<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 September 30, 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. [X] Yes [ ] No
On November 15, 1999, there were 1,000 shares of common stock, no par value,
issued and outstanding.
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COGENTRIX DELAWARE HOLDINGS, INC.
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PAGE NO.
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PART I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Income for the Three-Months and Nine-Months
Ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine-Months
Ended September 30, 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 15
Signatures 17
</TABLE>
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COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(dollars in thousands)
<TABLE>
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SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,411 $ 33,027
Restricted cash 43,061 33,253
Accounts receivable 72,276 64,637
Inventories 19,794 18,697
Other current assets 3,961 5,018
----------- -----------
Total current assets 177,503 154,632
NET INVESTMENT IN LEASES 499,786 498,614
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: September 30, 1999, $250,912; December 31, 1998, $223,481 443,356 470,853
LAND AND IMPROVEMENTS 4,793 3,974
DEFERRED FINANCING COSTS,
net of accumulated amortization: September 30, 1999, $15,938
December 31, 1998, $12,371 26,001 28,419
NATURAL GAS RESERVES 934 1,557
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 326,938 251,312
NOTES RECEIVABLE FROM PARENT 109,870 57,348
OTHER ASSETS 50,951 50,234
----------- -----------
$ 1,640,132 $ 1,516,943
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 89,360 $ 86,256
Accounts payable 30,980 27,766
Payable to Parent 27,131 15,537
Income taxes payable to Parent 19,296 13,553
Other accrued liabilities 16,270 15,936
----------- -----------
Total current liabilities 183,037 159,048
LONG-TERM DEBT 803,380 791,397
DEFERRED INCOME TAXES 109,375 91,460
MINORITY INTERESTS 68,699 61,167
OTHER LONG-TERM LIABILITIES 14,486 15,879
----------- -----------
1,178,977 1,118,951
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock 1 1
Paid in capital 583,269 522,381
Net unrealized loss on available-for-sale securities -- (15)
Accumulated deficit (122,115) (124,375)
----------- -----------
461,155 397,992
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$ 1,640,132 $ 1,516,943
=========== ===========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these balance sheets.
3
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COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(dollars in thousands, except for earnings per common share)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE-MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Electric $ 88,405 $ 84,832 $ 233,771 $ 231,200
Steam 5,869 5,620 18,780 19,325
Lease 11,178 11,134 33,509 23,567
Service revenue under sales-type capital leases 12,089 12,703 34,983 25,955
Income from unconsolidated investments in power projects 5,570 829 16,302 2,626
Other 5,285 5,443 16,377 14,344
--------- --------- --------- ---------
128,396 120,561 353,722 317,017
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel 25,855 24,486 61,318 62,500
Operations and maintenance 23,204 23,995 70,546 68,247
Cost of services under sales-type capital leases 12,939 13,687 39,766 29,358
General, administrative and development 263 373 637 1,146
Depreciation and amortization 10,342 10,529 31,029 30,469
--------- --------- --------- ---------
72,603 73,070 203,296 191,720
--------- --------- --------- ---------
OPERATING INCOME 55,793 47,491 150,426 125,297
OTHER INCOME (EXPENSE):
Interest expense (15,885) (16,819) (46,560) (45,437)
Investment and other income, net 3,016 1,927 5,990 5,854
Equity in net loss of affiliates, net -- (1,477) -- (3,017)
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTERESTS IN INCOME,
INCOME TAXES AND EXTRAORDINARY LOSS 42,924 31,122 109,856 82,697
MINORITY INTERESTS IN INCOME BEFORE
EXTRAORDINARY LOSS (4,392) (4,187) (10,874) (9,800)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 38,532 26,935 98,982 72,897
PROVISION FOR INCOME TAXES (15,389) (11,163) (39,533) (29,530)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 23,143 15,772 59,449 43,367
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
OF DEBT, net of minority interest
and income tax benefit of $473 -- -- -- (743)
--------- --------- --------- ---------
NET INCOME $ 23,143 $ 15,772 $ 59,449 $ 42,624
========= ========= ========= =========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $ 23,143 $ 15,772 $ 59,449 $ 43,367
Extraordinary loss -- -- -- (743)
--------- --------- --------- ---------
$ 23,143 $ 15,772 $ 59,449 $ 42,624
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,000 1,000 1,000 1,000
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
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COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(dollars in thousands)
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NINE-MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,449 $ 42,624
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 31,029 30,469
Decrease in unrealized gain on investments -- (26)
Deferred income taxes 17,915 14,295
Extraordinary loss on early extinguishment of debt -- 2,067
Minority interests in income, net of dividends 7,344 (14,933)
(Income) loss of unconsolidated power projects (15,911) 390
Distributions from unconsolidated power projects 16,784 6,842
Minimum lease payments received 32,337 22,242
Amortization of unearned lease income (33,509) (23,567)
Increase in accounts receivable (7,639) (4,897)
Increase in inventories (474) (3,028)
Increase in other assets -- (9,880)
Increase in accounts payable 3,214 4,913
Increase in other accrued liabilities 17,671 5,171
Increase in other (2,978) (176)
--------- ---------
Net cash flows provided by operating activities 125,232 72,506
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (1,216) (378)
Decrease in marketable securities -- 42,118
Investments in affiliates (76,500) (1,007)
Acquisition of facilities, net of cash acquired -- (155,324)
Decrease (increase) in restricted cash (9,808) 7,797
--------- ---------
Net cash flows used in investing activities (87,524) (106,794)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (57,189) (77,015)
Proceeds from issuance of debt 96,336 120,900
Repayments of debt (79,824) (105,036)
Increase in note receivable from parent (52,522) (39,791)
Capital contribution from parent 60,888 96,428
Increase in deferred financing costs (13) (1,540)
--------- ---------
Net cash flows used in financing activities (32,324) (6,054)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,384 (40,342)
CASH AND CASH EQUIVALENTS, beginning of period 33,027 63,205
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 38,411 $ 22,863
========= =========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these statements.
5
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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 September 30, 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 and its subsidiary companies. Wholly-owned and
majority-owned subsidiaries, including a 50%-owned joint venture in which
Holdings has effective control through majority representation on the board of
directors of the managing general partner, are consolidated.
Less-than-majority-owned subsidiaries, and subsidiaries for which control is
deemed to be temporary, are accounted for using the equity method. Investments
in unconsolidated affiliates in which Holdings has less than a 20% interest and
does not exercise significant influence over operating and financial policies
are accounted for under the cost method. All material intercompany transactions
and balances among Holdings, its subsidiary companies and its consolidated joint
ventures have been eliminated in the accompanying consolidated condensed
financial statements.
Information presented as of September 30, 1999 and for the three-months
and nine-months ended September 30, 1999 and 1998 is unaudited. In the opinion
of management, however, such information reflects all adjustments, which consist
of normal recurring adjustments necessary to present fairly the financial
position of Holdings as of September 30, 1999, and the results of operations for
the three-month and nine-month periods ended September 30, 1999 and 1998 and
cash flows for the nine-months ended September 30, 1999 and 1998. The results of
operations for these interim periods are not necessarily indicative of results
which may be expected for any other interim period or for the fiscal year as a
whole.
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. These unaudited consolidated condensed financial statements should
be read in conjunction with the audited consolidated financial statements and
the notes thereto included in the Parent's 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, 1999, 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
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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.
Certain reclassifications have been made to the prior year's financial
statements to conform with the classification used in the financial statements
as of September 30, 1999, and for the three-months and nine-months ended
September 30, 1999.
2. 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 provides for a payment to the Company of approximately
$21.0 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 a non-appealable, final 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. The original agreement expired in December, 1998 and was extended
through June, 1999. The Company further extended the agreement through December,
1999. Management does not expect this event, if it occurs, to have an adverse
impact on the Company's consolidated results of operations, cash flows or
financial position.
3. 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 which
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 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 condensed balance sheets as of
September 30, 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 condensed balance sheets as of September 30, 1999 and December 31,
1998. The accompanying consolidated statement of income for the nine-months
ended September 30, 1999 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 nine-months ended
September 30, 1999 includes the results of operations of the acquired facilities
for nine months.
Batesville Acquisition
In August, 1998, the Company acquired an approximate 53% 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
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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 53% 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 the cost method to account for
its ownership interests in the other four.
On June 4, 1999, the Company entered into an agreement to purchase an
additional 40% interest in the Indiantown facility, one of the twelve electric
generating facilities included in the Bechtel Acquisition. The agreement calls
for the purchase to be made during 1999 in three phases, the first of which, the
purchase of a 19.9% interest, occurred on June 4, 1999. The second phase, a
purchase of an additional 20% interest occurred on September 20, 1999. The first
and second phases of the acquisition were accounted for as a purchase and
resulted in a total premium of approximately $37.9 million that will be
amortized over the remaining life of the facility. The remaining phase,
comprising a 0.1% interest, will be completed during the fourth quarter of 1999.
The Company will account for the acquisition of the additional interest as a
purchase, and will use the equity method of accounting to account for its entire
ownership in the Indiantown facility we acquired in 1999.
4. COGENTRIX EASTERN AMERICA REVOLVING CREDIT FACILITY
Cogentrix Eastern America (CEA), a subsidiary of Holdings, has entered
into a $75 million, three-year revolving credit facility. CEA is a special
purpose holding company formed to hold ownership interests in the twelve
electric generating facilities acquired in the Bechtel Acquisition. The
commitment under the credit facility reduces to $67.5 million after one year and
$60 million after two-years. This credit facility will be used to finance a
portion of the purchase price for the additional ownership interests in the
Indiantown facility.
5. PENDING CLAIMS AND LITIGATION
One of Holdings' indirect, wholly-owned subsidiaries is party 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 subsidiary 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 this
subsidiary in 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 Holdings' 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. The Company's management is of the opinion that
none of this routine litigation should have a material adverse effect on our
consolidated financial position, results of operations, or cash flows.
8
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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 1,842 megawatts. We currently operate 12 of our plants, 10 of
which we developed and constructed.
When our plant 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 2,262 megawatts.
Unless the context requires otherwise, references in this report to
"we", "us" or "our", refer to Holdings 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".
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Results of Operations - Three-Months and Nine-Months Ended September 30, 1999
and 1998
<TABLE>
<CAPTION>
Three-Months Ended September 30, Nine-Months Ended September 30,
------------------------------------------- -------------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------- -------------------
(dollars in thousands, unaudited) (dollars in thousands, unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $128,396 100.0% $120,561 100.0% $353,722 100.0% $317,017 100.0%
Operating costs 61,998 48.3 62,168 51.6 171,630 48.5 160,105 50.5
General, administrative
and development 263 .2 373 .3 637 .2 1,146 .4
Depreciation and amortization 10,342 8.1 10,529 8.7 31,029 8.8 30,469 9.6
-------- ----- -------- ----- -------- ----- -------- -----
Operating income $ 55,793 43.4% $ 47,491 39.4% $150,426 42.5% $125,297 39.5%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Total operating revenues increased 6.5% to $128.4 million for the third
quarter of 1999 as compared to the third quarter of 1998. The increase was
primarily attributable to $4.7 million in earnings in the third quarter of 1999
from the power projects acquired in the Bechtel Acquisition in October, 1998. To
a lesser extent, operating revenues were impacted by an increase in electric
revenue from the Richmond, Hopewell and Portsmouth facilities related to an
increase in megawatt hours sold to the purchasing utility and an increase in
capacity revenue at the Southport and Roxboro facilities related to the
declaration of electric capacity.
Our operating revenues for the nine-month period ended September 30,
1999, which increased 11.6% to $353.7 million as compared to $317.0 million for
the nine-month period ended September 30, 1998, were largely influenced by some
of the same factors discussed above: the Bechtel Acquisition, the increase in
electric revenue at the Richmond and Portsmouth facilities and the increase in
capacity revenue at the Southport and Roxboro facilities. The increase in
operating revenues for the nine-month period ended September 30, 1999 was also
attributable to an increase in lease 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 operating revenues was
partially offset by a decrease in electric revenue at the Lumberton and
Kenansville facilities related to a decrease in megawatt hours sold to the
purchasing utility and a decrease in capacity revenue related to the declaration
of electric capacity.
Our operating costs remained fairly consistent for the third quarter of
1999 as compared to the third quarter of 1998. Fuel expense increased as a
result of an increase in megawatt hours sold to the purchasing utilities at
Richmond, Hopewell and Portsmouth facilities. This increase in operating costs
was partially offset by a decrease in fuel expense at the Rocky Mount facility
related to a decrease in megawatt hours sold to the purchasing utility for the
three-month period ended September 30, 1999.
The Company's operating costs for the nine-month period ended September
30, 1999, increased 7.2% to $171.6 million as compared to $160.1 million for the
nine-month period ended September 30, 1998. This increase was primarily the
result of a significant increase in the costs of services incurred at the
Cottage Grove and Whitewater facilities. We also had an increase in routine
maintenance expenses at the Hopewell and Ringgold facilities, an increase in
operating expenses at ReUse Technology, Inc., one of our indirect wholly-owned
subsidiaries and an increase in fuel expense as a result of an increase in
megawatt hours sold to the purchasing utilities at the Richmond and Portsmouth
facilities. The increase in operating expense was partially offset by a decrease
in operating costs incurred at the Richmond facility related to routine
maintenance performed during the nine-month period ended September 30, 1998, a
decrease in fuel expense at the Southport facility related to reduced steam
demand from the steam host and a decrease in fuel expense as a result of a
decrease in the megawatt hours sold to the purchasing utility at the Rocky Mount
facility.
General, administrative and development expenses remained fairly
consistent for the third quarter of 1999 as compared to the third quarter of
1998 as well as the nine-months ended September 30, 1999 as compared to the
corresponding period in 1998. The slight decrease primarily resulted from
general decreases in payroll, travel and consulting costs.
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Interest expense decreased 5.6% to $15.9 million for the quarter ended
September 30, 1999 and increased 2.5% to $46.6 million for the nine-months ended
September 30, 1999 as compared to the corresponding periods of 1998. Our
weighted average long-term debt increased to $885 million, with a weighted
average interest rate of 7.0% through the third quarter of 1999, as compared to
weighted average long-term debt of $752 million, with a weighted average
interest rate of 8.0% through the third quarter of 1998. The decrease in
interest expense for the quarter ended September 30, 1999 resulted primarily
from the scheduled repayments of outstanding project finance debt at some of our
project subsidiaries. The increase in interest expense and weighted average debt
outstanding for the nine months ended September 30, 1999 were related to the
inclusion of the project finance debt of the Cottage Grove and Whitewater
facilities acquired in March, 1998. The increase also relates to borrowings
incurred during the first nine months of 1999 under revolving credit facilities
at some subsidiaries. The increase in interest expense for the nine month period
ended September 30, 1999 was partially offset by the scheduled repayment of
outstanding project finance debt.
The increase in minority interest in income for the third quarter of
1999 as compared to the third quarter of 1998 related primarily to an increase
in earnings at the Cottage Grove and Whitewater facilities related to a decrease
in operating costs at the Cottage Grove facility due to a decrease in fuel
costs, and an increase in the variable energy rate charged to the purchasing
utility at the Whitewater facility. The increase in minority interest in income
for the nine-month period ended September 30, 1999 as compared to the
corresponding period of 1998 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 operations for the nine-month period ended
September 30, 1999 include a full nine months of earnings for the Cottage Grove
and Whitewater facilities, as compared to less than seven months for the
nine-month period ended September 30, 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 February, 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 nine-month
period ended September 30, 1999 were net income of $59.4 million, increases due
to adjustments for depreciation and amortization of $31.0 million, deferred
income taxes of $17.9 million, minority interest in income, net of dividends of
$7.3 million, equity in net income of unconsolidated affiliates, net of
dividends of $0.9 million, and a net $9.8 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 $1.1 million. Cash flow provided by operating activities of $125.2
million, proceeds from borrowings of $96.3 million, and cash contribution from
parent of $60.9 million were primarily used to purchase property, plant and
equipment of $1.2 million, repay project finance borrowings of $79.8 million,
pay a common stock dividend of $57.2 million, fund $9.8 million of escrow, make
additional investments in an affiliate of $76.5 million, and lend $52.5 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 some 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 $830.4 million as of
September 30, 1999, is non-recourse to us and our other project subsidiaries,
except in connection with transactions where our Parent has 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 some types of 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
11
<PAGE> 12
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 Holdings' 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.
The ability of our project subsidiaries, two of our intermediary
holding companies and the project entities in which we have an investment to pay
dividends and management fees periodically to us is subject to limitations in
their respective project credit documents. These limitations generally require
that: (a) project debt service payments be current, (b) project debt service
coverage ratios be met, (c) all project debt service and other reserve accounts
be funded at required levels and (d) 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 of September 30, 1999, we had long-term debt, including the current
portion thereof, of approximately $893 million, substantially all of such
indebtedness is project financing debt. Future annual maturities of long-term
debt range from $54.7 million to $90.0 million in the five-year period ending
December 31, 2003. We believe that 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.
In September 1999, Cogentrix Eastern America, Inc., our subsidiary
formed to hold our interests in the twelve electric generating facilities we
acquired in the Bechtel Acquisition, entered into its own $75 million,
three-year revolving credit facility. The commitment under this facility reduces
to $67.5 million after one-year and to $60 million after two years. With the
closing of this credit facility, our subsidiaries now maintain revolving credit
facilities, which are non-recourse to us, with aggregate commitments of $143.7
million. As of September 30, 1999, we had $57.2 million available under these
facilities.
As a result of a March, 1999 arbitration award related to a contract
dispute with a coal supplier, we were obligated to pay the coal supplier
approximately $8 million in 1999. This payment was made from cash on hand in the
third quarter of 1999. Approximately $3 million of this award related 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.
In June, 1999, we entered into an agreement to purchase an additional
40% ownership interest in the Indiantown Cogeneration facility in a three phase
transaction. We paid $39.8 million to acquire a 19.9% interest in the facility
in June, 1999 and $36.6 million to acquire a 20% interest in the facility in
September, 1999. We funded the purchase of these interests with proceeds from
revolving credit facilities at certain of our subsidiaries. The acquisition of
an additional 0.1% interest in the facility for a purchase price of
approximately $.2 million is scheduled to be completed in the fourth quarter of
1999.
We have entered into commitments with a turbine supplier to purchase a
specified number of turbines with specified delivery dates. We have made $8.6
million in non-refundable deposits related to these commitments through
September 30, 1999. We expect to make additional progress payments of $19.3
million in 1999 prior to closing the financing for the projects that will use
the turbines.
12
<PAGE> 13
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 our
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 September 30, 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.
YEAR 2000 COMPLIANCE
We have completed our investigation, analysis, remediation and
contingency planning for our corporate business critical systems, as well as our
embedded technology systems for our mission critical facilities. The
investigation and analysis identified no significant Year 2000 issues. We will
continue to communicate with critical suppliers, vendors, joint venture partners
and major customers to assess their compliance efforts and our exposure to any
Year 2000 problems they may experience. We did not incur any significant
additional expenses related to the Year 2000 issue in the quarter ended
September 30, 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 most likely worse case scenario which is
the inability of our facilities to produce and distribute power. These plans
have been tested, and appear to be adequate. We cannot guarantee, however, that
no interruptions or other limitations of financial and operating system
functionality will occur 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
One of our indirect, wholly-owned subsidiaries is party 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, our subsidiary 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 this subsidiary in defense of these claims
- - that the ultimate resolution of these claims should not have a material
adverse effect on our consolidated financial position or results of operations,
or on our ability to generate sufficient cash flow to service our outstanding
debt.
In addition, we experience other routine litigation in the normal
course of our business. Our management is of the opinion that none of this
routine litigation should have a material adverse effect on our financial
position, results of operations, or cash flows.
14
<PAGE> 15
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 Credit agreement, dated as of September 8, 1999
between Cogentrix Eastern America, Inc. and
Dresdner Bank, AG as administrative agent. (10.1)
(5)
10.2 Pledge Agreement, dated as of September 8, 1999
between Cogentrix Delaware Holdings, Inc. and
Dresdner Bank, AG as administrative agent. (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.
(1) Incorporated by reference to the Amendment No. 3 to the
Registration Statement on Form S-4 (File No. 33-67171) filed
with the Securities and Exchange Commission by Cogentrix
Energy, Inc. and Cogentrix Delaware Holdings, 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 by Cogentrix Energy, Inc.
on 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.
15
<PAGE> 16
(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. 33-74254)
filed by Cogentrix Energy, Inc. on November 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.
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)
November 15, 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 AS OF AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 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> SEP-30-1999
<CASH> 81,472
<SECURITIES> 0
<RECEIVABLES> 72,276
<ALLOWANCES> 0
<INVENTORY> 19,794
<CURRENT-ASSETS> 177,503
<PP&E> 699,061
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<TOTAL-ASSETS> 1,640,132
<CURRENT-LIABILITIES> 183,037
<BONDS> 803,380
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<OTHER-SE> 461,154
<TOTAL-LIABILITY-AND-EQUITY> 1,640,132
<SALES> 252,551
<TOTAL-REVENUES> 359,712
<CGS> 203,296
<TOTAL-COSTS> 203,296
<OTHER-EXPENSES> 10,874
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<INTEREST-EXPENSE> 46,560
<INCOME-PRETAX> 98,982
<INCOME-TAX> 39,533
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