<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
--------------
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________
TO _____________
COMMISSION FILE NUMBER 1-9208
COGENERATION CORPORATION OF AMERICA
(Exact name of Registrant as Specified in Charter)
DELAWARE 59-2076187
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
--------------
ONE CARLSON PARKWAY, SUITE 240
MINNEAPOLIS, MINNESOTA 55447-4454
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 745-7900
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X Yes No
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. X Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,836,769 shares
of Common Stock, $0.01 par value per share, as of August 10, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 is hereby amended and restated in its entirety by this
Amendment No. 1 on Form 10-Q/A ("Amendment No. 1"). The purpose of this
Amendment No. 1 is to add Note 4 "INVESTMENT IN GRAYS FERRY" to the Notes to
Consolidated Financial Statements.
COGENERATION CORPORATION OF AMERICA
FORM 10-Q/A
JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997. . . . . . . . . . . . . 3
Consolidated Statements of Operations -
Three months and six months ended June 30, 1998 and
June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and June 30, 1997 . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Default Upon Senior Securities . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 22
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 22
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
2
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 5,114 $ 3,444
Restricted cash and cash equivalents......................... 9,278 8,527
Accounts receivable, net..................................... 9,881 11,099
Receivables from related parties............................. 245 87
Notes receivable, current.................................... 3 27
Inventories.................................................. 2,439 2,134
Other current assets......................................... 1,229 1,022
--------- ---------
Total current assets....................................... 28,189 26,340
Property, plant and equipment, net............................. 124,063 127,574
Property under construction.................................... 80,847 46,247
Project development costs...................................... 129 129
Investments in equity affiliates............................... 16,022 13,381
Deferred financing costs, net.................................. 5,389 5,643
Deferred tax assets, net....................................... 7,996 7,996
Other assets................................................... 543 584
--------- ---------
Total assets............................................... $ 263,178 $ 227,894
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of loans and payables due NRG Energy, Inc.... $ 1,596 $ 2,864
Current portion of nonrecourse long-term debt................ 9,068 8,525
Current portion of recourse long-term debt................... 415 495
Short-term borrowings........................................ 1,524 1,313
Accounts payable............................................. 16,713 20,582
Prepetition liabilities...................................... 789 775
Other current liabilities.................................... 2,681 3,083
--------- ---------
Total current liabilities.................................. 32,786 37,637
Loans due NRG Energy, Inc...................................... 4,439 4,439
Nonrecourse long-term debt..................................... 201,077 165,020
Recourse long-term debt........................................ 25,000 25,000
--------- ---------
Total liabilities.......................................... 263,302 232,096
--------- ---------
Stockholders' equity (deficit):
Preferred stock, par value $.01, 20,000,000 shares
authorized; none issued or outstanding..................... - -
New common stock, par value $.01, 50,000,000 shares
authorized, 6,871,069 shares issued,
6,836,769 shares outstanding as of
June 30, 1998 and December 31, 1997, respectively.......... 68 68
Additional paid-in capital................................... 65,715 65,715
Accumulated deficit.......................................... (65,540) (69,592)
Accumulated other comprehensive income (loss)................ (367) (393)
--------- ---------
Total stockholders' equity (deficit)....................... (124) (4,202)
--------- ---------
Total liabilities and stockholders' equity (deficit)....... $ 263,178 $ 227,894
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Energy revenues....................... $ 10,518 $ 9,002 $ 21,801 $ 21,393
Equipment sales and services.......... 2,863 4,586 8,334 9,192
Rental revenues....................... 606 467 1,481 927
-------- -------- -------- --------
13,987 14,055 31,616 31,512
COST OF REVENUES:
Cost of energy revenues............... 4,187 4,072 7,700 7,232
Cost of equipment sales and services.. 2,729 3,662 7,468 7,561
Cost of rental revenues............... 524 440 1,174 823
-------- -------- -------- --------
7,440 8,174 16,342 15,616
Gross profit........................ 6,547 5,881 15,274 15,896
Selling, general and
administrative expenses.............. 2,429 1,663 4,536 3,916
-------- -------- -------- --------
Income from operations.............. 4,118 4,218 10,738 11,980
-------- -------- -------- --------
Interest and other income............. 251 227 469 389
Equity in earnings of affiliates...... 1,639 4 2,646 43
Interest and debt expense............. (3,486) (3,794) (7,039) (7,331)
-------- -------- -------- --------
Income before income taxes.......... 2,522 655 6,814 5,081
-------- -------- -------- --------
Provision for income taxes............. 1,143 184 2,762 523
-------- -------- -------- --------
Net income.......................... $ 1,379 $ 471 $ 4,052 $ 4,558
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share............... $ 0.20 $ 0.07 $ 0.59 $ 0.71
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share............. $ 0.20 $ 0.07 $ 0.58 $ 0.69
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares
outstanding (Basic)................... 6,837 6,441 6,837 6,441
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares
outstanding (Diluted)................. 6,987 6,578 6,999 6,566
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income................................................... $ 4,052 $ 4,558
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................ 4,234 3,774
Equity in earnings of affiliates......................... (2,646) (43)
(Gain) loss on disposition of property and equipment..... (137) 491
Other, net............................................... 31 (38)
Changes in operating assets and liabilities:
Accounts receivable, net............................... 1,218 1,183
Inventories............................................ (305) (121)
Receivables from related parties....................... (158) 121
Other assets........................................... (223) 23
Accounts payable and other current liabilities......... 662 (2,067)
-------- --------
Net cash provided by operating activities............ 6,728 7,881
-------- --------
Cash Flows from Investing Activities:
Capital expenditures......................................... (35,557) (1,277)
Proceeds from disposition of property and equipment.......... 686 600
Investment in equity affiliates.............................. - (1,100)
Project development costs.................................... - (15)
Collections on notes receivable.............................. 24 1,122
Deposits into restricted cash accounts, net.................. (737) (1,158)
-------- --------
Net cash used in investing activities................ (35,584) (1,828)
-------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt................................. 34,672 1,100
Repayments of long-term debt................................. (4,353) (6,016)
Net proceeds (repayments) of short-term borrowings........... 211 (415)
Net repayments of prepetition liabilities.................... - (1,732)
Deferred financing costs..................................... (4) -
-------- --------
Net cash provided by (used) in financing activities.. 30,526 (7,063)
-------- --------
Net increase in cash and cash equivalents..................... 1,670 (1,010)
Cash and cash equivalents, beginning of period................ 3,444 3,187
-------- --------
Cash and cash equivalents, end of period...................... $ 5,114 $ 2,177
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 7,306 $ 8,040
Income taxes paid........................................... 648 1,030
Transfer of construction payables into long-term debt....... 6,201 -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
COGENERATION CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cogeneration Corporation of America ("CogenAmerica" or the "Company"
formerly NRG Generating (U.S.) Inc.) and its subsidiaries develop and own
cogeneration projects which produce electricity and thermal energy for sale
to industrial and commercial users and public utilities. In addition, the
Company, through its subsidiaries, sells and rents power generation,
cogeneration and standby/peak shaving equipment and services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of all
majority-owned subsidiaries and all significant intercompany accounts and
transactions have been eliminated. Investments in companies, partnerships
and projects that are more than 20% but less than majority-owned are
accounted for by the equity method.
The accompanying unaudited consolidated financial statements and notes
should be read in conjunction with the Company's Report on Form 10-K for the
year ended December 31, 1997. In the opinion of management, the consolidated
financial statements reflect all adjustments necessary for a fair
presentation of the interim periods presented. Results of operations for an
interim period may not give a true indication of results for the year.
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior years' data to
the current presentation. These reclassifications had no impact on
previously reported net income or stockholders' deficit.
NET EARNINGS PER SHARE
Basic earnings per share includes no dilution and is computed by dividing
net income available to common stockholders by the weighted average shares
outstanding. Diluted earnings per share is computed by dividing net income by
the weighted average shares of common stock and dilutive common stock
equivalents outstanding. The Company's dilutive common stock equivalents
result from stock options and are computed using the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
-------------------------------------------- --------------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
-------------- ----------------- --------- -------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income:
Basic EPS $ 1,379 6,837 $ 0.20 $ 471 6,441 $ 0.07
Effect of dilutive
stock options - 150 - 137
------------- ---------------- ------------- ----------------
Diluted EPS $ 1,379 6,987 $ 0.20 $ 471 6,578 $ 0.07
------------- ---------------- ------------- ----------------
------------- ---------------- ------------- ----------------
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
-------------------------------------------- --------------------------------------------
Income Shares Income Shares
(Numerator) (Denominator) EPS (Numerator) (Denominator) EPS
-------------- ----------------- --------- -------------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income:
Basic EPS $ 4,052 6,837 $ 0.59 $ 4,558 6,441 $ 0.71
Effect of dilutive
stock options - 162 - 125
------------- ----------------- ------------- ----------------
Diluted EPS $ 4,052 6,999 $ 0.58 $ 4,558 6,566 $ 0.69
------------- ----------------- ------------- ----------------
------------- ----------------- ------------- ----------------
</TABLE>
2. LOANS DUE NRG ENERGY, INC.
Of the June 30, 1998 loan balance of $4,439 due to NRG Energy, Inc.
("NRG Energy"), $2,539 has a maturity date of April 30, 2001 and $1,900 has a
maturity date of July 1, 2005.
3. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") which established new rules for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Adoption of SFAS 130 had no impact on
the Company's net income or stockholders' equity. Total comprehensive income
for the quarter ended June 30, 1998 and 1997 was $1,370 and $520,
respectively. Total comprehensive income for the six months ended June 30,
1998 and 1997 was $4,078 and $4,536, respectively. The difference between
total comprehensive income and net income for the above periods was due to
foreign currency translation adjustments.
4. INVESTMENT IN GRAYS FERRY
CogenAmerica Schuylkill Inc., a wholly-owned subsidiary ("CSI"), has a
one-third partnership interest in the Grays Ferry Cogeneration Partnership
("Grays Ferry Partnership"). The other partners are affiliates of PECO Energy
Company ("PECO") and Trigen Energy Corporation ("Trigen"). Grays Ferry has
constructed a 150 MW cogeneration facility located in Philadelphia. Grays
Ferry has a 25-year contract to supply all the steam produced by the project
to an affiliate of Trigen through January 2023 and a 20-year contract to
supply all the electricity produced by the project to PECO through January
2018.
The Company accounts for its investment in Grays Ferry by the equity
method. The investment in Grays Ferry was $15,476 and $12,845 at June 30,
1998 and December 31, 1997, respectively. The Company's equity in the
earnings of Grays Ferry was $1,645 and $2,631 for the quarter and six months
ended June 30, 1998. Grays Ferry commenced commercial operations in January
1998 and therefore had no earnings in 1997. Summarized income statement
information of Grays Ferry for 1998 is presented below.
7
<PAGE>
<TABLE>
<CAPTION>
Grays Ferry
----------------------------
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1998
------------ ----------
<S> <C> <C>
Net revenues $ 20,430 $ 37,463
Cost of sales 11,746 22,609
Operationg income 7,552 12,724
Partnership net income 5,157 8,115
</TABLE>
5. LITIGATION
GRAYS FERRY LITIGATION. The Company's wholly-owned subsidiary through
which it owns a one-third interest in the Grays Ferry Cogeneration
Partnership (the "Grays Ferry Partnership"), filed suit as one of three
Plaintiffs (including the Grays Ferry Partnership) in an action brought
against PECO Energy Company ("PECO") on March 9, 1998, in the United States
District Court for the Eastern District of Pennsylvania, for PECO's refusal
to pay the partnership the electricity rates set forth in the power purchase
agreements. On March 19, 1998, the federal district court dismissed the
federal lawsuit for lack of subject matter jurisdiction. On March 27, 1998,
the Plaintiffs filed a motion for reconsideration and leave to file an
amended complaint. On April 13, 1998 the federal district court judge denied
the Plaintiffs' motion. The Plaintiffs thereafter filed a new lawsuit in
state court in Pennsylvania seeking, among other things, to enjoin PECO from
terminating its power purchase agreements with the partnership and to compel
PECO to pay the electricity rates set forth in the agreements. On May 5,
1998, the Grays Ferry Partnership obtained a preliminary injunction enjoining
PECO from terminating the power purchase agreements and ordering PECO to
comply with the terms of the power purchase agreements pending the outcome of
the litigation. The Court of Common Pleas in Philadelphia also ordered PECO
to abide by all of the terms and conditions of the power purchase agreements
and pay the rates set forth in the agreements. The Plaintiffs were required
to post a bond in the amount of $50 in connection with the preliminary
injunction. On May 8, 1998, PECO filed a motion to stay the preliminary
injunction order. On May 13, 1998, the Grays Ferry Partnership filed an
emergency petition for contempt to compel PECO to pay the amounts due and
owing under the power purchase agreements. On May 20, 1998, the Court of
Common Pleas granted the motion for civil contempt and ordered PECO to pay
$50 for each day that PECO failed to comply with the court's order. The
power purchaser, in response to the preliminary injunction, has made all past
due payments under protest and continues to make payments to the Grays Ferry
Partnership under protest according to the terms of the power purchase
agreements. PECO has filed a notice of appeal from the court's preliminary
injunction order. On July 7, 1998 PECO withdrew its appeal of the
preliminary injunction. The trial date of March 31, 1999 has been
established and the discovery phase of the litigation is progressing. The
Grays Ferry Partnership is vigorously pursuing the litigation and expects to
achieve a favorable result.
As a result of the power purchasers actions, the Grays Ferry Partnership
is currently in default of its project financing credit agreement. The debt
under the credit agreement is secured only by the partnership's assets and
the partners' ownership interest in the partnership. The lenders have not
accelerated the debt as a result of the default. However, the Grays Ferry
Partnership is currently prohibited from making certain
8
<PAGE>
distributions to its owners and other parties. At June 30, 1998 the
Company's investment in the Grays Ferry Partnership, which is accounted for
by the equity method, was $15.5 million. While it is possible that the
Company's investment could become impaired, the Company does not believe that
is likely and no provision for loss has been recorded.
NRG ENERGY ARBITRATION. On January 30, 1998, the Company gave notice to
NRG Energy of a dispute to be arbitrated pursuant to the terms of its
Co-Investment Agreement with the Company. With certain exceptions, the
Co-Investment Agreement obligates NRG Energy to offer to sell to the Company
"eligible projects," which are defined in the Co-Investment Agreement as
certain facilities which generate electricity for sale through the combustion
of natural gas, oil or any other fossil fuel. The Co-Investment Agreement
provides that if NRG Energy offers to sell an eligible project to the Company
and the Company declines to purchase the project, NRG Energy then has the
right to sell the project to a third party at a price which equals or exceeds
that offered to the Company. See "Business -- Project Development Activities
- -- Co-Investment Agreement with NRG Energy." In the arbitration proceeding,
the Company contended that NRG Energy breached the Co-Investment Agreement
by, among other things, agreeing to sell to OGE Energy Corp., an affiliate of
Oklahoma Gas and Electric Company a 110 MW cogeneration project in Oklahoma
without first offering the project to the Company at the same price. The
Company requested specific performance of NRG Energy's obligations under the
Co-Investment Agreement. NRG Energy argued that it had no obligation to
offer the project to the Company. On June 8, 1998, the arbitration panel
reviewing the matter issued a preliminary injunction prohibiting NRG Energy
from closing the sale of the project to OGE Energy Corp., pending the outcome
of the arbitration and subject to the Company's posting of a $500 bond, which
the Company posted.
On July 31, 1998 the arbitration panel held that NRG Energy had not
fulfilled its obligations under the Co-Investment Agreement by failing to
offer the project to CogenAmerica under the terms of the Co-Investment
Agreement. The arbitration panel ordered NRG Energy to offer the project to
CogenAmerica. Specifically the order provided for a permanent injunction
enjoining the closing of the sale of the project to OGE Energy Corp. In
addition, the bond that CogenAmerica posted for the preliminary injunction
was released and no additional bond or security was required. By August 30,
1998, NRG Energy is required to make a written offer of the project to
CogenAmerica on the same terms, price and structure as offered to OGE Energy
Corp. In addition, the offer is required to include seller financing, based
on a good faith standard, as required by the Co-Investment Agreement.
CogenAmerica will have thirty days from receipt of the reoffer to inform NRG
Energy if it intends to purchase the project.
On August 4, 1998 NRG Energy made an offer to sell the facility to
CogenAmerica as required by the arbitration panel's order. As of the date of
this Report, CogenAmerica has made no determination whether to accept NRG
Energy's offer.
For additional information see "Part I -- Financial Information -- Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources;" "Part II -- Other Information
- -- Item 1. Legal Proceedings;" and "Part II - Other Information - Item 3.
Defaults Upon Senior Securities."
6. REVOLVING CREDIT FACILITY
On December 17, 1997, the Company entered into a credit agreement
providing for a $30,000 reducing revolving credit facility. The facility
reduces by $2,500 on the first and second anniversaries of the agreement and
repayment of the outstanding balance is due on the third anniversary of the
agreement. At June 30, 1998, borrowings of $25,000 were outstanding. The
facility is secured by the assets and cash flows of the Philadelphia PWD
Project as well as the distributable cash flows of the Newark and Parlin
Projects and the Grays Ferry Partnership.
The credit agreement includes cross-default provisions that cause
defaults to occur in the event certain defaults or other adverse events occur
under certain other instruments or agreements (including financing and other
project documents) to which the Company or one or more of its subsidiaries or
other entities in which it owns an ownership interest is a party. The
actions taken by the power purchaser of the Grays Ferry Project have resulted
in a cross default under the revolving credit facility. Repayment of the
revolving credit facility has not been accelerated and the lender has waived
such default through July 1, 1999. The Company has agreed not to draw any
additional amounts under the revolving credit facility.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained in this Item 2 updates, and should be read in
conjunction with, the information set forth in Part II, Item 7, of the
Company's Report on Form 10-K for the year ended December 31, 1997.
Capitalized terms used in this Item 2 which are not defined herein have the
meaning ascribed to such terms in the Notes to the Company's financial
statements included in Part I, Item 1 of this Report on Form 10-Q/A. All
dollar amounts (except per share amounts) set forth in this Report are in
thousands.
Except for the historical information contained in this Report, the
matters reflected or discussed in this Report which relate to the Company's
beliefs, expectations, plans, future estimates and the like are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are not
guarantees of future performance and are subject to risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the Company to differ materially from historical results or from any
results expressed or implied by such forward-looking statements. Such
factors include, without limitation, uncertainties inherent in predicting the
outcome of litigation and other factors discussed in this report and the
Company's Report on Form 10-K for the year ended December 31, 1997 entitled
"Item 1. Business -- Risk Factors." Many of such factors are beyond the
Company's ability to control or predict, and readers are cautioned not to put
undue reliance on such forward-looking statements. The Company disclaims any
obligation to update or review any forward-looking statements contained in
this Report or in any statement referencing this Report, whether as a result
of new information, future events or otherwise.
GENERAL
The Company is engaged primarily in the business of developing, owning
and operating cogeneration projects, which produce electricity and thermal
energy for sale under long-term contracts with industrial and commercial
users and public utilities. In addition to its energy business, the Company
sells and rents power generation and cogeneration equipment through
subsidiaries located in the United States and the United Kingdom.
In its role as a developer and owner of energy projects, the Company has
developed the following projects in which it currently has an ownership
interest:
(a) The 52 megawatt ("MW") Newark Boxboard Project (the "Newark
Project"), located in Newark, New Jersey, began operations in
November 1990, and is owned by the Company's wholly-owned
subsidiary CogenAmerica Newark, Inc. ("Newark");
(b) The 122 MW E.I. du Pont de Nemours Parlin Project (the "Parlin
Project"), located in Parlin, New Jersey, began operations in June
1991, and is owned by the Company's wholly-owned subsidiary
CogenAmerica Parlin, Inc. ("Parlin");
(c) The 22 MW Philadelphia Cogeneration Project (the "Philadelphia PWD
Project"), located in Philadelphia, Pennsylvania, began operations
in May 1993. The principal project agreements relating to the
Philadelphia PWD Project are held by an 83%-owned subsidiary of the
Company; and
10
<PAGE>
(d) The 150 MW Grays Ferry Project, located in Philadelphia,
Pennsylvania, began operations in January 1998. The Company owns a
one-third interest in the Grays Ferry Partnership, which owns the
Grays Ferry Project.
In December 1997, the Company acquired from NRG Energy a 117 MW steam
and electricity cogeneration project located in Morris, Illinois (the "Morris
Project"). The Morris Project is currently under construction with
commercial operation currently expected to occur during the fourth quarter of
1998.
The Company's power purchase agreements ("PPAs") with utilities have
typically contained, and may in the future contain, price provisions which in
part are linked to the utilities' cost of generating electricity. In
addition, the Company's fuel supply prices, with respect to future projects,
may be fixed in some cases or may be linked to fluctuations in energy prices.
These circumstances can result in high volatility in gross margins and
reduced operating income, either of which could have a material adverse
effect on the Company's financial position or results of operations.
Effective April 30, 1996, the Company renegotiated its PPAs with Jersey
Central Power and Light Company ("JCP&L"), the primary electricity purchaser
from its Newark and Parlin Projects. Under the amended PPAs, JCP&L is
responsible for all natural gas supply and delivery. Management believes
that this change in these PPAs has reduced its historical volatility in gross
margins on revenues from such projects by eliminating the Company's exposure
to fluctuations in the price of natural gas that must be paid by its Newark
and Parlin Projects.
Both the Newark and Parlin Projects were previously certified as
qualifying facilities ("QFs") by the Federal Energy Regulatory Commission
("FERC") under the Public Utility Regulatory Policies Act of 1978 ("PURPA").
The effect of QF status is generally to exempt a project's owners from
relevant provisions of the Federal Power Act, the Public Utility Holding
Company Act of 1935 ("PUHCA"), and state utility-type regulation. However,
as permitted under the terms of its renegotiated PPA, Parlin has chosen to
file rates with FERC as a public utility under the Federal Power Act. The
effect of this filing was to relinquish the Parlin Project's claim to QF
status. The FERC approved Parlin's rates effective April 30, 1996 and has
determined Parlin to be an exempt wholesale generator ("EWG"). As an EWG,
Parlin is exempt from PUHCA, and the ownership of Parlin by the Company does
not subject the Company to regulation under PUHCA. Finally, as a seller of
power exclusively at wholesale, Parlin is not generally subject to state
regulation and, in any case, management believes that Parlin complies with
all applicable requirements of state utility law.
In addition to the energy business, the Company sells and rents power
generation and cogeneration equipment and provides related services. The
Company operates its equipment sales, rentals and services business
principally through two subsidiaries. In the United States, the equipment
sales, rentals and services business operates under the name of O'Brien
Energy Services Company ("OES"). NRG Generating Limited, a wholly-owned
United Kingdom subsidiary, is the holding company for a number of
subsidiaries that operate in the United Kingdom under the common name of Puma
("Puma"). The Company has determined that OES and Puma are no longer a part
of its strategic plan, and the Company is currently pursuing alternatives for
the disposition of these businesses. The disposition of these businesses is
not expected to have a material impact on the Company's results of operations
or financial position.
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NET INCOME AND EARNINGS PER SHARE
Pre-tax earnings for the 1998 second quarter were $2,522 compared to
$655 in the prior year comparable quarter. Pre-tax earnings for the first
six months of 1998 were $6,814 compared to $5,081 in the prior year
comparable period. Net income for the 1998 second quarter was $1,379, or
diluted earnings per share of $0.20, compared to second quarter 1997 net
income of $471, or diluted earnings per share of $0.07. Net income for the
first six months of 1998 was $4,052, or diluted earnings per share of $0.58,
compared to net income of $4,558 in the prior year comparable period, or
diluted earnings per share of $0.69. The increase in net income for the
second quarter is primarily due to higher earnings from the Newark and Parlin
Projects and the equity in earnings from the Grays Ferry Project, which
commenced operations in January 1998, offset by lower earnings from the
equipment sales, rental and services segment and higher income tax expense.
Net income for the first six months of 1998 was lower than the prior year
period primarily due to lower earnings from the equipment sales, rental and
services segment and higher income tax expense, offset by the positive impact
of earnings from the Grays Ferry Project. Diluted earnings per share for the
1998 second quarter increased from the prior comparable quarter due to higher
net income, offset by an increase in the weighted average shares outstanding.
Diluted earnings per share for the first six months of 1998 decreased from
the prior year comparable period due to lower net income and an increase in
the weighted average shares outstanding. Weighted average shares outstanding
increased primarily due to the conversion by NRG Energy in October 1997 of
$3,000 of borrowings to the Company into 396,255 shares of the Company's
common stock.
During the 1997 fourth quarter, the Company recorded an income tax
benefit by reducing the valuation allowance previously established for
federal and state net operating loss carryforwards and other deferred tax
assets. Consequently, although the net operating loss carryforwards continue
to reduce income taxes currently payable, 1998 earnings are generally
fully-taxed. In the quarter and six months ended June 30, 1997, which was
prior to reversal of the valuation allowance, net operating loss
carryforwards were recognized each period as a reduction of income tax
expense based on pretax income. On a comparable basis, net income for the
quarter and six months ended June 30, 1997 would have been $358 and $3,021,
or diluted earnings per share of $0.05 and $0.46, respectively, assuming the
same effective tax rate as in the 1998 periods.
REVENUES
Energy revenues for the second quarter 1998 of $10,518 increased from
revenues of $9,002 for the comparable period in 1997. Energy revenues for
the first six months of 1998 of $21,801 increased from $21,393 for the
comparable period in 1997. Energy revenues primarily reflect billings
associated with the Newark and Parlin Projects and the Company's Philadelphia
PWD Project. The increase in energy revenues for the second quarter 1998 was
primarily attributable to seasonal capacity revenues and due to a major
maintenance outage at the Newark Project in the second quarter 1997.
Revenues recognized at Parlin and Newark were $5,127 and $4,343 for the
second quarter 1998 and $4,317 and $3,615 for the comparable period in 1997,
respectively. Revenues recognized at Parlin and Newark were $10,513 and
$9,188 for the first six months of 1998 and $10,606 and $8,709 for the
comparable period in 1997, respectively. The increases were primarily due to
seasonal capacity revenues and due to a major maintenance outage at the
Newark Project in the second quarter 1997.
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Energy revenues from the Company's Philadelphia Water Department standby
facility project for the second quarter 1998 of $1,048 decreased slightly
from revenues of $1,070 for the comparable period in 1997. Energy revenues
from this project for the first six months of 1998 of $2,100 increased
slightly from the $2,078 of revenues for the comparable period in 1997.
Equipment sales and services revenues for the second quarter 1998 of
$2,863 decreased from revenues of $4,586 for the comparable period in 1997.
Equipment sales and services revenues for the first six months of 1998 of
$8,334 decreased from the $9,192 of revenues for the comparable period in
1997. The decreases wee primarily attributable to lower sales volume in the
second quarter 1998.
OES equipment sales and services revenues for the second quarter 1998 of
$1,208 decreased from revenues of $1,440 for the comparable period in 1997.
OES equipment sales and services revenues for the first six months of 1998 of
$3,456 increased from the $2,728 of revenues for the comparable period in
1997. The increase for the first six months is primarily due to higher sales
volume. Puma equipment sales and services revenues for the second quarter
1998 of $1,655 decreased from revenues of $3,146 for the comparable period in
1997. Puma equipment sales and services revenues for the first six months of
1998 of $4,878 decreased from the $6,464 of revenues for the comparable
period in 1997. The decreases were primarily due to lower sales volumes in
some of Puma's Asian markets.
Rental revenues for the second quarter 1998 of $606 increased from
revenues of $467 for the comparable period in 1997. Rental revenues for the
first six months of 1998 of $1,481 increased from the $927 of revenues for
the comparable period in 1997. The increases were due primarily to higher
sales volume due to ice storms in the northeastern United States and Canada.
COSTS AND EXPENSES
Cost of energy revenues for the second quarter 1998 of $4,187 increased
from costs of $4,072 for the comparable period in 1997. Cost of energy
revenues for the first six months of 1998 of $7,700 increased from the $7,232
of costs for the comparable period in 1997. The increases were primarily the
result of depreciation associated with equipment capitalized at the Newark
and Parlin facilities in periods subsequent to the first quarter of 1997.
Cost of equipment sales and services for the second quarter 1998 of
$2,729 decreased from costs of $3,662 for the comparable period in 1997.
Cost of equipment sales and services for the first six months of 1998 of
$7,468 decreased from the $7,561 of costs for the comparable period in 1997.
The decreases were primarily due to lower sales volume at Puma.
Cost of rental revenues for the second quarter 1998 of $524 increased
from costs of $440 for the comparable period in 1997. Cost of rental
revenues for the first six months of 1998 of $1,174 increased from the $823
of costs for the comparable period in 1997. The increases were primarily due
to increased sales volume due to ice storms in the northeastern United States
and Canada.
The Company's gross profit for the second quarter 1998 of $6,547 (46.8%
of sales) increased from the second quarter 1997 gross profit of $5,881
(41.8% of sales). Gross profit for the first six months of 1998 of $15,274
(48.3% of sales) decreased from gross
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profit of $15,896 (50.4% of sales) for the first six months of 1997. The
gross profit increase for the second quarter is primarily attributable to
energy segment seasonal capacity revenues. The gross profit decrease for the
first six months of 1998 is primarily due to lower equipment sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for the second
quarter 1998 of $2,429 increased from second quarter 1997 SG&A expenses of
$1,663. SG&A for the first six months of 1998 of $4,536 increased from SG&A
of $3,916 for the comparable period in 1997. The increase is primarily due
to higher legal expenses, offset in part by lower insurance costs.
INTEREST AND OTHER INCOME
Interest and other income for the second quarter 1998 of $251 increased
from interest and other income of $227 for the comparable period in 1997.
Interest and other income for the first six months of 1998 of $469 increased
from interest and other income of $389 for the comparable period in 1997.
The increase for the six month period is primarily attributable to a gain on
the disposal of equipment.
EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates for the second quarter 1998 of $1,639
increased from second quarter 1997 equity in earnings of affiliates of $4.
Equity in earnings of affiliates for the first six months of 1998 of $2,646
increased from equity in earnings of affiliates of $43 for the comparable
period in 1997. The increases were primarily due to earnings from the Grays
Ferry Project, which commenced operations in January 1998, of $1,646 and
$2,632 for the second quarter and first six months of 1998, respectively.
The earnings of the Grays Ferry Project reflect the contract price of
electricity under the terms of the power purchase agreements. The electric
power purchaser has asserted that such power purchase agreements are not
effective and that the power purchaser is not obligated to pay the rates set
forth in the agreements, and the Company and the Grays Ferry Partnership are
in litigation with the power purchaser over that issue. For additional
information see "Part I -- Financial Information" and "Part II -- Other
Information -- Item 1. Legal Proceedings."
INTEREST AND DEBT EXPENSE
Interest and debt expense for the second quarter 1998 of $3,486
decreased from interest and debt expense of $3,794 for the comparable period
in 1997. Interest and debt expense for the first six months of 1998 of $7,039
decreased from interest and debt expense of $7,331 for the comparable period
in 1997. The decrease is primarily attributable to lower average outstanding
debt at Parlin and Newark as well as reduced interest rates on the Company's
borrowings.
INCOME TAXES
During the 1997 fourth quarter, the Company reduced the valuation
allowance established for tax benefits attributable to net operating loss
carryforwards and other deferred tax assets, resulting in recognition of most
remaining operating loss carryforwards in 1997 fourth quarter earnings.
Consequently, beginning with the 1998
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first quarter, income taxes are generally charged against pre-tax earnings
without any reduction for operating loss carryforwards that continue to be
used to reduce income taxes currently payable. Prior to the 1997 fourth
quarter, net operating loss carryforwards were recognized each period as a
reduction of income tax expense based on pre-tax income.
The consolidated effective tax rate for the quarters ended June 30, 1998
and 1997 was 45.3% and 28.1%, respectively. The consolidated effective tax
rate for the six months ended June 30, 1998 and 1997 was 40.5% and 10.3%,
respectively. The higher effective rates in 1998 were due to the
above-mentioned reduction in the valuation allowance and foreign losses at
the Puma subsidiary for which a tax benefit was not recorded.
LIQUIDITY AND CAPITAL RESOURCES
In May 1996, the Company's wholly-owned subsidiaries Newark and Parlin
entered into a Credit Agreement (the "Credit Agreement") which established
provisions for a $155,000 fifteen-year loan (of which $139,190 was
outstanding at June 30, 1998) and a $5,000 five-year debt service reserve
line of credit. The loan is secured by all of Newark's and Parlin's assets
and a pledge of the capital stock of such subsidiaries. The Company has
guaranteed repayment of up to $25,000 of the amount outstanding under the
Loan. The interest rate on the outstanding principal is variable based on,
at the option of Newark and Parlin, LIBOR plus a 1.125% margin or a defined
base rate plus a 0.375% margin, with nominal margin increases in the sixth
and eleventh year. For any quarterly period where the debt service coverage
ratio is in excess of 1.4:1, both margins are reduced by 0.125%.
Concurrently with entering into the Credit Agreement, Newark and Parlin
entered into an interest rate swap agreement with respect to 50% of the
principal amount outstanding under the Credit Agreement. This interest rate
swap agreement fixes the interest rate on such principal amount ($69,595 at
June 30, 1998) at 6.9% plus the margin.
CogenAmerica Schuylkill, Inc. ("CSI"), a wholly owned subsidiary of the
Company, owns a one-third partnership interest in the Grays Ferry Project.
In March 1996, the Grays Ferry Partnership entered into a credit agreement
with The Chase Manhattan Bank N.A. to finance the project. The credit
agreement obligated each of the project's three partners to make a $10,000
capital contribution prior to the commercial operation of the facility. The
Company made its required capital contribution in 1997.
NRG Energy entered into a loan commitment to provide CSI the funding, if
needed, for the CSI capital contribution obligation to the Grays Ferry
Partnership. CSI borrowed $10,000 from NRG Energy under this loan agreement
in 1997, of which $1,900 remained outstanding to NRG Energy at June 30, 1998,
and contributed the proceeds to the Grays Ferry Partnership as part of the
above-referenced capital contribution. In connection with this loan
commitment for the Grays Ferry Project, the Company granted NRG Energy the
right to convert $3,000 of borrowings under the commitment into 396,255
shares of common stock of the Company. In October 1997, NRG Energy exercised
such conversion right in full.
In connection with its acquisition of the Morris Project, CogenAmerica
Funding Inc. (a wholly-owned subsidiary of the Company) ("CogenAmerica
Funding") assumed all of the obligations of NRG Energy to provide future
equity contributions to the project, which obligations are limited to the
lesser of 20% of the total project cost or $22,000 and are expected to be
required to be funded starting in September 1998. NRG Energy has guaranteed
to the Morris Project's lenders that CogenAmerica Funding will make these
future equity contributions, and the Company has guaranteed to NRG Energy the
obligation of CogenAmerica
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Funding to make these future equity contributions (which guarantee is secured
by a second priority lien on the Company's interest in the Morris Project).
NRG Energy has committed in a Supplemental Loan Agreement between the
Company, CogenAmerica Funding and NRG Energy to loan CogenAmerica Funding and
the Company (as co-borrower) the full amount of such equity contributions by
CogenAmerica Funding, subject to certain conditions precedent, at
CogenAmerica Funding's option. Any such loan will be secured by a second
priority lien on all of the membership interests of the project and will be
recourse to CogenAmerica Funding and the Company. The Company anticipates
that certain of such equity contributions will be financed through the
Supplemental Loan Agreement. However, the Company is continuing to pursue
alternative sources of financing for either CogenAmerica Funding or itself
(the terms and manner of which have not been determined by the Company) to
fund the remainder of the required future equity contributions by
CogenAmerica Funding to the Morris Project, which financing may include a
refinancing of any amounts borrowed under the Supplemental Loan Agreement.
On December 17, 1997, the Company entered into a credit agreement
providing for a $30,000 reducing revolving credit facility with a new lender.
The facility is secured by the assets and cash flows of the Philadelphia PWD
Project as well as the distributable cash flows of the Newark and Parlin
Projects, and the Grays Ferry Partnership. On December 19, 1997 the Company
borrowed $25,000 under this facility. The proceeds were used to repay
$16,949 to NRG Energy, to repay $6,551 of obligations of the Philadelphia PWD
Project and $1,500 for general corporate purposes. As a consequence of the
pending Grays Ferry Partnership litigation, however, the Company has agreed
not to draw additional funds under this facility. In the absence of a waiver
which the Company has obtained, the actions taken by the power purchaser from
the Grays Ferry Project would have resulted in cross-defaults under this
facility. The Company is unable to predict whether or when additional funds
may become available under this facility. The $30,000 facility reduces by
$2,500 on the first and second anniversaries of the agreement and repayment
of the outstanding balance is due on the third anniversary of the agreement.
Interest is based, at the Company's option, on LIBOR plus a margin ranging
from 1.50% to 1.875% or the prime rate plus a margin ranging from 0.75% to
1.125%. The interest rate resets on a monthly basis. The interest rate was
7.31% at June 30, 1998. The facility provides for commitment fees of 0.375%
on the unused facility.
The electric power purchaser from the Grays Ferry Project has asserted
that its power purchase agreements are not effective and that the power
purchaser is not obligated to pay the rates set forth in the agreements. The
Company and the Grays Ferry Partnership are in litigation with the power
purchaser over its obligations under such agreements. After initially
refusing to pay the rates set forth in the power purchase agreements, the
power purchaser has been ordered by the court in which the litigation is
pending to comply with the power purchase agreements pending the outcome of
the litigation. As a consequence of such order, the power purchaser is
currently paying the contracted rates for electric power under protest.
However, the power purchaser has filed a notice of appeal and motion to stay
the court's order, and there can be no assurance that such order will not be
stayed or reversed on appeal. Moreover, as a result of the power purchasers
actions, the Grays Ferry Partnership is in default of its principal credit
agreement, and the lenders thereunder have the ability to prevent the Grays
Ferry Partnership from distributing or otherwise disbursing cash held or
generated by the Grays Ferry Project. Such rights, if exercised by such
lenders, could prevent the Grays Ferry Partnership from meeting its
obligations to suppliers and others and from distributing cash to its
partners during the pendency of the litigation. Any such actions by the
Grays Ferry Partnership's lenders could materially disrupt the Grays Ferry
Partnership's relations with its suppliers and
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could have other potentially material adverse effects on its operations and
profitability and on the Company. The Company believes that as long as the
Grays Ferry Partnership continues to receive the contracted amounts due under
the power purchase agreements, such lenders are unlikely to cause such
adverse effects to occur. While the Grays Ferry Partnership's lenders have
allowed the partnership to meet its obligations to suppliers, the partnership
received a notice of default from the lenders on June 22, 1998, for the
failure to timely convert the loan used for construction purposes to a term
loan. Such failure occurred due to the Event of Default created by the
alleged termination of the power purchase agreements by the electric power
purchaser and due to the inability of the Grays Ferry Partnership to declare
either provisional or final acceptance of the Grays Ferry Project due to the
endurance of certain unresolved issues between the Grays Ferry Partnership
and Westinghouse Electric Corporation ("Westinghouse") regarding completion
and testing of the Grays Ferry Project, which issues are the subject of an
ongoing arbitration proceeding between the partnership and Westinghouse.
Based on discussions with representatives of the lenders to the Grays Ferry
Partnership, the Company believes that until there is a satisfactory
resolution of the litigation the lenders will continue to fund the operations
of the project but will not allow distributions for the payment of
subordinated fees, payments to the subordinated debt lender or equity
distributions to the partners. In lieu of making these payments, the Company
anticipates that the Grays Ferry Partnership will be required to apply such
amounts to the repayment of the loan. The Company further expects that at
the time the litigation is resolved the loan will be restructured. For
additional information see "Part II -- Item 1. Legal Proceedings" and "Part
II -- Item 3. Defaults Upon Senior Securities."
The Company believes that the Grays Ferry Partnership is likely either
to prevail in the pending litigation with its electric power purchaser or
otherwise to achieve a favorable resolution of this dispute. However, the
Company believes that if the power purchaser's position ultimately were to be
sustained, the Grays Ferry Partnership would cease to be economically viable
as currently structured and the Company's earnings and financial position
could be materially adversely affected. In addition, the Company could incur
other material costs associated with such litigation, which would not be
recovered and could suffer cross-defaults under one or more of its credit
agreements. While the Company intends to continue to pursue a rapid and
favorable resolution of the litigation with the power purchaser, there can be
no assurance that such an outcome will be obtained.
YEAR 2000
The Year 2000 issue refers generally to the data structure problem that
will prevent systems from properly recognizing dates after the year 1999.
For example, computer programs and various types of electronic equipment that
process date information by reference to two digits rather than four to
define the applicable year may recognize a date using "00" as the year 1900
rather than the year 2000. The Year 2000 problem could result in system
failures or miscalculations causing disruptions of operations. The Year 2000
problem may occur in computer software programs, computer hardware systems
and any device that relies on a computer chip if that chip relies on date
information. There can be no assurance that the Company's systems nor the
systems of other companies with whom the Company conducts business will be
properly remediated as required prior to December 31, 1999. The failure of
any such system could have a material adverse effect on the Company's
business, operating results and financial condition.
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NEW ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is
required to be adopted for fiscal years beginning after June 15, 1999 (fiscal
year 2000 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are to be recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Management has not yet determined the impact that adoption of
SFAS 133 will have on its earnings or financial position.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131, which supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise,"
establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. The Company is required to first adopt the provisions of SFAS 131
in its financial statements for the year ending December 31, 1998, and
provide comparative information for earlier years. Management believes that
adoption of SFAS 131 will require minimal, if any, additional disclosures in
its annual financial statements.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ALL DOLLAR AMOUNTS ARE IN THOUSANDS.
GRAYS FERRY COGENERATION PARTNERSHIP, TRIGEN-SCHUYLKILL COGENERATION,
INC., COGENAMERICA (SCHUYLKILL) INC. AND TRIGEN-PHILADELPHIA ENERGY CORP. v.
PECO ENERGY COMPANY, ADWIN (SCHUYLKILL) COGENERATION, INC. AND THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION, Court of Common Pleas Philadelphia
County, April Term 1998, No. 544, filed April 9, 1998. This action arose out
of PECO Energy Company's ("PECO") notification to the Grays Ferry
Cogeneration Partnership (the "Grays Ferry Partnership") that PECO believes
its power purchase agreements with the Grays Ferry Partnership relating to
the Grays Ferry Cogeneration Project (the "Grays Ferry Project") are no
longer effective and PECO's refusal to pay the electricity rates set forth in
the agreement based on its allegations that the Pennsylvania Public Utility
Commission has denied cost recovery of the power purchase agreements in
retail electric rates. The Grays Ferry Partnership's complaint against PECO
asserts claims which include breach of contract, fraud, breach of implied
covenant of good faith, conversion, breach of fiduciary duties and tortious
interference with contract. The Plaintiffs are seeking to enjoin PECO from
terminating the power purchase agreements and to compel PECO to pay the rates
set forth therein. The Plaintiffs also are seeking actual and punitive
damages and attorneys' fees and costs. On April 22, 1998, the court allowed
the Grays Ferry Partnership to file an amended complaint to discontinue the
suit against the Pennsylvania Public Utility Commission without prejudice. On
May 5, 1998, the Grays Ferry Partnership obtained a preliminary injunction
pending the outcome of the litigation enjoining PECO from terminating the
power purchase agreements and ordering PECO to comply with the terms of the
power purchase agreements. The Court of Common Pleas in Philadelphia also
ordered PECO to abide by all of the terms and conditions of the power
purchase agreements and pay the rates set forth in the agreements. The
Plaintiffs were required to post a bond in the amount of $50 in connection
with the preliminary injunction. On May 8, 1998, PECO filed a notice of
appeal and a motion to stay the preliminary injunction order. On May 13,
1998, the Grays Ferry Partnership filed an emergency petition for contempt to
compel PECO to pay the amounts due and owing under the power purchase
agreements. On May 20, 1998, the Court of Common Pleas granted the motion for
civil contempt and ordered PECO to pay $50 for each day that PECO failed to
comply with the court's order. The power purchaser, in response to the
preliminary injunction, has made all past due payments and continues to make
payments to the Grays Ferry Partnership according to the terms of the power
purchase agreements. PECO has filed a notice of appeal from the court's
preliminary injunction order. On July 7, 1998 PECO withdrew its appeal of
the preliminary injunction. The trial date of March 31, 1999 has been
established and the discovery phase of the litigation is progressing. The
Grays Ferry Partnership is vigorously pursuing the litigation and expects to
achieve a favorable result.
NRG ENERGY ARBITRATION. On January 30, 1998, the Company gave notice to NRG
Energy of a dispute to be arbitrated pursuant to the terms of its Co-Investment
Agreement with the Company. With certain exceptions, the Co-Investment
Agreement obligates NRG Energy to offer to sell to the Company "eligible
projects," which are defined in the Co-Investment Agreement as certain
facilities, which generate electricity for sale through the combustion
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of natural gas, oil or any other fossil fuel. The Co-Investment Agreement
provides that if NRG Energy offers to sell an eligible project to the Company
and the Company declines to purchase the project, NRG Energy then has the
right to sell the project to a third party at a price which equals or exceeds
that offered to the Company. See "Business -- Project Development Activities
- -- Co-Investment Agreement with NRG Energy." In the arbitration proceeding,
the Company contended that NRG Energy breached the Co-Investment Agreement
by, among other things, agreeing to sell to OGE Energy Corp., an affiliate of
Oklahoma Gas and Electric Company a 110 MW cogeneration project in Oklahoma
without offering the project to the Company at the same price. The Company
requested specific performance of NRG Energy's obligations under the
Co-Investment Agreement. NRG Energy argued that it had no obligation to
offer the project to the Company. On June 8, 1998, the arbitration panel
reviewing the matter issued a preliminary injunction prohibiting NRG Energy
from closing the sale of the project to OGE Energy Corp., pending the outcome
of the arbitration and subject to the Company's posting of a $500 bond, which
the Company posted.
On July 31, 1998 the arbitration panel held that NRG Energy had not
fulfilled its obligations under the Co-Investment Agreement by failing to
reoffer the project to CogenAmerica under the terms of the Co-Investment
Agreement. The arbitration panel ordered NRG Energy to reoffer the project
to CogenAmerica. Specifically the order provided for a permanent injunction
enjoining the closing of the sale of the project to OGE Energy Corp.,
replacing the preliminary injunction issued on June 8, 1998. In addition,
the bond that CogenAmerica posted for the preliminary injunction was released
and no additional bond or security was required. By August 30, 1998, NRG
Energy is required to make a written reoffer of the project to CogenAmerica
on the same terms, price and structure as offered to OGE Energy Corp. In
addition, the reoffer is required to include seller financing, based on a
good faith standard, as required by the Co-Investment Agreement.
CogenAmerica then will have thirty days from receipt of the reoffer to inform
NRG Energy if it intends to purchase the project.
On August 4, 1998 NRG Energy made an offer to sell the facility to
CogenAmerica. As of the date of this Report, CogenAmerica has made no
determination whether to accept any reoffer of the project by NRG Energy as
required by the arbitration panel's order.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ALL DOLLAR AMOUNTS ARE IN THOUSANDS.
GRAYS FERRY COGENERATION PARTNERSHIP
CogenAmerica Schuylkill Inc., a wholly owned subsidiary of the Company,
owns a one-third partnership interest in the Grays Ferry Partnership, which
owns the Grays Ferry Project. The Grays Ferry Partnership and The Chase
Manhattan Bank N.A. ("Chase"), as Agent bank for the Lenders (as defined
therein), are parties to a Credit Agreement dated March 1, 1996 to finance
the Grays Ferry Project (the "Chase Facility"), of which $113,000 was
outstanding as of June 30, 1998. Certain actions taken by PECO, the electric
power purchaser under two power purchase agreements with the Grays Ferry
Partnership have caused certain defaults to occur under the Chase Facility.
Such defaults have included defaults in the obligation to make interest
payments thereon as well as certain other defaults resulting directly or
indirectly from the actions taken by PECO. All payment defaults subsequently
were cured by the Grays Ferry Partnership when the agent for the lenders
under the Chase Facility permitted the release of cash held by the Grays
Ferry Partnership for the purpose of making such interest payments. For
additional information see "Part I -- Financial Information --Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Part II -- Other
Information -- Item 1. Legal Proceedings."
On June 22, 1998, the lenders under the Chase Facility gave notice to
the Grays Ferry Partnership of a default under the Chase Facility arising out
of the failure to timely convert the loan used for construction purposes to a
term loan. Such failure occurred due to the Event of Default created by the
alleged termination of the power purchase agreements by the electric power
purchaser and due to the inability of the Grays Ferry Partnership to declare
either provisional or final acceptance of the Grays Ferry Project due to the
endurance of certain unresolved issues regarding completion and testing of
the Grays Ferry Project. The Grays Ferry Partnership and Westinghouse are in
arbitration over these unresolved issues. See "Part II -- Other Information
- -- Item 1. Legal Proceedings."
THE COMPANY
The Company, MeesPierson Capital Corp. ("MeesPierson") and certain other
Lenders (as defined therein) are parties to a Credit Agreement dated as of
December 17, 1997 which provides for a $30,000, three-year reducing,
revolving credit facility agreement (the "MeesPierson Facility"), of which
$25,000 was outstanding on June 30, 1998. The MeesPierson Facility includes
cross-default provisions that cause defaults to occur under the MeesPierson
Facility in the event certain defaults or other adverse events occur under
certain other instruments or agreements (including financing and other
project documents) to which the Company or one or more of its subsidiaries or
other entities in which it owns an ownership interest is a party. In the
absence of a waiver the actions taken by PECO would have resulted in certain
cross-defaults under the MeesPierson Facility. As of the date of this
Report, MeesPierson, as Agent under the MeesPierson Facility, has waived
through July 1, 1999 all such cross-defaults. For additional information see
"Part I -- Financial Information -- Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of the Company held on May 22,
1997 (the "Meeting"), the following directors were elected, each of whom will
serve until the 1998 annual meeting of stockholders and until their successor
is elected and qualified:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE NEGATIVE
VOTES VOTES ABSTENTIONS
------------- ----------- -----------
<S> <C> <C> <C>
David H. Peterson 6,118,142 9,377 -
Julie A. Jorgensen 6,118,955 8,564 -
Lawrence I. Littman 6,118,955 8,564 -
Craig A. Mataczynski 6,118,955 8,564 -
Robert T. Sherman, Jr. 6,118,955 8,564 -
Spyros S. Skouras, Jr. 6,118,955 8,564 -
Charles J. Thayer 6,118,955 8,564 -
Ronald J. Will 6,118,955 8,564 -
</TABLE>
In addition, the following proposals were approved at the Meeting:
Ratification of the selection of PricewaterhouseCoopers LLP as the
Company's independent public accountants.
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE
VOTES VOTES ABSTENTIONS
------------- ----------- -----------
<S> <C> <C>
6,115,221 1,650 10,648
</TABLE>
Approval of the amendment to the Company's Certificate of Incorporation
to change the Company's name to Cogeneration Corporation of America.
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE
VOTES VOTES ABSTENTIONS
------------- ----------- -----------
<S> <C> <C>
6,109,280 4,408 13,831
</TABLE>
Approval of the Company's 1998 Stock Option Plan authorizing the Company
to grant options to purchase up to 250,000 shares of the Company's Common
Stock to members of the Board of Directors, officers, key employees of the
Company or its subsidiaries and other individuals who occupy responsible
managerial, professional or advisory or other positions and who have made or
have the capability of making a substantial contribution to the success of
the Company.
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE
VOTES VOTES ABSTENTIONS
------------- ----------- -----------
<S> <C> <C>
5,947,174 162,623 17,722
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The "Index to Exhibits" following the signature page is incorporated
herein by reference.
(b) Reports on Form 8-K
None.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned hereunto duly authorized.
Cogeneration Corporation of America
-------------------------------------------
Registrant
Date: December __, 1998 By: /s/ Timothy P. Hunstad
------------------------------
Timothy P. Hunstad
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(Principal Financial Officer and Duly Authorized Officer)
23
<PAGE>
INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company filed
as Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30,
1998 and incorporated herein by this reference.
3.2 Preferred Stock Certificate of Designation of the Company filed as Exhibit
3.3 to the Company's Current Report on Form 8-K dated April 30, 1996 and
incorporated herein by this reference.
3.3 Restated Bylaws of the Company filed as Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 and
incorporated herein by this reference.
27 Financial Data Schedule for the six months ended June 30, 1998 (for SEC
filing purposes only).
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR ITS SECOND QUARTER YEAR-TO-DATE OF FISCAL
YEAR 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 14,392
<SECURITIES> 0
<RECEIVABLES> 9,881
<ALLOWANCES> 0
<INVENTORY> 2,439
<CURRENT-ASSETS> 28,189
<PP&E> 124,063
<DEPRECIATION> 0
<TOTAL-ASSETS> 263,178
<CURRENT-LIABILITIES> 32,786
<BONDS> 0
68
0
<COMMON> 0
<OTHER-SE> (192)
<TOTAL-LIABILITY-AND-EQUITY> 263,178
<SALES> 31,616
<TOTAL-REVENUES> 31,616
<CGS> 16,342
<TOTAL-COSTS> 16,342
<OTHER-EXPENSES> 1,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,039
<INCOME-PRETAX> 6,814
<INCOME-TAX> 2,762
<INCOME-CONTINUING> 4,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,052
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
</TABLE>
