<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number: 33-74254
COGENTRIX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1853081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NORTH CAROLINA 28273-8110
(Address of principal executive offices) (Zipcode)
(704) 525-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
On November 13, 1996, there were 282,000 shares of common stock, no par value,
issued and outstanding.
<PAGE> 2
COGENTRIX ENERGY, INC.
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at September 30, 1996 (Unaudited)
and June 30, 1996 3
Consolidated Statements of Income for the Three Months
Ended September 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
</TABLE>
2
<PAGE> 3
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and June 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
September June
30, 1996 30, 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $60,474 $33,351
Restricted cash 27,171 42,203
Accounts receivable 58,908 57,331
Inventories 17,884 19,086
Other current assets 2,670 2,883
-------- --------
Total current assets 167,107 154,854
PROPERTY, PLANT AND EQUIPMENT,
Net of accumulated depreciation: $164,294 and $156,215, respectively 596,615 604,491
LAND AND IMPROVEMENTS 2,424 2,424
DEFERRED FINANCING, START-UP AND ORGANIZATION COSTS,
Net of accumulated amortization: $19,523 and $19,653, respectively 25,491 25,105
RESTRICTED MARKETABLE SECURITIES 63,695 63,695
NATURAL GAS RESERVES 3,409 3,611
INVESTMENTS IN AFFILIATES 56,166 56,028
OTHER ASSETS 13,577 11,433
-------- --------
$928,484 $921,641
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $53,499 $48,416
Accounts payable 25,500 21,453
Accrued interest payable 1,445 4,063
Accrued dividends payable 0 4,759
Other accrued liabilities 11,189 13,209
-------- --------
Total current liabilities 91,633 91,900
LONG-TERM DEBT 681,851 670,900
DEFERRED INCOME TAXES 47,898 46,971
MINORITY INTEREST IN JOINT VENTURE 12,933 22,044
OTHER LONG-TERM LIABILITIES 7,888 6,816
-------- --------
842,203 838,631
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding 130 130
Accumulated earnings 86,151 82,880
-------- --------
86,281 83,010
-------- --------
$928,484 $921,641
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these balance sheets.
3
<PAGE> 4
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended September 30, 1996 and 1995
(dollars in thousands, except for earnings per common share)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1995
-------- --------
<S> <C> <C>
OPERATING REVENUE:
Electric $90,393 $93,970
Steam 6,632 5,503
Other 2,097 6,099
------- -------
99,122 105,572
------- -------
OPERATING EXPENSES:
Fuel expense 42,978 44,534
Operations and maintenance 19,425 18,954
General, administrative and development expenses 7,985 7,022
Depreciation and amortization 9,285 9,358
------- -------
79,673 79,868
------- -------
OPERATING INCOME 19,449 25,704
OTHER INCOME (EXPENSE):
Interest expense (14,078) (14,941)
Investment and other income 2,111 2,160
Equity in net loss of affiliates (219) (16)
------- -------
INCOME BEFORE MINORITY INTEREST IN INCOME OF JOINT
VENTURE, INCOME TAXES AND EXTRAORDINARY LOSS 7,263 12,907
MINORITY INTEREST IN INCOME OF JOINT VENTURE (477) (800)
------- -------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 6,786 12,107
PROVISION FOR INCOME TAXES (2,812) (4,824)
------- -------
INCOME BEFORE EXTRAORDINARY LOSS 3,974 7,283
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT OF $470 (703) 0
------- -------
NET INCOME $3,271 $7,283
======= =======
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $14.09 $25.83
Extraordinary loss (2.49) 0.00
------- -------
$11.60 $25.83
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 282,000 282,000
======= =======
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
4
<PAGE> 5
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended September 30, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,271 $7,283
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,285 9,358
Deferred income taxes 927 3,533
Extraordinary loss on early extinguishment of debt 1,173 0
Minority interest in income of joint venture, net of dividends (9,111) 805
Equity in net loss of affiliates 219 16
Dividends received from affiliates 143 136
Decrease (increase) in accounts receivable (1,577) 1,099
Decrease in inventories 1,404 2,515
Increase in accounts payable 4,047 145
Decrease in accrued liabilities (4,638) (4,086)
Increase in other (1,029) (347)
------- -------
Net cash flows provided by operating activities 4,114 20,457
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (308) (606)
Decrease in marketable securities 0 3,328
Investments in affiliates (500) (875)
Decrease in restricted cash 15,032 6,030
------- -------
Net cash flows provided by investing activities 14,224 7,877
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 67,750 455
Repayments of debt (51,622) (15,168)
Increase in deferred financing costs (2,584) 0
Common stock dividends paid (4,759) (4,235)
------- -------
Net cash flows provided by (used in) financing activities 8,785 (18,948)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 27,123 9,386
CASH AND CASH EQUIVALENTS, beginning of period 33,351 34,073
------- -------
CASH AND CASH EQUIVALENTS, end of period $60,474 $43,459
======= =======
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
5
<PAGE> 6
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include the
accounts of Cogentrix Energy, Inc., its subsidiary companies and a 50% owned
joint venture in which the Company has effective control through majority
representation on the board of directors of the managing general partner.
Investments in other affiliates in which the Company has a 20% to 50% interest
and/or the ability to exercise significant influence over operating and
financial policies are accounted for on the equity method. All material
intercompany transactions and balances among Cogentrix Energy, Inc., its
subsidiary companies and its consolidated joint venture have been eliminated in
the accompanying consolidated condensed financial statements.
Information presented as of September 30, 1996 and for the three months
ended September 30, 1996 and 1995 is unaudited. In the opinion of management,
however, such information reflects all adjustments, which consist of normal
recurring adjustments necessary to present fairly the financial position of the
Company as of September 30, 1996, the results of operations for the three
months ended September 30, 1996 and 1995, and cash flows for the three months
ended September 30, 1996 and 1995. The results of operations for these interim
periods are not necessarily indicative of results which may be expected for any
other interim period or for the fiscal year as a whole.
The accompanying unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although management believes that the disclosures made
are adequate to make the information presented not misleading. It is suggested
that these consolidated condensed financial statements be read in conjunction
with the audited consolidated financial statements and the notes thereto
included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on October 11, 1996.
2. JAMES RIVER REFINANCING
In July 1996, James River Cogeneration Company ("James River"), a joint
venture owned 50% by the Company which owns a cogeneration facility in
Hopewell, Virginia (the "Hopewell Facility"), renegotiated the Hopewell
Facility's project financing arrangements. The amended agreements resulted in
a $13 million increase in the amount of James River's outstanding debt and
extended the final maturity date of the loan by 21 months. The amended project
debt accrues interest at an annual rate equal to the applicable LIBOR as chosen
by the Company, plus .875% per annum through July 1999 and 1.125% thereafter.
Principal is payable quarterly with interest payable the earlier of the
maturity of the applicable LIBOR term or quarterly through June 2002. James
River transferred substantially all of the additional funds borrowed (net of
transaction costs) to its partners. The distribution received by Cogentrix
Energy, Inc. related to the refinancing was approximately $6.1 million which
will be used by the Company for general corporate purposes.
3. AMENDMENTS TO POWER SALES AGREEMENTS AND PROJECT DEBT AGREEMENTS
Effective in September 1996, the Company amended the power sales
agreements on its Lumberton, Elizabethtown, Kenansville, Roxboro and Southport
Facilities. These amendments provide the purchasing utility additional rights
related to the dispatch of the facilities and eliminate the purchase options
which the utility held related to the Roxboro and Southport Facilities. In
connection with the amendment of these power sales agreements, the Company
refinanced the existing project debt on the Lumberton, Elizabethtown and
Kenansville Facilities, as well as the project debt on the Roxboro and
Southport Facilities.
6
<PAGE> 7
The project debt on the Elizabethtown, Lumberton and Kenansville
Facilities, which consisted of a senior loan with a syndicate of banks and a
subordinated credit facility with a financial institution, was refinanced with
the proceeds of a $39 million senior credit facility and a $5.5 million capital
contribution by Cogentrix Energy, Inc. The senior credit facility accrues
interest at an annual rate equal to the applicable LIBOR rate, as chosen by the
Company, plus .875% through September 1997 and 1% thereafter. Principal is
payable quarterly with interest payable at the earlier of the maturity of the
applicable LIBOR term or quarterly through September 2000. The senior credit
facility also provides for a $3.3 million letter of credit to secure the
project's obligations to pay debt service. An extraordinary loss of $1.2
million related to the write-off of unamortized deferred financing costs from
the original senior loan and subordinated credit facility is shown net of an
income tax benefit of $470,000 in the accompanying consolidated income
statement for the quarter ended September 30, 1996.
The project debt for the Roxboro and Southport Facilities consisted of a
note payable to banks, which was refinanced with the proceeds of a senior
credit facility. This senior credit facility accrues interest at an annual
rate equal to the applicable LIBOR rate, as chosen by the Company, plus .875%
through September 1997, 1% through September 2001 and 1.125% thereafter.
Principal is payable quarterly with interest payable at the earlier of the
maturity of the applicable LIBOR term or quarterly through June 2002. The
senior credit facility also provides for a $6.5 million letter of credit to
secure the project's obligations to pay debt service. The revised credit
facility for the Roxboro and Southport Facilities increased outstanding
borrowings $18.4 million, the proceeds of which (net of transaction costs of
$1.3 million and accrued interest payments of $400,000) were paid as a
distribution to Cogentrix Energy, Inc. In connection with the refinancing,
Cogentrix Energy, Inc. has entered into an agreement for the benefit of the
project lenders to fund cash deficits the subsidiary that operates the Roxboro
and Southport Facilities could experience as a result of incurring certain
costs, subject to a cap of $11.3 million.
4. PENDING CLAIMS AND LITIGATION
The Company is a party to certain matters which have resulted in
litigation and arbitration proceedings. Management believes that the resolution
of these matters will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
7
<PAGE> 8
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
The information called for by this item is hereby incorporated herein by
reference to pages 3 through 7 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In addition to discussing and analyzing the Company's recent historical
financial results and condition, the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations" includes statements
concerning certain trends and other forward-looking information affecting or
relating to the Company which are intended to qualify for the protections
afforded "Forward-Looking Statements" under the Private Securities Litigation
Reform Act of 1995, Public Law 104-67. The forward-looking statements made
herein are inherently subject to risks and uncertainties which could cause the
Company's actual results to differ materially from the forward-looking
statements.
GENERAL
Cogentrix Energy, Inc. and subsidiary companies (collectively, the
"Company") are primarily engaged in the development, ownership and operation of
independent power generating facilities (individually, a "facility" or
collectively, the "facilities"). The Company's consolidated revenues are
derived and costs are incurred primarily from the generation and sale of
electricity and, to a lesser extent, from the production and sale of thermal
energy (primarily steam) and other commodities related to its cogeneration
operations. Other revenues and costs arise from fees earned and costs incurred
in connection with the development of power generating facilities, ash
transport, ash by-products, and environmental consulting services.
As of September 30, 1996, Cogentrix Energy, Inc. owned, through its
subsidiaries, ten operating facilities in the United States with an aggregate
installed capacity of approximately 900 megawatts ("MW"). One of the ten
facilities is owned equally by the Company and another independent power
producer. The Company also owns a 50% interest in a 220 megawatt facility
currently under construction and scheduled to commence commercial operations in
November 1996.
Effective in September 1996, the Company amended the power sales
agreements with Carolina Power & Light Company ("CP&L") on the Elizabethtown,
Lumberton, Kenansville, Roxboro and Southport facilities. Under the amended
terms, the power sales agreements are dispatchable contracts which provide the
utility the ability to suspend or reduce purchases of energy from the
facilities if CP&L determines it can operate its system for a designated period
more economically. The amended power sales agreements are structured so that
the Company will continue to receive capacity payments during any period of
economic dispatch. Capacity payments cover project debt service, fixed
operating costs and constitute a substantial portion of the profit component of
the power sales agreement. Energy payments, which will be reduced or
eliminated as a result of economic dispatch, primarily cover variable operating
and maintenance costs as well as coal and rail transportation costs. The
impact of the amendment to these power sales agreements will be a significant
reduction in the Company's electric revenues, which will be offset by reduced
fuel costs and operations and maintenance expense at these facilities in future
years. In addition to providing CP&L additional dispatch rights, the
amendments eliminated the purchase options which CP&L had on the Roxboro and
Southport facilities.
Unusual weather conditions, reduced demand for steam by a facility's steam
host and the needs of each facility to perform routine or unanticipated
facility maintenance involving planned or forced turbine outages may have an
effect on interim financial results. In addition, power sales agreements at
seven of the Company's facilities permit the utility customer to significantly
dispatch the related plant (i.e., direct the plant to deliver a reduced amount
of electrical output). However, even when dispatched, such facilities'
capacity payments, which are structured to cover fixed operating costs and debt
service and account for most of the profits of these facilities, are not
reduced.
8
<PAGE> 9
The activities of the Company are subject to stringent environmental
regulations by federal, state, local and (for future non-U.S. projects) foreign
governmental authorities. The Clean Air Act Amendments of 1990 require states
to impose permit fees on certain emissions, and Congress may consider proposals
to restrict or tax certain emissions, which proposals, if adopted, could impose
additional costs on the operation of the Company's facilities. There can be no
assurance that the Company's business and financial condition would not be
materially and adversely affected by the cost of compliance with future changes
in domestic or foreign environmental laws and regulations or additional
requirements for reduction or control of emissions imposed by regulatory
authorities in connection with renewals of required permits. The Company
maintains a comprehensive program to monitor its project subsidiaries'
compliance with all applicable environmental laws, regulations, permits and
licenses.
All of the Company's operating facilities are wholly-owned by the Company
except for its cogeneration facility located in Hopewell, Virginia in which the
Company has a 50% ownership interest. The "minority interest in income of
joint venture" on the Company's consolidated income statements for the three
months ended September 30, 1996 and 1995 reflects the Company's joint venture
partner's interest in the net income of this facility. The Company's
consolidated condensed financial statements include the accounts of the
Hopewell facility as the Company has effective control of the facility through
majority representation on the board of directors of the managing general
partner.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1995
------------------ ------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C>
Total operating revenues $ 99,122 100% $ 105,572 100%
Operating costs 62,403 63 63,488 60
General, administrative and development 7,985 8 7,022 7
Depreciation and amortization 9,285 9 9,358 9
--------- --- --------- ---
Operating income $ 19,449 20% $ 25,704 24%
========= === ========= ===
Megawatt hours sold 1,265,473 1,422,136
========= =========
</TABLE>
Total operating revenues decreased 6.1% to $99.1 million for the first
quarter of fiscal 1997, as compared to the first quarter of fiscal 1996. The
decrease in operating revenues was partially attributable to a $3.6 million
decrease in electric revenues resulting from an 11% reduction in aggregate
megawatt hours sold at the Company's facilities for the three months ended
September 30, 1996, as compared to the same period for fiscal 1996. A
significant decrease in megawatt hours sold during the first quarter of fiscal
1997 was experienced at the Lumberton, Elizabethtown, Kenansville, Rocky Mount
and Southport facilities as the result of a higher level of dispatch by the
purchasing utility, and at the Hopewell facility as a result of the reduction
in the facility's declared capacity from 100 to 88.5 megawatts in March 1996.
The decrease in revenues for the first quarter of fiscal 1997 also relates to
the payment received by the Company in July 1995 upon the execution of the
joint development agreement with China Light & Power Company, Limited ("CLP").
These decreases in revenues were partially offset by increases in steam revenue
at the Southport and Hopewell facilities associated with an increase in steam
demand by the industrial host and the escalation/inflation adjustment
provisions in certain power sales agreements.
Operating costs for the first quarter of fiscal 1997 decreased 1.7% to
$62.4 million, as compared to $63.5 million in the first quarter of fiscal
1996. This was primarily the result of a decrease of approximately $1.8
million in fuel expense at the Lumberton, Elizabethtown, Kenansville, Hopewell
and Rocky Mount facilities. This decrease in fuel expense is associated with
the decrease in the facilities' operating levels during the first quarter of
fiscal 1997. The decrease in operating costs was also related to decreases in
first quarter fiscal 1997 maintenance costs at the Portsmouth and Roxboro
facilities, at which facilities the Company performed routine maintenance
during the first quarter of fiscal 1996. These decreases were partially offset
by transaction costs incurred in connection with project debt refinancings
completed during the first quarter of fiscal 1997, severance costs incurred by
the Lumberton, Elizabethtown,
9
<PAGE> 10
Kenansville, Roxboro and Southport facilities in the first quarter of 1997
associated with the reduction of the workforce at those facilities due to the
amendment of their power sales agreements, and an increase in operating costs
of ReUse related to performing third party ash disposal services.
General, administrative and development expenses increased 13.7% to $8.0
million in the first quarter of fiscal 1997, as compared to $7.0 million in the
first quarter of fiscal 1996. This increase was primarily related to a general
increase in payroll, which was primarily related to an increase in performance
bonuses paid during the first quarter of fiscal 1997. The increase in general,
administrative and development expenses also related to an increase in the
level of development expenses related to the India project in the first quarter
of fiscal 1997 as compared to the same period of fiscal 1996. These increases
were partially offset by a reduction in development expenses incurred on a
project the Company is developing in Idaho.
The extraordinary loss on early extinguishment of debt in the first
quarter of fiscal 1997 relates to the write-off of the deferred financing costs
on the Elizabethtown, Lumberton and Kenansville facilities' original project
debt, which was refinanced in September 1996.
The Company's long-term debt averaged $727 million with a weighted average
interest rate of 7.7% for the three months ended September 30, 1996, compared
with an average of $755 million with a weighted average interest rate of 7.8%
in the corresponding period in fiscal 1996. The decrease in the weighted
average debt outstanding relates to the scheduled maturities of the Company's
project finance debt, which was partially offset by a net $25 million increase
in borrowings in connection with the renegotiations of the Hopewell facility's
project debt and the Roxboro and Southport facilities' project debt during the
first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
The principal components of operating cash flow for the three months ended
September 30, 1996 were generated by net income of $3.3 million, increases due
to adjustments for depreciation and amortization of $9.3 million, deferred
income taxes of $0.9 million, extraordinary loss on early extinguishment of
debt of $1.2 million and distributions from and equity in net loss of
unconsolidated affiliates of $0.3 million, which were partially offset by
minority interest in income of joint venture, net of dividends of $9.1 million
and a net $1.8 million use of cash reflecting changes in other working capital
assets and liabilities. Cash flow provided by operating activities of $4.1
million and proceeds from borrowings of $67.8 million were primarily used to
purchase property, plant and equipment of $0.3 million, to make investments in
affiliates of $0.5 million, to make deposits in cash escrows of $12.1 million,
to pay deferred financing costs of $2.6 million, to repay project finance
borrowings of $51.6 million, and to pay common stock dividends of $4.8 million.
Historically, the Company has financed the capital costs of each of its
facilities under financing arrangements that, with certain exceptions, are
substantially non-recourse to Cogentrix Energy, Inc. and its other project
subsidiaries. Based upon the Company's current level of operations, the
Company believes that its project subsidiaries will generate sufficient revenue
to pay all required debt service on the project financing debt and to allow
them to pay management fees and dividends to Cogentrix Energy, Inc.
periodically in sufficient amounts to allow the Company to pay all existing
debt service, fund a significant portion of its development activities and meet
its other obligations. If, as a result of unanticipated events, the Company's
ability to generate cash from operating activities is significantly impaired,
the Company could be required to curtail its development activities to meet its
debt service obligations.
In December 1994, the Company acquired a 50% interest in Birchwood Power
Partners, L.P. ("Birchwood Power"), a partnership formed to own a 220 megawatt
coal-fired cogeneration facility (the "Birchwood Facility") currently under
construction in King George County, Virginia, from two indirect wholly-owned
subsidiaries of The Southern Company. The purchase price of the 50% interest
in Birchwood Power was approximately $29.5 million and was funded with a
portion of the remaining net proceeds of the sale of $100 million of the
Company's Senior Notes due 2004 (the "Senior Notes"). The Company has also
committed to provide an equity contribution to Birchwood Power of approximately
$43.7 million upon the earliest to occur of the commencement of commercial
operations of the Birchwood Facility, an event of default under Birchwood
Power's financing arrangements or a date certain of June 1,
10
<PAGE> 11
1997. This equity commitment is supported by a letter of credit of equal
amount, provided by a bank, which is collateralized by a pledge of marketable
securities. The Birchwood Facility, which is currently under construction with
a wholly-owned affiliate of The Southern Company as contractor under a lump sum
turnkey construction contract, is anticipated to commence commercial operations
in November 1996. When the facility is completed, Birchwood Power will sell
electricity to Virginia Electric and Power Company and provide thermal energy
to a 36-acre greenhouse under long-term contracts.
In December 1994, the Company executed an engineering, procurement and
construction agreement (the "Construction Agreement") with Public Utility
District No. 1 of Clark County, Washington ("Clark"). Under this Construction
Agreement, the Company is engineering, procuring equipment for and constructing
a 248 megawatt combined-cycle, gas-fired electric generation facility (the
"Clark Facility"). In October 1995, the Company delivered to Clark a $20
million letter of credit, provided by a bank, which is collateralized by a
pledge of marketable securities. This letter of credit will support the
Company's contingent obligations under certain performance guarantees and late
construction completion payments under the Construction Agreement. The Company
is also obligated to pay 50% of costs and expenses, if any, incurred in
constructing the facility in excess of the contract amount. Pursuant to the
Construction Agreement, the contract amount of $117 million may be adjusted as
a result of a force majeure event, scope change, certain delays in schedule or
change in law. The Company will earn a construction fee of $5 million upon
completion of the Clark Facility. The Company will also share in 50% of the
amount, if any, equal to the excess of the contract amount over the costs and
expenses in constructing the Clark Facility. Cogentrix of Vancouver, Inc.
("CVC"), an indirect wholly-owned subsidiary of Cogentrix Energy, Inc.,
performed the development and preliminary engineering on the Clark Facility and
received a development fee of $5 million in October 1995. Construction on the
Clark Facility commenced in March 1996. Upon commencing commercial operations,
CVC will operate and maintain the Clark Facility pursuant to a two-year
operations and maintenance agreement.
In July 1995, the Company executed a joint development agreement with a
subsidiary of CLP (the "Joint Venture") which provides for the Company and CLP
to co-develop a 1,000 megawatt coal-fired facility in India and to share
equally in the direct development expenses related to the project.
Additionally, the Company is currently seeking other international partners for
the purpose of making equity investments in the project. The Company currently
anticipates requiring funds, in addition to amounts payable by CLP to the
Company at financial closing of the project, in an amount ranging from $50 to
$80 million for the purpose of making its equity investment in the India
project. The Company expects to fund this equity commitment from cash
generated from operating activities and from the remaining net proceeds of its
Senior Notes.
In February 1996, the Company formed the Village Farms of Texas, Limited
Partnership (the "Texas Partnership") with wholly-owned subsidiaries of Agro
Power Development, Inc., for the purpose of developing, constructing and
operating a 41 acre venlo-style greenhouse (the "Greenhouse Facility") located
in Fort Davis, Texas, which will produce tomatoes. In February 1996, the Texas
Partnership obtained construction financing and a working capital facility
aggregating $21.1 million from a group of banks (the "Banks"). In addition,
the Company, which holds a 50% interest in the Texas Partnership, made a
contribution to the Texas Partnership of $4.6 million which, together with the
funds provided by the Banks (the "Construction Funds"), will be used to
construct the Greenhouse Facility. In connection with the construction of the
Greenhouse Facility, which commenced in February 1996, the Company has entered
into a guaranty agreement with the Banks which obligates the Company to make an
additional capital contribution to the Texas Partnership in the event the
construction costs related to the Greenhouse Facility exceed the amount of the
Construction Funds. The maximum capital contribution the Company is obligated
to make under this guaranty agreement is $5 million. The Greenhouse Facility,
which will be constructed in two phases, is anticipated to commence sales of
tomatoes in November 1996.
In July 1996, the Company renegotiated the project financing arrangements
for its Hopewell facility, in which it owns a 50% interest. The amended
agreements resulted in a $13 million increase in the amount of indebtedness of
JRCC outstanding and extended the final maturity date of the loan by 21 months.
JRCC transferred substantially all of the additional funds borrowed (net of
transaction costs) to its partners. The distribution received by Cogentrix
Energy, Inc. related to the refinancing was approximately $6.1 million which
will be used by the Company for general corporate purposes.
11
<PAGE> 12
In September 1996, the Company renegotiated the project financing
arrangements for its Roxboro and Southport facilities. The amended agreements
resulted in an approximate $18.4 million increase in the amount of indebtedness
outstanding and extended the final maturity date of the loan by 7 months. The
Company's project subsidiary operating the Roxboro and Southport facilities
transferred substantially all of the additional funds borrowed (net of
transaction costs) to Cogentrix Energy, Inc., which utilized $5.5 million to
make a capital contribution to the project subsidiary operating the
Elizabethtown, Lumberton and Kenansville facilities in connection with the
refinancing of its project debt in September 1996. The remainder of the
proceeds will be used by the Company for general corporate purposes.
Any projects the Company develops in the future, and those independent
power projects it may seek to acquire, are likely to require substantial
capital investment. The Company's ability to arrange financing on a
substantially non-recourse basis and the cost of such capital are dependent on
numerous factors. In order to access capital on a substantially non-recourse
basis in the future, the Company may have to make larger equity investments in,
or provide more financial support for, its project subsidiaries.
The ability of the Company's project subsidiaries to declare and pay
dividends and management fees periodically to Cogentrix Energy, Inc. is subject
to certain limitations in their respective project credit documents. Such
limitations generally require that: (i) project debt service payments be
current, (ii) project debt service coverage ratios be met, (iii) all project
debt service and other reserve accounts be funded at required levels, and (iv)
there be no default or event of default under the relevant project credit
documents. There are also additional limitations that are adapted to the
particular characteristics of each project subsidiary.
In September 1996, the Company paid a $4.8 million dividend to the common
shareholders of the Company for the fiscal year ended June 30, 1996. The Board
of Directors has adopted a policy, which is subject to change at any time, of
maintaining a dividend payout ratio of no more than 20% of the Company's net
income for the immediately preceding fiscal year. Under the terms of the
Indenture for the Senior Notes, the Company's ability to pay dividends and make
other distributions to its shareholders is restricted.
IMPACT OF ENERGY PRICE CHANGES, INTEREST RATES AND INFLATION
Energy prices are influenced by changes in supply and demand, as well as
economic conditions, and generally tend to fluctuate significantly. Through
various hedging mechanisms, the Company has attempted to mitigate the impact of
such changes on the results of operations of most of its projects. The basic
hedging mechanism against increased fuel and transportation costs is to provide
contractually for matching increases in the energy payments the Company's
project subsidiaries receive from the utility purchasing the electricity
generated by the facility.
Under the power sales agreements for two of the Company's recently
developed facilities, energy payments are indexed, subject to certain caps, to
reflect the purchasing utility's solid fuel cost of producing electricity. The
Company's other power sales agreements provide periodic, scheduled increases in
energy prices that are designed to match periodic, scheduled increases in fuel
and transportation costs that are included in the fuel supply and
transportation contracts for the facilities.
Changes in interest rates could have a significant impact on the Company.
Interest rate changes affect the cost of capital needed to construct projects,
as well as interest expense of existing project financing debt. As with fuel
price escalation risk, the Company has substantially hedged against the risk of
fluctuations in interest rates by arranging either fixed-rate financing or
variable-rate financing with interest rate swaps, collars or caps. As of
September 30, 1996, approximately 85.2% of the Company's project financing debt
was hedged, of which 28.5% was hedged with interest rate caps which were above
the prevailing market rate at September 30, 1996 and therefore subject to
interest rate volatility.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Under the recently amended terms of the power sales agreements for the
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport Facilities, the
purchasing utility, CP&L, has exercised its right of economic dispatch
resulting in significantly reduced fuel requirements at each of these
facilities. Coal is supplied to the Elizabethtown, Lumberton and Kenansville
Facilities (collectively, the "ELK Facilities") by James River Coal Sales, Inc.
("James River") and its affiliate, Bell County Coal Corporation. The coal
sales agreement for the ELK Facilities provides that the Company's subsidiary
operating the ELK Facilities will purchase, and James River will provide, all
of such subsidiary's coal requirements through the end of the contract term.
In November 1996, James River and its affiliate instituted an action against
the Company claiming breach of contract and fraud in the inducement based on
the reduction in fuel requirements at the ELK Facilities as a consequence of
the recent amendments to the power sales agreements. James River and its
affiliate seek specific performance and, in the alternative, an unspecified
amount of damages. The lawsuit is pending in the United States District Court
for the Eastern District of Kentucky. The coal sales agreement for the ELK
Facilities contains an arbitration provision requiring disputes to be submitted
to arbitration in North Carolina, which the Company intends to seek to enforce
with respect to these claims.
In October 1996, Coastal Sales, Inc. ("Coastal"), the coal supplier to the
Company's Southport facility under a similar requirements contract, initiated
an arbitration proceeding against the Company through the American Arbitration
Association in Charlotte, North Carolina. The notice of arbitration alleges
breach of contract based on the reduction in fuel requirements at the Southport
facility as a consequence of the recent amendment to the power sales agreement.
Coastal is seeking an unspecified amount of damages.
Management believes that in some instances there is no basis for these
claims and as to the others the Company has meritorious defenses. The Company
intends to defend the lawsuit and arbitration proceeding vigorously. In the
opinion of management, the ultimate outcome of the litigation, or any
arbitration proceeding relating to these claims, will not have a material
adverse effect on the Company's consolidated results of operations or financial
condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- -----------------------------------------------------------------
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and is
not filed.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter covered by
this report.
13
<PAGE> 14
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.
COGENTRIX ENERGY, INC.
(Registrant)
November 14, 1996 /s/ BRUCE C. MCMILLEN
------------------------------
Bruce C. McMillen
Group Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
November 14, 1996 /s/ THOMAS F. SCHWARTZ
------------------------------
Thomas F. Schwartz
Vice President - Finance
Treasurer
(Principal Accounting Officer)
14
<PAGE> 15
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- -----------------------------------------------------------------
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and is
not filed.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COGENTRIX
ENERGY, INC.'S CONSOLIDATED CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 87,645
<SECURITIES> 0
<RECEIVABLES> 58,908
<ALLOWANCES> 0
<INVENTORY> 17,884
<CURRENT-ASSETS> 167,107
<PP&E> 760,909
<DEPRECIATION> 164,294
<TOTAL-ASSETS> 928,484
<CURRENT-LIABILITIES> 91,633
<BONDS> 681,851
0
0
<COMMON> 130
<OTHER-SE> 86,151
<TOTAL-LIABILITY-AND-EQUITY> 928,484
<SALES> 99,122
<TOTAL-REVENUES> 101,014
<CGS> 79,673
<TOTAL-COSTS> 79,673
<OTHER-EXPENSES> 477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,078
<INCOME-PRETAX> 6,786
<INCOME-TAX> 2,812
<INCOME-CONTINUING> 3,974
<DISCONTINUED> 0
<EXTRAORDINARY> 703
<CHANGES> 0
<NET-INCOME> 3,271
<EPS-PRIMARY> 11.60
<EPS-DILUTED> 11.60
</TABLE>
