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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
|_| 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
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(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 59-2076187
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
ONE CARLSON PARKWAY, SUITE 240; MINNEAPOLIS, MINNESOTA 55447-4454 (612) 745-7900
(Address of principal executive offices) (Zip Code) (Telephone number, including area code)
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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, and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Report on Form 10-K or
any amendment to this Report on Form 10-K. / /
As of March 2, 1999, there were outstanding 6,856,769 shares of Common
Stock. Based on the last sales price at which such stock was sold on that date,
the approximate aggregate market value of the shares of Common Stock held by
non-affiliates of the Company was $27,170,911.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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
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DOCUMENTS INCORPORATED BY REFERENCE
The information required for the following items is incorporated by
reference to the 1999 Definitive Proxy Statement of Cogeneration Corporation of
America ("CogenAmerica"):
Item 10 -- Directors and Executive Officers of the Registrant
Item 11 -- Executive Compensation
Item 12 -- Security Ownership of Certain Beneficial Owners and
Management
Item 13 -- Certain Relationships and Related Transactions
TABLE OF CONTENTS
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PAGE
NUMBER
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PREFACE: SELECTED DEFINITIONS ................................................................. 2
Part I
Item 1. Business ............................................................................. 5
Item 2. Properties ........................................................................... 29
Item 3. Legal Proceedings .................................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders .................................. 31
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters .................................................................. 32
Item 6. Selected Financial Data .............................................................. 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................ 34
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................... 52
Item 8. Financial Statements and Supplementary Data .......................................... 53
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ............................................................. 54
Part III
Item 10. Directors and Executive Officers of the Registrant.................................... 55
Item 11. Executive Compensation ............................................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management ....................... 55
Item 13. Certain Relationships and Related Transactions ....................................... 55
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 56
Consolidated Financial Statements ............................................................. F-1 through F-28
Index to Exhibits ......................................................................................... 59
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1
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PREFACE: SELECTED DEFINITIONS
When used in this report, the following terms will have the meanings
indicated.
"Aquila" means Aquila Energy Marketing Corporation.
"Authority" means the Philadelphia Municipal Power Authority.
"Bankruptcy Court" means the U.S. Bankruptcy Court for the District of
New Jersey.
"Btu" means British thermal unit.
"Chase" means Chase Manhattan Bank N.A.
"CogenAmerica" or "the Company" means Cogeneration Corporation of
America.
"CogenAmerica Funding" means CogenAmerica Funding Inc.
"CogenAmerica Morris" means CogenAmerica Morris Inc.
"CogenAmerica Newark" means CogenAmerica Newark Inc.
"CogenAmerica Parlin" means CogenAmerica Parlin Inc.
"CogenAmerica Pryor" means CogenAmerica Pryor Inc.
"CogenAmerica Schuylkill" means CogenAmerica Schuylkill Inc.
"Co-Investment Agreement" means the Co-Investment Agreement dated
April 30, 1996 between NRG Generating (U.S.) Inc. (currently known as
CogenAmerica) and NRG Energy.
"Common Stock" means CogenAmerica's common stock, par value $.01 per
share.
"DuPont" means E.I. du Pont de Nemours and Company.
"Dynegy" means Dynegy Marketing and Trade.
"EPA" means the U.S. Environmental Protection Agency.
"Equistar" means Equistar Chemicals, LP, a joint venture of Lyondell
Petrochemical Company, Millennium Chemicals and Occidental Chemical
Corporation.
"EWG" means an "exempt wholesale generator," as that term is defined in
PUHCA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FERC" means the Federal Energy Regulatory Commission.
"Grays Ferry Partnership" means the Grays Ferry Cogeneration
Partnership.
"Grays Ferry PPAs" means the power purchase agreements with PECO.
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"Grays Ferry Project" means the 150 MW cogeneration facility located in
Philadelphia, Pennsylvania.
"JCP&L" means Jersey Central Power and Light Company.
"kWh" means Kilowatt hour.
"MCPC" means Mid-Continent Power Company, LLC.
"MeesPierson Credit Agreement" means the Credit Agreement dated
December 17, 1997 between NRG Generating (U.S.) Inc. (currently known as
CogenAmerica) and MeesPierson Capital Corporation.
"MW" means megawatt.
"Morris ESA" means the Morris energy service agreement dated June 3,
1997 between CogenAmerica Morris LLC and Millennium Petrochemicals Incorporated.
"Morris LLC" means CogenAmerica Morris LLC.
"Morris Project" means the 117 MW cogeneration facility in Morris,
Illinois.
"National Ambient Air Quality Standard" means those ambient air quality
standards required under the Clean Air Act.
"Newark Boxboard" means The Newark Group, Inc.
"Newark and Parlin Credit Agreement" means the Credit Agreement dated
May 17, 1996 between NRG Generating (Newark) Cogeneration Inc. (currently known
as CogenAmerica Newark), NRG Generating (Parlin) Cogeneration Inc. (currently
known as CogenAmerica Parlin), Credit Suisse, Greenwich Funding Corporation and
any Purchasing Lender, as amended.
"Newark Project" means the 58 MW cogeneration facility in Newark, New
Jersey.
"1990 Amendments" means the Clean Air Act Amendments of 1990.
"NMO" means NRG Morris Operations, Inc.
"NOx" means nitrogen oxide.
"NPI" means NRG Parlin, Inc.
"NRG Energy" means NRG Energy, Inc.
"O'Brien" means O'Brien Environmental Energy, Inc.
"OES" means O'Brien Energy Services Company.
"OG&E" means Oklahoma Gas and Electric Company.
"OPCI" means O'Brien (Philadelphia) Cogeneration, Inc.
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"Parlin Project" means the 122 MW cogeneration facility in Parlin, New
Jersey.
"PECO" means PECO Energy Company.
"PJM" means the Pennsylvania - New Jersey - Maryland interconnected
power pool.
"Plan" means the plan of reorganization of O'Brien, discussed more
fully in "Item 1. Business --General" of this report.
"POI" means Power Operations, Inc.
"PPA" means a power purchase agreement.
"PRP" means a potentially responsible party.
"Pryor Project" means the 110 MW cogeneration facility in Pryor,
Oklahoma.
"PSO" means Public Service Company of Oklahoma.
"PUHCA" means Public Utility Holding Company Act of 1935, as amended.
"PUMA" means, collectively, CogenAmerica's subsidiaries that operate in
the United Kingdom and are held by NRG Generating Ltd., a wholly-owned
subsidiary of CogenAmerica.
"PUPCO" means Philadelphia United Power Corporation.
"PURPA" means the Public Utility Regulatory Policies Act of 1978, as
amended.
"PWD" means the Philadelphia Water Department.
"PWD Project" means the two standby/peak shaving facilities with an
aggregate capacity of 22 MW in Philadelphia, Pennsylvania.
"QF" means a "qualifying small power production facility" or a
"qualifying cogeneration facility" as these terms are defined in PURPA.
"RCRA" means the Resource Conservation and Recovery Act of 1976.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Supplemental Loan Agreement" means the Supplemental Loan Agreement
dated December 10, 1997 between NRG Energy, NRG Generating (U.S.) Inc.
(currently known as CogenAmerica) and NRGG Funding Inc. (currently known as
CogenAmerica Funding).
"TPEC" means Trigen-Philadelphia Energy Corporation, a wholly-owned
subsidiary of Trigen.
"Trigen" means Trigen Energy Corporation.
4
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PART I
ALL DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, SET FORTH IN THIS PART I
ARE IN THOUSANDS.
ITEM 1. BUSINESS.
CERTAIN OF THE STATEMENTS MADE IN THIS ITEM 1 AND IN OTHER PORTIONS OF
THIS REPORT AND IN DOCUMENTS INCORPORATED BY REFERENCE HEREIN CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT, AND SECTION 21E OF THE EXCHANGE ACT. THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT 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, THOSE DISCUSSED IN
"BUSINESS -- RISK FACTORS" HEREIN. SEE "BUSINESS -- RISK FACTORS -- RISKS
ASSOCIATED WITH FORWARD-LOOKING STATEMENTS."
FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN
THIS ITEM I, PLEASE SEE THE SELECTED DEFINITIONS IMMEDIATELY PRECEDING THIS ITEM
1.
GENERAL
CogenAmerica, formerly known as NRG Generating (U.S.) Inc. and O'Brien
Environmental Energy, Inc., is an independent power producer primarily in the
business of developing, owning and managing the operation of cogeneration
projects which produce electricity and thermal energy for sale under long-term
contracts with industrial and commercial users and public utilities. The Company
is currently focusing on natural gas-fired cogeneration projects with long-term
contracts for substantially all of the output of such projects including "inside
the fence" projects on the premises of the project's steam/energy hosts. The
Company's strategy is to develop, acquire and manage the operation of such
cogeneration projects and to provide U.S. industrial facilities and utilities
with reliable and competitively priced energy from the Company's power projects.
CogenAmerica has substantial expertise in the development and
management of the operation of cogeneration power projects. The Company's
current project portfolio consists of: (i) the Parlin Project; (ii) the Newark
Project; (iii) the Morris Project; (iv) the Pryor Project; (v) an 83% interest
in the PWD Project; and (vi) a one-third interest in the Grays Ferry Project.
All of the Company's cogeneration projects commenced commercial operation in the
1990s.
When still known as O'Brien, the Company emerged from bankruptcy on
April 30, 1996, under the Plan approved by the Bankruptcy Court. O'Brien had
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on September 28, 1994. In connection with the
consummation of the Plan, all of the shares of O'Brien Class A and Class B
Common Stock were canceled and replaced by a new issue of common stock, par
value $.01 per share. At that time the Company changed its name to NRG
Generating (U.S.) Inc. In addition, NRG Energy advanced approximately $71,200
under loan agreements with the Company and purchased approximately 41.86% of the
Common Stock for aggregate consideration of approximately $21,200. NRG Energy
also purchased certain subsidiaries of the Company for $7,500 and funded a cash
distribution to the O'Brien stockholders aggregating $7,500. NRG Energy's
financial backing of the Plan enabled the Company to provide for full and
immediate payment of all undisputed pre-petition claims as well as a provision
for post-petition interest. In addition, pursuant to the Plan, NRG Energy and
the Company entered into a Co-Investment
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Agreement, pursuant to which NRG Energy has agreed to offer to the Company
ownership interests in certain power projects which are initially developed by
NRG Energy or with respect to which NRG Energy has entered into a binding
acquisition agreement with a third party. See "Business -- Project Development
- -- Co-Investment Agreement with NRG Energy."
The Company was incorporated in Florida in 1981 and subsequently merged
with a Delaware corporation in 1984. Prior to the merger, the Company was part
of a group of several affiliated companies which had served the power generation
market since 1915.
The following chart summarizes certain information concerning each of
the Company's projects. See "Business -- Products and Services -- Energy Segment
- -- Parlin Project," "-- Newark Project," "-- Morris Project," "--Pryor Project,"
"-- PWD Project" and "-- Grays Ferry Project."
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PARLIN NEWARK MORRIS PRYOR PWD GRAYS FERRY
PROJECT PROJECT PROJECT PROJECT PROJECT PROJECT
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Capacity (1) 122 MW 58 MW 117 MW 110 MW 22 MW 150 MW
Ownership 100.0% 100.0% 100.0% (2) 100% 83.0% (3) 33.3%
Availability (4) 95.7% 95.4% 100% 93.7% Standby (5) 93%
Ownership date June November November October September January
1991 1990 1998 1998 1993 1998
Type Gas-Fired, Gas-Fired, Gas-Fired, Gas-Fired, Diesel Gas-Fired,
Combined Combined Combined Combined Standby Combined
Cycle Cycle Cycle Cycle Cycle
Power purchaser JCP&L; JCP&L; Equistar OG&E; PSO Authority PECO
DuPont (6) Newark
Boxboard
Expiration year of
power purchase 2011 2015 2023 2007 2013 2017
contract
Steam purchaser DuPont Newark Equistar Various -- TPEC (7)
Boxboard
Expiration year of
steam purchase 2021 2015 2023 Various -- 2022
contract
Fuel provider JCP&L JCP&L Equistar Aquila; PWD Aquila
Dynegy
Expiration year of
fuel supply 2011 2015 2023 Annual 2013 2013
contract
Operator POI (8) POI (8) NMO (8) Cogen- OES (9) PUPCO (10)
America
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(1) Reflects the nameplate capacity of the project. Nameplate capacity may not
represent the actual output for a facility at any particular time.
(2) Equistar has notified the Morris Project of its intention to exercise an
option to purchase a 5% membership interest in Morris LLC, the owner of
the Morris Project. A final agreement for the purchase has not been
executed. See "Business -- Products and Services -- Energy Segment --
Morris Project."
(3) The Company owns substantially all of the assets constituting the PWD
Project except for its principal project agreements, which are held by
OPCI. All of the common stock of OPCI is held by the Company and all of
the
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preferred stock of OPCI is held by an unrelated third party. The terms
of the preferred stock entitle the preferred stockholder to receive
dividends equal to 17% of OPCI's earnings (as determined in accordance
with the terms of the preferred stock).
(4) Reflects availability (as defined in the PPA for the project) during 1998.
The Morris Project began commercial operation in November 1998 and the
Pryor Project was acquired in October 1998. The Grays Ferry Project began
commercial operation in January 1998.
(5) The PWD Project consists of two standby/peak shaving facilities which are
used only as back-up sources of electricity by the power purchaser.
(6) A portion of the power from the Parlin Project is sold to NPI, a
wholly-owned subsidiary of NRG Energy, and NPI resells this portion of the
power at retail to DuPont under an agreement extending until 2021.
(7) TPEC is a wholly-owned subsidiary of Trigen, a partner in the Grays Ferry
Partnership.
(8) POI and NMO are wholly-owned subsidiaries of NRG Energy. NRG Energy owns
approximately 45.2% of the Company's Common Stock.
(9) On November 5, 1998 the Company sold OES, a wholly-owned subsidiary of the
Company. OES continues to serve as operator of this project under the
terms of the existing operations and maintenance contract.
(10) PUPCO is a wholly-owned subsidiary of Trigen.
PRODUCTS AND SERVICES
During fiscal 1998, the Company operated principally in two industry
segments: (i) energy -- the development, ownership and operation of cogeneration
projects and standby/peak shaving projects through wholly-owned subsidiaries and
limited liability companies; and (ii) equipment sales, rental and service -- the
sale and rental of power generating, cogenerating and standby/peak shaving
equipment and associated services. The Company has determined and previously
announced that its equipment sales, rental and service business is no longer a
part of its strategic plan. On November 5, 1998 the Company sold OES, a
wholly-owned subsidiary of the Company, in a stock transaction to an unrelated
third party. The Company is currently pursuing alternatives for the disposition
of PUMA, which comprises the remaining operations of the equipment sales, rental
and service segment. See Note 18 of the Notes to the Consolidated Financial
Statements for financial information with respect to industry segments.
ENERGY SEGMENT
OVERVIEW. Cogeneration involves the sequential production of two or
more forms of usable energy (E.G., electricity and thermal energy) using a
single fuel source, thereby substantially increasing fuel efficiency. The key
elements to the successful development and operation of a cogeneration project
are permit applications, contracts for sales of electricity and thermal energy,
contracts or arrangements for fuel supply and project operation, and project
financing and construction. The Company attempts to design and develop its
projects so that they qualify for the benefits of PURPA, which exempts QFs from
rate, financial and similar utility regulation and requires public utilities to
purchase power generated by these projects. Electricity may be sold to utilities
and end users of electrical power, including large industrial facilities, and
possibly to power marketers. Thermal energy from cogeneration plants may be sold
to commercial enterprises and other institutions. Large industrial users of
thermal energy include plants in the chemical processing, petroleum refining,
food processing, pharmaceutical and paper industries. The Company owns equity
interests in five operating cogeneration projects discussed below -- the Parlin,
Newark, Morris, Pryor and Grays Ferry Projects. Revenues from these projects
collectively accounted for 65.0%, 60.2%, 49.1% and 63.9% of the Company's total
revenues for 1998, 1997, the 1996 transition period and 1996, respectively.
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The Company owns an 83% equity interest in one operating standby/peak
shaving generator project, the PWD Project. Revenues from this project accounted
for 5.6%, 6.5%, 5.2% and 4.2% of the Company's total revenues for 1998, 1997,
the 1996 transition period and 1996, respectively. Large electrical demand
customers use a standby/peak shaving project's power generation equipment as a
back-up source of electricity. The availability of an alternative energy source
allows these customers to benefit from discounted interruptible energy tariffs
from their primary electricity provider. Standby/peak shaving generators
typically are required to be available and be capable of providing a specified
amount of electricity during peak periods within a limited time.
Each of these projects is currently producing revenues under long-term
contracts. Business interruption insurance and performance guarantees from the
third-party operators have been obtained for the cogeneration projects in
connection with the financing of such projects. These arrangements are
negotiated and closed prior to commencement of project operations. Taken as a
whole, these arrangements reduce the risks associated with any past and future
equipment problems or unscheduled plant shutdowns. For example, in the event of
an unscheduled outage, the Company and any other project owners generally are
entitled, pursuant to its business interruption insurance policy, to the net
profit which it is prevented from earning from the particular project, including
all charges and expenses which continue during the period of interruption, less
the applicable deductible amounts.
NEWARK PROJECT. The Newark Project is a 58 MW gas-fired combined cycle
cogeneration project located in Newark, New Jersey that utilizes one General
Electric Frame 6B combustion turbine with an air inlet chiller system. The
Newark Project commenced operation in November 1990. CogenAmerica Newark, a
wholly-owned subsidiary of the Company, owns all of the Newark Project. As a QF,
the Newark Project sells up to 58 MW of electric power to JCP&L and provides up
to 75,000 pounds per hour of steam to Newark Boxboard. In September 1998 the
Company completed an upgrade of the electrical and steam production systems and
increased the electrical production capacity from 52 MW to 58 MW. The upgrade
added a mechanical chiller unit to cool inlet air to the combustion turbine
which increased the capacity to supply steam and electricity to Newark Boxboard.
The Newark Project accounted for approximately $17,541 and $17,319 in revenues,
representing approximately 23.7% and 26.7% of the Company's consolidated
revenues, during the years ended December 31, 1998 and 1997, respectively.
PARLIN PROJECT. The Parlin Project is a 122 MW gas-fired combined cycle
cogeneration project located in Parlin, New Jersey that utilizes two General
Electric Frame 6B turbine generators. The Parlin Project commenced operation in
June 1991. CogenAmerica Parlin, a wholly-owned subsidiary of the Company, owns
all of the Parlin Project. As an EWG, the Parlin Project sells up to 114 MW of
electric power to JCP&L and provides up to 150,000 pounds per hour of steam to
DuPont. In addition, the Parlin Project sells up to 9 MW of power to NPI, a
wholly-owned subsidiary of NRG Energy, which power NPI resells to DuPont. The
Parlin Project accounted for approximately $21,527 and $21,685 in revenues,
representing approximately 29.1% and 33.5% of the Company's consolidated
revenues, during the years ended December 31, 1998 and 1997, respectively.
MORRIS PROJECT. The Morris Project is a 117 MW gas-fired cogeneration
project located near Morris, Illinois that utilizes three General Electric Frame
6 combustion turbines and three heat recovery steam generators. The Morris
Project commenced operation in November 1998. CogenAmerica Morris LLC, a
wholly-owned subsidiary of CogenAmerica Funding, currently
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owns all of the Morris Project. The Morris Project sells as a QF up to an
average of 78 MW of electric power and up to 720,000 pounds per hour of steam to
Equistar. The Morris Project designed redundancy into the energy production
capability of the facility in order to meet Equistar's steam and electric
demand, and as a result the Morris Project expects that it will be able to make
periodic sales of energy to other customers on a merchant basis.
In the Morris ESA, Equistar was granted an option to purchase up to 10%
of the Morris Project. In February 1998, Equistar gave notice of its intention
to purchase a 5% membership interest in the Morris Project.
The parties have not finalized an acquisition agreement.
The Morris Project accounted for approximately $5,779 in
revenues, representing approximately 7.8% of the Company's consolidated
revenues, during the year ended December 31, 1998. The Morris Project commenced
commercial operations in November 1998. The Morris facility experienced two
unscheduled outages in January 1999 which resulted in service and business
interruptions to Equistar. CogenAmerica, Equistar and NRG Energy as provider of
construction management services and operation and maintenance services, are
currently investigating the matter and are examining their respective rights and
obligations with respect to each other and with respect to potentially
responsible third parties, including insurers. CogenAmerica's investigation and
discussions with Equistar are continuing. The company does not believe that
there will be a material adverse impact on the financial statements, however, no
assurance can be given as the ultimate outcome of this matter.
GRAYS FERRY PROJECT. The Grays Ferry Project is a 150 MW dual-fueled
(natural gas and fuel oil) combined-cycle cogeneration plant located in
Philadelphia, Pennsylvania that commenced operation in January 1998. The Grays
Ferry Partnership owns 100% of the Grays Ferry Project. The Grays Ferry
Partnership is a general partnership that is one-third owned by each of
CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company,
Trigen-Schuylkill Cogeneration Inc., an affiliate of Trigen, and Adwin
(Schuylkill) Cogeneration, Inc., an affiliate of PECO. As a QF, the Grays Ferry
Project sells all of its electric power to PECO and provides all of its steam to
TPEC.
In March 1998, PECO declared that the Grays Ferry PPAs were ineffective
and ceased paying in full for electricity. The Grays Ferry Partnership
instituted a lawsuit against PECO and obtained a preliminary injunction
requiring PECO to make electricity payments in full while the litigation
proceeds. The Grays Ferry Partnership recorded revenue of approximately $78,126
from PECO in 1998. PECO claims it was not obligated to pay approximately $34,500
of such revenue. The Company has recorded $4,758 of equity in earnings of
affiliates representing its pro rata share of the Grays Ferry Partnership's net
income for the year ended December 31, 1998. On March 9, 1999 the court issued
an order for partial summary judgment in favor of the Grays Ferry Partnership,
ruling that PECO's attempted termination of the Grays Ferry PPA was improper.
See "Business - Risk Factors -- Grays Ferry Litigation/Default" and "Item 3. --
Legal Proceedings."
PRYOR PROJECT. The Pryor Project is a 110 MW combined cycle facility
located in Pryor, Oklahoma. Oklahoma Loan Acquisition Corporation ("OLAC"), a
wholly-owned subsidiary of the Company, owns 100% of the Pryor Project. The
Company acquired all of the capital stock of OLAC on October 9, 1998 from MCPC,
which was 50% owned by NRG Energy and 50% owned by Decker Energy, International
and associated entities. The facility sells power to OG&E on a dispatchable
basis and steam to a number of industrial users including Georgia-Pacific. The
facility also sells electricity to PSO when not dispatched by OG&E. Subsequent
to the
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acquisition, the Pryor Project accounted for approximately $3,235 in revenues,
representing approximately 4.4% of the Company's consolidated revenues, during
the year ended December 31, 1998.
PWD PROJECT. The PWD Project comprises two standby peak shaving
facilities (each of which has a number of gas and diesel generator sets)
located at the PWD's Northeast and Southwest waste water treatment plants in
Philadelphia, Pennsylvania. Each facility has a capacity of approximately 11
MW for an aggregate capacity of 22 MW. The PWD Project's Northeast unit
commenced operation in May 1993, and its Southwest unit commenced operation
in September 1993. OPCI sells the short-start-time capacity of the two units
to the Authority, and the Authority has the right to demand energy from the
PWD Project at any time on thirty minutes' notice. The biogas portion of each
unit (approximately 1 MW in each case) operates as a QF, but the standby
generators do not. The PWD Project accounted for approximately $4,134 and
$4,206 in revenues, representing approximately 5.6% and 6.5% of the Company's
consolidated revenues, during the years ended December 31, 1998 and 1997,
respectively.
The Company owns substantially all of the assets constituting the PWD
Project except for its principal project agreements, which are held by OPCI. All
of the common stock of OPCI is held by the Company and all of the preferred
stock of OPCI is held by an unrelated third party. The terms of the preferred
stock entitle the preferred stockholder to receive dividends equal to 17% of
OPCI's earnings (as determined in accordance with the terms of the preferred
stock).
EQUIPMENT SALES, RENTAL AND SERVICE SEGMENT
In 1998, the Company operated its equipment sales, rental and service
segment principally through two subsidiaries: OES, which, until it was sold in
November 1998, served the United States market; and NRG Generating Limited, a
holding company for a number of subsidiaries that operate in the United Kingdom
under the common name of PUMA. Revenues from this segment accounted for 29.4%,
33.3%, 41.8% and 28.2% of the Company's consolidated revenues for 1998, 1997,
the 1996 transition period and 1996, respectively.
The Company has determined and previously announced that its equipment
sales, rental and services business is not a part of its strategic plan.
Accordingly, on November 5, 1998 the Company sold OES to an unrelated third
party for $2,000. The Company is currently pursuing several avenues for the
disposition of PUMA, which is not expected to have a material adverse effect on
the Company's financial position or results of operations.
PUMA designs and assembles diesel and natural gas fueled power
generation systems ranging in size from 5 kilowatts to 5 MW. These products are
engineered and sold for use in prime power base load applications as well as for
standby or main failure emergency situations. Major markets for these products
include commercial buildings, governmental institutions such as schools,
hospitals and public facilities, industrial manufacturing or production plants,
shipyards, the entertainment industry and offshore drilling operations. PUMA
also designs and manufactures custom electrical control and distribution
subsystems. These include medium voltage cubicle switchboards, main distribution
systems, control instrumentation panels and packaged substations. This equipment
receives and distributes power through a building, ship or other self-contained
structure. PUMA exports many of its products primarily through established
distributors and dealers in local areas for delivery to markets such as Europe,
the Far East, including Hong Kong and mainland China, together with the Middle
East and South America. The revenues from the Company's operations in the U.K.
are attributable solely to the equipment sales and services segment of the
Company's business. The revenues from such operations accounted for 63% of
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that particular segment's revenue in 1998. See Note 18 of the Notes to the
audited Consolidated Financial Statements for financial information with respect
to the Company's domestic and foreign operations.
PROJECT DEVELOPMENT ACTIVITIES
GENERAL
The Company, its subsidiaries and affiliates develop, own and manage
the operation of power projects which produce electricity and/or thermal energy
for sale to industrial and commercial users and to public utilities. The Company
follows a disciplined and focused approach to its development efforts.
Specifically, the Company focuses its development activities on both the
acquisition of operating cogeneration and power generation facilities and the
development of greenfield inside-the-fence cogeneration projects.
In pursuing new opportunities, the Company plans to adhere to the
following stringent selection criteria:
PROFITABILITY. The Company does not plan to pursue new greenfield
projects or acquisitions merely for the sake of growth, but rather seeks to grow
with the addition of profitable projects.
MID-SIZE PROJECTS. The Company plans to focus on middle market size
projects.
DOMESTIC FOCUS. The Company intends to seek opportunities for the
foreseeable future exclusively in the U.S., thus avoiding any exposure to
foreign political and currency exchange rate risk.
MANAGEMENT INPUT AND CONTROL. The Company seeks to have sole ownership
of future projects. However, to the extent that a potential partner offers
complementary skills and resources, the Company will consider partnering with
such a firm, provided that the Company has significant managerial and strategic
input. The Company does not plan to pursue purely passive minority stakes.
LONG-TERM CONTRACTS. The Company seeks to develop projects that include
medium to long-term off-take contracts with creditworthy commercial or
industrial offtakers.
FUEL RISK. The Company attempts to structure off-take contracts for
new projects to avoid the risk of fluctuations in fuel prices.
In addition to its internal project development efforts, the Company is
party to the Co-Investment Agreement with NRG Energy. Pursuant to this
agreement, NRG Energy has agreed to offer to the Company the opportunity to
acquire ownership interests in certain power projects initially developed by NRG
Energy or with respect to which NRG Energy has entered into a binding
acquisition agreement with a third party. The Company continues to believe this
Agreement will not serve as the primary source of future project development
activities. However, NRG Energy continues to express its commitment to support
the business development activities of the Company. See "Business -- Project
Development Activities -- Co-Investment Agreement with NRG Energy."
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POTENTIAL PROJECTS
The Company from time to time identifies and considers potential
opportunities to develop additional projects as well as to acquire projects in
operation or under development that are owned by third parties.
As a project developer, the Company is responsible for the evaluation,
design, installation and operation of a project. The Company also assumes the
responsibility for evaluating project alternatives, obtaining financing,
insurance and all necessary licenses, permits and certifications, conducting
contract negotiations with offtakers, and arranging turnkey construction. In
connection with obtaining financing, the Company may negotiate for credit
support facilities with equipment suppliers, turnkey construction firms and
financial institutions.
The Company anticipates that in the ordinary course of its business it
will investigate and/or pursue opportunities with respect to various potential
projects which will not be completed. Moreover, in certain instances the Company
may not generate any revenue from such projects and may not be able to recover
its investment in such projects, each of which could have a material adverse
effect on the Company.
CO-INVESTMENT AGREEMENT WITH NRG ENERGY
Pursuant to the Co-Investment Agreement, NRG Energy has agreed to offer
to the Company ownership interests in certain power projects which were
initially developed by NRG Energy or with respect to which NRG Energy has
entered into a binding acquisition agreement with a third party. If any eligible
project reaches certain contract milestones (which include the execution of a
binding PPA and fuel supply agreement and the completion of a feasibility and
engineering study) by April 30, 2003, NRG Energy has agreed to offer to sell to
the Company all of NRG Energy's ownership interest in such project. Eligible
projects include, with certain exceptions and exclusions, proposed or existing
electric power plants within the U.S. which NRG Energy initially develops or in
which NRG Energy proposes to acquire an ownership interest. NRG Energy is
obligated under the Co-Investment Agreement to offer to the Company, during the
three-year period ending on April 30, 1999, projects with an aggregate equity
value of at least $60,000 or a minimum of 150 net MW. As of the date hereof,
ownership interests in projects with an aggregate of more than 240 net MW have
been offered under the Co-Investment Agreement, including the 117 MW Morris
Project and the 110 MW Pryor Project.
Among the exclusions from the Co-Investment Agreement are (i) any
ownership interest in a project which is below a level that would cause the
project (or its owners) to be in violation of the relevant PPA or applicable
state or federal law upon the generation of electricity for sale by such
project, (ii) any indirect ownership interest held by NRG Energy in an eligible
project arising from NRG Energy's direct or indirect ownership of equity
interests in the Company, (iii) any ownership interest in a facility below 25 MW
in capacity, and (iv) any ownership interest that is retained in order to later
be sold in an "exempt transaction." Exempt transactions include (i) any sale or
disposition of all or a portion of an ownership interest that is consummated as
a result of a foreclosure or conveyance in lieu of foreclosure of liens or
security interests (other than by NRG Energy) encumbering the eligible project
or such ownership interest, (ii) any sale or disposition of an ownership
interest to a third party that is or will become a participant in the eligible
project (such as a local or industry investor, a financial institution or a fuel
or equipment supplier), provided that the obligation to sell the interest is
incidental to the provision of services or the contribution of assets to the
eligible project and is created prior to the execution and
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delivery of a binding PPA and fuel supply agreement and the completion of an
engineering and feasibility study with respect to the project, and (iii) any
sale or disposition of an ownership interest to another person as part of a
larger transaction involving the sale of all or substantially all of the assets
of NRG Energy or the sale of an equity interest in NRG Energy, provided that the
person acquiring the ownership interest agrees to be bound by the Co-Investment
Agreement with respect to such ownership interest (if such ownership interest
has not previously been offered for sale to CogenAmerica pursuant to the
Co-Investment Agreement). In January 1998, the Company initiated an arbitration
proceeding pursuant to the terms of the Co-Investment Agreement to resolve a
dispute with NRG Energy concerning the rights and obligations of the Company and
NRG Energy with respect to the Pryor Project. The arbitration proceeding was
resolved in favor of the Company and the Company closed on its acquisition of
the project on October 9, 1998.
NRG Energy has agreed to finance the Company's purchase of ownership
interests that may be offered pursuant to its Co-Investment Agreement at
commercially competitive terms to the extent funds are unavailable to the
Company on comparable terms from other sources. The Co-Investment Agreement
requires any such financing to be recourse to the Company and secured by a lien
on the ownership interest acquired. The Company is required to repay such
financing from the net proceeds of any offerings of equity or debt securities of
the Company (when market conditions permit such offerings to be made on
favorable terms) after taking into account the working capital and other cash
requirements of the Company, as determined by its Board of Directors.
REGULATION OF THE COMPANY'S PROJECTS
In connection with the development and operation of its projects, the
Company is significantly affected by federal, state and local energy laws and
regulations.
SIGNIFICANCE OF QF STATUS
With the exception of the Parlin Project and part of the PWD Project,
all of the Company's existing electric generating facilities are QFs. Under
PURPA, QFs receive certain regulatory and economic benefits. Specifically, the
owners of QFs generally receive exemption from the application of PUHCA, rate
and other utility regulation under the Federal Power Act, and state laws
concerning the rates and the financial and organizational regulation of electric
utilities. In addition, PURPA obligates utilities to purchase power offered by
QFs at an individual utility's "incremental cost of alternative electric
energy," which is sometimes referred to as the "avoided cost standard" and which
is defined as the cost that the utility avoids by not generating the power
itself or purchasing it from another source.
In order to maintain QF status, a generating project must meet certain
technological criteria. QFs are required to generate sequentially electricity
and thermal energy (generally in the form of steam) under standards prescribed
by the FERC. As part of this requirement, every QF is required under FERC
regulations to meet certain standards on a calendar year basis relating to the
facility's overall thermal efficiency (i.e., conversion of the energy content of
fuel into useful electricity and steam) and relative production of electricity
versus steam. These standards are referred to collectively as the "operating and
efficiency standards."
QFs that are qualifying small power production facilities are required
to produce a certain amount of their electric power using biomass, waste,
renewable resources or geothermal resources as their primary energy source and
are generally subject to size restrictions.
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In addition to the technological requirements for QF status, under FERC
regulations no more than 50% of the attributable equity interest in a QF may be
owned by an electric utility.
The failure of a QF to meet any of the requirements for QF status can
result in material adverse consequences to the owner of the facility. Under FERC
precedent, for any calendar year in which a QF fails to meet the applicable
requirements for QF status, the owner of the facility is required to refund to
any utility purchasing power from the facility the difference between the
contracted rate for sales of power and the utility's hourly incremental cost of
electric energy during the year in question. In addition, contracts for the
purchase of power from QFs (including some power purchase contracts for the
Company's facilities) frequently provide for termination of the contract or
other adverse consequences in the event that the facility is not continuously
maintained as a QF. Finally, in the event that a QF is permanently unable to
meet the criteria for QF status it risks the loss of all of its regulatory
exemptions, most notably the exemption from PUHCA. See "Business -- Risk Factors
- -- Loss of QF Status" and "-- Risks Associated with Becoming a Holding Company
under PUHCA."
SIGNIFICANCE OF EWG STATUS
One alternative to QF status is for the owner of a generating project
to become an EWG. PUHCA, as amended by the Energy Policy Act of 1992, defines an
EWG as a person determined by the FERC to be "engaged directly (or indirectly)
and exclusively in the business of ...selling electric energy at wholesale" and
meetinG certain other criteria. An EWG is completely exempt from PUHCA, and all
companies are free to acquire EWGs without restrictions. Moreover EWGs are
permitted to own QFs. The Company has elected to obtain EWG status for its
Parlin Project.
Because the Parlin Project is not a QF, CogenAmerica Parlin is not
exempt from wholesale rate regulation and has therefore filed rates with the
FERC as a public utility under the Federal Power Act. In the event that
CogenAmerica Parlin lost EWG status, the Company would suffer material adverse
consequences under PUHCA. See "Business -- Risk Factors -- Risks Associated with
Becoming a Holding Company under PUHCA."
SPECIAL STATUS OF PWD PROJECT
The PWD Project consists of two identical generation facilities located
at separate but proximate sites, each facility consisting of approximately 1 MW
of biogas-fired generating equipment and 10 MW of natural gas-fired generating
equipment. The owner of the principal project agreements of the PWD Project,
OPCI, sells all power produced by the biogas-fired units to a retail customer,
the Authority. In addition, OPCI is obligated to provide the Authority with 20
MW of standby power from the natural gas fired generating units upon thirty
minutes' notice.
The biogas-fired generating units collectively constitute a QF.
However, the standby natural gas-fired generation units included within the PWD
Project are not part of the PWD QF and therefore do not carry with them any of
the regulatory exemptions that otherwise accompany QF status. Nevertheless, the
Company believes that the ownership of the natural gas-fired generating units by
OPCI does not make it an "electric utility company" under PUHCA, by virtue of 17
CFR 250 of the SEC's regulations. See "Business -- Risk Factors -- Risks
Associated witH Becoming a Holding Company under PUHCA."
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ENVIRONMENTAL LAW AND REGULATIONS
In addition to the regulations described above, the Company and its
projects are subject to a number of comprehensive environmental laws and
regulations, affecting both present and future operations. The laws and
regulations applicable to the Company primarily relate to the discharge of
emissions into the water and air, but can also include wetlands preservation,
waste disposal and noise abatement. Frequently, these laws and regulations
require a lengthy and complex process of obtaining licenses, permits and
approvals from federal, state and local agencies as well as ongoing reporting
and compliance obligations. Compliance may require modification of a project
which may increase its cost, extend its completion date or otherwise adversely
affect a project before or after its completion. Additional or modified
licenses, permits and approvals may be required for any physical or operational
changes to the Company's facilities. For some conditions, environmental laws
also may impose cleanup or other remediation obligations. In many instances,
state laws impose requirements on the Company that are similar to, and in some
cases more stringent than, the requirements under federal law. Noncompliance
with environmental laws and regulations can result in the imposition of civil or
criminal fines or penalties. The current environmental requirements under which
the Company's projects operate are subject to amendment, and the Company cannot
predict what effect compliance with such amendments may have on the Company's
business or operations.
As discussed below, the Company believes its facilities are in
substantial compliance with applicable environmental requirements. To date,
compliance with these environmental regulations has not had a material effect on
the Company's earnings and has not required the Company to expend significant
capital.
In the future, the environmental requirements likely to have the
greatest impact on the Company's business and operations are the air quality
emission limitations under the Clean Air Act. As originally enacted, the Clean
Air Act set guidelines for emission standards for major pollutants (e.g., sulfur
dioxide and NOx) from newly constructed stationary sources. The Clean Air Act
provides for the regulation, largely through state implementation of federal
requirements, of emissions of regulated substances from certain facilities and
operations, including an obligation to obtain preconstruction and operating
permits for sources of certain air emissions. Each state in which the Company's
plants are located implements the requirements of the Clean Air Act through its
own state air pollution control statute and implementing regulations. For
example, the requirements of the Clean Air Act are implemented in New Jersey
through the New Jersey State Air Pollution Act, in Pennsylvania through the
Pennsylvania Air Pollution Control Act, in Illinois through the Illinois
Environmental Protection Act, and in Oklahoma through the Oklahoma Clean Air
Act. Each of the states implements these requirements through regulations
promulgated by the EPA and the respective state agencies.
In November 1990, significant amendments to the Clean Air Act were
adopted by Congress. The 1990 Amendments attempt to reduce emissions from
existing sources, particularly previously exempted older power plants. Although
the EPA is still implementing the requirements mandated by the 1990 Amendments,
the Company believes that air quality regulations in the U.S. will become even
more stringent. Currently, the Company believes that all of the Company's
operating plants are in compliance in all material respects with applicable
federal and state performance standards under the Clean Air Act, the 1990
Amendments and the state statutory and regulatory air quality requirements of
the states in which they are located.
The 1990 Amendments require the EPA to establish technology-based
emission standards
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for hazardous air pollutants. "Electric utility steam generating units" greater
than 25 MW have been excluded from regulation pending completion of an EPA study
of hazardous air pollutant emissions from these units to determine whether such
regulation is "appropriate and necessary." The final report, issued in February
1998, concluded that regulation of hazardous air pollutant emissions from those
units is not necessary with a few possible exceptions. The EPA has decided to
conduct further studies of certain utility emissions and will determine at a
later date whether regulation of those emissions is appropriate. The EPA plans
to issue hazardous air pollutant regulations for combustion sources not included
within the scope of the EPA's electric utility study by November 2000. Depending
on whether they are finalized, these regulations may require the Company to
install additional emission control technology.
With the exception of the Pryor Project in Oklahoma, each of the
Company's projects are located in an area which does not attain the National
Ambient Air Quality Standard for ozone. Accordingly, these projects will be
subject to stringent preconstruction review requirements if they undertake
"major modifications" to their facilities and they may face more stringent
emissions limitations on NOx, a precursor to ozone formation, than facilities
that are located in areas attaining the ozone standard. Other requirements apply
to "major modifications" to the Pryor Project, as this project is located in an
area which meets the National Ambient Air Quality Standards.
Additionally, the EPA and several states are in the process of
developing more stringent emission limitations to control ground-level ozone
across the entire eastern U.S. that may ultimately affect all of the Company's
projects. In November 1997, the EPA proposed a rule that would require 22 states
in the eastern U.S., including Illinois, New Jersey and Pennsylvania, to make
substantial reductions in NOx emissions. If finalized as proposed, this rule
potentially could result in the adoption of new NOx emission standards by the
affected states. If more stringent NOx standards are adopted by states in which
the Company has facilities, the Company could be required to install additional
NOx emission control technology at such facilities. In addition, the EPA
recently lowered the current National Ambient Air Quality Standards for
ground-level ozone and particulate matter, and these new standards will be
implemented by the states over the next several years. To comply with the new
standards, additional control technology requirements may be required at the
Company's existing facilities. The Company does not believe that the effect of
any such additional requirements, if implemented, would have a material adverse
effect on its financial condition or operations.
Section 112(r) of the Clean Air Act requires facilities in certain
industries, including electricity generation, to prepare and submit a Risk
Management Plan to the EPA which examines certain release scenarios and provides
for the public review of this information. The New Jersey Toxic Catastrophe
Prevention Act ("TCPA") requires owners of facilities that use an
"extraordinarily hazardous substance" to prepare a comprehensive risk management
plan covering their use of such substances. The Company's Parlin and Newark
Project facilities in New Jersey are subject to these requirements because
anhydrous ammonia is used in the air pollution control systems operating at the
facility. The TCPA requirements are more stringent than the federal
requirements. Although Illinois does not currently have a state program similar
to the TCPA applicable to the electricity generation industry, the state is
currently developing a program with similar requirements. Pennsylvania does not
currently have a similar state program requiring risk management plans for
electricity generating units. The Company believes that it is in material
compliance with the Clean Air Act and TCPA requirements concerning risk
management programs.
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In addition to the regulations described above, the 1990 Amendments
established the North East Ozone Transport Region, which required northeastern
states, including New Jersey and Pennsylvania, to work together to determine
whether to adopt more stringent controls on the pollutants that contribute to
the formation of low-level ozone (i.e., volatile organic compounds and NOx).
Pursuant to a September 27, 1994 Memorandum of Understanding between the member
states of the North East Ozone Transport Region, New Jersey and Pennsylvania
have each proposed regulations to implement a region-wide budget for NOx
emissions. While some of the Company's operating plants will be subject to this
new rule (as presently drafted), and thus subject to stricter emission
limitations, the Company believes that the new rules will not have a material
impact on its ability to maintain its present level of operations.
The Federal Clean Water Act (the "Clean Water Act"), the New Jersey
Water Pollution Control Act (the "Water Pollution Control Act"), the
Pennsylvania Clean Streams Law ("the Clean Streams Law"), the Illinois
Environmental Protection Act ("the Illinois Environmental Protection Act"), and
other water quality laws and regulations in other states establish rules
regulating the discharge of pollutants into surface and ground waters.
Typically, these water quality laws establish requirements for municipally-owned
sewage treatment plants, including pretreatment requirements for industrial
users of those plants. Each local municipal sewage authority has established
regulations governing connections to and discharges into its sewer system and
treatment plants. In accordance with these regulations, the Company is required
to obtain permits for the discharge of its wastewater and storm water runoff.
The Company believes that it is in substantial compliance with applicable
discharge requirements under the Clean Water Act, the Water Pollution Control
Act, the Clean Streams Law, the Illinois Environmental Protection Act, and other
State water quality regulations.
The Resource Conservation and Recovery Act ("RCRA") regulates the
generation, treatment, storage, handling, transportation and disposal of solid
and hazardous wastes. The Company generates certain non-hazardous and hazardous
wastes that are subject to the requirements of RCRA and similar state statutes.
The Company believes that it is in substantial compliance with both the RCRA and
the similar state statutes.
The Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA" or "Superfund"), requires cleanup of sites
from which there has been a release or threatened release of hazardous
substances. CERCLA authorizes the EPA and certain other parties to take any
necessary response action at Superfund sites, including ordering potentially
responsible parties ("PRPs") that are liable for the release to take or pay for
such actions. PRPs are broadly defined under CERCLA to include past and present
owners and operators of, as well as generators of wastes sent to, a site.
In addition, the New Jersey Spill Act ("Spill Act"), the Pennsylvania
Hazardous Site Cleanup Act ("Site Cleanup Act"), and the Illinois Environmental
Protection Act, and other state laws and regulations, like many other state
superfund laws, impose similar liability under state law for discharges of
hazardous substances (including petroleum products) and, under certain
circumstances, authorizes the collection of treble damages from a responsible
party. Similar to CERCLA, PRPs are broadly defined to include owners and
operators of the facility where the discharge occurred, the owners of the
hazardous substance that is discharged, or anyone who has caused or allowed the
discharge to occur. As of the present time, the Company is not subject to
liability for any Superfund or other state superfund matters. However, the
Company generates certain wastes, including hazardous wastes, and sends certain
of its wastes to third-party waste
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disposal sites. As a result, there can be no assurance that the Company will not
incur liability under CERCLA, the Spill Act, the Site Cleanup Act, the Illinois
Environmental Protection Act, or other state statutes in the future.
State laws and regulations also requires facilities that store
significant quantities of petroleum products or other hazardous substances to
prepare detailed discharge prevention containment and countermeasure plans and
discharge cleanup and removal plans. The Company believes that it is in
substantial compliance with these requirements with respect to its plants.
COMPETITION
Many organizations, including equipment manufacturers and subsidiaries
of utilities and contractors, as well as other organizations similar to the
Company, have entered the cogeneration market. Many of these organizations have
substantially greater resources than the Company. In addition, obtaining power
contracts with utilities has become more competitive with the increased use of
competitive bidding procedures and the movement towards deregulation of the
electricity energy market. This increased competition may make it more difficult
for the Company to secure future projects, may increase project development
costs and may reduce the Company's operating margins. In addition, increased
competition is leading to the development of a market for merchant plants.
Merchant plants are power generation facilities that sell all or a portion of
their electricity into the competitive market rather than pursuant to long-term
power sales agreements. The operation of a merchant plant is essentially
participation in a commodity market, which creates certain risk exposures,
including, among other things, underlying price volatility, credit risk and
variation in cash flows. Even though many of its potential competitors have
substantially greater resources than the Company, management believes that its
experience, particularly if combined with a strategic alliance with a third
party with regard to larger projects, will enable it to compete effectively.
PRINCIPAL CUSTOMER
The Company derived 50%, 57%, 46% and 62% of its revenues in 1998,
1997, the 1996 transition period and 1996, respectively, from JCP&L as a result
of the operation of the Newark and Parlin facilities.
Approximately 53% and 60% of the Company's revenues during 1998 and
1997, respectively, were derived from the operations of the Parlin and Newark
Projects. JCP&L buys substantially all of the power from these projects. For at
least the near-term, the Company will continue to be substantially dependent on
the operations of these projects. A material decrease in the results of
operations for such projects would likely have a material adverse effect on the
Company's results of operations and financial condition. The success of the
Company will continue to depend in part on its ability to diversify its project
portfolio. There can be no assurance that the Company will be successful in its
diversification efforts.
EMPLOYEES
As of December 31, 1998, the Company had approximately 90 full-time
employees, including 33 in the energy business and approximately 57 in its
equipment, sales and services business.
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BACKLOG
Total production backlog relating to the Company's equipment sales and
services business was $4,054 and $3,900 at December 31, 1998 and 1997,
respectively.
INTELLECTUAL PROPERTY
The Company and its subsidiaries do not own any patents or trademarks,
but the Company uses the trade name "CogenAmerica." It has applied for federal
trademark registration of its full name and its logo (which includes this trade
name).
RISK FACTORS
INFLUENCE BY NRG ENERGY
NRG Energy owns approximately 45.2% of the Company's outstanding Common
Stock. Five of the Company's eight directors are executive officers of NRG
Energy. NRG Energy is a major domestic and international developer of
independent power projects. As a result, persons who simultaneously serve as
directors or executive officers of the Company and as directors or executive
officers of NRG Energy may be subject to conflicts of interest with respect to
business opportunities or other investments which may be of interest to both NRG
Energy and the Company. While the Company's Amended and Restated Articles of
Incorporation impose supermajority requirements in certain circumstances, and
while the Independent Directors Committee of the Board of Directors (the
"Independent Directors' Committee") has exclusive jurisdiction over the
Company's contractual relations and other material transactions with NRG Energy
(including under the Co-Investment Agreement), NRG Energy's share ownership may
permit it effectively to substantially influence the outcome of matters which
may be submitted to a vote of the shareholders, including the election of
directors of the Company (other than the members of the Independent Directors
Committee, who are nominated by the Independent Directors' Committee rather than
by the Board of Directors). NRG Energy also may exert significant influence over
the Company's business and affairs through its representation on the Board of
Directors and its other relationships with the Company, including the
Co-Investment Agreement. See "Business -- Project Development Activities --
Co-Investment Agreement with NRG Energy." A subsidiary of NRG Energy also serves
as the operator of the Company's Parlin and Newark Projects, and another
subsidiary of NRG Energy is serving as the operator of the Company's Morris
Project. A subsidiary of NRG Energy also purchases power from the Parlin Project
and sells such power to DuPont. NRG Energy, in its business relationships with
the Company and in its role as a shareholder of the Company, may have interests
which conflict with those of the Company and the other stockholders of the
Company under certain circumstances.
SUBSTANTIAL LEVERAGE
As of December 31, 1998, the Company had approximately $285,096 of
long-term debt, including approximately $219,683 of subsidiary-level
indebtedness. The Company may also incur additional indebtedness in the future.
Accordingly, the Company has significant debt service obligations. The extent of
the Company's leverage may have important consequences for the Company and its
shareholders, including, but not limited to, the following: (i) the ability of
the Company to obtain additional financing for acquisitions, working capital,
capital expenditures or other purposes, if necessary, may be impaired or such
financing may not be available on terms acceptable to the Company; (ii) a
substantial portion of the Company's cash flow will be used to
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pay the Company's interest expense and under certain conditions to repay
indebtedness, which will reduce the funds that would otherwise be available to
the Company for its operations and future business opportunities; (iii) a
substantial decrease in net operating cash flows or an increase in expenses of
the Company could make it difficult for the Company to meet its debt service
obligations and force it to modify its operations; (iv) the Company may be more
highly leveraged than its competitors, which may place it at a competitive
disadvantage; and (v) the Company's high degree of leverage may limit its
flexibility to react to changes in its operating environment or economic
conditions, making it more vulnerable to a downturn in its business or the
economy generally.
ENERGY PRICE FLUCTUATIONS AND FUEL SUPPLY COSTS
The Company's 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, and have
resulted, in 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Comparison of
the year ended December 31, 1998, 1997 the 1996 TransitioN Period and 1996 --
Costs and Expenses."
SEASONALITY
The Company's quarterly operating results have varied in the past and
may vary significantly in the future depending on many factors, including among
others: unusual weather conditions in the areas served by the Company's
projects, routine or unanticipated maintenance that may require an outage and
general economic conditions. Further, the Company's operating results have been,
and are expected to continue to be, highly sensitive to seasonal variations. The
Company's operations have historically been seasonal in nature with a
disproportionate percentage of revenues and earnings recorded in the Company's
first and third quarters, the winter and summer seasons. Based upon all of the
foregoing factors, the Company believes that its revenues, expenses and
operating results are likely to vary significantly from quarter to quarter in
the future, that period-to-period comparisons of its results of operations may
not be meaningful and that, in any event, such comparisons should not be relied
upon as indications of future performance.
PROJECT DEVELOPMENT AND CONSTRUCTION RISKS
The projects that the Company develops are generally large and complex
and require months or years to complete. Among the principal objectives involved
in developing projects are the selection of a site, obtaining commitments from
others to purchase electrical power and steam, negotiating fuel supply
arrangements, obtaining environmental and other governmental permits and
approvals, and arranging project financing and turnkey construction. These
objectives are subject to a host of uncertainties which in many instances cannot
be anticipated. Moreover, these objectives often are achieved independently of
one another, and success in achieving one objective does not necessarily
increase the likelihood of achieving others. There can be no assurance that the
Company will be able to obtain satisfactory projects from its own development
efforts, under the Co-Investment Agreement or from other sources, and
satisfactory project agreements, construction contracts, necessary licenses and
permits or satisfactory financing commitments in respect of such projects, or
that any projects will ultimately be completed. The Company may from time to
time
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devote substantial resources to the pursuit of competitively bid projects that
it is not awarded or projects that ultimately prove to be undesirable
investments. If its development efforts are not successful, the Company may
abandon a project under development. At the time of abandonment, the Company
would expense all capitalized development costs incurred in connection with the
project and could incur additional losses associated with any related contingent
liabilities. Such losses could have a material adverse effect on the Company's
results of operations and financial position.
The construction, expansion or refurbishment of a cogeneration facility
also involves many risks, including supply interruptions, work stoppages, labor
disputes, weather interferences, unforeseen engineering, environmental and
geological problems and unanticipated cost overruns and start-up problems,
including the breakdown or failure of equipment or processes and performance
below expected levels of output or efficiency. Such risks may result in reduced
revenues or increased expenses and may cause the Company to incur other
unrecovered costs. Moreover, most PPAs permit the purchaser to terminate the
agreement or impose penalties if the commercial operation of the project is not
achieved by a specified date. As a result, any material unremedied delay in, or
unsatisfactory completion of, construction of the Company's projects could have
a material adverse effect on the Company's business or financial condition.
Insurance is maintained to protect against certain of these construction and
start-up risks, warranties are generally obtained for limited periods relating
to the construction of a new plant and its equipment to varying degrees, and
contracts and equipment suppliers are obligated to meet certain performance
levels. Such insurance, warranties or performance guarantees may not be adequate
to cover lost revenues or increased expenses and, as a result, a project may be
unable to fund principal and interest payments under its financing obligations
(if any) and may operate at a loss. A default under such a financing obligation
could result in the Company losing its interest in any such new cogeneration
facility and could have other material adverse effects on the Company's
financial condition or results of operations. This could occur if, for example,
any such default were to result in defaults under other material contracts or
financing obligations of the Company.
GENERAL OPERATING UNCERTAINTIES
The operation of a power plant involves many risks, including the
breakdown or failure of power generation equipment, pipelines, transmission
lines or other equipment or processes, fuel interruption, and performance below
expected levels of output or efficiency. Moreover, new plants have no operating
history and may employ recently developed and technologically complex equipment.
Each facility may depend on a single or limited number of entities to purchase
electricity or thermal energy, to supply water, to supply fuel, to transport
fuel, to dispose of wastes or to transport or "wheel" electricity. The failure
of any such power purchaser, steam host, water or fuel supplier, fuel
transporter, wheeling utility or other relevant project participant to fulfill
its contractual obligations, or the occurrence of other unforeseen construction,
start-up or operating difficulties, could have a material adverse effect on the
profitability of the project and on the Company. The foregoing operating risks
may result in lost revenues or increased expenses, including higher maintenance
costs and penalties. Ultimately, the foregoing operating uncertainties can cause
a facility to be unable to perform its obligations under its power and steam
purchase agreements, triggering default provisions in financing agreements which
could render the project insolvent and which could have a material adverse
effect on the ability of the Company to service its debt.
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RISKS INVOLVED IN MAKING MINORITY INVESTMENTS IN PROJECTS
The Company currently conducts its business primarily through direct
and indirect wholly-owned or majority-owned subsidiaries. However, one of the
Company's current project investments, the Grays Ferry Project, consists of a
minority ownership interest in a project entity, which is operated by one of the
Company's partners. Moreover, future investments in projects may also take the
form of minority interests. The Company's ability to control the development,
construction, acquisition or operation of such projects may be limited. The
Company may be dependent on its co-investors to construct and/or to operate such
projects. There can be no assurance that such co-investors will have the same
level of experience, technical expertise, human resources management and other
attributes as the Company. Any such co-investor may have conflicts of interests,
including those relating to its status as a provider of goods or services to, or
a purchaser of power or other services from, the project. The approval of its
co-investors also may be required for distributions of funds from projects to
the Company.
DEPENDENCE ON CERTAIN CUSTOMERS AND PROJECTS
All of the Company's energy segment earnings are derived from six
projects. The Company's projects (including projects in which it may make
minority investments) typically rely on a single customer or a few customers to
purchase all or substantially all of a facility's output, in each case under
long-term agreements that provide the support for any project debt used to
finance such facilities. The failure of any one customer to fulfill its
contractual obligations to a facility could have a material adverse effect on
such facility's financial results and on the Company. As a result, the financial
performance of such facilities is dependent on continued performance by
customers of their obligations under such long-term agreements. Regulatory
developments, including deregulation and industry restructuring activity, may
cause major customers to attempt to renegotiate contracts or otherwise fail to
perform their contractual obligations. In addition, major customers may attempt
to renegotiate contracts or otherwise fail to perform their contractual
obligations if changes in current economic conditions make the terms of such
contracts less favorable to such customers. The occurrence of one or more of
these events could adversely affect the Company's results of operations and
financial condition.
COMPETITION
Many organizations, including equipment manufacturers and subsidiaries
of utilities and contractors, as well as other organizations similar to the
Company, have entered the market for the development, ownership and operation of
cogeneration projects. Many of these companies have substantially greater
resources and/or access to the capital required to fund such activities than the
Company. In addition, obtaining power contracts with utilities has become more
competitive with the increased use of competitive bidding procedures and
short-term electric purchases through power marketers and the acceleration of
deregulation in the electric utility market. This increased competition may
adversely affect the Company's ability to secure future projects and
project-level financing, increase project development costs and reduce the
Company's operating margins and returns on any future project investments. Any
such developments could have a material adverse effect on the Company's results
of operations and financial condition. See "Business -- Competition."
LOSS OF QF STATUS
With the exception of the Parlin Project and part of the PWD Project,
all of the Company's
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existing electric generating facilities are QFs. In order to maintain QF status,
a generating project must meet certain technological criteria. QFs that are
qualifying cogeneration facilities are required to generate sequentially
electricity and thermal energy (generally in the form of steam) under standards
prescribed by the FERC. As part of this requirement, every QF is required under
FERC regulations to meet certain standards on a calendar year basis relating to
the facility's overall thermal efficiency (i.e., conversion of the energy
content of fuel into useful electricity and steam) and relative production of
electricity versus steam. Accordingly, it is critical for QFs to have steam
sales contracts that require the purchaser to accept amounts of steam which
allow the facility to meet the requisite operating and efficiency standards.
Cessations or material reductions in steam purchases from a cogeneration
facility carry the risk that the facility will fail to meet the FERC's operating
and efficiency standards, resulting in a loss of QF status. Similarly, for QFs a
critical factor in maintaining QF status is the use of enough biomass, waste,
renewable resources or geothermal resources (rather than supplementary fossil
fuels) to meet the requirements of the FERC's regulations concerning primary
energy source.
The failure of a QF to meet any of the requirements for QF status can
result in material adverse consequences to the owner of the facility. Under
FERC, for any calendar year in which a QF fails to meet the applicable
requirements for QF status, the owner of the facility is required to refund to
any utility purchasing power from the facility the difference between the
contracted rate for sales of power and the utility's hourly incremental cost of
electric energy during the year in question. In addition, contracts for the
purchase of power from QFs (including some power purchase contracts for the
Company's facilities) frequently provide for termination of the contract or
other adverse consequences in the event that the facility is not continuously
maintained as a QF. Finally, in the event that a QF is permanently unable to
meet the criteria for QF status it risks the loss of all of its regulatory
exemptions, most notably the exemption from PUHCA, as discussed below. See
"Business -- Regulation of the Company's Projects -- Significance of QF Status."
RISKS ASSOCIATED WITH BECOMING A HOLDING COMPANY UNDER PUHCA
In the event that the Company becomes a "holding company" under PUHCA,
the Company would suffer material adverse consequences. The following situations
would cause the Company to become a holding company under PUHCA: (i) the loss of
QF status for one of the Company's generating projects, which would cause the
subsidiary owning the project to become an "electric utility company" under
PUHCA; (ii) the loss of EWG status for CogenAmerica Parlin, which would also
cause such subsidiary to become an electric utility company under PUHCA; and
(iii) the loss of OPCI's exemption under 17 CFR ss. 250.7(a) of the SEC's
regulations, which would result in OPCI becoming aN electric utility company
under PUHCA. See "Business -- Regulation of the Company's Projects --
Significance of QF Status," "-- Significance of EWG Status" and "-- Special
Status of PWD Project."
One of the requirements under the FERC's regulations for determining QF
status of a project is that utility ownership be limited to 50% of the equity
interest in the project. Thus, because all of the QFs in which the Company has
an ownership interest are either: (i) more than 50% owned by the Company, or
(ii) partially owned by a utility whose ownership interest together with the
Company's interest exceeds 50%, if the Company became a holding company under
PUHCA the QF status of all of the Company's QF projects could automatically be
lost, at least temporarily. The loss of QF status for these projects could
trigger refund obligations and power sales contract terminations, as described
above, and ultimately could require portions of
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the projects to be divested in order for QF status to be regained. Other
consequences of the Company becoming a holding company under PUHCA are difficult
to predict but could ultimately include a requirement that the Company divest
itself completely of certain of its generating projects and a requirement that
NRG Energy, the owner of 45.2% of the Company's stock, divest itself of its
interest in the Company.
RESTRUCTURING OF THE ELECTRIC UTILITY INDUSTRY
The U.S. Congress is considering legislation to repeal PURPA entirely,
or at least to repeal the obligation of utilities to purchase from QFs
thereunder. There is support for grandfathering QF contracts if such legislation
is enacted, and also support for requiring utilities to conduct competitive
bidding for new electric generation if the PURPA purchase obligation is
eliminated. Under PURPA, QFs receive the benefit of exemptions from the Federal
Power Act, PUHCA and certain aspects of state utility regulation. In addition,
PURPA obligates utilities to purchase power offered by QFs at an individual
utility's "incremental cost of alternative electric energy," which is sometimes
referred to as the "avoided cost" standard and which is defined as the cost that
the utility avoids by not generating the power itself or purchasing it
elsewhere. All of the Company's projects other than the Parlin Project and a
part of the PWD Project are QFs. Since the Company benefits from PURPA, the
Company's business could experience a material adverse effect in the event of
the repeal of, or a significant change in, PURPA.
Various bills have also proposed repeal of PUHCA. Repeal of PUHCA would
allow both independent power producers and vertically integrated utilities to
acquire retail utilities in the U.S. that are geographically widespread, as
opposed to the current requirements of PUHCA which, as interpreted by the SEC,
tend to require that retail electric systems owned by the same entity be capable
of either electric integration or to be operated in geographic proximity. With
the repeal of PURPA and PUHCA, competition for independent power generators from
vertically integrated utilities would likely increase. Any such repeal could
have a material adverse effect on the Company's financial position or results of
operations.
While the Company does not believe that ongoing federal and state
restructuring efforts necessarily will have a material adverse effect on its
financial position or results of operations, the long term effect of any such
restructuring on the Company cannot be predicted at this time. See "Business --
Regulation of the Company's Projects."
GRAYS FERRY LITIGATION/DEFAULT
PECO, the electric power purchaser from the Grays Ferry Project, has
asserted that its PPAs with the Grays Ferry Partnership are not effective based
on an alleged denial of cost recovery by the Pennsylvania Public Utility
Commission. PECO claims that it is not obligated to pay the rates set forth in
the agreements. PECO has further taken the position that, in any event, its
total liability under each of the two PPAs is limited to $25,000 ($50,000 in
aggregate) by the terms of such agreements. The Company and the Grays Ferry
Partnership are in litigation with PECO over its obligations under such
agreements. After initially refusing to pay the rates set forth in the PPAs and
making payments for the electricity purchased from the Grays Ferry Project at
substantially lower rates, PECO has been ordered by the court in which the
litigation is pending to comply with the PPAs pending the outcome of the
litigation. Following the court order, PECO has resumed paying under protest the
full contract rates and, as of December 31, 1998, has paid all amounts then due
under the applicable PPAs. Through December 31, 1998, the Grays Ferry
Partnership has recorded revenue of approximately $78,100 of which $34,500
represents the amount which PECO
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claims it was not obligated to pay. For the year ended December 31, 1998, the
Company has recorded $4,758 of equity in earnings of affiliates representing its
pro rata share of the Grays Ferry Partnership's net income for such period. In
addition, the Company's investment in the Grays Ferry Partnership totaled
$17,603 on December 31, 1998. On March 9, 1999 the court issued an order for
partial summary judgment in favor of the Grays Ferry Partnership, ruling that
PECO's attempted termination of the Grays Ferry PPAs was improper.
Due to PECO's actions the Grays Ferry Partnership defaulted in the
payment of certain interest due under its principal credit agreement, which
default has since been cured, and the Grays Ferry Partnership continues to be in
default under other provisions of such credit agreement. As a result of such
continuing default, the lenders under the credit agreement have the ability
generally to prevent the Grays Ferry Partnership from distributing or otherwise
disbursing cash held or generated by the Grays Ferry Project. These rights, if
exercised by the lenders, could prevent the Grays Ferry Partnership from meeting
its obligations to suppliers and others and from disbursing or otherwise
distributing cash to its partners during the pendency of the litigation. Any of
these actions by the Grays Ferry Partnership's lenders could materially disrupt
the Grays Ferry Partnership's relations with its suppliers and could have other
potentially material adverse effects on its operations and profitability and,
ultimately, on the Company's earnings and financial position. 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. This failure occurred due to the event of default
created by the alleged termination of the PPAs by PECO 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 existence of certain unresolved issues
between the Grays Ferry Partnership and Westinghouse Electric Corporation
("Westinghouse") regarding completion and testing of the Grays Ferry Project.
These issues between the partnership and Westinghouse are the subject of an
ongoing arbitration proceeding. Until there is a satisfactory resolution of the
litigation with PECO, the lenders 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, Grays Ferry
Partnership will be required to apply such amounts to the repayment of the loan.
During 1998, $18,700 was applied to the repayment of the loan. The Company
further expects that at the time the litigation is resolved the loan will be
restructured.
The Company believes that if PECO's position ultimately is 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 various respects. Such effects could include, without
limitation, a material adjustment to the value of the Company's investment in
the Grays Ferry Project, the loss of future income and cash flows from the
project and other material costs which would not be recovered. See "Item 3.
- --Legal Proceedings."
ENVIRONMENTAL LAW AND REGULATION
The Company and its projects are subject to a number of comprehensive
environmental laws and regulations, affecting many aspects of its present and
future operations. The laws and regulations applicable to the Company primarily
involve the discharge of emissions into the water and air, but can also include
wetlands preservation, waste disposal and noise abatement. Frequently, these
laws and regulations require a lengthy and complex process of obtaining
licenses, permits and approvals from federal, state and local agencies as well
as ongoing reporting and
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compliance obligations. Compliance may require modification of a project which
may increase its costs, extend its completion date or otherwise adversely affect
a project before or after its completion. Additional or modified licenses,
permits and approvals may be required for any physical or operational changes to
the Company's facilities. For some conditions, environmental laws also may
impose cleanup or other remediation obligations. In many instances, state laws
impose requirements on the Company that are similar to, and in some cases more
stringent than, the requirements under federal law. Noncompliance with
environmental laws and regulations can result in the imposition of civil or
criminal fines or penalties. The current environmental requirements under which
the Company's projects operate are subject to amendment, and the Company cannot
predict what effect compliance with such amendments may have on the Company's
business or operations.
In the future, the environmental requirements likely to have the
greatest impact on the Company's business and operations are air quality
emission limitations under the Clean Air Act. As originally enacted, the Clean
Air Act set guidelines for emission standards for major pollutants (e.g., sulfur
dioxide and nitrogen oxide ("NOx")) from newly constructed stationary sources.
The Clean Air Act provides for the regulation, largely through state
implementation of federal requirements, of emissions of regulated substances
from certain facilities and operations, including an obligation to obtain
preconstruction and operating permits for sources of certain air emissions. Each
state in which the Company plants are located implements the requirements of the
Clean Air Act through its own state air pollution control statute and
implementing regulations. In New Jersey, for example, the requirements of the
Clean Air Act are implemented through the New Jersey State Air Pollution Act. In
Pennsylvania, the requirements are implemented through the Pennsylvania Air
Pollution Control Act, in Illinois through the Illinois Environmental Protection
Act, and in Oklahoma through the Oklahoma Clean Air Act. Each of the states
implement these requirements through regulations promulgated by the U.S.
Environmental Protection Agency (the "EPA") and the respective state agencies.
In November 1990, significant amendments to the Clean Air Act were
adopted by Congress (the "1990 Amendments"). The 1990 Amendments attempt to
reduce emissions from existing sources, particularly previously exempted older
power plants. Although the EPA is still implementing the requirements mandated
by the 1990 Amendments, the Company believes that air quality regulations in the
U.S. may become even more stringent.
The 1990 Amendments require the EPA to establish technology-based
emission standards for hazardous air pollutants. "Electric utility steam
generating units" greater than 25 MW have been excluded from regulation pending
completion of an EPA study of hazardous air pollutant emissions from these units
to determine whether such regulation is "appropriate and necessary." The final
report, issued in February 1998, concluded that regulation of hazardous air
pollutant emissions from those units is not necessary with a few possible
exceptions. The EPA has decided to conduct further studies of certain utility
emissions and will determine at a later date whether regulation of those
emissions is appropriate. The EPA plans to issue hazardous air pollutant
regulations for combustion sources not included within the scope of the EPA's
electric utility study by November 2000. Depending on whether they are
finalized, these regulations may require the Company to install additional
emission control technology.
The EPA and several states are in the process of developing more
stringent emission limitations to control ground-level ozone. In November 1997,
the EPA proposed a rule that would require 22 states in the Eastern U.S.,
including Illinois, New Jersey and Pennsylvania, to make
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substantial reductions in NOx emissions. If finalized as proposed, this rule
potentially could result in the adoption of new NOx emission standards by the
affected states. If more stringent NOx standards are adopted by states in which
the Company has facilities, the Company could be required to install additional
NOx emission control technology at such facilities. In addition, the EPA
recently lowered the current National Ambient Air Quality Standards for
ground-level ozone and particulate matter, and these new standards will be
implemented by the states over the next several years. To comply with the new
standards, additional control technology requirements may be required at the
Company's existing facilities.
In addition to the above, the 1990 Amendments established the North
East Ozone Transport Region which required northeastern states, including New
Jersey and Pennsylvania, to work together to determine whether to adopt more
stringent controls on the pollutants that contribute to the formation of
low-level ozone (i.e., volatile organic compounds and oxides of nitrogen).
Pursuant to a September 27, 1994 Memorandum of Understanding between the member
states of the North East Ozone Transport Region, New Jersey and Pennsylvania
have each proposed regulations to implement a region-wide budget for nitrogen
oxide emissions.
CAPITAL REQUIREMENTS
The Company's business is capital intensive. The long-term growth of
the Company, which involves the development and acquisition of additional power
generation projects, will require the Company to seek substantial funds through
various forms of financing. There can be no assurance that the Company will be
able to arrange the financing needed for additional projects. Also, limitations
in the Company's credit agreements may limit its ability to finance future
projects on a recourse basis, thereby requiring the Company to finance such
future projects on a substantially nonrecourse basis, which may either be
unavailable, or available on terms which may not be acceptable to the Company.
In order to access capital on a substantially nonrecourse basis in the future,
the Company may have to make larger equity investments in, or provide more
financial support for, its subsidiaries and other project entities. The
Company's ability to arrange financing of additional projects and the costs of
such capital are dependent on numerous factors, including general economic and
capital market conditions, credit availability from banks and other financial
institutions, investor confidence in the Company, its partners and in the
independent power market, the success of current projects, the perceived quality
of new projects and applicable tax and securities laws. If the Company is unable
to secure such financing, or if the terms of such financing are not satisfactory
to the Company, its business could be materially adversely affected. See
"Business -- Project Development Activities."
RECENT HISTORY OF LOSSES
The Company filed a voluntary petition for reorganization under Chapter
11 of the U.S. Bankruptcy Code on September 28, 1994. Formerly known as O'Brien,
the Company emerged from bankruptcy on April 30, 1996, under the Plan approved
by the Bankruptcy Court. The Company reported net income of approximately
$8,002, $23,352 and $6,423 for the fiscal years ended December 31, 1998,
December 31, 1997 and the six months ended December 31, 1996, respectively.
However, due in part to costs associated with its bankruptcy proceeding, the
Company incurred losses of approximately $17,713 and $40,919 for the fiscal
years ended June 30, 1996, and June 30, 1995, respectively. These losses and the
Company's bankruptcy had a material adverse effect on the Company's liquidity
and financial position and may continue to adversely affect the Company's
liquidity and results of operations in future periods by, among other things,
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rendering it more difficult for the Company to raise capital or otherwise to
conduct project development activities.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
The Company does not generate power outside of the U.S. Its foreign
operations consist of its equipment sales and rental operations based in the
U.K. which sell in various international markets and which are subject to the
risks inherent in doing business in foreign countries, including changes in
currency exchange rates, currency restrictions, changes in duties and quotas,
introduction of tariff or non-tarriff barriers, and economic, political and
regulatory changes. The Company currently does not engage in hedging
transactions. There can be no assurance that any of the factors described above
will not have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Products and Services
- -- Equipment Sales, Rentals and Services Segment."
YEAR 2000
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999. The Company believes that it has allocated adequate
resources for this purpose and expects its Year 2000 conversions to be completed
on a timely basis. In light of its compliance efforts, the Company does not
believe that the Year 2000 issue will materially adversely affect operations or
results of operations, and does not expect implementation to have a material
impact on the Company's financial statements. However, there can be no assurance
that the Company's systems will be Year 2000 compliant prior to December 31,
1999, or that the failure of any such system will not have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, to the extent the Year 2000 problem has a material adverse effect on
the business, operations or financial condition of third parties with whom the
Company has material relationships, such as venders, suppliers and customers,
the Year 2000 problem could have a material adverse effect on the Company's
business, results of operations and financial condition.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Report on Form 10K contains various forward-looking statements and
information that are based on the Company's beliefs and assumptions, as well as
information currently available to the Company. The Company also may make other
such forward-looking statements in the future. Without limiting the generality
of the foregoing, the words "believe," "anticipate," "estimate," "expect,"
"intend," "plan," "seek" and similar expressions, when used in this Report on
Form 10-K or in such other statements are intended to identify forward-looking
statements. All forward-looking statements and information in this Report on
Form 10-K or in such other statements are forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
and are intended to be covered by the safe harbor created thereby. Such
forward-looking statements 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 risks, uncertainties and other
factors include, without limitation, those discussed above. The Company is
unable to control or predict many of these factors, and investors 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 on Form 10-K or in any statement referencing the risk
factors and other cautionary statements set forth in
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this Report on Form 10-K, whether as a result of new information, future events
or otherwise.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located in suburban
Minneapolis, Minnesota. On June 4, 1998, the Company entered into a lease with
respect to approximately 6,745 square feet of space for its corporate
headquarters which continues until July 17, 2003.
The headquarters for PUMA's executive offices and its principal
manufacturing facility (each of which serve the Company's equipment sales,
rentals and services segment) are located in Ash, Canterbury, Kent, United
Kingdom.
The Newark, PWD, Parlin, Grays Ferry, Pryor and Morris project entities
(each of which is in the Company's energy segment) lease property for the sites
of its facilities from the commercial user of electric or thermal energy for a
nominal fee. The lease terms equal or exceed that of each respective electric or
thermal supply agreement. Management believes that these leased premises are
suitable and adequate for the Company's projects.
ITEM 3. LEGAL PROCEEDINGS.
The Company or a subsidiary is party to the following legal
proceedings:
1. STEVENS, ET AL. V. O'BRIEN ENVIRONMENTAL ENERGY, INC., ET AL., United
States District Court for the Eastern District of Pennsylvania, Civil
Action No. 94-cv-4577, filed July 27, 1994. This action was filed by
certain purchasers of the Class A Common Stock of the Company's
predecessor, O'Brien Environmental Energy, Inc. ("O'Brien"), during the
class period of O'Brien's bankruptcy. The plaintiffs alleged various
violations of the Federal securities laws, claiming that certain material
misrepresentations and nondisclosures concerning the Company's financial
conditions and prospects allegedly caused the price of the Common Stock to
be artificially inflated during the class period. The parties in this
action have agreed on a proposed settlement, which was filed with the
District Court for its approval on March 18, 1999. Management does not
expect the outcome of this litigation to have a material adverse effect on
the Company.
2. BLACKMAN AND FRANTZ V. O'BRIEN, United States District Court, Eastern
District of Pennsylvania, Civil Action No. 94-cv-5686, filed October 25,
1995. This action was filed by purchasers of O'Brien debentures during the
class period. The Plaintiffs objected to treatment of the class under the
Plan. This matter has been consolidated with the Stevens class action case
described in paragraph number 1 above. The parties in this action have
agreed on a proposed settlement, and on February 11, 1999, filed the
proposed settlement with the District Court for its approval. Management
does not expect the outcome of this litigation to have a material adverse
effect on the Company.
3. IN RE: O'BRIEN ENVIRONMENTAL ENERGY, Case No. 94-26723, U.S. Bankruptcy
Court for the District of New Jersey, filed September 29, 1994. Calpine
Corporation ("Calpine"), an unsuccessful bidder for the acquisition of
O'Brien in the bankruptcy case, filed an application for allowance of an
administrative claim for approximately $4,500 in break-up fees and
expenses in the bankruptcy case. The Bankruptcy Court denied the
application
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in full, by order dated November 27, 1996. Calpine filed an appeal from
the Bankruptcy Court's order denying its application. On May 29, 1998 the
United States District Court for the District of New Jersey upheld the
Bankruptcy Court's order. Calpine filed an appeal with the United States
Third Circuit Court of Appeals on June 26, 1998. The appeal has been
briefed, but oral arguments have not yet occurred. Management does not
expect the outcome of its bankruptcy case to have a material adverse
effect on the Company.
4. GRAYS FERRY COGENERATION PARTNERSHIP, TRIGEN-SCHUYLKILL COGENERATION,
INC., NRGG (SCHUYLKILL) COGENERATION 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's notification to the Grays Ferry Partnership
that PECO believes its PPAs with the Grays Ferry Partnership relating to
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 PPAs 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 PPAs 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 PPAs and ordering PECO to comply with the terms
of the PPAs. The Court of Common Pleas in Philadelphia also ordered PECO
to abide by all of the terms and conditions of the PPAs 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 PPAs. 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 PPAs, in each case under protest. On August
10, 1998, Chase filed an unopposed petition to intervene as a co-plaintiff
in the litigation, which was entered on August 26, 1998. Chase's
complaint, filed on September 4, 1998, asserted claims against PECO in
connection with Chase's roles as lender and agent of other lenders under
the Grays Ferry Project financing credit agreement. On March 9, 1999 the
Court of Common Pleas issued an order for partial summary judgment in
favor of the Grays Ferry Partnership, ruling that PECO's attempted
termination of the Grays Ferry PPAs was improper. Trial is set for March
29, 1999 to determine damages owed to the Grays Ferry Partnership, as well
as to decide the remaining claims such as fraud, conversion, breach of the
implied covenant of good faith and breach of fiduciary duties.
30
<PAGE>
The Company is subject from time to time to various other claims that
arise in the normal course of business, and management believes that the outcome
of any such matters as currently may be pending (either individually or in the
aggregate) will not have a material adverse effect on the business or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
As previously reported by the registrant, on September 14, 1998, NRG
Energy sent a letter to David H. Peterson, the Company's Chairman, requesting
that he call a special meeting of the Company's stockholders to consider the
removal of Robert T. Sherman, Jr. from the Company's Board of Directors. On such
date NRG Energy also filed preliminary solicitation materials with the SEC
pursuant to Section 14(a) of the Exchange Act, as amended, relating to a
proposed solicitation of proxies and consents from the Company's stockholders to
remove Mr. Sherman from the Company's Board (the "Proxy Solicitation"). On
October 8, 1998, NRG Energy filed definitive solicitation materials with the SEC
relating to the Proxy Solicitation.
On October 26, 1998, NRG Energy delivered to the Company's registered
agent consents of the holders of more than 50% of the Company's outstanding
Common Stock in favor of Mr. Sherman's removal from the Company's Board of
Directors. The following persons continued to serve as directors of the Company
immediately following the delivery of the consents: David H. Peterson, Julie A.
Jorgensen, Lawrence I. Littman, Craig A. Mataczynski, Spyros S. Skouras, Jr.,
Charles J. Thayer and Ronald J. Will. At a Board of Directors meeting on October
27, 1998, by the affirmative vote of a majority of such directors, Michael
O'Sullivan was appointed to fill the vacancy created by the removal of Mr.
Sherman from the Board.
At a Special Meeting of the Company's stockholders held on November 12,
1998, the stockholders approved the removal of Mr. Sherman as a director of
the Company, with the holders of 5,314,119 shares, or 77.73% of the outstanding
shares, voting in favor of such removal; the holders of 85,626 shares, or 1.25%
of the outstanding shares, voting against; and 9,139 abstentions. Continuing as
directors were Mr. Peterson, Ms. Jorgensen, Mr. Littman, Mr. Mataczynski, Mr.
Skouras, Mr. Thayer and Mr. Will. On the same day, the Company's Board of
Directors also confirmed the appointment of Michael O'Sullivan to fill the
vacancy on the Board of Directors created by the removal of Mr. Sherman.
31
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN
THIS ITEM 5 PLEASE SEE THE SELECTED DEFINITIONS THAT IMMEDIATELY PRECEDE ITEM 1.
The Company's Common Stock has been quoted and traded on the Nasdaq
National Market under the symbol "CGCA" since July 1998 and under the symbol
"NRGG" from November 1997 to July 1998. From March 1997 to November 1997, the
Company's Common Stock was quoted and traded under the symbol "NRGG" on the
Nasdaq SmallCap Market. Prior to March 1997, the Company's Common Stock was not
listed on an exchange or on the Nasdaq Stock Market but traded from time to time
on the pink sheets and on the OTC Bulletin Board. The high and low sales prices
of the Common Stock for the period from March 1997 to December 1998 are shown in
the table below. Such prices may have reflected inter-dealer prices, without
retail mark-ups, mark downs or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
COGENAMERICA COMMON STOCK PRICE PER SHARE
-----------------------------------------------------------------------------------------------------------------
PRICE PER 1998 SHARE ($) PRICE PER 1997 SHARE ($)
------------------------------------ -----------------------------------
PERIOD LOW HIGH LOW HIGH
---------------------------------------- ------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
First Quarter ...................... 15.125 19.531 11.250 13.750
Second Quarter...................... 13.313 18.250 11.125 16.000
Third Quarter....................... 7.250 15.000 14.250 21.000
Fourth Quarter...................... 7.625 10.000 18.000 22.375
</TABLE>
As of March 2, 1999, the Company had approximately 465 holders of
record of its Common Stock, not including beneficial owners whose shares are
held by banks, brokers and nominees.
The Company did not pay any cash dividends during fiscal 1998 or 1997.
The Company presently intends to retain all earnings for the operation and
expansion of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. Any future determination as to the
payment of dividends on the common stock will depend upon future earnings,
results of operations, capital requirements, the financial condition of the
Company and any other factors the Board of Directors of the Company may
consider. Moreover, as a holding company, the Company's ability to pay any
dividends in the future will depend largely on the ability of its operating
subsidiaries and project entities to pay cash dividends or other cash
distributions, which dividends or other cash distributions may be materially
limited by the terms of credit agreements or other material contracts to which
such operating subsidiaries or project entities may be parties.
Two of the Company's principal operating subsidiaries, CogenAmerica
Newark and CogenAmerica Parlin, are parties to a Credit Agreement which
prohibits the payment of dividends by such subsidiaries to the Company, provided
that such dividend payments may be made out of funds available after the payment
of various costs and expenses set forth in the
32
<PAGE>
Credit Agreement (including, without limitation, operating costs, various debt
service payments and the funding of various accounts required to be maintained
pursuant to the Credit Agreement) if certain conditions set forth in the Credit
Agreement are satisfied, including, without limitation, the maintenance of a
debt service coverage ratio set forth in the Credit Agreement, the absence of
any default or event of default under the Credit Agreement, and the satisfaction
of certain conditions relating to the composition of the Board of Directors of
the Company.
Morris LLC (the owner of the Morris Project) is party to a Construction
and Term Loan Agreement which prohibits the payment of distributions or the
return of capital to Morris LLC's members or the authorization to make any other
distribution, payment or delivery of property or cash to its members as such, or
redeem, retire, purchase or otherwise acquire any membership interests, units or
other equity interests of Morris LLC, or any options or rights thereto, or the
setting aside of funds for any of such purposes, except upon the satisfaction of
certain conditions which include (i) the acceptance and commercial operation of
the facility and conversion of the project's construction loan to term loans,
(ii) the absence of any default or event of default under various financing and
project documents, and the absence of the possibility that default will occur as
a result of such disbursement, (iii) the full prior funding of various accounts
required to be maintained by Morris LLC under the Construction and Term Loan
Agreement, and (iv) the maintenance of a required debt service coverage ratio.
The Company and CogenAmerica Funding also are parties to a Supplemental Loan
Agreement with NRG Energy which prohibits CogenAmerica Funding (which owns 100%
of the membership interests of Morris LLC) from paying any distributions or
dividends unless, among other things, the principal and interest then
outstanding does not exceed a prescribed maximum amount and is not projected to
exceed the maximum amount prescribed for the next two interest and principal
payment dates.
The Company is the borrower under the MeesPierson Credit Agreement,
which prohibits the payment of dividends by the Company without prior written
consent unless the Company provides not less than 30 days prior to the proposed
date of payment of such dividend a letter of credit (in the form and upon the
terms provided in the MeesPierson Credit Agreement) and a certificate signed by
the chief financial officer of the Company that, after giving effect to such
dividend payment, no default or event of default (as defined in therein) would
occur or reasonably be anticipated to occur, and/or be continuing.
The Grays Ferry Partnership (the owner of the Grays Ferry Project) is
party to a credit agreement, dated March 1, 1996 with Chase which prohibits the
Grays Ferry Partnership from making distributions unless i) the loan under the
agreement has converted to a term loan, ii) a specified debt service coverage
ratio is met, iii) no event of default has occurred and is continuing, and iv)
the distribution would not trigger an event of default. In addition, due to the
ongoing litigation between the Grays Ferry Partnership and PECO, Chase will not
allow any distributions to partners pursuant to Chase's rights under such credit
agreement. See Item 3. "Legal Proceedings."
CogenAmerica and CogenAmerica Pryor are parties to a loan agreement,
dated October 9, 1998, with NRG Energy as lender, which prohibits the payment of
distributions unless i) CogenAmerica Pryor has sufficient unencumbered funds to
cover two payments of a specified interest payment obligation, ii) no event of
default has occurred and is continuing, and iii) after giving effect to the
proposed distribution, no event of default would occur or reasonably be
anticipated to occur and/or be continuing.
33
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The consolidated selected financial data as of and for each of the
periods indicated have been derived from the audited financial statements of the
Company. This data should be read in conjunction with, and is qualified in its
entirety by reference to, the related financial statements and notes included
elsewhere in this Report.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
YEAR ENDED YEAR ENDED ENDED --------------------------------------
(DOLLARS IN THOUSANDS, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30 JUNE 30, JUNE 30,
EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 (1) 1996 1995 1994
------------- ------------ ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Energy ................................ $ 52,216 $ 43,210 $ 21,669 $ 66,623 $ 74,455 $ 62,647
Equipment sales and services .......... 19,342 19,415 15,607 25,344 19,639 24,304
Rental ................................ 2,438 2,179 1,062 1,895 2,362 5,372
Development fees and other ............ -- -- 1,578 2,685 5,791 14,266
--------- --------- --------- --------- --------- ---------
Total ............................... 73,996 64,804 39,916 96,547 102,247 106,589
Income (loss) before extraordinary item.. 8,002 23,352 4,780 (17,713) (40,919) (16,501)
Net income (loss) ....................... 8,002 23,352(4) 6,423 (17,713) (40,919) (16,501)
Basic earnings (loss) per share (2):
Before extraordinary item ............. $ 1.17 $ 3.59 $ 0.75 $ (4.24) $ (11.02) $ (4.45)
Extraordinary item .................... -- -- 0.25 -- -- --
--------- --------- --------- --------- --------- ---------
$ 1.17 $ 3.59 $ 1.00 $ (4.24) $ (11.02) $ (4.45)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Diluted earnings (loss) per share (2)
Before extraordinary item ............. $ 1.15 $ 3.48 $ 0.74 $ (4.24) $ (11.02) $ (4.45)
Extraordinary item .................... -- -- 0.25 -- -- --
--------- --------- --------- --------- --------- ---------
$ 1.15 $ 3.48 $ 0.99 $ (4.24) $ (11.02) $ (4.45)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total assets ............................ $ 318,674 $ 227,894 $ 173,624 $ 178,162 $ 189,748 $ 237,816
Long-term debt, net of current maturities
Loans due NRG Energy .................. 36,123 4,439 14,388 96,929 -- --
Nonrecourse long-term debt ............ 189,848 143,697 143,972 60,415 3,405 3 60,310
Recourse long-term debt ............... 45,225 46,323 6,339 6,374 -- 7,073
Total ............................... 271,196 194,459 164,699 163,718 3,405 3 67,383
</TABLE>
(1) Effective July 1, 1996, the Company changed its year end from June 30 to
December 31.
(2) Net income (loss) per share has been restated for all periods presented to
reflect the common shares issued under the terms of the Plan.
(3) Excludes $60,310 of long-term project financing which was included in
current liabilities due to default under the debt agreement.
(4) Reflects a net tax benefit of $20,454 resulting from reduction of a tax
valuation allowance. (See Note 16)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS
INCLUDING NOTES THERETO. CERTAIN OF THE STATEMENTS MADE IN THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH FORWARD-LOOKING
STATEMENTS 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, THOSE
DISCUSSED IN "RISK FACTORS" HEREIN. SEE "ITEM 1. BUSINESS -- RISK FACTORS
- -- RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS."
34
<PAGE>
FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN
THIS ITEM 7, PLEASE SEE THE SELECTED DEFINITIONS THAT IMMEDIATELY PRECEDE ITEM
1.
EFFECTIVE JULY 1, 1996, THE COMPANY CHANGED ITS YEAR END FROM JUNE 30
TO DECEMBER 31. AS A RESULT, AS USED HEREIN, "1996" REFERS TO THE 12-MONTH
PERIOD ENDED JUNE 30, 1996; THE "1996 TRANSITION PERIOD" REFERS TO THE 6-MONTH
PERIOD ENDED DECEMBER 31, 1996; "1997" AND "1998" REFER TO THE 12-MONTH PERIODS
ENDED DECEMBER 31, 1997, AND 1998, RESPECTIVELY.
ALL DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, SET FORTH IN THIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ARE IN THOUSANDS.
GENERAL
CogenAmerica is an independent power producer pursuing
"inside-the-fence" cogeneration projects in the U.S. The Company is engaged
primarily in the business of developing, owning and managing the operation of
cogeneration projects which produce electricity and thermal energy for sale
under long-term contracts with industrial and commercial users and public
utilities. The Company is currently focusing on natural gas-fired cogeneration
projects with long-term contracts for substantially all of the output of such
projects. The Company's strategy is to develop, acquire and manage the operation
of such cogeneration projects and to provide U.S. industrial facilities and
utilities with reliable and competitively priced energy from its power projects.
CogenAmerica has substantial expertise in the development and operation
of power projects. The Company's current project portfolio consists of:
(i) a 122 MW cogeneration facility in Parlin, New Jersey, which began
commercial operation in June 1991 and is owned through its wholly-owned
subsidiary, CogenAmerica Parlin;
(ii) a 58 MW cogeneration facility in Newark, New Jersey, which began
commercial operation in November 1990 and is owned through its
wholly-owned subsidiary, CogenAmerica Newark;
(iii) a 117 MW cogeneration facility in Morris, Illinois, which began commercial
operation in November 1998 and is owned through its wholly-owned
subsidiary, CogenAmerica Morris. See "Business --Products and Services --
Energy Segment -- Morris Project";
(iv) a 110 MW cogeneration facility in Pryor, Oklahoma, which had been in
commercial operation prior to acquisition by the Company in October 1998,
and is owned through the Company's wholly-owned subsidiary, Oklahoma Loan
Acquisition Corporation;
(v) two standby/peak shaving facilities with an aggregate capacity of 22 MW in
Philadelphia, Pennsylvania, which began commercial operation in September
1993, the principal project agreements of which are held by O'Brien
(Philadelphia) Cogeneration, Inc., an 83%-owned subsidiary of the Company;
and
(vi) a one-third partnership interest in a 150 MW cogeneration facility located
at Grays Ferry in Philadelphia, Pennsylvania, which began operation in
January 1998.
35
<PAGE>
Each of the projects is currently producing revenues under long-term
power sales agreements that expire at various times. See the chart under
"Business -- General" which summarizes certain contractual arrangements and
other information concerning each of the Company's power projects.
Energy and capacity payment rates are generally negotiated during the
development phase of a cogeneration project and are finalized prior to securing
project financing and the start of a plant's commercial operation. Pricing
provisions of each of the Company's project power sales agreements contain
unique features. As a result, different rates exist for each plant and customer
pursuant to the applicable power sales agreement.
However, in general, revenues for each of the Company's cogeneration
projects consist of two components: energy payments and capacity payments.
Energy payments are based on the power plant's actual net electrical output,
expressed in kilowatt-hours of energy, purchased by the customer. Capacity
payments are based on the net electrical output the power plant is capable of
producing (or portion thereof) and which the customer has contracted to have
available for purchase. Energy payments are made for each kilowatt-hour of
energy delivered, while capacity payments, under certain circumstances, are made
whether or not any electricity is actually delivered.
The projects' energy and capacity payments are generally based on
scheduled prices and/or base prices subject to periodic indexing mechanisms, as
specified in the power sales agreements. In general terms, energy and capacity
payments are intended to recover the variable and fixed costs of operating the
plant, respectively, plus a return.
A power plant may be characterized as one or more of the following: a
"base-load" facility, a "dispatchable" facility, a combination
"base-load/dispatchable" facility or a "merchant" facility. Such
characterization depends upon the manner in which the plant will be used and the
requirements of the related power sales agreement(s). A "base-load" facility
generally means that the plant is operated continuously to produce a fixed
amount of energy and capacity for one or more customers. A "dispatchable"
facility generally means that the customer(s) purchased the right to a fixed
amount of available capacity, which must be produced if and when requested by
the customer(s). A combination "base-load/dispatchable" facility is a plant that
operates in both modes, with a portion of the plant's capacity designated as
base-load and the remainder available for dispatch. A "merchant" facility
generally refers to a plant that operates and sells its output to various
customers at prevailing market prices rather than pursuant to a long-term power
sales agreement.
Under a power sales agreement with JCP&L extending into 2011,
CogenAmerica Parlin has committed 114 MW of the Parlin facility's generating
capacity to JCP&L, of which 41 MW are committed as base capacity and 73 MW as
dispatchable capacity. JCP&L must purchase energy from the base capacity
whenever such energy is available from the Parlin facility. Energy from the
dispatchable capacity is purchased by JCP&L only when requested (dispatched) by
JCP&L.
The Parlin PPA provides for curtailment by JCP&L under such typical
conditions as emergencies, inspection and maintenance. In addition, JCP&L may
also reduce base capacity during periods of low load on the PJM by up to 600
hours in any calendar year, of which 400 may be during on-peak periods, but only
when all PJM member utilities are required to reduce generation to minimum
levels and PJM has requested JCP&L to reduce or interrupt external
36
<PAGE>
generation purchases. During 1998, JCP&L's curtailment was ten hours. The Parlin
PPA also provides for an annual average heat rate adjustment that will increase
or decrease JCP&L's payments to CogenAmerica Parlin, depending upon whether the
average heat rate of the Parlin Project is below or above average 9,500 Btu per
kWh (higher heating value). The actual adjustment is calculated by applying a
ratio based on this differential to a fuel cost calculation. For the year ended
December 31, 1998 this heat rate adjustment was $92.
CogenAmerica Newark has a power sales agreement with JCP&L extending
through 2015 whereby it has committed to sell all of the Newark facility's
generating capacity to JCP&L, up to a maximum of 58 MW per hour. The Newark
Project is effectively a base-load unit and JCP&L must purchase the energy
whenever such energy is available from the Newark facility.
Under the terms of the Newark PPA, JCP&L, in its sole discretion, is
allowed to curtail production at the facility for 700 hours per year provided
that the duration of each curtailment is a minimum of six hours and all
curtailments occur only during Saturdays, Sundays and Holidays. Since contract
inception in 1996, JCP&L has fully utilized this curtailment option annually and
the Company expects JCP&L will continue to do so in future years. JCP&L may also
disconnect from CogenAmerica Newark for emergencies, inspections and maintenance
for up to 400 hours per year if all PJM member utilities are required to reduce
generation to minimum levels and JCP&L has been requested by PJM to reduce or
interrupt external generation purchases. During 1998, JCP&L's curtailment for
these purposes was nine hours. The Newark PPA provides for an annual average
heat rate adjustment that will increase or decrease JCP&L's payments to
CogenAmerica Newark depending upon whether the average heat rate of the Newark
Project is above or below 9,750 Btu per kWh (higher heating value). The actual
adjustment is calculated by applying a ratio based upon this differential to a
fuel cost calculation. For the year ended December 31, 1998 this heat rate
adjustment reduced CogenAmerica Newark revenues by $684.
Morris LLC has an ESA with Equistar through 2023 to provide base-load
power and steam. Equistar has agreed to purchase the entire requirements of
Equistar's plant (subject to certain exceptions) for electricity up to the full
electric output of two of the three combustion turbines at the Morris Project.
In addition, the Morris Project has an arrangement with the local utility to
provide standby power. Each combustion turbine at the Morris facility has a
nominal rating of 39 MW. The Morris Project designed redundancy into the energy
production capability of the facility in order to meet Equistar's demand. The
cost of installing and maintaining the reserve capacity was taken into account
when the energy services agreement was negotiated.
CogenAmerica Morris is permitted to arrange for the sale to third
parties of interruptible capacity and/or energy from the third turbine and to
the extent available, any excess power from the two turbines required to supply
Equistar with its actual requirements. CogenAmerica Morris is in the process of
contracting with a third-party power marketer for the sale of this excess
capacity/energy.
CogenAmerica Pryor has a power sales agreement with OG&E through 2008
to provide 110 MW of dispatchable capacity, with a maximum dispatch of 1,500
hours per year. The facility also sells electricity to PSO when not dispatched
by OG&E. The Pryor Project purchases natural gas from Dynegy and Aquila. Under
the terms of the agreement with PSO, the pricing of energy sales is indexed to a
market fuel rate. Under terms of the agreement with OG&E, energy sales are
linked to the average cost of fuel.
37
<PAGE>
The power sales agreements for the Parlin, Newark, and Morris projects
are structured to avoid or minimize the impact on the Company's revenues from
fluctuations in fuel costs. Since the power sales agreements were amended in
April 1996, JCP&L is responsible for the supply and transportation of natural
gas required to operate the Parlin and Newark plants. Thus, revenues from the
Parlin and Newark plants exclude any amounts attributable to recovery of fuel
costs. Prior to the contract amendments, Parlin and Newark cost of revenues
included fuel and related costs and contract provisions for delayed recovery of
such costs in revenues caused variability in the projects' gross profit.
Under the terms of the Morris ESA with Equistar, Equistar is the fuel
manager and all of the costs of supplying the fuel are effectively a
pass-through to Equistar. As a result, although fuel costs are included in the
Morris Project revenues and costs of revenues, the Company has minimized any
impact on gross profit from fluctuations in the price of natural gas purchases
and supply for the Morris Project.
The Grays Ferry Project has a gas sales agreement with Aquila providing
for the purchase of natural gas to meet the power plant's requirements. For the
period from commercial operations in January 1998 until the end of the year
2000, the partnership has purchased a natural gas collar with a cap in order to
limit the volatility of natural gas purchases. Beginning in 2001, the price for
natural gas supplied by Aquila is indexed to a market electricity rate.
During 1998, the Company also sold and rented power generation
equipment and provided related services in the U.S. and international markets
under the names OES and PUMA. As previously announced, the Company has
determined that its equipment sales, rental and service segment, which accounted
for $21,780, $21,594, $16,669 and $27,239 of revenues in 1998, 1997, the 1996
transition period and 1996, respectively, is no longer a part of its strategic
plan. Accordingly, on November 5, 1998 the Company sold OES, a wholly-owned
subsidiary of the Company, in a stock transaction to an unrelated third party
for $2,000. The Company is currently pursuing alternatives for the disposition
of its remaining equipment sales, rental and service business operated by PUMA.
The Company expects that the disposition of PUMA will not have a material
adverse effect on the Company's results of operations or financial condition.
Although OES was sold in 1998, the equipment sales, rental and service segment
has not been reported as a discontinued operation in the financial statements
because specific plans regarding the timing and manner of ultimate disposition
of PUMA are still under consideration.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Energy revenues for 1998 of $52,216 increased from revenues of $43,210
for 1997. Energy revenues primarily reflect billings associated with the Parlin,
Newark, Morris and Pryor Projects and the Company's PWD Project. The increase in
energy revenues was primarily attributable to the acquisition of the Pryor
Project in October 1998, and commencement of Morris operations in November 1998.
Energy revenues in 1997 were negatively impacted by a routine, scheduled major
maintenance outage at the Newark Project in the second quarter of 1997.
38
<PAGE>
<TABLE>
<CAPTION>
PROJECT ENERGY REVENUES
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------------ -----------------
<S> <C> <C>
COGENERATION PROJECTS
Parlin $ 21,527 $ 21,685
Newark 17,541 17,319
Morris 5,779 --
Pryor 3,235 --
STANDBY/PEAK SHAVING FACILITIES
PWD 4,134 4,206
------------- -------------
$ 52,216 $ 43,210
------------- -------------
------------- -------------
</TABLE>
Equipment sales and services revenues for 1998 of $19,342 decreased
from revenues of $19,415 for 1997. The decrease was attributable to the sale of
OES in November 1998. OES accounted for revenues of $5,625 and $6,115 in 1998
and 1997, respectively.
Rental revenues for 1998 of $2,438 increased from revenues of $2,179
for 1997. The increases were due primarily to higher sales volume due to ice
storms in the northeastern U.S. and Canada. OES rental revenues were $2,391 and
$2,179 in 1998 and 1997, respectively.
COSTS AND EXPENSES
Cost of energy revenues for 1998 of $23,462 increased from $14,841 for
1997. The increase was primarily the result of commencement of Morris
operations, the Pryor acquisition and depreciation associated with equipment
capitalized at the Parlin and Newark facilities in 1998.
Cost of equipment sales and services for 1998 of $16,929 decreased
from $17,037 for 1997. The decrease was primarily due to the sale of OES.
Cost of rental revenues for 1998 of $1,954 increased from $1,817 for
1997. The increases were primarily due to increased sales volume due to ice
storms in the northeastern U.S. and Canada.
Gross profit for 1998 of $31,651 increased from $31,109 for 1997. The
increase is primarily attributable to expansion of the Newark Project's rated
capacity from 52 MW to 58 MW and the addition of the Morris and Pryor
operations. The gross profit margin in 1998 was 42.8% as compared to 48.0% in
1997. This decrease was due primarily to the addition of the Morris and Pryor
Projects which have lower operating margins than the Newark and Parlin Projects.
It is expected that competition will continue to put pressure on these margins
in the future as new projects are added.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") for 1998 of
$9,415 decreased from $9,479 in 1997. The decrease is primarily due to lower
insurance costs, offset by higher legal expenses.
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INTEREST AND OTHER INCOME
Interest and other income for 1998 of $1,715 increased from $1,205 for
1997. The increase is primarily attributable to a gain on the sale of OES.
EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates for 1998 was $4,784 compared to $105
for 1997. The increase was attributable to earnings from the Grays Ferry
Project, which commenced operations in January 1998. The earnings of the Grays
Ferry Project reflect the contract price of electricity under the terms of the
PPAs. The electric power purchaser has asserted that such PPAs 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 that issue. For additional information see "Item 3. --
Legal Proceedings."
INTEREST AND DEBT EXPENSE
Interest and debt expense for 1998 of $15,855 increased from $14,768
for 1997. The increase is primarily attributable to debt issued to acquire the
Pryor Project, borrowings under the Supplemental Loan Agreement for the Morris
Project, and higher interest rates due to default rate interest.
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 first quarter, income taxes are generally
charged against pre-tax earnings without any reduction for operating loss
carryforwards that continue to be utilized in reducing 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 higher income tax expense in 1998 was due to the above-mentioned
reduction in the valuation allowance in 1997.
NET INCOME AND EARNINGS PER SHARE
Net income for 1998 was $8,002, or diluted earnings per share of $1.15,
compared to net income of $23,352 for 1997, or diluted earnings per share of
$3.48. Net income and earnings per share for 1998 were lower than the prior year
primarily due to the combined effects of the increase in income tax expense as a
result of the income tax benefit recognized in 1997, earnings from the Grays
Ferry Project which commenced operations in January 1998 and the one-time asset
impairment charge recorded in 1997.
COMPARISON OF 1997, THE 1996 TRANSITION PERIOD AND 1996
REVENUES
Energy revenues for 1997, the 1996 transition period and 1996 were
$43,210, $21,669 and $66,623, respectively. Energy revenues primarily reflect
billings associated with the Parlin, Newark and PWD Projects.
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<TABLE>
<CAPTION>
PROJECT ENERGY REVENUES
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1996 1996
------------------ ---------------------- ---------------
<S> <C> <C> <C>
COGENERATION PROJECTS
Parlin $ 21,685 $ 10,327 $ 34,867
Newark 17,319 9,259 26,820
STANDBY/PEAK SHAVING FACILITIES
PWD 4,206 2,083 4,936
-------------- ------------- -------------
$ 43,210 $ 21,669 $ 66,623
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The revenues at the Parlin and Newark Projects have been affected by
the terms of their PPAs, which were renegotiated effective April 30, 1996 to
make JCP&L responsible for supplying the natural gas at no cost to the projects.
Previously, revenues from the Parlin and Newark Projects had reflected the
impact of unit fuel cost fluctuations on the energy rate calculation under the
Parlin and Newark PPAs. The increase in energy revenues for 1997 as compared to
the 1996 transition period was primarily due to only six months of revenues
reported in the 1996 transition period. The decrease in energy revenues for the
1996 transition period as compared to 1996 was primarily due to only six months
of revenues reported in the 1996 transition period and to the amended PPAs
affecting both the Parlin and Newark Projects.
Parlin's 1996 revenues were negatively impacted by a voluntary
curtailment of electric output during the first and second quarters in order to
maintain the correct ratio of thermal to electric production after DuPont, the
steam host, significantly decreased its steam demand by moving a business
segment overseas. In addition, Parlin's 1996 revenues were affected by a
decrease in the energy rate under the previous PPA, which rate was adjusted
quarterly based on, in part, the average cost of fuel over the preceding year.
Equipment sales and service revenues for 1997, the 1996 transition
period and 1996 were $19,415, $15,607 and $25,344, respectively, which
principally reflect the operations of OES, PUMA and American Hydrotherm
Corporation ("American Hydrotherm"). American Hydrotherm was sold in December
1996. Revenues increased for 1997 as compared to the 1996 transition period
primarily due to only six months of revenues reported in the 1996 transition
period and due to higher sales volumes. Revenues decreased for the 1996
transition period as compared to 1996 primarily due to only six months of
revenues reported in the 1996 transition period, offset in part by the inclusion
of nine months of revenues in the period from the operations of PUMA. PUMA
changed its fiscal year end from March 31 to a calendar year end effective on
December 31, 1996.
OES equipment sales and service revenues for 1997, the 1996 transition
period and 1996 were $6,115, $1,575 and $5,232, respectively.
Rental revenues for 1997, for the 1996 transition period and 1996 were
$2,179, $1,062 and $1,895, respectively. The fluctuations were primarily due to
only six months of revenues reported in the 1996 transition period.
There were no development fees and other revenues for 1997. Development
fees and other revenues for the 1996 transition period and 1996 were $1,578 and
$2,685, respectively.
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Revenues decreased for the 1996 transition period as compared to 1996 primarily
due to only six months of revenues reported in the 1996 transition period.
COSTS AND EXPENSES
Cost of energy revenues for 1997, the 1996 transition period and 1996
were $14,841, $7,229 and $45,663, respectively. Cost of energy revenues
increased for 1997 primarily due to only six months of costs reported in the
1996 transition period. Cost of energy revenues decreased for the 1996
transition period as compared to 1996 primarily due to only six months of costs
reported in the 1996 transition period and the result of the amended PPAs in
which JCP&L began assuming the cost of fuel for the Parlin and Newark
facilities.
Cost of equipment sales and service for 1997, for the 1996 transition
period and 1996 were $17,037, $12,365 and $22,153, respectively. The 1997
increase was primarily due to only six months of costs reported in the 1996
transition period, except for the operations of PUMA which included nine months
of costs for the 1996 transition period, and to the recording of $190 of
inventory write-downs in the fourth quarter. Cost of equipment sales and service
decreased for the 1996 transition period as compared to 1996 primarily due to
only six months of costs reported in the 1996 transition period.
Cost of rental revenues for 1997, for the 1996 transition period and
1996 were $1,817, $834 and $1,406, respectively. The fluctuations were primarily
due to only six months of costs reported in the 1996 transition period.
There were no development fee expenses and other costs for 1997. Cost
of development fees and other for the 1996 transition period and 1996 were
$1,559 and $2,531, respectively. These costs consist principally of costs
associated with the sale of various projects either under development or in
operation.
The Company's gross profit was $31,109, $17,929, and $24,794 for 1997,
for the 1996 transition period and for 1996, respectively. The higher gross
margin for 1997 is due to only six months of operations included in the 1996
transition period. The gross margin for the 1996 transition period decreased
from 1996 due to only six months of operations included in the 1996 transition
period and to fluctuations in the recovery of fuel costs through energy revenues
under the Parlin and Newark Project PPAs in effect until April 30, 1996.
PROVISION FOR IMPAIRED ASSETS
During the 1997 fourth quarter, the Company recorded provisions for
impaired assets in the aggregate amount of $5,274 for various asset disposals,
write-offs and write-downs. The impairment charge reduced identifiable assets of
the energy segment and the equipment sales, rental and service segment by
approximately $697 and $2,161, respectively, and corporate assets by $2,416. The
components of the charge were as follows:
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<PAGE>
<TABLE>
<CAPTION>
EQUIPMENT
SALES, RENTAL
& SERVICE ENERGY CORPORATE TOTAL
------------- ------ --------- -------
<S> <C> <C> <C> <C>
Assets disposed
Equipment held for sale $ 62 $ -- $ 1,491 $1,553
Property, plant and equipment
Write-offs 551 326 146 1,023
Equipment sold or scrapped -- -- 779 779
Project development costs -- 371 -- 371
Other 72 -- -- 72
------------- ------ --------- -------
685 697 2,416 3,797
------------- ------ --------- -------
Assets held and used
Investment in PoweRent 500 -- -- 500
Property, plant and equipment 976 -- -- 976
------------- ------ --------- -------
1,476 -- -- 1,476
------------- ------ --------- -------
$ 2,161 $ 697 $ 2,416 $5,274
------------- ------ --------- -------
------------- ------ --------- -------
</TABLE>
To improve liquidity, in fiscal 1994 the Company initiated efforts to liquidate
specific power generation equipment that was not in use in an operating project,
rented to a customer or critical to the completion of projects in development.
These assets, consisting mainly of gas and steam turbines, were written down in
fiscal 1994 and 1995 to liquidation values determined by independent appraisal,
reclassified on the balance sheet as "equipment held for sale" and no longer
depreciated. The $3,228 carrying value of the equipment at June 30, 1995 was
reduced to $2,628 and $1,598 at December 31, 1996 and September 30, 1997,
respectively, through periodic sales. In the 1997 fourth quarter, due to lack of
interest by potential buyers, the remaining equipment was scrapped resulting in
an impairment charge of $1,553.
Impairment charges for property, plant and equipment disposals totaled $1,801,
comprised of losses of $779 from disposal of other power generating equipment,
and write-offs of $1,023 for equipment that was determined to be non-useable or
could not be located during asset counts and inspections performed at OES and
the PWD Project. The asset counts and inspections were undertaken as part of the
overall review performed to determine whether OES and PWD Project operations
should be continued. In addition, the PWD Project asset counts were required in
order to pledge the equipment as security for a new corporate revolving credit
facility which the Company entered into with Meespierson Capital Corp. Prior to
the 1997 fourth quarter, physical counts of the equipment were last performed in
fiscal 1995 during the period of bankruptcy reorganization.
The asset impairment charge also included $371 to write-off capitalized project
development costs related to certain development projects that were terminated.
During the 1997 fourth quarter, the Company completed a thorough review of its
business operations and market opportunities to determine whether operations of
the PWD Project and the equipment sales, rental and service businesses should be
continued. The board of directors determined that the PWD Project should be
retained and that the equipment sales, rental and service segment should be
exited.
The equipment sales, rental and service segment has not been reported as a
discontinued operation
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because of uncertainties about the expected timing and manner of disposal.
However, management performed an impairment review of the segment's long-lived
assets as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Based on an analysis of
estimated future cash flows, the carrying value of OES' generator equipment was
determined to be impaired. Consequently, a provision of $976 was recorded to
write-down the assets to their estimated fair value as determined by management
based on sales values of similar equipment.
Management also evaluated the carrying value of its 50% investment in PoweRent.
Due to PoweRent's low earnings capacity, combined with the expectation of
exiting this business in the near term, the investment was determined to be
permanently impaired. The carrying value of the investment was written down by
$500 based on discussions with potential buyers and management's estimate of the
investment value.
During the year ended June 30, 1996, unrecoverable project development costs of
$180 were written off.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for 1997, the 1996 transition period and 1996 were
$9,479, $6,149 and $12,612, respectively. SG&A increased for 1997 primarily due
to only six months of costs reported in the 1996 transition period, except for
the operations of PUMA which included nine months of costs for the 1996
transition period, and due to the recording of $914 in the fourth quarter for
various staffing and relocation costs and other reserves. SG&A decreased for the
1996 transition period as compared to 1996 primarily due to only six months of
costs reported in the 1996 transition period. 1996 includes a $3,100 cost
incurred to terminate an interest rate swap agreement in connection with the
Parlin nonrecourse project debt refinancing.
INTEREST AND OTHER INCOME
Interest and other income for 1997, the 1996 transition period and 1996
were $1,205, $251 and $508, respectively. Interest and other income increased
for 1997 primarily due to only six months of income reported in the 1996
transition period, the settlement of a legal suit, and the sale of a development
project in Pakistan, offset in part by fees paid to Wexford Management LLC under
a Liquidating Asset Management Agreement entered into in connection with its
emergence from bankruptcy and the sale of unused equipment. Interest and other
income for the 1996 transition period was positively impacted by interest income
earned on escrow account balances established in connection with the nonrecourse
financing on the Parlin and Newark facilities.
REORGANIZATION COSTS
Reorganization costs represent all costs incurred after filing
bankruptcy that relate to the Company's reorganization and restructuring
efforts. Reorganization costs for 1996 were $12,101 and consist primarily of
professional and administrative fees and expenses.
INTEREST AND DEBT EXPENSE
Interest and debt expense for 1997, the 1996 transition period and 1996
were $14,768, $7,681 and $18,646, respectively. Interest and debt expense
increased for 1997 as compared to
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the 1996 transition period primarily due to only six months of expense reported
in the 1996 transition period. Interest and debt expense decreased for the 1996
transition period as compared to 1996 primarily due to only six months of
expenses reported in the 1996 transition period and to the refinancing of the
Parlin and Newark Projects. 1996 interest and debt expense includes
post-petition interest on prepetition liabilities of $6,487. 1996 also includes
$1,098 in interest costs associated with loans provided by NRG Energy and $1,433
of deferred financing costs attributable to the nonrecourse debt relating to the
Parlin and Newark Projects which were refinanced during the year (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources").
EXTRAORDINARY ITEM
In the 1996 transition period, the Company negotiated a buyout of a
subsidiary's capital lease obligation. The lender agreed to accept a $1,100
payment in full satisfaction of the lease. The transaction resulted in an
extraordinary gain of $1,643 (net of $124 of state income taxes).
INCOME TAXES
For 1997, the 1996 transition period and 1996, the Company recorded an
income tax benefit of $20,454, $268 and $463, respectively. The benefit for 1997
was attributable to the reduction of a deferred tax asset valuation reserve
previously established for net operating losses incurred by the Company from
1992 to 1996. The income tax benefit for the 1996 transition period and for 1996
was attributable to the utilization of state net operating loss carryforwards.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
Net income for 1997 was $23,352 compared to net income for the 1996
transition period of $6,423 and a net loss for 1996 of $17,713. The basic
earnings per share for 1997 was $3.59 compared to basic earnings per share for
the 1996 transition period of $1.00 and basic losses per share for 1996 of
$4.24.
The increase in 1997 net income and earnings per share was primarily
due to the income tax benefit recognized upon reduction of the deferred tax
asset valuation reserve, less the impairment provision to write-down and
write-off certain assets. Net income and earnings per share for the 1996
transition period increased from the net loss in 1996 primarily due to the
non-recurring bankruptcy reorganization costs incurred in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The development, construction and operation of cogeneration projects
and other power generation facilities requires significant capital.
Historically, the Company has employed substantial leverage at both the project
and parent company level to finance its capital requirements. Debt financing at
the project level is typically nonrecourse to the parent. Nonrecourse project
financing agreements usually require initial equity investments at the project
level. The Company has financed such equity investments through cash generated
from operations and other borrowings, including borrowings at the parent level.
Almost all of the Company's operations are conducted through
subsidiaries and other affiliates. As a result, the Company depends almost
entirely upon their earnings and cash flow to service consolidated indebtedness,
including indebtedness of the parent, CogenAmerica. The
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<PAGE>
nonrecourse project financing agreements of certain subsidiaries and other
affiliates generally restrict their ability to pay dividends, make distributions
or otherwise transfer funds to the parent prior to the payment of other
obligations, including operating expenses, debt service and reserves.
At December 31, 1998, consolidated long-term indebtedness (including
current maturities) totals $285,096, consisting of nonrecourse project
borrowings in the aggregate amount of $197,908, project borrowings with
recourse to the parent of $21,775, $25,000 outstanding under a revolving
credit facility and borrowings from NRG Energy of $40,413. Of the total
long-term indebtedness, borrowings with recourse to the parent totaled
$87,188 at December 31, 1998, consisting of borrowings under the revolving
credit facility and from NRG Energy, and a guarantee by the parent of $21,775
of the Parlin and Newark project borrowings. NRG Energy also has provided a
corporate guarantee of $3,000, of certain pre-existing liabilities of Parlin
and Newark as of May 23, 1996.
At December 31, 1998, cash and cash equivalents totaled $3,568 and
restricted cash totaled $12,135. The restricted cash primarily represents
escrow funds required by the terms of credit agreements for the Newark,
Parlin and Morris projects.
Cash provided by operating activities was $17,571, $16,989 and $1,056
for 1998, 1997 and the 1996 transition period, respectively. In 1996 cash used
by operating activities was $8,050. Cash provided by operations in 1998
increased from 1997 primarily due to higher depreciation and amortization
expense. Cash provided by operating activities in 1997 increased from the 1996
transition period due to only six months of operations included in the 1996
transition period and improved working capital cash management. Cash used by
operating activities in 1996 resulted from the net loss incurred during the
period the Company emerged from bankruptcy.
Cash used by investing activities was $74,274, $14,484 and $776 in
1998, 1997 and the 1996 transition period, respectively. During 1996 cash
provided by investing activities was $1,604.
Cash used by investing activities in 1998 primarily represents
capital expenditures of $73,406 to complete construction of the Morris
project and upgrade other facilities, and net deposits of $3,578 into
restricted cash accounts as required by certain credit agreements. These uses
of cash were offset by proceeds of $2,686 from the sale of OES and other
assets.
Cash used by investing activities in 1997 primarily represents
capital expenditures of $5,858 for the Newark and Parlin Project improvements
and an equity contribution of $10,000 to the Grays Ferry Partnership. These
uses of cash were reduced by collection of notes receivable of $1,175 and
proceeds of $552 from the sale of certain assets.
Cash used by investing activities for the 1996 transition period
primarily resulted from expenditures of $1,315 for capital improvements and
project development activities, less net withdrawals from restricted cash
accounts.
Cash provided by investing activities in 1996 primarily reflected
$7,500 proceeds from the sale of certain subsidiaries in connection with the
Company's bankruptcy plan, less $1,783 for capital expenditures and project
development activities and less $5,156 for net deposits into restricted cash
accounts.
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<PAGE>
Cash provided by (used in) financing activities was $56,827, $(2,248),
$(2,115) and $7,385 for 1998, 1997, the 1996 transition period and 1996.
During 1998, proceeds from long-term debt totaled $67,771, consisting
of construction loan draws of $54,450, and $12,027 of loans from NRG Energy
related to the Morris project. Repayments of long-term debt totaled $10,142.
1998 Non-cash investing and financing activities include $23,890 for
acquisition of the Pryor Project and $6,230 of capital expenditures for the
Morris Project included in liabilities.
The Company evaluates current and forecasted cash flow as a basis for
financing operating requirements and capital expenditures. Management believes
there is sufficient liquidity from cash flow from operations and working capital
to finance recurring capital expenditures and to fund working capital
requirements, including scheduled debt service, for the next twelve months.
In May 1996, the Company's wholly-owned subsidiaries CogenAmerica
Newark and CogenAmerica Parlin entered into a credit agreement (the "Newark
and Parlin Credit Agreement") which established provisions for a $155,000
fifteen-year loan and a $5,000 five-year debt service reserve line of credit.
The loan is secured by all of CogenAmerica Newark's and CogenAmerica Parlin's
assets and a pledge of the capital stock of such subsidiaries. The Company
has guaranteed repayment of UP TO $21,775 of the amount outstanding under the
Credit Agreement. The interest rate on the outstanding principal is variable
based on, at the option of CogenAmerica Newark and CogenAmerica 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 the Newark and Parlin Credit
Agreement, CogenAmerica Newark and CogenAmerica 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 ($77,500 at December 31,
1998) at 6.9% plus the margin. At December 31, 1998, the principal amount
outstanding under the credit agreement was $134,927.
The Company used the proceeds of the loan under the Newark and Parlin
Credit Agreement to repay certain preexisting obligations of the Company
including $87,291 of indebtedness to NRG Energy. NRG Energy provided the Company
loans of which $40,413, $4,439, $14,388 and $101,679 was outstanding at December
31, 1998, 1997, 1996 and June 30, 1996, respectively.
CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company, owns
a one-third partnership interest in the Grays Ferry Project which commenced
operation in January 1998. In March 1996, the Grays Ferry Partnership entered
into a credit agreement with Chase 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 CogenAmerica Schuylkill the funding, if needed, for the
CogenAmerica Schuylkill capital contribution obligation to the Grays Ferry
Partnership. Prior to December 31, 1997, CogenAmerica Schuylkill had borrowed
$10,000 from NRG Energy under this loan agreement, of which $1,900 remained
outstanding to NRG Energy at December 31, 1998.
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In connection with its acquisition of the Morris Project,
CogenAmerica Funding, a wholly-owned subsidiary of the Company, 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. 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 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). In addition, 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-borrowers) 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.
Effective November 30, 1998 the Company and NRG Energy agreed to a First
Amendment to the Supplemental Loan Agreement that allowed the Company to
contribute the $22,000 of equity in installments to match the construction
draw payments. At December 31, 1998, $12,027 had been drawn and contributed
as equity. Subsequent to year end, additional draws and equity fundings have
been made and as of March 26, 1999, the entire $22,000 had been drawn and
contributed as equity. The Supplemental Loan Agreement calls for an interest
rate of prime plus 1.5%. Effective with the First Amendment the interest rate
was changed to prime plus 3.5% until the possible event of default related to
the Grays Ferry Project has been eliminated. This additional interest rate
resulted in an additional $35 of interest expense for the Morris Project in
1998. On February 16, 1999 NRG Energy agreed to reduce the interest rate
under the loan back to prime plus 1.5%. This adjustment was made effective
January 1, 1999. At December 31, 1998, $12,027 was due NRG Energy under the
Supplemental Loan Agreement.
On December 17, 1997, the Company entered into the MeesPierson Credit
Agreement providing for a $30,000 reducing revolving credit facility. The
facility is secured by the assets and cash flows of the PWD Project as well as
the distributable cash flows of the Parlin and Newark 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 PWD Project and $1,500 for general corporate purposes. The
MeesPierson 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 MeesPierson Credit Agreement. Repayment of the MeesPierson
Credit Agreement has not been accelerated and the lender has waived such default
and the Company has agreed not to draw any additional amounts under the
MeesPierson Credit Agreement. On August 14, 1998 the lender agreed to continue
the waiver on the default until July 1, 1999 by imposing a 2.0% increase in the
interest rate effective October 1, 1998. This additional interest rate increased
interest expense by $126 for the year ended December 31, 1998. On February 12,
1999 the lender agreed to a permanent waiver of the Grays Ferry Project cross
default and eliminated the 2.0% increase in the interest rate effective January
1, 1999. The Company also reduced the size of the facility to $25,000. The
repayment of the $25,000 is due in full on December 17, 2000.
The Company's principal credit agreements (including the Newark and
Parlin Credit Agreement) include cross-default provisions that generally permit
its lenders to accelerate the
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indebtedness owed thereunder, to decline to make available any additional
amounts for borrowing thereunder, and to exercise certain other remedies in
respect of any collateral securing such indebtedness 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. As a result, a default under one such other
instrument or agreement could have a material adverse effect on the Company by
causing one or more cross-defaults to occur under one or more of the Company's
principal credit agreements, potentially having one or more of the effects set
forth above and otherwise adversely affecting the Company's liquidity and
capital position.
During 1998 the Company incurred approximately $1,001 of third-party
costs related to a capital markets financing transaction expected to be
completed during 1999. These costs have been deferred and are included in the
balance sheet as "Deferred financing costs, net." If the Company elects to
pursue an alternative financing, such as through the commercial bank market, or
if the financing currently contemplated for the capital markets is indefinitely
delayed or discontinued, it will have to expense the financing costs that have
been deferred.
On October 9, 1998, CogenAmerica Pryor, a wholly-owned subsidiary of
CogenAmerica, acquired from MCPC the entire interest in a 110 MW cogeneration
project, the Pryor project, located in the Mid-America Industrial Park, in
Pryor, Oklahoma. CogenAmerica Pryor acquired the Pryor Project by purchasing
from MCPC all of the issued and outstanding stock of OLAC for a cash purchase
price of approximately $23,900.
NRG Energy has loaned the Company and CogenAmerica Pryor
approximately $23,900 to finance the acquisition. The loan is a six-year term
facility calling for principal and interest payments on a quarterly basis,
based on project cash flows. The interest rate on the note relating to such
loan was initially set at prime rate plus 3.5% and such rate reduces by two
percentage points upon the occurrence of certain events related to
elimination of default risk under the loan. On February 16, 1999 NRG Energy
agreed to reduce the interest rate under the loan to prime plus 1.5%. This
adjustment was made effective January 1, 1999.
SALE OF OES
On November 5, 1998 the Company sold OES, a wholly-owned subsidiary of
the Company, in a stock transaction to an unrelated third party. The sales price
was $2,000 and the Company recorded a gain on the sale. The Company recorded
revenue from OES of $8,343 for fiscal 1998. This transaction did not have a
material impact on the Company's results of operations or financial position.
YEAR 2000
The Year 2000 issue refers generally to the data structure problem that
may prevent systems from properly recognizing dates after the year 1999. The
Year 2000 issue affects information technology ("IT") systems, such as computer
programs and various types of electronic equipment that process date information
by using only two digits rather than four digits to define the applicable year,
and thus may recognize a date using "00" as the year 1900 rather than the year
2000. The issue also affects some non-IT systems, such as devices which rely on
a microcontroller to process date information. The Year 2000 issue could result
in system failures or miscalculations, causing disruptions of a company's
operations. Moreover, even if a company's
49
<PAGE>
systems are Year 2000 compliant, a problem may exist to the extent that the data
that such systems process is not.
The following discussion contains forward-looking statements reflecting
management's current assessment and estimates with respect to the Company's Year
2000 compliance efforts and the impact of Year 2000 issues on the Company's
business and operations. Various factors, many of which are beyond the control
of the Company, could cause actual plans and results to differ materially from
those contemplated by such assessments, estimates and forward-looking
statements. Some of these factors include, but are not limited to,
representations by the Company's vendors and counterparties, technological
advances, economic considerations and consumer perceptions. The Company's Year
2000 compliance program is an ongoing process involving continual evaluation and
may be subject to change in response to new developments.
THE COMPANY'S STATE OF READINESS
The Company has implemented a Year 2000 compliance program designed to
ensure that the Company's computer systems and applications will function
properly beyond 1999. The Company believes that it has allocated adequate
resources for this purpose and expects its Year 2000 conversions to be completed
on a timely basis. In light of its compliance efforts, the Company does not
believe that the Year 2000 issue will materially adversely affect operations or
results of operations, and does not expect implementation to have a material
impact on the Company's financial statements. However, there can be no assurance
that the Company's systems will be Year 2000 compliant prior to December 31,
1999, or that the failure of any such system will not have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, to the extent the Year 2000 problem has a material adverse effect on
the business, operations or financial condition of third parties with whom the
Company has material relationships, such as vendors, suppliers and customers,
the Year 2000 problem could have a material adverse effect on the Company's
business, results of operations and financial condition.
IT SYSTEMS. The Company has reviewed and continues to review all of its
IT systems as they relate to the Year 2000 issue. The Company's accounting
system has been upgraded to alleviate any potential Year 2000 issues. The
Company outsources its human resource and payroll systems and is in the process
of working with the outside vendor to identify and correct any potential Year
2000 issues. This process is expected to be complete and any changes implemented
by December 31, 1999. The Company's billing systems are either provided by the
customer or are performed internally on microcomputer systems. In these cases,
the collection of data is the most important feature and any impact from a Year
2000 issue is expected to be immaterial.
NON-IT SYSTEMS. As indicated above, the Company is dependent upon some
of its customers for billing data related to the amount of electricity and steam
sold and delivered during the month. For the most part, the collection of this
data is done mechanically rather than electronically. Only data storage is
managed electronically. The collection of this data also occurs within the
control systems of the Company's various facilities. The Company has requested
that the control system vendors audit their software to identify any potential
Year 2000 issues and provide recommendations for alleviating any potential
problems. This process has been completed for all of the Company's facilities
and the various solutions have been implemented. The Company does not believe
that any further upgrades, if necessary, will be material to its financial
condition or results of operation.
50
<PAGE>
YEAR 2000 ISSUES RELATING TO THIRD PARTIES. As described above, the
Company, in some cases, is dependent upon certain customers to provide billing
data. However, the Company also captures and processes this data as a
redundancy. The Company's control systems have been upgraded as described above
and the Company does not believe that any loss of data will occur due to a Year
2000 issue. In addition, the Company's third parties are major utilities and
sophisticated industrial concerns who are participants in sophisticated Year
2000 readiness programs. The Company has participated in numerous vendor surveys
to determine the readiness of various Company systems for any potential Year
2000 issues. In addition, the Company has obtained written disclosure from a
number of vendors relating to their Year 2000 preparedness.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The Company's costs to review and assess the Year 2000 issue have not
been material. The Company believes that its future costs to implement Year 2000
solutions will also be immaterial to the financial statements.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES
The Company believes that its most likely Year 2000 worst case scenario
would be the loss of billing data to utilities and industrial companies which
purchase the Company's electricity and steam. This billing information, as
explained above, is also captured by the Company's control systems at its
various facilities.
THE COMPANY'S CONTINGENCY PLANS
As described above, the contingency plan for the loss of billing data
is to use the data provided by the Company's internal control systems which are
in the process of being upgraded to eliminate any Year 2000 issues.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. The Company adopted the
statement in 1998. The adoption had no affect on the Company's results of
operations, cash flows or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 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 area and major customers. As required, the Company adopted the
disclosure requirements for annual financial statements in 1998. The interim
reporting requirements will be adopted beginning with the Company's quarterly
report on Form 10-Q for the quarter ending March 31, 1999.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting the Costs of
Start-Up Activities," which is effective for financial statements for fiscal
years beginning after December 15, 1998. For the
51
<PAGE>
purposes of this SOP, start-up activities are broadly defined as those one-time
activities related to opening a new facility, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
operation. Start-up activities are also defined to include activities related to
organizing a new entity. The Company assessed the impact and adopted SOP 98-5 as
of December 31, 1998, and determined it to be immaterial to the consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 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 No. 133 will have on its earnings or financial
position, but it may increase earnings volatility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk is primarily impacted by changes in interest
rates and changes in natural gas prices.
The Company's strategy is to mitigate fuel supply price risk at the
facilities through the use of several methods. At the Newark and Parlin
Projects, the customer is responsible for natural gas supply and delivery. The
customer is the fuel manager at the Morris Project with all costs of supplying
gas treated as pass-through to the customer. The Pryor Project bases sales
prices of energy on the weighted average cost of fuel. The Gray's Ferry Project
has obtained fuel supply contracts to limit risk of fluctuating fuel prices. The
Company does not hold or issue derivative instruments to hedge future fuel price
fluctuations.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including debt
obligations and interest rate swaps. For debt obligations the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by contractual maturity dates. The information
is presented in U.S. dollar equivalents, which is the reporting currency. The
instrument's actual cash flows are denominated in both U.S. dollars ($US) and
British Sterling (L), as indicated in parentheses.
52
<PAGE>
<TABLE>
<CAPTION>
Expected Maturity Date
--------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter Total Fair
Value
(US$ Equivalent)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
- ----------------------------
Long-Term Debt:
Variable Rate ($US) $ 13,901 $ 39,958 $ 22,401 $ 19,861 $ 19,148 $169,415 $284,684 $284,684
Average Interest Rate 7.94% 8.19% 8.29% 7.98% 8.15% 6.63% 7.24%
Fixed Rate (UK Sterling) $ 25 $ 28 $ 31 $ 34 $ 38 $ 256 $ 412 $ 412
Average Interest Rate 10.27% 10.27% 10.27% 10.27% 10.27% 10.27% 10.27%
--------------------------------------------------------------------------------------
Interest Rate Derivatives
- ----------------------------
Variable to Fixed ($US) $ 4,805 $ 4,301 $ 5,231 $ 5,464 $ 4,650 $ 43,013 $ 67,464 $ 6,060
Average Pay Rate 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90%
Average Receive Rate 6.13% 6.13% 6.13% 6.13% 6.13% 6.13% 6.13%
</TABLE>
The average interest on debt outstanding was 7.71% during 1998. For
additional information concerning the Company's debt obligations, please see
Notes 9 and 10 to the Company's Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements of the Company and its
subsidiaries and independent auditors' report thereon are included as pages F-1
through F-24 immediately following the signature page of this Annual Report on
Report on Form 10-K, and is incorporated herein by reference:
<TABLE>
<S> <C>
Report of Independent Accountants .................................................................... F-1
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 .................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1998, December 31,
1997, the six months ended December 31, 1996 and the year
ended June 30, 1996 ............................................................................. F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1998, December 31, 1997, the six months ended December 31,
1996 and the year ended June 30, 1996 ........................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1998, December 31, 1997, the six months ended December 31,
1996 and the year ended June 30, 1996 ........................................................... F-5
Notes to Consolidated Financial Statements ......................................... F-6 through F-28
</TABLE>
See item 14(a)(2) for the audited financial statements of the Grays
Ferry Partnership and the Independent Accountants Report thereon.
53
<PAGE>
All other supplementary financial information has been omitted because
of the absence of the conditions under which it is required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the heading "Proposal One: Election of
Directors" and the subheadings "Executive Officers of CogenAmerica" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement relating
to the annual meeting of shareholders of the Company, scheduled to be held on
May 20, 1999, is incorporated herein by references.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the headings "Report of the
Compensation Committee on Executive Compensation," "Performance Graph,"
"Executive and Director Compensation," and "Related Party Transactions" in the
1999 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the heading "Security Ownership of
Certain Beneficial Owners and Management" in the 1999 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the subheading "Compensation Committee
Interlocks and Insider Participation" and the heading "Related Party
Transactions" in the 1999 Proxy Statement is incorporated herein by reference.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report.
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
Subsidiaries and report of independent auditors thereon are included as Pages
F-1 through F-24 immediately following the signature page of this Annual Report
on Report on Form 10-K.
Index to Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and December 31,
1997
Consolidated Statements of Operations for the years ended December 31,
1998, December 31, 1997, the six months ended December 31, 1996 and for
the year ended June 30, 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, December 31, 1997, the six months ended
December 31, 1996 and for the year ended June 30, 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, December 31, 1997, the six months ended December 31, 1996 and for
the year ended June 30, 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Financial Statements for the years ended December 31, 1998 and 1997 and
Independent Accountants Report for the Grays Ferry Cogeneration Partnership
All schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
3. EXHIBITS
The "Index to Exhibits" following the Consolidated Financial Statements
of the Company and its subsidiaries is incorporated herein by reference.
56
<PAGE>
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the last quarter of
the calendar year ended December 31, 1998:
1. Current Report on Form 8-K dated November 12, 1998 reporting
information under Item 5.
2. Current Report on Form 8-K dated October 26, 1998 reporting
information under Item 5.
3. Current Report on Form 8-K dated October 8, 1998 reporting
information under Items 2 and 7.
57
<PAGE>
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COGENERATION CORPORATION OF AMERICA
Date: March 26, 1999 /s/ TIMOTHY P. HUNSTAD
---------------------------------------------------
By: Timothy P. Hunstad
Title: Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ JULIE A. JORGENSEN Interim President and March 26, 1999
- ------------------------------------
By: Julie A. Jorgensen Chief Executive Officer and Director
/s/ TIMOTHY P. HUNSTAD Vice President and March 26, 1999
- ------------------------------------
By: Timothy P. Hunstad Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ DAVID H. PETERSON Chairman of the Board of Directors March 26, 1999
- ------------------------------------
By: David H. Peterson
/s/ LAWRENCE I. LITTMAN Director March 26, 1999
- ------------------------------------
By: Lawrence I. Littman
/s/ CRAIG A. MATACZYNSKI Director March 26, 1999
- ------------------------------------
By: Craig A. Mataczynski
/s/ MICHAEL A. O'SULLIVAN Director March 26, 1999
- ------------------------------------
By: Michael A. O'Sullivan
/s/ SPYROS S. SKOURAS, JR. Director March 26, 1999
- ------------------------------------
By: Spyros S. Skouras, Jr.
/s/ CHARLES J. THAYER Director March 26, 1999
- ------------------------------------
By: Charles J. Thayer
/s/ RONALD J. WILL Director March 26, 1999
- ------------------------------------
By: Ronald J. Will
</TABLE>
58
<PAGE>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Cogeneration Corporation of America
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders'
equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of Cogeneration Corporation of
America and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended
December 31, 1998 and 1997, the six months ended December 31, 1996,
and the year ended June 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, on
April 30, 1996, the Company, formerly known as O'Brien Environmental
Energy, Inc., was reorganized and emerged from bankruptcy.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 19, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,568 $ 3,444
Restricted cash and cash equivalents 12,135 8,527
Accounts receivable, net 14,326 11,099
Receivables from related parties 130 87
Notes receivable -- 27
Inventories 2,683 2,134
Other current assets 640 1,022
---------------- ----------------
Total current assets 33,482 26,340
Property, plant and equipment, net 244,040 127,574
Projects under development -- 46,376
Investments in equity affiliates 18,179 13,381
Deferred financing costs, net 6,503 5,643
Deferred tax assets, net -- 7,996
Other assets 16,470 584
---------------- ----------------
Total assets $ 318,674 $ 227,894
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of loans and payables due NRG Energy $ 7,020 $ 2,864
Current portion of nonrecourse long-term debt 8,060 7,106
Current portion of recourse long-term debt 1,550 1,914
Short-term borrowings 1,887 1,313
Accounts payable 8,800 5,136
Prepetition liabilities 803 775
Other current liabilities 4,227 3,083
---------------- ----------------
Total current liabilities 32,347 22,191
Loans due NRG Energy 36,123 4,439
Nonrecourse long-term debt 189,848 143,697
Recourse long-term debt 45,225 46,323
Deferred tax liabilities, net 2,793 --
Other liabilities 8,525 15,446
---------------- ----------------
Total liabilities 314,861 232,096
Stockholders' equity (deficit):
Common stock, par value $.01, 50,000,000 shares
authorized; 6,871,069 and 6,836,769 shares issues
and outstanding, respectively 68 68
Additional paid-in capital 65,715 65,715
Accumulated deficit (61,590) (69,592)
Accumulated other comprehensive income (loss) (380) (393)
---------------- ----------------
Total stockholders' equity (deficit) 3,813 (4,202)
---------------- ----------------
Total liabilities and stockholders' equity (deficit) $ 318,674 $ 227,894
---------------- ----------------
---------------- ----------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
<TABLE>
<CAPTION>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Six Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, June 30,
1998 1997 1996 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Energy revenues $ 52,216 $ 43,210 $ 21,669 $ 66,623
Equipment sales and services 19,342 19,415 15,607 25,344
Rental revenues 2,438 2,179 1,062 1,895
Development fees and other -- -- 1,578 2,685
-------------- ------------- ------------- -------------
73,996 64,804 39,916 96,547
Cost of energy revenues 23,462 14,841 7,229 45,663
Cost of equipment sales and services 16,929 17,037 12,365 22,153
Cost of rental revenues 1,954 1,817 834 1,406
Cost of development fees and other -- -- 1,559 2,531
-------------- ------------- ------------- -------------
42,345 33,695 21,987 71,753
-------------- ------------- ------------- -------------
Gross profit 31,651 31,109 17,929 24,794
Selling, general and administrative
expenses 9,415 9,479 6,149 12,612
Provision for impaired assets -- 5,274 -- 180
-------------- ------------- ------------- -------------
Income (loss) from operations 22,236 16,356 11,780 12,002
Interest and other income 1,715 1,205 251 508
Reorganization costs -- -- -- (12,101)
Interest and debt expense (15,855) (14,768) (7,681) (18,646)
Equity in earnings of affiliates 4,784 105 162 61
-------------- ------------- ------------- -------------
Income (loss) before income taxes 12,880 2,898 4,512 (18,176)
Provision for income taxes (benefit) 4,878 (20,454) (268) (463)
-------------- ------------- ------------- -------------
Income (loss) before extraordinary item 8,002 23,352 4,780 (17,713)
Extraordinary item, net of income taxes -- -- 1,643 --
-------------- ------------- ------------- -------------
Net income (loss) $ 8,002 $ 23,352 $ 6,423 $ (17,713)
-------------- ------------- ------------- -------------
Basic earnings (loss) per share:
Before extraordinary item $ 1.17 $ 3.59 $ 0.75 $ (4.24)
Extraordinary item -- -- 0.25 --
-------------- ------------- ------------- -------------
$ 1.17 $ 3.59 $ 1.00 $ (4.24)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Diluted earnings (loss) per share:
Before extraordinary item $ 1.15 $ 3.48 $ 0.74 $ (4.24)
Extraordinary item - - 0.25 -
-------------- ------------- ------------- -------------
$ 1.15 $ 3.48 $ 0.99 $ (4.24)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Weighted average shares outstanding
Basic 6,837 6,511 6,430 4,182
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Diluted 6,966 6,725 6,463 4,182
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) ACCUMULATED
ADDITIONAL ACCUMU- OTHER COM- TOTAL
COMMON PREFERRED PAID-IN LATED PREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT INCOME (LOSS) EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 $ 169 $ -- $41,353 $(81,654) $ (626) $(40,758)
Net loss -- -- -- (17,713) -- (17,713)
Currency translation adjustment -- -- -- -- (223) (223)
------
Comprehensive Income (Loss) (17,936)
Plan of reorganization:
Purchase of common stock by NRG Energy 27 -- 21,151 -- -- 21,178
Exchange class A and B common stock
for new common shares, retire
treasury shares (132) -- 68 -- 64 --
Issue preferred shares to Wexford -- 49 4,908 -- -- 4,957
Redemption of preferred shares -- (49) (4,908) -- -- (4,957)
Preferred dividends -- -- (57) -- -- (57)
-------- ---------- ---------- ---------- ------- ---------
Balance, June 30, 1996 64 -- 62,515 (99,367) (785) (37,573)
Net income -- -- -- 6,423 -- 6,423
Currency translation adjustment -- -- -- -- 433 433
---------
Comprehensive Income (Loss) 6,856
Payment received on treasury stock
resulting from reorganization -- -- 105 -- -- 105
Issue restricted stock -- -- 99 -- -- 99
-------- ---------- ---------- ---------- ------- ---------
Balance, December 31, 1996 64 -- 62,719 (92,944) (352) (30,513)
Net income -- -- -- 23,352 -- 23,352
Currency translation adjustment -- -- -- -- (41) (41)
---------
Comprehensive Income (Loss) 23,311
NRG Energy conversion of
stock option 4 -- 2,996 -- -- 3,000
-------- ---------- ---------- ---------- ------- ---------
Balance, December 31, 1997 68 -- 65,715 (69,592) (393) (4,202)
Net income -- -- -- 8,002 -- 8,002
Currency translation adjustment -- -- -- -- 13 13
---------
Comprehensive Income (Loss) 8,015
-------- ---------- ---------- ---------- ------- ---------
Balance, December 31, 1998 $ 68 $ -- $65,715 $(61,590) $(380) $ 3,813
-------- ---------- ---------- ---------- ------- ---------
-------- ---------- ---------- ---------- ------- ---------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
COGENERATION CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1996 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,002 $ 23,352 $ 6,423 $ (17,713)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary item, net of income taxes -- -- (1,643) --
Depreciation and amortization 9,791 7,840 4,869 9,441
Deferred tax (benefit) expense 3,589 (21,400) (778) (904)
Provision for impaired assets -- 5,274 -- 180
Gain on disposition of property and equipment -- 756 59 --
Equity in earnings of affiliates (4,784) -- -- --
(Gain) on disposal of business (807) -- -- --
Bankruptcy professional fees accrued -- -- -- 432
Other, net -- (212) 148 (216)
Changes in operating assets and liabilities:
Accounts receivable (3,453) 772 (1,011) 730
Inventories (931) 621 (13) 615
Receivables from related parties (43) 97 275 223
Other assets 416 178 (277) --
Payables to related parties (135) -- -- --
Accounts payable and other current liabilities 5,926 (289) (6,996) (838)
--------- --------- --------- ---------
Net cash provided by (used in) operating
activities 17,571 16,989 1,056 (8,050)
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures and project development costs (73,406) (5,858) (1,315) (1,783)
Proceeds from sale of property and equipment 686 552 104 --
Proceeds from sale of subsidiaries and projects 2,000 -- -- 7,500
Investment in equity affiliates -- (10,000) -- --
Collections on notes receivable 24 1,175 10 816
Withdrawals from (deposits into) restricted cash
accounts - net (3,578) (353) 545 (5,156)
Other, net -- -- (120) 227
--------- --------- --------- ---------
Net cash (used in) provided by investing activities (74,274) (14,484) (776) 1,604
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt 55,744 24,582 95,000 60,226
Proceeds from NRG Energy loans 12,027 10,000 -- 128,078
Repayments of NRG Energy loans -- (16,949) (86,035) (26,398)
Repayments of long-term debt (10,142) (16,857) (6,098) (92,816)
NRG Energy capital contribution -- -- -- 21,178
Net (repayments) proceeds of short-term borrowings 574 (1,072) 595 193
Payments on prepetition liabilities -- (1,762) (4,660) (73,483)
Deferred financing costs (1,376) (190) (1,121) (4,579)
Payment received on treasury stock resulting from
reorganization -- -- 105 --
Issuance of restricted stock -- -- 99 --
Redemption of and dividends on preferred shares -- -- -- (5,014)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities 56,827 (2,248) (2,115) 7,385
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 124 257 (1,835) 939
Cash and cash equivalents at beginning of year 3,444 3,187 5,022 4,083
--------- --------- --------- ---------
Cash and cash equivalents at end of year $ 3,568 $ 3,444 $ 3,187 $ 5,022
--------- --------- --------- ---------
--------- --------- --------- ---------
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Acquisition of subsidiary financed with long-term
debt from NRG Energy $ 23,890 $ -- $ -- $ --
Capital expenditures included in other liabilities 6,230 15,446 -- --
Conversion of NRG Energy debt to common stock -- 3,000 -- --
Interest paid 18,160 15,887 12,472 18,926
Income taxes paid 2,024 1,477 495 110
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED BUT NOT DEFINED IN THESE NOTES
TO FINANCIAL STATEMENTS, PLEASE SEE THE SELECTED DEFINITIONS THAT IMMEDIATELY
PRECEDE ITEM 1.
1. Business and Emergence from Bankruptcy
Cogeneration Corporation of America ("CogenAmerica" or the "Company"), formerly
known as NRG Generating (U.S.) Inc., is an independent power producer pursuing
"inside-the-fence" cogeneration projects in the U.S. The Company is engaged
primarily in the business of developing, owning and managing the operation of
cogeneration projects which produce electricity and thermal energy for sale
under long-term contracts with industrial and commercial users and public
utilities. The Company is currently focusing on natural gas-fired cogeneration
projects with long-term contracts for substantially all of the output of such
projects. In addition, the Company sells and rents power generation and
standby/peak shaving equipment and services.
On April 30, 1996, O'Brien Environmental Energy, Inc. ("O'Brien"), the formerly
named parent company, emerged from bankruptcy pursuant to the Plan submitted by
NRG Energy, Inc. ("NRG Energy"), the O'Brien Official Committee of Equity
Security Holders and Wexford Management Corporation ("Wexford") and approved by
the U.S. Bankruptcy Court for the District of New Jersey (the "Court"). The Plan
awarded NRG Energy the rights to acquire a 41.86% equity interest in the Company
and generally provided for full and immediate payment of all undisputed
prepetition liabilities and included a provision for post-petition interest.
O'Brien was renamed on the April 30, 1996 closing date to NRG Generating (U.S.)
Inc.
O'Brien filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code with the Court on September 28, 1994 to pursue
financial restructuring efforts under the protection afforded by the U.S.
bankruptcy laws. The decision to seek Chapter 11 relief was based on the
conclusion that action had to be taken to preserve its business relationships,
restructure its debt and maintain the operational strength and assets of the
Company. The Company continued its normal operations as Debtor-in-Possession
during the bankruptcy period but could not engage in transactions outside the
ordinary course of business without approval of the Court.
On April 30, 1996, NRG Energy funded approximately $107,418 in accordance with
the Plan and O'Brien's existing Class A and Class B common stock was canceled
and became exchangeable for 3,764,457 (58.14%) shares of new common stock. The
NRG Energy funding was comprised of: $71,240 advanced under the terms of three
loan agreements; $21,178 to purchase 2,710,357 (41.86%) of new common stock;
$7,500 for the purchase of ten wholly-owned subsidiaries of O'Brien; and $7,500
deposited with the Company's stock transfer agent representing a cash
distribution of approximately $0.44 per share by NRG Energy to O'Brien's Class A
and Class B common stockholders.
On April 30, 1996 the Company also issued 49,574 shares of series A, 13.5%
cumulative preferred stock to Wexford in satisfaction of $4,957 of prepetition
unsecured claims allowed by the Court. The preferred shares were redeemed by the
Company in May 1996 for $4,957 plus $57 in dividends.
The funds received from NRG Energy were disbursed according to the Plan's terms
which generally provided for full payment (or cure/reinstatement) of all
undisputed prepetition liabilities including the payment of post-petition
interest on most prepetition obligations. Additionally, disbursements were made
to certain creditors of subsidiary companies whose obligations were not included
in prepetition liabilities and for professional fees incurred during the
bankruptcy proceedings. Certain other bankruptcy claims filed with the Court
remain in dispute and are classified on the balance sheet as
F-6
<PAGE>
"prepetition liabilities." An escrow fund has been established to fully reserve
the remaining disputed claims submitted to the Court. Any remaining escrow funds
resulting from the Court disallowing any disputed claims will be disbursed pro
rata to all reinstated creditor claimholders as additional post-petition
interest.
In accordance with the Plan, on April 30, 1996 the Company and Wexford entered
into a Liquidating Asset Management Agreement whereby Wexford agreed to assist
the Company with the possible liquidation of certain specified assets consisting
of (a) the Company's equipment sales, rental and services business operated by
its subsidiaries OES and PUMA, (b) the PWD Project, (c) certain unused
equipment, and (d) American Hydrotherm Corporation ("American Hydrotherm") and
two other related subsidiaries. During 1996 and 1997, the unused equipment,
American Hydrotherm and the two other related subsidiaries were sold or
otherwise disposed. In the fourth quarter of 1997, the board of directors
decided to retain the PWD Project and determined that the equipment sales,
rental and services business is not a part of the Company's strategic plan for
the future and would be disposed. Consistent with the board of directors'
determination to exit this business, OES was sold in November 1998 (see Note 6)
and possible alternatives for the disposition of PUMA continued to be pursued.
In accordance with the agreement and as approved by the Court, the Company paid
Wexford $1,219, and $281 in compensation for services during the year ended
December 31, 1997 and six months ended December 31, 1996.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of all majority-owned
subsidiaries and all significant intercompany balances 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.
Effective July 1, 1996, the Company changed its year end from June 30 to
December 31. The Company filed a transition Report on Form 10-K for the period
July 1, to December 31, 1996. The periods presented in the Company's
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows are for the twelve months ended December 31, 1998 and 1997, the six
months ended December 31, 1996 and the twelve months ended June 30, 1996. The
twelve months ended June 30, 1996 are sometimes referred to in these Notes to
Consolidated Financial Statements as fiscal 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
REORGANIZATION COSTS AND PREPETITION LIABILITIES
Expenses incurred after filing bankruptcy related to the Company's
reorganization and restructuring efforts have been presented in the consolidated
statement of operations as reorganization costs. Liabilities which remain
subject to the bankruptcy proceeding are classified on the balance sheet as
prepetition liabilities and include provisions for post-petition interest.
F-7
<PAGE>
REVENUE RECOGNITION
Energy revenues from cogeneration projects are recognized as electricity and
steam are delivered. Revenue from sales and rental of power generation equipment
are recognized upon shipment or over the term of the rental. Development fee
revenue is generally recognized on a cost recovery basis as cash is received
(without future lending provisions).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
INVENTORIES
Inventories, consisting principally of power generation equipment and related
parts held for sale, are valued at the lower of cost (determined primarily by
the specific identification method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated depreciation.
When assets are disposed of, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains or losses are included in
results of operations. The cost of property, plant and equipment, net of
estimated salvage value is depreciated using the straight-line method over the
useful lives of the assets which range from five to thirty years. It is
reasonably possible that the estimated useful lives or salvage values could
differ materially in the near term from the amounts assumed in arriving at
current depreciation expense. These estimates are affected by such factors as
the Company's overhaul, repair and maintenance activities, the ability of the
Company to continue selling electricity and steam to customers under existing
long-term contracts, changes in estimated prices of electricity and steam as
well as alternative sources of energy and changes in the regulatory environment.
Cost of maintenance and repairs is charged to expense as incurred. Betterments
and improvements are capitalized. During the years ended December 31, 1998 and
1997, the Company capitalized interest in connection with the construction of
power plants of $4,465 and $744, respectively. No interest was capitalized
during the six months ended December 31, 1996 or the year ended June 30, 1996.
PROJECT DEVELOPMENT COSTS
Project development costs consist of fees, licenses, permits, site testing, bids
and other charges, including employee costs, incurred incidental to specific
projects under development. Project development costs are expensed in any period
in which management determines the costs to be unrecoverable.
DEFERRED FINANCING COSTS
Financing costs are deferred and amortized on a straight-line basis over the
term of the related debt, which is comparable to results using the effective
interest method. Interest expense includes amortization of $516, $407, $199, and
$1,480 for the years ended December 31, 1998 and 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively. Accumulated
amortization was $1,101 and $585 at December 31, 1998 and 1997, respectively.
OTHER ASSETS
Other assets include $16,470 (net of accumulated amortization of $110) at
December 31, 1998 for
F-8
<PAGE>
capitalized project development costs related to the Morris Project. The
capitalized project development costs are amortized by the straight-line
method over the 25-year life of the project.
NONRECOURSE LONG-TERM DEBT
Nonrecourse long-term debt consists of project financing for which the repayment
obligation is limited to specific project subsidiaries.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109. SFAS No. 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and tax basis of other assets and liabilities. Valuation allowances are recorded
when it is more likely than not that a tax benefit will not be realized.
INTEREST RATE SWAP AGREEMENT
The Company has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates on certain of its variable rate long-term
debt. The differentials paid or received under the swap agreement are accrued
and recorded as adjustments to interest expense.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries have been translated in accordance with
SFAS No. 52, whereby assets and liabilities are translated at rates of exchange
existing at the balance sheet date and revenues and expenses are translated at
the average rates of exchange for the period.
CONCENTRATION OF CREDIT RISK
The Company primarily sells electricity and steam to industrial and commercial
users and public utilities under long-term agreements. The Company also sells,
rents and services power generation equipment to various entities worldwide. The
Company performs on-going credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations.
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' equity (deficit).
3. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. The Company adopted the statement in 1998 and
displays comprehensive income on its consolidated statement of stockholders'
equity (deficit). The Company's comprehensive income is comprised of net income
and foreign currency translation adjustments.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public companies report
F-9
<PAGE>
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued tot he public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. The
Company adopted the disclosure requirements for annual financial statements in
1998. The interim reporting requirements will be adopted beginning with the
Company's quarterly report on Form 10-Q for the quarter ending March 31, 1999.
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-5, "Reporting the Costs of Start-Up
Activities," which is effective for financial statements for fiscal years
beginning after December 15, 1998. For purposes of this SOP, start-up activities
are broadly defined as those one-time activities related to opening a new
facility, conducting business in a new territory, conducting business with a new
class of customer or beneficiary, initiating a new process in an existing
facility, or commencing some new operation. Start-up activities are also defined
to include activities related to organizing a new entity. The Company assessed
the impact and adopted SOP 98-5 as of December 31, 1998, and determined it to be
immaterial to the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is required to be adopted for
fiscal years beginning after June 15, 1999 (fiscal year 2000 for the Company).
SFAS No. 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 No. 133 will have on its earnings or financial
position, but it may increase earnings volatility.
4. Restricted Cash and Cash Equivalents
Cash and cash equivalents that are not fully available for use in operations are
classified as restricted. Restricted cash and cash equivalents relate primarily
to debt service reserve accounts required by the nonrecourse project debt
agreements for CogenAmerica Newark, CogenAmerica Parlin and CogenAmerica Morris
and to bankruptcy escrow accounts.
Restricted cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Bankruptcy escrow accounts $ 803 $ 770
Debt service reserve accounts 11,332 7,757
----------- -----------
$ 12,135 $ 8,527
----------- -----------
----------- -----------
</TABLE>
F-10
<PAGE>
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Plant and equipment $ 291,098 $ 169,839
Furniture and fixtures 297 687
Land, buildings and improvements 464 1,528
Other equipment -- 37
------------- -------------
291,859 172,091
Accumulated depreciation and amortization (47,819) (44,517)
------------- -------------
$ 244,040 $ 127,574
------------- -------------
------------- -------------
</TABLE>
Depreciation expense was $8,581, $7,320, $3,626 and $7,858, for the years ended
December 31, 1998, 1997, the six months ended December 31, 1996, and the year
ended June 30, 1996, respectively.
Plant and equipment relates primarily to the Newark, Parlin, Morris and Pryor
cogeneration projects and the PWD Project standby facility.
The Newark Project consists of a 58 MW cogeneration power plant in Newark, New
Jersey which commenced operations in November 1990 and is supplying electricity
and steam pursuant to 25-year supply contracts. The Project is a qualifying
facility as defined in the Public Utility Regulatory Policies Act of 1978.
The Parlin Project consists of a 122 MW cogeneration power plant in Parlin, New
Jersey which commenced operations in June 1991 and is supplying up to 114 MW of
electricity pursuant to a 20-year electric supply contract and steam pursuant to
a 30-year supply contract. Parlin relinquished its claim to QF status and filed
rates as a public utility under the Federal Power Act. However, Parlin has been
determined to be an exempt wholesale generator (EWG). The Parlin project has
also changed from a full base load operation to a partial base load/partial
dispatchable project.
The Morris Project consists of a 117 MW cogeneration power plant in Morris,
Illinois which commenced operations in November 1998 and is supplying
electricity and steam pursuant to 25 year supply contracts. The Morris Project
is a qualifying facility as defined in the Public Utility Regulatory Policies
Act of 1978.
The Pryor Project was acquired in October 1998 and consists of a 110 MW
cogeneration power plant in Pryor, Oklahoma. The Pryor Project sells 110 MW of
capacity and varying amounts of energy to Oklahoma Gas and Electric Company
under a contract through 2007 and steam to a number of industrial users under
contracts with various termination dates ranging from 1998 and 2007. In
addition, the Pryor Project sells varying amounts of energy to the Public
Service of Oklahoma at its avoided cost. The Pryor Project is a qualifying
facility as defined in the Public Utility Regulatory Policies Act of 1978.
The PWD Project is a 22 MW standby/peak shaving facility in Philadelphia,
Pennsylvania which commenced operations in September 1993 and is supplying
electricity pursuant to 20-year supply contracts. The Company owns an 83%
interest in this project.
F-11
<PAGE>
6. Acquisitions and Divestitures
PRYOR PROJECT
On October 9, 1998, CogenAmerica Pryor, a wholly-owned subsidiary of
CogenAmerica, acquired from Mid Continent Power Company, L.L.C. ("MCPC") all of
the issued and outstanding stock of Oklahoma Loan Acquisition Corporation
("OLAC"), the owner of the Pryor Project. MCPC is owned 50% by NRG Energy and
50% by parties affiliated with Decker Energy International, Inc. The purchase
price was approximately $23,900, including related acquisition costs, and was
financed with borrowings from NRG Energy (See Note 10). The acquisition was
accounted for by the purchase method. Accordingly, the operating results of OLAC
have been included in the Company's consolidated financial statements since the
date of acquisition.
The following unaudited pro forma consolidated financial information assumes the
acquisition had occurred on January 1 of each year:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues $86,784 $74,943
Net Income $ 7,158 $19,955
Earnings per share:
Basic $ 1.05 $ 3.06
Diluted $ 1.03 $ 2.97
</TABLE>
The pro forma consolidated results are not indicative of the actual results that
would have occurred had the acquisition been completed as of the beginning of
each period presented, nor are they necessarily indicative of results that will
be obtained in the future.
MORRIS PROJECT
On December 29, 1997, CogenAmerica Funding, a wholly-owned subsidiary of the
Company, acquired all of the issued and outstanding stock of Morris LLC from NRG
Energy for a purchase price of $5,000. At the date of acquisition, Morris LLC
had no operations, but was developing and constructing the 117 MW cogeneration
facility referred to as the Morris Project. As part of the acquisition, the
Company assumed all of the rights and obligations held by NRG Energy related to
the development, construction and financing of the Morris Project, including
those under the engineering, procurement and construction contract, the
construction and term loan agreement (see Note 10), the power purchase agreement
and various other project agreements and documents. The acquisition was
accounted for by the purchase method. The purchase price was capitalized and
included in "projects under development" on the balance sheet as of December 31,
1997. During 1998 the capitalized cost was reclassified to "other assets" and
are being amortized over the 25-year life of the Morris Project.
OES
In November 1998, the Company sold OES, a wholly-owned subsidiary of the
Company, in a stock transaction to an unrelated third party. The sales price was
$2,000 and the Company recorded a pre-tax gain of approximately $800 on the
sale.
F-12
<PAGE>
7. Investments in Equity Affiliates
Investments in equity affiliates consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Grays Ferry (33% owned) $ 17,603 $ 12,845
PoweRent Limited (50% owned) 576 536
----------- -----------
$ 18,179 $ 13,381
----------- -----------
----------- -----------
</TABLE>
GRAYS FERRY
CogenAmerica Schuylkill, a wholly-owned subsidiary of the Company, has a
one-third partnership interest in the Grays Ferry Partnership. The other
partners are affiliates of PECO Energy Company and Trigen Energy Corporation
("Trigen"). Grays Ferry has constructed a 150 MW cogeneration facility located
in Philadelphia which began commercial operations in January 1998. Grays Ferry
has a 25-year contract to supply all the steam produced by the project to an
affiliate of Trigen through 2022 and two 20-year contracts ("PPAs") to supply
all of the electricity produced by the project to PECO through 2017.
The Company accounts for its investment in the Grays Ferry Partnership by the
equity method. The Company's equity in earnings of the partnership was $4,758 in
1998. Grays Ferry commenced commercial operation in January 1998 and therefore
had no earnings prior to 1998. The Company and the Grays Ferry Partnership are
in litigation with PECO Energy Company over the validity of the PPAs (see Note
8).
Summarized financial information of Grays Ferry for 1998 is presented
below:
<TABLE>
<S> <C> <C> <C>
Net revenues $78,126 Current Assets $ 33,393
Cost of sales $39,274 Noncurrent assets $150,771
Operating income $26,304 Current Liabilities $133,426
Partnership net income $15,295 Nonwarrant liabilities $ --
</TABLE>
POWERENT LIMITED
PoweRent Limited ("PoweRent") is a 50% owned United Kingdom company that sells
and rents power generation equipment. The Company accounts for its investment by
the equity method. In 1997 the Company recorded a charge of $500 to reduce the
carrying value of its investment in PoweRent (see Note 14).
8. Contingencies
In March 1998 PECO asserted that its PPAs with the Grays Ferry Partnership are
not effective based on an alleged denial of cost recovery by the Pennsylvania
Public Utility Commission. PECO claims that it is not obligated to pay the rates
set forth in the agreements. PECO has further taken the position that, in any
event, its total liability under each of the two PPAs is limited to $25,000
($50,000 in the aggregate) by the terms of such agreements. The Company and the
Grays Ferry Partnership are in litigation with PECO over its obligations under
such agreements. They are seeking actual and punitive damages plus attorneys'
fees and costs. After initially refusing to pay the rates set forth in the PPAs
and making payments for the electricity purchased from the Grays Ferry Project
at substantially lower rates, PECO was ordered by the court in which the
litigation is pending to comply with the PPAs pending the outcome
F-13
<PAGE>
of the litigation. Following the court order, PECO resumed paying under protest
the full contract rates and, as of December 31, 1998, has paid all amounts due
under the applicable PPAs. Through December 31, 1998, the Grays Ferry
Partnership has recorded revenue of approximately $34,500 from PECO, which PECO
claims it was not obligated to pay. On March 9, 1999 the court issued an order
for partial summary judgment in favor of the Grays Ferry Partnership, ruling
that PECO's attempted termination of the Grays Ferry PPAs was improper. A trial
date of March 29, 1999 has been established to determine damages owed to the
Grays Ferry Partnership and to decide the remaining litigated claims.
Due to PECO's actions, the Grays Ferry Partnership defaulted in the payment of
certain interest due under its principal credit agreement, which default has
since been cured, and the Grays Ferry Partnership continues to be in default
under other provisions of such credit agreement. As a result of such continuing
default, the lenders under the credit agreement have the ability generally to
prevent the Grays Ferry Partnership from distributing or otherwise disbursing
cash held or generated by the Grays Ferry Project. These rights, if exercised by
the lenders, could prevent the Grays Ferry Partnership from meeting its
obligations to suppliers and others and from disbursing or otherwise
distributing cash to its partners during the pendency of the litigation. Any of
these actions by the Grays Ferry Partnership's lenders could materially disrupt
the Grays Ferry Partnership's relations with its suppliers and could have other
potentially material adverse effects on its operations and profitability and,
ultimately, on the Company's earnings and financial position. 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. This failure occurred due to the event of default
created by the alleged termination of the PPAs by PECO 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 existence of certain unresolved issues
between the Grays Ferry Partnership and Westinghouse Electric Corporation
("Westinghouse") regarding completion and testing of the Grays Ferry Project.
These issues between the partnership and Westinghouse are the subject of an
ongoing arbitration proceeding. Until there is a satisfactory resolution of the
litigation with PECO, the lenders 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 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.
Although the Company does not believe it likely PECO's position ultimately will
be sustained, the Company believes that upon such event 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
effected in various respects. Such effects could include, without limitation, a
material adjustment to the value of the Company's investment in the Grays Ferry
Project, the loss of future income and cash flows form the project and other
material costs which would not be recovered.
In January 1999 the Morris facility experienced two unscheduled outages which
resulted in service and business interruptions to Equistar. The Company,
Equistar and NRG Energy, as provider of construction management services and
operation and maintenance services, are currently investigating the matter
and are examining their respective rights and obligations with respect to
each other and with respect to potentially responsible third parties,
including insurers. The Company's investigation and discussions with Equistar
are continuing. The Company does not believe that there will be a material
adverse impact on the financial statements, however, no assurance can be
given as to the ultimate outcome of this matter.
9. Short-Term Borrowings
Short-term borrowings consist of amounts owed financial institutions under lines
of credit, primarily in
F-14
<PAGE>
the United Kingdom. The Company has aggregate lines of credit of approximately
$2,000 of which approximately $1,887, and $1,313 was outstanding at December 31,
1998 and 1997, respectively. The respective weighted average interest rates on
short-term borrowings as of December 31, 1998 and 1997, respectively, were
approximately 9.7% and 10.0%.
10. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Notes payable, due in monthly installments of principal
plus interest at 10.27% maturing in 2008 $ 413 $ 733
Capital lease obligations 38 -
MeesPierson Credit Agreement 25,000 25,000
Morris Project financing (nonrecourse) 84,305 29,855
Newark / Parlin financing (nonrecourse) 113,152 120,710
Newark / Parlin financing (recourse) 21,775 22,742
------------- -------------
244,683 199,040
Less amounts classified as current (9,610) (9,020)
------------- -------------
$ 235,073 $ 190,020
------------- -------------
------------- -------------
</TABLE>
Aggregate amounts of long-term debt maturing during each of the next five years
are $9,610, $33,603, $12,283, $13,689 and $12,406 in 1999, 2000, 2001, 2002 and
2003 respectively.
The credit agreements for the MeesPierson, Morris, and Newark / Parlin long-term
debt, include cross-default provisions. As a result, a default under one such
instrument or agreement could have a material adverse effect on the Company's
liquidity and capital position.
MEESPIERSON CREDIT AGREEMENT
On December 17, 1997, the Company and MeesPierson Capital Corp. entered into a
$30,000, three-year reducing, revolving credit facility (however, the Company
has agreed to not increase its borrowings above the $25,000 currently
outstanding). The $30,000 facility reduces by $2,500 on each of the first and
second anniversaries of the agreement and repayment of the outstanding balance
is due on December 17, 2000. Interest is variable based on, at the Company's
option, 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 margin is dependent
upon the Company's debt service coverage ratio. The interest rate resets based
on the borrowing period selected, generally one to six months, and was 9.1875%
at December 31, 1998. The credit facility 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 interest is a party. The actions taken by
the power purchaser of the Grays Ferry Project have resulted in a cross default
under the MeesPierson Credit Agreement. Repayment of the MeesPierson Credit
Agreement has not been accelerated and the lender has waived such default and
the Company has agreed not to draw any additional amounts under the MeesPierson
Credit Agreement. On August 14, 1998 the lender agreed to continue the waiver on
the default until July 1, 1999 by imposing a 2.0% increase in the interest rate
effective October 1, 1998. On February 12, 1999 the lender agreed to a permanent
waiver of the Grays Ferry Project cross default and eliminated the 2.0% increase
in the interest rate effective January 1, 1999. The Company also reduced
F-15
<PAGE>
the size of the facility to $25,000. Commitment fees of 0.375% accrue on the
unused facility. Borrowings are secured by the assets, capital stock and cash
flows of the PWD Project as well as the distributable cash flows of the Newark
and Parlin Projects and the Grays Ferry Partnership, as permitted by primary
lenders of each project.
The MeesPierson Credit Agreement specifies that the Company maintain certain
covenants with which the Company is in compliance at December 31, 1998. The
Company may under certain circumstances be limited in its ability to make
restricted payments, as defined, which include dividends and certain purchases
and investments, incur additional indebtedness and engage in certain
transactions.
MORRIS PROJECT FINANCING
On September 15, 1997, Morris LLC (which was at that time an affiliate of NRG
Energy) entered into a $91,000 construction and term loan agreement (the
"Agreement") to provide nonrecourse project financing for a major portion of the
Morris Project. The Company assumed the Agreement in December 1997 upon
acquiring Morris LLC. The Agreement provides $85,600 of 20-month construction
loan commitments and $5,400 in letter of credit commitments (the "LOC
Commitment"). Upon satisfaction of all completion criteria as set forth in the
Agreement, the construction loan is due and payable or, if certain criteria are
satisfied, may be converted to a five year term loan based on a 25-year
amortization with a balloon payment at maturity. At December 31, 1998 and 1997,
$84,305 and $29,855, respectively were outstanding under the construction loan
and no amounts were pledged under the LOC Commitment. Interest on the
construction loan is variable based on, at the Company's option, either the base
rate, as defined in the Agreement, or LIBOR plus 0.75%. The interest rate resets
based on the Company's selection of the borrowing period ranging from one to six
months. The interest rate was 6.0% at December 31, 1998. Borrowings are secured
by CogenAmerica Funding's ownership interest in Morris LLC, its cash flows,
dividends and any other property that CogenAmerica Funding may be entitled to as
owner of Morris LLC.
The Agreement specifies that the Company maintain certain covenants with which
the Company is in compliance at December 31, 1998. The Company may under certain
circumstances be limited in its ability to make restricted payments, as defined,
which include dividends and certain purchases and investments, incur additional
indebtedness and engage in certain transactions.
NEWARK AND PARLIN FINANCING
On May 17, 1996, CogenAmerica Newark and CogenAmerica Parlin entered into the
Newark and Parlin Credit Agreement with provisions for a $155,000 fifteen-year
nonrecourse term loan and a $5,000 five-year debt service reserve line of
credit. On May 23, 1996, CogenAmerica Newark borrowed $60,000 in the form of a
temporary term loan under the Newark and Parlin Credit Agreement. On July 11,
1996, an additional $95,000 was borrowed and the aggregate borrowings were
converted into a $155,000 fifteen-year nonrecourse term loan (the "Term Loan")
which is a joint and several liability of CogenAmerica Newark and CogenAmerica
Parlin. The Term Loan is amortized by quarterly principal payments ranging from
1.275% to 1.825% through the fourteenth year and 3.075% in the fifteenth year.
The interest rate on the outstanding principal is variable based on, at the
Company's option, LIBOR plus a 1.125% margin or a defined base rate plus a
0.375% margin. For any quarterly period where the debt service coverage ratio is
in excess of 1.4:1, both margins are reduced by 0.125%. The interest rate resets
based on the borrowing period selected, generally one to three months. The
interest rate was 6.3125% at December 31, 1998. Nominal margin increases for
both the LIBOR and the defined base rate will occur in year six and eleven of
the Newark and Parlin Credit Agreement. Upon entering into
F-16
<PAGE>
the Newark and Parlin Credit Agreement, CogenAmerica Newark and CogenAmerica
Parlin entered into an interest rate swap agreement with the lender which fixes
the interest rate on 50% of the principal amount outstanding under the Term Loan
at 6.9% plus the margin in effect as described above.
No amounts were outstanding on the debt service reserve line of credit at
December 31, 1998 and 1997. The line carries a commitment fee of 1.125% on the
undrawn amount. CogenAmerica Newark and CogenAmerica Parlin are required to
maintain debt service reserve accounts with the lender to provide for future
debt service, capital improvements and major maintenance. At December 31, 1998
and 1997 these balances totaled $11,249 and $7,757, respectively, and earned
interest at 3.25%. These balances are recorded as restricted cash and cash
equivalents in the accompanying financial statements.
The Term Loan is secured by all CogenAmerica Newark and CogenAmerica Parlin
assets and a pledge of CogenAmerica Newark's and CogenAmerica Parlin's capital
stock. CogenAmerica has guaranteed repayment of up to $25,000 of the Term Loan
based on the principal balance of the loan, and also guaranteed payment by
CogenAmerica Newark and CogenAmerica Parlin of all income and franchise taxes
when due. The Company's guarantee is reduced proportionate to the outstanding
principal as payments are made on the debt. The balance of this guarantee was
$21,775 as of December 31, 1998. As an inducement to obtain the $60,000
temporary term loan, effective May 23, 1996, NRG Energy guaranteed payment of
pre-existing liabilities of CogenAmerica Newark and CogenAmerica Parlin up to
$5,000. The maximum guarantee is reduced as certain defined milestones are
reached and eliminated no later than May 23, 2001. At December 31, 1998, the
guarantee amount was $3,000.
The Newark and Parlin Credit Agreement specifies that the Company maintain
certain covenants with which the Company is in compliance at December 31, 1998.
The Company may under certain circumstances be limited in its ability to make
restricted payments, as defined, which include dividends and certain purchases
and investments, incur additional indebtedness and engage in certain
transactions.
11. Loans and Payables Due NRG Energy
Amounts owed to NRG Energy are comprised as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Long-term debt:
Note due April 30, 2001 bearing interest at 9.5% $ 2,539 $ 2,539
Grays Ferry note due July 1, 2005 bearing
interest at 9.3125% 1,900 1,900
Pryor note due September 30, 2004 bearing
interest at 11.25% 23,947 --
Morris note due December 31, 2004 bearing
interest at 11.25% 12,027 --
------------ -----------
40,413 4,439
Less current portion (4,290) --
------------ -----------
$ 36,123 $ 4,439
------------ -----------
------------ -----------
F-17
<PAGE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Current maturities of loans and accounts payable:
Current Maturities:
Morris note $ 2,104 $ --
Pryor note 2,186 --
Accounts payable:
Accrued interest -- 821
Management services, operations and other 2,730 2,043
------------ -----------
$ 7,020 $ 2,864
------------ -----------
------------ -----------
</TABLE>
Aggregate amounts of long-term debt due NRG Energy maturing during each of the
next five years are $4,290, $6,355, $10,118, $6,171, and $6,742 in 1999, 2000,
2001, 2002 and 2003, respectively. Interest expense related to loans due NRG
Energy was $1,249, $1,327, $648 and $1,098 for the years ended December 31, 1998
and 1997, the six months ended December 31, 1996 and the year ended June 30,
1996, respectively.
MORRIS NOTE
In connection with its acquisition of the Morris Project, CogenAmerica
Funding, a wholly-owned subsidiary of the Company, assumed all of the
obligations of NRG Energy to provide future equity contributions to the
project, which obligations are limited ot the lesser of 20% of the total
project cost or $22,000. 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 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). In addition, 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-borrowers) 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.
Effective November 30, 1998 the Company and NRG Energy agreed to a First
Amendment to Supplemental Loan Agreement that allowed the Company to
contribute the $22,000 of equity in installments to match the construction
draw payments. At December 31, 1998, $12,027 had been drawn and contributed
as equity. Subsequent to year end additional draws and equity fundings have
been made and as of March 26, 1999, the entire $22,000 had been drawn and
contributed as equity. The Supplemental Loan Agreement calls for an interest
rate of prime plus 1.5%. Effective with the First Amendment the interest rate
was increased to prime plus 3.5% pending elimination of the possible event of
default under the MeesPierson Credit Agreement related to the Grays Ferry
Project. On February 23, 1999 the Company reached agreement with NRG Energy
that the possible event of default under the MeesPierson Credit Agreement had
been eliminated. As a result, NRG Energy reduced the interest rate by 2%
effective as of January 1, 1999.
PRYOR NOTE
On September 30, 1998, NRG Energy loaned the Company and CogenAmerica Pryor
$23,947 to finance the acquisition of the Pryor Project. The loan is a
six-year term facility calling for principal and interest payments on a
quarterly basis, based on project cash flows. The interest rate on the note
was set at prime plus 3.5%, reducing by 2% upon elimination of the possible
event of default under the MeesPierson Credit Agreement related to the Grays
Ferry Project. On February 23, 1999 the Company reached agreement with NRG
Energy that the possible event of default under the
F-18
<PAGE>
MeesPierson Credit Agreement had been eliminated. As a result, NRG Energy
reduced the interest rate by 2% effective as of January 1, 1999.
12. Stockholders' Equity
NRG ENERGY STOCK OPTION
During 1997 NRG Energy made loans aggregating $10,000 to CogenAmerica Schuylkill
to provide funding for CogenAmerica Schuylkill's equity contribution obligation
to Grays Ferry. Pursuant to a stock option right approved by the bankruptcy
court and included in the loan commitment agreement, in October 1997 NRG Energy
converted $3,000 of the borrowings into 396,255 shares of the Company's common
stock. Following exercise of the option, NRG Energy's ownership interest in the
Company increased to 45.21%.
EARNINGS PER SHARE
Basic earnings per share ("EPS") includes no dilution and is computed by
dividing net income (loss) by the weighted average shares of common stock
outstanding. Diluted EPS is computed by dividing net income (loss) 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. The following table
reconciles the numerators and denominators of the basic and diluted EPS
computations for the years ended December 31, 1998 and 1997, and the six months
ended December 31, 1996. The dilutive stock options became outstanding
subsequent to June 30, 1996. Accordingly, there was no difference in basic and
diluted EPS for the year ended June 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------- --------------------------------- ---------------------------------
INCOME SHARES EPS INCOME SHARES EPS INCOME SHARES EPS
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item:
Basic EPS $8,002 6,837 $1.17 $ 23,352 6,511 $ 3.59 $ 4,780 6,430 $ 0.75
Effect of dilutive
stock options -- 129 33 214 -- 33
------ ------ -------- ------- ------- -------
Diluted EPS $8,002 6,966 $1.15 $ 23,385 6,725 $ 3.48 $ 4,780 6,463 $ 0.74
------ ------ -------- ------- ------- -------
------ ------ -------- ------- ------- -------
</TABLE>
Options to purchase 147,000 shares of common stock at prices ranging from $11.58
- - $18.38 were outstanding at December 31, 1998 but were not included in the 1998
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
STOCK OPTIONS
The Company has reserved 1,000,000 shares of common stock for issuance under its
1996, 1997 and 1998 stock option plans. The plans provide for nonqualified and
incentive stock options to be granted to directors, officers, key employees and
others who make a significant contribution to the Company as determined by the
Board at an exercise price not less than the fair market value of the common
stock at the date of grant. An option will generally expire ten years after the
date it is granted and will ordinarily become exercisable as to one third of the
shares subject to the option on each of the first three anniversaries of the
grant. Following a "change of control" all options granted under the stock
option plans may become immediately exercisable.
F-19
<PAGE>
Option transactions under these plans are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES OPTION PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at June 30, 1996 --
Granted 399,000 $ 5.46
------------- ---------
Outstanding at December 31, 1996 399,000 5.46
Granted 305,000 13.19
Canceled (75,000) 5.44
------------- ---------
Outstanding at December 31, 1997 629,000 9.21
Granted 62,000 17.18
Canceled (173,000) 11.50
------------- ---------
Outstanding at December 31, 1998 518,000 $ 9.40
------------- ---------
------------- ---------
</TABLE>
The following table summarizes the stock options outstanding and exercisable at
December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------- -----------------------------------
WEIGHTED-AVERAGE
EXERCISE NUMBER OF CONTRACTUAL LIFE WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
PRICE RANGE OPTIONS REMAINING EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$5.44-$6.58 321,000 7.8 years $ 5.46 216,000 $ 5.47
$11.58-$16.47 152,000 8.7 years 15.07 68,333 13.97
$18.38 45,000 9.2 YEARS 18.38 -- --
----------- --------- ---------- ----------- ----------
518,000 8.2 years $ 9.40 284,333 $ 7.51
----------- --------- ---------- ----------- ----------
----------- --------- ---------- ----------- ----------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. Had the Company's
compensation costs been determined based on the fair value of the awards at the
option grant dates consistent with the accounting provisions of SFAS 123
"Accounting for Stock Based Compensation," the Company's net income and EPS for
the years ended December 31, 1998 and 1997, and the six months ended
December 31, 1996 would have been adjusted to the pro-forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Income
As reported $ 8,002 $ 23,352 $ 6,423
Pro-forma 7,365 22,695 6,362
EPS (Diluted)
As reported $ 1.15 $ 3.48 $ 0.99
Pro-forma 1.06 3.38 0.98
</TABLE>
The estimated weighted average fair value of stock options granted during the
years ended December 31, 1998 and 1997 and the six months ended December 31,
1996 were $6.44, $6.24 and $2.30 per option, respectively. The fair values were
estimated on the grant dates utilizing the Black-Scholes option-pricing model
and the following assumptions:
F-20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Risk free interest rates 5.5 - 5.6% 6.2 - 6.6% 5.8 - 6.1%
Expected life 6 years 6 years 6 years
Expected volatility 25.0% 36.7% 30.0%
Expected dividends -- -- --
</TABLE>
13. Extraordinary Item
During the six months ended December 31, 1996, the Company negotiated a buyout
of a subsidiary's capital lease obligation resulting in an extraordinary gain of
$1,643 (net of $124 of state income taxes).
14. Provision for Impaired Assets
During the 1997 fourth quarter, the Company recorded provisions for impaired
assets in the aggregate amount of $5,274 for various asset disposals, write-offs
and write-downs. The impairment charge reduced identifiable assets of the energy
segment and the equipment sales, rental and service segment by approximately
$697 and $2,161, respectively, and corporate assets by $2,416. The components of
the charge were as follows:
<TABLE>
<CAPTION>
EQUIPMENT
SALES, RENTAL
& SERVICE ENERGY CORPORATE TOTAL
------------- ------ --------- ------
<S> <C> <C> <C> <C>
Assets disposed
Equipment held for sale $ 62 $ -- $ 1,491 $1,553
Property, plant and equipment
Write-offs 551 326 146 1,023
Equipment sold or scrapped -- -- 779 779
Project development costs -- 371 -- 371
Other 72 -- -- 72
------------- ------ --------- ------
685 697 2,416 3,797
------------- ------ --------- ------
Assets held and used
Investment in PoweRent 500 -- -- 500
Property, plant and equipment 976 -- -- 976
------------- ------ --------- ------
1,476 -- -- 1,476
------------- ------ --------- ------
$ 2,161 $ 697 $ 2,416 $5,274
------------- ------ --------- ------
------------- ------ --------- ------
</TABLE>
To improve liquidity, in fiscal 1994 the Company initiated efforts to liquidate
specific power generation equipment that was not in use in an operating project,
rented to a customer or critical to the completion of projects in development.
These assets, consisting mainly of gas and steam turbines, were written down in
fiscal 1994 and 1995 to liquidation values determined by independent appraisal,
reclassified on the balance sheet as "equipment held for sale" and no longer
depreciated. The $3,228 carrying value of the equipment at June 30, 1995 was
reduced to $2,628 and $1,598 at December 31, 1996 and September 30, 1997,
respectively, through periodic sales. In the 1997 fourth quarter, the remaining
equipment included in the balance sheet caption "equipment held for sale" was
scrapped due to lack of interest by potential buyers, resulting in an impairment
charge of $1,553.
F-21
<PAGE>
Impairment charges for property, plant and equipment disposals totaled $1,801,
comprised of losses of $779 from disposal of other power generating equipment,
and write-offs of $1,023 for equipment that was determined to be non-useable or
could not be located during asset counts and inspections performed at OES and
the PWD Project.
The asset impairment charge also included $371 to write-off capitalized project
development costs related to certain development projects that were terminated.
During the 1997 fourth quarter, the Company completed a thorough review of its
business operations and market opportunities to determine whether operations of
the PWD Project and the equipment sales, rental and service businesses should be
continued. The board of directors determined that the PWD Project should be
retained and that the equipment sales, rental and service segment should be
exited.
The equipment sales, rental and service segment has not been reported as a
discontinued operation because of uncertainties about the expected timing and
manner of disposal. However, management performed an impairment review of the
segment's long-lived assets as required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Based on an analysis of estimated future cash flows, the carrying value of OES'
generator equipment was determined to be impaired. Consequently, a provision of
$976 was recorded to write-down the assets to their estimated fair value as
determined by management based on sales values of similar equipment.
Management also evaluated the carrying value of its 50% investment in PoweRent.
Due to PoweRent's low earnings capacity, combined with the expectation of
exiting this business in the near term, the investment was determined to be
permanently impaired. The carrying value of the investment was written down by
$500 based on discussions with potential buyers and management's estimate of the
investment value.
During the year ended June 30, 1996 unrecoverable project development costs of
$180 were written off.
15. Disclosures about Fair Value of Financial Instruments
At December 31, 1998 and 1997, the carrying amounts and fair values of the
Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,568 $ 3,568 $ 3,444 $ 3,444
Restricted cash and cash equivalents 12,135 12,135 8,527 8,527
Notes receivable -- -- 27 27
Liabilities:
Short-term borrowings 1,887 1,887 1,313 1,313
Long-term debt 244,683 244,683 199,040 199,040
Loans and payables due NRG Energy 43,143 43,143 7,303 7,303
Interest rate swap -- 6,060 -- 2,691
</TABLE>
The carrying amounts of cash and cash equivalents, restricted cash and cash
equivalents and notes receivable approximates the fair value of those
instruments due to their short maturity. The fair value of short-term and
long-term debt and amounts due NRG Energy are estimated based on interest rates
F-22
<PAGE>
available to the Company for issuance of debt with similar terms and remaining
maturities. The fair value of the interest rate swap is the estimated amount
that the Company would pay to terminate the interest rate swap agreement at the
reporting date.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instruments. The estimated fair values of
financial instruments presented are not necessarily indicative of the amounts
the Company might realize in actual market transactions.
16. Income Taxes
Income (loss) before income taxes and extraordinary item consists of the
following:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1996 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States $ 12,834 $ 2,758 $ 4,195 $ (18,054)
Foreign 46 140 317 (122)
-------------- ------------- ------------- -------------
$ 12,880 $ 2,898 $ 4,512 $ (18,176)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
The income tax provision (benefit)
consists of:
Current income taxes:
Federal $ 287 $ -- $ 803 $ --
State 1,002 946 570 792
-------------- ------------- ------------- -------------
1,289 946 1,373 792
-------------- ------------- ------------- -------------
Deferred income taxes:
Federal 3,721 (20,400) (2,292) (493)
State (132) (1,000) 651 (762)
-------------- ------------- ------------- -------------
3,589 (21,400) (1,641) (1,255)
-------------- ------------- ------------- -------------
Income tax provision (benefit)
excluding extraordinary item $ 4,878 $ (20,454) $ (268) $ (463)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Deferred income tax liabilities:
Property, plant & equipment $ (23,609) $ (18,925) $ (18,445)
------------- ------------- -------------
Total deferred tax liabilities (23,609) (18,925) (18,445)
------------- ------------- -------------
Deferred income tax assets:
Net operating loss carryforwards 22,756 27,525 26,502
Alternative minimum tax credits 446 159 183
Investment tax credits 1,172 1,427 1,622
Miscellaneous 4,377 5,040 5,571
</TABLE>
F-23
<PAGE>
<TABLE>
<S> <C> <C> <C>
Valuation allowance (7,935) (7,230) (28,837)
------------- ------------- -------------
Total deferred tax assets 20,816 26,921 5,041
------------- ------------- -------------
Net deferred tax assets (liabilities) $ (2,793) $ 7,996 $ (13,404)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The difference between tax expense (benefit) calculated at the U.S. federal
statutory tax rate and the recorded tax expense (benefit) on pre-tax income
before extraordinary item is reconciled below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1996 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income tax expense (benefit)
at the federal statutory rate $ 4,508 $ 985 $ 1,534 $ (6,180)
State income taxes (benefit) 628 (36) 806 252
Current benefit of state
operating loss carryforwards (176) (353) (655) (232)
State operating losses with no
current tax benefit 114 1,182 -- 3,204
Other increase (decrease) in
valuation allowance 192 (22,232) (1,630) (544)
Reorganization costs -- -- -- 2,636
Other (388) -- (323) 401
-------------- ------------- ------------- -------------
Total income tax provision
(benefit) $ 4,878 $ (20,454) $ (268) $ (463)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
At December 31, 1998, the Company has federal net operating loss carryforwards
available to offset future regular taxable income and investment tax credit
carryforwards available to offset future federal income taxes payable.
These carryforwards expire as follows:
<TABLE>
<CAPTION>
FEDERAL
NET OPERATING LOSS INVESTMENT TAX
DECEMBER 31, CARRYFORWARDS CREDIT CARRYFORWARDS
----------- ------------------ ---------------------
<S> <C> <C>
1999 $ -- $ 240
2000 -- 409
2001 -- 82
2002 -- 174
2003 -- 52
2004 -- 215
2005 9,213 --
2006 4,545 --
2007 15,089 --
2008 10,682 --
2009 6,358 --
2010 9,031 --
----------- ----------
Total $ 54,918 $ 1,172
----------- ----------
----------- ----------
</TABLE>
The Company has $52,875 of state and local net operating loss carryforwards
available to offset future years' state and local taxable income. These
carryforwards will expire starting in 1999 and will continue to expire through
2012. The Company also has foreign net operating loss carryforwards of
F-24
<PAGE>
approximately $2,051. The net operating loss carryforward for alternative
minimum tax purposes is approximately $23,621 at December 31, 1998.
A valuation allowance was recorded in prior years to reserve primarily for
deferred tax assets that were not expected to be recovered through future
reversal of existing temporary differences. In management's judgment,
realization of the reserved tax benefits did not meet the "more likely than not"
recognition criteria of SFAS No. 109 due to the Company's history of operating
losses and projections of future taxable income. At December 31, 1997, the
valuation allowance was reduced to $7,230 based on management's evaluation of
the weight of available evidence about the likelihood of realizing the deferred
tax assets. Positive factors contributing to the decision to reduce the
valuation allowance included the sustained period of profitability since
emergence from bankruptcy and improved outlooks for future earnings. The
remaining valuation allowance at December 31, 1998 reserves a portion of the
state operating loss carryforwards and certain other temporary differences and
all of the investment tax credit, capital loss, and foreign operating loss
carryforwards.
Under the Plan, NRG Energy acquired a 41.86% equity interest in the Company.
This acquisition, along with other shifts in shareholders' stock holdings,
amounted to a more than 50% change in ownership in the Company over a three year
period. Under the general net operating loss and tax credit carryover rules,
utilization of these losses and tax credits would be limited. However, the
Internal Revenue Code provides an exception to the general rules for loss
corporations that undergo an ownership change by reason of certain bankruptcy
proceedings. The Company believes it qualifies for the bankruptcy exception and
its net operating loss and tax credit carryforwards are not subject to the
change of ownership limitations. The bankruptcy exception rules also provide
that if a subsequent ownership change should occur within the two years
following the bankruptcy-protected change, the benefits of the bankruptcy
exception will be lost and the Company's net operating loss and tax credit
carryforwards will be effectively eliminated. During the year ended of December
31, 1998, the Company did not undergo a subsequent ownership change in the two
year period following the bankruptcy protected change.
17. Transactions with Related Parties
NRG Energy provides management, administrative, operation and maintenance
services and certain other services to the Company. Selling, general and
administrative expenses include $217, $562, $479 and $129 for reimbursement of
services provided by NRG Energy under the terms of a management services
agreement for the year ended December 31, 1998 and 1997, the six months ended
December 31, 1996 and the year ended June 30, 1996. Effective January 1, 1997,
Power Operation, Inc., a wholly-owned subsidiary of the Company providing
operations and maintenance for the Newark and Parlin facilities under long-term
contracts, was sold to NRG Energy. The amount expensed by the Company for these
services was $427 and $350 in 1998 and 1997, respectively.
Beginning in 1997, the Parlin Project sells up to 9 MW of power to NPI, a
wholly-owned subsidiary of NRG Energy. NPI resells this power at retail to a
customer of the Company under an agreement extending until 2021. Total sales to
NPI were $1,313 and $1,300 in 1998 and 1997, respectively.
On December 10, 1997 CogenAmerica purchased 100% of the equity interest in the
Morris Project from NRG Energy. NRG Energy is the construction manager for the
project and received $1,200 in fees and expense reimbursements for these
services in 1998. NRG Energy, though a wholly-owned subsidiary is also the
operator of the project under a long-term agreement. NRG Energy was paid $1,100
for these services during the construction start up and two months of operation
in 1998. (See Note 6.)
On October 9, 1998 a wholly-owned subsidiary of the Company purchased 100% of
the equity interest of the Pryor Project from NRG Energy. In conjunction with
the acquisition, NRG Energy financed the
F-25
<PAGE>
purchase with a loan of $23,900. (See Note 6.)
18. Segment Information and Major Customers
The Company is engaged principally in developing, owning and managing
cogeneration projects and the sale, rental and service of cogeneration related
equipment. The Company has classified its operations into the following
segments: energy and equipment sales, rental and service. The energy segment
consists of cogeneration and standby/peak shaving projects. The equipment sales,
rental and service segment consists of PUMA, the Company's wholly owned
subsidiary based in the United Kingdom and OES until its sale in November 1998.
Summarized information about the Company's operations in each industry segment
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
EQUIPMENT
SALES, RENTAL &
ENERGY SERVICE OTHER TOTAL
----------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 52,216 $ 21,780 $ -- $ 73,996
Depreciation & amortization 8,424 267 -- 8,691
Other cost of revenues 15,038 18,616 -- 33,654
-------------- ------------- ------------- -------------
Gross profit 28,754 2,897 -- 31,651
Selling, general & administrative expenses 4,852 2,206 2,357 9,415
-------------- ------------- ------------- -------------
Income (loss) from operations 23,902 691 (2,357) 22,236
Interest & other income 497 30 1,189 1,715
Reorganization cost -- -- -- --
Interest & debt expense (14,071) (352) (1,433) (15,855)
Equity in earnings of affiliates 4,758 26 -- 4,784
-------------- ------------- ------------- -------------
Income (loss) before taxes $ 15,086 $ 395 $ (2,601) $ 12,880
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Identifiable assets $ 304,834 $ 7,885 $ 5,955 $ 318,674
Capital expenditures 86,949 389 26 87,364
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
EQUIPMENT
SALES, RENTAL &
ENERGY SERVICE OTHER TOTAL
----------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 43,210 $ 21,594 $ -- $ 64,804
Depreciation & amortization 6,788 498 -- 7,286
Other cost of revenues 8,053 18,356 -- 26,409
-------------- ------------- ------------- -------------
Gross profit 28,369 2,740 -- 31,109
Selling, general & administrative expenses 3,579 3,318 2,582 9,479
Provision for impaired assets 697 2,161 2,416 5,274
-------------- ------------- ------------- -------------
Income (loss) from operations 24,093 (2,739) (4,998) 16,356
Interest & other income 436 125 749 1,310
Interest & debt expense (13,112) (280) (1,376) (14,768)
-------------- ------------- ------------- -------------
Income (loss) before taxes $ 11,417 $ (2,894) $ (5,625) $ 2,898
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Identifiable assets $ 206,337 $ 8,332 $ 13,225 $ 227,894
Capital expenditures 5,115 432 168 5,715
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1996
EQUIPMENT
SALES, RENTAL &
ENERGY SERVICE OTHER TOTAL
----------------- ----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 23,247 $ 16,669 $ -- $ 39,916
Depreciation & amortization 3,272 333 -- 3,605
Other cost of revenues 5,516 12,866 -- 18,382
-------------- ------------- ------------- -------------
Gross profit 14,459 3,470 -- 17,929
Selling, general & administrative expenses 2,323 2,452 1,374 6,149
-------------- ------------- ------------- -------------
Income (loss) from operations 12,136 1,018 (1,374) 11,780
Interest & other income 197 359 (143) 413
Interest & debt expense (6,014) (461) (1,206) (7,681)
-------------- ------------- ------------- -------------
Income (loss) before taxes $ 6,319 $ 916 $ (2,723) $ 4,512
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Identifiable assets $ 141,583 $ 15,790 $ 16,251 $ 173,624
Capital expenditures 1,189 31 2 1,222
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
EQUIPMENT
SALES, RENTAL &
ENERGY SERVICE OTHER TOTAL
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 69,308 $ 27,239 $ -- $ 96,547
Depreciation & amortization 7,025 756 -- 7,781
Other cost of revenues 41,169 22,803 -- 63,972
-------------- ------------- ------------- -------------
Gross profit 21,114 3,680 -- 24,794
Selling, general & administrative expenses 4,149 4,434 4,029 12,612
Provision for impaired assets 180 -- -- 180
-------------- ------------- ------------- -------------
Income (loss) from operations 16,785 (754) (4,029) 12,002
Interest & other income 236 333 -- 569
Reorganization cost -- -- (12,101) (12,101)
Interest & debt expense (9,392) (1,119) (8,135) (18,646)
-------------- ------------- ------------- -------------
Income (loss) before taxes $ 7,629 $ (1,540) $ (24,265) $ (18,176)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
Identifiable assets $ 133,774 $ 17,293 $ 27,095 $ 178,162
Capital expenditures 273 7 19 299
</TABLE>
Information with respect to the Company's foreign and domestic operations is:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1996 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
United States $ 60,279 $ 51,504 $ 27,937 $ 82,917
United Kingdom 13,717 13,300 11,979 13,630
-------------- ------------- ------------- -------------
$ 73,996 $ 64,804 $ 39,916 $ 96,547
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
F-27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Identifiable assets:
United States $ 310,789 $ 221,752 $ 164,631 $ 169,657
United Kingdom 7,885 6,142 8,993 8,505
-------------- ------------- ------------- -------------
$ 318,674 $ 227,894 $ 173,624 $ 178,162
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
Revenues from one energy customer accounted for 50%, 57%, 46% and 62% for the
years ended December 31, 1998 and 1997, the six months ended December 31, 1996,
and the year ended June 30, 1996, respectively.
19. Minority Interest
OPCI, a subsidiary of the Company, is 17% owned by an unrelated private
investor. OPCI is required to make quarterly distributions to the minority owner
of 17% of its net earnings. These distributions totaled $247, $244, $125 and
$227 for the years ended December 31, 1998 and 1997, the six months ended
December 31, 1996, and fiscal 1996, respectively, and are recorded as interest
expense in the consolidated statement of operations. The 17% minority interest
is redeemable by the Company at its option for a price equal to 17% of the
present value of the projected income stream of OPCI. The Company is obligated
upon certain events of default to redeem the minority interest at 60% of the
Company's redemption price. The Company's redemption price at December 31, 1998
was approximately $2,400. There are currently no events of default.
F-28
<PAGE>
- --------------------------------------------------------------------------------
GRAYS FERRY COGENERATION PARTNERSHIP
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND
INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Grays Ferry Cogeneration Partnership:
We have audited the accompanying balance sheets of Grays Ferry Cogeneration
Partnership (the "Partnership"), as of December 31, 1998 and 1997, and the
related statements of changes in partners' capital, and cash flows for the years
then ended, and the related statement of income for the period from January 9,
1998 (date of commercial operation) to December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1998 and
1997, and its cash flows for the years then ended, and the results of its
operations for the period from January 9, 1998 (date of commercial operation) to
December 31, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
financial statements, PECO Energy has taken action to terminate its power
purchase agreements with the Partnership. As a consequence, the Project Lender
has determined that the Partnership is in default. These actions raise
substantial doubt about the Partnership's ability to continue as a going
concern. Management's plans concerning these matters are also discussed in Note
2. The financial statements do not include any adjustment that might result from
the outcome of these uncertainties, other than the classification of the Project
debt as current.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 26, 1999 (except Note 9, as to
which the date is March 10, 1999)
<PAGE>
<TABLE>
<CAPTION>
GRAYS FERRY COGENERATION PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,628,423 $ 6,441,729
Accounts receivable - related parties 10,678,770 2,630,093
Accounts receivable - other 1,805,350
Inventory 2,163,444 1,020,469
Prepaid expenses 116,976
------------- --------------
Total current assets 33,392,963 10,092,291
PROPERTY, PLANT AND EQUIPMENT:
Construction work-in-progress 144,328,197
Plant in service 151,297,117
------------- --------------
Total property, plant and equipment 151,297,117 144,328,197
Accumulated depreciation (7,402,171)
------------- --------------
Property, plant and equipment - net 143,894,946 144,328,197
OTHER ASSETS (Net of accumulated amortization of $426,949 in 1998) 6,875,906 6,544,595
------------- --------------
TOTAL ASSETS $ 184,163,815 $ 160,965,083
------------- --------------
------------- --------------
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Construction loan (Notes 2 and 6) $ 94,324,049 $ 113,000,000
Subordinated debt (Note 6) 15,000,000
Accounts payable and accrued liabilities - related parties 3,503,417 558,759
Accounts payable and accrued liabilities - other 15,017,152 6,381,865
Retainage payable 5,581,729 5,581,729
------------- --------------
Total liabilities 133,426,347 125,522,353
PARTNERS' CAPITAL 50,737,468 35,442,730
------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 184,163,815 $ 160,965,083
------------- --------------
------------- --------------
</TABLE>
See notes to financial statements.
-2-
<PAGE>
<TABLE>
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENT OF INCOME
PERIOD FROM JANUARY 9, 1998 (DATE OF COMMERCIAL OPERATION)
TO DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------
<S> <C>
REVENUES FROM RELATED PARTIES:
Electric energy sales $50,776,226
Steam sales 14,741,775
Capacity fees:
Electric 9,531,900
Steam 3,075,988
-----------
Total revenues 78,125,889
-----------
OPERATING EXPENSES:
Fuel and consumables:
Related party 2,531,844
Other 32,394,334
Operation and maintenance:
Related parties 1,527,916
Other 2,819,680
General and administrative:
Related parties 2,772,641
Other 2,373,432
Depreciation 7,402,171
-----------
Total operating expenses 51,822,018
-----------
INCOME FROM OPERATIONS 26,303,871
-----------
OTHER INCOME (EXPENSE):
Interest income 665,765
Interest expense (11,674,898)
-----------
Total other expense (11,009,133)
-----------
NET INCOME $15,294,738
-----------
-----------
</TABLE>
See notes to financial statements.
-3-
<PAGE>
GRAYS FERRY COGENERATION PARTNERSHIP
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------
Adwin CogenAmerica Trigen Total
(Schuylkill) Schuylkill (Schuylkill) Partners'
Cogeneration, Inc. Inc. Cogeneration, Inc. Capital
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 2,784,214 $ 2,658,516 $ 5,442,730
Capital contributions $10,000,000 10,000,000 10,000,000 30,000,000
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 12,784,214 12,658,516 10,000,000 35,442,730
Net income for period 5,098,246 5,098,246 5,098,246 15,294,738
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $17,882,460 $17,756,762 $15,098,246 $50,737,468
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
GRAYS FERRY COGENERATION PARTNERSHIP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $15,294,738
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 7,402,171
Amortization of other asset 426,949
Changes in assets and liabilities which provided (used) cash:
Accounts receivable - related parties (8,048,677)
Accounts receivable - other (1,805,350)
Prepaid assets (116,976)
Inventories (1,142,975)
Accounts payable and accrued expenses - related parties 3,503,417
Accounts payable and accrued expenses - other 15,017,152
Other assets (758,260)
------------
Net cash provided by operating activities 29,772,189
------------
INVESTING ACTIVITIES:
Construction expenditures $(6,968,920) $(74,253,351)
Decrease in other construction related expenses (2,439,849)
Decrease in construction related accruals - related parties (558,759)
Decrease in construction related accruals - other (6,381,865) (4,812,728)
------------- -------------
Net cash used in investing activities (13,909,544) (81,505,928)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from borrowings under construction loan agreement and subordinated debt 15,000,000 57,900,000
Repayment of construction loan agreement (18,675,951)
Partners' capital contributions 30,000,000
------------- -------------
Net cash (used in) provided by financing activities (3,675,951) 87,900,000
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 12,186,694 6,394,072
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,441,729 47,657
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $18,628,423 $ 6,441,729
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the year for interest, net of amounts capitalized in 1997 $ 7,770,075 $ --
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
-5-
<PAGE>
GRAYS FERRY COGENERATION PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION OF PARTNERSHIP
Grays Ferry Cogeneration Partnership, (the "Partnership") was organized on
October 29, 1991 as a Pennsylvania general partnership for the sole
purpose of developing, owning, constructing and operating a 150 megawatt
gas and oil fired qualifying cogeneration facility (the "Project") at the
Schuylkill Station of the Trigen-Philadelphia Energy Corporation ("TPEC")
in Philadelphia, Pennsylvania. For the period from October 29, 1991 (date
of inception) through January 8, 1998, the Partnership was considered a
development stage entity as its sole activity was construction of the
Facility. Pursuant to 20-year electricity and 25-year steam purchase
agreements between the Partnership and its two customers, sales of
electricity and steam began in January 9, 1998, the date of Commercial
Operation.
The Partnership's date of Commercial Operation of January 9, 1998 was
chosen because it was the date its customers started paying it for
electricity and steam sold to them under its 20-year electricity purchase
agreements and its 25-year steam purchase agreements. The Partnership
believes the date should have been December 30, 1997 and is litigating
this issue as part of the litigation described in Note 2.
The Partnership's original general partners are Adwin Equipment Company, a
wholly owned subsidiary of Eastern Pennsylvania Development Company, which
is a wholly owned subsidiary of PECO Energy Company ("PECO") and O'Brien
(Schuylkill) Cogeneration, Inc., ("O'Brien"), a wholly owned subsidiary of
O'Brien Environmental Energy, Inc. Subsequent to the original Partnership
formation, Adwin (Schuylkill) Cogeneration, Inc. ("Adwin"), a wholly owned
subsidiary of Adwin Equipment Company, was assigned all rights,
responsibilities, and obligations of the Partnership previously held by
Adwin Equipment Company.
Trigen (Schuylkill) Cogeneration, Inc. ("Trigen"), a wholly owned
subsidiary of Trigen Energy Corporation and an affiliate of TPEC,
Philadelphia Thermal Development Corporation, ("PTDC"), and Philadelphia
United Power Corporation, ("PUPCO"), joined the Partnership as an equal
partner as of March 1, 1996.
In a reorganization plan, approximately 40% of the capital stock of
O'Brien Environmental Energy, Inc. was acquired by NRG Energy, Inc.,
and the Company was renamed NRG Generating (U.S.) Inc. As a result of
this reorganization, O'Brien became known as NRGG (Schuylkill)
Cogeneration, Inc. ("NRGG"). During 1998, NRGG was renamed
CogenAmerica Schuylkill, Inc. ("Cogen").
The three general partners are equal partners, with net operating profits
and losses and distributions to be allocated equally to the partners,
subject to the terms and provisions as stated in the Amended and Restated
Partnership Agreement.
2. CONTINUATION OF BUSINESS
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed below, PECO has
taken action to terminate its power purchase agreements with the
Partnership. As a consequence, the Project Lender has determined that the
-6-
<PAGE>
Partnership is in default. These actions raise substantial doubt about the
Partnership's ability to continue as a going concern. The financial
statements do not include any adjustment that might result from the
outcome of these uncertainties, other than the classification of the
Project debt as current.
ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT - Although the
Partnership began Commercial Operation on January 9, 1998, the Partnership
has not yet accepted care, custody or control of the Project from
Westinghouse Electric Corporation (the "Contractor") due to the
Partnership's concerns over design and construction issues. This issue is
in arbitration.
PECO - In March 1998, the Partnership received notice from PECO that PECO
believes its power purchase agreements with the Partnership are no longer
effective. PECO has refused to pay the rates set forth in the agreements
based on its allegations that the Pennsylvania Public Utilities Commission
(the "PPUC") has denied cost recovery of the power purchase agreements in
retail electric rates.
On March 9, 1998, the Partnership, along with Trigen, NRGG and TPEC
(collectively "Plaintiffs") filed suit against PECO, Adwin and the PPUC
(collectively "Defendants") in United States District Court for the
District of Pennsylvania. The suit sought to enjoin PECO from terminating
the power purchase agreements and to compel PECO to pay the rates set
forth in the agreements. In addition, the Plaintiffs sought actual
damages, punitive damages, attorneys' fees and costs. On March 19, 1998,
the federal district court dismissed the lawsuit for lack of subject
matter jurisdiction.
On April 9, 1998, the Plaintiffs filed suit against the Defendants in the
Court of Common Pleas (the "Court") for Philadelphia County in the State
of Pennsylvania. Preliminary injunctive relief against PECO in the form of
specific performance of the electric sale agreements, including payments
according to the contract terms, was granted by the Court on May 6, 1998.
A $50,000 bond required by the Court was posted by the Plaintiffs on May
7, 1998. On May 8, 1998, PECO sought a stay of the May 6 Order which was
denied on May 20, 1998. Also on May 20, 1998, the Court issued a separate
order adjudging PECO to be in civil contempt of the May 6 Order. A
coercive sanction of $50,000 per day, or portion thereof, for nonpayment
of all sums owing by PECO in accordance to the contract terms was included
in the May 20, 1998 Order. An emergency application of stay by PECO of the
May 6 Order was denied on May 22, 1998. As a result, PECO complied with
the May 6 Order on May 22, 1998.
CONSTRUCTION LOAN DEFAULT - On March 17, 1998 the Partnership received a
notice of default from the Project Lender stating that PECO's
determination that the power purchase agreements are no longer in effect
constitutes a Material Adverse Effect as defined under the credit
agreement. In addition, the Subordinate Credit Commitment (the
"Subordinate Debt") contains cross-default provisions; accordingly upon
notice of default from the Project Lender, the Partnership was in default
on its Subordinate Debt. As of the date of this report, the default has
not been waived; accordingly, the Partnership's long-term debt has been
reclassified as current in the Partnership's balance sheet (see Note 6).
The Project Lender has also restricted the Partnership's ability to make
distributions to related parties for certain transactions, along with
distributions to the Partners of Partnership earnings. In addition, the
interest rate charged under the credit agreement increased to prime plus
2.00%, and the interest on the Subordinate Debt increased to prime plus
3.5% (9.75% and 11.25%, respectively, at December 31, 1998), the penalty
interest rates.
Management intends to vigorously pursue enforcement of the power purchase
agreements, which if successful, should result in a cure of the
construction loan and Subordinate Debt default.
-7-
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CAPITALIZED PROJECT COSTS - Construction of the Project was originally
scheduled to be completed on or about December 8, 1997 (see Notes 1
and 5), at an estimated cost of $158,000,000. $128,000,000 was
provided from the proceeds of the credit agreements (see Note 6), and
$30,000,000 was provided from partners' capital contributions (see
Note 7). The remainder has been financed through accounts and
retainage payable. Capitalized Project costs include costs incurred in
the development and construction of the gas and oil fired 150-megawatt
cogeneration facility. The majority of these costs represent
expenditures made under the Engineering, Procurement, and Construction
contract between the Partnership and the Contractor. Other costs
represent expenditures for legal, consulting, engineering and
financing activities relating to the Project. All costs related to the
design and construction of the Project up to the date of Commercial
Operation on January 9, 1998, have been capitalized as construction
work-in-progress when incurred and now are classified as plant in
service, except deferred financing fees which are included in other
assets.
Substantially all of the property, plant and equipment is being
depreciated over 20 years, the life of the Project's electric and
contingent capacity sales agreements (see Note 4).
(b) REVENUE RECOGNITION - The Partnership's primary source of revenues is
from the sale of steam to TPEC and the sale of electricity generated
by the Project to PECO. Pursuant to the Steam Sales Agreement, TPEC is
obligated to purchase all of its steam requirements from the Project
as defined in the agreement. Under the provisions of the Power
Purchase Agreements, PECO has agreed to purchase, or accept delivery
of, the net electric output from the Project, up to the lesser of 150
megawatts or the amount of electric output for which the Federal
Energy Regulatory Commission ("FERC") has certified the Project.
(c) SEGMENT REPORTING - The Partnership currently operates the Project,
which produces two forms of salable energy from one generation
process. Revenues from each of the two forms are disclosed on the
statement of income.
(d) INVENTORY - Inventory, which is recorded on the first-in, first-out
basis, consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Fuel $ 1,532,987 $ 1,020,469
Spare Parts 630,457
----------- -----------
$ 2,163,444 $ 1,020,469
----------- -----------
----------- -----------
</TABLE>
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS - The amounts reported in the
balance sheets for accounts receivable, accounts payable and debt
approximate fair value.
(f) ACCOUNTING FOR INCOME TAXES - The Partnership is not a taxpaying
entity for income tax purposes. Taxable income or loss from the
Partnership is reportable by the Partners on their respective income
tax returns. Accordingly, there is no recognition of income taxes in
the financial statements.
(g) INTEREST RATE HEDGING - The Partnership entered into interest rate
swap agreements in order to hedge against future increases in interest
rates. For swap contracts that effectively hedge interest
-8-
<PAGE>
rate exposures, the net cash amounts paid or received on the
contract are accrued and recognized as an adjustment to interest
expense over the period of the contract.
(h) USE OF ESTIMATES - The preparation of the Partnership's financial
statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the balance sheet dates and the amounts of expenses during the
reporting periods. Actual results could differ from those estimates.
(i) RECLASSIFICATIONS - Certain amounts in the 1997 financial statements
have been reclassified to conform to current year presentation.
(j) CASH AND CASH EQUIVALENTS - The Partnership classifies all
investments with terms to maturity of less than three months upon
purchase as cash and cash equivalents. Cash and cash equivalents at
December 31, 1998 consist primarily of a money market investment
account, which is carried at market, which approximates cost.
(k) DEFERRED FINANCING COSTS - Deferred financing costs of $6,544,596
are amortized over the life of the credit agreements and are
included in other assets.
(l) REAL ESTATE TAXES - The Partnership has accrued real estate taxes as
required in the Facility Lease (see Note 4). The Partnership has
made its best estimate of its anticipated real estate taxes, but has
not yet been billed by its local taxing authority. However,
management does not believe that actual taxes due will be materially
different than the amounts currently accrued.
4. RELATED PARTY AGREEMENTS AND TRANSACTIONS
FACILITY LEASE - The Project is located at 2600 Christian Street,
Philadelphia, Pennsylvania, on the site of TPEC's Schuylkill Station and
PECO's Schuylkill Station, which is owned by PECO. The Partnership has
leased a portion of the land which TPEC has leased from PECO. The lease
agreement with TPEC commenced on the date construction began, March 8,
1996, and will terminate 25 years from the date of Commercial Operation.
The Partnership is obligated to pay TPEC $1 per year as rent. The
Partnership is required to pay any increase in taxes, assessments and fees
assessed against the site or the Facility during the lease term.
DOCK FACILITY SERVICE AGREEMENT - The Partnership has an agreement with
PTDC and TPEC, an affiliate of PTDC, for fuel oil transportation and
storage services. The Partnership pays operating fees based on the number
of barrels received at, or delivered to, the dock as well as a storage fee
for barrels stored for use by the Project. These fees are adjusted
annually based on the Consumer Price Index ("CPI"). During 1998 and 1997,
the Partnership incurred costs associated with these services of $199,640
and $100,923, respectively, of which $12,862 and $100,923 is included in
accounts payable at December 31, 1998 and 1997, respectively. The entrance
to the Schuylkill Station of TPEC, which is also the entrance to the
Project, was upgraded in 1997. The Partnership had previously agreed to
reimburse TPEC for its share of the cost which amounted to $250,000.
OPERATIONS AND MAINTENANCE AGREEMENT - PUPCO, a Delaware corporation, an
affiliate of TPEC, manages and performs all operation and maintenance of
the Project subsequent to the Commercial Operation date in accordance with
a 25-year agreement. Prior to Commercial Operation, PUPCO was reimbursed
for certain costs incurred during mobilization and received a monthly fee
of $25,000 limited to $150,000 in total monthly fees. After Commercial
Operation begins, the Partnership is required to pay PUPCO an annual
operating fee of $600,000 as detailed in the agreement. A portion of the
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operating fee, $400,000, is adjusted annually based on changes in the CPI.
As an additional fee, PUPCO will receive 30% of all payments received by
the Partnership pursuant to the Contingent Capacity Purchase Addendum
(Phase 1). The Partnership was billed by PUPCO annual operating fees of
$600,000 and a capacity fee of $757,416, and reimbursable expenses of
$1,647,658 for 1998, of which $1,497,003 was included in accounts payable
at December 31, 1998. Included in those billings were $29,192 and $32,851
of fees and reimbursable expenses, respectively, which were capitalized as
construction cost.
STEAM SALE AGREEMENT - The Partnership has a 25-year agreement with TPEC
in which the Partnership sells all of the steam produced by the plant to
TPEC. The price for low- and high-pressure steam is determined based on a
function of weighted average fuel price, CPI and the City of Philadelphia
Tariff Water and Sewer Rates. The agreement requires TPEC to pay for a
minimum of 3.3 Mlbs on an annual basis upon Commercial Operation. During
1998 and 1997, $18,113,962 and $851,182, respectively, was billed by the
Partnership to TPEC for steam produced and capacity charges. Of the
amounts billed in 1998 and 1997, $296,199 and $851,182, respectively, were
capitalized as a reduction of construction costs as such sales occurred as
a result of plant testing. Accounts receivable as of December 31, 1998 and
1997 include $3,985,346 and $851,182, respectively, due from TPEC for
these billings.
ELECTRIC AND CONTINGENT CAPACITY SALES AGREEMENTS - The Partnership has
two 20-year electric sale agreements with PECO, commencing at the
Commercial Operation date, whereby the Partnership supplies PECO with
electric output at costs defined by the agreements. The terms of
agreements require PECO to purchase or accept delivery of the net electric
output from the power plant of the lesser of 150 megawatts or the amount
of electric output for which the FERC has certified the power plant. The
two parties also entered into a 20-year Contingent Capacity Purchase
Addendum which requires PECO to purchase electric capacity from the
Partnership. The addendum term commenced on the date of Commercial
Operation. During 1998 and 1997, $61,932,981 and $1,778,911, respectively,
was billed by the Partnership to PECO for electricity produced and
capacity charges. Of the amounts billed in 1998 and 1997, $1,624,855 and
$1,778,911, respectively, were applied as a reduction of construction
costs as such sales occurred as a result of plant testing. Accounts
receivable as of December 31, 1998 and 1997 include $6,693,424 and
$1,778,911, respectively, due from PECO for these billings. As a result of
the Project, PECO was required to construct an interconnection between its
facility and the Partnership's facility. The costs associated with the
interconnection, $2,355,426, were reimbursed to PECO by the Partnership
during 1997. Other amounts paid to PECO during 1997 for reimbursement of
expenses were $6,000 for the Partnership's portion of a joint thermal
modeling study.
STEAM VENTURE AGREEMENT - On September 17, 1993, TPEC, PUPCO and the
Partnership entered into an Amended and Restated Steam Venture Agreement
for the purpose of the Partnership designing, constructing, starting-up,
and testing and owning a cogeneration facility, with the assistance of the
other two participants. The agreement required the Partnership to pay
PUPCO quarterly fees of $150,000 up to Commercial Operation. Amounts
billed in 1997 were capitalized as construction costs; however, $252,635
was in accounts payable at December 31, 1997. After Commercial Operation
commenced, PUPCO receives annual fees of $1,200,000 payable in monthly
installments. Two-thirds of the annual fee is subject to an escalation of
3% per annum. During 1998 the Partnership was billed $1,200,000 by PUPCO
under this agreement, of which $25,806 was capitalized as construction
cost. Accounts payable at December 31, 1998, include $1,200,000 related to
these billings. In addition, during 1997, the Partnership incurred PUPCO
mobilization fees of $150,000.
FUEL MANAGEMENT AGREEMENT - During 1998, the Partnership had an agreement
with Exelon Corporation, a subsidiary of PECO, for fuel management
services. Under the terms of the agreement, the Partnership was to pay
Exelon a fee based on the amount of natural gas and liquid fuels delivered
to
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the Project. During 1998, the Partnership incurred costs associated with
these services of $176,480, of which $4,474 was capitalized as
construction costs and $176,480 was included in accounts payable at
December 31, 1998.
CONSTRUCTION MANAGEMENT - NRGG received fees and reimbursed expenses for
management services provided to the Project and for acting as the
Partnership's representative to administer all third-party contracts
during the construction phase. The arrangement commenced on March 8, 1996
and ceased upon Commercial Operation. During 1998, NRGG billed the
Partnership fees and reimbursed expenses of $56,250 and $214,795,
respectively, all of which was capitalized as construction cost. Accounts
payable at December 31, 1997 included $205,201 of such fees and expenses.
MANAGEMENT SERVICES AND OTHER - In accordance with the Partnership
agreement, the Partnership is required to pay it's Managing Partner
$150,000 per year for providing management services to the Partnership.
NRGG acted as Managing Partner through November 15, 1998 and billed the
Partnership fees and reimbursable expenses of $131,250 and $36,719,
respectively of which $118,750 was included in accounts payable at
December 31, 1998. Of these fees, $3,387 was capitalized as construction
cost. Effective November 15, 1998, Trigen became the Managing Partner and
billed the Partnership fees of $18,750 for the year ended December 31,
1998, all of which was included in accounts payable as of December 31,
1998. In addition, the Partnership purchases demineralized water from
Trigen. For the year ended December 31, 1998, the Partnership purchased
$2,206,869 of demineralized water from Trigen of which $46,671 was
capitalized as a construction cost prior to commercial operation and
$498,322 was included in accounts payable as of December 31, 1998.
5. OTHER SIGNIFICANT CONTRACTS
GAS SUPPLY AGREEMENT - The Partnership has a Gas Sales Agreement with
Aquila Energy Marketing Corporation ("Aquila"), a Delaware corporation,
providing for the purchase of natural gas to meet the power plant's
requirements. The purchase of gas as stated in the agreement is divided
into two tiers based on quantity purchased. The price of the first tier,
for daily purchases up to 32,000 million British Thermal units (MMBtu) is
based on the gas spot market plus a premium. The second tier, for daily
purchases above the initial 32,000 MMBtu, is also based on the gas spot
market plus a premium. The premium on second tier gas purchases is subject
to annual negotiations effective for years beginning January 1, 1999 and
after. In addition, beginning in 2001 the price of both tiers is indexed
based on the electricity rate received by the Project. The agreement also
has a pricing provision for winter quantity gas delivered to certain
redelivery points as defined in the agreement. The initial term of the Gas
Sales Agreement is 192 months from the initial delivery and may be
extended for one-year renewal periods unless terminated by either party.
During 1998, the Partnership purchased $14,691,090 of gas under this
agreement.
GAS TRANSPORTATION ARRANGEMENTS - The Partnership and the Philadelphia
Authority for Industrial Development ("PAID") entered into a Service
Agreement dated January 28, 1996, whereby PAID agreed to deliver
non-interruptible local gas service to the Project for up to 50,000
Dekatherms ("Dth") per day from the date of Commercial Operation via an
established agreement with Philadelphia Gas Works ("PGW"). The agreement
between the Partnership and PAID is for a period of 25 years and may be
extended at the mutual agreement of the two parties. The Partnership is
committed to purchase transportation services for a minimum annual
quantity based in part, on steam sales to Trigen. In addition, TPEC
permanently released capacity of 15,000 Dth to the Partnership beginning
November 1, 1997. TPEC retained first refusal privileges on this released
capacity in the event that the Partnership does not require the additional
capacity. During 1998, the Partnership purchased $3,187,640 of
transportation services under these agreements.
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ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT - The Partnership has a
$116,300,000 engineering, procurement and construction contract (the
"EPC") with the Contractor. The contract guaranteed that the Project would
be provisionally completed by December 8, 1997, the projected date of
Commercial Operation. Provisions of the contract included rebates to the
Partnership of $70,000 a day should the Contractor fail to complete the
Project on schedule as well as bonus payments to the Contractor should the
Project be completed prior to schedule. The contract was not completed on
time. As such, a rebate in the amount of $1,722,000 has been recorded in
accounts receivable at December 31, 1998. The Partnership believes this
accrual is based on a conservative estimate. Currently, the Partnership
and the Contractor are in arbitration over the completion of the EPC
contract (see Note 2). Provisional acceptance of the Project has not yet
occurred.
COMBUSTION TURBINE PARTS SUPPLY AND REPAIR AND SCHEDULED OUTAGE SERVICES
AGREEMENT - The Partnership entered into a combustion turbine parts supply
and repair and scheduled outage services agreement with Westinghouse
Electric Corporation as of August 29, 1997. The agreement requires the
Partnership to purchase from the Contractor parts and miscellaneous
hardware for the gas turbine comprising a portion of the Project, repair
of parts for the gas turbine comprising a portion of the Project, and
scheduled outage services and technical field assistance for unscheduled
outages as defined in the agreement.
6. CREDIT AGREEMENTS
On March 1, 1996 the Partnership entered into a $125,000,000 Credit
Agreement (the "Agreement") to provide construction and term loan
financing for the purpose of financing a major portion of the Project
facility. The Agreement provides the Partnership with $113,000,000 of
construction loan commitments (the "Construction Loan") which are
convertible to term loan commitments (the "Term Loan") after completion of
certain criteria as stated in the Agreement, $7,000,000 in letter of
credit commitments (the "LOC Commitment"), and $5,000,000 in working
capital loan commitments (the "WC Loan"). Upon completion of the Project,
the Construction Loan is due and payable or may be converted to a 15-year
Term Loan, payable in quarterly installments through the year 2013. The
Term Loan is available only to repay the Construction Loan. Substantially
all of the Partnership's assets have been pledged as collateral under the
Agreement.
The Partnership had $94,324,049 outstanding under the Construction Loan at
December 31, 1998. The Partnership has pledged $5,000,000 under its LOC
Commitment for outstanding letters of credit as of December 31, 1998.
Interest on balances outstanding under the Construction Loan and the WC
Loan prior to conversion of Construction Loan to Term Loan, is based on
either the base rate, as defined in the Agreement, or LIBOR plus 1.1% as
elected by the Partnership at the time of borrowing, and was 6.66% at
December 31, 1998. Interest on balances outstanding under the Term Loan
and the WC Loan, subsequent to conversion of Construction Loan to Term
Loan, is based on the rates as noted during the Construction Loan period
and is subject to an increase in the percentage as defined in the
Agreement. Interest on letters of credit outstanding under the LOC
Commitment is currently 1.1%, and is subject to periodic increases during
the term of the Agreement. The LOC Commitment also is subject to a fee of
0.125%, due quarterly.
The Agreement provides for commitment fees of 0.375% on the unused
Construction Loan, WC Loan and LOC Commitment.
To protect the Project Lender from the uncertainty of interest rate
changes during the term of the loan, the Partnership entered into an
agreement (the "Swap Agreement") with Chase Manhattan Bank
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(the "Counterparty"), a participating bank in the Loan Agreement on
March 1, 1996. Under the Swap Agreement, the Partnership agreed to
swap interest payments with the Counterparty. Effective December 8,
1997, the Partnership is obligated to make fixed interest payments at
a rate of 7.18% from effective date of December 8, 1997 through
termination date of December 8, 2012 on a balance of $56,500,000 at
December 8, 1997 and decreasing in accordance with the Swap Agreement.
The Counterparty is obligated to make variable interest payments based
on a three-month LIBOR, which was 5.2% at December 31, 1998, on the
same balance.
The Partnership also has a Subordinate Credit Commitment with the
Project's Contractor. The Contractor agreed to lend the Partnership
$15,000,000 to provide additional funding for the construction of the
Project. The funds are available after the Construction Loan commitments
described above have been exhausted and the Partners have made their
equity contribution of $30,000,000 to be used for the continuation of the
Project's construction. The term of the Subordinate Debt is nine years and
interest on the Subordinate Debt will be calculated using the prime rate
for the first four years and prime rate plus 1.5% for the remaining years.
During 1998, the Partnership borrowed the full $15,000,000 available under
the Subordinate Debt.
During 1998, the Partnership received a notice of default from the Project
Lender. Such default resulted in a cross-default on the Partnership's
Subordinate Debt. See Note 2.
7. CAPITAL CONTRIBUTIONS
During 1997, the Construction Loan (see Note 6) was fully utilized. Each
of the Partners made an equity contribution of $10,000,000. The last
contributions were made December 29, 1997.
8. NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 (SOP 98-5), REPORTING ON THE COSTS OF
START-UP ACTIVITIES. This statement, which requires that costs related to
start-up activities generally be expensed as incurred, is effective for
fiscal years beginning after December 25, 1998. At this time, the
Partnership has not determined the impact the adoption of this standard
will have on the Partnership's financial statements.
In July 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, ("SFAS No. 133") ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and
for hedging activities, is effective for fiscal years beginning after June
15, 1999. At this time, the Partnership has not determined the impact the
adoption of this standard will have on the Partnership's financial
statements.
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9. SUBSEQUENT EVENTS
On February 28, 1999, the 20 year agreement with Exelon for fuel
management services was terminated by mutual consent among the parties.
On March 10, 1999, the Court of Common Pleas granted the Partnership's
motion for partial summary judgement effectively deciding the issue of
liability on the contract claim against PECO and in favor of the
Partnership in the matter discussed in Note 2. The trial will now be
limited to the amount of damages PECO must pay the Partnership and the
counts of fraud, conversion, breach of the implied covenant of good faith
and fair dealing and breach of fiduciary duties.
The trial is scheduled to begin March 29, 1999.
******
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form, S-8 (No. 333-38603) of Cogeneration Corporation of America of
our report, dated January 26, 1999 (except for Note 9, as to which the date is
March 10, 1999), on the financial statements for the years ended December 31,
1998 and 1997 of Grays Ferry Cogeneration Partnership appearing in this
Form 10-K.
/s/ Deloitte & Touche LLP
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Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 25, 1999
<PAGE>
INDEX TO EXHIBITS
PERIODIC REPORTS, PROXY STATEMENTS AND OTHER INFORMATION FILED BY COGENAMERICA
WITH THE SEC PURSUANT TO THE INFORMATIONAL REQUIREMENTS OF THE EXCHANGE ACT MAY
BE INSPECTED AND COPIED AT THE SEC'S PUBLIC REFERENCE ROOM, 450 FIFTH STREET,
N.W., WASHINGTON, D.C. 20549, AND THE PUBLIC MAY OBTAIN INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM BY CALLING THE SEC AT 1-800-SEC-0330. THE
SEC ALSO MAINTAINS AN INTERNET SITE (HTTP://WWW.SEC.GOV) THAT MAKES AVAILABLE
REPORTS, PROXY STATEMENTS AND OTHER INFORMATION REGARDING COGENAMERICA. THE
COMPANY'S SEC FILE NUMBER REFERENCE IS COMMISSION FILE NO. 1-9208.
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EXHIBIT NO. DESCRIPTION
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2.1 Composite Fourth Amended and Restated Plan of Reorganization
for O'Brien Environmental Energy, Inc. (currently Cogeneration
Corporation of America) (the "Company") dated January 31, 1996
and proposed by the Company, the Official Committee of Equity
Security Holders, Wexford Management Corp. ("Wexford") and NRG
Energy, Inc. ("NRG Energy") filed as Exhibit 2.1 to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (Commission File No. 1-9208)
and incorporated herein by this reference.
2.2 Order confirming Composite Fourth Amended and Restated Plan of
Reorganization for the Company proposed by the Company, the
Official Committee of Equity Security Holders, Wexford and NRG
Energy dated February 13, 1996 and entered on February 22,
1996 and filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K dated February 13, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
2.3 Amended and Restated Stock Purchase and Reorganization
Agreement dated January 31, 1996 between the Company and NRG
Energy filed as Exhibit 10.1 to the Company's Current Report
on Form 8-K dated February 13, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
2.4 Letter Agreement dated April 26, 1996 between the Company and
NRG Energy amending the Stock Purchase and Reorganization
Agreement filed as Exhibit 2.4 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
2.5 Stock Purchase Agreement dated September 10, 1998 between the
Company and MCPC LLC filed as Exhibit 2.1 to the Company's
Current Report on 8-K dated October 9, 1998 (Commission File
No. 1-9208) and incorporated herein by this reference.
3.1 Amended and Restated Certificate of Incorporation of the
Company filed as Exhibit 3.1 to Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (Commission File
No. 1-9208) and incorporated herein by this reference.
3.2 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 (Commission File No. 1-9208) and
incorporated herein by reference.
10.1 Co-Investment Agreement dated April 30, 1996 between the
Company and NRG Energy filed as Exhibit 10.1 to Amendment No.
1 to the Company's Annual Report on
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Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.2.1 Chapter 11 Financing Agreement dated August 30, 1995 between
the Company and NRG Energy filed as Exhibit 10.2.1 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.2.2 Letter Agreement dated February 20, 1996 between the Company
and NRG Energy amending the Chapter 11 Financing Agreement
filed as Exhibit 10.2.2 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.2.3 Letter Agreement dated April 30, 1996 between the Company and
NRG Energy further amending the Chapter 11 Financing Agreement
filed as Exhibit 10.2.3 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.3 Liquidating Asset Management Agreement dated April 30, 1996
between the Company and Wexford filed as Exhibit 10.3 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.4 Management Services Agreement dated as of January 31, 1996
between the Company and NRG Energy filed as Exhibit 10.4 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.5.1 Loan Agreement dated April 30, 1996 between the Company and
NRG Energy filed as Exhibit 10.5.1 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.5.2 Note dated April 30, 1996 from the Company to NRG Energy in
the principal amount of $45,000,000 filed as Exhibit 10.5.2 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.6.1 Supplemental Loan Agreement dated April 30, 1996 between NRG
Energy and the Company filed as Exhibit 10.6.1 to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (Commission File No. 1-9208)
and incorporated herein by this reference.
10.6.2 Note dated April 30, 1996 from the Company to NRG Energy in
the principal amount of $15,855,545.25 filed as Exhibit 10.6.2
to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.7.1 NRG Newark Cogen Loan Agreement dated April 30, 1996 between
NRG Energy and the Company filed as Exhibit 10.7.1 to
Amendment No. 2 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.7.2 Note dated April 30, 1996 from the Company to NRG Energy in
the principal amount of $24,000,000 filed as Exhibit 10.7.2 to
Amendment No. 1 to the Company's Annual
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Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.8.1 Credit Agreement dated May 17, 1996 between NRG Generating
(Newark) Cogeneration Inc. (currently CogenAmerica Newark
Inc.), NRG Generating (Parlin) Cogeneration Inc. (currently
CogenAmerica Parlin Inc.), Credit Suisse, Greenwich Funding
Corporation and any Purchasing Lender, as Lenders thereunder
filed as Exhibit 10.8.1 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.8.2 Amendment No. 1 to the Credit Agreement dated June 28, 1996
between NRG Generating (Newark) Cogeneration Inc., NRG
Generating (Parlin) Cogeneration Inc. and Credit Suisse,
Greenwich Funding Corporation and any Purchase Lender (as
defined therein) filed as Exhibit 10.8.2 to Amendment No. 1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.8.3 Stock Pledge Agreement dated June 28, 1996 between the Company
as Pledgor and Credit Suisse filed as Exhibit 10.8.3 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.8.4 Guaranty dated as of May 17, 1996 by NRG Energy, as Guarantor,
to Credit Suisse, as Agent for the benefit of Credit Suisse,
Greenwich Funding Corporation and any Purchasing Lender, as
Lenders under the Credit Agreement (as defined therein) filed
as Exhibit 10.8.4 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.8.5 Guaranty dated as of June 28, 1996 by the Company as Guarantor
to Credit Suisse as Agent for the benefit of Credit Suisse,
Greenwich Funding Corporation and any Purchasing Lender, as
Lenders under the Credit Agreement (as defined therein) filed
as Exhibit 10.8.5 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.8.6 Tax Indemnification Agreement dated June 28, 1996 between the
Company, NRG Generating (Newark) Cogeneration Inc., NRG
Generating (Parlin) Cogeneration Inc. and Credit Suisse filed
as Exhibit 10.8.6 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.8.7 Assignment and Security Agreement dated June 28, 1996 between
NRG Generating (Parlin) Cogeneration Inc. and Credit Suisse
filed as Exhibit 10.8.7 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.8.8 Amended and Restated Leasehold Mortgage, Assignment of Leases
and Rents and Security Agreement dated June 28, 1996 between
NRG Generating (Newark) Cogeneration Inc. and Credit Suisse
filed as Exhibit 10.8.8 to Amendment No. 2 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
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10.8.9 Leasehold Mortgage, Assignment of Leases and Rents and
Security Agreement dated June 28, 1996 between NRG Generating
(Parlin) Cogeneration Inc. and Credit Suisse filed as Exhibit
10.8.9 to Amendment No. 2 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.8.10 Interest Rate Swap Agreement dated August 2, 1996 between NRG
Generating (Newark) Cogeneration Inc., NRG Generation (Parlin)
Cogeneration, Inc. and Credit Suisse filed as Exhibit 10.8.10
to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.9 Loan Agreement dated March 8, 1996 between O'Brien
(Schuylkill) Cogeneration Inc. (currently CogenAmerica
Schuylkill Inc.) and NRG Energy in connection with the Grays
Ferry Partnership filed as Exhibit 10.9.1 to Amendment No. 2
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.10 Loan Agreement between the Company and PECO Energy Company
("PECO") filed as Exhibit 10.10.6 to Amendment No. 2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.11.1 Long Term Power Purchase Contract for Cogeneration and Small
Power Production dated March 10, 1986 between the Company and
Jersey Central Power and Light ("JCP&L") and filed as Exhibit
10.3.11 to the Company's Registration Statement (File No.
33-11789) and incorporated herein by this reference.
10.11.2 Letter Agreement dated June 2, 1986 between the Company and
JCP&L amending the Long Term Power Purchase Contract filed as
Exhibit 10.11.2 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.11.3 Second Amendment to Power Purchase Agreement dated March 1,
1988 between the Company and JCP&L filed as Exhibit 10.11.3 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.11.4 Letter Agreement dated April 30, 1996 between O'Brien (Newark)
Cogeneration, Inc. (currently CogenAmerica Newark Inc.),
O'Brien (Parlin) Cogeneration, Inc. (currently CogenAmerica
Parlin Inc.) and JCP&L filed as Exhibit 10.11.4 to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (Commission File No. 1-9208)
and incorporated herein by this reference.
10.11.5 Third Amendment to Power Purchase Agreement dated April 30,
1996 between O'Brien (Newark) Cogeneration, Inc. and JCP&L
filed as Exhibit 10.11.5 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.12 Transmission Service and Interconnection Agreement dated
November 17, 1987 between O'Brien Energy Systems, Inc.
(currently Cogeneration Corporation of America) and Public
Service Electric and Gas Company filed as Exhibit 10.14 to
Amendment No. 2 to the Company's Annual Report on Form 10-K
for the fiscal year
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ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.13.1 Steam Purchase Agreement dated October 3, 1986 between
O'Brien Cogeneration IV, Inc. (currently CogenAmerica Newark
Inc.) and Newark Boxboard Co. filed as Exhibit 10.15.1 to
Amendment No. 2 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.13.2 Amendment to Steam Purchase Agreement dated March 15, 1988
between O'Brien Cogeneration IV, Inc. and Newark Boxboard Co.
filed as Exhibit 10.15.2 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.13.3 Amendment to Steam Purchase Agreement dated July 18, 1988
between O'Brien (Newark) Cogeneration, Inc. and Newark Group
Industries, Inc. filed as Exhibit 10.15.3 to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.14.1 Agreement for Purchase and Sale of Electric Power dated
October 20, 1986 between the Company and JCP&L and filed
Exhibit 10.3.12 to the Company's Registration Statement (File
No. 33-11789) and incorporated herein by this reference.
10.14.2 First Amendment to Agreement for Purchase and Sale Electric
Power dated June 11, 1991 between the Company and JCP&L filed
as Exhibit 10.17.2 to Amendment No. 2 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.14.3 Amended and Restated Agreement for Purchase and Sale of
Electric Power dated April 30, 1996 between O'Brien (Parlin)
Cogeneration, Inc. and JCP&L filed as Exhibit 10.17.3 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.14.4 Letter Agreement dated April 30, 1996 between O'Brien (Parlin)
Cogeneration, Inc. and JCP&L filed as Exhibit 10.17.4 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.15.1 Steam Purchase Contract dated December 8, 1986 between the
Company and E.I. du Pont de Nemours ("E.I. du Pont") and
Company filed as Exhibit 10.20.1 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.15.2 Amendment No. 1 to Steam Purchase Contract dated January 12,
1988 between the Company and E.I. du Pont filed as Exhibit
10.20.2 to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.15.3 Letter Agreement dated July 25, 1988 between the Company and
E.I. du Pont filed as Exhibit 10.20.3 to Amendment No. 1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
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10.15.4 Amendment No. 3 to Steam Purchase Agreement dated December 12,
1988 between the Company and E.I. du Pont filed as Exhibit
10.20.4 to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.15.5 Amendment No. 4 to Steam Purchase Contract dated July 14, 1989
between the Company and E.I. du Pont filed as Exhibit 10.20.5
to Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.15.6 Amendment No. 5 to Steam Purchase Contract dated February 16,
1993 between the Company and E.I. du Pont filed as Exhibit
10.20.6 to Amendment No. 1 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.16.1 Electricity Purchase Contract dated January 18, 1988 between
the Company and E.I. du Pont filed as Exhibit 10.21.1 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.16.2 Electricity Purchase Contract dated April 30, 1996 between
O'Brien (Parlin) Cogeneration, Inc. and NRG Parlin Inc. filed
as Exhibit 10.21.2 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.16.3 Assignment of Electricity Purchase Contract dated April 30,
1996 between O'Brien (Parlin) Cogeneration, Inc., NRG Parlin,
Inc. and E.I. du Pont filed as Exhibit 10.21.3 to Amendment
No. 1 to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996 (Commission File No. 1-9208)
and incorporated herein by this reference.
10.17 Amended and Restated Partnership Agreement of Grays Ferry
Cogeneration Partnership ("Grays Ferry") dated March 1, 1996,
between Adwin (Schuylkill) Cogeneration, Inc. ("Adwin
Schuylkill"), O'Brien (Schuylkill) Cogeneration, Inc. and
Trigen-Schuylkill Cogeneration, Inc. ("Trigen-Schuylkill")
filed as Exhibit 10.23 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.18.1 Acquisition Agreement dated March 1, 1996 between Adwin
Schuylkill, O'Brien (Schuylkill) Cogeneration, Inc. and
Trigen-Schuylkill filed as Exhibit 10.24.1 to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.18.2 Side Agreement dated March 1, 1996 between Adwin Schuylkill,
O'Brien (Schuylkill) Cogeneration, Inc. and Trigen-Schuylkill
filed as Exhibit 10.24.2 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.19.1 Contingent Capacity Purchase Addendum to the Agreement for
Purchase of Electric Output (Phase I) dated September 17, 1993
between PECO and Grays Ferry filed as Exhibit 10.25.1 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
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10.19.2 Contingent Capacity Purchase Addendum to the Agreement for
Purchase of Electric Output (Phase II) dated September 17,
1993 between PECO and Grays Ferry filed as Exhibit 10.25.2 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.19.3 Amendment Agreement dated January 31, 1994 between PECO and
Grays Ferry filed as Exhibit 10.25.3 to Amendment No. 2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.19.4 Agreement for Purchase of Electric Output (Phase I) dated July
28, 1992 between PECO and Grays Ferry filed as Exhibit 10.25.4
to Amendment No. 2 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.19.5 Agreement for Purchase of Electric Output (Phase II) dated
July 28, 1992 between PECO and Grays Ferry filed as Exhibit
10.25.5 to Amendment No. 2 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.20.1 Amended and Restated Steam Purchase Agreement dated September
17, 1993 among Philadelphia Thermal Energy Corporation
("PTEC"), Adwin Equipment Company ("Adwin"), the Company and
Grays Ferry filed as Exhibit 10.26.1 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.20.2 Amended and Restated Steam Venture Agreement dated September
17, 1993 among PTEC, Philadelphia United Power Corporation
("PUPCO"), Adwin and the Company filed as Exhibit 10.26.2 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.21.1 Amended and Restated Project Services and Development
Agreement dated September 17, 1993 by and between PUPCO and
Grays Ferry filed as Exhibit 10.27.1 to Amendment No. 2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.21.2 Consent to Assignment of Agreement dated March 1, 1996 between
PUPCO, Grays Ferry and The Chase Manhattan Bank, N.A.
("Chase") filed as Exhibit 10.27.2 to Amendment No. 1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996 (Commission File No. 1-9208) and incorporated
herein by this reference.
10.22 Amended and Restated Site lease, dated September 17, 1993
between PTEC and Grays Ferry filed as Exhibit 10.28 to
Amendment No. 1 to the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (Commission File No.
1-9208) and incorporated herein by this reference.
10.23.1 NRG Generating (Newark) Cogeneration Inc./Power Operations,
Inc. Operating and Maintenance Agreement dated November 8,
1996 between NRG Generating (Newark) Cogeneration Inc. and
Power Operations, Inc. filed as Exhibit 10.25.1 to the
Company's
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Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.23.2 NRG Generating (Parlin) Cogeneration Inc./Power Operations,
Inc. Operating and Maintenance Agreement dated December 31,
1996 between NRG Generating (Parlin) Cogeneration Inc. and
Power Operations, Inc. filed as Exhibit 10.25.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.23.3 Guarantee of Operator's Obligations by the Company dated
November 8, 1996 relative to NRG Generating (Newark)
Cogeneration Inc. filed as Exhibit 10.25.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (Commission File No. 1-9208) and incorporated herein
by this reference.
10.23.4 Indemnification Agreement dated March 21, 1997 between NRG
Generating (Newark) Cogeneration Inc., NRG Generating (Parlin)
Cogeneration Inc., NRG Energy and Credit Suisse First Boston
filed as Exhibit 10.25.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.23.5 Stock Purchase Agreement dated January 1, 1997 between NRG
Energy and the Company filed as Exhibit 10.25.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.23.6 Guarantee of Operator's Obligations by NRG Energy dated March
21, 1997 between NRG Generating (Newark) Cogeneration Inc. and
NRG Generating (Parlin) Cogeneration Inc. filed as Exhibit
10.25.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.23.7 Consent to Assignment of Operating Guaranty Agreement dated
March 21, 1997 between NRG Generating (Newark) Cogeneration
Inc., NRG Generating (Parlin) Cogeneration Inc., NRG Energy
and Credit Suisse First Boston filed as Exhibit 10.25.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.24.1 Credit Agreement dated December 17, 1997 between the Company,
MeesPierson Capital Corp. and the Lenders (as defined therein)
filed as Exhibit 10.26.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.24.2 Promissory Note dated December 17, 1997 from the Company to
MeesPierson Capital Corp. in the principal amount of
$30,000,000 filed as Exhibit 10.26.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.24.3 Pledge Agreement dated December 17, 1997, between the Company
and MeesPierson Capital Corp. filed as Exhibit 10.26.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.24.4 Guarantee dated as of December 17, 1997, made by O'Brien
(Philadelphia) Cogeneration Inc. in favor of MeesPierson
Capital Corp. filed as Exhibit 10.26.4 to the
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Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.24.5 General Security Agreement dated as of December 17, 1997,
between O'Brien (Philadelphia) Cogeneration Inc. and
MeesPierson Capital Corp. filed as Exhibit 10.26.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.24.6 General Security Agreement dated as of December 17, 1997, by
the Company in favor of MeesPierson Capital Corp. filed as
Exhibit 10.26.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (Commission File
No. 1-9208) and incorporated herein by this reference.
10.24.7 General Security Agreement dated as of December 17, 1997, by
O'Brien Energy Services Company in favor of MeesPierson
Capital Corp. filed as Exhibit 10.26.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.24.8 Subordination Agreement dated as of December 10, 1997, among
MeesPierson Capital Corp., the Senior Lenders, the Company and
NRG Energy filed as Exhibit 10.26.8 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.24.9 Subordination Agreement dated as of December 17, 1997 among
MeesPierson Capital Corp., the Senior Lenders, O'Brien
(Philadelphia) Cogeneration Inc. and O'Brien Energy Services
Company filed as Exhibit 10.26.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.24.10 First Amendment to Credit Agreement dated as of February 12,
1999 between the Company and MeesPierson Capital Corp.
10.25.1 Membership Interest Purchase Agreement dated December 10, 1997
between NRG Energy, NRGG Funding Inc. (currently CogenAmerica
Funding Inc.) and the Company filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 30, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.25.2 Equity Commitment Agreement dated September 15, 1997 between
NRG Energy and Chase filed as Exhibit 10.27.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (Commission File No. 1-9208) and incorporated herein
by this reference.
10.25.3 Assignment and Assumption Agreement dated December 10, 1997
between NRG Energy and NRGG Funding Inc. filed as Exhibit
10.27.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.4 Equity Commitment Guaranty, dated as of December 10, 1997 by
NRG Energy in favor of Chase and NRG (Morris) Cogen, LLC
(currently CogenAmerica Morris LLC) filed as Exhibit 10.27.4
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
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10.25.5 Amendment and Consent, dated as of December 10, 1997 among NRG
(Morris) Cogen, LLC and the banks (the "Banks") party to the
Credit Agreement, dated as of September 15, 1997, among NRG
(Morris) Cogen, LLC, the Banks and Chase filed as Exhibit
10.27.5 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.6 Construction Services Agreement dated August 29, 1997 between
NRG (Morris) Cogen, LLC and NRG Energy filed as Exhibit
10.27.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.7 First Amendment to Construction Services Agreement dated
December 10, 1997 between NRG (Morris) Cogen, LLC and NRG
Energy filed as Exhibit 10.27.7 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.25.8 Construction and Term Loan Agreement dated September 15, 1997
between NRG (Morris) Cogen, LLC, Chase and the Banks filed as
Exhibit 10.27.8 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (Commission File
No. 1-9208) and incorporated herein by this reference.
10.25.9 Consent and Amendment, dated as of December 10, 1997, among
NRG (Morris) Cogen, LLC, the Banks and Chase filed as Exhibit
10.27.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.10 Pledge and Security Agreement, dated as of December 10, 1997
by NRGG Funding Inc. and NRG Morris, Inc. (currently
CogenAmerica Morris Inc.) in favor of Chase filed as Exhibit
10.27.10 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.11 Supplemental Loan Agreement, dated as of December 10, 1997
between NRG Energy, the Company and NRGG Funding Inc. filed as
Exhibit 10.27.11 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (Commission File
No. 1-9208) and incorporated herein by this reference.
10.25.12 Subordination Agreement, dated as of December 10, 1997 between
Chase and NRG Energy filed as Exhibit 10.27.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.25.13 Subordinated Pledge and Security Agreement, dated as of
December 10, 1997 by NRGG Funding Inc. and NRG Morris, Inc. to
NRG Energy filed as Exhibit 10.27.13 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.25.14 Operation and Maintenance Agreement dated September 19, 1997
between NRG (Morris) Cogen, LLC and NRG Morris Operations Inc.
filed as Exhibit 10.27.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.25.15 First Amendment to Operation and Maintenance Agreement dated
December 10, 1997 between NRG (Morris) Cogen, LLC and NRG
Morris Operations Inc filed as Exhibit
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10.27.15 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.16 Assignment, Assumption and Consent, dated as of December 30,
1997 among NRG Energy, NRGG Funding Inc., the Company and
Equistar Chemicals, LP a successor in interest to Millennium
Petrochemicals, Inc. filed as Exhibit 10.27.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.25.17 Limited Guaranty dated September 19, 1997 by NRG Energy for
the benefit of NRG (Morris) Cogen, LLC filed as Exhibit
10.27.17 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.25.18 First Amendment to Limited Guaranty, dated as of the 10th day
of December, 1997 that amends the Limited Guaranty made by NRG
Energy for the benefit of NRG (Morris) Cogen, LLC dated
September 19, 1997 filed as Exhibit 10.27.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (Commission File No. 1-9208) and incorporated herein
by this reference.
10.25.19 First Amendment to Loan Agreement dated as of November 30,
1998 between the Company, CogenAmerica Funding Inc., and NRG
Energy.
10.26 Lease dated July 18, 1988 between Newark Group Industries,
Inc. and O'Brien (Newark) Cogeneration, Inc. filed as Exhibit
10.29 to Amendment No. 2 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.27 Ground Lease dated January 2, 1987 between E.I. Du Pont and
Company and O'Brien Energy Systems, Inc. filed as Exhibit
10.30 to Amendment No. 2 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.28.1* NRG Generating (U.S.) Inc. 1996 Stock Option Plan ("1996
Plan") dated September 20, 1996 and filed as Appendix A to the
Company's Proxy Statement dated October 28, 1996 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.28.2* Form of 1996 Plan Incentive Stock Option Agreement filed as
Exhibit 10.31.2 to Amendment No. 1 to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1996
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.28.3* Form of 1996 Plan Employee Nonqualified Stock Option Agreement
filed as Exhibit 10.31.3 to Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended June 30,
1996 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.28.4* Form of 1996 Plan Nonemployee Director Nonqualified Stock
Option Agreement filed as Exhibit 10.31.4 to Amendment No. 1
to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1996 (Commission File No. 1-9208) and
incorporated herein by this reference.
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* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to Item 14(c) of Form 10-K.
70
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10.29.1* NRG Generating (U.S.) Inc. 1997 Stock Option Plan ("1997
Plan") dated May 1, 1997 and filed as an Appendix to the
Company's Proxy Statement dated April 24, 1997 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.29.2* Form of 1997 Plan Incentive Stock Option Agreement filed as
Exhibit 10.31.2 to the Company's Report on Form 10-K for the
year ended December 31, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.29.3* Form of 1997 Plan Employee Nonqualified Stock Option Agreement
filed as Exhibit 10.31.3 to the Company's Report on Form 10-K
for the year ended December 31, 1997 (Commission File No.
1-9208) and incorporated herein by this reference.
10.29.4* Form of 1997 Plan Nonemployee Director Nonqualified Stock
Option Agreement filed as Exhibit 10.31.4 to the Company's
Report on Form 10-K for the year ended December 31, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.30* Employment Agreement dated March 28, 1997 between the Company
and Robert T. Sherman, Jr., and filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997 (Commission File No. 1-9208) and
incorporated herein by this reference.
10.31* Employment Agreement dated August 28, 1997 between the
Company and Richard Stone filed as Exhibit 10.33 in the
Compay's Report on Form 10-K for the year ended December 31,
1997 (Commission File No. 1-9208) and incorporated herein by
this reference.
10.32 Confidentiality Agreement dated October 3, 1997 between the
Company and NRG Energy filed as Exhibit 10.35 in the Company's
Report on Form 10-K for the year ended December 31, 1997
(Commission File No. 1-9208) and incorporated herein by this
reference.
10.33* Settlement Agreement and Mutual Release dated December 1,
1998 between the Company, Robert T. Sherman, and NRG Energy.
10.34 Loan Agreement dated as of October 9, 1998 between NRG Energy,
the Company, CogenAmerica Pryor Inc. and Oklahoma Loan
Acquisition Corporation.
10.35.1* NRG Generating (U.S.) Inc. 1998 Stock Option Plan ("1998
Plan") dated May 20, 1998 and filed as an Appendix to the
Company's Proxy Statement dated April 27, 1998 (Commission
File No. 1-9208) and incorporated herein by this reference.
10.35.2* Form of 1998 Plan Incentive Stock Option Agreement.
10.35.3* Form of 1998 Plan Employee Nonqualified Stock Option Agreement.
10.35.4* Form of 1998 Plan Nonemployee Director Nonqualified Stock
Option Agreement.
10.35.5* Form of 1998 Plan Nonemployee Nonqualified Stock Option
Agreement.
21 List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
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- -------------------------------------------------------------------------------
FIRST AMENDMENT
TO
CREDIT AGREEMENT
DATED AS OF FEBRUARY 12, 1999
BETWEEN
COGENERATION CORPORATION OF AMERICA
(f/k/a NRG GENERATING (U.S.), INC.),
AS BORROWER
AND
MEESPIERSON CAPITAL CORP.,
AS ARRANGER, LENDER, AGENT AND SECURITY TRUSTEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FIRST AMENDMENT
TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made as
of the 12th day of February, 1999, between Cogeneration Corporation of
America (f/k/a NRG Generating (U.S.), Inc.), as the Borrower, and MeesPierson
Capital Corp., as the Arranger, the Lender, the Agent and the Security
Trustee (in such collective capacity, "MPCC"), and amends and is supplemental
to that certain Credit Agreement, dated as of December 17, 1997, between the
Borrower, and MPCC (the "Credit Agreement").
WITNESSETH:
WHEREAS, the Borrower and the Lender desire to amend the Credit
Agreement; and
NOW, THEREFORE, in consideration of the premises and such other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged by the Borrower and MPCC, it is hereby agreed as follows:
1. RULES OF CONSTRUCTION; DEFINITIONS. Capitalized terms not
otherwise defined herein shall have the meanings assigned to such terms in
the Credit Agreement.
2. AMENDMENTS TO THE CREDIT AGREEMENT. (a) Subject to the terms and
conditions of this Amendment, Section 9.1(f) of the Credit Agreement is
hereby amended and supplemented by inserting the following at the end of the
Section:
; PROVIDED, HOWEVER, no Event of Default arises under this Section
9.1(f) as the result of either (i) the purported termination by PECO of
the Grays Ferry Power Purchase Agreements, (ii) the subsequent
declaration of an event of default under that certain Credit Agreement
(the "CHASE FACILITY"), dated as of March 1, 1996, among Grays Ferry,
the financial institutions party thereto and The Chase Manhattan Bank,
as agent for such financial institutions, or (iii) by reason of or due
to acceleration of the indebtedness under the Chase Facility and/or
enforcement of the lender's rights under the Chase Facility and/or any
other actions taken by PECO Energy Company or any other person or entity
under or allegedly as allowed by the Grays Ferry Power Purchase
Agreements and/or any other action taken by the lenders or any other
person or entity under or as allowed by the Chase Facility and/or events
or circumstances that result directly or indirectly from, are directly
or indirectly due to or are directly or indirectly caused by any or all
of the above, including without limitation action, events or
circumstances which with the passing
<PAGE>
of time, or both, would or could otherwise constitute an Event of Default
under the Credit Agreement.
(b) The Credit Agreement is hereby further amended by substituting the
Schedule 2 attached hereto as Annex A in place of the existing Schedule 2.
4. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents
that this Amendment has been duly authorized, executed and delivered by
Borrower pursuant to its corporate powers and constitutes the legal, valid
and binding obligation of Borrower. After giving effect to the amendment set
forth above in Section 2(a) above, as of the date hereof no Event of Default
has occurred and is in effect, and each representation and warranty set forth
in Section 2 of the Credit Agreement is hereby restated and affirmed as true
and correct as of the date hereof.
5. CONDITIONS PRECEDENT. The effectiveness of this Amendment shall be
subject to the conditions precedent that the Agent shall have received the
following, each in form and substance satisfactory to the Agent:
(a) this Amendment executed by each party hereto; and
(b) a fee in the amount of $187,500.00; and
(c) a written instruction from the Borrower to the Agent canceling the
undrawn commitment under the Facility
6. CONFIRMATION OF CREDIT AGREEMENT. Except as herein expressly
amended, the Credit Agreement is ratified and confirmed in all respects and
shall remain in full force and effect in accordance with its terms. Each
reference in the Credit Agreement to "this Agreement" shall mean the Credit
Agreement as amended by this Amendment, and as hereinafter amended or
restated.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS
CONFLICT OF LAW RULES.
8. COUNTERPARTS. This Amendment may be executed in counterparts
which, taken together, shall constitute a single document.
9. MODIFICATIONS IN WRITING. No amendment, modifications, supplement,
termination or waiver of this Amendment shall be effective unless the same
shall be in writing and otherwise made in accordance with Section 17.5 of the
Credit Agreement.
10. EFFECTIVENESS. This amendment shall be effective as of January 1,
1999. Any payment of interest in excess of the non-default rate made by the
Borrower during the month of January 1999 shall be applied towards the fee
described in Section 5(b) hereof.
2
<PAGE>
IN WITNESS WHEREOF, each of the Borrower and MPCC caused this Amendment
to be executed by its duly authorized officer as of the 12th day of February,
1999.
COGENERATION CORPORATION OF AMERICA,
as Borrower
By: /s/ Timothy P. Hunstad
--------------------------------------------
Name: Timothy P. Hunstad
Title: V.P. and Chief Financial Officer
MEESPIERSON CAPITAL CORP.,
as Arranger, Lender, Agent and Security Trustee
By: /s/ Hendrik Vroege
--------------------------------------------
Name: Hendrik Vroege
Title: Managing Director
By: /s/ Eugene Oliva
--------------------------------------------
Name: Eugene Oliva
Title: Assistant Vice President
3
<PAGE>
FIRST AMENDMENT TO LOAN AGREEMENT
This FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment"), made and
entered into as of November 30, 1998, is by and between Cogeneration
Corporation of America, formerly known as NRG Generating (U.S.) Inc., a
Delaware corporation ("CogenAmerica"), and CogenAmerica Funding Inc.,
formerly known as NRGG Funding Inc., a Delaware corporation (each a
"Borrower" and collectively, the "Borrowers"), and NRG Energy, Inc., a
Delaware corporation (the "Lender").
RECITALS
1. The Lender and the Borrowers entered into a Supplemental Loan
Agreement dated as of December 10, 1997 (the "Loan Agreement"); and
2. The Borrowers desire to amend certain provisions of the Loan
Agreement, and the Lender has agreed to make such amendments, subject to the
terms and conditions set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby covenant
and agree to be bound as follows:
SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not
otherwise defined herein shall have the meanings assigned to them in the Loan
Agreement, unless the context shall otherwise require. For purposes of the
Loan Agreement, CogenAmerica shall continue to be referred to as "NRGG" and
CogenAmerica Funding Inc. shall continue to be referred to as "Funding".
SECTION 2. AMENDMENTS. The Loan Agreement is hereby amended as follows:
2.1 DEFINITIONS
(a) The definitions of "Base Rate", "Funding Date," "Notes,"
"NRG Equity Guaranty" and "NRGG Equity Guaranty" contained in
Section 1.01 of the Loan Agreement are amended to read in their
entireties as follows:
"Base Rate" means (a) a rate per annum equal to the Prime
Rate for that date PLUS one and one-half percent (1.5%) PLUS
two percent (2%) during the period commencing on October 30,
1998 until such time as the Borrowers have provided the Lender
with evidence, reasonably satisfactory to the Lender, that (i)
the "Possible Event of Default" (as defined in the MeesPierson
Waiver Letter) has been absolutely and irrevocably waived by
the lenders party to the MeesPierson Credit Agreement or has
been cured by NRGG, (ii) no "Event of Default" as defined in
the MeesPierson Credit Agreement (nor any event or
<PAGE>
circumstance which with the giving of notice or the passage of
time, or both, would constitute an "Event of Default") has
occurred and is then continuing, whether or not any temporary
or contingent waiver may be in effect with respect to such
"Event of Default," and (iii) the "Margin" (as defined under
the MeesPierson Credit Agreement) has been reduced by the
lenders party to the MeesPierson Credit Agreement to the rate
in effect immediately prior to October 1, 1998 and (b) for any
date not falling within the period described in clause (a), a
rate per annum equal to the Prime Rate for that date PLUS one
and one-half percent (1.5%).
"Funding Date" shall mean any date upon which the Lender
makes a Loan to the Borrowers pursuant to the terms of this
Agreement.
"Note" means the joint and several Note of the Borrowers
substantially in the form attached hereto as Exhibit A.
"NRC Equity Guaranty" shall have the meaning assigned
thereto in Section 2.03.
"NRGG Equity Guaranty" shall have the meaning assigned
thereto in Section 2.02.
(b) Section 1.01 of the Loan Agreement is further amended by
adding thereto the following definitions of "Amount Advanced,"
"Initial Funding Date," "MeesPierson Credit Agreement,"
"MeesPierson Waiver Letter," "NRG Morris Inc." and "Prime Rate" in
correct alphabetical order:
"Amount Advanced" shall mean the aggregate amount of all
Loan advances made by the Lender under this Loan Agreement,
and shall not be reduced by any principal payment made by the
Borrowers to the Lender.
"Initial Funding Date" shall mean October 30, 1998.
"MeesPierson Credit Agreement" shall mean that certain
Credit Agreement dated December 17,1997 entered into by and
among NRGG and MeesPierson Capital Corp. and the other lenders
party thereto.
"MeesPierson Waiver Letter" shall mean that certain
waiver letter between NRGG and MeesPierson Capital Corp. dated
as of August 14,1998, under the MeesPierson Credit Agreement.
"NRG Morris Inc." shall mean CogenAmerica Morris Inc., formerly known
as NRG Morris Inc., a Delaware corporation.
"Prime Rate" shall mean at the time any determination
thereof is to be made, the fluctuating interest rate per annum
announced from time to time by The Chase Manhattan Bank, New
York, New York, as its "Prime Rate" (or, if otherwise
denominated, such bank's reference rate for interest rate
calculations on general commercial loans), which rate is not
necessarily the lowest or best rate which such bank may at any
time and
<PAGE>
from time to time charge any of its customers.
2.2 LOAN. Section 2.01 of the Loan Agreement is amended to read
in its entirety as follows:
Section 2.01 LOAN. Subject to the terms and conditions hereof,
the Lender agrees to make one or more loans to the Borrowers, each on a
Funding Date prior to March 31, 1999, in an aggregate principal amount
with respect to all such loans not to exceed $22,000,000 (individually
or collectively, as the context may require, the "Loan"). Amounts paid
on the Loan may not be reborrowed.
2.3 MATURITY. Section 2.04 of the Loan Agreement is amended to
read in its entirety as follows:
Section 2.04 MATURITY. The Loan shall mature in its entirety on
December 31, 2004.
2.4 AMORTIZATION Article 2 of the Loan Agreement is amended to
add new Section 2.05(e) as follows:
(e) If on any payment date set forth on the Amortization
Schedule the Amount Advanced is less than $22,000,000, then the
principal payment date shall be reduced to the amount equal to (i)
the principal payment set forth on the Amortization Schedule
multiplied by (ii) the ratio of (A) the Amount Advanced to (B)
$22,000,000.
2.5 CONDITIONS PRECEDENT. Article 3 of the Loan Agreement is
amended by adding new Section 3.02 as follows:
SECTION 3.02. CONDITIONS TO ADDITIONAL LOANS AFTER THE
INITIAL FUNDING DATE. The obligation of the Lender on any
Funding Date after the Initial Funding Date to make any
additional Loan is subject to the satisfaction, or waiver by
the Lender, immediately prior to or concurrent with the making
of such Loan (or at such other time specified below), of the
following conditions:
(a) RESOLUTIONS; NOTICE OF BORROWING. The Lender
shall have received from the Borrowers a copy of the
resolutions of the Board of Directors of each Borrower
authorizing the requested borrowing, certified as true
and accurate by the Secretary or Assistant Secretary of
each Borrower, and, at least three Business Days prior to
the Funding Date, the signed notice of borrowing
specified in Section 2.07, in form and substance
satisfactory to the Lender. The notice of borrowing
shall include (i) an acknowledgment by the Borrowers of
the outstanding amounts of principal of and accrued
interest on the Note and (ii) a certification from each
Borrower that all conditions precedent to funding have
been satisfied.
(b) OPINION OF COUNSEL. The Lender shall have
<PAGE>
received an opinion of counsel to the Borrowers and to
NRG Morris Inc. in form and substance satisfactory to the
Lender.
(c) REPRESENTATIONS TRUE; NO DEFAULT. Each
representation and warranty of the Borrowers hereunder
and under the Pledge Agreement and the other Credit
Documents shall be accurate and complete in all material
respects as of each Funding Date and no Default or Event
of Default shall have occurred hereunder.
(d) FEES AND EXPENSES. The Borrowers shall have
paid to the Lender the fees and expenses set forth in
Section 9.04 and all reasonable costs and expenses
incurred by the Lender in connection with the making of
any Loan on any Funding Date, including the reasonable
fees and disbursements of counsel to the Lender.
2.6 ARTICLE 6.
(a) The opening paragraph of Article 6 of the Loan Agreement is
amended to read in its entirety as follows:
The Borrowers hereby covenant and undertake with the Lender
that, from the date hereof and so long as any principal, interest
or other moneys are owing in respect of this Agreement, under the
Note or under any of the Security Documents or so long as the fall
amount of the Loan has not been drawn pursuant to Section 2.01:
(b) Article 6 of the Loan Agreement is further amended to add new
Section 6.01(s) as follows:
(s) Promptly upon obtaining knowledge thereof (and in any
event within five (5) days thereof), inform the Lender of the
occurrence of (i) any event which would constitute an "Event of
Default" under and as defined in the MeesPierson Credit Agreement
or of any event which, with the giving of notice or lapse of time,
or both, would constitute an "Event" of Default" thereunder, (ii)
receipt of any notice from MeesPierson Capital Corp. that (A) an
"Event of Default" has occurred under the MeesPierson Credit
Agreement, (B) an event which, with the giving of notice or lapse
of time, or both, would constitute an "Event of Default" thereunder
has occurred, or (C) any waiver or forbearance of any "Event of
Default" thereunder has expired or been terminated, (iii) receipt
by NRGG of any agreement or notice from MeesPierson Capital Corp.,
or from any other lender party to the MeesPierson Credit Agreement,
waiving any term, condition, representation or covenant applicable
to NRGG under the MeesPierson Credit Agreement or any of the other
agreements, documents or instruments executed and delivered in
connection therewith, or of the covenants described therein, or
consenting to any modification of the obligations or duties of NRGG
with respect to the same, and (iv) any change in the status or
terms of the financial
<PAGE>
accommodations extended under the MeesPierson Credit Agreement,
including without limitation, any change with respect to or
affecting the MeesPierson Waiver Letter.
2.7 ACCELERATION. Section 7.02 of the Loan Agreement is amended to
read in its entirety as follows:
SECTION 7.02. ACCELERATION. If an Event of Default (other
than an Event of Default specified in Section 7.01(5) or (6) with
respect to a Borrower) occurs and is continuing, the Lender by
notice to a Borrower may declare the principal of and accrued
interest on the Loan to be due and payable and may terminate any
obligation of the Lender to make any Loans pursuant to Article 2 or
any Section thereof. Upon such declaration, all outstanding
principal of and accrued interest on the Loan shall be due and
payable immediately. If an Event of Default specified in Section
7.01(5) or (6) with respect to a Borrower occurs, the principal of
and interest on the Loans shall IPSO FACTO become and be
immediately due and payable without any declaration or other act on
the part of the Lender and, unless the Lender otherwise elects, any
obligation of the Lender to make any Loans pursuant to Article 2 or
any Section thereof shall terminate. The Lender by notice to a
Borrower may rescind an acceleration or any termination of
obligation to extend credit and the consequences of either such
action. No such rescission shall affect any subsequent Default or
impair any right consequent thereto.
2.8 FUNDING DATE. All references to "Funding Date" in Sections
5(i) (Insurance), 5(1) (ERISA), 6.01(p) (Maintenance of Insurance). 7.03
(Default and Remedies) and 7.04 (Other Remedies) shall be amended to
refer to "Initial Funding Date".
2.9 FEES. Sections 9.04(a) and (b) of the Loan Agreement are
amended by deleting the term "Funding Date" as it appears therein and
inserting in lieu thereof the term "Initial Funding Date".
2.10 AMENDED NOTE. Exhibit A to the Loan Agreement is hereby
amended to read as set forth on EXHIBIT A-1 attached to this Amendment
which is made a part of the Loan Agreement as Exhibit A thereto.
SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments contained in
this Amendment shall become effective upon delivery by the Borrowers of, and
compliance by the Borrowers with, the following:
3.1 This Amendment and the promissory note in the form of EXHIBIT
A-1 hereto (the "Amended Note") each duly executed by the Borrowers.
3.2 A copy of the resolutions of the Board of Directors of each
Borrower authorizing the execution, delivery and performance of this
Amendment and the Amended Note certified as true and accurate by its
Secretary or Assistant Secretary, along with a copy of the Bylaws of
each Borrower and a certification by such Secretary or Assistant
Secretary (i) certifying that the Bylaws of such Borrower delivered
therewith are true and accurate, and (ii) identifying each officer of
such Borrower authorized to
<PAGE>
execute this Amendment, the Amended Note and any other instrument or
agreement executed by such Borrower in connection with this Amendment
(collectively, the "Amendment Documents"), and certifying as to
specimens of such officer's signature and such officer's incumbency in
such offices as such officer holds.
3.3 Certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment, including without limitation, the
consent of the lenders to the MeesPierson Credit Agreement and
MeesPierson Capital Corp. as "Agent" pursuant to the terms and
conditions of that certain Subordination Agreement dated as of December
10, 1997, made by the Lender in favor of MeesPierson Capital Corp. and
the lenders party to the MeesPierson Credit Agreement and the consent of
The Chase Manhattan Bank as Collateral Agent pursuant to the terms and
conditions of that certain Subordination Agreement dated as of December
12, 1997 made by the Lender in favor of The Chase Manhattan Bank as
Collateral Agent.
3.4 An opinion of counsel to the Borrowers and to NRG Morris Inc.,
addressed to the Lender and dated the date of execution and delivery of
this Amendment, covering the matters set forth in EXHIBIT B hereto, duly
executed by said counsel.
3.5 A good standing certificate for the Borrowers from the State
of Delaware and from all other States in which the Borrowers are doing
business issued in each case as of a date satisfactory to the Lender.
3.6 A certificate of a responsible officer of each Borrower
certifying as to the matters set forth in Section 4.1 below.
3.7 The Borrowers shall have satisfied such other conditions as
specified by the Lender, including payment of all unpaid legal fees and
expenses incurred by the Lender through the date of this Amendment in
connection with the Loan Agreement and the Amendment Documents.
SECTION 4. REPRESENTATIONS, WARRANTIES, AUTHORITY, NO ADVERSE CLAIM.
4.1 REASSERTION OF REPRESENTATIONS AND WARRANTIES, NO DEFAULT.
The Borrowers hereby represent that on and as of the date hereof and
after giving effect to this Amendment (a) all of the representations and
warranties contained in the Loan Agreement are true, correct and
complete in all respects as of the date hereof as though made on and as
of such date, except for changes permitted by the terms of the Loan
Agreement, and (b) there will exist no Default or Event of Default under
the Loan Agreement as amended by this Amendment which is not subject to
a written waiver executed by the Lender or with respect to which the
Lender has not agreed in writing to forbear.
4.2 AUTHORITY, NO CONFLICT, NO CONSENT REQUIRED. Each Borrower
represents and warrants that such Borrower has the power and legal right
and authority to enter into the Amendment Documents and has duly
authorized as appropriate the execution and delivery of the Amendment
Documents and other agreements and documents executed and delivered by
such Borrower in connection herewith or therewith
<PAGE>
by proper corporate action, and none of the Amendment Documents nor the
agreements contained herein or therein contravene or constitute a
default under any agreement, instrument or indenture to which such
Borrower is a party or a signatory or a provision of such Borrower's
Certificate of Incorporation, Bylaws or any other agreement or
requirement of law, or result in the imposition of any lien or
encumbrance on any of its property under any agreement binding on or
applicable to such Borrower or any of its property except, if any, in
favor of the Lender. Each Borrower represents and warrants that no
consent, approval or authorization of or registration or declaration
with any Person, including but not limited to any governmental
authority, is required in connection with the execution and delivery by
such Borrower of the Amendment Documents or other agreements and
documents executed and delivered by such Borrower in connection
therewith or the performance of obligations of such Borrower therein
described, except for those which such Borrower has obtained or provided
and as to which such Borrower has delivered certified copies of
documents evidencing each such action to the Lender.
4.3 NO ADVERSE CLAIM. The Borrowers warrant, acknowledge and agree
that no events have been taken place and no circumstances exist at the
date hereof which would give either Borrower a basis to assert a
defense, offset or counterclaim to any claim of the Lender with respect
to the Borrowers' obligations under the Loan Agreement as amended by
this Amendment.
4.4. MEESPIERSON CREDIT AGREEMENT. The Borrowers represent and
warrant that they have delivered to the Lender true and correct copies
of all material documents in connection with the MeesPierson Credit
Agreement and the obligations thereunder, including, without limitation,
all waiver and forbearance agreements, and that such documents and
agreements, in the respective forms delivered to the Lender, embody the
entire agreements and understandings between the parties thereto with
respect to the matters therein and remain in full force and effect
without supplement, amendment or other modification.
SECTION 5. AFFIRMATION OF LOAN AGREEMENT, FURTHER REFERENCES,
AFFIRMATION OF SECURITY INTEREST. The Lender and the Borrowers each
acknowledge and affirm that the Loan Agreement, as hereby amended, is hereby
ratified and confirmed in all respects and all terms, conditions and
provisions of the Loan Agreement, except as amended by this Amendment, shall
remain unmodified and in full force and effect. All references in any
document or instrument to the Loan Agreement are hereby amended and shall
refer to the Loan Agreement as amended by this Amendment. The Borrowers
confirm to the Lender that the Borrowers' obligations under the Loan
Agreement, as amended by this Amendment are and continue to be secured by the
security interest granted by Funding and NRG Morris Inc. in favor of the
Lender under that certain Subordinated Pledge and Security Agreement dated as
of December 10, 1997, and all of the terms, conditions, provisions,
agreements, requirements, promises, obligations, duties, covenants and
representations of the Borrowers under such documents and any and all other
documents and agreements entered into with respect to the obligations under
the Loan Agreement are incorporated herein by reference and are hereby
ratified and affirmed in all respects by the Borrowers. Funding hereby
ratifies and reaffirms all terms, conditions and provisions of the Assignment
and Assumption Agreement. NRGG hereby ratifies and reaffirms all terms,
<PAGE>
conditions and provisions of the NRGG Equity Guaranty.
SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment
and the Amended Note, from and after the date hereof, embodies the entire
agreement and understanding between the parties hereto and supersedes and has
merged into this Amendment all prior oral and written agreements on the same
subjects by and between the parties hereto, including without limitation,
that certain Note of the Borrowers dated October 30, 1998 in the principal
amount of $8,902,750.59 and payable to the order of the Lender and that
certain loan request made by the Borrowers by letter dated October 30, 1998,
with the effect that this Amendment, shall control with respect to the
specific subjects hereof and thereof.
SECTION 7. SEVERABILITY. Whenever possible, each provision of this
Amendment and the other Amendment Documents and any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto
or thereto shall be interpreted in such manner as to be effective, valid and
enforceable under the applicable law of any jurisdiction, but, if any
provision of this Amendment, the other Amendment Documents or any other
statement, instrument or transaction contemplated hereby or thereby or
relating hereto or thereto shall be held to be prohibited, invalid or
unenforceable under the applicable law, such provision shall be ineffective
in such jurisdiction only to the extent of such prohibition, invalidity or
unenforceability, without invalidating or rendering unenforceable the
remainder of such provision or the remaining provisions of this Amendment,
the other Amendment Documents or any other statement, instrument or
transaction contemplated hereby or thereby or relating hereto or thereto in
such jurisdiction, or affecting the effectiveness, validity or enforceability
of such provision in any other jurisdiction.
SECTION 8. SUCCESSORS. The Amendment Documents shall be binding upon
the Borrowers and the Lender and their respective successors and assigns, and
shall inure to the benefit of the Borrowers and the Lender and the successors
and assigns of the Lender.
SECTION 9. LEGAL EXPENSES. The Borrowers agree to reimburse the
Lender, upon execution of this Amendment, for all reasonable out-of-pocket
expenses (including attorneys' fees and legal expenses of Dorsey & Whitney
LLP, special counsel for the Lender) incurred in connection with the Loan
Agreement, including in connection with the negotiation, preparation and
execution of the Amendment Documents and all other documents negotiated,
prepared and executed in connection with the Amendment Documents, and in
enforcing the obligations of the Borrower under the Amendment Documents, and
to pay and save the Lender harmless from all liability for, any stamp or
other taxes which may be payable with respect to the execution or delivery of
the Amendment Documents, which obligations of the Borrowers shall be joint
and several and shall survive any termination of the Loan Agreement.
SECTION 10. HEADINGS. The headings of various sections of this
Amendment have been inserted for reference only and shall not be deemed to be
a part of this Amendment,
SECTION 11. COUNTERPARTS. The Amendment Documents may be executed in
several counterparts as deemed necessary or convenient, each of which, when
so executed, shall be deemed an original provided that all such counterparts
shall be regarded as one and the same document, and either party to the
Amendment Documents may execute any such agreement by executing a counterpart
of such agreement.
SECTION 11 GOVERNING LAW. THE AMENDMENT DOCUMENTS SHALL BE
<PAGE>
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING
EFFECT TO CONFLICT OF LAW PRINCIPLES THEREOF.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date and year first above written.
BORROWER: COGENERATION CORPORATION OF
AMERICA, formerly known as NRG
Generating (U.S.) Inc.
By: /s/ Timothy P. Hunstad
--------------------------------
Title: VP & CFO
--------------------------------
BORROWER: COGENAMERICA FUNDING INC., formerly
known as NRGG Funding Inc.
By: /s/ Timothy P. Hunstad
--------------------------------
Title: VP & CFO
--------------------------------
LENDER: NRG ENERGY, INC.
By: Brian Bird
--------------------------------
Title: Treasurer
------------------------------
<PAGE>
EXHIBIT A-1 TO
FIRST AMENDMENT
EXHIBIT A
November 30, 1998
AMENDED AND RESTATED NOTE
FOR VALUE RECEIVED, the undersigned, COGENERATION CORPORATION OF
AMERICA, formerly known as NRG Generating (U.S.) Inc., a Delaware corporation
("NRGG"), and CogenAmerica Funding Inc., formerly known as NRGG Funding Inc.,
a Delaware corporation ("Funding"), hereby jointly, severally and
unconditionally promise to pay to the order of NRG ENERGY, INC. a Delaware
corporation, or registered assigns (the "Lender"), at the office of the
Lender at 1221 Nicollet Mall, Suite 700, Minneapolis, MN 53403 or by wire
transfer in accordance with such instructions as the Lender may require, in
lawful money of the United States of America and in immediately available
funds, the principal amount of up to $22,000,000 or, if less, the aggregate
unpaid principal amount of the Loan made by the Lender pursuant to Section
2.01 of the Loan Agreement referred to below (in either case, to be paid
together with any accrued interest not required to be paid currently in
cash), which sum shall be due and payable in such amounts and on such dates
as are set forth in the Supplemental Loan Agreement, dated as of December 10,
1997 among NRGG and Funding (each a "Borrower" and collectively the
"Borrowers") and the Lender (as the same may be supplemented or amended from
time to time, the "Loan Agreement"; terms defined therein being used herein
as so defined). The undersigned further agree to pay interest at said office
or to such account, in like money, from October 30, 1998 on the unpaid
principal amount hereof from time to time outstanding at the rates and on the
dates specified in Section 2.06 of the Loan Agreement.
All parties now and hereafter liable with respect to this Note, whether
maker, principal, surety, guarantor, endorser or otherwise, hereby waive
diligence, presentment, demand, protest and notice of any kind whatsoever.
The nonexercise of the holder of this Note of any of its rights hereunder in
any particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
This note is the Note referred to in the Loan Agreement, which Loan
Agreement, among other things, contains provisions for the acceleration of
the maturity hereof upon the happening of certain events, for optional and
mandatory prepayment of the principal hereof prior to the maturity hereof and
for the amendment or waiver of certain provisions of the Loan Agreement, all
upon the terms and conditions therein specified.
This Note amends and restates that certain Note of the Borrowers dated
October 30, 1998 in the principal amount of $8,902,750.59 and evidences
unpaid principal in such amount and an accrued and unpaid interest thereon.
This Note shall be construed in accordance with and governed by the laws
of the State of Minnesota and any applicable laws of the United States of
America.
<PAGE>
THIS NOTE MAY NOT BE TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS OF
THE LOAN AGREEMENT. TRANSFERS OF THIS NOTE MUST BE RECORDED IN THE REGISTER
MAINTAINED BY THE LENDER PURSUANT TO THE TERMS OF THE LOAN AGREEMENT.
THIS NOTE IS SUBJECT TO THE SUBORDINATION AGREEMENT, DATED AS OF
DECEMBER 10,1997, AMONG NRGG, THE LENDER AND MEESPIERSON CAPITAL CORP., UNDER
WHICH THIS NOTE AND NRGG'S OBLIGATIONS HEREUNDER ARE SUBORDINATED IN THE
MANNER SET FORTH THEREIN TO THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS TO THE
HOLDERS OF SENIOR INDEBTEDNESS AS DEFINED THEREIN.
THIS NOTE IS FURTHER SUBJECT TO THE SUBORDINATION PROVISIONS SET FOR THE
IN THE SUBORDINATION AGREEMENT, DATED AS OF DECEMBER 10, 1997, BETWEEN THE
LENDER AND THE CHASE MANHATTAN BANK IN ITS CAPACITY AS COLLATERAL AGENT. A
COPY OF THAT SUBORDINATION AGREEMENT IS ON FILE WITH NRGG, FUNDING AND
COGENAMERICA MORRIS INC., FORMERLY KNOWN AS NRG MORRIS INC., AND IS AVAILABLE
FOR INSPECTION AT THEIR RESPECTIVE OFFICES.
COGENERATION CORPORATION OF AMERICA
-------------------------------------------
Timothy P. Hunstad
Vice President and Chief Financial Officer
COGENAMERICA FUNDING INC.
-------------------------------------------
Timothy P. Hunstad
Vice President and Chief Financial Officer
<PAGE>
EXHIBIT B TO
FIRST AMENDMENT
MATTERS TO BE COVERED BY
OPINION OF COUNSEL
TO THE BORROWERS
The opinion of counsel to the Borrowers and to NRG Morris Inc. (the
Borrowers and NRG Morris Inc. from time to time being referred to,
collectively, as the "Loan Parties") and which is called for by Article 3 of
the Supplemental Loan Agreement, as amended by the First Amendment to Loan
Agreement dated November 30, 1998 (as amended, the "Loan Agreement") shall be
addressed to the Lender and dated the date upon which all other conditions to
effectiveness of the First Amendment to Loan Agreement are satisfied. It
shall be satisfactory in form and substance to the Lender and shall cover
the matters set forth below, subject to such assumptions, exceptions and
qualifications as may be acceptable to the Lender and counsel to the Lender.
For purposes of the opinion of counsel the term "Transaction Documents" shall
mean the Loan Agreement, the Amended and Restated Note of the Borrowers dated
November 30, 1998 in the principal amount of $22,000,000, the Pledge
Agreement (as such term and other capitalized terms used herein and not
otherwise defined herein are defined in the Loan Agreement), the Security
Documents and all agreements, instruments and documents executed and
delivered by the Borrowers or either of them in connection with the Loan
Agreement, the Equity Commitment Guaranty dated as of December 10, 1997 made
by NRGG in favor of the Lender and the Assignment and Assumption Agreement
dated as of December 10, 1997 between the Lender and Funding.
(i) Each Loan Party is a corporation duly incorporated and validly
existing and in good standing under the laws of the State of Delaware and has
and had at the time of entry into the Transaction Documents all requisite
corporate power and authority to carry on its business as now conducted, to
enter into the Transaction Documents executed by it and to perform all of its
obligations under each and all of the foregoing. Each Loan Party is duly
qualified and in good standing as a corporation in the State of Delaware and
as a foreign corporation in all of the jurisdictions in which the character
of the properties owned or leased by it or the business conducted by it makes
such qualification necessary and the failure to so qualify would permanently
preclude the Borrower from enforcing its rights with respect to any material
asset or expose the Borrower to material liability.
(ii) The execution, delivery and performance by each Loan Party of the
Transaction Documents have been duly authorized by all necessary corporate
action by such Loan Party.
(iii) The Transaction Documents constitute the legal, valid and binding
obligations of each Loan Party executing the same, enforceable against such
Loan Party in accordance with their respective terms.
(iv) The execution, delivery and performance by each Loan Party of the
Transaction Documents executed by it did not and will not (i) violate any
provision of any law, statute, rule or regulation or, to the best knowledge
of such counsel, any order, writ judgment, injunction, decree, determination
or award of any court, governmental agency or arbitrator presently in effect
having applicability to such Loan Party, (ii) violate or contravene any
provision of the
<PAGE>
Certificate of Incorporation or bylaws of such Loan Party, or (iii) result in
a breach of or constitute a default under any indenture, loan or credit
agreement or any other agreement lease or instrument known to such counsel to
which such Loan Party is a party or by which it or any of its properties may
be bound or result in the creation of any Lien thereunder.
(v) No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with, or exemption by, any
governmental or public body or authority was or is required on the part of
any Loan Party to authorize, or was or is required in connection with the
execution, delivery either performance of, or the legality, validity, binding
effect or enforceability of, the Transaction Documents, except for any
necessary filing or recordation of or with respect to any of the Security
Documents.
(vi) The best knowledge of such counsel, there are no actions, suits
or proceedings pending or threatened against or affecting any Loan Party or
any of its properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which (i) challenge the
legality, validity or enforceability of the Transaction Documents, or (ii) if
determined adversely to a Loan Party, would have a material adverse effect on
the business, operations, property or condition (financial or otherwise) of
such Loan Party and its Subsidiaries as a consolidated enterprise or on the
ability of such Loan Party to perform its obligations under the Transaction
Documents.
(vii) The Pledge Agreement creates the lien it purports to create upon
the properties and interests specifically described therein. The descriptions
of properties and interests in the Security Documents and any related
financing statements are adequate for the purpose of such instruments and for
perfection of the liens of the Lender. The filing of the Uniform Commercial
Code financing statements executed by Funding and by NRG Morris Inc. and
filed in [describe filing office] on [state dates of filings] perfected the
Liens created under the Pledge Agreement and such Liens continue to be
perfected on the date hereof.
<PAGE>
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
This Settlement Agreement is made and entered into effective December 1,
1998, by and among Robert T. Sherman ("Sherman"), Cogeneration Corporation of
America ("Cogen") and NRG Energy, Inc. ("NRG").
WHEREAS disputes have arisen between the undersigned parties; and
WHEREAS each undersigned party has determined independently that it is
desirable and beneficial for it or him to settle, compromise and resolve the
disputes in the manner and on the terms and conditions set forth herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby expressly acknowledged, the undersigned
Sherman, Cogen and NRG agree as follows:
1. Cogen and NRG, for themselves, and for all of their respective
predecessor and successor firms, subsidiaries and affiliates, which as to NRG
includes Northern States Power Company ("NSP"), and for all of their
respective present and former officers, directors, partners, principals,
employees, attorneys, assigns, agents, representatives and anyone claiming to
act on behalf of Cogen and/or NRG (hereinafter referred to collectively as
the "Cogen and NRG Releasors"), remise, release and forever discharge Sherman
and all and each of his present and former attorneys, agents, assigns,
representatives, family members, heirs, executors and administrators
(hereinafter referred to collectively as the "Sherman Releasees"), both
individually and in their representative capacities, of and from any and all
actions, causes of action, liabilities, suits, debts, sums of money,
accounts, bonds, bills, covenants, contracts, controversies, agreements,
promises, damages, judgments, claims and demands whatsoever,
<PAGE>
state or federal, in law or in equity, whether known or unknown, asserted or
unasserted, suspected or unsuspected, which the Cogen and NRG Releasors, any
or all of them, may now have or hereafter have or claim to have against the
Sherman Releasees, any or all of them, for, upon, or by reason of any matter,
event, cause or thing arising or which may have arisen at any time up to the
date of this Agreement.
2. Sherman does for himself and for all of his present and former
attorneys, agents, representatives, family members, heirs, executors,
administrators and anyone acting or claiming to act on his behalf
(hereinafter referred to collectively as the "Sherman Releasors"), remise,
release and forever discharge Cogen and NRG, and their respective predecessor
and successor firms, subsidiaries and affiliated companies, which as to NRG
includes NSP, all and each of their respective present and former officers,
directors, partners, principals, employees, attorneys, assigns, agents and
representatives, both individually and in their representative capacities
(hereinafter referred to collectively as the "Cogen and NRG Releasees"), of
and from any and all actions, causes of action, liabilities, suits, debts,
sums of money, accounts, bonds, bills, covenants, contracts, controversies,
agreements, promises, damages, judgments, claims and demands whatsoever,
state or federal, in law or in equity, whether known or unknown, asserted or
unasserted, suspected or unsuspected, which the Sherman Releasors, any or all
of them, may now have or hereafter have or claim to have against the Cogen
and NRG Releasees, any or all of them, for, upon, or by reason of any matter,
event, cause or thing arising or which may have arisen at any time up to the
date of this Agreement. The sole exception to the above release is that it
does not release any claim Sherman may have for indemnification under
applicable law or Cogen's Bylaws or Articles of Incorporation for a claim
made against
<PAGE>
Sherman based upon action taken by Sherman in his capacity as an officer,
director, or employee of Cogen.
This release includes, but is not limited to, any and all claims arising
from Sherman's employment with Cogen and the termination of that employment,
including claims under the Age Discrimination in Employment Act, the Older
Workers Benefit Protection Act, Title VII of the Civil Rights Act of 1964,
the Americans with Disabilities, the Employee Retirement Income Security Act,
the Minnesota Human Rights Act, and any other local, state or federal
discrimination act or ordinance, claims arising out of Minnesota Statute
Section 181.932, et seq., claims for breach of contract, claims for libel or
slander, claims for assault or battery, claims for infliction of emotional
distress whether intentional or negligent, claims for tortious interference
with prospective contractual relations, claims of negligence (including
negligent hiring, negligent supervision and negligent retention), claims that
Sherman has been unlawfully discharged or in any other respect unfairly
treated during his employment with Cogen and any and all claims in and
arising out of the civil actions referred to in paragraphs 4 and 5 of this
Agreement.
3. It is the intention of the undersigned parties that the releases
contained in Paragraphs 1 and 2 herein shall be effective as a full and final
accord and satisfaction, and as a bar to all actions, causes of action,
obligations, costs, expenses, attorneys' fees, damages, losses, claims,
liabilities and demands of whatsoever nature, character or kind, known or
unknown, suspected or unsuspected. The undersigned parties, hereby
acknowledge that they are aware that they or their attorneys may hereafter
discover claims or facts in addition to or different from those that they now
know or believe to exist with respect to the subject matter of this
Settlement Agreement and Mutual Release but that it is their intention hereby
fully, finally and
<PAGE>
forever to settle and release all of the disputes and differences, known or
unknown, suspected or unsuspected, which do now exist, may hereafter exist,
or may heretofore have existed, and without regard to the subsequent
discovery or existence of different or additional facts.
4. The lawsuit styled ROBERT T. SHERMAN, JR. VS. NRG ENERGY, INC., et
al., Civil File No. 99-CV-2358, in the United States District Court, District
of Minnesota, Fourth Division (the "Minnesota Action"), shall be dismissed
with prejudice and on the merits, with each party to bear its, his or her own
attorneys' fees, costs and disbursements. Counsel for each of the parties to
the Minnesota Action shall sign and file a joint stipulation for dismissal of
the Minnesota Action promptly after expiration of the rescission period
described in paragraph 18 of this Settlement Agreement and Mutual Release.
5. The lawsuit styled NRG ENERGY, INC. V. ROBERT T. SHERMAN, C.A. No.
16731NC, in the Court of Chancery of the State of Delaware, in and for New
Castle County (the "Delaware Action"), shall be dismissed without prejudice
by NRG, with each party to bear its or his own attorneys fees, costs and
disbursements, and NRG hereby covenants and agrees not to sue Sherman in the
future to obtain the relief requested in the Delaware Action. Counsel for
NRG in the Delaware Action shall file a Notice of Dismissal of the Delaware
Action promptly after expiration of the rescission period described in
paragraph 18 of this Settlement Agreement and Mutual Release.
6. Sherman shall receive his current Base Salary, in the amount of
Eighteen Thousand Three Hundred Thirty-Three and Thirty-Three Hundredths
Dollars ($18,333.33) per month, and employee health benefits, as described in
paragraph 7 of Sherman's Employment Agreement with Cogen dated March 28,1997
(the "Sherman Employment Agreement"), through December 31, 1998. Sherman
shall not be entitled to receive any other compensation,
<PAGE>
including compensation in the form of salary, bonus or benefits, from Cogen,
whether under the Sherman Employment Agreement or otherwise, except as
expressly provided for in this paragraph and in Paragraphs 7 and 10 herein.
Nor shall Sherman perform any services on behalf of Cogen except as expressly
provided for in this Agreement or as agreed to in writing by Cogen and
Sherman prior to their performance. Sherman shall be entitled to receive
notice and continuation of his rights under COBRA, as provided for in the
statute, for continuation of particular insurance benefits.
7. Upon expiration of the rescission period described in paragraph I 8
of this Agreement, Cogen shall pay Sherman the sum of Four Hundred and Six
Thousand Dollars ($406,000.00) which shall include payment for Sherman's
outstanding shares of stock as described in Paragraph 8 of this Agreement.
In addition, upon expiration of the rescission period described in Paragraph
18 of this Agreement, NRG shall pay Sherman the sum of One Hundred Thirty
Thousand Dollars ($130,000.00). These two payments together constitute the
"Settlement Payments." The Settlement Payments shall be allocated as follows:
PAYABLE BY COGEN:
a. The sum of $82,500 as payment for Sherman's outstanding shares of
stock. This sum is not subject to withholding or Form 1099 tax
reporting.
b. The sum of $70,000 as payment for emotional distress, general damages,
and settlement of any and all other claims. This sum is not subject
to withholding but shall be reported on Form 1099.
c. The sum of $253,500 (prior to withholding) as settlement of severance
and any and all claims under the Sherman Employment Agreement or
arising out of the employment relationship. This sum is subject to
withholding and will be reported on Form W-2.
TOTAL: $406,000
<PAGE>
PAYABLE BY NRG:
The sum of $130,000 as payment for emotional distress, general damages, and
settlement of any and all other claims. This sum is not subject to
withholding but will be reported on Form 1099.
Sherman shall sign all tax withholding and other forms required by Cogen
and NRG under applicable law. Except for items (a) and (b) above, all
amounts paid to Sherman by Cogen under this paragraph are payments on account
of wages and are, therefore, subject to withholding obligations under state
and federal law, and only the net amount after applicable withholdings shall
be paid to Sherman. If it is determined by any federal or state tax
authority that any amount that may be paid to Sherman under this Settlement
Agreement but is treated by Cogen and/or NRG as not subject to information
reporting, or treated as a payment other than taxable wages, was in fact
subject to such reporting and/or was taxable wages, and if as a consequence
Cogen and/or NRG is held responsible for the employee's portion of any
penalties, interest or taxes, Sherman shall immediately upon Cogen and/or
NRG's demand therefor and reasonable proof of Cogen and/or NRG's actual
payment of the same, indemnify and hold Cogen and/or NRG harmless for the
employee's portion of all such penalties, interest and taxes.
8. Sherman represents and warrants that he is the record and
beneficial owner of five thousand five hundred (5,500) shares of Cogen stock,
that such stock has not been pledged or encumbered in any way, and that he
can sell and convey such stock free and clear of any lien of encumbrance.
Sherman further represents and warrants that he has no record or beneficial
ownership or interest in any other Cogen stock with the sole exception of
stock options granted to him pursuant to the Sherman Employment Agreement,
pursuant to which his options to purchase thirty five thousand (35,000)
shares, and only thirty five thousand (35,000) shares, have vested.
Contemporaneously with the payment of the sum provided for in paragraph 7
<PAGE>
herein, Sherman shall deliver and convey legal title to, and all beneficial
interest in, free and clear of any lien or encumbrance, all of the Cogen
stock he owns, that is five thousand five hundred (5,500) shares, to Cogen.
In connection with his conveyance of this Cogen stock, Sherman shall execute
all documents reasonably requested by Cogen to effect such conveyance,
including stock powers.
9. While NRG owns 20% or more of the outstanding shares of Cogen or
its successors, but in no event for a period of time in excess of 10 years,
Sherman shall not acquire, directly or indirectly, or otherwise become the
beneficial owner of any common stock of Cogen (or any successor to Cogen by
merger or otherwise) or any security or other right which is convertible,
exchangeable or exercisable, with or without consideration into common stock
of Cogen (or any successor to Cogen by merger or otherwise), with the sole
exception that he may exercise some or all of his vested options to purchase
thirty five thousand (35,000) shares of Cogen stock, provided that he
contemporaneously sells or conveys all legal and beneficial interest in such
stock to Cogen for fair market value. If Cogen does not purchase such stock
within five (5) business days, Sherman may sell such shares to one or more
third parties, provided that such sale is completed and such stock is sold
within twenty (20) business days of Sherman's exercise of his option or
options. For purposes of this Agreement, "fair market value" shall mean the
average, for the ten trading days prior to the date on which Sherman's
exercise his options, of the closing sale price of the shares of Cogen stock
(or in the event no sale takes place on any day, the average of the closing
bid and asked quotations for the shares of Cogen stock on such day) on the
National Association of Securities Dealers Automatic Quotation System
("NASDAQ") or any comparable system.
<PAGE>
The parties expressly acknowledge and agree that Sherman shall maintain
the right to exercise his vested options to purchase up to thirty five
thousand (35,000) shares of Cogen stock for ninety (90) calendar days after
December 31, 1998. The parties also expressly acknowledge and agree that
Sherman's vested stock options total thirty five thousand (35,000) and that
he will not acquire any further options to purchase Cogen stock pursuant to
any agreement with Cogen, any Cogen stock option plan, or otherwise except as
provided in this paragraph 9.
10. Sherman agrees to serve as an independent contractor consultant for
Cogen during the period from January 1, 1999 through December 31, 2001. In
this capacity, Sherman will consult with Cogen, or its representatives, for
up to ten (10) days per calendar year. In consideration for Sherman serving
as a consultant to Cogen, Cogen shall pay Sherman Twenty Thousand Dollars
($20,000) upon expiration of the rescission period described in paragraph 18
of this Agreement; Twenty Thousand Dollars ($20,000) on the date which is one
year after the first Twenty Thousand Dollar ($20,000) payment; and Twenty
Thousand Dollars ($20,000) on the date which is two years after the first
Twenty Thousand Dollar ($20,000) payment. If Cogen requires additional
consulting services from Sherman during this period, Sherman shall provide
such services as are mutually agreeable in consideration for payments in the
amount of Two Thousand Five Hundred Dollars ($2,500) per day. Sherman shall
be reimbursed by Cogen for reasonable expenses which he incurs in performing
consulting services under this paragraph. Cogen shall report such payment to
applicable state and federal tax agencies. Sherman understands that he is
not an employee of Cogen for purposes of providing services under this
paragraph, and that, as such, he is not eligible to have benefits in any
employee health or welfare benefit plan, or any other benefits from Cogen.
<PAGE>
11. Cogen and Sherman will issue a joint statement, in the form
attached hereto as Exhibit A, promptly after expiration of the rescission
period described in paragraph 18 and completion of the filings required by
paragraphs 4 and 5 of this Settlement Agreement and Mutual Release.
12. Sherman shall have the right, at his sole option, to purchase or
transfer the lease of the Chevrolet Tahoe vehicle presently being used by
Sherman pursuant to Cogen's lease of the vehicle. If Sherman elects to
purchase or transfer the lease of the vehicle, he shall advise Cogen in
writing of his decision to do so by January 25,1999. If Sherman has not
advised Cogen in writing of his decision to purchase or transfer the lease of
the vehicle by January 25, 1999, his right to do so shall expire, he shall
have no further right to possess or use the vehicle, and he shall return the
vehicle and keys to the vehicle to Cogen on or before January 25, 1999.
13. NRG shall contribute a total of Thirty Thousand Dollars ($30,000)
to a bona fide Section 501(c)(3) qualified organization for environmental
education, either in one lump sum or in annual increments of Ten Thousand
Dollars ($10,000) beginning December 31, 1999. Sherman shall have the right
to determine whether such sum shall be paid as a lump sum or in annual
increments. This 501(c)(3) qualified organization shall be established by
Sherman and if not, the contribution shall be made to a bona fide 501(c)(3)
qualified organization or charitable organization as determined by the mutual
agreement of the parties.
14. Cogen and NRG agree that their respective directors and officers
will not make any statement to any third party disparaging Sherman and
Sherman agrees that he will not make any statement to any third party
disparaging Cogen or NRG, or any of their respective present or former
directors or officers.
15. Cogen, NRG, and Sherman agree to maintain the terms of this
Settlement Agreement and Mutual Release in confidence and not to disclose
such terms to any third party,
<PAGE>
other than their respective attorneys and accountants, and as to Sherman, his
spouse, except as required by applicable law or regulation.
16. Sherman will return to Cogen all of its records, correspondence,
and documents in his possession, if any, at the time he signs this Settlement
Agreement and Mutual Release. Cogen acknowledges that Sherman is not
obligated to return strictly personal files now in his possession that were
at one time stored at Cogen's offices. Sherman will also return to Cogen all
property of Cogen, including Sherman's corporate credit cards and air travel
card, if any, at the time it signs this Agreement. Cogen will return to
Sherman all of his property in its possession, if any, at the time it signs
this Agreement.
17. Sherman has been advised by Cogen and NRG that he should consult
with an attorney prior to executing this Agreement, and that he has
twenty-one (21) days from the date on which he received this Agreement to
consider whether or not he wishes to sign it. Sherman acknowledges that he
has had the opportunity to review this Agreement with his attorney before
signing it, that he has the right to sign this Agreement before the
twenty-one (21) days period expires and that if he so chooses, he does so of
his own free will and not of duress. She further acknowledges that the date
on which he received this Agreement is accurately set forth on the last page
of this Agreement.
18. Sherman may rescind this Severance Agreement and Release within 15
calendar days of signing it. To be effective, the rescission must be in
writing and delivered to Cogen and NRG in care of Julie A. Jorgensen, Interim
CEO and President, Cogeneration Corporation of America, One Carlson Parkway,
Suite 240, Minneapolis, Minnesota 55447-4454, either by hand or by mail
within the fifteen (15) day period. If sent by mail, the rescission must be:
a. Postmarked within the fifteen (15) day period;
<PAGE>
b. Properly addressed to Cogen; and
c. Sent by certified mail, return receipt requested.
If the Agreement is rescinded by Sherman all of its provisions shall
immediately become null and void.
19. Noting in this Settlement Agreement and Mutual Release is intended
to be, nor will be deemed to be, an admission of liability by any party that
it or he has violated any state or federal statute, local ordinance, or
principle of common law, or that it or he has engaged in any wrongdoing.
20. The parties agree that this Agreement will not be assignable by
either party unless other party agrees in writing.
21. In case any one or more of the provisions of this Agreement should
be invalid, illegal, or unenforceable in any respect, the validity, legality,
and enforceability of the remaining provisions contained in this Agreement
will not in any way be affected or unpaired thereby.
22. This Agreement will be construed and intend in accordance with the
laws of the State of Minnesota.
23. Each party to this Agreement acknowledges that this Agreement was
the result of mediation pursuant to the Minnesota Civil Mediation Act. Each
party specifically acknowledges and agrees that this Agreement is binding
upon all parties and that the parties were advised by the mediator that (a)
the mediator has no duty to protect the parties' interests or provide them
with information about their legal rights; (b) signing a mediated settlement
agreement may adversely affect the parties' legal rights; and (c) the parties
should consult an attorney before signing a mediated settlement agreement if
they are uncertain of their rights.
<PAGE>
24. This Agreement contains the entire understanding between Cogen and
NRG on the one hand, the Sherman on the other hand, and supersedes all oral
agreements and negotiations between the parties on this subject. Any
amendments, modifications or waivers of the provisions of this Agreement
shall be valid only when they have been reduced to writing and duly signed by
the parties. The terms of this Paragraph shall not be deemed to have been
waived by oral agreement, course of performance or by any other means other
than a written agreement expressly providing for such waiver.
25. No breach of any provision hereof can be waived by any undersigned
party unless in writing. Waiver of any one breach or alleged breach by an
undersigned party shall not be deemed to be a waiver of any other breach of
the same or any other provision hereof.
26. Sherman and Cogen acknowledge that Exhibit B hereto contains a list
of projects known by Sherman to be projects which Cogen is developing as of
December 31, 1998. This is the list of projects referred to in Paragraph 15
of the Sherman Employment Agreement, the provisions of which shall survive,
notwithstanding any provision of this Settlement Agreement and Mutual Release.
27. Nothing contained in this Settlement Agreement and Mutual Release
shall be construed to release any party hereto or any other person with
respect to the covenants, undertakings, and agreements of such party
contained in this document.
28. Each of the undersigned and its and his counsel has reviewed and
revised this Settlement Agreement and Mutual Release, and the rule of
construction that any ambiguities are to be resolved against the drafting
party shall not apply to the interpretation of these documents.
<PAGE>
29. Each of the undersigned parties acknowledges and represents that it
and he has been represented by counsel in connection with its and his
consideration and execution of this Settlement Agreement and Mutual Release.
Each undersigned party further represents and declares that in executing this
document it or he has relied solely upon its or his own judgment, belief and
knowledge, and the advice and recommendation of its or his own independently
selected counsel, concerning the nature, extent and duration of its or his
rights and claims, and that it or he has not been influenced to any extent
whatsoever in executing this document, or the exhibits hereto, by any
representations or statements except those expressly contained or referred to
herein.
30. This Settlement Agreement may be executed in counterparts, each of
which shall be deemed an original and shall be deemed duly executed upon the
signing of the counterparts by the parties.
COGENERATIN CORPORATION OF AMERICA
Date Signed: 1/18/99 By: /s/ Julie Jorgensen
---------- --------------------------------------
Its President and CEO
---------------------------------
NRG ENERGY
Date Signed: 1/19/99 By: James J. Bender
---------- --------------------------------------
Its Vice President & General Counsel
---------------------------------
ROBERT T. SHERMAN, JR.
Date Received: 1/13/99 By: Robert T. Sherman, Jr.
---------- --------------------------------------
Date Signed: 1/13/99 Its
---------- ---------------------------------
<PAGE>
[COGEN AMERICA LETTERHEAD]
CogenAmerica and Robert T. Sherman, Jr., its Chief Executive Officer,
announced today that they have agree upon terms under which Mr. Sherman will
step down as President and CEO and provide consulting services to the
Company. The Company and NRG Energy, Inc., owner of 45.4% of the Company's
stock, had previously announced that Mr. Sherman's employment had been
terminated for expenditures incurred in connection with the solicitation of
proxies on behalf of the Company without authorization from the Company's
Board of Directors. After an investigation by the Company's Board of
Directors, it was determined that these expenditures were approved by the
Independent Directors Committee and were within Mr. Sherman's authority as
established by the Board of Directors. Further, the Company acknowledged that
any media accounts accusing Mr. Sherman of mismanagement were inaccurate.
Julie Jorgensen, interim President and CEO of the Company, said "Bob
Sherman and CogenAmerica have reached an amicable resolution of all issues
between them. Mr. Sherman acted within the authority bestowed on him by the
Company's Board of Directors. Bob has agreed to remain a consultant to the
Company in the transition to a new CEO, and we are glad to have his help."
David Peterson, Chairman, CEO and President of NRG Energy also stated
that: "We are pleased that our investigation has shown that Bob Sherman's
actions were authorized, and that his matter has been resolved to the
satisfaction of all concerned."
In a joint statement, Mr. Sherman said "I am proud of my accomplishments at
CogenAmerica, and will continue to assist the Company in achieving a smooth
transition to new
<PAGE>
leadership. I am especially pleased that CogenAmerica, NRG Energy and I
could rise above our differences and resolve our differences quickly and
amicably."
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS NEWS
RELEASE CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934 THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE RISK THAT PROJECT
DEVELOPMENT EFFORTS WILL NOT RESULT IN THE ADDITION OF NEW PROJECTS, THE RISK
THAT THE ACTUAL OPERATING RESULTS OF ANY PROJECT OR OF CGCA WILL NOT EQUAL OR
EXCEED THE RESULTS EXPECTED, AND OTHER RISKS DETAILED FROM TIME TO TIME IN
THE COMPANY'S SEC REPORTS, INCLUDING THE REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1997.
EXHIBIT NO.
A
-----
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOAN AGREEMENT
DATED AS OF OCTOBER 9, 1998
BETWEEN
NRG ENERGY, INC.
as Lender,
and
COGENERATION CORPORATION OF AMERICA
and
COGENAMERICA PRYOR INC.
as Borrowers,
and
OKLAHOMA LOAN ACQUISITION CORPORATION
as Guarantor.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
THIS LOAN AGREEMENT, dated as of October 9,1998, is among Cogeneration
Corporation of America, a Delaware Corporation ("CogenAmerica") and
CogenAmerica Pryor Inc., a Delaware corporation ("OLAC Holding"), as
Borrowers, Oklahoma Loan Acquisition Corporation, a Delaware corporation,
("OLAC"), as Guarantor, and NRG Energy, Inc., a Delaware corporation, as
Lender (the "Lender").
W I T N E S S E T H:
WHEREAS, CogenAmerica and OLAC Holding (each, a "Borrower" and
collectively, the "Borrowers") wish to jointly and severally borrow up to
$23,947,140 to meet their joint and several obligation to fund the purchase
of all of the outstanding stock of OLAC (which owns all of the assets of a
power generation facility located near Pryor, Oklahoma known as the
Mid-Continent Power Company (the "MCPC Facility")) pursuant to a stock
purchase agreement dated September 10, 1998 between CogenAmerica and
Mid-Continent Power Company, L.L.C., a Delaware limited liability company
("Seller"), as supplemented by that certain letter agreement dated October 9,
1998, among the Seller, CogenAmerica and the Lender (the "Stock Purchase
Letter Supplement" and collectively with the Stock Purchase Agreement, the
"Stock Purchase Agreement"); and
WHEREAS, the sole members of the Seller are NRG Energy, Inc., Decker
Energy International, Inc. and WP Power Company LLC; and
WHEREAS, the Lender agrees to lend such amount to the Borrowers on the
terms and conditions set forth below;
NOW, THEREFORE, the Borrowers, the Guarantor and the Lender agree as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the terms
defined in the caption hereto shall have the meanings set forth therein, and
the following terms have the following meanings:
"Affiliate" of any specified person means (i) any other Person, directly
or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person or (ii) any Person who is a
director or officer (a) of such Person, (b) of any Subsidiary of such Person
or (c) of any Person described in clause (i) above. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
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"Agreement" means this Loan Agreement, as amended, supplemented or
modified from time to time.
"Amortization Schedule" shall have the meaning assigned thereto in
Section 2.05(b).
"Bankruptcy Law" shall mean any applicable liquidation, dissolution,
conservatorship, bankruptcy, moratorium, rearrangement, insolvency,
reorganization, readjustment of debt or similar laws affecting the rights and
remedies of creditors generally, as in effect from time to time.
"Base Rate" means, for any date, a rate per annum equal to the Prime
Rate for that date plus three and one-half percent (3.5%), provided that such
percentage shall be reduced by two percent (2.0%) at such time that the
Borrowers have provided the Lender with evidence, reasonably acceptable to
Lender, that (a) the "Possible Event of Default" (as defined in the
MeesPierson Waiver) has been absolutely and irrevocably waived by the
MeesPierson Lenders, or has been cured by CogenAmerica, (b) no "Event of
Default", as defined under the MeesPierson Credit Agreement (nor any event or
circumstance which with the giving of notice or the passage of time, or both,
would constitute an Event of Default), has occurred and is then continuing,
whether or not any temporary or contingent waiver may be in effect with
respect to such or Event of Default, and (c) the "Margin" (as defined under
the MeesPierson Credit Agreement) has been reduced by the MeesPierson Lenders
to the percentage in effect immediately prior to October 1, 1998.
"Borrower" and "Borrowers" mean the parties named as such in this
Agreement until one or more successors replace the Borrowers, and thereafter
such successor(s).
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City, New York or Minneapolis, Minnesota
are authorized or required by law to close.
"Calculation Period" shall have the meaning assigned thereto in Section
6.02(i).
"Certification Date" shall have the meaning assigned thereto in Section
6.02(i).
"Closing Date" means the date this Agreement is executed and delivered
by each party hereto.
"Co-Investment Agreement" shall mean that certain Co-Investment
Agreement between Lender and NRG Generating (U.S.) Inc. (now known as
Cogeneration Corporation of America) dated as of April 30, 1996.
"Code" means the Internal Revenue Code of 1986, as amended.
"Cogen Entity" and "Cogen Entities" means, individually or collectively,
as the context may require, CogenAmerica, OLAC Holding and OLAC.
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"Collateral" shall mean all assets of OLAC, OLAC Holding and
CogenAmerica in which the Lender is granted a security interest or other Lien
under the Security Documents.
"Credit Documents" means the collective reference to this Agreement, the
Note, the Stock Purchase Agreement, the Guaranty and the Security Documents.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Distribution Payment Date" shall have the meaning assigned thereto in
Section 6.02(i).
"Distributions" shall mean dividends or other payments of any kind,
whether in cash, in kind, or in securities or other property.
"Dollars" and "$" means dollars in lawful currency of the United States
of America.
"Earnest Money Note" shall mean that certain Promissory Note dated
September 10, 1998, made payable by CogenAmerica to the Lender in the
original principal amount of $2,500,000.
"Environmental Approval" shall have the meaning assigned thereto in
Section 5(u)(ii).
"Environmental Claim" shall have the meaning assigned thereto in Section
5(u).
"Environmental Laws" shall have the meaning assigned thereto in Section
5(u).
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means a trade or business (whether or not
incorporated) which is under common control with any of the Cogen Entities
within the meaning of Sections 414(b), (c), (m) or (o) of the Code.
"Event of Default" shall have the meaning assigned thereto in Section
7.01.
"Existing NRG Loan" shall mean the loan previously extended by the
Lender to CogenAmerica and NRGG Funding, Inc. pursuant to that certain loan
agreement dated as of December 10, 1997 by and among such parties (the
"Existing NRG Loan Agreement.")
"Funding Date" means the date not later than the closing date for the
purchase and sale of stock under the Stock Purchase Agreement, upon which the
Borrowers shall request that the Loan be made available.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time.
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"Good Faith Contest" means the contest of an item if the item is
diligently contested in good faith by appropriate proceedings timely
instituted and (i) adequate cash reserves (or at the applicable entity's
option, bonds or other security reasonably satisfactory to the Lender) are
established with respect to the contested item, and (ii) during the period of
such contest, the enforcement of any contested item is effectively stayed.
"Governmental Authority" means the United States Federal Government, any
state or other political subdivision thereof, including any entity exercising
executive, legislative, judicial, regulatory or administrative functions of
or pertaining to such government.
"Guarantor" means the party named as such in the opening paragraph of
this Agreement.
"Guaranty" shall have the meaning assigned to such term in Section
3.01(c) hereof.
"Highest Lawful Rate" shall have the meaning assigned thereto in Section
9.09.
"Indemnified Liabilities" shall have the meaning assigned thereto in
Section 9.04.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after
the date of placing such property in service or taking delivery thereof or
the completion of such services, except trade payables, (v) all obligations
on account of principal of such Person as lessee under capitalized leases,
(vi) all indebtedness of other Persons secured by a lien on any asset of such
Person, whether or not such indebtedness is assumed by such Person; PROVIDED
that the amount of such indebtedness shall be the lesser of (a) the fair
market value of such asset at such date of determination and (b) the amount
of such indebtedness, and (vii) all indebtedness of other Persons guaranteed
by such Person to the extent such indebtedness is guaranteed by such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, PROVIDED that
the amount outstanding at any time of any indebtedness issued with original
issue discount is the face amount of such indebtedness less the remaining
unamortized portion of the original issue discount of such indebtedness at
such time as determined in conformity with GAAP; and PROVIDED FURTHER that
Indebtedness shall not include any liability for current or deferred federal,
state, local or other taxes, or any trade payables; PROVIDED, HOWEVER, in the
case of the CogenAmerica, "Indebtedness" shall not include (i) any Lien
granted by the CogenAmerica on any equity interest of CogenAmerica in any of
its Subsidiaries (other than OLAC or OLAC Holding) as security for any debt
of such Subsidiary in respect of any energy project acquired or developed
after the date hereof or any debt with respect to such Subsidiary's project
or project owner in respect of any such project, or (ii) subject to the
limitations set forth
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herein, any equity funding commitment made or guaranteed by CogenAmerica
regardless of whether such equity funding commitment is assigned or otherwise
pledged as security for any debt of any Subsidiary in respect of any energy
project acquired or developed after the date hereof or any debt with respect
to such Subsidiary's project or project owner in respect of any energy
project acquired or developed after the date hereof. For purposes of
calculating the amount of any Indebtedness hereunder, there shall be no
double-counting of direct obligations, guarantees and reimbursement
obligations for letter of credit.
"Interest Payment Date" means each principal reduction date set forth on
Schedule B hereto, and, for periods after the last date reflected thereon,
the last day of each calendar quarter.
"Investments" in any Person means (i) any loan, extension of credit or
advance to such Person, (ii) any purchase or other acquisition of any capital
stock, warrants, rights, options, obligations or other securities of such
Person, or (iii) any capital contribution to such Person.
"Lender" means the party named in this Agreement until one or more
successors replace it, and thereafter means the successor or successors.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, a
mandatory deposit arrangement with any party owning indebtedness of any Cogen
Entity, encumbrance, lien (statutory or other), or preference, priority or
other security agreement of any kind or nature whatsoever, including, without
limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same effect at any of the foregoing
and the filing of any financing statement or similar instrument under the
Uniform Commercial Code or comparable law.
"Loan" shall have the meaning assigned thereto in Section 2.01.
"Material Adverse Effect" means a material adverse effect on (i) the
ability of any Cogen Entity to perform its obligations to the Lender under
this Agreement, the Note or any of the Credit Documents to which it is a
party or (ii) the business, property, assets, liabilities, operations or
condition (financial or otherwise) of any Cogen Entity and their respective
Subsidiaries, taken as a whole.
"Material Governmental Approvals" means all Governmental Approvals which
are required under applicable law in connection with the operation,
maintenance, ownership or leasing of the facility other than such
Governmental Approvals as are immaterial in nature.
"Maturity Date" shall have the meaning assigned thereto in Section 2.04.
"MCPC Facility" shall have the meaning assigned thereto in the first
recital hereto.
"MeesPierson Credit Agreement" shall have the meaning assigned thereto
in Section 8.01 hereof.
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"MeesPierson Lenders" shall have the meaning assigned thereto in Section
8.01 hereof.
"MeesPierson Obligations" shall have the meaning assigned thereto in
Section 8.01 hereof.
"MeesPierson Waiver" shall mean that certain waiver letter issued by
MeesPierson Capital Corp to CogenAmerica dated August 14, 1998 and
acknowledged and agreed to by CogenAmerica and O'Brien (Philadelphia)
Cogeneration Inc. relating to certain potential events of default under the
MeesPierson Credit Agreement, a true and correct copy of which waiver is
attached hereto as Exhibit B.
"Note" means the joint and several Note of the Borrowers substantially
in the form attached hereto as Exhibit A.
"Obligations" shall mean all obligations, liabilities and indebtedness
of every nature of any of the Cogen Entities from time to time owing to the
Lender under this Agreement and/or any other Credit Documents, each whether
now existing or hereafter incurred, each whether direct or indirect,
contingent or liquidated, owed jointly, severally or jointly and severally,
and including, without limitation, (i) all principal, interest and fees due
hereunder or thereunder, (ii) any amounts (including, without limitation,
insurance premiums, licensing fees, recording and filing fees and taxes)
which the Lender expends on behalf of either Borrower because such Borrower
fails to make such payment require under the terms of any Credit Documents,
and (iii) all amounts required to by paid under any indemnification or
similar provision.
"Permitted Liens" means any Liens that are: (a) Liens for taxes, or
other governmental levies and assessments that (i) do not arise under ERISA
or Environmental Laws and (ii) are not yet due or which are subject to a Good
Faith Contest; (b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business
which are not past due for a period of more than ninety (90) days or which
are subject to Good Faith Contest; (c) pledges or deposits in connection with
workmen's compensation unemployment insurance and other social security
legislation; (d) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business; (e) easements, rights-of-way,
restrictions (including landmarking and zoning restrictions, royalties,
leasehold and fee interest covenants and other similar encumbrances incurred
or imposed in the ordinary course of business which are not of the nature of
a Lien for security purposes and which do not in any case materially detract
from the value of the property subject thereto or interfere with the ordinary
conduct of the business of either Borrower; (f) liens for purchase money
obligations permitted by Section 6.02(c) hereof, provided that any such lien
encumbers only the asset so purchased; (g) liens arising from legal
proceedings, as long as such proceedings are being contested in a Good Faith
Contest and so long as execution is stayed on all judgments resulting from
any such proceedings; (h) liens arising on the title insurance policies to be
delivered in connection with the MeesPierson Credit Agreement; (i) liens
securing permitted secured indebtedness of CogenAmerica as permitted under
this Agreement, including without limitation pledges by CogenAmerica of its
equity interest in any Subsidiary (other than OLAC
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Holding or OLAC) or in any electrical cogeneration project(s) (other than the
MCPC Facility) hereafter owned and/or operated, in whole or in part, by
CogenAmerica or any Subsidiary of CogenAmerica (other than OLAC or OLAC
Holding) as security for such indebtedness; and (j) any Liens in favor of the
Lender, including, without limitation, the Lien on the shares of stock of
O'Brien Schuykill owned by CogenAmerica pursuant to that certain NRG
Subordinated Stock Pledge Agreement dated as of March 1, 1996 among the
Lender, CogenAmerica, O'Brien Schuykill and The Chase Manhattan Bank.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agent or political subdivision thereof or any other entity.
"Plan" means any employee benefit plan covered by Title IV of ERISA.
"Pledge Agreements" shall have the meaning assigned thereto in Section
3.01(b).
"Pledged Stock" means the capital stock and other ownership interests of
OLAC and OLAC Holding respectively pledged to the Lender by the Borrowers
pursuant to the Pledge Agreements.
"Prime Rate" shall mean at the time any determination thereof is to be
made, the fluctuating interest rate per annum announced from time to time by
The Chase Manhattan Bank, New York, New York, as its "Prime Rate" (or, if
otherwise denominated, such bank's reference rate for interest rate
calculations on general commercial loans), which rate is not necessarily the
lowest or best rate which such bank may at any time and from time to time
charge any of its customers.
"Project Agreement" means any agreements, contracts or leases of any
kind whatsoever pursuant to which OLAC is entitled directly, indirectly, by
assignment or otherwise to receive payments in respect of the MCPC Facility
or has granted any interest therein to any Person, and shall further mean,
any of (a) that certain Electrical Interconnection and Wheeling Agreement
dated July 21, 1989, between Public Service Company of Oklahoma and
Mid-Continent Power Corporation, (b) Natural Gas Sales Agreement dated
October 31, 1997, between Natural Gas Clearinghouse and Mid-Continent Power
Company, L.L.C., and (c) any future agreements or contracts in replacement
thereof or of a similar nature thereto, all of the foregoing as heretofore
and hereafter amended.
"Projected EBIDA" shall mean for the Calculation Period, the projected
after-tax net income of OLAC, plus projected interest expense, depreciation,
amortization and other noncash charges for such period, all as determined in
accordance with GAAP, consistently applied; PROVIDED that (i) such
calculation shall assume the timely payment of all scheduled crises and other
obligations of OLAC, and (ii) the projected amount of after-tax net income
shall further assume and be reduced by the making of adequate reserves for
anticipated maintenance expenses of the MCPC Facility during the twelve (12)
month period commencing on the Certification Date.
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"PURPA" means the Public Utility Regulatory Policies Act of 1978, as
amended from time to time, and all rules and regulations adopted thereunder.
"Register" shall have the meaning assigned thereto in Section 2.11(b).
"Security Documents" shall have the meaning assigned in Section 3.01(b).
"Stock Purchase Agreement" shall have the meaning ascribed thereto in
the first recital hereto.
"Stock Purchase Letter Supplement" Stock Purchase Letter Supplement
shall have the meaning ascribed thereto in the first recital hereto.
"Subsidiary" of any Person means any corporation, association,
partnership or other business entity of which more than 50% of the total
voting power of shares of capital stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by (i)
such Person or (ii) one or more Subsidiaries of such Person.
"Uniform Commercial Code" means the Minnesota Uniform Commercial Code as
in effect from time to time.
SECTION 1.02. RULES OF CONSTRUCTION. Unless the context otherwise
requires:
a term has the meaning assigned to it;
"or" is not exclusive;
"including" means including without limitation;
words in the singular include the plural and words in the plural include
the singular;
unless otherwise specified therein, all terms defined in this Agreement
shall have the defined meanings when used in the Note or any certificate or
other document made or delivered pursuant hereto; and
the words "hereof', "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not
to any particular provision of this Agreement, and section, Section, schedule
and exhibit references are to this Agreement unless otherwise specified.
ARTICLE 2
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LOAN
SECTION 2.01. LOAN. Subject to the terms and conditions hereof, the
Lender agrees to make a loan in Dollars to the Borrowers on the Funding Date,
in an aggregate principal amount of $23,947,140 (if drawn upon, the "Loan").
SECTION 2.02. USE OF PROCEEDS; MANNER OF FUNDING. The proceeds of the
Loan shall be used exclusively to refinance and satisfy in full the
outstanding indebtedness owing under the Earnest Money Note and to make
payments to Lender in accordance with and in satisfaction of the obligations
of CogenAmerica under the Stock Purchase Agreement. The proceeds of the Loan
shall be transferred directly to an account of Lender pursuant to Section
2.07.
SECTION 2.03. DEEMED BORROWING. If any amount becomes due and owing
under the Stock Purchase Agreement, the Lender may elect, in its sole
discretion, to fund the Loan in the manner contemplated by Section 2.02,
without receiving a notice of borrowing pursuant to Section 2.07. In such
cases, notice of borrowing shall be deemed to have been given in advance of
the closing date under the Stock Purchase Agreement. Such a deemed borrowing
shall be in addition to and shall not affect the remedies of the Lender
hereunder, or under the other Credit Documents or the remedies of Lender
under the Stock Purchase Agreement.
SECTION 2.04. MATURITY. The Loan will mature on the date that is six
years following the Funding Date (the "Maturity Date").
SECTION 2.05. OPTIONAL AND MANDATORY PREPAYMENTS; REPAYMENTS OF LOAN.
(a) The Borrowers may at any time and from time to time prepay the
Loan, in whole or in part, without premium or penalty, upon at least five
days irrevocable notice to the Lender. If such notice is given, the
Borrowers shall make such prepayment, and the payment amount specified in
such notice shall be due and payable, on the date specified therein.
(b) The Borrowers shall pay, in reduction of the principal amount of
the Loan then outstanding, the principal amounts set forth on the
amortization schedule attached hereto as Exhibit C (the "Amortization
Schedule") on the dates specified on the Amortization Schedule.
(c) The Note shall be subject to mandatory prepayment as contemplated
by Section 2.5(iv) of the Co-Investment Agreement.
(d) Accrued interest on the amount of any prepayments shall be paid on
the date of such date of prepayment.
SECTION 2.06. INTEREST RATE AND PAYMENT DATES.
The Loan shall bear interest for the period from and including the date
the Loan is made to, but excluding, the Maturity Date thereof on the unpaid
principal thereof at a rate per annum equal to the Base Rate.
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If all or a portion of (i) the principal amount of the Loan or (ii) any
interest payable thereon shall not be paid when due, whether at the stated
maturity (including, without limitation, amortization payments as required by
Section 2.05(b)), by acceleration or otherwise, the Loan shall, without
limiting the rights of the Lender under Article 7, bear interest at a rate
per annum which is 2.00% above the Base Rate from the date of such
non-payment until paid in full (as well after as before judgment).
Interest shall be payable in arrears on each Interest Payment Date.
SECTION 2.07. NOTICE OF LOAN. The Loan shall be made upon written
notice, by way of a notice of borrowing executed by an officer of each of the
Borrowers, given by telecopy, mail, or personal service, delivered to the
Lender at its office at 1221 Nicollet Mall, Minneapolis, Minnesota (Attn:
Treasurer) at least three Business Days prior to the day on which the Loan to
be made and such notice shall specify that the Loan is requested and state
the amount thereof (subject to the provisions of this Article 2) and shall
specify that the proceeds of the Loan shall be deposited by the Lender into
such account of Lender as Lender selects.
SECTION 2.08. COMPUTATION OF INTEREST AND FEES. Interest in respect of
the Loan shall be calculated on the basis of a 365 (or 366, as the case may
be) day year for the actual days elapsed.
SECTION 2.09. TREATMENT OF PAYMENTS.
Whenever any payment received by the Lender under this Agreement or the
Note is insufficient to pay in full all amounts then due and payable to the
Lender under this Agreement or the Note, such payment shall be applied by the
Lender in the following order: FIRST, to the payment of fees, expenses and
other amounts due and payable to the Lender under and in connection with this
Agreement and the other Credit Documents, including the payment of all
expenses due and payable under Section 9.04 hereof, but excluding interest
and principal on the Loan; SECOND, to the payment of interest then due and
payable on the Loan; and THIRD, to the payment of the principal amount of the
Loan which is then due and payable.
All payments (including prepayments) to be made by the Borrowers on
account of principal, interest, fees and other Obligations shall be made
without set-off or counterclaim and shall be made to the Lender, for the
account of the Lender at its office located at 1221 Nicollet Mall,
Minneapolis, Minnesota (or by wire transfer to: LaSalle National Bank,
Chicago, Illinois; ABA No.: 071-000-505; Account No.: 5800-07-6852;
Recipient: NRG Energy, Inc.), in lawful money of the United States of America
and in immediately available funds. If any payment hereunder would become
due and payable on a day other than a Business Day, such payment shall become
due and payable the next succeeding Business Day and, with respect to
payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.
SECTION 2.10. INDEMNITY. The Borrowers agree jointly and severally to
indemnify the Lender and to hold the Lender harmless from any loss or expense
(but without duplication of any
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amounts payable as default interest and excluding lost profits; PROVIDED, for
the avoidance of doubt that interest and/or default interest accruing prior
to payment in full of the Loan shall not be deemed to be "lost profits")
which the Lender may sustain or incur as a consequence of default by the
Borrowers in making any prepayment after Borrowers have given a notice in
accordance with Section 2.05. Any amounts payable hereunder shall be due
within thirty (30) days following receipt by the Borrowers of a certificate
signed by an officer of the Lender showing in reasonable detail the
calculation of such costs and expenses, which certificate shall constitute
prima facie evidence of such amounts. This covenant shall survive
termination of this Agreement and repayment of the Loan; PROVIDED, that the
Borrowers shall not be liable to the Lender for any costs or expense incurred
more than ninety (90) days prior to the delivery of the applicable
certificate pursuant to this Section 2.10.
SECTION 2.11. REPAYMENT OF THE LOAN; EVIDENCE OF DEBT.
Each Borrower hereby jointly and severally, and unconditionally promises
to pay to the Lender the then unpaid principal amount of the Loan, interest
thereon and all other Obligations in accordance with the terms hereof, the
terms of the Note, and the terms of the other Credit Documents, as
applicable; and each of the undersigned is primarily liable for all such
Obligations as co-maker; and neither is merely an "accommodation party." Each
Borrower hereby waives all defenses based upon the status of an accommodation
party. Each Borrower hereby further agrees, jointly and severally and
unconditionally, to pay interest on the unpaid principal amount of the Loan
from time to time outstanding from the date hereof until payment in full
thereof at the rates per annum, and on the dates, set forth in Section 2.06.
The Lender shall maintain a Register (the "Register") in which shall be
recorded (i) the amount of the Loan made hereunder, (ii) the amount of any
principal or interest due and payable or to become due and payable from
Borrowers to the Lender hereunder and (iii) the amount of any sum received by
the Lender hereunder from Borrowers.
The entries made in the Register to the extent permitted by applicable
law, shall be PRIMA FACIE evidence of the existence and amounts of the
obligations of Borrowers therein recorded; PROVIDED, HOWEVER that the failure
of the Lender to maintain the Register, or any error therein, shall not in
any manner affect the obligation of Borrowers to repay (with applicable
interest) the Loan made to Borrowers by the Lender in accordance with the
terms of this Agreement.
SECTION 2.12. PURCHASE PRICE/NOTE ADJUSTMENT.
The Lender and Borrower acknowledge and agree that the "Purchase Price"
for the acquisition of the equity interests of OLAC under the Stock Purchase
Agreement and the Note shall be subject to adjustment in accordance with the
terms set forth in the Stock Purchase Letter Supplement.
ARTICLE 3
CONDITIONS PRECEDENT
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SECTION 3.01. CONDITIONS TO LOAN. The obligation of the Lender to make
the Loan on the Funding Date is subject to the satisfaction, or waiver by the
Lender, immediately prior to or concurrently with the making of the Loan, of the
following conditions:
(a) NOTE. The Lender shall have received the Note conforming to the
requirements hereof and executed by a duly authorized officer of each Borrower.
(b) SECURITY DOCUMENTS. The Lender shall have received the Pledge
Agreements dated as of even date herewith respectively entered into by
CogenAmerica and OLAC Holding, as pledgors, in favor of the Lender (the "Pledge
Agreements"), and the other documents, instruments and agreements referenced
therein or to be delivered in connection therewith (the Pledge Agreements, and
all such documents, instruments and agreements being collectively referred to as
the "Security Documents") conforming to the requirements hereof or the Security
Documents, executed by a duly authorized officer of each Cogen Entity, as
applicable, and otherwise in form and substance acceptable to the Lender.
(c) GUARANTY. The Lender shall have received a guaranty dated as of even
date herewith, duly executed and delivered by OLAC, in form and substance
acceptable to the Lender.
(d) LIEN SEARCHES. The Lender shall have received UCC and state and
federal tax lien searches with respect to each of the Cogen Entities from all
applicable filing offices in the States of Delaware, Minnesota and Oklahoma.
(e) OPINION OF COUNSEL. The Lender shall have received the opinion of
counsel to the Cogen Entities in form and substance satisfactory to the Lender.
(f) PURCHASE. CogenAmerica and OLAC Holding shall have consummated the
Purchase of the stock of OLAC in accordance with the Stock Purchase Agreement.
(g) REPRESENTATIONS TRUE; NO DEFAULT. Each representation and warranty of
each of the Cogen Entities hereunder and under the Pledge Agreements and the
other Credit Documents, which shall be affirmed pursuant to officers
certificates of the Chief Executive and Chief Financial Officers of each of the
Cogen Entities as of the Funding Date, shall continue to be accurate and
complete in all material respects and no Default or Event of Default shall have
occurred hereunder.
(h) FEES AND EXPENSES. The Borrowers shall have paid to the Lender the
fees and expenses set forth in Section 9.04.
(i) CORPORATE AUTHORIZATIONS. Each of the Cogen Entities shall deliver to
the Lender a copy of the duly adopted Board of Director resolutions of each of
such entities authorizing the transactions contemplated by the Stock Purchase
Agreement and the other Credit Documents, and which resolutions shall otherwise
be in form and substance acceptable to the Lender, each duly certified as true
and correct as of the Funding Date by the corporate secretary of each of the
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Cogen Entities, as applicable, and accompanied by (a) certified copies of their
respective organizational documents and (b) certificates of good standing from
their respective states of incorporation and from each state in which they
qualified to do business (provided that with respect to CogenAmerica, such
certificates only from the states of Delaware and Minnesota and as to OLAC from
the States of Delaware and Oklahoma).
ARTICLE 4
SECURITY INTEREST
To secure the Obligations of the Borrowers hereunder and the other
obligations described therein, CogenAmerica and OLAC Holding have executed the
Pledge Agreements and the other Security Documents granting the Lender a first
priority Lien in all of the Collateral, as applicable.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to make the
Loan available, each Cogen Entity hereby represents and warrants to the Lender
(which representations and warranties shall survive the execution and delivery
of this Agreement and the Note and the drawdown of the Loan hereunder) that, as
of the Funding Date:
(a) DUE ORGANIZATION AND POWER. Each Cogen Entity is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization and is properly qualified to do business and in good standing in
every jurisdiction where the failure to maintain such qualification or good
standing could reasonably be expected to result in a Material Adverse Effect.
Each Cogen Entity has full power to carry on its business as now being conducted
and has complied with all statutory, regulatory and other requirements relative
to such business and such agreements, except where non-compliance could not
reasonably be expected to result in a Material Adverse Effect. Each Cogen
Entity has full power and authority to enter into and perform its obligations
under the Credit Documents to which it is a party.
(b) CAPITALIZATION. The authorized capital stock or other equity
interests of OLAC and OLAC Holding are held as set forth on Schedule 5(b) and
except as set forth thereon, no other shares of the capital stock or other
equity interests of either OLAC or OLAC Holding are issued and outstanding. All
of the issued and outstanding shares of capital stock of OLAC and OLAC Holding
are duly authorized and validly issued, fully paid, nonassessable, and free and
clear of all Liens (other than Permitted Liens), and such shares were issued in
compliance with all applicable state, federal and foreign laws concerning the
issuance of securities. There are no preemptive or other outstanding rights,
options, warrants, conversion rights or similar agreements or understandings for
the purchase or acquisition of shares of capital stock or other securities or
equity interests of OLAC or OLAC Holding. CogenAmerica is the sole owner of
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100% of the outstanding equity interests of OLAC Holding, and OLAC Holding is
the owner of 100% of the outstanding equity interests of OLAC, each free and
clear of all Liens.
(c) AUTHORIZATION AND CONSENTS. All necessary corporate action has been
taken to authorize, and all necessary consents and authorities have been
obtained and remain in full force and effect to permit, each Cogen Entity to
enter into and perform its respective obligations under the Credit Documents to
which it is a party and to borrow and repay the Loan. No further consents or
authorities are necessary for the repayment of the Loan or any part thereof,
including, without limitation, any consent or approval of, or notice to, or
other action with or by, any Governmental Authority, regulatory body or any
other Person which has not been made or obtained and is in full force and
effect.
(d) BINDING OBLIGATIONS. Each Credit Document constitutes or when
executed and delivered, will constitute the legal, valid and binding obligations
of each Cogen Entity to the extent it is a party, enforceable against such
parties in accordance with their respective terms, except to the extent that
such enforcement may be limited by equitable principles, principles of public
policy or applicable bankruptcy, insolvency, reorganization, moratorium or other
laws affecting generally the enforcement of creditors' rights.
(e) NO VIOLATION. The execution and delivery of, and the performance of
the provisions of, each Credit Document to which it is or will be a party by
each Cogen Entity do not contravene any applicable law or regulation existing at
the date hereof, any Governmental Approval or any contractual restriction
binding on such party or the certificate of incorporation or by-laws (or
equivalent instruments) thereof.
(f) LITIGATION. Except as set forth on Schedule 5(f), no action, suit or
proceeding is pending or, to any Cogen Entity's knowledge, threatened against
any Cogen Entity before any court, board of arbitration or administrative agency
which could reasonably be expected to result in any Material Adverse Effect.
There is no injunction, writ, preliminary restraining order or any order of any
nature issued by an arbitrator or other Governmental Authority directing that
any material aspect of the transactions provided for in this Agreement not be
consummated as herein or therein provided.
(g) NO DEFAULT. None of the Cogen Entities is in default under any
material agreement by which it is bound, or is in default in respect of any
financial commitment or obligation, in either case the default of which could
reasonably be expected to result in a Material Adverse Effect.
(h) PROJECT AGREEMENTS. Upon the Funding Date:
(i) Each Material Governmental Approval required in connection
with the MCPC Facility has been obtained, is validly issued,
is in full force and effect, is not subject to appeal by any
Person, and, to the knowledge of the Cogen Entities, is free
from conditions or requirements compliance with which could
reasonably be expected to result in a Material Adverse Effect.
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There is no proceeding pending or, to the knowledge of Cogen
Entities, threatened which is reasonably likely to result in
the rescission, revocation, material modification, suspension,
determination of invalidity or limitation of effectiveness of
any Material Governmental Approval. To the knowledge of the
Cogen Entities, the information set forth in each application
and other written material submitted by or on behalf of any of
the Cogen Entities to the applicable Governmental Authority in
connection with such Material Governmental Approval was
accurate and complete in all material respects at the time
such application or other written material was submitted.
Each of the Cogen Entities complies in all material respects
with all covenants, conditions, restrictions and reservations
in the Material Governmental Approvals relating to the MCPC
Facility and the Project Agreements applicable thereto and all
laws applicable thereto, except to the extent any
noncompliance could not reasonably be expected to result in a
Material Adverse Effect;
(ii) Each Project Agreement is a legal, valid and binding agreement
enforceable in accordance with its terms, except to the extent
enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or other similar laws
affecting the enforcement of creditors' rights and subject to
general equitable principles;
(iii) All representations and warranties set forth in each Project
Agreement by OLAC or its predecessors which is a party thereto
are true and correct in all material respects (the
determination of such material truth and correctness to be
made by the Lender in good faith) as though made as of the
date hereof, except to the extent any such representation or
warranty relates to a prior date; and
(iv) The facilities of OLAC will be able to be operated on a safe
and commercially sound basis in compliance with all
Governmental Approvals and applicable Project Agreements and
laws, so that the performance and facility guarantees and
specifications provided for in the applicable Project
Agreements and Governmental Approvals can be substantially met
during the term of this Agreement and OLAC can duly and
punctually meet its obligations under the applicable Project
Agreements and Governmental Approvals in accordance with the
terms thereof, except to the extent any inadvertent
noncompliance with such Governmental Approvals and Project
Agreements could not reasonably be expected to have a Material
Adverse Effect; provided, however, that such inadvertent
noncompliance must be remedied or cured within 30 days of OLAC
obtaining knowledge thereof. OLAC has adequate inventories
and spare parts to operate the MCPC Facility in accordance
with the Project Agreements, Governmental Approvals and
applicable law.
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(i) INSURANCE. Schedule 5(i) (which shall be updated by the Cogen
Entities and provided to the Lender not less often than annually) sets forth a
complete and accurate description of all material policies of insurance that
will be in effect as of the Funding Date with respect to the MCPC Facility. To
the knowledge of the Cogen Entities, such policies are with companies rated "A-"
or better by Best's Insurance Guide and Key Rating or other insurance companies
of recognized responsibility satisfactory to the Lender and the coverages
provided by such policies are in amounts and cover such risks as are usually
carried by companies engaged in similar businesses and owning similar properties
in the same general areas in which OLAC operates.
(j) FINANCIAL INFORMATION. Except as otherwise disclosed in writing to
the Lender on or prior to the date hereof, all financial statements, information
and other data furnished by any of the Cogen Entities to the Lender are complete
and correct, such financial statements have been prepared in accordance with
GAAP (except, in the case of interim financial statements, for the absence of
footnotes) and accurately and fairly present the financial condition of the
parties covered thereby as of the respective dates thereof and the results of
the operations thereof for the period or respective periods covered by such
financial statements and since such date or dates, there has been no Material
Adverse Effect as to any of such parties and none thereof has any contingent
obligations, liabilities for taxes or other outstanding financial obligations
which are material in the aggregate except as disclosed in such statements,
information and data.
(k) TAX RETURNS. Each Cogen Entity has filed all material tax returns
required to be filed thereby and has paid all taxes payable thereby which have
become due, other than those not yet delinquent or the nonpayment of which would
not have a Material Adverse Effect on such Party and except for those taxes the
amount or validity of which is currently being contested in a Good Faith
Contest.
(l) ERISA. The execution and delivery of the Credit Documents and the
consummation of the transactions hereunder will not involve any prohibited
transaction within the meaning of ERISA or Section 4975 of the Code and no
condition exists or event or transaction has occurred in connection with any
Plan maintained or contributed to by any Cogen Entity or any ERISA Affiliate
resulting from the failure of any thereof to comply with ERISA insofar as ERISA
applies hereto which is reasonably likely to result in such party or any ERISA
Affiliate incurring any liability, fine or penalty which individually or in the
aggregate would have a Material Adverse Effect. Prior to the Funding Date, the
Cogen Entities have delivered to the Lender a list of all Plans to which any
Cogen Entity or any ERISA Affiliate is a "party in interest" (within the meaning
of Section 2(14) of ERISA) or a "disqualified person" (within the meaning of
Section 4975(e)(2) of the Code).
(m) MARGIN REGULATIONS. None of the Cogen Entities is engaged in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G, T, U, or X of the Board of Governors
of the Federal Reserve System) and no proceeds of any Loan will be used in a
manner which would violate or result in a violation of, such Regulation, G, T,
U, or X.
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(n) INVESTMENT COMPANY ACT. None of the Cogen Entities is an "investment
company" nor a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(o) SECURITY INTERESTS. Except for the consents set forth on Schedule
5(o), no consents are required to create a first priority perfected Lien in any
of the Collateral under and as described in the Security Documents, and the
Liens created in favor of the Lender under the Security Documents are valid and
perfected, first priority Liens (subject only to Permitted Liens) superior and
prior to the rights of all Persons (except those rights of the holders of
Permitted Liens), whether the property subject to the security interests is now
owned by the party granting such security interest or is hereafter acquired.
The Security Documents (including Uniform Commercial Code financing statements)
have been filed, recorded and/or registered in each office and in each
jurisdiction where required to create and perfect the lien and security interest
described above. The chief executive office and chief place of business of each
of Cogen Entity and the office in which the records relating to the earnings and
other receivables of each such party are kept is located, as of the date hereof,
at the locations set forth on Schedule 5(o) for such party. Such locations are
the sole offices or places of business maintained by each such party as of the
date hereof. To the knowledge of the Cogen Entities, no such party has
transacted any business during the five year period prior to the date of this
Agreement under any name other than those set forth on Schedule 5(o).
(p) BUSINESS OF PROJECT ENTITIES. Neither OLAC Holding nor OLAC has
engaged in any business other than the operation of the MCPC Facility nor is any
such party a party to any contract, operating lease, agreement or commitment
which, either individually, or in the aggregate is material to the operation of
the MCPC Facility other than the Project Agreements applicable thereto.
(q) QUALIFYING COGENERATION MCPC FACILITY STATUS. All necessary filings
have been made to establish and maintain "qualifying facility" status under
PURPA for the MCPC Facility, provided that the Cogen Entities will promptly file
a recertification certificate with the Federal Energy Regulatory Commission.
The MCPC Facility is owned and will be operated in the manner contemplated by
the certificate conferring upon it "qualifying facility" status.
(r) TITLE TO AND SUFFICIENCY OF ASSETS. Except as set forth on Schedule
5(r), CogenAmerica had good, valid and sufficient title to the Pledged Stock of
OLAC Holding and each of OLAC Holding and OLAC has good, valid and sufficient
title to its assets and properties and as to each of such Cogen Entities, such
Pledged Stock, assets and properties are free and clear of all liens other than
Permitted Liens of OLAC Holding and OLAC. Each Cogen Entity has good,
marketable, indefeasible and insurable title in fee simple (or its equivalent
under applicable law) to the real property owned by it. None of the real
property owned or leased by any Cogen Entity is located within any federal,
state or municipal flood plain. All leases necessary for the conduct of the
business of each Cogen Entity as presently conducted and as proposed to be
conducted are valid and subsisting and are in full force and effect. Each Cogen
Entity enjoys peaceful and undisturbed possession under all material leases to
which they are parties. The services to be performed, the materials to be
supplied and the easements, licenses
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and other rights granted or to be granted to OLAC pursuant to the Project
Agreements and Governmental Approvals applicable thereto provide or will
provide such party with all rights and property interests required to enable
such party to obtain all services, materials or rights (including access)
required for the operation and maintenance of the MCPC Facility, including
such party's full and prompt performance of its obligations, and full and
timely satisfaction of all conditions precedent to the performance by others
of their obligations under such Project Agreements and Governmental Approvals.
(s) LABOR MATTERS. There are no strikes or other material labor disputes
or grievances, charges or complaints with respect to any employee or group of
employees pending or, to the knowledge of any Cogen Entity, threatened against
any Cogen Entity.
(t) TRANSACTIONS WITH AFFILIATES. Set forth on Schedule 5(t) is a true,
accurate and complete description of all transactions between or among OLAC and
OLAC Holding and between or among each of them and any Affiliate of any such
party (other than the Lender) which required or which will require in the case
of OLAC or OLAC Holding the payment by such party of an aggregate amount equal
to or greater than $100,000 during any twelve-month period.
(u) ENVIRONMENTAL MATTERS AND CLAIMS.
(i) OLAC is in compliance with all applicable United States
federal, state and local laws, regulations, rules and orders
relating to pollution prevention or protection of the
environment or exposure to Materials of Environmental Concern
(including, without limitation, ambient air, surface water,
ground water, navigable waters, waters of the contiguous zone,
ocean waters and international waters), including, without
limitation, laws, regulations, rules and orders (collectively,
the "Environmental Laws") relating to (A) emissions,
discharges, releases or threatened releases of substances
defined as "hazardous substances," "hazardous materials,"
"contaminants," "pollutants," "hazardous wastes" or "toxic
substances" in (1) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the
Superfund Amendments and Reauthorization Act, 42 U.S.C.
Section 9601 ET SEQ., (2) the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 ET SEQ., (3) the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901
ET SEQ., (4) the Federal Water Pollution Control Act, as
amended, 33 U.S.C. Section 1251 ET SEQ., (5) the Clean Air
Act, 33 U.S.C. Section 7401 ET SEQ., (6) the Toxic Substances
Control Act, 15 U.S.C. Section 2601 ET SEQ. or (7) the Safe
Drinking Water Act, 42 U.S.C. Section 300f ET SEQ.
(collectively, "Materials of Environmental Concern"), or (B)
the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of
Environmental Concern, all except to the extent the failure to
comply with Environmental Laws could not reasonably be
expected to have a Material Adverse Effect;
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(ii) OLAC has all permits, licenses, approvals, consents or other
authorizations required under applicable Environmental Laws
(collectively, the "Environmental Approvals") and is in
compliance with all Environmental Approvals required to
operate its business as then being conducted, all except to
the extent the failure to maintain or comply with an
Environmental Approval could not reasonably be expected to
have a Material Adverse Effect;
(iii) OLAC has not received any notice of any claim, action, cause
of action, investigation or demand by any person, entity,
enterprise or government, or any political subdivision,
intergovernmental body or agency, department or
instrumentality thereof, alleging potential liability for, or
a requirement to incur, material investigatory costs, cleanup
costs, response and/or remedial costs (whether incurred by
governmental entity or otherwise), natural resources damages,
property damages, personal injuries, attorneys' fees and
expenses, or fines or penalties, in each case arising out of,
based on or resulting from (A) the presence, or release or
threat of release into the environment, of any Materials of
Environmental Concern at any location, whether or not owned by
such person, or (B) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law or
Environmental Approval, and in each case which could
reasonably be expected to have Material Adverse Effect
("Environmental Claim") (other than Environmental Claims that
have been fully and finally adjudicated or otherwise
determined and all fines, penalties and other costs, if any,
payable by OLAC in respect thereof have been paid in full or
which are fully covered by insurance (including permitted
deductibles));
(iv) there are no circumstances that may prevent or interfere with
such compliance in the future, except to the extent the same
could not reasonably be expected to have a Material Adverse
Effect;
(v) no Materials of Environmental Concern are currently located
at, in, or under or about or are being released from any of
the properties on which the MCPC Facility is located (or any
other property with respect to which any of OLAC has or may
have liability either contractually or by operation of law) in
a manner which violates any applicable Environmental Law, or
for which cleanup or corrective action of any kind is required
under any applicable Environmental Law where such violation,
cleanup or corrective action could reasonably be expected to
have a Material Adverse Effect; and
(vi) no notice of violation, Lien, complaint, suit, order or other
notice with respect to the environmental condition of any of
the properties on which the MCPC Facility is located (or any
other property with respect to which
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OLAC has or may have liability either contractually or by
operation of law) is outstanding or, to such Person's
knowledge, threatened against any such party which could
reasonably be expected to result in a Material Adverse Effect.
(v) THIRD PARTY FINANCING EFFORTS. The Borrowers have made good faith and
reasonable efforts to obtain third party financing of the purchase price for the
MCPC Facility under the Stock Purchase Agreement on terms comparable to those
provided under this Loan Agreement and the related Credit Documents; such
financing has been requested from at least three independent sources; and the
Borrowers have been unable to obtain said financing on such comparable terms.
(w) DUE DILIGENCE. In connection with the transactions contemplated by
the Stock Purchase Agreement and the Credit Documents, CogenAmerica has
conducted reasonably prudent due diligence under the circumstances of such
transactions.
To the extent the representations and warranties in this Article 5
specifically relating to
(i) the MCPC Facility, including those concerning the Project Agreements
or Environmental Approvals, Environmental Claims or Environmental Laws
specifically relating to the MCPC Facility, or
(ii) the assets and properties of OLAC
are untrue or incorrect as of the Funding Date due to facts, circumstances,
conditions or events that existed on or occurred prior to the date hereof, and
as of the date hereof,
(A) none of the Cogen Entities was aware of such facts,
circumstances, conditions or events, and
(B) the Lender knew or reasonably should have known of such facts,
circumstances, conditions or events,
the same shall not be considered to be, and shall not be, a breach of
representation or warranty or of the Agreement.
ARTICLE 6
COVENANTS
Each of the Cogen Entities hereby jointly and severally covenant and
undertake with the Lender that, from the date hereof and so long as any
Obligations are owing:
SECTION 6.01. Each of the Cogen Entities will:
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(a) PERFORMANCE OF CREDIT DOCUMENTS. Duly perform and observe, and
procure the observance and performance by all parties thereto (other than the
Lender) of the terms of the Credit Documents;
(b) NOTICE OF DEFAULT, ETC. Promptly upon obtaining knowledge thereof
(and in any event within ten (10) days thereof), inform the Lender of the
occurrence of (i) any Event of Default or of any event which, with the giving of
notice or lapse of time, or both, would constitute an Event of Default, (ii) any
litigation or governmental proceeding pending or threatened against it or
against any Affiliate of any Cogen Entity which could reasonably be expected to
have a Material Adverse Effect, and (iii) any other event or condition which is
reasonably likely to have a Material Adverse Effect on its ability to perform
its obligations under the Credit Documents;
(c) OBTAIN CONSENTS. Obtain every consent and do all other acts and
things which may from time to time be necessary or advisable for the continued
due performance of all obligations of each Cogen Entity under the Credit
Documents;
(d) FINANCIAL INFORMATION. At the expense of the Cogen Entities, deliver
to the Lender:
(i) as soon as available but not later than 105 days after the end
of each fiscal year of the Cogen Entities complete copies of
the consolidated financial reports of the Cogen Entities, all
in reasonable detail, which shall include at least the
consolidated balance sheet of such entity and its Subsidiaries
as of the end of such year and the related consolidated
statements of income and sources and uses of funds for such
year, which shall be audited reports, certified without
qualification, and shall be prepared by an accounting firm
reasonably acceptable to the Lender;
(ii) as soon as available but not less than 60 days after the end
of each of the first three quarters of each fiscal year of the
Cogen Entities, a quarterly interim consolidated balance sheet
of the Cogen Entities and their Subsidiaries and the related
consolidated profit and loss statements and sources and uses
of funds, all in reasonable detail, unaudited, but certified
to be true and complete by the chief financial officer of
CogenAmerica;
(iii) within 30 days of the filing thereof, copies of all
registration statements and reports on Forms 10-K, 10-Q and 8-K
(or their equivalents) and other material filings which any
Cogen Entity shall have filed with the Securities and Exchange
Commission or any similar governmental authority;
(iv) promptly upon the mailing thereof to the shareholders of any
Cogen Entity, copies of all financial statements, reports,
proxy statements and
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other communications provided to the shareholders of any Cogen
Entity; and
(v) such other statements (including, without limitation, monthly
consolidated statements of operating revenues and expenses),
operating logs for the MCPC Facility, lists of assets and
accounts, budgets, forecasts, reports and other financial
information with respect to the business of any Cogen Entity
as the Lender may from time to time reasonably request,
certified to be true and complete by the chief financial
officer of CogenAmerica;
(e) CORPORATE EXISTENCE. Do or cause to be done all things necessary to:
(a) preserve and keep in full force and effect its corporate existence; and (b)
preserve and keep in full force and effect all licenses, franchises, permits and
assets necessary to the conduct of its business, except, in the case of clause
(b) only, where the failure to do so could not reasonably be expected to result
in a Material Adverse Effect;
(f) BOOKS AND RECORDS. Keep proper and accurate books of record and
account in accordance with GAAP;
(g) TAXES AND ASSESSMENTS. Pay and discharge all material taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property prior to the date upon which penalties attach thereto;
provided, however, that it shall not be required to pay and discharge, or cause
to be paid and discharged, any such tax, assessment, charge or levy so long as
the legality thereof shall be contested in good faith and by appropriate
proceedings or other acts and it shall set aside on its books adequate reserves
with respect thereto;
(h) INSPECTION. Allow any representative or representatives designated by
the Lender, subject to applicable laws and regulations, to visit and inspect any
of its properties, and, on the reasonable request thereof, to examine (at a
location where normally kept) its books of account, records, reports and other
papers and to discuss its affairs, finances and accounts with its officers, at
reasonable times and upon reasonable prior notice;
(i) COMPLIANCE WITH STATUTES, ETC. Do or cause to be done all things
necessary to comply in all material respects with all material laws, and the
rules and regulations thereunder, applicable to either Borrower, including,
without limitation, those laws, rules and regulations relating to employee
benefit plans and environmental matters;
(j) ENVIRONMENTAL MATTERS. Promptly upon the occurrence of any of the
following conditions, provide to the Lender a certificate of an officer thereof,
specifying in detail the nature of such condition and its proposed response or
the response of its Affiliates:
(i) its receipt or the receipt by OLAC of any written
communication whatsoever that alleges that such person is not
in compliance with any applicable Environmental Law or
Environmental Approval, if such
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noncompliance could reasonably be expected to have a Material
Adverse Effect,
(ii) knowledge by it that there exists any Environmental Claim
pending or threatened against any such person, which could
reasonably be expected to have a Material Adverse Effect, or
(iii) any release, emission, discharge or disposal of any Material
of Environmental Concern that could form the basis of any
Environmental Claim against it under applicable Environmental
Law, if such Environmental Claim could reasonably be expected
to have a Material Adverse Effect; and upon the written
request by the Lender, it will submit to the Lender at
reasonable intervals, a report providing an update of the
status of any issue or claim identified in any notice or
certificate required pursuant to this subsection;
(k) ERISA. Forthwith upon learning of the occurrence of any material
liability of either Borrower or any ERISA Affiliate pursuant to ERISA in
connection with the termination of any Plan or withdrawal or partial withdrawal
of any multi-employer plan (as defined in ERISA) or of a failure to satisfy the
minimum funding standards of Section 412 of the Code or Part 3 of Title I of
ERISA by any Plan for which any Cogen Entity or any ERISA Affiliate is plan
administrator (as defined in ERISA), furnish or cause to be furnished to the
Lender written notice thereof;
(l) MAINTENANCE OF PROPERTIES, ETC. Preserve and maintain good and
marketable title to all of its properties and assets which are necessary in the
conduct of its business in good working order and condition, ordinary wear and
tear excepted, subject to no Liens other than Permitted Liens and without
limiting the foregoing, shall operate and maintain the MCPC Facility and all
related improvements and equipment in accordance with good utility industry
practices;
(m) [intentionally omitted];
(n) PERFORMANCE OF PROJECT AGREEMENTS. Each Cogen Entity shall (i)
perform and observe all of its covenants and agreements contained in the
Governmental Approvals and any of the Project Agreements to which it is a party,
unless the failure to perform or observe such covenants and agreements could not
reasonably be expected to result in a Material Adverse Effect, (ii) preserve,
protect and defend its rights contained in the Governmental Approvals and any of
the Project Agreements to which it is a party, unless the failure to preserve,
protect or defend such rights could not reasonably be expected to result in a
Material Adverse Effect and (iii) maintain in full force and effect each of the
Project Agreements to which it is a party and all contracts, permits and
Governmental Approvals relating thereto which are necessary for the maintenance
and operation of its facilities;
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(o) OPERATING LOGS. OLAC shall, at its sole cost and expense, (i)
maintain daily operating logs showing, among other things, the electrical and
steam output of its facilities and the fuel consumption of its facilities, (ii)
keep maintenance and repair reports in sufficient detail to indicate the nature
and date of all work done, (iii) maintain a current operating manual and
complete set of plans, accounting records and specifications reflecting all
alterations and (iv) maintain all other records, logs and other materials
required by the relevant Project Agreements or any Governmental Approval;
(p) MAINTENANCE OF INSURANCE. Maintain or cause to be maintained with
insurance companies rated "A-" or better by Best's Insurance Guide and Key
Ratings or other insurance companies of recognized responsibility reasonably
satisfactory to the Lender, insurance in such amounts and covering such risks as
are usually carried by companies engaged in similar businesses and owning
similar properties in the same general areas in which OLAC operates, and in any
event the insurance coverages shall not be less than the insurance coverages set
forth on Schedule 5(i) except with the prior written consent of the Lender,
which will not be unreasonably withheld. The Cogen Entities shall, upon the
request of the Lender, promptly provide a schedule indicating the policies
maintained by each Cogen Entity, coverage limits of liability, effective dates
of coverage, insurance carrier names and policy numbers. Within fourteen (14)
days after the Funding Date, the Cogen Entities shall cause the Lender to be
named as an "additional insured," and "certificate holder" with respect to all
insurance policies of the Borrowers and the liability insurance of OLAC, and as
"lender loss payee" and "mortgagee" on all applicable insurance policies in
respect of OLAC and the MCPC Facility, for the account of the Lender. Evidence
of payment of premiums for such insurance policies shall be delivered to the
Lender at least thirty (30) days prior to the expiration thereof and such
insurance policies shall be delivered to the Lender promptly upon its request
therefor;
(q) USE OF PROCEEDS. Use the proceeds of the Loan only as set forth in
Section 2.02;
(r) ADDITIONAL DOCUMENTS; FILINGS AND RECORDINGS. Execute and deliver
from time to time as reasonably requested by the Lender, at the expense of the
Cogen Entities, such other documents in connection with the rights and remedies
provided for by the Security Documents, as applicable, which are necessary to
consummate the transactions contemplated therein. Each Cogen Entity shall, at
its own expense, take all reasonable actions that have been or shall be
requested by the Lender to establish, maintain, protect, perfect and continue
the perfection of the security interests of the Lender created by the Security
Documents including the execution of such instruments, and providing such other
information as may be required to enable the Lender to effect any such action.
Without limiting the generality of the foregoing, each Cogen Entity shall
execute or cause to be executed and shall file or cause to be filed such
financing statements, continuation statements, fixture filings, assignments,
mortgages or deed of trust in all places necessary or advisable (in the opinion
of counsel for the Lender) to establish, maintain and perfect such security
interests and in all other places that the Lender shall reasonably request.
SECTION 6.02. Each Cogen Entity shall not, and CogenAmerica shall not
permit either OLAC Holding or OLAC (or any subsidiaries of OLAC Holding or OLAC)
to, directly or indirectly, without the prior written consent of the Lender:
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(a) LIENS. Create, assume or permit to exist, any mortgage, pledge, lien,
security interest, charge, or other encumbrance whatsoever upon the assets of
OLAC and/or OLAC Holding (except for Permitted Liens) or upon the Collateral;
(b) CAPITAL EXPENDITURES. Make any capital expenditures (excluding
ordinary or scheduled maintenance) in any calendar year, exceeding $1,000,000
other than those funded by CogenAmerica and made to improve the MCPC Facility;
(c) INDEBTEDNESS. Incur any Indebtedness except (i) Indebtedness
existing as of the Closing Date, or (ii) so long as no Event of Default
occurs and is continuing: (A) if non-recourse to each of the Cogen Entities,
Indebtedness of any Subsidiary of the Borrowers (other than OLAC Holding and
OLAC) which is formed after the Funding Date; (B) Indebtedness of
Subsidiaries of the Borrowers (other than OLAC Holding and OLAC) of up to
$1,000,000 during each calendar year; (C) unsecured Indebtedness of any Cogen
Entity, if subordinated, pursuant to a subordination agreement, to the
obligations of each of the Cogen Entities under the Credit Documents, the
terms of any such Indebtedness to be acceptable to the Lender; (D)
Indebtedness of any Subsidiary of any Cogen Entity (other than OLAC Holding
and OLAC) if non-recourse to each of the Cogen Entities, under interest rate
swap agreements to hedge interest rate exposure for permitted non-recourse
financings; (E) Indebtedness owing by CogenAmerica under the MeesPierson
Credit Agreement as in effect as of the date hereof; and (F) indebtedness, if
any, owing by CogenAmerica under the Existing NRG Loan Agreement.
(d) CHANGE IN BUSINESS. Materially change the nature of its business or
commence any business materially different from its current business;
(e) ISSUANCE, SALE OR PLEDGE OF SHARES. Issue any new shares of capital
stock of, or other equity interest in, either OLAC Holding or OLAC, nor sell,
assign, transfer, pledge or otherwise convey or dispose of any of the shares or
direct or indirect interest (including by way of spin-off, installment sale or
otherwise) of the capital stock of or other equity interests in either OLAC
Holding or OLAC;
(f) SALE OF ASSETS. Sell, or otherwise dispose of, the assets of either
OLAC Holding or OLAC or any other asset (including by way of spin-off,
installment sale or otherwise) which is substantial in relation to its assets
taken as a whole, except for sales and dispositions of obsolete, worn or
replaced property not used or useful in a Borrower's or any Subsidiary's
business;
(g) CHANGES IN OFFICES OR NAMES. Change the location of the chief
executive office of any Cogen Entity, the office of the chief place of business
any such parties, the office of such parties in which the records relating to
the earnings or insurances of or relating to the MCPC Facility are kept unless
the Lender shall have received thirty (30) days prior written notice of such
change;
(h) FUNDAMENTAL CHANGES. Consolidate with, or merge into, any corporation
or other entity, or merge any corporation or other entity into any Cogen Entity
or liquidate, windup or
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dissolve (or suffer any liquidation or dissolution of itself or discontinue
its business or operations in any respect);
(i) LIMITATION ON DIVIDENDS. Directly or indirectly declare or pay any
dividend or make any Distribution on its capital stock or to members, as the
case may be, or redeem, retire, purchase or otherwise acquire, directly or
indirectly, any ownership or other equity interest of either Borrower now or
hereafter outstanding (or any options or rights issued with respect thereto), or
set aside any funds for any of the foregoing purposes (except as otherwise
contemplated by this Section 6.02(i)); PROVIDED, HOWEVER, that Distributions may
be paid by OLAC to OLAC Holding, OLAC Holding to CogenAmerica and by
CogenAmerica to its shareholders upon the satisfaction of the following
conditions:
(i) not less than thirty (30) days prior to the proposed date of
payment of such Distribution (the "Distribution Payment
Date"), each Cogen Entity shall have respectively delivered to
the Lender a certificate (the date of such certificate
hereinafter referred to as the "Certification Date") signed by
the chief financial officer and chief executive officer of
such Cogen Entity stating and demonstrating (with appropriate
analysis and documentation attached thereto) that (A) at no
time during the six (6) month period commencing on the
Certification Date (the "Calculation Period") will the sum of
the then unencumbered (and unreserved) cash of OLAC plus its
Projected EBIDA for such Calculation Period be less than the
sum of the scheduled principal and interest payments due on
the Loan for the next two (2) Interest Payment Dates, and (B)
no Default or Event of Default has occurred and is then
continuing, and after giving effect to such proposed
Distribution, no Default or Event of Default would occur or
reasonably be anticipated to occur and/or be continuing; and
(ii) the certifications set forth in the above-referenced
certificates remain true and correct as of the Distribution
Payment Date.
Distributions may be made to CogenAmerica if the certificates contemplated
above are delivered and no Default or Event of Default has occurred and is
continuing as of the Distribution Payment Date;
(j) AMENDMENT, TERMINATION, ETC. OF PROJECT AGREEMENTS. Terminate, cancel
or suspend, or permit or consent to any termination, cancellation or suspension
of, or enter into or consent to or permit the assignment of the rights or
obligations of any party to, any of the Project Agreements or Governmental
Approvals. Each of the Cogen Entities shall not, directly or indirectly amend,
modify, supplement or waive, or permit or consent to the amendment,
modification, supplement or waiver of, any of the provisions of, or give any
consent under, any of the Project Agreements without (i) first submitting to the
Lender a copy of such proposed amendment, modification, supplement, waiver or
consent and (ii) obtaining the express prior written consent of the Lender,
PROVIDED that no such consent shall be required with respect to any proposed
amendment, modification, supplement, waiver or consent (A) that does not pertain
to
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the Project Agreements described in Schedule 6.020) and (B) if in the
reasonable judgment of the Lender, such proposed amendment, modification,
supplement, waiver or consent would not reasonably be expected to result in a
Material Adverse Effect;
(k) FISCAL YEAR. Change its fiscal year;
(l) TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including,
without limitation, the purchase, sale or exchange of property or the rendering
of any service, with any Affiliate except for transactions contemplated by the
April 30, 1996 Management Services Agreement between CogenAmerica and the
Lender, and other transactions entered into by CogenAmerica with any Affiliate
(excluding OLAC Holding and OLAC) in the ordinary course of business and
pursuant to the reasonable requirements of business and upon fair and reasonable
terms no less favorable than would be obtained in an comparable arm's length
transaction with a Person not an Affiliate; and
(m) INVESTMENTS. Make any Investments other than Investments made by
CogenAmerica when no Default or Event of Default exists hereunder or would be
created thereby.
(n) AMENDMENTS TO MEESPIERSON FINANCING. Make any amendment or
modification to or take any other action under the MeesPierson Credit Agreement
and related financing documents that would (a) increase the maximum principal
amount of advances which at any time may be outstanding thereunder in excess of
$30,000,000, (b) increase the stated interest rate on the loans thereunder
(except as currently contemplated by the MeesPierson Waiver), or (c) extend or
shorten the stated termination or maturity date of any such indebtedness.
ARTICLE 7
DEFAULTS AND REMEDIES
SECTION 7.01. EVENTS OF DEFAULT. An "Event of Default" shall arise upon
the occurrence of any one or more of the following:
(a) Any Cogen Entity fails to make any payment of interest or any other
amount (other than those specified in (b) below) with respect to the Loan when
the same becomes due and payable and such failure continues for a period of 30
days;
(b) Any Cogen Entity fails to make any payment of the principal of the
Loan when the same become due and payable and such failure continues for a
period of 30 days;
(c) Any representation or warranty made by any Cogen Entity herein or in
the Credit Documents fails to be accurate or complete in any material respect,
or any Cogen Entity fails to comply with any of its respective covenants or
agreements contained herein or the Credit Documents (other than those referred
to in (a) or (b) above) and such failure continues for 30 days after the notice
specified below;
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(d) An event occurs which entitles the holders of Indebtedness aggregating
in excess of $2,000,000 of any Cogen Entity or any Subsidiary of any Cogen
Entity to accelerate such Indebtedness;
(e) Any Cogen Entity or any Subsidiary of any Cogen Entity pursuant to or
within the meaning of any Bankruptcy Law;
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief against it in an
involuntary case;
(iii) consents to the appointment of a custodian of it or for any
substantial part of its property;
(iv) makes a general assignment for the benefit of its creditors;
or
or takes any action comparable to the foregoing under any foreign laws relating
to insolvency;
(f) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(i) is for relief against any Cogen Entity or any Subsidiary of
any Cogen Entity in an involuntary case;
(ii) appoints a custodian of any Cogen Entity or any Subsidiary of
any Cogen Entity or for any substantial part of its property;
or
(iii) orders the winding up or liquidation of any Cogen Entity or
any Subsidiary of any Cogen Entity;
or any similar relief is granted under any foreign laws and the order or decree
remains unstayed and in effect for 60 days;
(g) Any judgment or decree for payment of money in excess of $2,000,000 or
its foreign currency equivalent at the time is entered against any Cogen Entity
or any Subsidiary of any Cogen Entity and is not discharged and either (a) an
enforcement proceeding has been commenced by any creditor upon such judgment or
decree or (b) there is a period of 60 days following the entry of such judgment
or decree during which such judgment or decree is not discharged, waived or the
execution thereof stayed;
(h) This Agreement or any other Credit Document shall cease, for any
reason, to be in full force and effect or any Cogen Entity or any Subsidiary of
any Cogen Entity shall so assert in writing;
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(i) Any "Event of Default" shall occur under the Existing NRG Loan
Agreement; or
(j) OLAC shall revoke, breach or anticipatorily repudiate the Guaranty or
any term or provision therein or assert or threaten any defense, right of set
off or counterclaim against the enforcement thereof., the Guaranty or any term
or provision therein.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any Administrative or governmental body.
A Default under clause (c) is not an Event of Default until the Lender
notifies any Cogen Entity of the Default and the Cogen Entities do not cure such
Default within the time specified after receipt of such notice. Such notice
must specify the Default, demand that it be remedied and state that such notice
is a "Notice of Default".
SECTION 7.02. ACCELERATION. If an Event of Default (other than an Event
of Default specified in Section 7.01(e) or (f) with respect to any Cogen Entity
occurs and is continuing, the Lender by notice to any Cogen Entity may declare
the principal of and accrued interest on the Loan (together with all other
Obligations) to be due and payable. Upon such a declaration, such Obligations
shall be due and payable immediately. If an Event of Default specified in
Section 7.01 (e) or (f) with respect to any Cogen Entity occurs, the Obligations
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Lender. The Lender by notice to any
Cogen Entity may rescind an acceleration and its consequences. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.
SECTION 7.03. DEFAULT AND REMEDIES.
If, following the Funding Date, and so long as there shall remain
outstanding any Obligations hereunder, an Event of Default occurs and is
continuing, the Lender shall have all of the remedies of a secured party under
the Uniform Commercial Code, including, without limitation, the right to notify
OLAC and/or OLAC Holding to pay directly to the Lender any amount payable to any
Cogen Entity in respect of the Pledged Stock. In addition to and not in
derogation of any or all of the rights and remedies granted hereunder to the
Lender or otherwise available to the Lender under applicable law, following the
Funding Date and such an Event of Default, so long as there shall remain any
outstanding Indebtedness hereunder, the Lender shall have the further right and
power, at its sole option, to sell, or otherwise dispose of, the Collateral
(other than Collateral consisting of cash), or any part thereof, at any one or
more public or private sales as permitted by applicable law, and for that
purpose the Lender may take immediate and exclusive possession of such
Collateral, or any part thereof, to the extent capable of possession.
To the fullest extent permitted by law, each Cogen Entity irrevocably and
expressly waives any right to receive any notice of sale or notice of any other
disposition of all or any part of the Collateral that does not consist of cash,
except that to the extent may be entitled by
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applicable law to any notice of sale or other disposition of such Collateral,
each Cogen Entity agrees that if such notice is mailed, postage prepaid, to
any Cogen Entity at such party's address hereinafter specified not less than
five (5) days before the time of the sale or other disposition contemplated
therein, such notice shall conclusively be deemed commercially reasonable and
shall fully satisfy any requirement for giving of said notice. The Lender
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Lender may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place which it
was so adjourned.
The proceeds realized upon any such disposition, after deduction for the
expenses of retaking, holding, preparing for sale, selling or the like and
reasonable attorneys' fees, legal expenses and costs incurred by the Lender,
shall be applied in accordance with Section 7.06.
The remedies of the Lender hereunder or under any Credit Documents are
Cumulative and the exercise of any one or more of the remedies provided herein,
or under the Uniform Commercial Code or other applicable law, shall not be
construed as a waiver of any other rights or remedies of the Lender so long as
any part of the Obligations remain unsatisfied or unperformed. The making of
this Agreement shall not waive or impair any other security the Lender may have
or hereafter acquire for the payment or performance of the Obligations, nor
shall the making of any such additional security waive or impair this Agreement;
but the Lender may resort to any security it may have in the order it may be
deemed proper.
SECTION 7.04. OTHER REMEDIES. If, following the Funding Date, and so long
as there shall remain outstanding Obligations, an Event of Default occurs and is
continuing, the Lender may pursue any available remedy to collect the payment of
all outstanding Obligations or to enforce the performance of any provision of
the Note, this Agreement, or any other Credit Document. The Lender may maintain
a proceeding even if it does not possess the Note or does not produce it in the
proceeding. A delay or omission by the Lender in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 7.05. WAIVER OF PAST DEFAULTS. The Lender by notice to any Cogen
Entity may waive an existing Default and its consequences (subject to any
limitations expressly set forth in such waiver). When a Default is waived, it
is deemed cured, but no such waiver shall extend to any subsequent or other
Default or impair any consequent right.
SECTION 7.06. PRIORITIES. If the Lender collects any money or property
pursuant to this Article 7, it shall pay out the money or property in the
following order:
FIRST: to itself in accordance with the priority set forth in Section 2.09
until all Obligations have been indefeasibly satisfied in full; and
SECOND: to the extent of any excess, to the Borrowers.
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SECTION 7.07. UNDERTAKING FOR COSTS. In any suit for the enforcement of
any right or remedy under this Agreement a court in its discretion may require
the filing by any party litigant in the suit of an undertaking to pay the costs
of the suit, and the court in its discretion may assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by
the party litigant.
SECTION 7.08. WAIVER OF STAY OR EXTENSION Laws. Each Cogen Entity (to the
extent permitted by applicable law) shall not at any time insist upon, or plead,
or in any manner whatsoever claim or take the benefit or advantage of, any stay
or extension law wherever enacted, now or at any time hereafter in force, which
may affect the covenants or the performance of this Agreement; and each Cogen
Entity (to the extent that it may lawfully do so) hereby expressly waives all
benefit or advantage of any such law, and shall not hinder, delay or impede the
execution of any power herein granted to the Lender, but shall suffer and permit
the execution of every such power as though no such law had been enacted.
ARTICLE 8
SUBORDINATION; WAIVERS
SECTION 8.01. SUBORDINATION. The Indebtedness evidenced by the Note is
subordinate in certain respects to the Indebtedness (the "MeesPierson
Obligations") under and as that term is defined in that certain Credit Agreement
dated December 17, 1997 (the "MeesPierson Credit Agreement") entered into by and
among CogenAmerica, MeesPierson Capital Corporation and the other Lenders party
thereto (collectively the "MeesPierson Lenders"), to the extent and in the
manner provided in that certain Subordination Agreement by and between those
parties and the Lender dated as of October 9, 1998. Each Cogen Entity shall
cause all other Indebtedness incurred by it to be subordinated on terms and
conditions satisfactory to the Lender, to the prior payment in full of the Note
and that each such subordination is for the benefit of and enforceable by the
holders of the Note. Each Cogen Entity acknowledges and agrees that the terms
of any subordination agreement contemplated in this paragraph define the
relative rights of its creditors between such creditors and in no way affect the
obligations of any Cogen Entity to the Lender.
SECTION 8.02. WAIVER OF CONTRIBUTION, SUBROGATION, OTHER RIGHTS. Each
Cogen Entity hereby agrees that, from the date of this Agreement until the
Obligations and the MeesPierson Obligations have each been indefeasibly paid in
full, or this Agreement has been earlier terminated, it will not exercise any
rights which it may have or acquire, at law or in equity, by way of
contribution, subrogation, indemnity or similar principles as a result of
payments made by any Cogen Entity to the Lender hereunder. Each Cogen Entity
expressly acknowledges that it will benefit directly from the Loan hereunder and
that each of the Obligations are intended to be direct obligations and not a
guarantee or in the nature of a guarantee. If, notwithstanding the express
intention of the parties to the contrary, all or any portion of the Obligations
of any Cogen Entity are deemed a guarantee or in the nature of a guarantee, then
each Cogen Entity hereby agrees that, from the date of this Agreement until the
Obligations and the MeesPierson
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Obligations have each been indefeasibly paid in full, or this Agreement has
been earlier terminated, it will not exercise any suretyship, accommodation
party, guarantor and similar defenses and rights arising under any of the
Credit Documents as a result of the Loan hereunder, and any such party shall
be and remain liable for any deficiency remaining after foreclosure of any
Lien under any of the Security Documents, whether or not the liability of the
primary party obligated thereunder or any other obligor for such deficiency
is discharged Pursuant to statute or judicial decision, nor shall the Lender
be required to martial assets or remedies or first to resort for payment of
the Obligations to the primary obligor therefor or other parties or first to
enforce, realize upon or exhaust any Collateral for the Obligations, before
seeking collection of the Obligations from or enforcing any other rights or
remedies against such deemed surety, guarantor or accommodation party. This
Section 8.02 shall inure to the benefit of the Lender and to the benefit of
the MeesPiersn Lenders.
ARTICLE 9
MISCELLANEOUS
SECTION 9.01. AMENDMENTS. Except as otherwise expressly set forth in this
Agreement, neither this Agreement nor any terms hereof may be amended,
supplemented or modified except in writing signed by the Lender, the Borrowers
and the Guarantor.
SECTION 9.02. NOTICES. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy or telex, if one is listed), and, unless otherwise expressly provided
herein, shall be deemed to have been duly given or made when delivered by hand,
or three Business Days after being deposited in the mail, postage prepaid, or,
in the case of telecopy notice, when sent, confirmation of receipt received, or
in the case of telex notice, when sent, answer back received, address as
follows, or to such other address as may be hereafter notified by the respective
parties hereto and any further holders of the Note:
If to CogenAmerica: Cogeneration Corporation of America
One Carlson Parkway, Suite 240
Minneapolis, MN 55447-4454
Attention: President and Chief Executive
Officer
Telephone: (612) 745-7900
Telecopier: (612) 745-7901
With a copy to: Troutman Sanders
NationsBank Plaza, Suite 5200
600 Peachtree Street N.E.
Atlanta, Georgia 30308
Attention: M. Stuart Sutherland
Telephone: (404) 885-3000
Telecopier: (404) 885-3900
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if to OLAC: Oklahoma Loan Acquisition Corporation
One Carlson Parkway, Suite 240
Minneapolis, MN 55447-4454
Attention: President and Chief Executive
Officer
Telephone: (612) 745-7900
Telecopier: (612) 745-7901
With a copy to: Troutman Sanders
NationsBank Plaza, Suite 5200
600 Peachtree Street N.E.
Atlanta, Georgia 30308
Attention: M. Stuart Sutherland
Telephone: (404) 885-3000
Telecopier: (404) 885-3900
If to OLAC Holding: CogenAmerica Pryor Inc.
One Carlson Parkway, Suite 240
Minneapolis, MN 55447-4454
Attention: President and Chief Executive
Officer
Telephone: (612) 745-7900
Telecopier: (612) 745-7901
With a copy to: Troutman Sanders
NationsBank Plaza, Suite 5200
600 Peachtree Street N.E.
Atlanta, Georgia 30308
Attention: M. Stuart Sutherland
Telephone: (404) 885-3000
Telecopier: (404) 885-3900
If to Lender: NRG Energy, Inc.
1221 Nicollet Mall, Suite 700
Minneapolis, MN 55403
Attention: Treasurer
Telephone: (612) 373-5300
Telecopier: (612) 373-5430
With a copy to: NRG Energy, Inc.
Legal Department
1221 Nicollet Mall, Suite 700
Minneapolis, MN 55403
Attention: Vice President and General Counsel
Telephone: (612) 373-5300
Telecopier: (612) 373-5392
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PROVIDED that any notice, request or demand to or upon the Lender pursuant to
Section 2.05 shall not be effective until received.
SECTION 9.03. NO WAIVER: CUMULATIVE REMEDIES. No failure to exercise and
no delay in exercising, on the part of the Lender, any right, remedy, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise or any other right, remedy,
power or privilege. The rights, remedies, powers and privileges herein provided
are cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
SECTION 9.04. PAYMENT OF EXPENSES AND TAXES. The Borrowers jointly and
severally agree (a) to pay the Lender on the Funding Date a fee in the amount of
$ 100,000; (b) to pay the Lender on the Funding Date and on each anniversary of
the Funding Date the amount of $50,000 in respect of expenses incurred in
connection with the development, preparation and the execution and general
administration of the Credit Documents and in addition, to pay or reimburse the
Lender for all its reasonable costs and expenses incurred in connection with any
amendment, supplement or modification to the Credit Documents, including the
reasonable fees and disbursements of counsel to the Lender, (c) to pay or
reimburse the Lender for all its costs and expenses incurred in connection with,
and to pay, indemnify, and hold the Lender harmless from and against, any and
all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever arising out of or in connection with the enforcement or preservation
of any rights under any Credit Document, including reasonable fees and
disbursements of counsel to the Lender incurred in connection with the
foregoing, (d) to pay, indemnify, and to hold the Lender harmless from any and
all recording and filing fees and any and all liabilities with respect to, or
resulting from any delay in paying, stamp, excise and other similar taxes (other
than withholding taxes), if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation of any
of the transactions contemplated by, or any amendment, supplement or
modification of, or any waiver or consent under or in respect of, any Credit
Document and any such other documents, and (e) to pay, indemnify, and hold the
Lender and its respective Affiliates, officers and directors harmless from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever including reasonable fees and disbursements of counsel) which
may be incurred by or asserted against the Lender or such Affiliates, officers
or directors arising out of or in connection with any investigation, litigation
or proceeding related to this Agreement, the other Credit Documents, the
proceeds of the Loan and the transactions contemplated by or in respect of such
use of proceeds, or any of the other transactions contemplated hereby, whether
or not the Lender or such Affiliates, officers or directors is a party thereto,
including any of the foregoing relating to the violation of, noncompliance with
or liability under, any environmental law or regulation applicable to the
operations of any Cogen Entity or any Subsidiary of any Cogen Entity or any of
the facilities and properties owned, leased or operated by any Cogen Entity or
any Subsidiary of any Cogen Entity (all the foregoing, collectively, the
"Indemnified Liabilities"); PROVIDED that the Borrowers shall have no obligation
hereunder with respect to indemnified liabilities of the Lender or any of its
respective Affiliates, officers and directors arising from (i) the gross
negligence or willful misconduct of the Lender or
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its directors or officers or (ii) legal proceedings commenced against the
Lender by any security holder or creditor thereof arising out of and based
upon rights afforded any such security holder or creditor solely in its
capacity as such. The agreements in this Section 9.04 shall survive
repayment of the Note and all other documents payable hereunder.
SECTION 9.05. SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS.
This Agreement shall be binding upon and inure to the benefit of the Cogen
Entities, the Lender, all future holders of the Note and the Loan, and their
respective successors and assigns, except that no Cogen Entity may assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of the Lender.
SECTION 9.06. COUNTERPARTS. This Agreements may be executed by one or
more of the parties to this Agreement on any number of separate counterparts and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument.
SECTION 9.07. GOVERNING LAW; NO THIRD PARTY RIGHTS. This Agreement and
the Note and the rights and obligations of the parties under this Agreement and
the Note shall be governed by, and construed and interpreted in accordance with,
the law of the State of Minnesota and applicable laws of the United States of
America. This Agreement is solely for the benefit of the parties hereto and
their respective successors and assigns, and, except as expressly provided in
Section 8.02, no other Person shall have any right, benefit, priority or
interest under, or because of the existence of, this Agreement.
SECTION 9.08. SUBMISSION TO JURISDICTION; WAIVERS.
(a) Each party to this Agreement hereby irrevocably and unconditionally;
(i) submits for itself and its property in any legal action or
proceedings relating to this Agreement or any of the other Credit
Documents, or for recognition and enforcement of any judgment in
respect thereof, to the non-exclusive general jurisdiction of the
courts of the State of Minnesota, the courts of the United States
of America for Minnesota and appellate courts from any thereof;
(ii) consents that any such action or proceeding may be brought in such
courts, and waives any objection that it may now or hereafter have to
the venue of any such action or proceeding in any such court or that
such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same;
(iii) agrees that service of process in any such action or proceeding may
be effected by mailing a copy thereof by registered or certified mail
(or any substantially similar form of mail), postage prepaid, to such
party at its address set forth in Section 9.02; and
35
<PAGE>
(iv) agrees that nothing herein shall affect the right to effect service
of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction.
(b) EACH PARTY HERETO UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING REFERRED TO IN PARAGRAPH (A) ABOVE AND ANY COUNTERCLAIM
THEREIN.
SECTION 9.09. INTEREST. Each provision in this Agreement and each other
Credit Document is expressly limited so that in no event whatsoever shall the
amount paid, or otherwise agreed to be paid, by the Borrowers for the use,
forbearance or detention of the money to be loaned under this Agreement or any
other Credit Document or otherwise (including any sums paid as required by any
covenant or obligation contained herein or in any other Credit Document which is
for the use, forbearance or detention of such money), exceed that amount of
money which would cause the effective rate of interest to exceed the highest
lawful rate permitted by applicable law (the "Highest Lawful Rate"), and all
amounts owed under this Agreement and each other Credit Document shall be held
to be subject to reduction to the effect that such amounts so paid or agreed to
be paid which are for the use, forbearance or detention of money under this
Agreement or such Credit Document shall in no event exceed that amount of money
which would cause the effective rate of interest to exceed the Highest Lawful
Rate. Notwithstanding any provision in this Agreement or any other Credit
Document to the contrary, if the maturity of the Loan or the obligations in
respect of the other Credit Documents are accelerated for any reason, or in the
event of any prepayment of all or any portion of the Loan or the obligations in
respect of the other Credit Documents by the Borrowers or in any other event,
earned interest on the Loan and such other obligations of the Borrowers may
never exceed the Highest Lawful Rate, and any unearned interests otherwise
payable on the Loan or the obligations in respect of the other Credit Documents
that is in excess of the Highest Lawful Rate shall be canceled automatically as
of the date of such acceleration or prepayment or other such event and (if
theretofore paid) shall, at the option of the holder of the Loan or such other
obligations, be either refunded to the Borrowers or credited on the Principal of
the Loan. In determining whether or not the interest paid or payable, under any
specific contingency, exceeds the Highest Lawful Rate, the Borrowers and the
Lender shall, to the maximum extent permitted by applicable law, amortize,
prorate, allocate and spread, in equal parts during the period of the actual
term of this Agreement, all interest at any time contracted for, charged,
received or reserved in connection with this Agreement.
SECTION 9.10. JOINT AND SEVERAL LIABILITY. Notwithstanding any term or
provision contained in this Agreement or any other Credit Document to the
contrary, each and every covenant, agreement and other obligation each Cogen
Entity under pursuant to any of the Credit Documents to the extent it is a party
thereto, shall constitute a joint and several duty, liability and obligation of
each Cogen Entity, as applicable.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
BORROWERS:
COGENERATION CORPORATION OF AMERICA
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
COGENERATION PRYOR INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
GUARANTOR:
OKLAHOMA LOAN ACQUISITION CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
LENDER:
NRG ENERGY, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
37
<PAGE>
NRG GENERATING (U.S.) INC.
1998 STOCK OPTION PLAN
GRANT OF INCENTIVE STOCK OPTION
DATE OF GRANT: ______________________
THIS GRANT, dated as of the date of grant first stated above (the "Date of
Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to
_____________________ ("Grantee"), who is an Employee of the Company or a
Subsidiary.
WHEREAS, the Board of Directors of the Company (the "Board") on April 20,
1998 adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the "Plan")
to be effective as of that date, and the shareholders of the Company approved
the Plan on May 21, 1998.
WHEREAS, the Plan provides for the granting of Incentive Stock Options by
the Committee to directors, officers and key employees of the Company (excluding
officers and directors who are not employees) to purchase shares of the Common
Stock of the Company (the "Stock"), in accordance with the terms and provisions
thereof; and
WHEREAS, the Committee considers Grantee to be a person who is eligible for
a grant of Incentive Stock Options under the Plan, and has determined that it
would be in the best interest of the Company to grant the Incentive Stock
Options documented herein.
NOW THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. GRANT OF OPTION.
Subject to the terms and conditions hereinafter set forth, the Company, with
the approval and at the direction of the Committee, hereby grants to Grantee, as
of the Date of Grant, an option to purchase up to __________ shares of Stock at
a price of $___________ per share, its Fair Market Value as of the Date of
Grant. The shares of stock purchasable upon exercise of the Option are
hereinafter sometimes referred to as the "Option Shares." The Option is
intended by the parties hereto to be, and shall be treated as, an Incentive
Stock Option under Code Section 422.
2. INSTALLMENT EXERCISE.
Subject to such further limitations as are provided herein, the Option shall
become exercisable in three (3) installments, Grantee having the right hereunder
to purchase from the Company the following number of Option Shares upon exercise
of the Option, on and after the following dates, in cumulative fashion:
(i) on and after the first anniversary of the Date of Grant up to
one-third (ignoring fractional shares) of the total number of Option Shares;
(ii) on and after the second anniversary of the Date of Grant, up to an
additional one-third (ignoring fractional shares) of the total number of Option
Shares; and
(iii) on and after the third anniversary of the Date of Grant, the remaining
Option Shares.
Exhibit 10.35.2
<PAGE>
3. TERMINATION OF OPTION.
(a) The Option and all rights hereunder with respect thereto, to the extent
such rights shall not have been exercised, shall terminate and become null and
void after the expiration of ten (10) years from the Date of Grant (the "Option
Term").
(b) Upon the occurrence of Grantee's ceasing for any reason to be
employed by the Company, the Option, to the extent not previously exercised,
shall terminate and become null and void immediately upon the Separation
Date, except in a case where the termination of Grantee's employment is by
reason of retirement, Disability or death or otherwise as follows. Upon a
termination of Grantee's employment by reason of Disability or death, all
unexercised portions of the Option shall become immediately exercisable and
the Option may be exercised during the period beginning upon such termination
and ending one year after such date. [In the event of any other termination,
the Option may be exercised within the three-month period following the date
of retirement, but only to the extent that the Option was outstanding and
exercisable upon the date of such retirement. In no event, however, shall any
such period extend beyond the Option Term.]
(c) In the event of Grantee's death, the Option may be exercised by
Grantee's legal representative(s) as and to the extent that the Option would
otherwise have been exercisable by Grantee, subject to the provisions of
Section 3(b) hereof.
(d) A transfer of Grantee's employment between the Company and its
Parents or Subsidiaries shall not be deemed to be a termination of Grantee's
employment.
(e) Notwithstanding any other provisions set forth herein or in the
Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing
affecting the Company, its Parents or Subsidiaries, (ii) breach any covenant
not to compete, or employment contract, with the Company, its Parents or
Subsidiaries, or (iii) engage in conduct that would warrant Grantee's
discharge for cause (excluding general dissatisfaction with the performance
of Grantee's duties, but including any act of disloyalty or any conduct
clearly tending to bring discredit upon the Company, its Parents or
Subsidiaries), any unexercised portion of the Option shall immediately
terminate and be void.
4. EXERCISE OF OPTIONS.
(a) Grantee may exercise the Option with respect to all or any part of
the number of Option Shares that are exercisable hereunder by giving the
Secretary of the Company written notice of intent to exercise. The notice of
exercise shall specify the number of Option Shares as to which the Option is
to be exercised and date of exercise thereof, which date shall be at least
five (5) days after the signing of such notice unless an earlier time shall
have been mutually agreed upon.
(b) Full payment (in U.S. dollars) by Grantee of the Option Price for
Option Shares purchased shall be made on or before the exercise date
specified in the notice of exercise in cash, or as the Company may otherwise
permit as further set forth in the Plan. On the exercise date specified in
Grantee's notice or as soon thereafter as is practicable, the Company shall
cause to be delivered to Grantee, a certificate or certificates for the
Option Shares then being purchased (out of theretofore unissued Stock or
reacquired Stock, as the Company may elect) upon full payment for such Option
Shares. The obligation of the Company to deliver Stock shall, however, be
subject to the condition that if at any time the Committee shall determine in
its discretion that the listing, registration or qualification of the Option
or the Option Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection with, the
Option or the issuance or purchase of Stock thereunder, the Option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee.
Exhibit 10.35.2 2
<PAGE>
(c) If Grantee fails to pay for any of the Option Shares specified in
such notice or fails to accept delivery thereof, Grantee's right to purchase
such Option Shares may be terminated by the Company or the exercise of the
Option may be ignored, as the Committee in its sole discretion may determine.
The date specified in Grantee's notice as the date of exercise shall be
deemed the date of exercise of the Option, provided that payment in full for
the Option Shares to be purchased upon such exercise shall have been received
by such date.
5. ADJUSTMENT OF AND CHANGES IN STOCK.
In the event of a reorganization, recapitalization, change of shares,
stock split, spin-off, stock dividend, reclassification, subdivision, or
combination of shares, merger, consolidation, rights offering, or any other
change in the corporate structure of shares of capital stock of the Company,
the Committee shall appropriately adjust the number and kind of shares of
Stock subject to the Option and such option price; provided, however, that no
such adjustment shall give Grantee any additional benefits under the Option.
In the event of any Corporate Transaction or an event giving rise to a
Change in Control, the Option shall be fully vested, nonforfeitable and
become exercisable as of the date of the Change in Control or Corporate
Transaction or as otherwise determined in accordance with Section 5.5(c) of
the Plan. However, in the case of a Corporate Transaction, the Committee may
determine that the Option will not be so accelerated if and to the extent
(i) such Option is either to be assumed by the successor or parent thereof or
to be replaced with a comparable Option to purchase shares of the capital
stock of the successor corporation or parent thereof, or (ii) such Option is
to be replaced with a cash incentive program of the successor corporation
that preserves the option spread existing at the time of the Corporate
Transaction and provides for subsequent payment in accordance with the same
vesting schedule applicable to such Option.
In the event of a Corporate Transaction described in clauses (i) or (ii) of
Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days notice
to the optionee (an "Acceleration Notice") determine that such optionee's
Options will terminate as of the effective date of such Corporate Transaction,
in which event such Options shall be fully vested, nonforfeitable and become
exercisable immediately as of the date of such Acceleration Notice. In the
event of a Change in Control or Corporate Transaction described in clauses
(a)(i), (a)(ii) and (b)(iii) of Section 5.5 of the Plan or in the event the
Acceleration Notice is not timely given, the Option shall remain exercisable for
the remaining term of the Option notwithstanding the provisions of Article V of
the Plan, subject to any limitations thereto which may be applicable to
Incentive Stock Options. In the event of a Corporate Transaction described in
clauses (a)(iii), (b)(i) or (b)(ii) of Section 5.5 of the Plan, which is
preceded by a timely Acceleration Notice, the Option shall terminate as of the
effective date of the Corporate Transaction described therein. In no event
shall the Option be exercised after the expiration of the Option Term.
6. FAIR MARKET VALUE.
As used herein, the term "Fair Market Value" shall mean:
(a) If the Common Stock is listed on any established stock exchange or a
national market system, including, without limitation, the Nasdaq National
Market, its fair market value shall be the closing selling price for such stock
on the principal securities exchange or national market system on which the
Common Stock is at the time listed for trading. If there are no sales of Common
Stock on that date, then the closing selling price for the Common Stock on the
next preceding day for which such closing selling price is quoted shall be
determinative of fair market value; or
(b) If the Common Stock is not traded on an exchange or a national
market system, its fair market value shall be determined in good faith by the
Committee, possibly based upon, but not limited to, a fair market value
concept averaged over the twenty (20) trading days (or five (5) trading days
if the Common Stock is traded on the Nasdaq
Exhibit 10.35.2 3
<PAGE>
SmallCap Market or a similar market system) preceding the Date of Grant or
other relevant date, and such determination shall be conclusive and binding
on all persons.
In no event shall the Fair Market Value equal less than the par value of
the Common Stock.
7. NO RIGHTS AS SHAREHOLDERS.
Grantee shall have no rights as a shareholder with respect thereto unless
and until certificates for shares of Common Stock are issued to him or her.
8. NON-TRANSFERABILITY OF OPTION.
During Grantee's lifetime, this Option shall be exercisable only by
Grantee or his or her guardian or legal representative.
9. EMPLOYMENT NOT AFFECTED.
The grant of the Option hereunder shall not be construed as conferring on
Grantee any right to continued employment, and Grantee's employment may be
terminated without regard to the effect which such action might have upon him
as a holder of this Option.
10. AMENDMENT OF OPTION.
The Option may be amended by the Committee at any time (i) if the
Committee determines, in its sole discretion, that amendment is necessary or
advisable in light of any addition to or change in the Code or in the
regulations issued thereunder, or any federal or state securities law or
other law of regulation, which change occurs after the Date of Grant and by
its terms applies to the Option; or (ii) other than in the circumstances
described in clause (i), with the consent of Grantee.
11. NOTICE.
Any notice to the Company provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices and any
notice to Grantee shall be addressed to Grantee at the current address shown
on the payroll records of the Employer. Any notice shall be deemed to be
duly given if and when properly addressed and posted by registered or
certified mail, postage prepaid.
12. INCORPORATION OF PLAN BY REFERENCE.
The Option is granted pursuant to the Plan, the terms and definitions of
which are incorporated herein by reference, and the Option shall in all
respects by interpreted in accordance with the Plan.
13. GOVERNING LAW.
To the extent that federal law shall not be held to have preempted local
law, this Option shall be governed by the laws of the State of Delaware. If
any provision of the Option shall be held invalid or unenforceable, the
remaining provisions hereof shall continue in full force and effect.
Exhibit 10.35.2 4
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Grant of Incentive Stock Option, and Grantee has placed his or
her signature hereon, effective as of the Date of Grant.
NRG GENERATING (U.S.) INC.
By:
---------------------------------------
Timothy P. Hunstad
Vice President and Chief Financial
Officer
GRANTEE
Signature
---------------------------------
Name:
-------------------------------------
(Print)
Address:
---------------------------------
---------------------------------
---------------------------------
Exhibit 10.35.2 5
<PAGE>
NRG GENERATING (U.S.) INC.
1998 STOCK OPTION PLAN
GRANT OF EMPLOYEE NONQUALIFIED STOCK OPTION
DATE OF GRANT: ______________________
THIS GRANT, dated as of the date of grant first stated above (the "Date
of Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to
_____________________ (the "Grantee"), who is an Employee of the Company or a
Subsidiary.
WHEREAS, the Board of Directors of the Company (the "Board") on April
20, 1998, adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the
"Plan") effective as of that date;
WHEREAS, the Plan provides for the granting of Nonqualified Stock
Options by the Committee to directors of the Company, officers and key
employees of the Company and its Subsidiaries and certain other individuals
who have the capability of making or who have made a substantial contribution
to the Company to purchase shares of the Common Stock of the Company (the
"Stock"), in accordance with the terms and provisions thereof; and
WHEREAS, the Committee considers Grantee to be a person who is eligible
for a grant of Nonqualified Stock Options under the Plan, and has determined
that it would be in the best interest of the Company to grant the
Nonqualified Stock Options documented herein.
NOW THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. GRANT OF OPTION.
Subject to the terms and conditions hereinafter set forth, the Company,
with the approval and at the direction of the Committee, hereby grants to
Grantee, as of the Date of Grant, an option to purchase up to __________
shares of Stock at a price of $___________ per share. The shares of stock
purchasable upon exercise of the Option are hereinafter sometimes referred to
as the "Option Shares." The Option is intended by the parties hereto to be,
and shall be treated as, a Nonqualified Stock Option which is not subject to
the provisions of Code Section 422.
2. INSTALLMENT EXERCISE.
Subject to such further limitations as are provided herein, the Option
shall become exercisable in three (3) installments, Grantee having the right
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option, on and after the following dates, in cumulative
fashion:
(i) on and after the first anniversary of the Date of Grant up to
one-third (ignoring fractional shares) of the total number of Option Shares;
(ii) on and after the second anniversary of the Date of Grant, up to an
additional one-third (ignoring fractional shares) of the total number of
Option Shares; and
(iii) on and after the third anniversary of the Date of Grant, the
remaining Option Shares.
Exhibit 10.35.3
<PAGE>
3. TERMINATION OF OPTION.
(a) The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate and become
null and void after the expiration of ten (10) years from the Date of Grant
(the "Option Term").
(b) Upon the occurrence of Grantee's ceasing for any reason to be
employed by the Company, the Option, to the extent not previously exercised,
shall terminate and become null and void, subject to the further provisions
of this Section 3(b), which shall apply based upon the circumstances of such
termination of employment. Upon termination of Grantee's employment by
reason of Disability or death, all unexercised portions of the Option shall
become immediately exercisable and the Option may be exercised during the
period beginning upon such termination and ending one year after such date.
In the event of any other termination of Grantee's employment, the Option may
be exercised during the three-month period following the date of termination,
but only to the extent that the Option was outstanding and exercisable on the
date of such termination. In no event, however, shall any such period extend
beyond the Option Term.
(c) In the event of Grantee's death, the Option may be exercised by
Grantee's legal representative(s) as and to the extent that the Option would
otherwise have been exercisable by Grantee, subject to the provisions of
Section 3(b) hereof.
(d) A transfer of Grantee's employment between the Company, its Parents,
Subsidiaries or affiliates, shall not be deemed to be a termination of
Grantee's employment.
(e) Notwithstanding any other provisions set forth herein or in the
Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing
affecting the Company, its Parents or Subsidiaries, (ii) breach any covenant
not to compete, or employment contract, with the Company, its Parents or
Subsidiaries, or (iii) engage in conduct that would warrant Grantee's
discharge for cause (excluding general dissatisfaction with the performance
of Grantee's duties, but including any act of disloyalty or any conduct
clearly tending to bring discredit upon the Company, its Parents or
Subsidiaries), any unexercised portion of the Option shall immediately
terminate and be void.
4. EXERCISE OF OPTIONS.
(a) Grantee may exercise the Option with respect to all or any part of
the number of Option Shares that are exercisable hereunder by giving the
Secretary of the Company written notice of intent to exercise. The notice of
exercise shall specify the number of Option Shares as to which the Option is
to be exercised and date of exercise thereof, which date shall be at least
five (5) days after the signing of such notice unless an earlier time shall
have been mutually agreed upon.
(b) Full payment (in U.S. dollars) by Grantee of the Option Price for
Option Shares purchased shall be made on or before the exercise date
specified in the notice of exercise in cash or as the Company may otherwise
permit as further set forth in the Plan. On the exercise date specified in
Grantee's notice or as soon thereafter as is practicable, the Company shall
cause to be delivered to Grantee, a certificate or certificates for the
Option Shares then being purchased (out of theretofore unissued Stock or
reacquired Stock, as the Company may elect) upon full payment for such Option
Shares. The obligation of the Company to deliver Stock shall, however, be
subject to the condition that if at any time the Committee shall determine in
its discretion that the listing, registration or qualification of the Option
or the Option Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection with, the
Option or the issuance or purchase of Stock thereunder, the Option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee.
Exhibit 10.35.3 2
<PAGE>
(c) If Grantee fails to pay for any of the Option Shares specified in
such notice or fails to accept delivery thereof, Grantee's right to purchase
such Option Shares may be terminated by the Company or the exercise of the
Option may be ignored, as the Committee in its sole discretion may determine.
The date specified in Grantee's notice as the date of exercise shall be
deemed the date of exercise of the Option, provided that payment in full for
the Option Shares to be purchased upon such exercise shall have been received
by such date.
5. ADJUSTMENT OF AND CHANGES IN STOCK.
In the event of a reorganization, recapitalization, change of shares,
stock split, spin-off, stock dividend, reclassification, subdivision, or
combination of shares, merger, consolidation, rights offering, or any other
change in the corporate structure of shares of capital stock of the Company,
the Committee shall appropriately adjust the number and kind of shares of
Stock subject to the Option and such option price; provided, however, that no
such adjustment shall give Grantee any additional benefits under the Option.
In the event of any Corporate Transaction or an event giving rise to a
Change in Control, the Option shall be fully vested, nonforfeitable and
become exercisable as of the date of the Change in Control or Corporate
Transaction or as otherwise determined in accordance with Section 5.5(c) of
the Plan. However, in the case of a Corporate Transaction, the Committee may
determine that the Option will not be so accelerated if and to the extent (i)
such Option is either to be assumed by the successor or parent thereof or to
be replaced with a comparable Option to purchase shares of the capital stock
of the successor corporation or parent thereof, or (ii) such Option is to be
replaced with a cash incentive program of the successor corporation that
preserves the option spread existing at the time of the Corporate Transaction
and provides for subsequent payment in accordance with the same vesting
schedule applicable to such Option. In the event of a Corporate Transaction
described in clauses (i) or (ii) of Section 5.5(b) of the Plan, the Committee
may, upon no less than 60 days notice to the optionee (an "Acceleration
Notice") determine that such optionee's Options will terminate as of the
effective date of such Corporate Transaction, in which event such Options
shall be fully vested, nonforfeitable and become exercisable immediately as
of the date of such Acceleration Notice. In the event of a Change in Control
or Corporate Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of
Section 5.5 of the Plan or in the event the Acceleration Notice is not timely
given, the Option shall remain exercisable for the remaining term of the
Option notwithstanding the provisions of Article V of the Plan, subject to
any limitations thereto which may be applicable to Incentive Stock Options.
In the event of a Corporate Transaction described in clauses (a)(iii), (b)(i)
or (b)(ii) of Section 5.5 of the Plan, which is preceded by a timely
Acceleration Notice, the Option shall terminate as of the effective date of
the Corporate Transaction described therein. In no event shall the Option be
exercised after the expiration of the Option Term.
6. NO RIGHTS AS SHAREHOLDERS.
Grantee shall have no rights as a shareholder with respect thereto unless
and until certificates for shares of Common Stock are issued to him or her.
7. NON-TRANSFERABILITY OF OPTION.
During Grantee's lifetime, this Option shall be exercisable only by
Grantee or his or her guardian or legal representative.
8. EMPLOYMENT NOT AFFECTED.
The grant of the Option hereunder shall not be construed as conferring on
Grantee any right to continued employment, and Grantee's employment may be
terminated without regard to the effect which such action might have upon him
as a holder of this Option.
9. AMENDMENT OF OPTION.
The Option may be amended by the Committee at any time (i) if the
Committee determines, in its sole discretion, that amendment is necessary or
advisable in light of any addition to or change in the Code or in the
regulations issued thereunder, or any federal or state securities law or
other law of regulation, which change occurs after the Date of Grant and by
Exhibit 10.35.3 3
<PAGE>
its terms applies to the Option; or (ii) other than in the circumstances
described in clause (i), with the consent of Grantee.
10. NOTICE.
Any notice to the Company provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices and any
notice to Grantee shall be addressed to Grantee at the current address shown
on the payroll records of the Employer. Any notice shall be deemed to be
duly given if and when properly addressed and posted by registered or
certified mail, postage prepaid.
11. INCORPORATION OF PLAN BY REFERENCE.
The Option is granted pursuant to the Plan, the terms and definitions of
which are incorporated herein by reference, and the Option shall in all
respects by interpreted in accordance with the Plan.
12. GOVERNING LAW.
To the extent that federal law shall not be held to have preempted local
law, this Option shall be governed by the laws of the State of Delaware. If
any provision of the Option shall be held invalid or unenforceable, the
remaining provisions hereof shall continue in full force and effect.
Exhibit 10.35.3 4
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Grant of Nonqualified Stock Option, and Grantee has placed
his or her signature hereon, effective as of the Date of Grant.
NRG GENERATING (U.S.) INC.
By:
--------------------------------------
Timothy P. Hunstad
Vice President and Chief Financial
Officer
GRANTEE
Signature
---------------------------------
Name:
------------------------------------
(Print)
Address:
---------------------------------
---------------------------------
---------------------------------
Exhibit 10.35.3 5
<PAGE>
NRG GENERATING (U.S.) INC.
1998 STOCK OPTION PLAN
GRANT OF NONEMPLOYEE DIRECTOR
NONQUALIFIED STOCK OPTION
DATE OF GRANT: ______________________
THIS GRANT, dated as of the date of grant first stated above (the "Date
of Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to
_____________________ (the "Grantee"), who is a director of the Company who
is not an Employee of the Company or a Subsidiary.
WHEREAS, the Board of Directors of the Company (the "Board") on April
20, 1998 adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the
"Plan") effective as of that date;
WHEREAS, the Plan provides for the granting of Nonqualified Stock
Options by the Committee to directors of the Company to purchase shares of
the Common Stock of the Company (the "Stock"), in accordance with the terms
and provisions thereof; and
WHEREAS, the Committee considers Grantee to be a person who is eligible
for a grant of Nonqualified Stock Options under the Plan, and has determined
that it would be in the best interest of the Company to grant the
Nonqualified Stock Options documented herein.
NOW THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. GRANT OF OPTION.
Subject to the terms and conditions hereinafter set forth, the Company,
with the approval and at the direction of the Committee, hereby grants to
Grantee, as of the Date of Grant, an option to purchase up to __________
shares of Stock at a price of $___________ per share. The shares of stock
purchasable upon exercise of the Option are hereinafter sometimes referred to
as the "Option Shares." The Option is intended by the parties hereto to be,
and shall be treated as, a Nonqualified Stock Option which is not subject to
the provisions of Code Section 422.
2. INSTALLMENT EXERCISE.
Subject to such further limitations as are provided herein, the Option
shall become exercisable in three (3) installments, Grantee having the right
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option, on and after the following dates, in cumulative
fashion:
(i) on and after the first anniversary of the Date of Grant up to
one-third (ignoring fractional shares) of the total number of Option Shares;
(ii) on and after the second anniversary of the Date of Grant, up to an
additional one-third (ignoring fractional shares) of the total number of
Option Shares; and
Exhibit 10.35.4
<PAGE>
(iii) on and after the third anniversary of the Date of Grant, the
remaining Option Shares.
3. TERMINATION OF OPTION.
(a) The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate and become
null and void after the expiration of ten (10) years from the Date of Grant
(the "Option Term").
(b) When the Grantee ceases to be a director of the Company, the
Option, to the extent not previously exercised, shall terminate and become
null and void immediately upon the Separation Date, except in a case where
the Grantee's service as a director of the Company ceases by reason of
Disability or death or otherwise as follows. If the Grantee ceases to be a
director of the Company by reason of Disability or death, all unexercised
portions of the Option shall become immediately exercisable and the Option
may be exercised during the period beginning upon such termination and ending
one year after such date. In no event, however, shall any such period extend
beyond the Option Term. If the Participant's service as a director of the
Company terminates for any other reason prior to the exercise of all portions
of the Option, the Participant shall have the right within three (3) months
of his Separation Date, but not beyond the expiration date of the Option, to
exercise such unexercised portions of the Option.
(c) In the event of Grantee's death, the Option may be exercised by
Grantee's legal representative(s) as and to the extent that the Option would
otherwise have been exercisable by Grantee, subject to the provisions of
Section 3(b) hereof.
(d) Notwithstanding any other provisions set forth herein or in the
Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing
affecting the Company, its Parents or Subsidiaries, or (ii) engage in conduct
that would warrant Grantee's removal for cause (excluding general
dissatisfaction with the performance of Grantee's duties, but including any
act of disloyalty or any conduct clearly tending to bring discredit upon the
Company, its Parents or Subsidiaries), any unexercised portion of the Option
shall immediately terminate and be void.
4. EXERCISE OF OPTIONS.
(a) Grantee may exercise the Option with respect to all or any part of
the number of Option Shares that are exercisable hereunder by giving the
Secretary of the Company written notice of intent to exercise. The notice of
exercise shall specify the number of Option Shares as to which the Option is
to be exercised and date of exercise thereof, which date shall be at least
five (5) days after the signing of such notice unless an earlier time shall
have been mutually agreed upon.
(b) Full payment (in U.S. dollars) by Grantee of the Option Price for
Option Shares purchased shall be made on or before the exercise date
specified in the notice of exercise in cash or as the Company may otherwise
permit as further set forth in the Plan. On the exercise date specified in
Grantee's notice or as soon thereafter as is practicable, the Company shall
cause to be delivered to Grantee, a certificate or certificates for the
Option Shares then being purchased (out of theretofore unissued Stock or
reacquired Stock, as the Company may elect) upon full payment for such Option
Shares. The obligation of the Company to deliver Stock shall, however, be
subject to the condition that if at any time the Committee shall determine in
its discretion that the listing, registration or qualification of the Option
or the Option Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection with, the
Option or the issuance or purchase of Stock thereunder, the Option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee.
(c) If Grantee fails to pay for any of the Option Shares specified in
such notice or fails to accept delivery thereof, Grantee's right to purchase
such
Exhibit 10.35.4 2
<PAGE>
Option Shares may be terminated by the Company or the exercise of the Option
may be ignored, as the Committee in its sole discretion may determine. The
date specified in Grantee's notice as the date of exercise shall be deemed
the date of exercise of the Option, provided that payment in full for the
Option Shares to be purchased upon such exercise shall have been received by
such date.
5. ADJUSTMENT OF AND CHANGES IN STOCK.
In the event of a reorganization, recapitalization, change of shares,
stock split, spin-off, stock dividend, reclassification, subdivision, or
combination of shares, merger, consolidation, rights offering, or any other
change in the corporate structure of shares of capital stock of the Company,
the Committee shall appropriately adjust the number and kind of shares of
Stock subject to the Option and such option price; provided, however, that no
such adjustment shall give Grantee any additional benefits under the Option.
In the event of any Corporate Transaction or an event giving rise to a
Change in Control, the Option shall be fully vested, nonforfeitable and
become exercisable as of the date of the Change in Control or Corporate
Transaction or as otherwise determined in accordance with Section 5.5(c) of
the Plan. However, in the case of a Corporate Transaction, the Committee may
determine that the Option will not be so accelerated if and to the extent (i)
such Option is either to be assumed by the successor or parent thereof or to
be replaced with a comparable Option to purchase shares of the capital stock
of the successor corporation or parent thereof, or (ii) such Option is to be
replaced with a cash incentive program of the successor corporation that
preserves the option spread existing at the time of the Corporate Transaction
and provides for subsequent payment in accordance with the same vesting
schedule applicable to such Option.
In the event of a Corporate Transaction described in clauses (i) or (ii)
of Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days
notice to the optionee (an "Acceleration Notice") determine that such
optionee's Options will terminate as of the effective date of such Corporate
Transaction, in which event such Options shall be fully vested,
nonforfeitable and become exercisable immediately as of the date of such
Acceleration Notice. In the event of a Change in Control or Corporate
Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of Section 5.5
of the Plan or in the event the Acceleration Notice is not timely given, the
Option shall remain exercisable for the remaining term of the Option
notwithstanding the provisions of Article V of the Plan, subject to any
limitations thereto which may be applicable to Incentive Stock Options. In
the event of a Corporate Transaction described in clauses (a)(i)(iii), b(i)
or (b)(ii) of Section 5.5 of the Plan, which is preceded by a timely
Acceleration Notice, the Option shall terminate as of the effective date of
the Corporate Transaction described therein. In no event shall the Option be
exercised after the expiration of the Option Term.
6. NO RIGHTS AS SHAREHOLDERS.
Grantee shall have no rights as a shareholder with respect thereto
unless and until certificates for shares of Common Stock are issued to him or
her.
7. NON-TRANSFERABILITY OF OPTION.
During Grantee's lifetime, this Option shall be exercisable only by
Grantee or his or her guardian or legal representative.
8. AMENDMENT OF OPTION.
The Option may be amended by the Committee at any time (i) if the Committee
determines, in its sole discretion, that amendment is necessary or advisable in
light of any addition to or change in the Code or in the regulations issued
thereunder, or any federal or state securities law or other law of regulation,
which change occurs after the Date of Grant and by its terms applies to the
Option; or (ii) other than in the circumstances described in clause (i), with
the consent of Grantee.
Exhibit 10.35.4 3
<PAGE>
9. NOTICE.
Any notice to the Company provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices and any
notice to Grantee shall be addressed to Grantee at the address below. Any
notice shall be deemed to be duly given if and when properly addressed and
posted by registered or certified mail, postage prepaid.
10. INCORPORATION OF PLAN BY REFERENCE.
The Option is granted pursuant to the Plan, the terms and definitions of
which are incorporated herein by reference, and the Option shall in all
respects by interpreted in accordance with the Plan.
11. GOVERNING LAW.
To the extent that federal law shall not be held to have preempted local
law, this Option shall be governed by the laws of the State of Delaware. If
any provision of the Option shall be held invalid or unenforceable, the
remaining provisions hereof shall continue in full force and effect.
Exhibit 10.35.4 4
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer to
execute this Grant of Nonqualified Stock Option, and Grantee has placed his or
her signature hereon, effective as of the Date of Grant.
NRG GENERATING (U.S.) INC.
By:
--------------------------------------
Timothy P. Hunstad
Vice President and Chief Financial
Officer
GRANTEE
Signature
---------------------------------
Name:
------------------------------------
(Print)
Address:
----------------------------------
----------------------------------
----------------------------------
Exhibit 10.35.4 5
<PAGE>
NRG GENERATING (U.S.) INC.
1998 STOCK OPTION PLAN
GRANT OF NONEMPLOYEE NONQUALIFIED STOCK OPTION
DATE OF GRANT: ______________________
THIS GRANT, dated as of the date of grant first stated above (the "Date of
Grant"), is delivered by NRG Generating (U.S.) Inc. (the "Company") to
_____________________ (the "Grantee").
WHEREAS, the Board of Directors of the Company (the "Board") on April 20,
1998, adopted the NRG Generating (U.S.) Inc. 1998 Stock Option Plan (the "Plan")
effective as of that date;
WHEREAS, the Plan provides for the granting of Nonqualified Stock Options
by the Committee to directors of the Company, officers and key employees of the
Company and its Subsidiaries and certain other individuals who have the
capability of making or who have made a substantial contribution to the Company
to purchase shares of the Common Stock of the Company (the "Stock"), in
accordance with the terms and provisions thereof; and
WHEREAS, the Committee considers Grantee to be a person who is eligible for
a grant of Nonqualified Stock Options under the Plan, and has determined that it
would be in the best interest of the Company to grant the Nonqualified Stock
Options documented herein.
NOW THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. GRANT OF OPTION.
Subject to the terms and conditions hereinafter set forth, the Company,
with the approval and at the direction of the Committee, hereby grants to
Grantee, as of the Date of Grant, an option to purchase up to __________
shares of Stock at a price of $___________ per share. The shares of stock
purchasable upon exercise of the Option are hereinafter sometimes referred to
as the "Option Shares." The Option is intended by the parties hereto to be,
and shall be treated as, a Nonqualified Stock Option which is not subject to
the provisions of Code Section 422.
[2. INSTALLMENT EXERCISE.
Subject to such further limitations as are provided herein, the Option
shall become exercisable in three (3) installments, Grantee having the right
hereunder to purchase from the Company the following number of Option Shares
upon exercise of the Option, on and after the following dates, in cumulative
fashion:
(i) on and after the first anniversary of the Date of Grant up to
one-third (ignoring fractional shares) of the total number of Option Shares;
(ii) on and after the second anniversary of the Date of Grant, up to an
additional one-third (ignoring fractional shares) of the total number of
Option Shares; and
(iii) on and after the third anniversary of the Date of Grant, the
remaining Option Shares.]
Exhibit 10.35.5
<PAGE>
3. TERMINATION OF OPTION.
(a) The Option and all rights hereunder with respect thereto, to the
extent such rights shall not have been exercised, shall terminate and become
null and void after the expiration of ten (10) years from the Date of Grant
(the "Option Term").
[ (b) Upon the occurrence of Grantee's ceasing for any reason to be
providing service to the Company, its Parents, Subsidiaries or affiliates,
the Option, to the extent not previously exercised, shall terminate and
become null and void immediately upon the Separation Date, except in a case
where the termination of Grantee's services is by reason of retirement,
Disability or death or otherwise as follows. Upon a termination of Grantee's
services by reason of Disability or death, all unexercised portions of the
Option shall become immediately exercisable and the Option may be exercised
during the period beginning upon such termination and ending one year after
such date. Upon termination of Grantee's services, the Option may be
exercised during the three-month period following the date of retirement, but
only to the extent that the Option was outstanding and exercisable on the
date of such retirement. In no event, however, shall any such period extend
beyond the Option Term.]
(c) In the event of Grantee's death, the Option may be exercised by
Grantee's legal representative(s) as and to the extent that the Option would
otherwise have been exercisable by Grantee, subject to the provisions of
Section 3(b) hereof.
(d) Notwithstanding any other provisions set forth herein or in the
Plan, if Grantee shall: (i) commit any act of malfeasance or wrongdoing
affecting the Company, its Parents, its Subsidiaries, (ii) breach any
covenant not to compete, or employment contract, with the Company, its
Parents, Subsidiaries or affiliates, or (iii) engage in conduct that would
warrant Grantee's discharge for cause if he were an employee of the Company
(excluding general dissatisfaction with the performance of Grantee's duties,
but including any act of disloyalty or any conduct clearly tending to bring
discredit upon the Company, its Parents, Subsidiaries or affiliates), any
unexercised portion of the Option shall immediately terminate and be void.
4. EXERCISE OF OPTIONS.
(a) Grantee may exercise the Option with respect to all or any part of
the number of Option Shares that are exercisable hereunder by giving the
Secretary of the Company written notice of intent to exercise. The notice of
exercise shall specify the number of Option Shares as to which the Option is
to be exercised and date of exercise thereof, which date shall be at least
five (5) days after the signing of such notice unless an earlier time shall
have been mutually agreed upon.
(b) Full payment (in U.S. dollars) by Grantee of the Option Price for
Option Shares purchased shall be made on or before the exercise date
specified in the notice of exercise in cash or as the Company may otherwise
permit as further set forth in the Plan. On the exercise date specified in
Grantee's notice or as soon thereafter as is practicable, the Company shall
cause to be delivered to Grantee, a certificate or certificates for the
Option Shares then being purchased (out of theretofore unissued Stock or
reacquired Stock, as the Company may elect) upon full payment for such Option
Shares. The obligation of the Company to deliver Stock shall, however, be
subject to the condition that if at any time the Committee shall determine in
its discretion that the listing, registration or qualification of the Option
or the Option Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body,
is necessary or desirable as a condition of, or in connection with, the
Option or the issuance or purchase of Stock thereunder, the Option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Committee.
(c) If Grantee fails to pay for any of the Option Shares specified in
such notice or fails to accept delivery thereof, Grantee's right to purchase
such Option Shares may be terminated by the Company
Exhibit 10.35.5 2
<PAGE>
or the exercise of the Option may be ignored, as the Committee in its sole
discretion may determine. The date specified in Grantee's notice as the date
of exercise shall be deemed the date of exercise of the Option, provided that
payment in full for the Option Shares to be purchased upon such exercise
shall have been received by such date.
5. ADJUSTMENT OF AND CHANGES IN STOCK.
In the event of a reorganization, recapitalization, change of shares,
stock split, spin-off, stock dividend, reclassification, subdivision, or
combination of shares, merger, consolidation, rights offering, or any other
change in the corporate structure of shares of capital stock of the Company,
the Committee shall appropriately adjust the number and kind of shares of
Stock subject to the Option and such option price; provided, however, that no
such adjustment shall give Grantee any additional benefits under the Option.
[In the event of any Corporate Transaction or an event giving rise to a
Change in Control, the Option shall be fully vested, nonforfeitable and
become exercisable as of the date of the Change in Control or Corporate
Transaction or as otherwise determined in accordance with Section 5.5(c) of
the Plan. However, in the case of a Corporate Transaction, the Committee may
determine that the Option will not be so accelerated if and to the extent
(i) such Option is either to be assumed by the successor or parent thereof or
to be replaced with a comparable Option to purchase shares of the capital
stock of the successor corporation or parent thereof, or (ii) such Option is
to be replaced with a cash incentive program of the successor corporation
that preserves the option spread existing at the time of the Corporate
Transaction and provides for subsequent payment in accordance with the same
vesting schedule applicable to such Option.
In the event of a Corporate Transaction described in clauses (i) or (ii)
of Section 5.5(b) of the Plan, the Committee may, upon no less than 60 days
notice to the optionee (an "Acceleration Notice") determine that such
optionee's Options will terminate as of the effective date of such Corporate
Transaction, in which event such Options shall be fully vested,
nonforfeitable and become exercisable immediately as of the date of such
Acceleration Notice. In the event of a Change in Control or Corporate
Transaction described in clauses (a)(i), (a)(ii) and (b)(iii) of Section 5.5
of the Plan or in the event the Acceleration Notice is not timely given, the
Option shall remain exercisable for the remaining term of the Option
notwithstanding the provisions of Article V of the Plan, subject to any
limitations thereto which may be applicable to Incentive Stock Options. In
the event of a Corporate Transaction described in clauses (a)(iii), (b)(i) or
(b)(ii) of Section 5.5 of the Plan, which is preceded by a timely
Acceleration Notice, the Option shall terminate as of the effective date of
the Corporate Transaction described therein. In no event shall the Option be
exercised after the expiration of the Option Term.]
6. NO RIGHTS AS SHAREHOLDERS.
Grantee shall have no rights as a shareholder with respect thereto
unless and until certificates for shares of Common Stock are issued to him or
her.
7. NON-TRANSFERABILITY OF OPTION.
During Grantee's lifetime, this Option shall be exercisable only by
Grantee or his or her guardian or legal representative.
8. EMPLOYMENT NOT AFFECTED.
The grant of the Option hereunder shall not be construed as conferring
on Grantee any right to continue providing services to the Company, and
Grantee's provision of services to the Company may be terminated without
regard to the effect which such action might have upon him as a holder of
this Option.
Exhibit 10.35.5 3
<PAGE>
9. AMENDMENT OF OPTION.
The Option may be amended by the Committee at any time (i) if the
Committee determines, in its sole discretion, that amendment is necessary or
advisable in light of any addition to or change in the Code or in the
regulations issued thereunder, or any federal or state securities law or
other law of regulation, which change occurs after the Date of Grant and by
its terms applies to the Option; or (ii) other than in the circumstances
described in clause (i), with the consent of Grantee.
10. NOTICE.
Any notice to the Company provided for in this instrument shall be
addressed to it in care of its Secretary at its executive offices and any
notice to Grantee shall be addressed to Grantee at the current address shown
on the payroll records of the Employer. Any notice shall be deemed to be
duly given if and when properly addressed and posted by registered or
certified mail, postage prepaid.
11. INCORPORATION OF PLAN BY REFERENCE.
The Option is granted pursuant to the Plan, the terms and definitions of
which are incorporated herein by reference, and the Option shall in all
respects by interpreted in accordance with the Plan.
12. GOVERNING LAW.
To the extent that federal law shall not be held to have preempted local
law, this Option shall be governed by the laws of the State of Delaware. If
any provision of the Option shall be held invalid or unenforceable, the
remaining provisions hereof shall continue in full force and effect.
Exhibit 10.35.5 4
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Grant of Nonqualified Stock Option, and Grantee has placed
his or her signature hereon, effective as of the Date of Grant.
NRG GENERATING (U.S.) INC.
By:
---------------------------------------
Timothy P. Hunstad
Vice President and Chief Financial
Officer
GRANTEE
Signature
---------------------------------
Name:
-------------------------------------
(Print)
Address:
----------------------------------
----------------------------------
----------------------------------
Exhibit 10.35.5 5
<PAGE>
EXHIBIT 21
EXHIBIT 21
LIST OF SUBSIDIARIES OF REGISTRANT
(MAJORITY OR WHOLLY OWNED UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
CogenAmerica Newark Inc. Delaware
CogenAmerica Parlin Inc. Delaware
O'Brien (Philadelphia) Cogeneration, Inc. Delaware
NRG Generating Ltd. United Kingdom
PoweRent* United Kingdom
Puma Manufacturing Ltd. United Kingdom
Puma Export Finance Ltd. United Kingdom
Puma Freight Forwarding Ltd. United Kingdom
Puma Far East Ltd. United Kingdom
Enercol Energy Systems, Ltd. United Kingdom
O'Brien Energy Europe United Kingdom
Philadelphia Biogas Supply, Inc. Delaware
CogenAmerica Parlin Supply Corporation Delaware
CogenAmerica Newark Supply Corporation Delaware
Grays Ferry Cogeneration Partnership* Pennsylvania
CogenAmerica Schuylkill Inc. Delaware
Grays Ferry Services Partnership Pennsylvania
CogenAmerica Funding Inc. Delaware
CogenAmerica Morris, Inc. Delaware
CogenAmerica Morris LLC Delaware
CogenAmerica Asia, Inc. Delaware
Power Service Company Delaware
O'Brien Fuels, Inc. Delaware
SDN Power, Inc. Delaware
CogenAmerica Pryor Inc. Delaware
Oklahoma Loan Acquisition Corporation Delaware
</TABLE>
* The Company owns 50% or less of the equity interest in these subsidiaries.
72
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-38603) of Cogeneration Corporation of America of
our report dated March 19, 1999 appearing in this Form 10-K.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 25, 1999
73
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,703
<SECURITIES> 0
<RECEIVABLES> 14,326
<ALLOWANCES> 0
<INVENTORY> 2,683
<CURRENT-ASSETS> 33,482
<PP&E> 244,040
<DEPRECIATION> 0
<TOTAL-ASSETS> 318,674
<CURRENT-LIABILITIES> 32,347
<BONDS> 0
68
0
<COMMON> 0
<OTHER-SE> 3,745
<TOTAL-LIABILITY-AND-EQUITY> 318,674
<SALES> 73,996
<TOTAL-REVENUES> 73,996
<CGS> 42,345
<TOTAL-COSTS> 42,345
<OTHER-EXPENSES> 7,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,855
<INCOME-PRETAX> 12,880
<INCOME-TAX> 4,878
<INCOME-CONTINUING> 8,002
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,002
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.15
</TABLE>
