Between November 1989 and April 1994, Mr. Killian
served as Vice President of Natural Resources for PEC. From 1988
to 1989, he was Senior Vice President of Texas Eastern
Corporation (an energy company). From 1969 to 1988, he held
various natural gas marketing and engineering management
positions with Amoco Corporation (an energy company) including
Regional Natural Gas Marketing Manager for Amoco Production
Company's Denver region. Mr. Killian graduated from the
University of Florida with a Bachelor of Science degree in
chemical engineering.
Steven W. Crain has served as Senior Vice President,
Business Development of PEII since February 1997. Mr. Crain
joined Panda in 1996, originally serving as Director of Business
Development for the Asian sub-continent. Prior to joining Panda,
Mr. Crain served for over 18 years in various capacities for
Eagleton Engineering Company, an engineering and construction
management firm specializing in oil and gas processing and
transportation. Mr. Crain served as a Vice President for
Business Development and member of the Board of Directors from
1987 and 1995. He also served as the resident Managing Director
of the Eagleton Saudi Arabia office for six years. From 1974 to
1977, Mr. Crain served as a Design Engineer for Stearns-Roger
(now Raytheon) where he was involved in the design of coal-
burning power plants. Mr. Crain earned a Bachelor of Science
Degree in Electrical Engineering from Rice University, and is a
registered professional engineer.
Ted C. Hollon has served as Senior Vice President, Project
Development of PEII since August 1997. Prior to his current
position, he served as Vice President of Construction for PEII
since March 1995. Mr. Hollon served as project manager for the
Company's 230 megawatt Panda-Brandywine Facility from March 1993
until March 1995. Mr. Hollon previously held various positions
with several prominent international engineering and construction
companies such as Brown & Root International and CSR Serrine.
Mr. Hollon has over 25 years of international construction
experience. He earned a Bachelor of Science degree from Texas
A&M University.
L. Stephen Rizzieri has served as Vice President and General
Counsel of PEII since February 1997 and has been Senior Vice
President and General Counsel since March 1998. Prior thereto, he
served as Deputy General Counsel since April 1996. From 1993
until he joined PEII, he was Assistant General Counsel of ENSERCH
Development Corporation, the independent power development
affiliate of ENSERCH Corporation. From 1985 to 1993, Mr. Rizzieri
served in various capacities with Sunshine Mining Company and its
affiliated companies, most recently as Assistant General Counsel
and Secretary. From 1981 to 1985, he served in various capacities
with Woods Petroleum Corporation (which was purchased by Sunshine
Mining Company in 1985) and its affiliates, most recently as
President of Woods Securities Corporation. In 1980, Mr. Rizzieri
served as Deputy General Counsel - Enforcement Division, Oklahoma
Securities Commission. Mr. Rizzieri earned a Bachelor of Arts
degree from the State University of New York at Geneseo and a
Juris Doctor degree from the University of Oklahoma.
Brian G. Trueblood became the Independent Director of the
Company in March 1997. He has served since February 1997, and
also from September 1989 through August 1994, as a senior partner
in the Dallas office of Lucas Associates (an Atlanta-based
executive search firm). From August 1994 to February 1997, Mr.
Trueblood served as Vice President of TNS Partners, Inc. (a
Dallas-based retained executive search firm). Mr. Trueblood
received a Bachelor of Science degree in general engineering from
the United States Military Academy. Mr. Trueblood also serves as
the Independent Director of various other subsidiaries of PEII.
Item 11. Executive Compensation and Benefits
No cash, stock options or other non-cash compensation has
been paid or is proposed to be paid in the current calendar year,
or in the last completed fiscal year, to any of the officers and
directors listed under "Management" for their services to the
Company. Mr. Trueblood is currently paid $1,000 annually by the
Company for serving as an Independent Director thereof.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Panda Interfunding Corporation owned beneficially, at March
25, 1998, one hundred percent (100%) of the issued and
outstanding shares of the Company's common stock, $.01 par value,
which is the only security entitled to vote for the election of
the Company's directors. No director or officer of the Company
owns any shares of any class of the Company's equity securities.
Item 13. Certain Relationships and Related Transactions
Since the date of incorporation of the Company, there have
been no transactions, and there currently are not any proposed
transactions, or series of similar transactions, to which the
Company (or any of it's subsidiaries) was or is to be party, in
which the amount involved exceeds $60,000 and in which a director
or executive officer of the Company, has a material interest.
Additionally, there are no business relationships that currently
exist or have existed since the date of incorporation of the
Company, involving the Company, on the one hand, and any director
of the Company (or an affiliate thereof), on the other hand. No
director or executive officer of the Company has been indebted to
the Company, since the date of incorporation of the Company.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) The following documents are filed as a part of this
Annual Report on Form 10-K:
1. Consolidated Financial Statements.
See Index to Financial Statements and Financial Statement
Schedules on page F-1 hereof.
2. Consolidated Financial Statement Schedules.
See Index to Financial Statements and Financial Statement
Schedules on page F-1 hereof.
Schedules other than those listed on the accompanying Index
to Financial Statements and Financial Statement Schedules are
omitted for the reason that they are either not required, not
applicable or the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits.
Exhibit
Number Exhibit Description
3.01 Certificate of Incorporation of Panda Interholding
Corporation. (1)
3.02 Bylaws of Panda Interholding Corporation. (1)
4.01 Trust Indenture dated July 31, 1996, among Panda
Funding Corporation, Panda Interfunding Corporation and
Bankers Trust Company, as Trustee. (1)
4.02 First Supplemental Indenture to Trust Indenture, dated
July 31, 1996, among Panda Funding Corporation, Panda
Interfunding Corporation and Bankers Trust Company, as
Trustee. (1)
4.03 Second Supplemental Indenture to Trust Indenture, dated
January 6, 1997, among Panda Funding Corporation, Panda
Interfunding Corporation and Bankers Trust Company, as
Trustee. (1)
4.04 Form of 11-5/8% Pooled Project Bonds, Series A due 2012
of Panda Funding Corporation. (1)
4.05 Form of 11-5/8% Pooled Project Bonds, Series A-1 due
2012 of Panda Funding Corporation. (1)
4.06 Registration Rights Agreement, dated July 31, 1996,
among Panda Funding Corporation, Panda Interfunding
Corporation and Jefferies & Company Inc. (1)
4.07 Collateral Agency Agreement, dated July 31, 1996, among
Panda Interfunding Corporation, Panda Funding
Corporation and Bankers Trust Company, as Trustee and
Collateral Agent. (1)
4.08 Subrogation and Contribution Agreement, dated July 31,
1996, among Panda Interfunding Corporation, Panda
Funding Corporation and Panda Interholding Corporation
and each PIC U.S. Entity that is a signatory thereto.
(1)
4.09 Guaranty Agreement (PIC U.S. Entity Subsidiaries),
dated July 31, 1996 by Panda Interholding Corporation
in favor of Bankers Trust Company, as Collateral Agent
for the benefit of the Secured Parties. (1)
10.01 PIC Loan Agreement, dated July 31, 1996, between Panda
Funding Corporation, as Lender, and Panda Interfunding
Corporation, as Borrower. (1)
10.02 Loan Agreement, dated July 31, 1996, between Panda
Interfunding Corporation, as Lender, and Panda Cayman
Interfunding Company, as Borrower. (1)
10.03 Promissory Note issued by Panda Interfunding
Corporation on July 31, 1996 to Panda Funding
Corporation in the original principal amount of
$105,525,000, endorsed to Bankers Trust Company, as
Collateral Agent. (1)
10.04 Security Agreement, dated July 31, 1996, between Panda
Interfunding Corporation and Bankers Trust Company, as
Collateral Agent. (1)
10.05 Security Agreement, dated July 31, 1996, between Panda
Funding Corporation and Bankers Trust Company, as
Collateral Agent. (1)
10.06 Security Agreement, dated July 31, 1996, between Panda
Cayman Interfunding Company, as Debtor, and Panda
Interfunding Corporation, as Secured Party. (1)
10.07 Stock Pledge Agreement (Panda Interfunding Corporation
Stock), dated July 31, 1996, between Panda Energy
Corporation and Bankers Trust Company, as Collateral
Agent. (1)
10.08 Stock Pledge Agreement (Panda Funding Corporation and
PIC Entity Stock), dated July 31, 1996, between Panda
Interfunding Corporation and Bankers Trust Company, as
Collateral Agent. (1)
10.09 Trust Indenture, dated July 31, 1996, among Panda-
Rosemary Funding Corporation, Panda-Rosemary, L.P. and
Fleet National Bank, as Trustee. (1)
10.10 First Supplemental Indenture to Trust Indenture, dated
July 31, 1996, among Panda-Rosemary Funding
Corporation, Panda-Rosemary, L.P. and Fleet National
Bank, as Trustee. (1)
10.10.1 Second Supplemental Indenture to Trust Indenture, dated
January 15, 1997, among Panda-Rosemary Funding
Corporation, Panda-Rosemary, L.P. and Fleet National
Bank, as Trustee. (1)
10.11 Form of 8-5/8% First Mortgage Bonds due 2016 of Panda-
Rosemary Funding Corporation. (1)
10.12 Deposit and Disbursement Agreement, dated July 31,
1996, among Panda-Rosemary Funding Corporation, Panda-
Rosemary, L.P., Fleet National Bank, as Collateral
Agent, and Fleet National Bank, as Depositary Agent.
(1)
10.13 Collateral Agency and Intercreditor Agreement, dated
July 31, 1996, among Panda Rosemary Funding
Corporation, Panda-Rosemary, L.P., The L/C Issuer, The
Trustee Under The Trust Indenture, The Depositary
Agent, The Collateral Agent and The Other Secured
Parties, all as named therein. (1)
10.14 Deed of Trust and Security Agreement, dated July 31,
1996, by Panda-Rosemary, L.P., Grantor, Ross J. Smyth,
Trustee, and Fleet National Bank, as Collateral Agent,
the Beneficiary. (1)
10.15 Security Agreement, dated July 31, 1996, by Panda-
Rosemary, L.P. to Fleet National Bank, as Collateral
Agent. (1)
10.16 Security Agreement, dated July 31, 1996, by Panda-
Rosemary Funding Corporation to Fleet National Bank, as
Collateral Agent. (1)
10.17 General Partner Pledge and Security Agreement, dated
July 31, 1996, by Panda-Rosemary Corporation to Fleet
National Bank, as Collateral Agent. (1)
10.18 Limited Partner Pledge and Security Agreement, dated
July 31, 1996, by PRC II Corporation to Fleet National
Bank, as Collateral Agent. (1)
10.19 Stock Pledge and Security Agreement, dated July 31,
1996, by Panda Interholding Corporation to Fleet
National Bank, as Collateral Agent. (1)
10.20 Stock Pledge and Security Agreement, dated July 31,
1996, by Panda-Rosemary, L.P. to Fleet National Bank,
as Collateral Agent. (1)
10.21 Partnership Guaranty, dated July 31, 1996, by Panda-
Rosemary, L.P. in favor of Fleet National Bank, as
Trustee. (1)
10.22 Reimbursement Agreement, dated July 31, 1996, between
Panda-Rosemary, L.P., Panda-Rosemary Funding
Corporation and Bayerische Vereinsbank AG, New York
Branch. (1)
10.23 Irrevocable Direct Pay Letter of Credit issued by
Bayerische Vereinsbank AG. (1)
10.24 Construction Loan Agreement and Lease Commitment, dated
March 30, 1996, between Panda-Brandywine, L.P. and
General Electric Capital Corporation. (1)
10.24.1 Participation Agreement, dated December 18, 1996, among
Panda-Brandywine, L.P., Panda Brandywine Corporation,
General Electric Capital Corporation, Fleet National
Bank, First Security Bank, National Association, and
Credit Suisse. (1)
10.24.2 Letter of Credit Reimbursement Agreement, dated
December 18, 1996, among Panda-Brandywine, L.P., Panda
Brandywine Corporation and General Electric Capital
Corporation. (1)
10.24.3 Equity Loan Facility Letter Agreement, dated December
18, 1996, among Panda Brandywine Corporation, Panda
Energy Corporation and General Electric Capital
Corporation. (1)
10.25 Bill of Sale and Severance Agreement, dated December
30, 1996, between Panda-Brandywine, L.P., as Seller,
and Fleet National Bank, Owner Trustee, as Buyer. (1)
10.26 Facility Lease, dated December 18, 1996, between Fleet
National Bank, as Owner Trustee, and Panda-Brandywine,
L.P. (1)
10.27 Steam Lease, dated as of December 18, 1996, between
Panda-Brandywine, L.P. and Brandywine Water Company.
(1)
10.28 Amended and Restated Security Deposit Agreement, dated
December 18, 1996, among Panda-Brandywine, L.P., Panda
Brandywine Corporation, General Electric Capital
Corporation, Fleet National Bank, Credit Suisse and
First Security Bank, National Association. (1)
10.28.1 First Amendment to Amended and Restated Security
Deposit Agreement, dated February 21, 1997, among Panda
Brandywine, L.P., General Electric Capital Corporation,
Fleet National Bank, Credit Suisse and First Security
Bank, National Association. (1)
10.29 Amended and Restated Deed of Trust and Security
Agreement, dated December 18, 1996, by Panda-
Brandywine, L.P. to Chicago Title Insurance Company,
Trustee for the benefit of Fleet National Bank, as
Security Agent, Beneficiary. (1)
10.30 Amended and Restated Steam Lessee Security Agreement,
dated December 18, 1996, by Brandywine Water Company in
favor of Fleet National Bank, as Security Agent. (1)
10.31 Amended and Restated Security Agreement, dated December
18, 1996, by Panda-Brandywine, L.P. in favor of Fleet
National Bank, as Security Agent. (1)
10.32 Amended and Restated Trust Agreement, dated December
18, 1996, between General Electric Capital Corporation,
as Owner Participant, and Fleet National Bank, as Owner
Trustee. (1)
10.33 Amended and Restated General Partner Pledge Agreement,
dated December 18, 1996, by Panda Brandywine
Corporation to Fleet National Bank, as Security Agent.
(1)
10.34 Amended and Restated Limited Partner Pledge Agreement,
dated December 18, 1996, by Panda Energy Corporation
to Fleet National Bank, as Security Agent. (1)
10.35 Amended and Restated Stock Pledge Agreement, dated
December 18, 1996, by Panda Interholding Corporation to
Fleet National Bank, as Security Agent. (1)
10.36 Assumption Agreement and Release, dated July 31, 1996,
by Panda Interholding Corporation in favor of General
Electric Capital Corporation and Fleet National Bank.
(1)
10.37 Power Purchase and Operating Agreement, dated January
24, 1989, between Panda Energy Corporation and Virginia
Electric and Power Company. (1)
10.38 Amendment No. 1 to Power Purchase and Operating
Agreement, dated October 24, 1989, between Panda Energy
Corporation and Virginia Electric and Power Company.
(1)
10.39 Amendment No. 2 to Power Purchase and Operating
Agreement, dated July 30, 1993, between Panda-Rosemary,
L.P. and Virginia Electric and Power Company. (1)
10.40 Fuel Supply Management Agreement, dated October 10,
1990, between Panda-Rosemary Corporation and Natural
Gas Clearinghouse. (1)
10.41 Amendment No. 1 to Fuel Supply Management Agreement,
dated March 5, 1991, between Panda-Rosemary Corporation
and Natural Gas Clearinghouse. (1)
10.42 Gas Purchase Contract, dated April 12, 1990, between
Panda-Rosemary Corporation and Natural Gas
Clearinghouse. (1)
10.43 Amendment of Gas Purchase Contract between Panda-
Rosemary Corporation and Natural Gas Clearinghouse. (1)
10.44 Pipeline Operating Agreement, dated February 14, 1990,
between Panda Energy Corporation, Panda-Rosemary
Corporation and North Carolina Natural Gas Corporation.
(1)
10.45 Amendment No. 1 to Pipeline Operating Agreement, dated
May 7, 1990, between Panda Energy Corporation, Panda-
Rosemary Corporation and North Carolina Natural Gas
Corporation. (1)
10.46 Assignment Agreement, dated June 15, 1990, between
Panda Energy Corporation and Panda-Rosemary
Corporation. (1)
10.47 Amendment No. 2 to Pipeline Operating Agreement, dated
November 19, 1991, among Panda Energy Corporation,
Panda-Rosemary Corporation and North Carolina Natural
Gas Corporation. (1)
10.48 Real Property Lease and Easement Agreement, dated June
9, 1989, between The Bibb Company and Panda-Rosemary
Corporation. (1)
10.49 First Amendment to Real Property Lease and Easement
Agreement, dated October 1, 1989, between The Bibb
Company and Panda-Rosemary Corporation. (1)
10.50 Second Amendment to Real Property Lease and Easement
Agreement, dated January 31, 1990, between The Bibb
Company and Panda-Rosemary Corporation. (1)
10.51 Leasehold and Real Property Assignment and Assumption
Agreement, dated January 6, 1992, between Panda-
Rosemary Corporation and Panda-Rosemary, L.P. (1)
10.52 Third Amendment to Real Property Lease and Easement
Agreement, dated March 15, 1996, between The Bibb
Company and Panda-Rosemary, L.P. (1)
10.53 Cogeneration Energy Supply Agreement, dated January 12,
1989, between Panda Energy Corporation and The Bibb
Company. (1)
10.54 First Amendment to Cogeneration Energy Supply
Agreement, dated October 1, 1989, between Panda Energy
Corporation, Panda-Rosemary Corporation and The Bibb
Company. (1)
10.55 Service Agreement, dated July 26, 1996, between
Transcontinental Gas Pipe Line Corporation and Panda-
Rosemary, L.P. (1)
10.55.1 Form of Amendment to Service Agreement, effective
January 1, 1997, between Transcontinental Gas Pipe Line
Corporation and Panda-Rosemary, L.P. (1)
10.56 Service Agreement Applicable to Transportation of
Natural Gas Under Rate Schedule FT, dated August 20,
1996, between CNG Transmission Corporation and Panda-
Rosemary, L.P. (1)
10.57 Gas Transportation Agreement, dated August 1, 1996,
between Texas Gas Transmission Corporation and Panda-
Rosemary, L.P. (1)
10.58 Assignment and Assumption Agreement, dated May 15,
1989, between Panda Energy Corporation and Panda-
Rosemary Corporation. (1)
10.59 Bill of Sale and Assignment and Assumption Agreement,
dated January 6, 1992, between Panda-Rosemary
Corporation and Panda-Rosemary, L.P. (1)
10.60 Assignment and Assumption Agreement, dated January 6,
1992, between Panda Energy Corporation and Panda-
Rosemary Corporation. (1)
10.61 Power Purchase Agreement, dated August 9, 1991, between
Panda-Brandywine, L.P. and Potomac Electric Power
Company. (1)
10.62 First Amendment to Power Purchase Agreement, dated
September 16, 1994, between Panda-Brandywine, L.P. and
Potomac Electric Power Company. (1)
10.62.1 Present Assignment of Power Purchase Agreement, dated
December 18, 1996, by Panda-Brandywine, L.P. to Fleet
National Bank, as Owner Trustee, for the benefit of
General Electric Capital Corporation, as Owner
Participant. (1)
10.62.2 Amended and Restated Consent and Agreement, dated
December 30, 1996, among Potomac Electric Power
Company, Panda-Brandywine, L.P., Fleet National Bank,
as Security Agent and Owner Trustee, General Electric
Capital Corporation, as the issuer of the Letters of
Credit, the Interest Hedging Counterparty and Owner
Participant, First Security Bank, National
Association, as Indenture Trustee, and Credit Suisse,
as Administrative Agent. (1)
10.63 Amended and Restated Turnkey Cogeneration Facility
Agreement, dated March 30, 1995, between Panda-
Brandywine, L.P. and Raytheon Engineers & Constructors,
Inc. (1)
10.64 Raytheon Parent Guaranty, dated May 18, 1994, between
Raytheon Company and Panda-Brandywine, L.P. (1)
10.65 Steam Sales Agreement, dated March 30, 1995, between
Panda-Brandywine, L.P. and Brandywine Water Company.
(1)
10.66 Gas Sales Agreement, dated March 30, 1995, between
Cogen Development Company and Panda Brandywine, L.P.
(1)
10.67 Precedent Agreement, dated February 25, 1994, between
Columbia Gas Transmission Corporation and Panda-
Brandywine, L.P. (1)
10.68 Amending Agreement, dated March 24, 1995, between
Columbia Gas Transmission Corporation and Panda-
Brandywine, L.P. (1)
10.69 Amended and Restated FTS Service Agreement, dated March
23, 1995, between Columbia Gas Transmission Corporation
and Panda-Brandywine, L.P. (1)
10.70 FTS Service Agreement, dated of as March 30, 1995,
between Cove Point LNG Limited Partnership and Panda-
Brandywine, L.P. (1)
10.71 Gas Transportation and Supply Agreement, dated November
10, 1994, between Panda-Brandywine, L.P. and Washington
Gas Light Company. (1)
10.72 Amended and Restated Site Lease, dated December 18,
1996, between Panda-Brandywine, L.P. and Fleet National
Bank, as Owner Trustee. (1)
10.73 Amended and Restated Site Sublease, dated December 18,
1996, between Fleet National Bank, Owner Trustee, as
Sublessor, and Panda-Brandywine, L.P., as Sublessee.
(1)
10.74 Purchase Agreement, dated July 26, 1996, between Panda
Funding Corporation and Jefferies & Company, Inc. (1)
10.75 Additional Projects Contract, dated July 31, 1996,
among Panda Energy International, Inc., Panda Energy
Corporation, and Panda Interfunding Corporation. (1)
10.76 Non-Petition Agreement, dated July 31, 1996, among
Panda Interfunding Corporation, Panda Interholding
Corporation, Panda-Rosemary Corporation, PRC II
Corporation, Panda-Rosemary Funding Corporation and
Panda-Rosemary, L.P. (1)
10.77 Non-Petition Agreement, dated July 31, 1996, among
Panda Funding Corporation, Panda Interholding
Corporation, Panda Interfunding Corporation and Panda
(Cayman) Interfunding Company. (1)
12.00 Computation of Ratio of Earnings to Fixed Charges. (2)
21.00 Subsidiaries of Registrant. (2)
24.00 Powers of Attorney, included on signature page hereof.(2)
27.00 Financial Data Schedule. (2)
(1) Previously filed as an exhibit to the Registration
Statement on Form S-1 (Registration No. 333-19445) of Panda
Funding Corporation, Panda Interfunding Corporation and Panda
Interholding Corporation (affiliates of the registrant), and
incorporated herein by reference.
(2) Filed herewith.
(b) Reports on Form 8-K. None.
Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by Registrants Which Have
Not Registered Securities Pursuant to Section 12 of the Act.
No annual report or proxy statement or other proxy
soliciting material was sent to security holders of the
registrant during the registrant's last fiscal year.
INDEX TO FINANCIAL STATEMENTS
Panda Interholding Corporation and Subsidiaries Consolidated
Financial Statements:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996
and 1997 F-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997 F-5
Consolidated Statements of Shareholder's Deficit for the
years ended December 31, 1995, 1996 and 1997 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997 F-7
Notes to Consolidated Financial Statements for the
years ended December 31, 1995, 1996 and 1997 F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of Panda Energy International, Inc.:
We have audited the accompanying consolidated balance sheets of
Panda Interholding Corporation and subsidiaries (the "Company")
as of December 31, 1996 and 1997, and the related consolidated
statements of operations, shareholder's deficit and cash flows
for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 23, 1998
F-2
PANDA INTERHOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 828,787 $ 2,922,990
Restricted cash - current ............................... 8,781,393 9,357,680
Accounts receivable ..................................... 9,402,685 8,098,231
Fuel oil, spare parts and supplies ...................... 7,913,777 6,264,549
Other current assets .................................... 164,905 257,877
------------- -------------
Total current assets .................................. 27,091,547 26,901,327
Plant and equipment:
Electric generating facilities .......................... 288,716,711 291,515,328
Furniture and fixtures .................................. 494,418 533,663
Less: accumulated depreciation .......................... (26,539,539) (38,114,058)
------------- -------------
Total plant and equipment, net ........................ 262,671,590 253,934,933
Restricted cash - debt service reserves and escrow deposits 17,357,524 20,602,976
Debt issuance costs, net of accumulated
amortization of $73,986 and $522,489 respectively ....... 3,680,902 3,333,436
------------- -------------
$ 310,801,563 $ 304,772,672
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PANDA INTERHOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses:
Construction costs ................................. $ 660,167 $ --
Interest and letter of credit fees ................. 1,186,191 1,126,876
Operating expenses and other ....................... 6,935,068 4,879,522
Current portion of long-term debt .................... 5,501,823 5,816,974
------------- -------------
Total current liabilities ........................ 14,283,249 11,823,372
Deferred revenue ....................................... -- 8,942,868
Long term debt, less current portion ................... 104,521,718 98,704,745
Capital lease obligation ............................... 217,488,645 231,278,528
Advances from parent ................................... 15,387,447 5,009,539
Commitments and contingencies (Note 8)
Shareholder's deficit:
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding ............................ 10 10
Accumulated deficit .................................. (40,879,506) (50,986,390)
------------- -------------
(40,879,496) (50,986,380)
------------- -------------
$ 310,801,563 $ 304,772,672
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PANDA INTERHOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Electric capacity and energy sales ..................................... $ 29,858,475 $ 32,273,736 $ 65,004,373
Steam and chilled water sales .......................................... 473,040 502,757 623,934
Interest income ........................................................ 895,268 1,227,669 1,527,650
------------ ------------ ------------
31,226,783 34,004,162 67,155,957
------------ ------------ ------------
EXPENSES:
Plant operating expenses ............................................... 9,347,707 12,050,495 26,245,012
Project development and administrative ................................. 1,821,376 3,533,348 8,083,348
Interest expense and letter of credit fees ............................. 11,715,929 14,302,645 31,011,459
Depreciation ........................................................... 4,209,453 5,531,502 11,574,519
Amortization of debt issuance costs .................................... 554,311 402,770 348,503
Amortization of partnership formation costs ............................ 533,116 533,100 --
------------ ------------ ------------
28,181,892 36,353,860 77,262,841
------------ ------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM ............ 3,044,891 (2,349,698) (10,106,884)
Minority interest ...................................................... (5,047,580) (2,405,160) --
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM ........................................... (2,002,689) (4,754,858) (10,106,884)
Extraordinary item - loss on early extinguishment of debt .............. -- (21,336,550) --
------------ ------------ ------------
NET LOSS ................................................................. $ (2,002,689) $(26,091,408) $(10,106,884)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PANDA INTERHOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock Total
----------------------------- Accumulated Shareholder's
Shares Amount Deficit Deficit
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 ..................................... 1,000 $ 10 $(12,785,409) $(12,785,399)
Net loss ................................................... -- -- (2,002,689) (2,002,689)
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 .................................. 1,000 10 (14,788,098) (14,788,088)
Net loss ................................................... -- -- (26,091,408) (26,091,408)
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 .................................. 1,000 10 (40,879,506) (40,879,496)
Net loss ................................................... -- -- (10,106,884) (10,106,884)
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 .................................. 1,000 $ 10 $(50,986,390) $(50,986,380)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PANDA INTERHOLDING CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ............................................................. $ (2,002,689) $ (26,091,408) $(10,106,884)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Loss on early extinguishment of debt ............................. -- 21,336,550 --
Minority interest ................................................ 5,047,580 2,405,160 --
Depreciation ..................................................... 4,209,453 5,531,502 11,574,519
Amortization of debt issuance costs .............................. 554,311 402,770 348,503
Amortization of partnership formation costs ...................... 533,116 533,100 --
Amortization of loan discount and deferred interest
interest on capital lease obligation ........................... 124,176 391,491 21,621,411
Changes in assets and liabilities:
Accounts receivable ................................................ 460,319 (4,202,686) 1,304,454
Fuel oil, spare parts and supplies ................................. 261,516 (4,829,609) 1,649,228
Other current assets ............................................... 26,484 (152,241) (92,972)
Accounts payable and accrued expenses .............................. (81,728) 4,361,851 (2,114,862)
------------- ------------- ------------
Net cash provided (used) by operating activities ................. 9,132,538 (313,520) 24,183,397
------------- ------------- ------------
INVESTING ACTIVITIES:
Restricted cash - current ............................................ 695,684 (6,905,251) (576,287)
Additions to property, plant and equipment ........................... (122,001,950) (60,179,401) (3,498,029)
Acquisition of minority interest ..................................... -- (34,256,423) --
Restricted cash - debt service reserves and escrow deposits .......... (747,655) (7,158,576) (3,245,452)
------------- ------------- ------------
Net cash provided (used) by investing activities ................. (122,053,921) (108,499,651) (7,319,768)
------------- ------------- ------------
FINANCING ACTIVITIES:
Distributions to minority interest owner ............................. (3,800,279) (1,152,113) --
Advances (to) from parent ............................................ (15,746,235) 47,651,208 (10,377,908)
Deferred revenue ..................................................... -- -- 8,942,868
Proceeds from long term debt ......................................... 147,541,291 194,152,926 --
Repayment of long term debt .......................................... (17,500,000) (128,415,271) (5,501,822)
Repayment of capital lease obligation ................................ -- -- (7,831,527)
Debt issuance costs .................................................. (334,391) (3,754,888) (1,037)
------------- ------------- ------------
Net cash provided (used) by financing activities ................. 110,160,386 108,481,862 (14,769,426)
------------- ------------- ------------
Increase (decrease) in cash and cash equivalents ....................... (2,760,997) (331,309) 2,094,203
Cash and cash equivalents, beginning of period ......................... 3,921,093 1,160,096 828,787
------------- ------------- ------------
Cash and cash equivalents, end of period ............................... $ 1,160,096 $ 828,787 $ 2,922,990
============= ============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized ............................ $ 11,799,297 $ 15,656,801 $ 31,070,774
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
PANDA INTERHOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1995, 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 (see Note 5) 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 (see Note 5). 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 preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Any differences from those estimates are recorded in
the period in which they are identified.
Cash -- Included in cash and cash equivalents are highly
liquid investments with original maturities of three months or
less.
Restricted Cash - Current -- Restricted cash-current
represents escrowed cash which may be used to pay operating
expenses and make debt payments and distributions to partners
pursuant to the trust indenture agreements.
Restricted Cash - Debt Service Reserves and Escrow Deposits
- -- Debt service reserves and escrow deposits include cash held
by the bank to pay debt service and capital improvements pursuant
to the trust indenture agreements.
Fuel Oil, Spare Parts and Supplies -- These items include
fuel oil stored on-site and various spare parts and supplies
necessary for plant maintenance. The items are valued at cost
using the weighted average method, and are expensed, as plant
operating expenses, when used.
Plant and Equipment -- Electric generating facility assets
are recorded at cost and depreciated using the straight-line
method over the estimated useful lives of the assets, generally
twenty-five years. Depreciation of office furniture, equipment,
and leasehold improvements is provided using the straight-line
method over the estimated useful lives of the assets, generally
three to five years. Costs, including interest on funds borrowed
to finance the construction of facilities, related to projects
under construction are capitalized as construction in progress.
Construction in progress balances are transferred to electric
generating facilities when the assets are ready for their
intended use. Capitalized interest was $5,793,296 and $11,055,172
during 1995 and 1996, respectively. No interest was capitalized
in 1997. Maintenance and repair costs are charged to expense as
incurred. Other projects currently under development by PEII may
be transferred to the Company at PEII's historical cost when
construction financing has been obtained or when the completed
projects have commenced commercial operations, subject to certain
limitations in the Company's indentures (see Note 6).
Debt Issuance Costs -- The costs related to the issuance of
debt are capitalized and amortized using the effective interest
method over the term of the related debt.
Partnership Formation Costs -- The costs related to the
formation of Panda-Rosemary were capitalized and amortized over a
five year period ended December 31, 1996.
Deferred revenue -- Revenue from the sale of rights to
future interest income from certain of the Company's restricted
cash accounts (debt service reserves and escrow deposits) is
deferred and recognized as interest revenue over the lives of the
related debt obligations.
Environmental Matters -- The operations of the Company are
subject to federal, state and local laws and regulations relating
to protection of the environment. Although the Company believes
that its operations are in compliance with applicable
environmental regulation, risks of additional costs and
liabilities are inherent in cogeneration operations, and there
can be no assurance that significant costs and liabilities will
not be incurred by the Company. Management is not aware of any
contingent liabilities that currently exist with respect to
environmental matters.
Environmental expenditures are expensed or capitalized as
appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current
or future revenue generation, are expensed. Liabilities are
recorded if environmental assessments and/or remedial efforts
become probable, and the costs reasonably estimable.
Revenue Recognition -- Revenue generated from the sale of
electric capacity and energy from the Rosemary and Brandywine
projects is recognized based on the amount billed under the power
purchase agreements. The revenue generated from the sale of
electric capacity and energy from other projects will be
recognized based on the lesser of the amount billable under the
power purchase agreement or an amount determined by the annual
kilowatts made available multiplied by the estimated average
revenue per kilowatt over the term of the power purchase
agreement. Revenue from the sale of steam and chilled water is
recognized based on the output delivered at rates specified under
contract terms.
Income Taxes -- The Company records income taxes according
to Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS 109) which requires deferred
tax liabilities or assets to be recognized for the anticipated
future tax effects of temporary differences that arise as a
result of the differences in the carrying amounts and the tax
bases of assets and liabilities. SFAS 109 also requires a
valuation allowance for deferred tax assets in certain
circumstances.
The Company is included in the consolidated federal income
tax return of PEII. PEII's policy is to allocate income tax
expense or benefits to the Company as if it filed a separate tax
return.
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 $870,200, $1,654,000 and $2,480,000 in 1995, 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.
Asset Impairment -- In accordance with Statement of
Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (SFAS 121), the Company evaluates the impairment of
long-lived assets if circumstances indicate that the carrying
value of those assets may not be recoverable. The Company adopted
SFAS 121 in 1996 and such adoption had no material impact on its
financial position or results of operations.
Interest Cost -- Total interest cost incurred, including
capitalized interest, was $17,509,225, $25,357,817 and
$31,011,459 in 1995, 1996 and 1997, respectively.
3. ADVANCES (TO) FROM PARENT
Advances (to) from parent represent cash advances to or from
the parent, allocations of general and administrative expenses
from the parent, and the excess of liabilities assumed over the
assets contributed on projects owned by the parent and
contributed in connection with the formation of the Company.
The advances (to) from parent for the years ended December
31, 1995, 1996 and 1997 consist of the following:
<TABLE>
<S> <C>
Balance, January 1, 1995 $(16,517,526)
Cash advanced to parent, net (16,616,435)
Administrative costs allocated from parent 870,200
------------
Balance, December 31, 1995 (32,263,761)
Cash advanced from parent, net 45,997,208
Administrative costs allocated from parent 1,654,000
------------
Balance, December 31, 1996 15,387,447
Cash advanced to parent, net. (12,857,908)
Administrative costs allocated from parent 2,480,000
------------
Balance, December 31, 1997. $5,009,539
============
</TABLE>
The average balance of advances to parent was $(20,336,000),
$8,438,000 and $10,198,000 during 1995, 1996 and 1997,
respectively.
4. FUEL OIL, SPARE PARTS AND SUPPLIES
Fuel oil, spare parts and supplies are comprised of the
following amounts:
<TABLE>
1996 1997
<S> <C> <C>
Fuel oil $3,496,269 $3,232,983
Spare parts and supplies 4,417,508 3,031,566
Total $7,913,777 $6,264,549
</TABLE>
5. POWER PROJECTS
Rosemary Project -- Effective May 5, 1989, PEII formed a
wholly-owned subsidiary, now a wholly-owned subsidiary of the
Company, to develop, construct, and operate the 180 megawatt gas-
fired Rosemary cogeneration facility in Roanoke Rapids, North
Carolina ("Rosemary Project"). Construction on the Rosemary
Project began in September 1989, and commercial operation of the
facility began on December 27, 1990.
The Rosemary Project produces both electricity and useful
thermal energy in the form of steam. Electric capacity and energy
sales are based on the terms of the power purchase agreement
between Panda-Rosemary and Virginia Electric Power Company
("VEPCO") dated January 24, 1989. The agreement requires Panda-
Rosemary to provide VEPCO with all the available capacity of the
Rosemary Project on an as-needed basis with VEPCO obligated to
pay for the power delivered and dependable capacity of the
facility at a rate per kilowatt which decreases in certain
periods as defined by the agreement. The term of the agreement is
25 years and expires December 2015. A financial institution has
provided a letter of credit for approximately $5 million
guaranteeing Panda-Rosemary's performance under the power
purchase agreement. Steam and chilled water are sold to a third
party under a separate agreement which also has a term of 25
years and expires December 2015. The Rosemary Project is managed
by PRC, the general partner, and was operated by an unrelated
third party through 1996. Effective January 1, 1997, the
Rosemary Project is operated by a subsidiary of PEII. The
Company incurred management fees of $1,675,142 to the affiliated
management company for the year ended December 31, 1997.
On January 6, 1992, PRC contributed substantially all
project assets and liabilities and $216,553 in cash to Panda-
Rosemary, in exchange for a 10% combined general partnership and
limited partnership interest. The assets and liabilities were
recorded at historical cost, resulting in $19,874,216 in
partners' deficit being contributed by PRC. An institutional
investor ("Investor") contributed $30,948,987 in cash in exchange
for a 90% limited partnership interest. On July 31, 1996, the
Company acquired the Investor's limited partnership interest in
Panda-Rosemary for a purchase price of approximately $34.3
million. As a result of this acquisition, the Company owns 100%
of Panda-Rosemary. The acquisition was accounted for using the
purchase method of accounting. The excess of minority interest
over the purchase price (approximately $3.8 million) was
allocated to plant and equipment.
Prior to July 31, 1996, the Investor received percentage
allocations of income, expense, and cash flow which would decline
over time if certain rate of return requirements were achieved.
For the duration of the Investor's participation in Panda-
Rosemary, the allocation to the Investor remained at 90%.
Prior to acquiring the Investor's 90% limited partnership
interest on July 31, 1996, the Company controlled Panda-Rosemary
through its general partner interest. As general partner, the
Company has exclusive management authority over the operations of
Panda-Rosemary. Accordingly, Panda-Rosemary's statements of
operations and of cash flows for the year ended December 31, 1995
and for the period January 1, 1996 through July 31, 1996 (in
addition to the post-acquisition period) have been consolidated
in the accompanying financial statements. The capital of the
Investor and Panda-Rosemary's net income allocated to the
Investor are presented as minority interest in the accompanying
financial statements.
Brandywine Project -- On August 9, 1991, Panda-Brandywine
entered into a power purchase agreement ("PPA") with Potomac
Electric Power Company ("PEPCO") to build a 230 megawatt gas-
fired facility in Brandywine, Maryland ("Brandywine Project").
The Brandywine Project, constructed by Raytheon Engineers and
Constructors, Inc. ("Raytheon") under a fixed fee, turn-key
contract, was substantially completed and commenced commercial
operations in October, 1996.
The PPA requires Panda-Brandywine to supply PEPCO with all
available capacity from the facility for the 25-year term of the
agreement with a guaranteed dispatch level of at least 60 hours
per week for the first 15 years. In late 1997, Panda-Brandywine
and PEPCO reached a tentative agreement for modification of the
PPA (see Note 8). A construction loan commitment in the amount of
$215 million was provided by General Electric Capital Corporation
("GECC") in April, 1995. On December 30, 1996 the loan converted
to a capital lease with GECC in the amount of $217.5 million with
a twenty year term and two five year renewal options (see Note
6). GECC has committed to provide letters of credit up to a
maximum of approximately $7.3 million (under certain
circumstances) guaranteeing Panda-Brandywine's performance under
the agreement. `
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION
Long-term debt and capital lease obligation of the Company
as of December 31, 1996 and 1997 are summarized as follows:
<TABLE>
1996 1997
<S> <C> <C>
First Mortgage Bonds for
Rosemary Project $110,023,541 $104,521,719
Less current portion (5,501,823) (5,816,974)
------------ -------------
$104,521,718 $ 98,704,745
Capital lease obligation for
Brandywine Project $217,488,645 $231,278,528
============ =============
</TABLE>
Taxable Revenue Bonds -- In October 1989, PRC obtained long-
term financing for the Rosemary Project in the form of $116
million of taxable revenue bonds ("Tax Bonds") issued by the
Halifax Regional Economic Development Corporation ("Halifax"), a
nonprofit corporation organized in North Carolina. In connection
with the issuance of first mortgage bonds for the Rosemary
Project in July 1996 as discussed below, the Company refinanced
the Tax Bonds and incurred a loss of $13.3 million on the early
extinguishment of that obligation. The Tax Bonds bore interest at
a fixed rate of 9.25% payable semiannually.
Term Loan -- On October 27, 1995, PEII obtained a term loan
in the amount of $20 million from Trust Company of the West
("TCW"). This loan amended and restated the loan agreement dated
November 8, 1994. In July 1996, in connection with the offering
of Series A Bonds by PIC (the Company's parent) as discussed in
Note 8, approximately $26.4 million of the proceeds was advanced
by PIC to the Company to retire all of the term loan debt. The
Company incurred a loss of $8 million on the early extinguishment
of this obligation. The loan bore interest at a rate of 13.5%,
payable at a rate of 11.0%. The 2.5% interest not payable
currently was added to the principal balance of the loan.
Under the loan agreement, TCW also received 1,004,000
warrants to purchase shares of PEII stock. A loan discount of
$1,241,812 was created as a result of allocating value to the
warrants. The carrying value of the warrants is adjusted
annually to the redemption price. Such adjustment, which was
allocated to the Company from PEII until the debt was retired in
July 1996, was $153,861 and $172,924 in 1995 and 1996,
respectively, and was recorded as interest expense in the
accompanying statements of operations.
First Mortgage Bonds -- In July 1996, Panda-Rosemary
Funding Corporation ("PRFC"), a wholly-owned subsidiary of Panda-
Rosemary, issued $111,400,000 of first mortgage bonds ("Rosemary
Bonds"). The Rosemary Bonds bear interest at a fixed rate of 8-
5/8% payable quarterly commencing November 15, 1996. Scheduled
principal payments are required quarterly commencing November 15,
1996, and will continue through maturity on February 15, 2016.
The Rosemary Bonds are subject to mandatory redemption prior to
maturity under certain conditions. The Rosemary Bonds are
unconditionally guaranteed by Panda-Rosemary but are non-recourse
to the Company, and are secured by substantially all of the
assets of Panda-Rosemary as well as all of the outstanding
capital stock of PRC, PRC II and PRFC. The indenture contains
certain covenants, including limitations on distributions,
additional debt and certain other transactions.
While amounts are outstanding under the Rosemary Bonds, all
revenues of Panda-Rosemary are paid to a collateral agent. Funds
held by the collateral agent are included in the accompanying
consolidated balance sheets as restricted cash-current. On a
monthly basis, the collateral agent remits to Panda-Rosemary
remaining funds available after payment of all expenditures
relating to the Rosemary project, including debt service,
provided that Panda-Rosemary is in compliance with the debt
covenants. Additionally, the collateral agent withholds funds to
meet future debt service, maintenance and pollution control
requirements, if required under the indenture. These amounts are
included in the accompanying consolidated balance sheets as
restricted cash-current and restricted cash-debt service reserves
and escrow deposits.
Construction Loan and Capital Lease -- On April 10, 1995,
Panda-Brandywine closed the initial funding of a $215 million
construction loan commitment with GECC. The construction loan
bore an interest rate of the Eurodollar rate plus 2.5%.
The Brandywine Project commenced commercial operations on
October 31, 1996. The construction loan was converted to long-
term non-recourse financing of $217.5 million in the form of a
capital lease on December 30, 1996. To effect the lease
financing, title to the Brandywine Project was transferred to a
third party trustee and leased back to Panda-Brandywine. The
Brandywine facility lease is a net lease with an initial term of
20 years and two five-year renewal options. The minimum lease
payments through 2000 are less than the interest expense on the
capital lease obligation, resulting in increases in the principal
amount of the capital lease obligation. Amortization of the
original principal amount of the capital lease obligation begins
in 2007. The documents governing the lease financing contain
various affirmative and negative covenants, including limitations
on the ability of Panda-Brandywine to make distributions to its
partners. In connection with the capital lease financing, GECC
has committed to provide letters of credit up to a maximum of
approximately $7.3 million under certain circumstances (see Note
5). The letters of credit have an annual fee of 1.50% on any
amounts outstanding.
The future minimum lease commitments under the capital lease
for the Brandywine Project are as follows:
<TABLE>
<S> <C>
1998 $ 10,419,439
1999 17,584,915
2000 20,489,320
2001 25,613,918
2002 27,770,137
Thereafter 473,645,389
-------------
Total minimum lease payments 575,523,118
Amounts representing interest (344,244,590)
-------------
Present value of net minimum payments $231,278,528
=============
</TABLE>
Long-term Debt Maturities -- The principal maturities of
long-term obligations, excluding the capital lease relating to
the Brandywine Project, for each of the five years succeeding
December 31, 1997 and thereafter are as follows:
<TABLE>
<S> <C>
1998 $ 5,816,974
1999 5,300,189
2000 5,377,835
2001 5,778,318
2002 6,190,275
Thereafter 76,058,128
$104,521,719
</TABLE>
7. INCOME TAXES
A provision for income taxes for 1995, 1996 and 1997 has not
been recorded since operating losses were incurred for each year.
The Company has approximately $27 million of net operating
loss carryforwards at December 31, 1997, the benefits of which
will be available to the Company when realized by PEII. The net
operating loss carryforwards will expire during the years 2007 to
2012. PEII may become subject to a limitation on the amount of
net operating loss carryforwards which may be used annually to
offset income should certain changes in its ownership occur in
the future. Should PEII become subject to such a limitation, the
amount of tax benefits available to the Company could be reduced.
Deferred tax assets of approximately $11 million and $17
million as of December 31, 1996 and 1997, respectively, consist
primarily of interest in partnerships and net operating losses
and are offset by a valuation allowance. The deferred tax asset
for interest in partnerships relates to the difference between
the tax basis of the assets contributed to the partnership upon
its formation and the Company's financial reporting basis in
those assets.
SFAS No. 109 requires that a valuation allowance be recorded
against tax assets which are not likely to be realized. The
Company's carryforwards expire at specific future dates and
utilization of certain carryforwards is limited to specific
amounts each year. However, due to the uncertain nature of their
ultimate realization based upon past performance and expiration
dates, the Company has established a full valuation allowance
against these carryforward benefits and will recognize the
benefits only when reassessment demonstrates that it is more
likely than not that such benefits will be realized. Realization
is entirely dependent upon future earnings in specific tax
jurisdictions. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax
benefits of the carryforwards will be recorded in future
operations as a reduction of the Company's income tax expense or
as an income tax benefit.
8. 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, 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 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,
and (ii) approximately $26.4 million to retire the term loan as
discussed in Note 6. See Note 3.
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. PEII 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. In 1997, this dispute was
settled. The cost of the settlement will be paid by PEII;
accordingly, the cost is not reflected in the Company's financial
statements. The settlement did not have a material impact on
the consolidated financial position, results of operations or
cash flows of PEII.
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"). In late
1997, Panda-Brandywine reached a tentative agreement with PEPCO
under which the amount of capacity payments will be increased (as
compared with the capacity payments originally anticipated)
during the first ten years following the commencement of
commercial operations, and will be reduced during the final
fifteen years of the Power Purchase Agreement. The agreement
provides that PEPCO will pay to Panda-Brandywine within two
business days following the effective date of the settlement (as
discussed below) approximately $3.8 million, which represents the
difference between the originally scheduled capacity payments and
the capacity payments due under the agreement for the first nine
months of 1997. Capacity payments for the final three months of
1997 were made in accordance with the tentative agreement.
Additionally, PEPCO has agreed to release certain amounts of
capacity to Panda-Brandywine for resale of energy to other
parties, and to grant Panda-Brandywine the right to sell
additional energy to other parties subject to the availability of
the facility. The effectiveness of the agreement with PEPCO is
subject to the consent of the financing parties, including GECC,
under the capital lease financing arrangements for the facility.
In this regard, Panda-Brandywine has commenced discussions with
GECC and the other financing parties concerning such consents,
and has executed an agreement in principle with GECC. Among
other things, this agreement in principle provides for (i) the
reallocation of lease payments to GECC in order to match the
revised capacity payment schedule with PEPCO, (ii) the
reimbursement to GECC by Panda-Brandywine of certain fees, and
(iii) certain technical amendments to the applicable financing
documents. The finalization of the tentative agreement is
subject to several conditions, including but not limited to
written consents from all other financing parties and other
applicable parties, receipt of legal opinions concerning the tax
and regulatory consequences of the transaction, and the
preparation of definitive legal documentation of the transaction
to the satisfaction of all parties involved.
As discussed in Note 5, 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 allocable to the Company with respect to these matters
will not have a material affect on the financial position,
results of operations or cash flows of the Company.
9. RELATED PARTY TRANSACTIONS
The Company purchases insurance coverage through an agency
owned by a major shareholder of PEII who is also a member of the
board of directors of PEII and a relative of PEII's chairman.
The Company believes such coverage is on terms that are no less
favorable than reasonably available from unaffiliated third
parties. Total insurance purchases through this agency were
$298,728, $754,388 and $1,153,623 for the years ended December
31, 1995, 1996 and 1997, respectively.
The Rosemary Project is operated by an affiliated management
company which is a subsidiary of PEII (see Note 5).
10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF
CREDIT RISK
The estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1997 are as follows:
<TABLE>
Carrying Value Fair Value
<S> <C> <C>
1996: Long-term debt,
including current portion $110,023,541 $110,023,541
1997: Long-term debt,
including current portion 104,521,719 104,521,719
</TABLE>
The Rosemary Bonds have limited trading. The fair value of
these bonds is estimated based on a third party quotation.
The Company is also a party to letters of credit.
Historically, no claims have been made against these financial
instruments and management does not expect any material losses to
result from these off-balance-sheet instruments because
performance is not usually expected to be required. Therefore,
management is of the opinion that the fair value of these
instruments is zero.
The Company's electric capacity and energy sales are
currently under two power sales contracts with two customers. The
failure of these customers to fulfill their contractual
obligations could have a substantial negative impact on the
Company's revenue. However, the Company does not anticipate non-
performance by the customers under these contracts.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 INTERHOLDING CORPORATION
Date: March 27, 1998 By: /s/ Robert W. Carter
Robert W. Carter, Chairman of
the Board and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PEOPLE BY THESE PRESENTS, that each of the
undersigned officers and directors of Panda Interholding
Corporation. (the "Company") hereby constitutes and appoints
Robert W. Carter or Janice Carter or any of them (with full power
to each of them to act along), his or her true and lawful
attorney-in-fact and agent, with full power of substitution, for
him or her and on his or her behalf and in his or her name, place
and stead, in any and all capacities, to sign, execute, and file
any and all documents relating to the Company's Form 10-K for the
year ending December 31, 1997, including any and all amendments
and supplements hereto, with any regulatory authority, granting
said attorneys and each of them; full power and authority to do
and perform each and every act and thing requisite and necessary
to be done in and about the premises in order to effectuate the
same as fully to all intents and purposes as he himself, or she
herself, might or could do if personally present, hereby
ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his or her substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Robert W. Carter Chairman of the Board, March 27, 1998
Robert W. Carter Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Janice Carter Executive Vice President, March 27, 1998
Janice Carter Secretary and Treasurer
(Principal Financial
and Accounting Officer)
EXHIBIT 12.00
PANDA INTERHOLDING CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Income (loss) before minority
interest and extraordinary items $ 4,502 $ 5,242 $ 3,045 $ (2,350) $ (10,107)
Interest expense 11,066 11,018 11,716 14,303 31,011
Amortization of debt issue costs 502 600 554 403 349
Capitalized interest - 803 5,793 11,055 -
-----------------------------------------------------
Total fixed charges 11,568 12,421 18,063 25,761 31,360
Earnings before fixed charges 16,070 16,860 15,315 12,356 21,253
Ratio of earnings to fixed charges 1.39 1.36 0.85 0.48 0.68
Deficiency in coverage of
fixed charges $(2,748) $(13,405) $(10,107)
</TABLE>
EXHIBIT 21.00
SUBSIDIARIES OF PANDA INTERHOLDING CORPORATION
Jurisdiction of
Name of Entity Organization
Panda-Rosemary Corporation Delaware
PRC II Corporation Delaware
Panda-Rosemary, L.P. Delaware
Panda-Rosemary Funding Corporation Delaware
Rosemary Water Company Delaware
Panda Brandywine Corporation Delaware
Panda Energy Corporation Delaware
Brandywine Water Company Delaware
Panda-Brandywine, L.P. Delaware
27.01 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from SEC Form 10-K and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 9,610,190 12,280,670
<SECURITIES> 0 0
<RECEIVABLES> 9,402,685 8,098,231
<ALLOWANCES> 0 0
<INVENTORY> 7,913,777 6,264,549
<CURRENT-ASSETS> 27,091,547 26,901,327
<PP&E> 289,211,129 292,048,991
<DEPRECIATION> (26,539,539) (38,114,058)
<TOTAL-ASSETS> 310,801,563 304,772,672
<CURRENT-LIABILITIES> 14,283,249 11,823,372
<BONDS> 104,521,718 98,704,745
0 0
0 0
<COMMON> 10 10
<OTHER-SE> (40,879,506) (50,986,390)
<TOTAL-LIABILITY-AND-EQUITY> 310,801,563 304,772,672
<SALES> 32,776,493 65,628,307
<TOTAL-REVENUES> 34,004,162 67,155,957
<CGS> 12,050,495 26,245,012
<TOTAL-COSTS> 15,583,843 34,328,360
<OTHER-EXPENSES> 6,467,372 11,923,022
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,302,645 31,011,459
<INCOME-PRETAX> (4,754,858) (10,106,884)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,754,858) (10,106,884)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (21,336,550) 0
<CHANGES> 0 0
<NET-INCOME> (26,091,408) (10,106,884)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
