<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
Commission File Number: 33-67171
COGENTRIX DELAWARE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0352024
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1105 North Market Street, Suite 1108, Wilmington, Delaware 19801
(Address of principal executive offices) (Zipcode)
(302) 427-9635
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. [ ] Yes [X] No
On May 17, 1999, there were 1,000 shares of common stock, no par value, issued
and outstanding.
<PAGE> 2
COGENTRIX DELAWARE HOLDINGS, INC.
Page No.
Part I: Financial Information
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at March 31, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Income for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II: Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
<PAGE> 3
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 30,573 $ 33,027
Restricted cash 43,303 33,253
Accounts receivable 67,447 64,637
Inventories 17,893 18,697
Other current assets 2,972 5,018
----------- -----------
Total current assets 162,188 154,632
NET INVESTMENT IN LEASES 498,996 498,614
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: March 31, 1999, $232,693;
December 31, 1998, $223,481 461,687 470,853
LAND AND IMPROVEMENTS 3,984 3,974
DEFERRED FINANCING, START-UP AND ORGANIZATION
COSTS, net of accumulated amortization: March 31, 1999, $13,175
December 31, 1998, $12,371 27,617 28,419
NATURAL GAS RESERVES 1,345 1,557
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 252,498 251,312
NOTES RECEIVABLE FROM PARENT 72,891 57,348
OTHER ASSETS 49,689 50,234
----------- -----------
$ 1,530,895 $ 1,516,943
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 103,403 $ 86,256
Accounts payable 22,734 27,766
Payable to Parent 17,914 15,537
Income taxes payable to Parent 20,553 13,553
Other accrued liabilities 25,865 15,936
----------- -----------
Total current liabilities 190,469 159,048
LONG-TERM DEBT 765,021 791,397
DEFERRED INCOME TAXES 97,431 91,460
MINORITY INTERESTS 64,967 61,167
OTHER LONG-TERM LIABILITIES 14,533 15,879
----------- -----------
1,132,421 1,118,951
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock 1 1
Paid in capital 522,918 522,381
Net unrealized loss on available-for-sale securities -- (15)
Accumulated deficit (124,445) (124,375)
----------- -----------
398,474 397,992
----------- -----------
$ 1,530,895 $ 1,516,943
=========== ===========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
3
<PAGE> 4
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands, except for earnings per common share)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
OPERATING REVENUE:
Electric $ 74,408 $ 73,935
Steam 6,712 7,341
Lease 11,161 1,314
Service revenue under sales-type capital leases 11,870 1,296
Income from unconsolidated investments in power projects 5,410 923
Other 4,964 3,196
-------- --------
114,525 88,005
-------- --------
OPERATING EXPENSES:
Fuel 16,506 19,036
Operations and maintenance 23,236 21,656
Cost of services under sales-type capital leases 13,995 1,398
General, administrative and development 340 464
Depreciation and amortization 10,348 9,867
-------- --------
64,425 52,421
-------- --------
OPERATING INCOME 50,100 35,584
OTHER INCOME (EXPENSE):
Interest expense (15,450) (11,278)
Investment and other income, net 1,654 2,277
Equity in net income of affiliates, net -- 550
-------- --------
INCOME BEFORE MINORITY INTERESTS IN INCOME,
INCOME TAXES AND EXTRAORDINARY LOSS 36,304 27,133
MINORITY INTERESTS IN INCOME BEFORE
EXTRAORDINARY LOSS (3,826) (1,955)
-------- --------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 32,478 25,178
PROVISION FOR INCOME TAXES (12,972) (10,978)
-------- --------
INCOME BEFORE EXTRAORDINARY LOSS 19,506 14,200
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of minority interest and income tax benefit of $473 -- (743)
-------- --------
NET INCOME $ 19,506 $ 13,457
======== ========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $ 19,506 $ 14,200
Extraordinary loss -- (743)
-------- --------
$ 19,506 $ 13,457
======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,000 1,000
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
4
<PAGE> 5
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998 (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,506 $ 13,457
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 10,348 10,047
Deferred income taxes 5,971 6,344
Extraordinary loss on early extinguishment of debt, non-cash portion - 2,145
Minority interests in income, net of dividends 3,767 (18,771)
Equity in net (loss) income of unconsolidated affiliates, net of dividends (1,186) 19
Minimum lease payments received 10,779 1,242
Amortization of unearned lease income (11,161) (1,314)
Decrease (increase) in accounts receivable (2,810) 1,245
Decrease in inventories 1,016 121
Decrease in accounts payable (5,032) (3,782)
Increase (decrease) in other accrued liabilities 16,929 (5,706)
Increase in payable to parent 2,377 3,200
Decrease in other 1,376 12,966
-------- --------
Net cash flows provided by operating activities 51,880 21,213
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (178) (574)
Decrease in marketable securities - 42,118
Investments in affiliates - (105)
Acquisition of facilities, net of cash acquired - (155,324)
Increase in restricted cash (10,050) (8,077)
-------- --------
Net cash flows used in investing activities (10,228) (121,962)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (19,576) (32,944)
Proceeds from issuance of debt 15,000 100,250
Repayments of debt (24,184) (64,530)
Decrease in note payable to parent - (6,233)
Capital contribution from parent 537 105,110
Increase in note receivable from parent (15,543) (20,000)
Increase in deferred financing costs (340) (1,050)
-------- --------
Net cash flows (used in) provided by financing activities (44,106) 80,603
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,454) (20,146)
CASH AND CASH EQUIVALENTS, beginning of period 33,027 63,205
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 30,573 $ 43,059
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
5
<PAGE> 6
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. Nature of Business
Cogentrix Delaware Holdings, Inc. ("Holdings") is a Delaware holding
company whose subsidiary companies are principally engaged in the business of
acquiring, developing, owning and operating independent power generating
facilities (individually, a "Facility", or collectively, the "Facilities").
Cogentrix Delaware Holdings, Inc. and subsidiary companies are collectively
referred to as the "Company".
Holdings is a wholly-owned subsidiary of Cogentrix Energy, Inc. (the
"Parent") and has guaranteed all of the Parent's existing and future senior
unsecured debt for borrowed money (the "Guarantee"). This guarantee was given to
the lenders under the Parent's corporate credit facility and terminates, unless
the term of the credit agreement is extended, when the credit agreement for the
corporate credit facility terminates in 2001. As of March 31, 1999, the Parent
had $355 million of senior notes outstanding due 2004 and 2008 and had no
borrowings outstanding under the corporate credit facility. The Guarantee
provides that the terms of the Guarantee may be waived, amended, supplemented
or otherwise modified at any time and from time to time by Holdings and the
agent bank for the lenders under the credit agreement. The Guarantee is not
incorporated in the indenture under which the Parent issued its outstanding
senior notes due 2004 and 2008.
2. Principles of Consolidation and Basis of Presentation
The accompanying consolidated condensed financial statements include
the accounts of Holdings, its subsidiary companies, and a 50% owned joint
venture in which the Company has effective control through majority
representation on the board of directors of the managing general partner.
Investments in other affiliates in which the Company has a 20% to 50% interest
and/or the ability to exercise significant influence over operating and
financial policies are accounted for on the equity method. All material
intercompany transactions and balances among Holdings, its subsidiary companies
and its consolidated joint ventures have been eliminated in the accompanying
consolidated financial statements.
The accompanying unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the "Commission"). Certain information and
note disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although management believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these unaudited consolidated condensed
financial statements be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the most recent Report on
Form 10-K for the year ended December 31, 1998, filed by the Parent with the
Commission on March 31, 1999.
In March 1998, Holdings filed a registration statement to register the
Guarantee under the Securities Act of 1933. As a result, Holdings is required
by Section 15(d) of the Securities Exchange Act of 1934 to file with the
Commission periodic reports required to be filed pursuant to Section 13 of the
Exchange Act in respect of a security registered pursuant to Section 12 of the
Exchange Act. The duty to file such reports shall be automatically suspended as
to any fiscal year, other than the current fiscal year, if, at the beginning of
such fiscal year, the securities of each class enjoying the benefit of the
Guarantee are held of record by less than three hundred persons. There are
currently fewer than three hundred holders of record of the outstanding 2004
and 2008 Notes, and Holdings expects that its duty to file periodic reports
under the Exchange Act will be automatically suspended as of the beginning of
the fiscal year ending December 31, 2000.
3. Cogentrix of Pennsylvania, Inc.
In January, 1998, the Company signed an agreement with Pennsylvania
Electric Company ("Penelec") to terminate the Ringgold facility's power purchase
agreement. This termination agreement was the result of a request for proposals
to buy-back or restructure power sales agreements issued to all major operating
independent power producer projects in Penelec's territory in April, 1997. The
termination agreement with Penelec provides for a payment to the Company of
approximately $22 million which will be sufficient to retire all of Cogentrix of
Pennsylvania, Inc.'s ("CPA") outstanding project debt. The buy-back of the power
purchase agreement is subject to the issuance of an order by the Pennsylvania
Public Utility Commission granting Penelec the authority to fully recover from
its customers the consideration paid to CPA under the buyout agreement.
Management does not expect this event to have an adverse impact on the Company's
consolidated results of operations, cash flows or financial position.
6
<PAGE> 7
4. Acquisitions
Whitewater and Cottage Grove Acquisition
In March, 1998, the Company acquired from LS Power Corporation (the "LS
Acquisition") an approximate 74% ownership interest in two partnerships that own
and operate electric generating facilities located in Whitewater, Wisconsin and
Cottage Grove, Minnesota. Each of the Cottage Grove and Whitewater facilities is
a 245-megawatt gas-fired, combined-cycle cogeneration facility. Commercial
operations of both of these facilities commenced in the last half of calendar
year 1997. The Cottage Grove facility sells capacity and energy to Northern
States Power Company under a 30-year power sales contract terminating in 2027.
The Whitewater facility sells capacity and energy to Wisconsin Electric Power
Company under a 25-year power sales contract terminating in 2022. Each of the
power sales contracts has characteristics similar to a lease in that the
agreement gives the purchasing utility the right to use specific property, plant
and equipment. As such, each of the power sales contracts is accounted for as a
"sales-type" capital lease in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases."
The Company accounted for the LS Acquisition using the purchase method
of accounting. The accompanying consolidated balance sheets as of March 31, 1999
and December 31, 1998 reflect 100% of the assets and liabilities of the
partnerships acquired. The minority owner's share of the partnerships' net
assets is included in "minority interests" on the accompanying consolidated
balance sheets as of March 31, 1999 and December 31, 1998. The accompanying
consolidated statement of income for the three months ended March 31, 1998
includes the results of operations of the acquired facilities since the closing
date of the LS Acquisition on March 20, 1998. The accompanying consolidated
statement of income for the three months ended March 31, 1999 includes the
results of operations of the acquired facilities for three months.
Batesville Acquisition
In August, 1998, the Company acquired an approximate 52% interest in an
800-megawatt, gas-fired electric generating facility (the "Batesville facility")
under construction in Batesville, Mississippi (the "Batesville Acquisition").
The Company has committed to provide an equity contribution to the project
subsidiary of approximately $54 million upon the earliest to occur of (i) the
incurrence of construction costs after all project financing has been expended,
(ii) an event of default under the project subsidiary's financing arrangements
or (iii) June 30, 2001. This equity commitment is supported by a $54 million
letter of credit provided under the Company's corporate credit facility. The
Company expects the Batesville facility, which will be operated by the Company,
to commence commercial operation in June, 2000. Electricity generated by the
Batesville facility will be sold under long-term power purchase agreements with
two investment-grade utilities. The Company accounts for its interest in the
Batesville facility using the equity method, as its 52% ownership is deemed to
be temporary.
Bechtel Asset Acquisition
In October, 1998, the Company acquired from Bechtel Generating Company,
Inc. ("BGCI") ownership interests in twelve electric generating facilities,
comprising a net equity interest of approximately 365 megawatts, and one
interstate natural gas pipeline in the United States (the "Bechtel
Acquisition").
The Bechtel Acquisition was accounted for using the purchase method of
accounting, which resulted in the recognition of a net purchase premium of
approximately $66.5 million. The purchase premiums or discounts related to the
Bechtel Acquisition are being amortized over the remaining lives of the
facilities or over the remaining terms of the power purchase agreements. The
Company is using the equity method of accounting to account for its ownership
interests in eight of these twelve facilities and will use the cost method of
accounting for its ownership interests in the other four.
5. Pending Claims and Litigation
Effective September, 1996, the Company amended the power sales
agreements on its Elizabethtown, Lumberton, Kenansville, Roxboro and Southport
facilities. Under the amended terms of these power sales agreements, the
purchasing utility has exercised its right of economic dispatch resulting in
significant reductions in fuel requirements at each of these facilities. In
response to this reduction in fuel requirements, one of the coal suppliers
initiated an arbitration proceeding, and another filed a civil action against
certain subsidiaries of the Company. The Company has resolved a subsequent
contract dispute with the coal
7
<PAGE> 8
supplier for the Elizabethtown, Lumberton and Kenansville facilities. The
dispute was arbitrated in March, 1999 resulting in an award to the coal supplier
in the amount of approximately $8.0 million payable in 1999. Approximately $3.0
million of this $8.0 million award relates to the reduction in purchase
quantities prior to the arbitration, and approximately $5.0 million relates to
the reduction in purchase quantities at these facilities from the date of the
arbitration award through the balance of the term of the coal contract, which
ends in September, 2001. The future reduction in coal purchase quantities
provides a future economic benefit to the Company.
The Company has resolved the contract dispute with the coal supplier at
the Southport facility concerning the reduction in coal requirements. The
dispute was arbitrated in October, 1997 in favor of the Company and against the
coal supplier. The coal supplier challenged the arbitration award in federal
district court, which vacated the award and ordered a new arbitration be
conducted. On April 1, 1999, the district court's decision was reversed on
appeal, and the award was reinstated in favor of the Company.
Effective December, 1997, the Company amended the power sales agreement
on its Portsmouth facility. Under the amended terms, the purchasing utility has
exercised its right of economic dispatch, which has led to significant
reductions in that facility's fuel requirements. In response to the reduced fuel
requirements, the coal supplier for the Portsmouth facility filed a civil action
in federal district court against a project subsidiary of the Company. In March,
1999, a project subsidiary of the Company entered into a comprehensive
settlement with the coal supplier, which became final in May, 1999. Under the
terms of the settlement, the project subsidiary has agreed to take a stated
minimum quantity of coal in each of the five years remaining under the terms of
the coal contract. If the project subsidiary fails to make these purchases, the
project subsidiary will make a payment to the coal supplier based on the
shortfall quantity at an agreed upon price per ton.
Indirect, wholly-owned subsidiaries of the Company are also parties to
certain product liability claims related to the sale of coal combustion
by-products for use in various construction projects. Management cannot
currently estimate the range of possible loss, if any, the Company will
ultimately bear as a result of these claims. However, management believes -
based on its knowledge of the facts and legal theories applicable to these
claims and after consultations with various counsel retained to represent these
subsidiaries in their defense of such claims - that the ultimate resolution of
these claims should not have a material adverse effect on the Company's
consolidated financial position or results of operations or the Company's
ability to generate sufficient cash flow to service its outstanding debt.
In addition, the Company experiences other routine litigation in the
normal course of its business. Management is of the opinion that none of this
routine litigation should have a material adverse effect on its consolidated
financial position or results of operations.
8
<PAGE> 9
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements.
The information called for by this item is hereby incorporated herein
by reference to pages 3 through 8 of this report.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In addition to discussing and analyzing our recent historical financial
results and condition, the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" includes statements concerning
certain trends and other forward-looking information affecting or relating to us
which are intended to qualify for the protections afforded "Forward-Looking
Statements" under the Private Securities Litigation Reform Act of 1995, Public
Law 104-67. The forward-looking statements made herein are inherently subject to
risks and uncertainties which could cause our actual results to differ
materially from the forward-looking statements.
General
Holdings is a Delaware holding company that, through its direct and
indirect subsidiaries, acquires, develops, owns and operates electric generating
plants, principally in the United States. We derive most of our revenue from the
sale of electricity, but we also produce and sell steam. We sell the electricity
we generate, principally under long-term power purchase agreements, to regulated
electric utilities. We sell the steam we produce to industrial customers with
manufacturing or other facilities located near our electric generating plants.
We were one of the early participants in the market for electric power generated
by independent power producers that developed as a result of energy legislation
the United States Congress enacted in 1978. We believe we are one of the largest
independent power producers in the United States based on our total project
megawatts in operation.
We currently own - entirely or in part - a total of 25 electric
generating plants in the United States. Our 25 plants are designed to operate at
a total production capability of approximately 4,000 megawatts. After taking
into account our part interests in the 16 plants that are not wholly-owned by
us, which range from 3.3% to approximately 74.0%, our net equity interest in the
total production capability of our 25 electric generating plants is
approximately 1,690 megawatts. We developed, constructed and currently operate
10 of our plants, which, with one exception, are located in either North
Carolina or Virginia.
When our plant currently under construction in Batesville, Mississippi
begins operation, we will have ownership interests in a total of 26 domestic
electric generating plants that are designed with a total production capability
of 4,800 megawatts. Our net equity interest in the total production capability
of those 26 facilities will be approximately 2,110 megawatts.
Unless the context requires otherwise, references in this report to
"we", "us", "our", or "Cogentrix", refer to Cogentrix Delaware Holdings, Inc.
and its subsidiaries, including subsidiaries that hold investments in other
corporations or partnerships whose financial results are not consolidated with
ours. The term "Cogentrix" refers only to Cogentrix Energy, Inc., the Parent of
Holdings, which is a development and management company that conducts its
business primarily through subsidiaries, all of which are also subsidiaries of
Holdings. Holdings' subsidiaries that are engaged in the development, ownership
or operation of cogeneration facilities are sometimes referred to individually
as a "project subsidiary" and collectively as "project subsidiaries".
9
<PAGE> 10
Results of Operations - Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Total operating revenues $ 114,525 100.0% $ 88,005 100.0%
Operating costs 53,737 46.9 42,090 47.8
General, administrative and development 340 0.3 464 0.5
Depreciation and amortization 10,348 9.0 9,867 11.2
--------- ----- --------- -----
Operating income $ 50,100 43.8% $ 35,584 40.5%
========= ===== ========= =====
</TABLE>
Total operating revenues increased 30.1% to $114.5 million for the
first quarter of 1999 as compared to the first quarter of 1998. This increase
was primarily attributable to the $23.0 million aggregate amount of lease
revenue and service revenue earned under the power sales agreements for the
Cottage Grove and Whitewater facilities in which we acquired our interests on
March 20, 1998. The increase in revenues also relates to a $2.2 million increase
during the quarter, as compared to the previous year fiscal quarter, in equity
earnings from interests in each of the twelve power projects acquired in the
Bechtel Acquisition in October, 1998. The increase in equity in earnings was
partially offset by a decrease in earnings from the Birchwood facility. In
addition, the increase in operating revenues was related to an increase in sales
of excess gas supply to third parties at the Cottage Grove and Whitewater
facilities. To a lesser extent, operating revenues were impacted by an increase
in electric revenue from the Richmond facility related to an increase in
megawatt hours sold to the purchasing utility. These increases in electric
revenue were partially offset by a decrease in revenue at the Southport facility
related to a decrease in capacity payments received in the first quarter of 1999
as compared to the first quarter of 1998.
Our operating costs increased 27.7% to $53.7 million for the first
quarter of 1999 as compared to the first quarter of 1998. This increase resulted
primarily from the significant increase in cost of services at the Cottage Grove
and Whitewater facilities, interests in which we acquired on March 20, 1998.
Operating costs include a full three months of activity for the Cottage Grove
and Whitewater facilities in the quarter ended March 31, 1999, as compared to
less than one month in the quarter ended March 31, 1998. The increase in
operating costs is also related to increased operating expenses at the
Elizabethtown, Lumberton, Kenansville, Southport and Roxboro facilities. The
increase at the Elizabethtown, Lumberton and Kenansville facilities primarily
relates to expenses incurred related to the settlement of litigation in March,
1999. See "Part II - Item 1. Legal Proceedings" for a further explanation. The
increase in operating expenses at the Southport and Roxboro facilities was due
to routine maintenance costs incurred in the first quarter of 1999. The
increases in operating expenses were partially offset by a significant reduction
in the fuel expense at the Hopewell facility associated with the restructuring
of its power sales agreement and a decrease in maintenance costs incurred at the
Richmond facility related to routine maintenance performed during the first
quarter of 1998. To a lesser extent, the increase in operating expenses was
offset by a decrease in costs incurred by ReUse Technology, Inc., a wholly-owned
subsidiary of the Company, engaged in coal ash disposal.
General, administrative and development expenses remained fairly
consistent for the first quarter of 1999 as compared to first quarter 1998. The
slight decrease primarily resulted from general decreases in payroll and
employee benefits.
Interest expense increased 37.0% to $15.5 million for the first quarter
of 1999 as compared to the first quarter of 1998. Our average long-term debt
increased to $873 million, with a weighted average interest rate of 7.08% for
the first quarter of 1999, as compared to average long-term debt of $752
million, with a weighted average interest rate of 6.0% for the first quarter of
1998. The increases in interest expense and weighted average debt outstanding
were related to the inclusion of the project finance debt of the Cottage Grove
and Whitewater facilities acquired in March, 1998. The increase in interest
expense discussed above was partially offset by a decrease in interest expense
at several of our project subsidiaries due to the scheduled repayment of
outstanding project finance debt.
10
<PAGE> 11
The decrease in equity in net income of affiliates related to the
decrease in earnings recognized from our interest in partnerships operating
greenhouses in the states of New York and Texas. We entered into an agreement in
December, 1998 to sell our interests in these partnerships.
The increase in minority interest in income for the first quarter of
1999 as compared to the first quarter of 1998 related primarily to an increase
in earnings at the Hopewell facility due to a reduction in fuel expense incurred
as a result of a restructuring of the power sales agreement in February, 1998.
In addition, the increase related to an increase in earnings associated with the
Cottage Grove and Whitewater facilities, interests in which we acquired on March
20, 1998. The results of operation for the period ended March 31, 1999 include a
full three months of earnings for the Cottage Grove and Whitewater facilities,
as compared to less than one month for the three month period ended March 31,
1998.
The extraordinary loss on early extinguishment of debt for the first
quarter of 1998 related to the refinancing of the Hopewell facility's project
debt in January, 1998. The loss consisted of a write-off of the deferred
financing costs on the Hopewell facility's original project debt and a swap
termination fee on an interest rate swap agreement hedging the original project
debt.
Liquidity and Capital Resources
The principal components of operating cash flow for the first quarter
of 1999 were net income of $19.5 million, increases due to adjustments for
depreciation and amortization of $10.3 million, deferred income taxes of $6.0
million, minority interest in income, net of dividends, of $3.8 million, and a
net $13.9 million adjustment to cash reflecting changes in other working capital
assets and liabilities, which were partially offset by amortization of unearned
lease income, net of minimum lease payments received, of $0.4 and $1.2 million
equity in net (loss) income of unconsolidated affiliates, net of dividends. Cash
flow provided by operating activities of $51.9 million, proceeds from borrowings
of $15.0 million and cash on hand at the beginning of the period of $2.4 million
were primarily used to purchase property plant and equipment of $0.2 million,
repay project finance borrowings of $24.2 million, pay deferred financing costs
of $0.4 million, pay a common stock dividend of $19.5 million, fund $10.0
million of escrow and lend $15.5 million to an affiliate.
Historically, we have financed each facility primarily under financing
arrangements and related documents that generally require the extensions of
credit to be repaid solely from the project's revenues and provide that the
repayment of the extensions of credit (and interest thereon) is secured solely
by the physical assets, agreements, cash flow and, in certain cases, the capital
stock of or the partnership interest in that project subsidiary. This type of
financing is generally referred to as "project financing". The project financing
debt of our subsidiaries and joint ventures (aggregating $832.3 million as of
March 31, 1999) is non-recourse to us and our other project subsidiaries, except
in connection with certain transactions where we have agreed to certain limited
guarantees and other obligations with respect to such projects. These limited
guarantees and other obligations include agreements for the benefit of the
project lenders to three project subsidiaries to fund cash deficits that the
projects may experience as a result of incurring certain costs, subject to an
aggregate cap of $51.9 million.
In addition, Cogentrix, Inc., which is an indirect subsidiary of
Holdings, has guaranteed two project subsidiaries' obligations to the purchasing
utility under five power sales agreements. Three of these power sales agreements
provide that in the event of early termination that is not for cause, the
project subsidiary must pay the utility a termination charge equal to the excess
paid for capacity and energy over what would have been paid to the utility under
the utility's published five-year capacity credit and variable energy rates plus
interest. The remaining two power sales agreements provide that in the event of
early termination, the project subsidiary must pay the utility the cost of
replacing the electricity from a third party for the remainder of the
agreement's term. Because these project subsidiaries' obligations do not by
their terms stipulate a maximum dollar amount of liability, the aggregate amount
of potential exposure under these guarantees cannot be quantified. If we or our
subsidiary were required to satisfy all of these guarantees and other
obligations or even one or more of the significant ones, it could impair
Holding's ability to pay dividends and management fees to the Parent.
Any projects we develop in the future, and those independent power
projects we may seek to acquire, are likely to require substantial capital
investment. Our ability to arrange financing on a substantially non-recourse
basis and acquisition financing and the cost of such capital are dependent on
numerous factors. In order to access capital on a substantially non-recourse
basis in the future, we may have to make larger equity investments in, or
provide more financial support for, the project entity.
As of March 31, 1999, we had long-term debt (including the current
portion thereof) of approximately $868 million, substantially all of such
indebtedness is project financing debt. Future annual maturities of long-term
debt range from $54.7 million to $86.3 million in the five-year period ending
December 31, 2003. We believe that
11
<PAGE> 12
our project subsidiaries and the project entities in which we have an investment
will generate sufficient cash flow to pay all required debt service on the
project financing debt.
The ability of our project subsidiaries and the project entities in
which we have an investment to pay dividends and management fees periodically to
us is subject to certain limitations in our respective project credit documents.
Such limitations generally require that: (i) project debt service payments be
current, (ii) project debt service coverage ratios be met, (iii) all project
debt service and other reserve accounts be funded at required levels and (iv)
there be no default or event of default under the relevant project credit
documents. There are also additional limitations that are adapted to the
particular characteristics of each project subsidiary, and project entities in
which we have an investment.
As a result of a March, 1999 arbitration award related to a contract
dispute with a coal supplier, we are obligated to pay the coal supplier
approximately $8 million in 1999. Approximately $3 million of this award relates
to the reduction in purchase quantities for prior periods and approximately $5
million relates to the reduction in purchase quantities from the date of the
award through the balance of the term of the coal contract, which ends in
September, 2001. The future reduction in purchase quantities provides a future
economic benefit to our project subsidiary. The amount of damages awarded will
not materially reduce the projected amount of cash flow to Cogentrix Delaware
Holdings for the current fiscal year and should not, therefore, have a material
adverse impact on Holding's ability to pay dividends or management fees to the
Parent.
Impact of Energy Price Changes, Interest Rates and Inflation
Energy prices are influenced by changes in supply and demand, as well
as general economic conditions, and therefore tend to fluctuate significantly.
Through various hedging mechanisms, we have attempted to mitigate the impact of
changes on the results of operations of most of our projects. The basic hedging
mechanism against increased fuel and transportation costs is to provide
contractually for matching increases in the energy payments our project
subsidiaries receive from the utility purchasing the electricity generated by
the facility.
Under the power sales agreements for certain of our facilities, energy
payments are indexed, subject to certain caps, to reflect the purchasing
utility's solid fuel cost of producing electricity or provide periodic,
scheduled increases in energy prices that are designed to match periodic,
scheduled increases in fuel and transportation costs that are included in the
fuel supply and transportation contracts for the facilities.
Changes in interest rates could have a significant impact on us.
Interest rate changes affect the cost of capital needed to construct projects as
well as interest expense of existing project financing debt. As with fuel price
escalation risk, we attempt to hedge against the risk of fluctuations in
interest rates by arranging either fixed-rate financing or variable-rate
financing with interest rate swaps, collars or caps on a portion of its
indebtedness.
Although hedged to a significant extent, our financial results will
likely be affected to some degree by fluctuations in energy prices, interest
rates and inflation. The effectiveness of the hedging techniques implemented by
us is dependent, in part, on each counterparty's ability to perform in
accordance with the provisions of the relevant contracts. We have sought to
reduce the risk by entering into contracts with creditworthy organizations.
Interest Rate Sensitivity
We routinely enter into derivative financial instruments and other
financial instruments to hedge our risk against interest rate fluctuations. As
of March 31, 1999, there have been no significant changes in the portfolio of
instruments as disclosed in the report on Form 10-K for the year ended December
31, 1998, filed by our Parent with the Commission on March 31, 1999.
12
<PAGE> 13
Year 2000 Compliance
We continue to assess our readiness with the Year 2000 issue, and
expect that all of our business critical systems such as corporate, embedded
technology systems, business partners and vendor systems will be Year 2000
compliant by June 30, 1999. Non-compliance with the embedded technology systems,
or business partner and vendor systems could result in temporary shutdown of the
facilities and equipment damage. The investigation, analysis, remediation and
contingency planning for the embedded technology at the power generation
facilities was completed before January 1, 1999. The investigation and analysis
identified no significant Year 2000 issues. The power generation facilities as
currently configured require no action to be Year 2000 operational, but certain
remediation is underway and scheduled for completion by October 21, 1999, which
will address certain non-operational Year 2000 functions. We will continue to
communicate with critical suppliers, vendors, joint venture partners and major
customers to assess their compliance efforts and our exposure to their efforts.
We have not incurred any significant additional expenses related to the Year
2000 issue in the quarter ended March 31, 1999. At this time, we do not expect a
major impact from non-compliant Year 2000 suppliers, vendors, joint venture
partners or major customers. We have developed contingency plans for all of the
critical systems. These plans were developed to address our most likely worse
case scenario, the inability of the plants to produce and distribute power.
These plans have been tested, and appear to be adequate. Despite our current
expectations, there can be no assurances that there will not be interruptions or
other limitations of financial and operating system functionality or that we
will not ultimately incur significant, unplanned costs to avoid such
interruptions or limitations.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Disputes with Coal Suppliers
Under the terms of the amended power sales agreements for our
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities, the
purchasing utility has exercised its right to suspend or reduce purchases of
energy resulting in significantly reduced fuel requirements at each of these
facilities. Coal is supplied to the Elizabethtown, Lumberton and Kenansville
facilities by James River Coal Sales, Inc. and one of its affiliates. Coal was
supplied to the Southport facility until November, 1997 when the contract term
expired by Coastal Coal Sales, Inc. The coal sales agreements for the
Elizabethtown, Lumberton and Kenansville facilities provide for the sale and
purchase of the coal requirements of those facilities through September, 2001.
Under the amended power sales agreement for our Portsmouth facility,
Virginia Power has from time to time since December, 1997 exercised its right to
suspend or reduce purchases of energy resulting in significantly reduced fuel
requirements at the facility. Coal is supplied to the Portsmouth facility by
Arch Coal Sales Company, Inc. The coal sales agreement provides for the sale and
purchase of the coal requirements of the Portsmouth facility through April,
2003.
As a result of the purchasing utility exercising its right to suspend
or reduce purchases of energy from these facilities and the consequent reduction
in fuel requirements, our project subsidiaries operating these facilities are
purchasing significantly less coal. In response, the coal suppliers sought to
recover damages and, in some cases, sought injunction relief. A summary of the
resolution of each of these disputes is set forth below.
We recently resolved the contract dispute with James River Coal
concerning reduction in coal requirements at the Elizabethtown, Lumberton and
Kenansville facilities, which has been pending since November, 1996. The issue
was arbitrated in March, 1999 with the coal supplier's claims in excess of $24
million reduced to an award in favor of the coal supplier of approximately $8
million. The arbitration award was satisfied by the project subsidiary and the
pending lawsuit by James River Coal Sales, Inc. against the project subsidiary
in the United States District Court was dismissed with prejudice on May 6, 1999.
Approximately $3 million of this $8 million award relates to the reduction in
purchase quantities prior to the arbitration and approximately $5 million
relates to the reduction in purchase quantities from the arbitration award date
through the balance of the term of the coal contract, which ends in September,
2001. The future reduction in coal purchase quantities provides a future
economic benefit to this project subsidiary.
We also recently resolved the contract dispute with Coastal Coal Sales,
Inc. concerning reduction in coal requirements at the Southport facility that
has been pending since October, 1996. The dispute was arbitrated in October,
1997 and the decision was in favor of our project subsidiary and against the
coal supplier. The successor company to Coastal Coal Sales, Inc. challenged the
arbitration award in the United States District Court. In April, 1998 the
District Court issued an order vacating the arbitration award and directing a
new arbitration be conducted. We appealed the District Court's order to the
United States Court of Appeals for the Fourth Circuit, which by order dated
April 1, 1999, Court of Appeals reversed the District Court and remanded the
matter with direction to reinstate the arbitration award in favor of our project
facility. A subsequent request by the coal supplier for reconsideration by the
Court of Appeals has been denied.
We also recently resolved the contract dispute with Arch Coal Sales
Company, Inc. concerning reduction in coal requirements at the Portsmouth
facility that has been pending since February, 1998. In March, 1999 we entered
into a comprehensive settlement with this coal supplier which became final in
May, 1999. Under the settlement agreement, our project subsidiary has agreed to
take a stated minimum quantity of coal in each of the five years remaining under
the term of the coal contract and, failing such purchases, to make a payment
based upon the shortfall quantity at an agreed upon price. Given the projected
coal requirements for electric and steam production over that five year period,
we believe any required shortfall payments should not have a material adverse
effect on the projected aggregate amount of cash flow to Cogentrix Delaware
Holdings, Inc. from its project subsidiaries and unconsolidated affiliates.
14
<PAGE> 15
The amount paid to satisfy the arbitration award in favor of James
River Coal Sales, Inc. together with the amounts we expect to pay under the
settlement with Arch Coal Sales, Inc. will not materially reduce the projected
amount of cash flow to the Parent for the current fiscal year. The payment of
these amounts should not, therefore, have a material adverse effect on our
ability to service our outstanding debt.
Other Litigation
In addition to the litigation described above, we experience other
litigation in the normal course of business. Several of our indirect,
wholly-owned subsidiaries are parties to certain product liability claims
related to the sale of coal combustion by-products for use in various
construction projects. We cannot currently estimate the range of possible loss,
if any, we will ultimately bear as a result of these claims. However, our
management believes - based on its knowledge of the facts and legal theories
applicable to these claims and after consultations with various counsel retained
to represent these subsidiaries in its defense of such claims - that the
ultimate resolution of these claims should not have a material adverse effect on
our consolidated financial position, results of operations or ability to
generate sufficient cash flow to service its outstanding debt.
In addition, we experience other routine litigation in the normal
course of its business. Our management is of the opinion that none of this
routine litigation should have a material adverse effect on our financial
position or results of operation.
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Certificate of Incorporation of Cogentrix Delaware
Holdings, Inc. (3.3) (1)
3.2 Bylaws of Cogentrix Delaware Holdings, Inc. (3.4) (1)
4.1 Indenture, dated as of March 15, 1994 between
Cogentrix Energy, Inc. and First Union National Bank
of North Carolina, as Trustee, including form of
8.10% 2004 Senior Note (4.1) (2)
4.2 Indenture, dated as of October 20, 1998, between
Cogentrix Energy, Inc. and First Union National Bank,
as Trustee, including form of 8.75% Senior Note
(4.2) (3)
4.3 First Supplemental Indenture, dated as of October 20,
1998 between Cogentrix Energy, Inc. and First Union
National Bank, as Trustee (4.3) (3)
4.4 Registration Agreement, dated as of October 20, 1998,
by and among Cogentrix Energy, Inc., Salomon Smith
Barney Inc., Goldman, Sachs & Co. and CIBC Oppenheimer
Corp. (4.4) (3)
4.5 Registration Agreement, dated as of November 25, 1998,
between Cogentrix Energy, Inc. and Salomon Smith
Barney, Inc. (4.5) (4)
4.6 Amendment No. 1 to the First Supplemental Indenture,
dated as of November 25, 1998 between Cogentrix
Energy, Inc. and First Union National Bank, as
Trustee (4.6) (4)
4.7 Amended and Restated Guarantee, dated as of
October 29, 1998, made by Cogentrix Delaware Holdings,
Inc., the Guarantor in favor of the Borrower
Creditors (10.130) (3)
10.1 Operations and Maintenance Agreement by and between
LSP-Whitewater Limited Partnership as Owner and LSP-
Whitewater I, Inc. as Operator dated as of April 15,
1999. (10.1)(*)(5)
10.2 Operations and Maintenance Agreement by and between
LSP-Cottage Grove, L.P. as Owner and LSP-Cottage
Grove, Inc. as Operator dated as of April 15, 1999.
(10.2)(*)(5)
27 Financial Data Schedule, which is submitted
electronically to the U.S. Securities and Exchange
Commission for information only, and is not filed
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered
by this report.
(*) Certain portions of this exhibit have been deleted pursuant to
a request for confidential treatment filed with the Securities
and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to Amendment No. 3 of the
Registration Statement on Form S-4, (File No. 33-67171) filed
with the Securities and Exchange Commission by Cogentrix
Energy, Inc. on March 15, 1999. The number designating the
exhibit on the exhibit index to such previously-filed report
is enclosed in parentheses at the end of the description of
the exhibit above.
(2) Incorporated by reference to the Form 10-K (File No. 33-74254)
filed by Cogentrix Energy, Inc. on September 28, 1994. The
number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end
of the description of the exhibit above.
(3) Incorporated by reference to the Registration Statement on
Form S-4 (File No. 33-67171) filed November 12, 1998. The
number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end
of the description of the exhibit above.
(4) Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 33-67171) filed
by Cogentrix Energy, Inc. on January 27, 1999. The number
designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end
of the description of the exhibit above.
(5) Incorporated by reference to the Form 10-Q (File No. 33-95928)
filed by LS Power Funding Corporation, LSP-Whitewater Limited
Partnership and LSP-Cottage Grove, L.P. on May 17, 1999. The
number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end
of the description of the exhibit above.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGENTRIX DELAWARE HOLDINGS, INC.
(Registrant)
May 17, 1999 /s/ Thomas F. Schwartz
-----------------------------------------
Thomas F. Schwartz
President
(Principal Financial and Accounting
Officer)
17
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COGENTRIX
DELAWARE HOLDINGS, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999
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<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 67,447
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<CURRENT-ASSETS> 162,188
<PP&E> 694,380
<DEPRECIATION> 232,693
<TOTAL-ASSETS> 1,530,895
<CURRENT-LIABILITIES> 190,469
<BONDS> 765,021
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<TOTAL-REVENUES> 116,179
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<TOTAL-COSTS> 64,425
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