<PAGE>
================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 1-10592
DESTEC ENERGY, INC.
(A DELAWARE CORPORATION)
2500 CITYWEST BLVD.
HOUSTON, TEXAS 77042
(NAME OF REGISTRANT, STATE OF INCORPORATION, ADDRESS
OF PRINCIPAL EXECUTIVE OFFICE AND ZIP CODE)
I.R.S. EMPLOYER IDENTIFICATION NO. 38-2875546
TELEPHONE: (713) 735-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
On September 30, 1996 there were 56,057,381 shares of the issuer's Common
Stock, $.01 par value, outstanding.
================================================================================
<PAGE>
DESTEC ENERGY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PART I Financial Information Page No.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets............................. 2
Statements of Consolidated Income -
For the three and nine months ended
September 30, 1996 and 1995........................ 4
Statements of Consolidated Cash Flows................... 5
Notes to Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 9
PART II Other Information
Item 6. Exhibits and Reports on Form 8-K...................... 16
</TABLE>
<PAGE>
PART 1--FINANCIAL INFORMATION
Item 1. Financial Statements
DESTEC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 26,608 $ 7,044
Cash equivalents-Dow 4,888 4,422
----------- ----------
Total cash and cash equivalents 31,496 11,466
----------- ----------
Marketable Securities 83,376 328,799
Accounts Receivable:
Trade 67,851 64,029
Dow 3,783 1,144
Affiliates 25,425 23,832
Other 1,039 4,085
Notes receivable-affiliates 2,138 2,983
Income taxes receivable 5,331 1,934
Deferred taxes-net 5,358 5,680
Costs and estimated earnings in excess of
billings on uncompleted contracts-affiliates 45,915 37,063
Recoverable project costs 27 58,398
Prepaid expenses and other assets 24,301 14,076
----------- ----------
Total current assets 296,040 553,489
----------- ----------
Property-at cost 489,664 365,020
Accumulated depreciation, depletion
and amortization (163,731) (154,831)
----------- ----------
Property, net 325,933 210,189
----------- ----------
Lease receivable from Dow 44,159 44,159
Equity investments 305,516 139,784
----------- ----------
Goodwill (Net of accumulated amortization
of $16,880 and $15,027 at
September 30, 1996 and December 31, 1995,
respectively 81,928 83,781
Other assets 37,245 16,410
Other assets-affiliates 5,018 ---
----------- -----------
Total $ 1,095,839 $ 1,047,812
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
DESTEC ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $ 64,187 $ 45,169
Dow 8,530 13,249
Accrued liabilities 48,594 49,951
Billings in excess of costs and estimated
earnings on uncompleted contracts-affiliates 5,668 41,309
Income taxes payable --- 249
----------- ----------
Total current liabilities 126,979 149,927
----------- ----------
Long-term liabilities 47,595 46,172
Project financing debt 44,134 ---
Deferred taxes-net 46,805 34,720
Deferred income 53,190 47,676
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; 50,000,000
shares authorized, none issued
Common stock, $.01 par value; 150,000,000 shares
authorized, 62,250,000 issued 623 623
Additional paid-in capital 394,296 394,296
Retained earnings 462,906 427,757
Unearned compensation-related to
outstanding deferred stock (610) ---
Unrealized gains (losses) on investments (211) 651
Unrealized gains on foreign currency, net 831 ---
Less 6,192,619 and 4,159,464 shares of
treasury stock at cost at
September 30, 1996 and
December 31, 1995, respectively (80,699) (54,010)
----------- ----------
Total stockholders' equity 777,136 769,317
----------- -----------
Total $ 1,095,839 $ 1,047,812
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
DESTEC ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Power, steam, syngas and energy resources
-affiliates $ --- $ 1,529 $ --- $ 10,055
-guaranteed payments --- 11,177 --- 56,482
-nonaffiliates 71,005 27,036 168,634 77,426
---------- ---------- ---------- ----------
Total power, steam, syngas and energy resources 71,005 39,742 168,634 143,963
Development, engineering and operations-affiliates 76,333 60,803 264,447 329,101
---------- ---------- ---------- ----------
Total Revenues 147,338 100,545 433,081 473,064
---------- ---------- ---------- ----------
Operating Costs:
Power, steam, syngas and energy resources
-affiliates 204 14,665 1,401 53,633
-nonaffiliates 63,151 23,516 156,498 79,251
---------- ---------- ---------- ----------
Total power, steam, syngas and energy resources 63,355 38,181 157,899 132,884
Development, engineering and operations-affiliates 64,111 60,792 230,724 321,515
---------- ---------- ---------- ----------
Total Operating Costs 127,466 98,973 388,623 454,399
---------- ---------- ---------- ----------
Amortization of intangibles 618 618 1,853 1,854
---------- ---------- ---------- ----------
Selling, General and Administrative Expenses:
Dow 67 224 373 662
Direct 7,718 6,780 23,097 20,410
---------- ---------- ---------- ----------
Total selling, general and administrative 7,785 7,004 23,470 21,072
---------- ---------- ---------- ----------
Total operating costs and expenses 135,869 106,595 413,946 477,325
---------- ---------- ---------- ----------
Operating Income (Loss) 11,469 (6,050) 19,135 (4,261)
---------- ---------- ---------- ----------
Earnings from equity investments 6,913 5,061 13,519 9,283
---------- ---------- ---------- ----------
Other Income:
Interest Income-Dow 1,304 1,607 3,750 9,542
Interest Income-other 2,310 5,877 10,429 12,679
Gain on sale of oil and gas properties --- 11,890 --- 11,890
Sundry income-net 126 17 389 689
---------- ---------- ---------- ----------
Total Other Income 3,740 19,391 14,568 34,800
---------- ---------- ---------- ----------
Income before provision for taxes 22,122 18,402 47,222 39,822
Provision for taxes 3,859 3,718 11,887 10,145
---------- ---------- ---------- ----------
Net Income $ 18,263 $ 14,684 $ 35,335 $ 29,677
========== ========== ========== ==========
Per Share Amounts:
Net Income Per Share $ 0.33 $ 0.25 $ 0.62 $ 0.51
========== ========== ========== ==========
Weighted average shares outstanding 56,016,715 58,749,878 57,016,250 58,761,815
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
DESTEC ENERGY, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income ......................................................................$ 35,335 $ 29,677
Adjustments to reconcile net income to net cash provided by operating activities
Earnings from equity investments ............................................. (13,519) (9,283)
Gain on sale of oil and gas properties ....................................... --- (11,890)
Deferred income, net .......................................................... 5,514 3,432
Depreciation, depletion and amortization ..................................... 10,753 21,587
Compensation recognized under Variable Pay Plan .............................. 449 ---
Increase in deferred income taxes, net ....................................... 12,407 272
Changes in assets and liabilities that provided (used) cash: .................
Accounts receivable-trade ................................................. (3,822) (33,142)
Accounts receivable-Dow ................................................... (2,639) 12,035
Accounts receivable-affiliates ............................................ (1,593) 7,713
Accounts receivable-other ................................................. 3,046 (3,279)
Notes receivable-affiliates ............................................... 1,676 78
Income taxes-receivable ................................................... (3,397) ---
Costs and estimated earnings in excess of billings on uncompleted
contracts-affiliates ................................................... (8,852) (228)
Recoverable project costs ................................................. 58,371 940
Prepaid expenses and other assets ......................................... (10,225) 325
Accounts payable-trade .................................................... 19,018 (3,365)
Accounts payable-Dow ...................................................... (4,719) (4,871)
Accrued liabilities ....................................................... (1,357) (13,469)
Billings in excess of costs and estimated earnings on uncompleted
contracts-affiliates ................................................... (35,641) 35,398
Income taxes payable ...................................................... (249) (9,059)
Long-term liabilities ..................................................... 2,848 9,791
---------- ----------
Net Cash Provided by Operating Activities 63,404 32,662
---------- ----------
Cash Flows From Investing Activities:
Investments in marketable securities ......................................... (995,818) (1,507,927)
Proceeds from sale of marketable securities .................................. 1,240,378 1,167,578
Proceeds from sale of oil and gas properties ................................. --- 34,052
Purchases of property, net ................................................... (124,644) (12,039)
Long-term notes receivable-affiliates ........................................ --- 483
Equity investments-contributions ............................................. (170,120) (29,447)
Equity investments-distributions ............................................. 17,907 10,516
Investment in project ........................................................ (8,600) ---
Other assets ................................................................. (17,253) (623)
---------- ----------
Net Cash Used in Investing Activities ........................................... (58,150) (337,407)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from borrowings-Dow ................................................. --- ---
Repayment of borrowings-Dow .................................................. --- ---
Proceeds from project financing debt ......................................... 44,134
Proceeds from issuance of treasury stock ..................................... 1,358 4,457
Treasury stock purchases ..................................................... (30,716) (3,593)
---------- ----------
Net Cash Provided by (Used in) Financing Activities ............................. 14,776 (2,136)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents ............................ 20,030 (306,881)
Cash and Cash Equivalents at Beginning of Period ................................ 11,466 354,137
---------- ----------
Cash and Cash Equivalents at End of Period ......................................$ 31,496 $ 47,256
========== ==========
Supplemental Disclosures of Cash Flow Information:
Schedule of Noncash Investing and Financing Activities:
Loss on sale of treasury stock ...............................................$ 168 ---
Unrealized loss on marketable securities .....................................$ 862 ---
Proceeds from treasury stock for variable pay plan ...........................$ 2,483 ---
Unearned compensation ........................................................$ 610 ---
Cash paid for:
Interest .....................................................................$ --- $ 165
Income taxes .................................................................$ 1,180 $ 19,366
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
DESTEC ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. OPINION OF MANAGEMENT
In the opinion of management, all adjustments necessary for a fair
presentation of the unaudited results for the period are included. These
interim consolidated financial statements should be read in conjunction with the
Destec Energy, Inc. ("Destec") Financial Statements for the year ended December
31, 1995, included in Destec's 1995 Annual Report and on Destec's Form 10-K for
the year ended December 31, 1995. The results for interim periods are not
necessarily indicative of results for the full year.
2. FOREIGN CURRENCY GAINS/LOSSES
Assets and liabilities of certain non-U. S. subsidiaries are translated at
current exchange rates, and related revenues and expenses are translated at
average exchange rates in effect during the period. Resulting translation
adjustments are recorded as a currency component in stockholders' equity in
Unrealized gains on Foreign Currency, net. Long-term intercompany foreign
currency transactions are remeasured and reported in the same manner as
translation adjustments. The foreign currency gain/loss on the remeasurement of
short-term foreign currency transactions of certain U.S. subsidiaries are
included in net income.
3. SALE OF BLUE MOUNTAIN PROJECT
In July 1996, Destec agreed to sell its ownership interest in the 150 MW Blue
Mountain Power Project to AES Corporation. The sale of this project, which was
included in development revenue, had a positive after tax effect of
approximately $8,200 (considering an effective tax rate of 25.2%) or $0.14 per
share in the third quarter of 1996.
4. FINANCING OF INDIAN QUEENS PROJECT
In August 1996, Destec arranged nonrecourse financing for the 140 MW Indian
Queens power plant in Cornwall, England. The project financing of approximately
$53,000 was arranged and underwritten by BZW, a division of Barclays Bank plc.
As a result of this financing, Destec recorded the first application for payment
under the construction loan of approximately $44,000 in Project financing debt.
Under the terms of the credit agreement, interest is based on LIBOR plus a
variable margin. The conversion of the loan from construction to term is
expected to occur in late 1996 or early 1997. The term of the loan after
conversion is seventeen years.
5. HAZELWOOD PROJECT
In August 1996, an indirect wholly owned subsidiary of Destec, as part of an
international consortium, made a winning bid of $1,900,000 for the 1,600 MW
Hazelwood Power Station and the adjacent Hazelwood Mine in Victoria, Australia.
Based on its 20% interest in the consortium, Destec originally made an equity
contribution of $176,104 in September 1996. A wholly owned subsidiary of
Destec entered into a separate agreement with National Power PLC, another member
of the international consortium, in September 1996, which entitles Destec to
receive approximately $4,000 for each of the years ended December 31, 1997, 1998
and 1999. The total amount of $12,000 is recorded as a receivable as of
September 30, 1996 and reduces Destec's equity contribution to $164,104. The
remainder of Destec's investment is included in the project financing at the
partnership level as discussed below.
6
<PAGE>
In September 1996, the consortium obtained financing for the Hazelwood
acquisition of approximately $1,050,000, which was arranged and underwritten by
Morwell Financial Services Pty Ltd, Union Bank of Switzerland Australia Limited,
Citibank Limited, Societe Generale Australia Limited and the Commonwealth Bank
of Australia. The project financing was borrowed on a nonrecourse basis at the
partnership level.
Unaudited pro forma net income and net income per share of Destec for the nine
months ended September 30, 1996 and 1995, as if the acquisition had occurred at
the beginning of the nine month periods, after giving effect to certain pro
forma adjustments related to the acquisition were approximately $29,000 and
$0.51 for 1996 and $24,000 and $0.40 for 1995. Such pro forma amounts are not
necessarily indicative of what the actual consolidated results of operations
might have been if the acquisition had been effective at the beginning of 1996
or 1995.
The following is a summary of aggregated financial information as of
September 30, 1996 for all investments owned by Destec which are accounted for
under the equity method. The Hazelwood project's net income data is for the
period between the acquisition on September 13, 1996 and the end of the quarter
on September 30, 1996. The balance sheet for the Hazelwood project has been
adjusted for the purchase price.
<TABLE>
<CAPTION>
September 30,
1996
-----------------------
<S> <C>
Balance Sheets
Current assets $ 196,854
Construction in progress 115,132
Property and equipment, net 3,676,064
Other assets 74,052
-----------------------
Total assets $ 4,062,102
=======================
Current liabilities $ 160,682
Construction related 6,268
obligations
Long-term debt and other liabilities 3,184,711
Equity 710,441
-----------------------
Total liabilities and equity $ 4,062,102
=======================
Destec's share of equity $ 305,516
=======================
For the nine
months ended
September 30,
1996
-----------------------
Statements of Operations
Sales $ 395,297
Operating income 119,977
Net Income 33,198
Destec's share of earnings from
equity investments $ 13,519
</TABLE>
6. TREASURY STOCK
During each of the years, 1993 and 1992, the Destec Board of Directors (the
"Board") authorized the repurchase of up to $20,000 of Destec's common stock
over the succeeding three year periods. In 1994, the Board authorized the
repurchase of an additional 2,300,000 shares of its common stock over the next
7
<PAGE>
three years with a maximum cost of $30,000. In May 1996, the Board authorized
the repurchase of an additional 1,750,000 shares of its common stock over the
next three years with a maximum cost of $25,000. As of September 30, 1996,
Destec had repurchased 6,816,549 shares and reissued 623,930 shares of common
stock repurchased under these programs.
7. RESTRUCTURING CHARGES
In 1994, Destec's management announced a corporate restructuring in order to
refocus business development efforts from domestic to international markets and
to de-emphasize vertical integration. In order to implement this shift in
focus, management developed a restructuring plan to reduce and realign the work
force and reduce overhead. During 1994, Destec recorded a $10,000 restructuring
charge as a component of operating costs. As of September 30, 1996, Destec's
remaining accrual relating to this charge was $1,855 for vacated lease space net
of revenues from subleases.
8. EVENTS SUBSEQUENT TO SEPTEMBER 30, 1996
On October 1, 1996, Destec announced that its Board of Directors had
unanimously determined to retain the investment banking firm of Morgan Stanley &
Co. Incorporated to assist Destec in exploring strategic alternatives to
maximize shareholder value, including a possible sale of Destec. However, no
decision has been made at this time to pursue any particular transaction.
9. RECLASSIFICATIONS
Certain amounts for 1995 have been reclassified to conform to the 1996
presentation.
8
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forwardlooking statements reflecting the Company's
expectations in the near future; however, many factors which may affect the
actual results, especially prospective contract prices and changing regulations,
are difficult to predict. Accordingly, there is no assurance that the Company's
expectations will be realized.
OVERVIEW
- --------
Destec is an independent producer and marketer of electricity, thermal energy
and syngas. Destec has nineteen operating power projects and one operating
syngas project in the U.S.; in addition, Destec has four international power
projects which are operating or expected to commence operations during 1996 (Los
Mina, Hazelwood, Indian Queens and Kingston). During 1996, Destec received
revenues from the sale of electricity, thermal energy and syngas from Destec's
owned or leased projects. These revenues and revenues earned in 1995 from the
sale of syngas to The Dow Chemical Company ("Dow") and from the sale of power
from Dow's Freeport facility under the Power Marketing Agreement ("PMA") are
classified as "Power, steam and syngas" in the "Summary of Statements of
Consolidated Income" presented below. Destec also received revenues from its oil
and gas properties and lignite properties (classified as "Energy resources"),
from fees earned in connection with its activities as an engineer and operator
of various cogeneration projects (classified as "Engineering and operations")
and from fees earned as a developer of power generation projects (classified as
"Development"). The related costs for each of these activities appears in the
corresponding section of the summary as "Operating Costs and Expenses." Gross
margin for these activities represents revenues less the related operating
costs.
The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto.
DOMESTIC POWER
Destec has an interest in nineteen operating power projects in the United
States. Eleven of the nineteen operating projects are located in California,
three are located in Texas and the remainder are located in Virginia, Nevada,
Georgia, Florida and Michigan. In addition, Destec Power Services ("DPS"), a
power marketing subsidiary of Destec, began selling excess power from Destec's
facilities as well as from other power sources in June 1995.
In May 1996, DPS agreed to supply peaking power to Texas-New Mexico Power
("TNP"). The original agreement between DPS and TNP was for a maximum of 55 MW
of peaking power with an option to increase the amount. TNP, in various
periods, has exercised its option to increase this amount to as high as 132 MW.
The term of the contract expired on October 31, 1996. Destec is currently
negotiating a new contract with TNP. In addition to the TNP contract, DPS
continues to make spot sales for the excess capacity from the CoGen Lyondell
("CLI") facility to various customers. Management believes that DPS's access to
a wide range of power supply sources, including facilities owned by Destec,
allows DPS to take advantage of opportunities made available as Texas continues
to deregulate its electric power industry. Management also expects a positive
impact from DPS sales in California as a result of increased power marketing
activities.
In February 1996, CLI and Lyondell Petrochemical Company ("LYO") formed
Channelview CoGen General Partnership (the "Partnership") with CLI as an 88%
partner and LYO as a 12% partner. Houston Lighting and Power Company ("HL&P")
challenged the partnership on the basis that the structure is actually a retail
sale of electricity from CLI to LYO. A decision in HL&P's favor was rendered in
9
<PAGE>
Austin District Court in September 1996. Destec is pursuing an appeal of this
judgement. As a result, deliveries of power to LYO via the private transmission
line are postponed indefinitely.
In July 1996, Destec completed the sale of its ownership interest in the 150
MW Blue Mountain Power project to AES Corporation (see Note 3 of the Notes to
Consolidated Financial Statements).
INTERNATIONAL POWER
Currently, Destec has one project in construction, Elsta (Terneuzen, The
Netherlands), and one project in active development, Chiahui (Taipei, Taiwan).
In addition, management is currently evaluating the acquisition or
development of several international project opportunities in areas including
Asia, the Far East, Europe, Africa, Australia, the Middle East and Latin
America.
The Los Mina project, located in Santo Domingo, Dominican Republic, commenced
commercial operations in the second quarter of 1996. The Indian Queens project,
located in Cornwall, England began operating in September 1996, and the Kingston
project, located in Ontario, Canada achieved first fire in October 1996 with
commercial operations expected to commence in the fourth quarter of 1996. The
Elsta project is currently under construction and is expected to begin
operations in 1997, and construction of the Chiahui project is scheduled to
begin in 1997 with commercial operations estimated to begin in 2000.
In August 1996, an international consortium which includes an indirect wholly
owned subsidiary of Destec, made a winning bid of $1.9 billion for the 1,600 MW
Hazelwood Power Station and the adjacent Hazelwood Mine in Victoria, Australia.
In addition to the Destec subsidiary, which holds a 20% interest, the consortium
is composed of affiliates of the following entities: National Power PLC,
PacifiCorp and the Commonwealth Bank of Australia. Based on its subsidiary's
20% interest in the consortium, Destec's share of the bid price is approximately
$380 million. In September 1996, Destec made a net equity contribution of
approximately $164 million. The remainder of Destec's share of the bid price is
included on a nonrecourse basis in the financing at the partnership level (see
Note 5 of the Notes to Consolidated Financial Statements). The consortium is
planning a major capital expenditure program which may be funded from future
capital contributions to maximize operating efficiencies and upgrade
environmental performance in order to refurbish two of the eight operating
units. The consortium will also seek further investment opportunities in the
Australian power industry as they become available.
SYNGAS
The Wabash River Coal Gasification facility ("Wabash facility") began
commercial operations in November 1995. Under the terms of the Gasification
Services Agreement with PSI Energy, Inc., Wabash is subject to either an
operating bonus or penalty depending on the operating rate of the facility. The
maximum bonus or penalty is $7.0 million per year and is calculated based on the
annual average syngas production. Destec's accrual for the potential operating
penalty at September 30, 1996 was $2.1 million. In order to improve the
reliability and profitability of the Wabash facility, Destec is currently making
significant equipment and process improvements at an estimated cost of $14.3
million.
10
<PAGE>
RESULTS OF OPERATION
The following table sets forth a summary of statements of consolidated income
for Destec for the three and nine month periods ended September 30, 1996 and
1995, respectively. This information has been derived from Destec's unaudited
Consolidated Financial Statements.
<TABLE>
<CAPTION>
SUMMARY OF STATEMENTS OF CONSOLIDATED INCOME
(IN THOUSANDS OF DOLLARS)
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
--------------------------- ----------------------
1996 1995 1996 1995
-------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Power, steam and syngas $ 66,791 $ 37,035 $155,873 $132,178
Engineering and operations 65,275 60,798 241,652 321,039
Energy resources 4,214 2,707 12,761 11,785
Development 11,058 5 22,795 8,062
-------------- ----------- ----------- ---------
Total Revenues 147,338 100,545 433,081 473,064
-------------- ----------- ----------- ---------
Operating Costs and Expenses:
Power, steam and syngas 60,244 36,274 149,548 123,047
Engineering and operations 61,573 57,706 220,749 308,986
Energy resources 3,111 1,907 8,351 9,837
Development 2,538 3,086 9,975 12,529
Amortization of intangibles 618 618 1,854 1,854
Selling, general & administrative 7,785 7,004 23,469 21,072
expenses
-------------- ----------- ----------- ---------
Total Operating Costs 135,869 106,595 413,946 477,325
-------------- ----------- ----------- ---------
Earnings from equity investments 6,913 5,061 13,519 9,283
Gain on sale of oil and gas property --- 11,890 --- 11,890
Other income 3,740 7,501 14,568 22,910
-------------- ----------- ----------- ---------
Income before provision for taxes on 22,122 18,402 47,222 39,822
income
Provision for taxes on income 3,859 3,718 11,887 10,145
-------------- ----------- ----------- ---------
Net Income $ 18,263 $ 14,684 $ 35,335 $ 29,677
============== =========== =========== =========
</TABLE>
- -----------------------
For the three months ended September 30, 1996, Destec recorded net income of
$18.3 million. The operating income for the quarter was $11.5 million which
resulted primarily from the positive gross margins contributed by power, steam
and syngas, engineering and operations, energy resources and development. These
positive results were partially offset by charges for amortization of
intangibles and selling, general and administrative expenses.
The major factors supporting the operating income during the three month
period ended September 30, 1996 were development revenue from the sale of the
Blue Mountain project, commencement of operations at the Los Mina power project
in the second quarter of 1996, continued construction of the
11
<PAGE>
Elsta and Kingston projects, lower costs due to the new Operating and
Maintenance ("O&M") contracts for certain California projects and the continued
earnings from Destec's equity investments. See the discussion below for a
detailed analysis of revenue and expense for the three and nine month periods
ending September 30, 1996 and 1995.
REVENUES
- --------
Destec's third quarter revenue increased $46.8 million, or 47%, for 1996 as
compared to 1995. This increase resulted primarily from a $29.8 million
increase in power, steam and syngas, an $11.1 million increase in development
revenue, a $4.5 million increase in engineering and operations revenue and a
$1.5 million increase in energy resources revenue.
The $29.8 million increase in power, steam and syngas revenue resulted from a
$30.3 million increase in power revenue from the Los Mina, CLI and CoGen Power
("CPI") projects and a $5.6 million increase in revenue from DPS, partially
offset by a $6.1 million decrease in syngas revenue. Power revenue from the Los
Mina project increased due to the commencement of commercial operations in the
second quarter of 1996. Power revenue from the CLI and CPI facilities increased
compared to the third quarter of 1995 as a result of adjustments for higher fuel
prices. DPS revenue is higher in the third quarter of 1996 due primarily to
sales under contracts with the Port of Oakland and TNP which began in January
and May 1996, respectively. These increases were partially offset by a net
decrease in syngas revenue due to the decommissioning of the LGTI facility and
the start-up of commercial operations of the Wabash facility, both of which
occurred in November 1995.
The $11.1 million increase in development revenue resulted from the sale of
the Blue Mountain project in July 1996 (see Note 3 of the Notes to Consolidated
Financial Statements).
The $4.5 million increase in engineering and operations revenue resulted from
higher engineering revenue in the third quarter of 1996 due to revenue
recognition on the construction costs related to the Elsta and Kingston projects
in 1996, as compared to revenue recognition on the Wabash, Michigan Power and
Elsta projects in 1995. Operations revenue also increased in the third quarter
of 1996 as a result of O&M revenue earned from the Michigan Power project which
began commercial operations in October 1995 and fees earned prior to start-up on
the Kingston and Elsta projects. The Kingston and Elsta projects are expected
to commence commercial operations in the fourth quarter of 1996 and mid 1997,
respectively.
Energy resources revenue increased $1.5 million due to higher production
revenue as a result of the Southeast Piceance gas properties which were
purchased in April 1996.
Destec's revenue for the first nine months of 1996 decreased $40.0 million, or
8%, compared to 1995. The primary reasons for this decrease were the
decommissioning of the LGTI facility in November of 1995 and lower engineering
revenue on the construction costs for the Elsta and Kingston projects in 1996
compared to revenue recognition on the Wabash, Michigan Power, Bear Mountain and
Elsta projects in 1995. These decreases were partially offset by development
revenue recognized on the sale of the Blue Mountain project as well as from the
financing of the Elsta project, the commencement of operations at the Wabash and
Los Mina facilities, increased production at the CLI facility as a result of the
addition of the sixth gas turbine in June 1995 and higher sales through DPS to
TNP and various other customers.
OPERATING COSTS AND EXPENSES
- ----------------------------
Destec's third quarter total operating costs and expenses increased $29.3
million, or 27%, for 1996 as compared to 1995. This increase resulted from a
$24.0 million increase in power, steam and syngas
12
<PAGE>
costs, a $3.8 million increase in engineering and operations costs, a $1.2
million increase in energy resources costs and a $0.8 million increase in
selling, general and administrative costs, partially offset by a $0.5 million
decrease in development costs.
The $24.0 million increase in power, steam and syngas costs was primarily a
result of increased power costs due to the commencement of commercial operations
of the Los Mina facility in the second quarter of 1996, higher fuel costs due to
increased gas prices at the CLI and CPI facilities and increased DPS costs
related to the Port of Oakland and TNP contracts. Syngas costs decreased in
total as a result of the decommissioning of the LGTI facility, partially offset
by the commencement of operations at the Wabash facility, both of which occurred
in November 1995.
The $3.8 million increase in engineering and operations costs was primarily
due to higher construction costs for the Elsta and Kingston projects in the
third quarter of 1996, as compared to construction costs related to the Wabash,
Michigan Power and Elsta projects for the same period of 1995. Operations costs
increased as a result of costs associated with the Elsta and Kingston projects
prior to start-up in October 1996 and 1997, respectively.
The $1.2 million increase in energy resources costs resulted from higher
production costs in the third quarter of 1996 due to the Southeast Piceance gas
properties which were purchased in April 1996.
The $0.8 million increase in selling, general and administrative costs
resulted from additional marketing expenses for DPS and increased international
development costs and inflationary factors.
Destec's operating costs and expenses for the first nine months of 1996
decreased $63.4 million, or 13%, compared to 1995. The primary reasons for this
decrease were the decommissioning of the LGTI facility in November 1995 and
lower engineering costs related to the construction of the Elsta and Kingston
projects in 1996 compared to construction costs for the Wabash, Michigan Power,
Bear Mountain and Elsta projects in 1995. These decreases were partially offset
by increased costs due to the commencement of operations at the Wabash and Los
Mina facilities, higher costs related to the start-up of the Kingston project,
increased production costs at the CLI facility as a result of the addition of
the sixth gas turbine in June 1995 and higher DPS costs related to the Port of
Oakland and TNP contracts.
EQUITY INVESTMENTS, OTHER INCOME AND TAXES
- ------------------------------------------
Earnings from equity investments increased $1.9 million for the three months
ended September 30, 1996, as compared to the same period of 1995. The increase
in equity earnings was primarily a result of lower interest expense on the
projects' term loans due to lower interest rates and principal and contract
capacity payment escalators. Equity earnings also included earnings from
Michigan Power which began commercial operations in October 1995.
Other income decreased $3.8 million due primarily to decreased interest income
on a lower average cash balance for the three months ended September 30, 1996
compared to the same period of 1995.
The effective tax rate for the three months ended September 30, 1996 was 17.4%
as compared to 20.2% in the same period of 1995. The tax rate for the third
quarter of 1996 reflects the benefit from non-conventional fuels credit
generated this quarter, nontaxable income generated from the Los Mina facility
and the release of excess tax reserves. Effective June 6, 1996, Destec's
results from operations will be included in the consolidated U.S. federal income
tax return of Dow. Pursuant to a new tax sharing agreement between Dow and
Destec, federal and state income tax expense is computed on a stand-alone basis.
Any resulting current tax liability or refund is settled with Dow. The
agreement permits Destec to reduce its federal stand-alone tax liability by
certain non-conventional fuels tax credits which have been utilized in Dow's
consolidated return, even where such credits would not otherwise be currently
usable by Destec.
13
<PAGE>
Earnings from equity investments increased $4.2 million for the nine months
ended September 30, 1996, as compared to the same period of 1995. The increase
in equity earnings was a result of lower interest expense on the projects' term
loans due to lower interest rates and principal and lower interest expense at
the Oyster Creek facility as a result of the conversion of its construction loan
to a term loan in July 1995. Equity earnings also included earnings for a full
nine months for 1996 from the Bear Mountain and Michigan Power projects which
began operating in April and October 1995, respectively. Other income decreased
$8.3 million due primarily to decreased interest income on a lower average cash
balance at a lower average rate of return for the nine months ended September
30, 1996 compared to the same period of 1995. The effective tax rate for the
nine months ended September 30, 1996 was 25.2% as compared to 25.5% in the same
period of 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 1996, cash and cash equivalents totaled $31.5 million and
working capital totaled $169.1 million. In the first nine months of 1996, cash
and cash equivalents increased $20.0 million. Working capital decreased $234.5
million primarily as a result of Destec's investment in the Hazelwood project
(see Note 5 of the Notes to Consolidated Financial Statements). The increase in
cash and cash equivalents resulted from $63.4 million provided by Destec's
operating activities and $14.8 million provided by Destec's financing
activities, offset by $58.2 million used in Destec's investing activities. See
Destec's "Statements of Consolidated Cash Flows" for additional detail.
In September 1996, a wholly owned subsidiary of Destec entered into an
agreement with National Power PLC which entitles Destec to receive approximately
$4.0 million for each of the years ended December 31, 1997, 1998 and 1999. The
total amount of $12.0 million is recorded as a receivable and as a reduction to
Destec's equity contribution in the Hazelwood project as of September 30, 1996
(see Note 5 of the Notes to Consolidated Financial Statements).
In August 1996, Destec arranged nonrecourse financing for the 140 MW Indian
Queens power plant in Cornwall, England. The project financing of approximately
$53.0 million was arranged and underwritten by BZW, a division of Barclays Bank
plc. As a result of this financing, Destec recorded the first application for
payment under the construction loan of approximately $44.0 million in Project
financing debt. Under the terms of the credit agreement, interest is based on
LIBOR plus a variable margin. The conversion of the loan from construction to
term is expected to occur in late 1996. The term of the loan after conversion is
seventeen years.
In August 1995, CLI refinanced and amended the terms of its operating lease
agreement which resulted in a reduction to operating costs for the facility.
The financing underlying the lease expires in August 2000. The lease is an
operating lease with an initial non-cancelable term of five years ending in 2000
and an extended term of an additional thirteen years ending in 2013. The lease
allows for termination after the initial term, subject to a penalty clause. CLI
is required to remit to the lessor, in addition to basic rentals as defined,
variable rentals associated with the leveraged portion of the lease. As of
September 30, 1996, the future estimated minimum lease payments under the
operating lease are approximately $215 million.
Effective June 7, 1996, Destec refinanced its operating lease agreement for
the Wabash facility with a third-party owner. This lease agreement expires in
June 2001. Under the lease, Destec assumed a $193.3 million lease obligation
which resulted in future estimated minimum lease payments of approximately $228
million as of September 30, 1996. Destec has the option to purchase the facility
at the end of the lease term or make a surrender payment to the lessor and
surrender the facility. The refinancing of the lease reduced the magnitude of
financial covenants on Destec. Destec's management believes that these lease
obligations and covenants will not significantly affect Destec's ability to
conduct its business.
14
<PAGE>
At September 30, 1996, Destec had irrevocable letters of credit from banks
totaling $44.9 million pledged to support certain Destec obligations including
$11.5 million and $21.9 million for equity contributions to the Michigan Power
and Indian Queens projects, respectively. The remainder is pledged to support
obligations related to various other projects. Management plans to fund Destec's
remaining equity contributions to the Michigan Power and Indian Queens projects
in the fourth quarter of 1996. Additionally, Destec has committed to make a
capital contribution to the Elsta project of up to $44.4 million in 1997.
Destec may also make additional capital contributions to the Hazelwood project
in order to maximize operating efficiencies and upgrade environmental
performance at the Hazelwood facility.
In 1993, Destec entered into a twenty-year firm transportation agreement with
Florida Gas Transmission to maintain firm gas transportation capacity which
began in March 1995. Destec is required to pay approximately $3.5 million per
year over the life of the contract. During the first nine months of 1996,
Destec sold the excess capacity which it was unable to utilize. The current
market rate for natural gas transportation capacity is less than Destec's
contracted cost resulting in net costs of $2.2 million to Destec for the nine
month period ended September 30, 1996.
Between August 1992 and November 1994, Destec's Board of Directors (the
"Board") authorized the repurchase of up to $70.0 million of Destec's common
stock. In May 1996, the Board authorized the repurchase of an additional
1,750,000 shares of Destec's common stock with a maximum cost of $25.0 million
(see Note 6 of the Notes to Consolidated Financial Statements).
Destec currently has $350 million available under a revolving credit agreement
with Dow (the "Dow Credit Agreement"). Under the terms of this agreement which
expires in December 1996, interest is paid quarterly on advances based on Dow's
short-term borrowing rate plus .125%. At September 30, 1996, there were no
outstanding borrowings under this line of credit. This credit agreement along
with cash, cash equivalents and marketable securities is expected to be
sufficient to fund Destec's working capital, additions to fixed assets and
investments in projects.
Covenants are contained in various agreements relating to Dow's indebtedness.
Destec's management believes that these restrictions will not significantly
affect Destec's ability to conduct its business.
As a result of operational defects in the administration of the Destec Energy,
Inc. Retirement and Savings Plan since 1991, Destec filed a request for a
compliance statement from the Internal Revenue Service ("IRS") under the
Voluntary Compliance Resolution ("VCR") program. If the VCR application is
approved by the IRS, Destec will make a contribution to the Plan of
approximately $3.9 million (before tax effect) plus interest from January 1,
1996 to the date of contribution.
15
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits --
3 Bylaws at Destec Energy, Inc., as amended December 1, 1995.
11 Statement re: computation of per share earnings
(b) Reports on Form 8-K
A Current Report on Form 8-K dated September 13, 1996 was filed with the
Securities and Exchange Commission which included Destec's press release
describing the acquisition of the Hazelwood Power Station, and the adjacent
Hazelwood Mine located in Victoria, Australia.
A Current Report on Form 8-K dated October 1, 1996 was filed with the
Securities and Exchange Commission which included Destec's press release
regarding the engagement of Morgan Stanley & Co. Incorporated to assist Destec
in exploring strategic alternatives to maximize shareholder value, including a
possible sale of Destec.
A Current Report on Form 8-K dated October 23, 1996 was filed with the
Securities and Exchange Commission which included Destec's press release
reporting net income for the third quarter of 1996.
16
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DESTEC ENERGY, INC.
By: /s/ Craig E. Hess
----------------------------
CRAIG E. HESS, VICE
PRESIDENT AND CONTROLLER
(CHIEF ACCOUNTING OFFICER AND
DULY AUTHORIZED SIGNATORY)
November 13, 1996
<PAGE>
EXHIBIT 11
DESTEC ENERGY, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(In Thousands of Dollars, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ ------------ -----------
PRIMARY EARNINGS PER SHARE (a)
Weighted average shares of common stock outstanding 56,016,715 58,749,878 57,016,250 58,761,815
Effect of issuance of shares from assumed exercise
of stock options (treasury stock method) (436,666) (188,211) (436,666) (188,211)
------------ ------------ ------------ -----------
Weighted average shares 55,580,049 58,561,667 56,579,584 58,573,604
============ ============ ============ ===========
Net Income $ 18,263 $ 14,684 $ 35,335 $ 29,677
============ ============ ============ ===========
Primary earnings per share $ 0.33 $ 0.25 $ 0.62 $ 0.51
============ ============ ============ ===========
FULLY DILUTED EARNINGS PER SHARE
Weighted average shares per primary earnings per
share computation 55,580,049 58,561,667 56,579,584 58,573,604
Additional dilutive effect of stock options
(treasury stock method) 74,100 85,700 74,100 85,700
------------ ------------ ------------ -----------
Weighted average shares 55,654,149 58,647,367 56,653,684 58,659,304
============ ============ ============ ===========
Net Income $ 18,263 $ 14,684 $ 35,335 $ 29,677
============ ============ ============ ===========
Fully diluted earnings per share $ 0.33 $ 0.25 $ 0.62 $ 0.51
============ ============ ============ ===========
- ------
(a) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although it is contrary to paragraphs 14,30
and 40 of APB Opinion No.15 because it produces antidilutive results for the three and nine month periods ended September 30,
1996 and 1995.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 31,496 31,496
<SECURITIES> 83,376 83,376
<RECEIVABLES> 98,098 98,098
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 296,040 296,040
<PP&E> 489,664 489,664
<DEPRECIATION> 163,731 163,731
<TOTAL-ASSETS> 1,095,839 1,095,839
<CURRENT-LIABILITIES> 126,979 126,979
<BONDS> 0 0
0 0
0 0
<COMMON> 623 623
<OTHER-SE> 776,513 776,513
<TOTAL-LIABILITY-AND-EQUITY> 1,095,839 1,095,839
<SALES> 147,338 433,081
<TOTAL-REVENUES> 147,338 433,081
<CGS> 127,466 388,623
<TOTAL-COSTS> 135,869 413,946
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 22,122 47,222
<INCOME-TAX> 3,859 11,887
<INCOME-CONTINUING> 18,263 35,335
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 18,263 35,335
<EPS-PRIMARY> 0.33 0.62
<EPS-DILUTED> 0.33 0.62
</TABLE>
