<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, 1997
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 Identification
incorporation or organization) 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 14, 1997, there were 282,000 shares of common stock, no par value,
issued and outstanding.
<PAGE> 2
COGENTRIX ENERGY, INC.
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at September 30, 1997
(Unaudited) and June 30, 1997 3
Consolidated Statements of Income for the Three Months
Ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 5: Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
<PAGE> 3
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER JUNE
30, 1997 30, 1997
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 48,286 $ 62,596
Restricted cash 27,095 30,888
Marketable securities 31,011 21,494
Restricted investments 20,000 20,000
Accounts receivable 52,349 57,880
Inventories 15,304 15,723
Other current assets 5,767 5,779
-------- --------
Total current assets 199,812 214,360
PROPERTY, PLANT AND EQUIPMENT,
Net of accumulated depreciation: $179,022 and $169,761, respectively 504,981 514,449
LAND AND IMPROVEMENTS 2,540 2,540
DEFERRED FINANCING, START-UP AND ORGANIZATION COSTS,
Net of accumulated amortization: $17,218 and $16,373, respectively 21,756 22,601
NATURAL GAS RESERVES 2,608 2,829
INVESTMENTS IN AFFILIATES 87,145 84,599
OTHER ASSETS 17,152 18,450
-------- --------
$835,994 $859,828
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 64,037 $ 62,370
Accounts payable 19,439 22,147
Accrued compensation 3,888 12,290
Accrued interest payable 751 3,308
Accrued dividends payable 0 5,000
Other accrued liabilities 13,346 13,040
-------- --------
Total current liabilities 101,461 118,155
LONG-TERM DEBT 613,004 631,624
DEFERRED INCOME TAXES 25,128 23,074
MINORITY INTEREST IN JOINT VENTURE 15,718 14,354
OTHER LONG-TERM LIABILITIES 23,956 22,912
-------- --------
779,267 810,119
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding 130 130
Accumulated earnings 56,597 49,579
-------- --------
56,727 49,709
-------- --------
$835,994 $859,828
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated balance sheets.
3
<PAGE> 4
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(dollars in thousands, except for earnings per common share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING REVENUE:
Electric $ 82,358 $ 90,393
Steam 6,049 6,632
Other 2,728 2,097
--------- ---------
91,135 99,122
--------- ---------
OPERATING EXPENSES:
Fuel expense 31,199 42,978
Operations and maintenance 16,696 19,425
General, administrative and development expenses 8,139 7,985
Depreciation and amortization 10,238 9,285
--------- ---------
66,272 79,673
--------- ---------
OPERATING INCOME 24,863 19,449
OTHER INCOME (EXPENSE):
Interest expense (13,235) (14,078)
Investment and other income 1,923 2,111
Equity in net loss of affiliates (196) (219)
--------- ---------
INCOME BEFORE MINORITY INTEREST IN INCOME OF JOINT
VENTURE, INCOME TAXES AND EXTRAORDINARY LOSS 13,355 7,263
MINORITY INTEREST IN INCOME OF JOINT VENTURE (1,364) (477)
--------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 11,991 6,786
PROVISION FOR INCOME TAXES (4,973) (2,812)
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 7,018 3,974
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT OF $470 0 (703)
--------- ---------
NET INCOME $ 7,018 $ 3,271
========= =========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss $ 24.89 $ 14.09
Extraordinary loss 0.00 (2.49)
--------- ---------
$ 24.89 $ 11.60
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 282,000 282,000
========= =========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated statements.
4
<PAGE> 5
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,018 $ 3,271
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 10,238 9,285
Deferred income taxes 2,054 927
Extraordinary loss on early extinguishment of debt 0 1,173
Minority interest in income of joint venture, net of dividends 1,364 (9,111)
Equity in net loss of affiliates 196 219
Dividends received from affiliates 0 143
Decrease (increase) in accounts receivable 5,531 (1,577)
Decrease in inventories 640 1,404
Increase (decrease) in accounts payable (2,708) 4,047
Decrease in accrued liabilities (10,653) (4,638)
Decrease (increase) in other 2,624 (1,029)
-------- --------
Net cash flows provided by operating activities 16,304 4,114
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (213) (308)
Increase in marketable securities (9,517) 0
Investments in affiliates (2,742) (500)
Decrease in restricted cash 3,793 15,032
-------- --------
Net cash flows provided by (used in) investing activities (8,679) 14,224
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 600 67,750
Repayments of debt (17,535) (51,622)
Increase in deferred financing costs 0 (2,584)
Common stock dividends paid (5,000) (4,759)
-------- --------
Net cash flows provided by (used in) financing activities (21,935) 8,785
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (14,310) 27,123
CASH AND CASH EQUIVALENTS, beginning of period 62,596 33,351
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 48,286 $ 60,474
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated 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 unaudited consolidated condensed financial statements
include the accounts of Cogentrix Energy, Inc. and its subsidiary companies
(collectively, the "Company") 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, 1997 and for the three months
ended September 30, 1997 and 1996 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, 1997, the results of operations for the three months
ended September 30, 1997 and 1996, and cash flows for the three months ended
September 30, 1997 and 1996. The results of operations for these interim periods
are not necessarily indicative of results which may be expected for any other
interim period or for the fiscal year as a whole.
The accompanying unaudited consolidated condensed financial statements
have been prepared pursuant to the rules and regulations of the United States
Securities and Exchange Commission. 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 unaudited consolidated condensed financial statements
be read in conjunction with the audited consolidated financial statements and
the notes thereto included in the Company's most recent Annual Report on Form
10-K, which was filed with the United States Securities and Exchange Commission
on September 29, 1997.
2. PENDING CLAIMS AND LITIGATION
Effective September 1996, the Company amended the power sales
agreements on its Elizabethtown, Lumberton, Kenansville, Roxboro, and Southport
facilities. Under the amended terms of these power sales agreements, the
purchasing utility has exercised its right of economic dispatch resulting in
significant reductions in fuel requirements at each of these facilities. In
response to this reduction in fuel requirements, one of the coal suppliers for
these facilities initiated an arbitration proceeding and another initiated a
litigation proceeding against certain subsidiaries of the Company. The
arbitration proceeding was completed in October, 1997. The decision of the
arbitration panel was issued in favor of the Company's subsidiary and denied any
recovery to the coal supplier. The Company intends to vigorously defend itself
in the remaining litigation proceeding. The Company has maintained reserves
which management believes to be adequate to cover any costs resulting from this
matter. Management believes that the resolution of this matter will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
6
<PAGE> 7
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 6 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
The Company acquires, develops, owns and operates power generation
facilities and sells electricity and steam in the United States. The Company
owns or has interests in 11 power generation facilities having an aggregate
capacity of 1,120 megawatts. 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
development activities, ash disposal and environmental consulting services. Each
of the Company's facilities relies on a power sales agreement with a single
customer for the majority of its revenues over the life of the power sales
agreement. During the fiscal quarter ended September 30, 1997, two regulated
utilities, Carolina Power & Light Company ("CP&L") and Virginia Electric and
Power Company ("Virginia Power"), accounted for approximately 87% of the
Company's consolidated revenues.
Nine of the eleven cogeneration facilities in which the Company has an
interest are wholly owned by the Company. The Company has only a 50% ownership
interest in the Hopewell and Birchwood facilities. The Company's consolidated
financial statements include the accounts of the Hopewell facility over which
the Company has effective control of the management through majority
representation on the board of directors of the managing general partner. The
"minority interest in income of joint venture" on the Company's consolidated
statements of income reflects the interest of the Company's joint venture
partner in the income of the Hopewell facility. The Company accounts for its
investment in the Birchwood facility, which is operated by a subsidiary of the
Company's joint venture partner, under the equity method.
Effective in September 1996, the Company amended the power sales
agreements with 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. 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. The amended power sales
agreements are structured so that the Company continues to receive capacity
payments during any period of economic dispatch, which cover project debt
service, fixed operating costs and constitute a substantial portion of the
profit component of the power sales agreements. Energy payments, which are
reduced (or possibly 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 has been a significant reduction in the Company's electric revenues,
which has been offset by reduced fuel costs and operations and maintenance
expense at these facilities. In response to the reduction in fuel requirements
at these five facilities resulting from the exercise by CP&L of its economic
dispatch rights, certain of the Company's coal suppliers for these facilities
instituted various legal proceedings against the Company seeking to recover
damages. (See Part II: Other Information -- Item 1. "Legal Proceedings.")
7
<PAGE> 8
In future years, the Company's revenues will or could be impacted by
one or more of the following events and uncertainties. First, the Company is
engaged in ongoing negotiations with Virginia Power regarding the restructuring
of the power sales agreements with respect to the Company's cogeneration
facilities located in that utility's service area. These negotiations could
result in amendments to the Company's power sales agreements for these
facilities granting Virginia Power additional dispatch rights for certain
facilities, which, if exercised, would lead to a reduction in the Company's
electric revenues from these facilities. Second, certain of the Company's power
sales agreements either terminate in years 2000 through 2002 or provide that the
rates for energy paid under such agreements after 2002 will be the rates then
specified in the applicable avoided cost schedule published by the Virginia
State Corporation Commission. The rates specified in the current edition of the
applicable avoided cost schedule are significantly lower than the rates
currently being paid by Virginia Power for energy under the contracts. And
third, the Company is likely to develop future projects with one or more
partners as opposed to developing them on its own, in which event the Company's
ownership percentage will potentially be less than 51%. Any such jointly
developed projects would likely be accounted for under the equity method with
the Company recognizing only equity in net income of the project based on its
ownership percentage. Many of these same events and uncertainties, if they
occur, will also result in a corresponding decrease in the Company's operating
expenses.
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 may have an effect on financial results. In addition, power
sales agreements at eight 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.
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.
In 1996, the Company began making investments in partnerships formed to
develop, construct and operate greenhouses to produce tomatoes. Two of these
partnerships are operating greenhouses with a combined total of 50 acres of
production capacity. Two additional partnerships in which the Company has
invested are constructing greenhouses, with a combined total of 57 acres of
production capacity. The Company has a 50% interest in each of these
partnerships and accounts for these investments under the equity method.
8
<PAGE> 9
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------
1997 1996
---------------------- ---------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C>
Total operating revenues $ 91,135 100% $ 99,122 100%
Operating costs 47,895 53 62,403 63
General, administrative and development 8,139 9 7,985 8
Depreciation and amortization 10,238 11 9,285 9
--------- ------ --------- ------
Operating income $ 24,863 27% $ 19,449 20%
========= ====== ========= ======
Megawatt hours sold 887,926 1,265,473
========= =========
</TABLE>
Total operating revenues decreased 8.1% to $91.1 million for the first
quarter of fiscal 1998 as compared to $99.1 million for the first quarter of
fiscal 1997. This decrease was primarily attributable to the significant
decrease in electric revenues resulting from economic dispatch of and
consequently reduced energy payments from the Elizabethtown, Lumberton,
Kenansville, Roxboro, and Southport facilities. The decrease in operating
revenues was also due to a decrease in steam revenues at the Hopewell and
Southport facilities resulting from a decrease in demand for steam by the
facilities' steam hosts. These decreases in operating revenues were partially
offset by a $1.6 million increase in electric revenues at the Hopewell, Rocky
Mount, Richmond, and Ringgold facilities due to an increase in on-peak megawatt
hours provided to the purchasing utility, as well as escalation/inflation
adjustment provisions in certain power sales agreements and an increase in
revenue from third-party ash disposal activity.
Operating costs decreased 23.2% to $47.9 million for the first quarter
of fiscal 1998 as compared to $62.4 million for the first quarter of fiscal
1997. This decrease resulted primarily from the significant decrease in
operating expenses at the Elizabethtown, Lumberton, Kenansville, Roxboro, and
Southport facilities resulting from their economic dispatch by CP&L. The
decrease in operating expense was also due to reductions in maintenance costs at
the Hopewell and Rocky Mount facilities, at which facilities the Company
performed routine maintenance during the first quarter of fiscal 1997. The
decrease in operating costs was also related to transaction costs incurred in
connection with project debt refinancings completed during the first quarter of
fiscal 1997, and severance costs incurred by the Elizabethtown, Lumberton,
Kenansville, Roxboro, and Southport facilities in the first quarter of fiscal
1997 associated with the reduction of the workforce at those facilities. The
decreases in operating costs were partially offset by a $1.0 million increase in
operating costs related to an increase in third-party ash disposal activity.
General, administrative and development expenses increased 1.9% to $8.1
million for the first quarter of fiscal 1998 as compared to $8.0 million for the
first quarter of fiscal 1997. General, administrative and development expenses
were relatively stable with the exception of severance costs incurred in the
first quarter of fiscal 1998 related to the reduction of the workforce at the
corporate office and a decrease in incentive compensation expense in the first
quarter of fiscal 1998 as compared to the first quarter of fiscal 1997.
During fiscal 1997, the Company undertook an analysis of the
post-contract operating environment for all of its operating facilities in light
of the dramatic market changes taking place in the power generation industry. As
part of this analysis the Company reviewed the depreciable lives of its
operating facilities and concluded that, effective January 1, 1997, the
Elizabethtown, Lumberton, Kenansville, Roxboro, and Southport facilities would
be depreciated over the remaining terms of these facilities' power sales
agreements. The 10.3% increase in depreciation and amortization expense in the
first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997
related primarily to this change in the estimated useful lives of these
facilities.
Interest expense decreased 6.0% to $13.2 million for the first quarter
of fiscal 1998 as compared to $14.1 million for the first quarter of fiscal
1997. The decrease in interest expense was primarily attributable to a decrease
in the weighted average debt outstanding from $727 million in the first quarter
of fiscal 1997 to $683 million in the first quarter of fiscal 1998. The decrease
in weighted average debt outstanding related to scheduled maturities of the
Company's project financing debt.
9
<PAGE> 10
In aggregate, equity in net loss of affiliates did not change
materially in the first quarter of 1998 as compared to the first quarter of
1997. Decreases in equity in net loss of affiliates for the first quarter of
fiscal 1998 as compared to the same period of fiscal 1997 related primarily to
earnings generated by the Company's investment in the Birchwood facility, which
commenced commercial operations in November 1996, and a reduction in development
costs associated with the termination in December 1996 of funding for a
partnership pursuing development opportunities in Latin America. Increases in
equity in net loss of affiliates for the first quarter of fiscal 1998 as
compared to the same period of fiscal 1997 related primarily to losses generated
by the Company's investments in greenhouse facilities in Texas and Pennsylvania,
which commenced commercial operations in October 1996 and April 1997,
respectively, and equity in net income of affiliates recognized in the first
quarter of fiscal 1997 related to the Company's investment in Bolivian Power
Company Limited, which was sold in December 1996.
The increase in minority interest in income of joint venture for the
first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997
related to an increase in the net income of the Hopewell facility. The increase
in net income of the Hopewell facility resulted primarily from a reduction of
maintenance costs incurred at the Hopewell facility in the first quarter of
fiscal 1998 as compared to the first quarter of fiscal 1997, a reduction of
interest expense related to a decrease in the amount of project debt outstanding
and the expiration of an interest rate swap agreement in July 1997, and
transaction costs incurred in connection with the refinancing of Hopewell's
project debt in the first quarter of fiscal 1997.
The extraordinary loss on early extinguishment of debt in the first
quarter of fiscal 1997 related 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.
LIQUIDITY AND CAPITAL RESOURCES
The principal components of operating cash flow for the three months
ended September 30, 1997 were generated by net income of $7.0 million, increases
due to adjustments for depreciation and amortization of $10.2 million, deferred
income taxes of $2.1 million, minority interest in income of joint venture of
$1.4 million, and equity in net loss of unconsolidated affiliates of $0.2
million, which were partially offset by a net $4.6 million use of cash
reflecting changes in other working capital assets and liabilities. Cash flow
provided by operating activities of $16.3 million, proceeds from borrowings of
$0.6 million, and $18.0 million of cash escrows released were primarily used to
purchase property, plant and equipment additions of $0.2 million, to purchase
marketable securities of $9.5 million, to make an investment in a greenhouse
facility of $2.7 million, to repay project finance borrowings of $17.5 million
and to pay a dividend to common shareholders of $5.0 million.
Historically, the Company has financed each facility primarily under
financing arrangements and related documents which generally require the
extensions of credit to be repaid solely from the project's revenues and provide
that the repayment of the extensions of credit (and interest thereon) is secured
solely by the physical assets, agreements, cash flow and, in certain cases, the
capital stock of that project subsidiary. This type of financing is generally
referred to as "project financing." The project financing debt of the Company's
subsidiaries (aggregating $574.8 million as of September 30, 1997) is
substantially non-recourse to the Company and its other project subsidiaries,
except in connection with certain transactions where Cogentrix Energy, Inc. or
Cogentrix, Inc. has agreed to certain limited guarantees and other obligations
with respect to such projects. These limited guarantees and other obligations
include (i) an agreement for the benefit of the Roxboro and Southport project
lenders to fund cash deficits the project may experience as a result of
incurring certain costs, subject to a cap of $11.3 million, (ii) guarantees to
fund a reserve account in connection with the financing of a project subsidiary
in an aggregate amount of up to approximately $4.0 million and (iii) guarantees
of obligations and liabilities of the Company's ReUse subsidiary limited in an
aggregate amount of up to $2.5 million. In addition, Cogentrix has guaranteed
certain project subsidiaries' obligations to the utility under power sales
agreements and obligations of up to $1.5 million of ReUse under an ash disposal
agreement with an unrelated third party. Because certain of these limited
guarantees and other obligations do not by their terms stipulate a maximum
dollar amount of liability, the aggregate amount of the Company's potential
exposure under these guarantees cannot be quantified. The aggregate contractual
liability of the Company to its subsidiaries' project lenders is, in each case,
a small portion of the aggregate project debt. If,
10
<PAGE> 11
however, the Company were required to satisfy all these guarantees and other
obligations or even one or more of the significant ones, such event could have a
material adverse impact on the Company's financial condition.
As of September 30, 1997, the Company had long-term debt (including the
current portion thereof) of approximately $674.8 million. With the exception of
the Company's $100 million of Senior Notes issued in March, 1994, substantially
all of such indebtedness is project financing debt. Future annual maturities of
long-term debt range from $62.4 million to $90.4 million in the five-year period
ending June 30, 2002. The Company believes that its project subsidiaries will
generate sufficient cash flow 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 Cogentrix
Energy, Inc. to pay all required debt service on the Senior Notes, 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 May 1997, the Company entered into a credit agreement with Australia
and New Zealand Banking Group Limited, as Agent, which provides for a $50
million revolving credit facility (the "Credit Facility") with a term of three
years (the "Revolving Term"). The Credit Facility provides for one-year
extensions of the Revolving Term, subject to lender consent. The Company can
utilize the Credit Facility in the form of direct advances or the issuance of
unsecured letters of credit. The outstanding balance of the Credit Facility at
the end of the Revolving Term is payable over two years in four equal semiannual
repayments of direct advances or collateralization of letters of credit. As of
September 30, 1997, the Company had no advances or letters of credit outstanding
under the Credit Facility.
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, the project entity.
The ability of the Company's project subsidiaries to 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 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 has been 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 of the Clark facility and
received a development fee of $5 million in October 1995. The Company
anticipates that construction on the Clark facility will be completed in late
calendar 1997. Upon commencing commercial operations, CVC will operate and
maintain the Clark facility pursuant to a two-year operations and maintenance
agreement.
11
<PAGE> 12
In July 1995, the Company executed a joint development agreement with a
subsidiary of China Light & Power Company, Limited ("CLP") 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 expects to secure one or more other 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 $60 to
$65 million for the purpose of making its equity investment in the India
project. The Company expects to fund this equity commitment from corporate cash
balances.
In September 1997, the Company's board of directors declared a $5.0
million dividend for the fiscal year ended June 30, 1997 payable to the common
shareholders of the Company, which was paid in September 1997. 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. While the dividend declared
for fiscal 1997 represents a departure from the policy due to non-recurring
items, the board of directors intends to adhere to the policy in future years.
Under the terms of the Indenture for the Senior Notes and the Credit Facility,
the Company's ability to pay dividends and make other distributions to the
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 general economic conditions, and tend to fluctuate significantly. Through
various hedging mechanisms, the Company has attempted to mitigate the impact of
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 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, 1997, approximately 86.5% of the Company's project financing debt
was hedged, with 30.0% being hedged with interest rate caps which were above the
prevailing market rate at September 30, 1997 and therefore subject to interest
rate volatility.
Although hedged to a significant extent, the Company's financial
results will likely be affected to some degree by fluctuations in energy prices,
interest rates and inflation. The effectiveness of the hedging techniques
implemented by the Company is dependent, in part, on each counterparty's ability
to perform in accordance with the provisions of the relevant contracts. The
Company has sought to reduce the risk by entering into contracts with
creditworthy organizations.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Under the amended terms of the power sales agreements for the
Elizabethtown, Lumberton and Kenansville facilities (the "ELK 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 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 Cogentrix Eastern Carolina Corporation
("CECC"), the Company's subsidiary operating the ELK facilities, will purchase,
and James River will provide, all of CECC's coal requirements through the end of
the contract term. In November 1996, James River and its affiliate instituted an
action against CECC 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 CECC intends to seek to
enforce with respect to these claims.
In October 1996, Coastal Coal Sales, Inc. ("Coastal"), the coal
supplier to the Southport facility under a similar requirements contract,
initiated an arbitration proceeding against Cogentrix of North Carolina, Inc.
("CNC"), the Company's subsidiary operating the Roxboro and Southport
facilities, through the American Arbitration Association in Charlotte, North
Carolina. The notice of arbitration alleged 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. The arbitration panel was
selected and the proceedings were conducted September 30 - October 3, 1997. On
October 22, 1997, the decision of the arbitration panel was issued in favor of
CNC and denied any recovery to Coastal.
The Company's management believes that there is no basis for the James
River claim and intends to defend the lawsuit vigorously. The Company has
established reserves which management believes will be adequate to cover any
costs resulting from this matter. In the opinion of management, the ultimate
outcome of the litigation, or any arbitration proceeding relating to the James
River claim, will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
In addition, the Company experiences routine litigation in the normal
course of business. Management is of the opinion that none of this routine
litigation will have a material adverse effect on the consolidated financial
position or results of operations of the Company.
ITEM 5. OTHER INFORMATION
CHANGE OF CORPORATE FISCAL YEAR
On September 18, 1997, the Company's board of directors authorized
management to take the necessary actions and secure the required approvals to
change the fiscal year end of the Company from June 30 to December 31, effective
December 31, 1997. Management believes it is preferable for the Company to
report on a calendar year basis for reasons including, but not limited to, the
following: (1) the majority of corporations (the Company's peer group) in the
independent power industry report on a calendar year basis, (2) the majority of
the Company's joint ventures formed with third parties report on a calendar year
basis, and (3) a calendar year reporting period more closely approximates the
Company's business cycle under its long-term contracts.
13
<PAGE> 14
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 U.S. Securities and Exchange
Commission for information only and is not filed
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter covered
by this report.
----------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGENTRIX ENERGY, INC.
(Registrant)
November 14, 1997 /s/ JAMES R. PAGANO
--------------------------
James R. Pagano
Group Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
November 14, 1997 /s/ THOMAS F. SCHWARTZ
----------------------------
Thomas F. Schwartz
Vice President - Finance
Treasurer
(Principal Accounting Officer)
14
<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, 1997 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-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 95,381
<SECURITIES> 27,095
<RECEIVABLES> 52,349
<ALLOWANCES> 0
<INVENTORY> 15,304
<CURRENT-ASSETS> 5,767
<PP&E> 684,003
<DEPRECIATION> 179,022
<TOTAL-ASSETS> 835,994
<CURRENT-LIABILITIES> 101,461
<BONDS> 613,004
0
0
<COMMON> 130
<OTHER-SE> 56,597
<TOTAL-LIABILITY-AND-EQUITY> 835,994
<SALES> 88,407
<TOTAL-REVENUES> 92,862
<CGS> 66,272
<TOTAL-COSTS> 66,272
<OTHER-EXPENSES> 1,364
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,235
<INCOME-PRETAX> 11,991
<INCOME-TAX> 4,973
<INCOME-CONTINUING> 7,018
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<NET-INCOME> 7,018
<EPS-PRIMARY> 24.89
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