UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 333-29005-01
PANDA GLOBAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2697755
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
4100 Spring Valley Road, Suite 1001, Dallas, Texas 75244
(Address of principal executive offices, including zip code)
(972) 980-7159
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of May 10, 1999.
Common Stock, Par Value $.01 Per Share 1,000
<PAGE>
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited) F-1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 6
Item 5. Other Information 6
Item 6. Exhibits and Reports on Form 8-K 6
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this Quarterly Report on
Form 10-Q, 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 registrant 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 registrant's expectations
("Cautionary Statements") include the impact of geopolitical occurrences
worldwide; the results of financing efforts; risks in financial markets; 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 registrant or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
<PAGE>
PANDA GLOBAL HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
<PAGE>
PANDA GLOBAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 2,056,317 $ 1,997,454
Restricted cash - current ............................... 52,668,167 132,423,492
Accounts receivable ..................................... 9,582,815 11,677,801
Fuel oil, spare parts and supplies ...................... 6,324,191 6,196,835
Deferred taxes .......................................... 18,609,000 --
Other current assets .................................... 1,934,610 1,535,843
------------- -------------
Total current assets .................................. 91,175,100 153,831,425
Plant and equipment:
Electric generating facilities .......................... 301,411,796 301,322,454
Furniture and fixtures .................................. 542,989 542,989
Less: accumulated depreciation .......................... (50,314,383) (53,287,588)
Construction in progress ................................ 81,475,023 91,885,173
Development costs and equipment deposits ................ 58,751,189 8,000,000
------------- -------------
Total plant and equipment, net ........................ 391,866,614 348,463,028
Investment in joint venture ............................... 793,880 948,123
Restricted cash - debt service reserves and escrow deposits 39,022,048 49,147,180
Deferred taxes ............................................ 6,391,000 6,391,000
Debt issuance costs, net of accumulated
amortization of $3,239,618 and $3,652,731, respectively . 11,893,362 11,480,249
------------- -------------
$ 541,142,004 $ 570,261,005
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
F-1
<PAGE>
PANDA GLOBAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
1998 1999
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses:
Construction costs ................................. $ 9,106,941 $ 11,230,252
Interest and letter of credit fees ................. 9,770,768 11,544,256
Operating expenses and other ....................... 6,980,241 3,734,871
Short-term debt ...................................... 33,000,000 --
Current portion of long-term debt .................... 5,924,989 6,365,604
------------- -------------
Total current liabilities ........................ 64,782,939 32,874,983
Deferred revenue ....................................... 12,669,811 23,965,795
Long term debt, less current portion ................... 344,740,630 343,102,207
Capital lease obligation ............................... 246,078,324 248,555,032
Minority interest ...................................... 5,741,166 5,741,166
Commitments and contingencies (Note 4)
Shareholder's deficit:
Common stock, $.01 par value; 1,000 shares authorized,
issued and outstanding ............................ 10 10
Advances to parent ................................... (49,765,758) (53,212,028)
Accumulated deficit .................................. (83,105,118) (30,766,160)
------------- -------------
(132,870,866) (83,978,178)
------------- -------------
$ 541,142,004 $ 570,261,005
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
F-2
<PAGE>
PANDA GLOBAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
REVENUE:
Electric capacity and energy sales ............... $ 16,611,008 $ 22,086,346
Steam and chilled water sales .................... 189,938 147,323
Interest income .................................. 2,272,754 1,633,073
Other income - gain on sale of development project -- 86,698,331
------------- -------------
19,073,700 110,565,073
------------- -------------
EXPENSES:
Plant operating expenses ......................... 4,661,158 5,597,139
Project development and administrative ........... 2,430,519 5,016,188
Interest expense and letter of credit fees ....... 14,633,578 13,617,469
Depreciation ..................................... 2,917,687 2,973,206
Amortization of debt issuance costs .............. 412,925 413,113
------------- -------------
25,055,867 27,617,115
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES .................. (5,982,167) 82,947,958
Income tax benefit (expense):
Current ........................................ -- (12,000,000)
Deferred ....................................... -- (18,609,000)
------------- -------------
Total income tax expense ..................... -- (30,609,000)
------------- -------------
NET INCOME (LOSS) .................................. $ (5,982,167) $ 52,338,958
============= =============
</TABLE>
See accompanying notes to condensed financial statements.
F-3
<PAGE>
PANDA GLOBAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------------- ADVANCES (TO) ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT FROM PARENT DEFICIT DEFICIT
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1999 ....... 1,000 $ 10 $ (49,765,758) $ (83,105,118) $(132,870,866)
Advances (to) from parent, net -- -- (3,446,270) -- (3,446,270)
Net income ................... -- -- -- 52,338,958 52,338,958
------------- ------------- ------------- ------------- -------------
BALANCE, March 31, 1999 ........ 1,000 $ 10 $ (53,212,028) $ (30,766,160) $ (83,978,178)
============= ============= ============= ============= =============
</TABLE>
See accompanying notes to condensed financial statements.
F-4
<PAGE>
PANDA GLOBAL HOLDINGS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1999
------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ......................................... $ (5,982,167) $ 52,338,958
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Gain on sale of development project ................... -- (86,698,331)
Deferred tax expense .................................. -- 18,609,000
Depreciation .......................................... 2,917,687 2,973,206
Amortization of debt issuance costs ................... 412,925 413,113
Amortization of loan discount and deferred
interest on capital lease obligation ................ 5,794,925 6,178,161
Deferred revenue ...................................... (155,997) (204,016)
Changes in assets and liabilities:
Accounts receivable ..................................... (1,210,528) (2,094,986)
Fuel oil, spare parts and supplies ...................... (101,102) 127,356
Other current assets .................................... (23,067) 398,767
Accounts payable and accrued expenses ................... (519,865) (1,471,883)
------------- -------------
Net cash provided (used) by operating activities ...... 1,132,811 (9,430,655)
------------- -------------
INVESTING ACTIVITIES:
Restricted cash - current ................................. 17,105,669 (79,755,325)
Additions to property, plant and equipment ................ (9,053,055) (29,061,386)
Sale of development project ............................... -- 168,503,059
Restricted cash - debt service reserves and escrow deposits (4,296,690) (10,125,132)
------------- -------------
Net cash provided (used) by investing activities ...... 3,755,924 49,561,216
------------- -------------
FINANCING ACTIVITIES:
Advances (to) from parent ................................. (2,169,100) (3,790,163)
Deferred revenue .......................................... -- 1,500,000
Proceeds from short-term debt ............................. -- 15,534,633
Repayment of short-term debt .............................. -- (48,534,633)
Repayment of long term debt ............................... (1,375,122) (1,480,617)
Repayment of capital lease obligation ..................... (2,610,509) (3,418,644)
Debt issuance costs ....................................... (10,000) --
------------- -------------
Net cash provided (used) by financing activities ...... (6,164,731) (40,189,424)
------------- -------------
Increase (decrease) in cash and cash equivalents ............ (1,275,996) (58,863)
Cash and cash equivalents, beginning of period .............. 2,929,289 2,056,317
------------- -------------
Cash and cash equivalents, end of period .................... $ 1,653,293 $ 1,997,454
============= =============
NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES:
Investment in joint venture ............................... $ -- $ 154,243
Accrued construction costs ................................ 5,200,000 11,230,252
Interest expense on capital lease obligation .............. 5,550,437 5,895,352
</TABLE>
See accompanying notes to condensed financial statements.
F-5
<PAGE>
PANDA GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
Panda Global Holdings, Inc. ("Panda Global", or collectively with
its subsidiaries the "Company"), a wholly owned subsidiary of Panda Energy
International, Inc. ("PEII"), was formed in March 1997 to hold the ownership
interests in certain independent power projects which were formerly owned by
other wholly owned subsidiaries 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. The Company
operates primarily through three direct wholly owned subsidiaries: Panda Energy
Corporation ("PEC")( a Texas corporation) which indirectly holds the Company's
ownership and leasehold interests in two domestic projects currently in
operation; Panda Global Energy Company ("Global Cayman")(a Cayman Islands
company), which indirectly holds the Company's ownership interests in two
international projects currently under construction; and Panda Merchant Power
Holding, LLC ("Merchant Holding")(a Delaware limited liability company), which
has been established to hold the Company's ownership interests in any domestic
projects which might be developed.
PEC, through its wholly owned subsidiary Panda Interfunding
Corporation ("PIC") and PIC's wholly owned subsidiary Panda Interholding
Corporation ("Interholding"), holds the Company's ownership interest in the
Rosemary project and leasehold interest in the Brandywine project. The entities
holding such interests include the following: Panda Rosemary Corporation
("PRC"), the general partner in Panda-Rosemary, L.P. ("Panda-Rosemary"); PRC II
Corporation ("PRC II"), the limited partner in Panda-Rosemary; Panda Brandywine
Corporation, the general partner in Panda-Brandywine, L.P. ("Panda-Brandywine");
and Panda Energy Corporation (a Delaware corporation), the limited partner in
Panda-Brandywine. The Company, through its general and limited partnership
interests, owns 100% of Panda-Brandywine and, as of July 31, 1996, owns 100% of
Panda-Rosemary. Prior to July 31, 1996, the Company owned 10% of Panda-Rosemary.
The Rosemary and Brandywine projects are located in the United States. Other
direct or indirect wholly owned subsidiaries of PIC include Panda Funding
Corporation ("PFC") and Panda-Rosemary Funding Corporation ("PRFC") and Panda
Cayman Interfunding Corporation ("PIC Cayman"), which have been formed to
facilitate the financing of the development and acquisition of independent power
projects.
Global Cayman (which collectively with its subsidiaries is a
development stage enterprise having no operating revenues) holds a 95.5%
ownership interest in Pan-Sino Energy Development Company LLC ("Pan-Sino")(a
Cayman Islands company), which in turn holds a 99% ownership interest in
Pan-Western Energy Corporation LLC ("Pan-Western")(a Cayman Islands company),
which in turn owns an approximately 88% interest in four joint venture companies
(the "Joint Venture Companies") organized under the laws of the People's
Republic of China ("China") to develop and construct an independent power
project located in China. The Joint Venture Companies are: Tangshan Panda Heat
and Power Company, Ltd. ("Tangshan Panda"), Tangshan Pan-Western Heat and Power
Company, Ltd. ("Tangshan Pan-Western"), Tangshan Cayman Heat and Power Company,
Ltd. ("Tangshan Cayman") and Tangshan Pan-Sino Heat Company, Ltd. ("Tangshan
Pan-Sino"). Additionally, Global Cayman indirectly holds an equity investment in
Bhote Koshi Power Company Pvt. Ltd. (a Nepal company), which was organized under
the laws of Nepal to develop and construct an independent power project in
Nepal.
Merchant Holding (which collectively with its subsidiaries is a
development stage enterprise having no operating revenues), through wholly owned
subsidiaries, has been established to hold the Company's ownership interests in
any domestic projects which might be developed.
Additionally, the Company conducts other development activities
through various subsidiaries.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 1998. The accompanying
unaudited condensed consolidated financial statements for the three-month
periods ended March 31, 1998 and 1999 include all adjustments, consisting of
normal recurring accruals, which management considers necessary for a fair
presentation of the results for the interim periods. The results of operations
for the three months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. The amounts
presented in the balance
F-6
<PAGE>
sheet as of December 31, 1998 were derived from the Company's audited
consolidated financial statements.
ALLOCATION OF ADMINISTRATIVE COSTS -- PEII performs certain
accounting, legal, insurance, and consulting services for the Company. These
general and administrative costs are generally allocated to the Company using
the percentage of time PEII personnel spent performing these services. The
expenses allocated were $1.5 million and $3.5 million for the three-month
periods ended March 31, 1998 and 1999, respectively. Such costs are included in
project development and administrative expenses in the statement of operations.
Management believes the method used to allocate these costs is reasonable.
3. POWER PROJECTS
TEXAS PROJECTS-- In February 1999, the Company sold the Paris
Project to a third party for a price of approximately $160.5 million. The
Company retained a 1% limited partnership interest in the project. Of the sale
price, $10 million is being held in escrow pending successful completion of the
project within the anticipated time and cost budgets. After the project
commences commercial operations, any funds remaining in escrow will be
distributed to the Company. In connection with the sale, the Company repaid the
borrowings and accrued interest under the Bridge Financing Agreement of
approximately $48.5 million. The Company realized a gain of approximately $86.7
million on the sale. Gain recognition has been deferred on the $10 million held
in escrow pending final disposition of the escrowed funds.
In March 1999, the Company sold the Guadalupe Project (which was in
the initial stage of development) to PEII for $8.0 million, which was the fair
market value of the project as determined by an independent engineering firm.
The proceeds in excess of the Company's capitalized costs of approximately $7.5
million on the project have been included in advances to parent in the
accompanying financial statements.
LUANNAN PROJECT -- The Company has incurred costs on the Luannan
Project of $81.5 million and $91.9 million as of December 31, 1998 and March 31,
1999, respectively. Such costs are included in the accompanying balance sheets
in plant and equipment under construction in progress.
In May 1999, the Company filed an application with the Chinese
government for determination of the initial tariff under the Luannan Power
Purchase Agreement. The Company understands that current economic and political
conditions in China could adversely affect the amount of the initial tariff.
There can be no assurance that such tariff will allow the Luannan Facility to
generate sufficient revenues to meet outstanding debt obligations regarding the
Luannan Facility, or that any subsequent applications for an increase in the
tariff will be approved by the Chinese government.
NEPAL PROJECT -- BKPC, the Company's equity investee, has incurred
costs for the Nepal Project (including development, construction and debt
issuance costs) of $37.2 million and $40.5 million as of December 31, 1998 and
March 31, 1999, respectively.
EQUIPMENT DEPOSITS -- The Company has paid deposits of $8.0 million
on equipment orders. Management has not assigned the equipment orders to
specific projects.
4. COMMITMENTS AND CONTINGENCIES
The Rosemary and Brandywine projects operate as qualifying
facilities, and the related power contracts are subject to the rules and
regulations under the Public Utilities Regulatory Policies Act of 1978
("PURPA"). In order to promote open competition in the industry, proposed
legislation in the U.S. Congress has called for either a repeal of PURPA or a
complete restructuring of the regulations governing the electric industry
including PURPA. These federal initiatives are generally not yet effective, but
many states are implementing or considering regulatory initiatives designed to
increase competition in the domestic power generation industry. In most cases,
any initiatives discussed have indicated that power sales agreements of existing
qualifying facilities would be honored. The Company cannot predict the final
form or timing of the proposed restructuring on a federal or individual state
level or the impact, if any, that such restructuring would have on the Company's
existing business or results of operations. The Company currently believes that
any such restructuring would not have a material effect on its power sales
agreements and, accordingly, that its existing business and results of
operations would not be materially adversely affected, although there can be no
assurance in this regard.
In April 1998, the Company filed suit in federal court charging the
Bibb Company ("Bibb") and Westpoint Stevens, Inc. ("Westpoint") with violating a
contractual agreement in the sale of a textile mill in 1997 and in the operation
of the mill since that time. The Rosemary Facility supplies steam and chilled
water to the textile mill under a contract originally signed with Bibb.
F-7
<PAGE>
Westpoint acquired the textile mill from Bibb in 1997. The suit asked the court
to determine and clarify the rights of the parties to the contract. The federal
court dismissed this action in June 1998. Shortly thereafter, Bibb and Westpoint
filed a separate suit in state court in Halifax County, North Carolina claiming,
among other things, breach of contract in regard to delivery of steam. In
October 1998, the Company filed suit against Bibb and Westpoint in state court
in Dallas County, Texas regarding the contract. The Company intends to
vigorously pursue its claims against Bibb and Westpoint in these state court
actions. The Company continues to provide steam and chilled water to the mill
pursuant to the contract. The Company believes that the resolution of this
contractual 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 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 that the amount of
ultimate liability allocable to the Company with respect to these matters will
not have a material effect on the financial position, results of operations or
cash flows of the Company.
F-8
<PAGE>
PANDA GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(DOLLAR AMOUNTS ARE IN THOUSANDS UNLESS OTHERWISE NOTED)
GENERAL
The Company has interests in two completed electric power generation
facilities in the United States: a 100% equity ownership interest in the
Rosemary Facility, which began commercial operations in December 1990, and a
100% leasehold interest (through a capital lease arrangement) in 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. The
Company also owns an approximately 83% indirect interest in the Luannan Facility
currently under construction in China, financing for which was completed in
April 1997. Additionally, the Company owns an indirect equity interest in the
Nepal Facility currently under construction in Nepal, financing for which was
completed in December 1997. The Company also has other projects under
development.
RESULTS OF OPERATIONS
The Company's current revenues from electric power generation are
primarily 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 currently the predominant source of revenue for the Company. See
"Liquidity and Capital Resources."
FIRST QUARTER 1999 COMPARED TO 1998
The Company recorded net income of $52,339 in the first quarter of
1999 on revenues of $110,565 compared to a net loss of $5,982 on revenues of
$19,074 during the same period in 1998. The increase in revenues in the 1999
period was primarily caused by a gain of $86.7 million from the sale of a 99%
interest in the Paris project, as well as an increase in operating revenues at
the Rosemary and Brandywine facilities.
For the 1999 and 1998 periods, capacity revenues for the Rosemary
Facility were $6,406 and $6,922, respectively, reflecting a contractual decrease
in 1999. Energy revenues for the Rosemary Facility for the 1999 and 1998 periods
were $687 and $4, respectively. The increase in energy revenues for the Rosemary
Facility is attributable to higher dispatch levels at that facility compared to
the 1998 period. Capacity revenues from Potomac Electric Power Company ("PEPCO")
for the Brandywine Facility for the first quarter of 1999 and 1998 were $11,000
and $6,831, respectively, reflecting a contractual increase in 1999. Energy
revenues from PEPCO for the Brandywine Facility for the first quarter of 1999
and 1998 were $2,665 and $2,769, respectively. The decrease in energy revenues
for the Brandywine Facility is primarily attributable to lower energy prices at
that facility compared to the 1998 period. In addition to capacity and energy
revenues from PEPCO, the Company earned revenues of $1,279 in the 1999 period
from excess capacity and energy sales on a merchant basis from the Brandywine
Facility as allowed under the PEPCO agreement. Additionally, in the first
quarter of 1999 and 1998, the Brandywine Facility had energy revenues of $49 and
$85, respectively, from the sale of natural gas and fuel oil to other
purchasers.
Plant operating expenses, which included fuel cost, operation and
maintenance expense, insurance and property taxes, increased to $5,597 (25% of
electricity revenues) in the 1999 period from $4,661 (28% of electricity
revenues) in the 1998 period. The increase was primarily due to higher dispatch
levels in the 1999 period.
Project development and administrative expenses were $5,016 (23% of
electricity revenues) and $2,431 (15% of electricity revenues) for the 1999 and
1998 periods, respectively. The increase in 1999 was primarily attributable to a
1
<PAGE>
higher level of management involvement and support that was required to complete
the sale of the 99% interest in the Paris project, and to the accrual of
employee bonuses at PEII in the first quarter of 1999 instead of the fourth
quarter of 1998. Such bonuses, which are included in the overhead cost
allocation pool, were accrued in the fourth quarter of 1997 and prior years.
Interest expense decreased to $13,617 (62% of electricity revenues)
in the 1999 period from $14,634 (88% of electricity revenues) in 1998 as a
result of an increase in the capitalized portion of the interest cost on the
Senior Secured Notes as the Luannan Facility approaches completion.
Depreciation and amortization of debt issue costs amounted to $3,386
(15% of electricity revenues) in the 1999 period and $3,331 (20% of electricity
revenues) in 1998. The slight increase in 1998 was primarily attributable to
amortization of debt issue costs for the Senior Secured Notes issued in April
1997.
The provision for income taxes, which was attributable to the gain
on the sale of the Paris project, amounted to $30,609 in the first quarter of
1999. There was no provision for income taxes in the first quarter of 1998 due
to the net loss incurred and the uncertainty at that time concerning the
realization of the deferred tax asset that resulted from such net loss.
As a result of the various factors discussed above, the Company
recorded net income of $52,339 and a net loss of $5,982 for the 1999 and 1998
periods, respectively.
LIQUIDITY AND CAPITAL RESOURCES
In the 1999 and 1998 periods, the Company obtained cash from
operations of the Rosemary Facility and the Brandywine Facility and from
interest on cash balances. Additionally, the Company entered into a partnership
agreement concerning the Paris project and received net proceeds of
approximately $102 million, after repayment of project debt and escrowed funds,
in exchange for partnership interests therein. The Company utilized a portion of
this cash to service its debt and capital lease obligations, to fund project
development efforts, and for general and administrative expenses.
The principal future cash requirement of the Company will be payment
of its debt service and capital lease obligations. The Company will rely almost
exclusively on distributions from Global Cayman and PIC to meet its cash
requirements. Those entities in turn will rely almost exclusively on
distributions from the project entities to meet their cash requirements. The
project entities' ability to make such distributions will depend upon the
financial performance of the Rosemary Facility, the Brandywine Facility, the
Luannan Facility and the Nepal Facility and will be subject to a number of
limitations on distributions contained in the project-level debt agreements. To
continue its development activities, the Company will also require external
financing. The Company is pursuing debt and equity financing to fund these
activities. 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 development, construction and maintenance, 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.
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.
2
<PAGE>
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.
MARKET RISK DISCLOSURES
The Company has limited exposure to financial market risks. The
Company attempts, whenever possible, to hedge certain aspects of its projects
against the effects of fluctuations in inflation, interest rates, foreign
currency exchange rates and energy prices. Because of the complexity of hedging
strategies and the nature of the Company's operations, its results, although
significantly hedged, will likely be somewhat affected, and in certain cases may
be materially affected, by fluctuations in these variables and such fluctuations
may result in material improvement of deterioration of operating results.
The Company has generally structured the energy payments under its
power generation sales contracts to adjust with similar price indices as do its
contracts with the fuel suppliers for the corresponding power plants. The
Company's operations currently consist primarily of businesses with long-term
contracts. While the contract-based portfolio is expected to be an effective
hedge against future energy and electricity market price risks, a significant
portion of the Company's currently expected future revenues is anticipated to be
derived from businesses without significant long-term revenue contracts.
Increasing reliance on non-contract businesses in the Company's portfolio may
subject the Company to potentially increasing electricity market price
volatility.
The Company has also used a hedging strategy in an attempt to
insulate each plant's financial performance, where appropriate, against the risk
of fluctuations in interest rates. Because the capacity payments at the
Company's facilities are essentially fixed, the Company has attempted to hedge
against interest rate fluctuations by arranging fixed rate financing. The
Company's borrowings currently consist entirely of fixed rate obligations. There
are no interest rate swaps or other hedging facilities related to these
borrowings. The Company has no derivative financial instruments in place as of
March 31, 1999.
The Company has certain exposure to changes in the foreign currency
exchange rate for the Chinese renminbi. This exposure is limited during the
construction phase of the Luannan Facility because the related debt and most
construction expenditures are denominated in U.S. dollars. After the project
commences commercial operations, the exposure will increase because the
project's operating revenues and expenses will be primarily denominated in the
renminbi. However, certain components of the power price calculation may be
adjusted to reflect local and U.S. inflation and foreign exchange rate
fluctuations in order to mitigate the Luannan Facility's exposure to inflation
and currency risks, and the operation and maintenance contract for the facility
is denominated in dollars. Management currently believes that potential losses
due to fluctuations in the Chinese currency will not have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.
The Company has an investment in a joint venture in Nepal which has
debt at both fixed and variable interest rates. The joint venture has interest
rate derivative agreements, consisting of interest rate swaps, which serve as
hedges against a portion of the variable interest rate exposure. Most of the
debt is denominated in U.S. dollars; however, a portion of the debt is
denominated in the German mark. The joint venture has no hedging facilities
relating to the mark-denominated debt. After commercial operations commence, the
joint venture's foreign currency risk exposure will increase because a
significant portion of the project's operating expenses will be primarily
denominated in the Nepalese rupee. The project's operating revenues under the
power purchase agreement are denominated in U.S. dollars. The Company uses the
equity method of accounting for the joint venture. Management currently believes
that potential losses to the joint venture due to fluctuations in interest rates
and foreign currency exchange rates will not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
3
<PAGE>
YEAR 2000 MATTERS
Set forth below is information regarding the Company's efforts to be
prepared for problems associated with the potential inability of many existing
computer programs and/or embedded computer chips to recognize the year 2000,
both those in the Company's businesses and those that its businesses depend
upon. Certain of these statements may constitute forward-looking information as
contemplated by the Private Securities Litigation Reform Act of 1995, including
those regarding the Company's expected readiness to handle Y2K problems,
expected costs of remediation and testing, the future costs associated with
business disruption caused by supplier or customer Y2K problems and the success
of any contingency plans. The Company cautions that its predictions of the
extent of potential problems and the effectiveness of measures designed to
address them are based on numerous assumptions, including but not limited to the
accuracy of statements or certifications from critical third parties and
vendors, the ability to identify and remediate or replace embedded computer
chips in affected equipment, and resource availability, among other things, and
readers should be aware that actual results might differ materially from those
discussed below.
The Company's approach to analyzing Y2K issues is to (1) inventory
all systems and equipment likely to be affected, (2) perform an inventory
assessment, (3) conduct remediations, (4) test all equipment and systems, and
(5) develop contingency plans to aid in business continuity.
STATE OF READINESS
In 1998, the Company established a readiness program, led by a
senior executive and consisting of a team of employees with extensive knowledge
of the Company's businesses and processes, as well as outside consultants
experienced in these areas who are being used as advisors to assist with
third-party analysis and contingency planning. The Company estimates that it
has identified the potential problems in non-information technology (IT) areas
such as distributed control systems, programmable logic control systems, gas and
electricity metering systems, environmental emissions monitoring equipment,
back-up power systems and telephone and security systems. Additionally, the
Company estimates that it has identified the potential issues regarding the more
traditional IT areas such as computer hardware and software programs for
accounting and payroll, among others. The Company's generation plants are also
significantly dependent on transmission and distribution systems to carry the
electricity to the ultimate end users. Due to the interdependent nature of the
electricity supply chain, the Company has extended its evaluation of Y2K issues
to include key suppliers, customers and vendors, and has sought written
assurance from these parties as to their Y2K readiness. The Company expects to
complete steps one through four, referred to above, by the end of the third
quarter of 1999. The Company's businesses are currently working through planned
programs in order to achieve Y2K readiness.
COSTS OF ADDRESSING Y2K ISSUES
Based on internal analysis, the Company does not anticipate that the
costs to achieve full Y2K readiness company-wide will be material. This estimate
includes expected costs to make its businesses Y2K ready, but not necessarily
the costs associated with post-Y2K corrective actions or damage, if any.
The Company expects to fund these expenditures through internal sources.
RISKS OF Y2K FAILURES
Failures by each of the Company's generation facilities to address
Y2K issues may lead to numerical errors that, if not addressed or mitigated, may
cause system malfunctions resulting in the inability to deliver electricity,
among other things. There can be no assurance that Y2K issues will not
materially adversely impact the Company's facilities, services, competitive
conditions, operating results, financial conditions or cash flows. The Company's
generating businesses may also be unable to deliver electricity because of the
failure of the interconnected distribution companies to receive or transmit the
electricity. In such instances of business interruption due to supplier or
customer default, the Company will pursue all contractual remedies available to
it to minimize the impact on its results of operations; however, there can be no
assurance that, in all instances, the Company will be able to legally protect
itself from damages arising from third-party Y2K failures. Because of the
significant interdependency of the supplier chain, the Company cannot guarantee
that services will be uninterrupted nor can it adequately predict a reasonably
likely worst case scenario until substantially all of the testing phase is
completed.
4
<PAGE>
CONTINGENCY PLANS
The Company is still in the process of identifying and testing
appropriate contingency plans addressing emergency operations, disaster
recovery, data preservation and business continuation plans, and intends to have
them in place by the fourth quarter of 1999. The plans will be continuously
refined as new information becomes available.
5
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the registrant's Annual Meeting of Stockholders on March 31,
1999, there were no matters voted upon other than the elections of
directors. No proxies were solicited in regard to such meeting. Mr.
Robert W. Carter was unanimously elected as Director, and Mr. Brian
G. Trueblood was unanimously elected as Independent Director, of the
registrant. No other directors were elected at such annual meeting,
and the registrant has no other director whose term continued after
such annual meeting.
Item 5. Other Information
Moody's Investors Service recently downgraded the 12 1/2% Senior
Secured Notes due 2004 of Panda Global Energy Company from B2 toB3.
See Note 3 to Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
27.01 Financial Data Schedule.
(b) Reports on Form 8-K: The registrant filed a Report on Form 8-K (with
disclosure under Item 2. "Acquisition or Disposition of Assets")
with the Securities and Exchange Commision, dated February 17, 1999.
No financial statements were filed therewith.
-6-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANDA GLOBAL HOLDINGS, INC.
Date: May 12, 1999 By: /s/ Janice Carter
Janice Carter
Executive Vice President,
Secretary and Treasurer
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------ ------------
27.01 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> MAR-31-1998 MAR-31-1999
<CASH> 54,724,484 134,420,946
<SECURITIES> 0 0
<RECEIVABLES> 9,582,815 11,677,801
<ALLOWANCES> 0 0
<INVENTORY> 6,324,191 6,196,835
<CURRENT-ASSETS> 91,175,100 153,831,425
<PP&E> 442,180,977 401,750,616
<DEPRECIATION> (50,314,383) (53,287,588)
<TOTAL-ASSETS> 541,142,004 570,261,005
<CURRENT-LIABILITIES> 64,782,939 32,874,983
<BONDS> 344,740,630 343,102,207
0 0
0 0
<COMMON> 10 10
<OTHER-SE> (132,870,876) (83,978,188)
<TOTAL-LIABILITY-AND-EQUITY> 544,142,004 570,261,005
<SALES> 16,800,946 22,233,669
<TOTAL-REVENUES> 19,073,700 110,565,073
<CGS> 4,661,158 5,597,139
<TOTAL-COSTS> 7,091,677 10,613,327
<OTHER-EXPENSES> 3,330,612 3,386,319
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 14,633,578 13,617,469
<INCOME-PRETAX> (5,982,167) 82,947,958
<INCOME-TAX> 0 (30,609,000)
<INCOME-CONTINUING> (5,982,167) 52,338,958
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,982,167) 52,338,958
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