<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 1999
REGISTRATION NO. 333-67171
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COGENTRIX ENERGY, INC.
(Name of registrant as specified in its charter)
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<S> <C> <C>
NORTH CAROLINA 4911, 4961 56-1853081
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
9405 ARROWPOINT BOULEVARD
CHARLOTTE, NORTH CAROLINA 28273-8110
(704) 525-3800
(Address and telephone number of principal executive offices)
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THOMAS F. SCHWARTZ
SENIOR VICE PRESIDENT -- FINANCE AND TREASURER
9405 ARROWPOINT BOULEVARD
CHARLOTTE, NORTH CAROLINA 28273-8110
(704) 525-3800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
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DUMONT CLARKE IV, ESQ. JERRY THOMAS, ESQ.
MOORE & VAN ALLEN, PLLC SIMPSON THACHER & BARTLETT
NATIONSBANK CORPORATE CENTER 425 LEXINGTON AVENUE
100 NORTH TRYON STREET, FLOOR 47 NEW YORK, N.Y. 10017
CHARLOTTE, NC 28202-4003
</TABLE>
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COGENTRIX DELAWARE HOLDINGS, INC.
(Name of co-registrant as specified in its charter)
(See table on next page for additional information about co-registrant.)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.75% Senior Notes due 2008.............. $255,000,000 100% $255,000,000(1) $70,890(2)
Subsidiary Guarantee..................... -- -- -- -- (3)
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(1) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended, the
registration fee has been estimated based on the book value of the
securities to be received by the registrant in exchange for the securities
to be issued hereunder in the exchange offer described herein.
(2) Previously paid.
(3) Pursuant to Rule 457(n) of the Securities Act of 1933, as amended, no
registration fee is payable with respect to this security.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
TABLE OF ADDITIONAL INFORMATION ON CO-REGISTRANT
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Primary Standard
Jurisdiction of Industrial
Incorporation or Classification I.R.S. Employer
Name Organization Code Number Identification No.
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<S> <C> <C> <C>
COGENTRIX DELAWARE HOLDINGS, INC. DELAWARE 4911, 4961 51-0352024
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</TABLE>
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED MARCH 15, 1999
P R O S P E C T U S
(COGENTRIX LOGO)
COGENTRIX ENERGY, INC.
EXCHANGE OFFER FOR
$255,000,000 OUTSTANDING 8.75% SENIOR NOTES DUE 2008
TERMS OF THE EXCHANGE OFFER
- Expires at 5:00 p.m., New York City time on ____________, 1999, unless
extended.
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
- Tenders of outstanding notes may be withdrawn any time prior to the
expiration of the exchange offer.
- Not subject to any condition, other than that the exchange offer not
violate applicable law or any applicable interpretation of the staff of
the Securities and Exchange Commission.
- There will be no proceeds from the exchange offer.
- The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes.
- The terms of the notes to be issued in exchange for the outstanding notes
are substantially identical to the terms of the outstanding notes, except
for the transfer restrictions and registration rights relating to the
outstanding notes.
- There is no existing market for the exchange notes, and we do not intend
to apply for their listing on any securities exchange.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF RISK FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES IN THE
EXCHANGE OFFER.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
The date of this prospectus is March , 1999.
<PAGE> 4
---------------------
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS PROSPECTUS. THOSE DOCUMENTS, WHICH CONTAIN IMPORTANT
BUSINESS AND FINANCIAL INFORMATION ABOUT US, ARE AVAILABLE UPON REQUEST WITHOUT
CHARGE FROM COGENTRIX ENERGY, INC., 9405 ARROWPOINT BOULEVARD, CHARLOTTE, NORTH
CAROLINA 28273, TELEPHONE NUMBER (704) 525-3800. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY MARCH , 1999.
---------------------
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PAGE
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Prospectus Summary.................... 1
Summary Consolidated Historical and
Unaudited Pro Forma Financial
Information......................... 10
Risk Factors.......................... 11
Capitalization........................ 18
Use of Proceeds....................... 19
The Exchange Offer.................... 20
Selected Consolidated Historical
Financial Information............... 28
Unaudited Pro Forma Consolidated
Financial Data...................... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 40
Business.............................. 56
Trends Affecting the Domestic
Electric Generating Industry and
Our Business..................... 56
Our Development and Acquisition
Strategy......................... 57
Our Recent Acquisitions of Interests
in Electric Generating Plants.... 58
Project Agreements, Financing and
Operating Arrangements for Our
Facilities Owned Before the
Bechtel Acquisition.............. 59
Facility Under Construction in
Batesville, Mississippi.......... 61
Description of Facilities In
Operation Before the Bechtel
Acquisition...................... 62
The October 1998 Bechtel
Acquisition...................... 67
</TABLE>
<TABLE>
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PAGE
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Principal Customers................. 71
Regulation.......................... 71
Employees........................... 77
Properties.......................... 77
Legal Proceedings................... 77
Management............................ 79
Principal Stockholders................ 85
Transactions with Related Parties..... 85
Description of Exchange Notes......... 86
Description of Non-Operating
Subsidiary Guarantee................ 118
Description of Cogentrix Energy's
Other Material Indebtedness......... 119
Material Federal Income Tax
Considerations...................... 121
Plan of Distribution.................. 124
Legal Matters......................... 124
Experts............................... 124
Where You Can Find More Information... 126
Incorporation of Previously Filed
Documents by Reference.............. 126
Index to Cogentrix Energy, Inc. and
Subsidiary Companies Consolidated
Financial Statements................ F-1
Index to Cogentrix Delaware Holdings,
Inc. and Subsidiary Companies
Consolidated Financial Statements... F-33
Index to Historical Financial
Statements of Recent Acquisitions... F-63
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i
<PAGE> 5
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes a description of the terms of the notes we are offering in
exchange for outstanding notes, as well as information regarding our business
and detailed financial data. We encourage you to read the entire prospectus.
References in this prospectus to "we," "us," "our" or "Cogentrix" refer to
the combined business of Cogentrix Energy, Inc. and its subsidiaries, including
subsidiaries that hold investments in other corporations or partnerships whose
financial results are not consolidated with ours. The term "Cogentrix Energy"
refers only to Cogentrix Energy, Inc., which is a development and management
company that conducts its business primarily through subsidiaries. Cogentrix
Energy is the issuer of, and, with the exception of one, non-operating
subsidiary that has guaranteed all of its existing and future unsecured senior
debt, the only obligated corporation on, the outstanding notes and the notes we
are offering in exchange for the outstanding notes. The subsidiaries of
Cogentrix Energy that are engaged in the ownership and operation of electric
generating facilities are sometimes referred to in this prospectus individually
as a "project subsidiary" or collectively as "project subsidiaries."
THE EXCHANGE OFFER
On October 20, and November 25, 1998 Cogentrix Energy privately placed a
total of $255 million of 8.75% Senior Notes due 2008. Simultaneously with their
private placement, Cogentrix Energy entered into registration agreements with
the initial purchasers of the outstanding notes. Under these registration
agreements, Cogentrix Energy must deliver this prospectus and complete this
exchange offer for the outstanding notes on or before April 18, 1999. If this
exchange offer does not take place on or before April 18, 1999, Cogentrix Energy
must pay additional interest to the holders of the outstanding notes until this
exchange offer is completed.
You may exchange in this exchange offer the outstanding notes you currently
hold for notes issued by Cogentrix Energy with substantially the same terms.
Before deciding to tender your outstanding notes, you should read the discussion
in this prospectus summary that begins on page 7 under the heading "Summary of
Terms of the Exchange Notes" and in the back of this prospectus under the
heading "Description of the Exchange Notes."
We believe that you may resell the exchange notes you will receive without
complying with the registration and prospectus delivery provisions of the
Securities Act, if the conditions that are described in detail later in this
prospectus are met. You should read the discussion in this prospectus summary
that begins on page 4 under the heading "Summary of the Exchange Offer" and on
page 20 of this prospectus under the heading "The Exchange Offer" for further
information regarding those conditions and resales of the exchange notes.
USE OF PROCEEDS OF THE OUTSTANDING NOTES
We sold the outstanding notes primarily to finance our acquisition of
ownership interests in 12 electric generating plants and a natural gas pipeline
from Bechtel Generating Company, Inc. on October 20, 1998. The net proceeds we
received from the sale of the outstanding notes were $250.5 million, after we
deducted the discount to the initial purchasers and estimated expenses of the
offering. These proceeds were used to fund the purchase price of the Bechtel
Acquisition and related acquisition costs, pay settlement costs for an interest
rate hedge agreement related to the offering and repay outstanding debt under a
subsidiary's revolving credit facility.
OVERVIEW OF COGENTRIX
Cogentrix is an independent power producer that acquires, develops, owns
and operates electric generating plants, principally in the United States. We
derive most of our revenue from the sale of electricity,
<PAGE> 6
but we also produce and sell steam. We sell the electricity we generate,
principally under long-term power purchase agreements, to regulated electric
utilities. We sell the steam we produce to industrial customers with
manufacturing or other facilities located near our electric generating plants.
We were one of the early participants in the market for electric power generated
by independent power producers that developed as a result of energy legislation
the United States Congress enacted in 1978. We believe we are one of the larger
independent power producers in the United States based on our total project
megawatts in operation.
OUR ELECTRIC GENERATING PLANTS
We currently own -- entirely or in part -- a total of 25 electric
generating plants in the United States. Our 25 plants are designed to operate at
a total production capability of approximately 4,030 megawatts. After taking
into account our part interests in the 16 plants that are not wholly-owned by
us, which range from 3.3% to approximately 74%, our net equity interest in the
total production capability of our 25 electric generating plants is
approximately 1,690 megawatts. We developed, constructed and currently operate
10 of our plants, which, with one exception, are located in either North
Carolina or Virginia.
When our plant currently under construction in Batesville, Mississippi
begins operation, we will have ownership interests in a total of 26 domestic
electric generating plants that are designed with a total production capability
of 4,800 megawatts. Our net equity interest in the total production capability
of those 26 facilities will be approximately 2,110 megawatts.
PROJECT FINANCING ARRANGEMENTS FOR OUR ELECTRIC GENERATING PLANTS
The costs of developing and constructing all of our plants were financed
through non-recourse loans that are required to be repaid solely from the
plant's revenues. In the event of default under these loans, the remedies of the
lender, with minor exceptions, are limited to recovery of the collateral for the
loan. The lender to a particular partnership or subsidiary is generally
prohibited from getting a judgment or seeking other recourse against any of our
other subsidiaries or Cogentrix Energy for any deficiency left when the
collateral is sold to satisfy the debt. The collateral for these loans
principally consists of the generating plant and our interest in the land on
which the plant is located, together with an assignment of the contracts that
the subsidiary has in place to sell the electricity and steam the plant produces
and to purchase fuel. Under some of these project financing arrangements, we
have also been required to secure the repayment of the loan and the payment of
interest by pledging the capital stock of or partnership interests in the
subsidiary or partnership that owns the project.
COMPETITIVE WEAKNESSES AND RISKS
We discuss in this prospectus, particularly in the "Risk Factors" section,
our competitive weaknesses and the numerous uncertainties and contingencies
beyond our control that affect our business, including the following:
- our substantial leverage, which could adversely affect our financial
health and prevent us from fulfilling our obligations under the exchange
notes
- our dependence on our utility customers whose failure to fulfill their
contractual obligations to make payments to us for a prolonged period of
time could, depending upon the customer and the size of the facilities
affected, result in a reduction of our anticipated cash flow and threaten
our ability to service our debt
2
<PAGE> 7
- risks associated with our power sales agreements that contain provisions
that permit the utility customer to terminate the agreement or change the
amount of the payments upon the occurrence of an event such as the
failure to demonstrate specified operating and reliability standards, and
- the strong and increasing competition in the electric generating industry
for the development of new facilities and the acquisition of electric
generating assets
You should carefully consider the information in the "Risk Factors" section
of this prospectus as well as the other information and data included in this
prospectus before deciding whether to participate in the exchange offer.
3
<PAGE> 8
SUMMARY OF THE EXCHANGE OFFER
Registration Agreements.... We sold the outstanding notes on October 20, 1998
to three initial purchasers -- Salomon Smith Barney
Inc., Goldman, Sachs & Co. and CIBC Oppenheimer
Corp., and on November 25, 1998 to Salomon Smith
Barney Inc. The initial purchasers then sold the
outstanding notes to qualified institutional
buyers, as defined in Rule 144A of the Securities
Act. Simultaneously with the initial sales of the
outstanding notes, we entered into two registration
agreements, each of which provides for the exchange
offer.
You may exchange your outstanding notes for
exchange notes, which have substantially identical
terms. This exchange offer satisfies your rights
under the registration agreements. After this
exchange offer is over, you will not be entitled to
any exchange or registration rights with respect to
your outstanding notes.
The Exchange Offer......... We are offering to exchange $255.0 million total
principal amount of 8.75% Senior Notes due 2008 of
Cogentrix Energy, which have been registered under
the Securities Act, for your outstanding 8.75%
Senior Notes due 2008, which have not been
registered under the Securities Act and are subject
to restrictions on their transfer. To exchange your
outstanding notes, you must properly tender them,
and we must accept them. We will exchange all
outstanding notes that you validly tender and do
not validly withdraw. We will issue registered
exchange notes at or promptly after the end of the
exchange offer.
Resales.................... We believe that you may offer for resale, resell
and otherwise transfer the exchange notes without
complying with the registration and prospectus
delivery requirements of the Securities Act if:
- you acquire the exchange notes in the ordinary
course of your business;
- you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate,
in the distribution of the exchange notes; and
- you are not an affiliate of Cogentrix Energy,
as defined in Rule 405 of the Securities Act.
If any of these conditions is not satisfied and you
transfer any exchange note without delivering a
proper prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act. We do not assume or
indemnify you against that possible liability.
Each broker-dealer acquiring exchange notes for its
own account in exchange for outstanding notes that
it acquired through market-making or other trading
activities must acknowledge that it will deliver a
proper prospectus when any exchange notes are
transferred. A broker-dealer may use this
prospectus for an offer to resell, a resale or
other retransfer of the exchange notes.
Expiration Date............ The exchange offer expires at 5:00 p.m., New York
City time, , 1999, unless we extend the
expiration date. We will not extend the expiration
date more than 15 days.
4
<PAGE> 9
Conditions to the Exchange
Offer...................... The exchange offer is not subject to any condition
other than that the exchange offer not violate
applicable law or any applicable interpretation of
the staff of the Securities and Exchange
Commission.
Procedures For Tendering
Outstanding Notes........ Cogentrix Energy issued the outstanding notes as
global securities. When the outstanding notes were
issued, Cogentrix Energy deposited them with First
Union National Bank, as book-entry depositary.
First Union National Bank issued a certificateless
depositary interest in each note, which represents
a 100% interest in the notes, to DTC. Beneficial
interests in the outstanding notes, which are held
by direct or indirect participants in DTC through
the certificateless depositary interest, are shown
on records maintained in book-entry form by DTC.
If you wish to tender your outstanding notes for
exchange, you must transmit to First Union National
Bank, as exchange agent, on or prior to the
expiration date:
either
- a properly completed and duly executed letter
of transmittal, which accompanies this
prospectus, or a facsimile of the letter of
transmittal, including all other documents
required by the letter of transmittal, to the
exchange agent at the address set forth on the
cover page of the letter of transmittal; or
- a computer-generated message transmitted by
means of DTC's Automated Tender Offer Program
system and received by the exchange agent and
forming a part of a confirmation of book-entry
transfer in which you acknowledge and agree to
be bound by the terms of the letter of
transmittal;
and, either
- a timely confirmation of book-entry transfer of
your outstanding notes into the exchange
agent's account at DTC, pursuant to the
procedure for book-entry transfers described in
this prospectus under the heading "The Exchange
Offer -- Procedures for Tendering," must be
received by the exchange agent on or prior to
the expiration date; or
- the documents necessary for compliance with the
guaranteed delivery procedures described in
this prospectus under the heading "The Exchange
Offer -- Procedures for Tendering."
Do not send letters of transmittal and certificates
representing outstanding notes to Cogentrix Energy.
Send these documents only to the exchange agent.
See "The Exchange Offer -- Exchange Agent" for more
information.
Special Procedures for
Beneficial Owners.......... If you are a beneficial owner whose outstanding
notes are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and wish to tender your outstanding notes
in the exchange offer please contact the registered
holder as soon as possible and instruct that holder
to tender on your behalf.
5
<PAGE> 10
Withdrawal Rights.......... You may withdraw the tender of your outstanding
notes any time before 5:00 p.m. New York City time
on , 1999, unless we extend the
expiration date.
Federal Income Tax
Considerations........... The exchange of your outstanding notes is not a
taxable exchange for United States federal income
tax purposes. You will not recognize any taxable
gain or loss or any interest income as a result of
the exchange. For additional information regarding
federal income tax considerations you should read
the discussion under the heading "Material Federal
Income Tax Consequences."
Use of Proceeds............ We will not receive any proceeds from the issuance
of the exchange notes, and we will pay the expenses
of the exchange offer.
Exchange Agent............. First Union National Bank is serving as the
exchange agent in the exchange offer. The exchange
agent's address, and telephone and facsimile
numbers are listed in the section of this
prospectus entitled "The Exchange Offer -- Exchange
Agent" and in the letter of transmittal.
6
<PAGE> 11
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes, except that the exchange notes will be registered
under the Securities Act. As a result, the exchange notes will not bear a legend
restricting their transfer and will not have the registration rights contained
in the outstanding notes. The exchange notes represent the same debt as the
outstanding notes. Both the outstanding notes and the exchange notes are
governed by the same indenture.
Securities Offered......... $255,000,000 principal amount of 8.75% Senior Notes
due 2008.
Maturity Date.............. October 15, 2008.
Interest Payment Dates..... April 15 and October 15 of each year, commencing
April 15, 1999.
Guarantee by Non-operating
Subsidiary............... Cogentrix Delaware Holdings, Inc., a wholly-owned
subsidiary of Cogentrix Energy, has guaranteed all
of the existing and future senior, unsecured
outstanding indebtedness for borrowed money of
Cogentrix Energy, including the outstanding notes
and the exchange notes. If we cannot make payments
on any of our senior, unsecured outstanding
indebtedness when due, whether at the stated
maturity, by acceleration or otherwise, Cogentrix
Delaware Holdings must make them instead.
You should note, however, that this subsidiary
guarantee is not full and unconditional because it:
- does not apply unless the subsidiary has
more than $150,000 of assets
- may be waived or modified at any time by the
subsidiary and the agent bank for Cogentrix
Energy's corporate credit facility without
your consent or the consent of the trustee
under the indenture for the exchange notes
- terminates before the maturity date of the
exchange notes.
You should read "Risk Factors -- Risk Related to
Termination of Guarantee of Exchange Notes by
Non-operating Subsidiary of Cogentrix Energy" and
"Description of Non-operating Subsidiary Guarantee"
for more information about this subsidiary
guarantee.
Ranking.................... The exchange notes:
- are general, unsecured obligations of
Cogentrix Energy.
- rank equally in right of payment with all
existing and future unsecured senior debt of
Cogentrix Energy.
- will effectively rank subordinate to any
secured debt Cogentrix Energy is permitted
by the terms of the indenture to, and does,
issue.
7
<PAGE> 12
The guarantee:
- is a general, unsecured obligation of
Cogentrix Delaware Holdings
- ranks equally in right of payment with all
existing and future unsecured senior debt of
Cogentrix Delaware Holdings
- will effectively rank subordinate in right
of payment to any secured debt Cogentrix
Delaware Holdings issues in the future.
Assuming Cogentrix Energy had completed the
offering of the outstanding notes on September 30,
1998 and applied the proceeds as it subsequently
did, Cogentrix Energy would have had approximately
$405 million of unsecured senior debt outstanding
on that date, including letters of credit
outstanding under its corporate credit facility. On
the same date, Cogentrix Delaware Holdings would
have had no unsecured senior debt outstanding. On
the same date Cogentrix Energy and Cogentrix
Delaware Holdings would have had no secured debt
outstanding.
Subordination Risk related
to our Holding Company
Structure................ Cogentrix Energy is a holding company whose ability
to pay principal of, premium, if any, and interest
on the exchange notes will be dependent upon the
receipt of sufficient funds from its current and
future consolidated project subsidiaries and other
businesses in which it has investments but whose
results of operations are not consolidated with
Cogentrix Energy's. Their ability to distribute
funds to Cogentrix Energy in the form of dividends,
management fees, principal, interest, loans or
otherwise is restricted by the terms of their
existing project financing arrangements. Our right
to receive any assets of any of our project
subsidiaries upon liquidation or reorganization,
and the consequent right of the holders of the
exchange notes to participate in the distribution
of, or to realize proceeds from, those assets will
be effectively subordinated to the claims of the
creditors of our project subsidiaries. This same
subordination risk applies to our investments in
other businesses, which we refer to as our
"unconsolidated affiliates," whose debt is not
included on our balance sheet. As of September 30,
1998, our project subsidiaries had approximately
$938 million of outstanding non-recourse
indebtedness. As of the same date, on a pro forma
basis giving effect to our recent acquisitions, our
proportionate share, which corresponds to our
ownership percentage, of the outstanding
indebtedness of our affiliates whose debt is not
included on our balance sheet was approximately
$770 million. You should read "Risk
Factors -- Subordination Risk Related to Holding
Company Structure" and "Description of Exchange
Notes" for more information about this risk.
Optional Redemption........ The exchange notes will be redeemable, at our
option, in whole or in part, at any time or from
time to time. They are redeemable at the redemption
prices described in this prospectus under the
heading "Description of Exchange Notes -- Optional
Redemption," plus accrued and unpaid interest, if
any, to the date of redemption.
Change of Control.......... Upon a change of control of Cogentrix Energy, you
shall have the right to require Cogentrix Energy to
repurchase your exchange notes at a repurchase
price equal to 101% of the principal amount of the
exchange notes, plus accrued interest, if any, to
the date of repurchase. For more
8
<PAGE> 13
information about this right and the definition of
change in control, you should read "Description of
Exchange Notes -- Important Negative
Covenants -- Repurchase of Exchange Notes Upon a
Change of Control" and "Risk Factors -- Substantial
Leverage."
Negative Covenants......... The indenture under which the outstanding notes
have been, and the exchange notes are being issued,
contains covenants for your benefit which, among
other things and subject to exceptions that are
described in detail later in this prospectus,
restrict our ability to:
- incur additional debt,
- pay dividends and make other distributions,
- make investments,
- create encumbrances to secure debt,
- engage in transactions with affiliates,
- dispose of assets or
- merge or consolidate with or into, or sell
or otherwise transfer our properties and
assets as an entirety to, another entity.
For more information about these negative
covenants, you should read "Description of Exchange
Notes."
Change in Covenants When
the Exchange Notes Are
Rated Investment Grade... Following the first date upon which the exchange
notes are rated investment grade by two
nationally-recognized credit rating agencies, and
provided that no default exists under the indenture
on such date, some of the negative covenants
contained in the indenture will no longer apply to
the exchange notes. The negative covenants
regarding restrictions on transactions with
affiliates, limitations on liens and restrictions
on mergers, consolidations and sales of assets
will, however, remain in effect and a new covenant
restricting sale/leaseback transactions will then
apply. If, after the exchange notes are rated
investment grade, a default occurs, or the exchange
notes shall again be rated less than investment
grade, the negative covenants contained in the
indenture at the time of issuance of the exchange
notes that cease to apply after the exchange notes
are rated investment grade will not be reinstated.
For more information, you should read "Description
of Exchange Notes -- Change in Covenants When
Exchange Notes are Rated Investment Grade."
Form of Exchange Notes..... The notes issued in the exchange offer will be
represented by one permanent global note in
definitive, fully registered form deposited with
First Union National Bank, as custodian, for the
benefit of DTC. You will not receive notes in
registered form unless one of the events described
under the heading "Description of Exchange
Notes -- Book-Entry; Delivery and Form" occurs.
Instead, beneficial interests in the exchange notes
issued in the exchange offer will be shown on, and
transfers of these will be effected only through,
records maintained in book-entry form by DTC with
respect to its participants.
9
<PAGE> 14
SUMMARY CONSOLIDATED HISTORICAL AND UNAUDITED PRO FORMA
FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
The following tables present summary consolidated historical and unaudited
pro forma financial information of Cogentrix for the periods indicated. The
summary consolidated historical financial information was derived from our
consolidated financial statements included elsewhere in this prospectus. The
summary pro forma consolidated financial information was derived from the
unaudited pro forma consolidated financial information and gives effect to the
Whitewater/Cottage Grove Acquisition and the Bechtel Acquisition as described
under "Unaudited Pro Forma Consolidated Financial Data," as if both had occurred
on July 1, 1996. The information presented below should be read in conjunction
with "Selected Consolidated Historical Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
our consolidated financial statements and related notes, included elsewhere in
this prospectus. Effective January 1, 1998, we changed our fiscal year to
commence on January 1 and conclude on December 31. Our fiscal year previously
commenced each July 1, concluding on June 30 of the following year.
<TABLE>
<CAPTION>
SIX-MONTH NINE-MONTH PERIODS PRO FORMA PRO FORMA
PERIOD ENDED FISCAL YEAR SIX-MONTH
FISCAL YEARS ENDED JUNE 30, ENDED SEPTEMBER 30, ENDED PERIOD ENDED
------------------------------ DECEMBER 31, ------------------- JUNE 30, DECEMBER 31,
1995 1996 1997 1997 1997 1998 1997 1997
-------- -------- -------- ------------ -------- -------- ----------- ------------
(UNAUDITED)
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating revenue... $385,102 $410,546 $352,806 $177,946 $263,187 $317,528 $370,123 $208,605
Total operating
expenses................. 303,147 313,407 349,546 132,338 207,123 200,586 350,463 146,778
Operating income.......... 81,955 97,139 3,260 45,608 56,066 116,942 19,660 61,827
Interest expense.......... (59,621) (58,354) (56,328) (25,680) (41,419) (51,993) (81,808) (45,217)
Income (loss) before
income taxes............. 34,510 39,756 (44,710) 20,176 17,852 57,076 (59,048) 14,332
Net income (loss)......... 21,173 23,795 (28,301) 10,703 11,096 34,702 (36,325) 8,673
Ratio of earnings to fixed
charges (unaudited)(1)... 1.6x 1.7x .3x 1.7x 1.4x 2.0x .3x 1.3x
OTHER DATA (UNAUDITED)(2):
Parent EBITDA............. 31,068 34,271 59,854 35,388 11,680 30,441 62,235 45,815
Parent Fixed Charges...... 8,530 8,472 8,222 4,203 6,167 6,423 28,490 14,260
Parent EBITDA/Parent Fixed
Charges.................. 3.6x 4.0x 7.3x 8.4x 1.9x 4.7x 2.2x 3.2x
<CAPTION>
PRO FORMA
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
-------------
<S> <C>
STATEMENT OF OPERATIONS
DATA:
Total operating revenue... $350,147
Total operating
expenses................. 212,160
Operating income.......... 137,987
Interest expense.......... (74,644)
Income (loss) before
income taxes............. 54,294
Net income (loss)......... 33,033
Ratio of earnings to fixed
charges (unaudited)(1)... 1.7x
OTHER DATA (UNAUDITED)(2):
Parent EBITDA............. 42,130
Parent Fixed Charges...... 21,508
Parent EBITDA/Parent Fixed
Charges.................. 2.0x
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF AS OF SEPTEMBER 30, 1998
------------------------------ DECEMBER 31, -------------------------
1995 1996 1997 1997 ACTUAL PRO FORMA
-------- -------- -------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities...................... $ 41,540 $ 33,351 $ 84,090 $113,951 $ 29,638 $ 29,718
Total assets........................................ 930,733 921,641 859,828 822,974 1,307,270 1,519,972
Project financing debt(3)........................... 661,891 616,588 591,694 567,705 938,262 938,262
Parent debt(4)...................................... 100,000 100,000 100,000 100,000 100,000 355,000
Total shareholders' equity.......................... 63,618 83,010 49,709 58,298 92,231 92,231
</TABLE>
- ---------------
(1) For purposes of this ratio, earnings include income before income taxes and
cumulative effect of change in accounting principle and fixed charges
excluding capitalized interest. Fixed charges include interest, whether
capitalized or expensed, amortization of deferred financing costs and the
interest element of rentals.
(2) Parent EBITDA represents cash flow to Cogentrix Energy prior to debt service
and income taxes of Cogentrix Energy. Parent Fixed Charges include cash
payments made by Cogentrix Energy related to outstanding indebtedness of
Cogentrix Energy and the cost of funds associated with Cogentrix Energy's
guarantees of some of its subsidiaries' indebtedness. The calculation of pro
forma Parent Fixed Charges includes estimated interest expense on the notes,
net of the estimated interest income on the net proceeds of the sale of
notes in excess of (i) the purchase price of the Bechtel Acquisition and
related transaction costs, (ii) issuance costs associated with the sale of
notes and (iii) the settlement costs on an interest rate hedge agreement
related to the sale of notes. Parent EBITDA is not presented here as a
measure of operating results. Our management believes Parent EBITDA is a
useful measure of Cogentrix Energy's ability to service debt. Parent EBITDA
should not be construed as an alternative either (i) to operating income
(determined in accordance with generally accepted accounting principles) or
(ii) to cash flows from operating activities (determined in accordance with
generally accepted accounting principles).
(3) Project financing debt with respect to each of our facilities is
non-recourse to Cogentrix Energy and its other project subsidiaries. For a
discussion of the term "non-recourse," see "Prospectus Summary -- Project
Financing Arrangements for Our Electric Generating Plants."
(4) Parent debt represents obligations of Cogentrix Energy only and does not
include non-recourse obligations of its project subsidiaries.
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<PAGE> 15
RISK FACTORS
A holder of outstanding notes should carefully consider all of the information
contained in this prospectus before deciding whether to accept the exchange
offer and, in particular, the following factors:
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL INDEBTEDNESS MAKES US VULNERABLE TO
CHANGES IN ECONOMIC AND INDUSTRY CONDITIONS AND COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
EXCHANGE NOTES.
The following chart presents important financial information concerning our
total consolidated indebtedness as of September 30, 1998. The information is
presented assuming we had completed our recent acquisition of assets from
Bechtel Generating Company Inc. and the offering of the outstanding notes as of
September 30, 1998 and had applied the proceeds of the outstanding notes as
described under "Prospectus Summary -- Use of Proceeds of the Outstanding
Notes."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
----------------------
<S> <C>
Total consolidated indebtedness............................. $ 1.3 billion
Total consolidated assets................................... 1.5 billion
Total shareholders' equity.................................. 92.2 million
Ratio of total debt to total capitalization................. 93.3%
</TABLE>
Cogentrix is highly leveraged as a result of the outstanding indebtedness
of Cogentrix Energy and the debt incurred by its project subsidiaries to finance
the development and construction of electric generating facilities. With minor
exceptions, however, the debt incurred by our subsidiaries to finance the
development and construction of our electric generating plants limits the
remedies of the creditors to recovery of the collateral for the loan. The amount
of our project subsidiaries' debt at September 30, 1998 was $938 million. The
lenders are generally prohibited from getting a judgment or seeking other
recourse against Cogentrix Energy and its other project subsidiaries, except
when Cogentrix Energy has agreed to limited guarantees and other obligations
with respect to a project.
These limited guarantees and other obligations, which were given in
connection with the refinancing of project subsidiaries' debt facilities,
aggregate approximately $51.9 million. In addition, Cogentrix Energy's indirect
subsidiary, Cogentrix, Inc., which does not own a generating plant but has
subsidiaries which do, has guaranteed two project subsidiaries' obligations to
the purchasing utility. The aggregate amount of Cogentrix, Inc.'s potential
exposure under its guarantees of these project subsidiaries' obligations cannot
be quantified because the amount, if any, of their obligations will be
determined based on future events and there is no dollar limit on the amount of
their obligations. For more information about these guarantees, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Our substantial indebtedness could have important consequences to you. For
example, it could:
- make it more difficult for us to satisfy our obligations with respect to
the exchange notes;
- increase our vulnerability to general adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, reducing the availability of
our cash flow to fund working capital, capital expenditures and other
general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a competitive disadvantage compared to our competitors that
have less debt and
- limit, along with the financial and other restrictive covenants in our
indentures and credit agreement, among other things, our ability to
borrow additional funds.
The indenture under which the outstanding notes were, and the exchange
notes will be, issued permits Cogentrix Energy to issue additional unsecured
senior debt that will rank equal in right of payment to the
11
<PAGE> 16
exchange notes. With limited exceptions, the indenture restricts Cogentrix
Energy's ability to issue debt which is secured, directly or indirectly, by a
lien on any of its property unless the exchange notes are also secured by those
assets. See "Description of Exchange Notes -- Important Negative Covenants."
CHANGE OF CONTROL REPURCHASE RISK -- WE MAY NOT HAVE SUFFICIENT FUNDS TO
REPURCHASE THE NOTES UPON A CHANGE OF CONTROL.
The indenture under which the outstanding notes were issued, and the
exchange notes will be issued, contains provisions that require Cogentrix
Energy, in the event of a change in the control of Cogentrix Energy, to
repurchase any exchange notes that holders desire to have repurchased. Cogentrix
Energy may not have the financial resources necessary to purchase the exchange
notes upon a change of control. See "Description of Exchange Notes -- Important
Negative Covenants -- Repurchase of Exchange Notes Upon a Change of Control."
SUBORDINATION RISK RELATED TO OUR HOLDING COMPANY STRUCTURE -- YOUR RIGHT TO
RECEIVE PAYMENTS ON THE EXCHANGE NOTES COULD BE ADVERSELY AFFECTED IF ANY OF OUR
PROJECT SUBSIDIARIES OR UNCONSOLIDATED AFFILIATES ARE UNABLE TO PAY FUNDS TO
COGENTRIX ENERGY OR DECLARE BANKRUPTCY, LIQUIDATE OR REORGANIZE.
Cogentrix Energy is a development and management company that conducts its
business primarily through its project subsidiaries and other subsidiaries that
hold investments in "unconsolidated affiliates," which are corporations,
partnerships or limited liability companies that own electric generating plants
in which we have less than a majority interest. Our ability to pay principal of,
premium, if any, and interest on the exchange notes is dependent upon the cash
flow of our project subsidiaries and unconsolidated affiliates and the receipt
of sufficient funds from them in the form of dividends, fees, interest, loans or
otherwise. The project finance agreements that our project subsidiaries and our
unconsolidated affiliates currently have in place restrict their ability to make
distributions to Cogentrix Energy. These restrictions generally require that,
prior to the payment of dividends, distributions or other transfers, the
subsidiary or unconsolidated affiliate must provide for the payment of its other
obligations, including operating expenses, debt service and reserves, and must
meet specified debt service coverage ratios.
Our project subsidiaries and unconsolidated affiliates are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due on the exchange notes or to make any funds available to us to
pay our debt service. Any right of Cogentrix Energy to receive any assets of any
of its project subsidiaries or unconsolidated affiliates upon liquidation or
reorganization, and the consequent right of the holders of the exchange notes to
participate in the distribution of, or to realize proceeds from, those assets,
will be effectively subordinated to the claims of the project subsidiaries' or
unconsolidated affiliates' creditors.
As of September 30, 1998, approximately $938 million of indebtedness of our
project subsidiaries would be effectively senior to the exchange notes.
Substantially all of this indebtedness represents non-recourse project financing
secured by the assets of these project subsidiaries. In addition, all of the
indebtedness of our unconsolidated affiliates will be effectively senior to the
exchange notes. Substantially all of this indebtedness also represents
non-recourse project financing secured by the assets of our unconsolidated
affiliates. As of September 30, 1998, on a pro forma basis giving effect to an
acquisition that occurred after that date, our proportionate share, which
corresponds to our ownership percentage, of the outstanding indebtedness of our
unconsolidated affiliates was approximately $770 million. See "Description of
Exchange Notes."
RISK RELATED TO TERMINATION OF GUARANTEE OF EXCHANGE NOTES GIVEN BY
NON-OPERATING SUBSIDIARY OF COGENTRIX ENERGY -- THIS GUARANTEE TERMINATES PRIOR
TO THE MATURITY OF THE EXCHANGE NOTES BY ITS TERMS AND MAY BE CHANGED AT ANY
TIME WITHOUT YOUR CONSENT. THEREFORE, YOU SHOULD NOT RELY UPON THIS GUARANTEE
FOR REPAYMENT OF THE EXCHANGE NOTES.
One of our two, non-operating, direct subsidiaries, Cogentrix Delaware
Holdings has guaranteed all of Cogentrix Energy's existing and future unsecured
debt for borrowed money. This guarantee was given by
12
<PAGE> 17
Cogentrix Delaware Holdings to the lenders under Cogentrix Energy's corporate
credit facility. The guarantee expressly extends, however, to all holders of
senior unsecured outstanding indebtedness of Cogentrix Energy, including the
outstanding notes and the exchange notes. We did this to insure that the claims
of our bank lenders would not effectively rank senior as a result of the
guarantee to the claims of the holders of the outstanding notes and the exchange
notes.
The guarantee provides, however, that the terms or provisions of the
guarantee may be waived, amended, supplemented or otherwise modified at any time
and from time to time by Cogentrix Delaware Holdings and the agent bank for the
lenders under the credit agreement. The guarantee further provides that any
waiver, amendment, supplement or modification shall be effective against the
holders of the exchange notes, notwithstanding any reliance by the holders of
the exchange notes or any of them on the guarantee prior to the waiver,
amendment, supplement or modification.
Because this guarantee can by its express terms be waived, amended,
supplemented or modified without your consent, and because this guarantee is not
incorporated in the indenture under which Cogentrix Energy issued the
outstanding notes and will issue the exchange notes, you should not rely upon
its continuing existence as a source of payment for Cogentrix Energy's
obligations, under either the outstanding notes or the exchange notes. You
should also note that unless the term of the credit agreement is extended or any
letters of credit issued by the banks remain outstanding, this guarantee
terminates when the credit agreement for the corporate credit facility
terminates in 2001, approximately seven years before the maturity date of the
outstanding notes and the exchange notes.
DEPENDENCE ON OUR UTILITY CUSTOMERS -- THE FAILURE OF A UTILITY CUSTOMER TO MAKE
PAYMENTS UNDER A POWER SALES AGREEMENT FOR A PROLONGED PERIOD OF TIME COULD,
DEPENDING UPON THE CUSTOMER, MATERIALLY REDUCE OUR CASH FLOW AND CONSEQUENTLY
IMPACT OUR ABILITY TO SERVICE OUR DEBT.
Each of our operating facilities relies on a power sales agreement with a
single electric utility customer for the majority of its revenues over the life
of the power sales agreement. The failure of a utility customer to fulfill its
contractual obligations to us for a prolonged period of time could materially
reduce our cash flow and, as a result, weaken our financial position and our
ability to service our debt.
RISKS ASSOCIATED WITH POWER SALES AGREEMENTS -- THE PROVISIONS OF THE POWER
SALES AGREEMENTS AT SOME OF OUR FACILITIES PERMIT THE UTILITY CUSTOMER TO
TERMINATE THE AGREEMENT OR CHANGE THE AMOUNT OF THE PAYMENTS UPON THE OCCURRENCE
OF CONTRACTUALLY SPECIFIED EVENTS.
Power sales agreements of some of our project subsidiaries and
unconsolidated affiliates permit the purchasing utility to terminate the
agreement or change the payments if the facility does not demonstrate
contractually specified operating and reliability standards. Some agreements
also permit the utility to reduce future payments or recover from the project
subsidiary or unconsolidated affiliate payments previously made if a state
utility commission prohibits the utility from recovering from its customers
payments made under the power sales agreement. Some of our power sales
agreements that contain these provisions also provide that the utility will
continue to pay the contract rates at least through the term of the related
project financing debt. Thereafter, the project subsidiary or unconsolidated
affiliate recognizes a reduction in payments received under the power sales
agreement to the extent necessary to repay, or is required to repay, to the
utility the amount of the accrued liability with interest. See
"Business -- Project Agreements, Financing and Operating Arrangements for Our
Facilities Owned Before the Bechtel Acquisition."
In the event a termination or modification of any of our power sales
agreements occurred, the affected project subsidiary or unconsolidated affiliate
would likely generate reduced revenues or no revenues, possibly triggering
default provisions in its financing agreements. These events might allow the
affected lenders to accelerate the debt and could result in Cogentrix Energy not
receiving any cash flow from that project subsidiary or unconsolidated
affiliate, which could threaten our ability to service our debt.
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<PAGE> 18
GOVERNMENT REGULATION -- WE OPERATE OUR BUSINESS IN AN INDUSTRY THAT IS SUBJECT
TO EXTENSIVE GOVERNMENT REGULATION; CHANGES IN THE REGULATORY ENVIRONMENT,
PARTICULARLY CHANGES RELATING TO EMISSIONS CONTROLS, DISPOSAL OF COAL ASH AND
EXEMPTIONS FROM REGULATION AS A UTILITY OR PUBLIC UTILITY HOLDING COMPANY, COULD
INCREASE OUR COSTS OF DOING BUSINESS AND REDUCE CASH FLOW AVAILABLE FOR DEBT
SERVICE.
Emissions Regulations -- Costs of compliance with stricter emission regulations
could have a material adverse impact upon our business.
The Clean Air Act Amendments of 1990 require states to impose permit fees
on emissions, and Congress may consider proposals to further restrict or tax
emissions. These proposals, if adopted, could impose additional costs on the
operation of our facilities and reduce the amount of funds available to our
subsidiaries to make distributions to Cogentrix Energy. This reduction in funds
available for distribution in turn could impair Cogentrix Energy's liability to
meet its debt service obligations on the exchange notes and its other
outstanding debt. See "Business -- Regulation -- Environmental
Regulations -- United States" and "-- International."
Environmental Regulations -- Changes in the laws governing disposal of coal ash
generated by our plants that use coal as their fuel to classify coal ash as a
hazardous waste could increase our costs and expose us to greater potential
liability for environmental remediation.
Project subsidiaries owning eight of our facilities contract with ReUse
Technology, Inc., a wholly-owned subsidiary of the Company operated as an
autonomous business unit, to remove coal ash generated by the coal-fired plants.
Coal ash is not currently subject to regulation as a hazardous waste under the
Resource Conservation and Recovery Act or the laws of the states where our
facilities are located. Any change in law subjecting coal ash to regulation as a
hazardous or other restricted waste could increase our costs of doing business
and could result in greater potential liability for costs associated with
remediating any adverse environmental effects of the disposal or use of coal
ash. This occurrence could reduce our cash flow and consequently impact our
ability to service our debt.
Energy Regulations -- Loss of the exemptions we currently enjoy from the
extensive regulation electric utilities and electric utility holding companies
are subject to could subject our business to increased federal and state
regulation and possibly result in the acceleration of some of our project
subsidiaries' debt and termination of their contracts.
The provisions of various laws and regulations, including the Public
Utility Regulatory Policies Act of 1978 and the Public Utility Holding Company
Act of 1935 apply to our cogenerating and small power production facilities. The
Public Utility Regulatory Policies Act of 1978 provides to qualifying facilities
exemptions from federal and state laws and regulations, including
organizational, rate and financial regulation exemptions. The Public Utility
Holding Company Act of 1935 regulates public utility holding companies and their
subsidiaries. We are not and will not be regulated as a holding company as long
as the power plants we own in whole or in part are qualifying facilities or
eligible facilities of exempt wholesale generators under the Public Utility
Holding Company Act of 1935.
Qualifying facility status is conditioned on meeting statutory criteria,
and would be jeopardized, for example, by the loss of a steam customer or
reduction of steam purchases below required amounts. If one of our qualifying
facilities that is not also an exempt wholesale generator were to lose its
status as a qualifying facility and we were not able to take prompt remedial
action to restore that status, the subsidiary operating the facility would lose
its exemptions, which could subject it to regulation and result in Cogentrix
Energy inadvertently becoming a public utility holding company. Our other
facilities could in turn lose their status as qualifying facilities and utility
customers of some of those facilities could elect to terminate their power sales
agreements. The lenders to the affected subsidiaries could also elect to
accelerate those project subsidiaries' debt which would materially reduce our
cash flow and consequently our ability to service our debt. See
"Business -- Regulation -- Energy Regulations."
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<PAGE> 19
ELECTRIC UTILITY INDUSTRY RESTRUCTURING PROPOSALS -- LEGISLATIVE PROPOSALS THAT
WOULD PERMIT UTILITY CUSTOMERS TO CHOOSE THEIR ELECTRIC ENERGY SUPPLIER AND
DEREGULATE ELECTRIC RATES ARE LIKELY TO LEAD IN THE FUTURE TO A MORE COMPETITIVE
AND RISKY MARKET FOR US AND OUR ELECTRIC UTILITY CUSTOMERS.
The Federal Energy Regulatory Commission and many state utility commissions
are currently studying or implementing a number of proposals that would
dramatically change the structure and method of operation of the electric
utility industry in the United States. Under most of these proposals utility
customers would be permitted to choose their electric energy supplier in a
competitive electric energy market. We cannot predict the final form or timing
of the proposed changes, but any changes that are adopted are likely to make the
market for independent energy producers like us more competitive and risky.
The Federal Energy Regulatory Commission issued a final rule in April 1996
which requires utilities to offer wholesale customers and suppliers open access
to utility transmission lines, on a comparable basis to the utilities' own use
of the lines. Many utilities have already filed "open access" tariffs in
response. The utilities contend that they should recover from departing
customers who choose another energy supplier their fixed costs that will be
"stranded" by the ability of their wholesale customers and perhaps eventually,
their retail customers, to choose new electric energy suppliers. The final rule
adopted by the Federal Energy Regulatory Commission endorses the recovery of
legitimate and verifiable "stranded costs." These may include the costs
utilities are required to pay under many power purchase agreements with
independent power producers like us which the utilities view as excessive when
compared with current market prices. Utilities are nonetheless seeking ways to
lower these contract prices or end the contracts altogether, out of concern that
their shareholders will be required to bear all or part of any "stranded" costs.
If any of our facilities from which we derive a substantial amount of our
revenue were to become the target of a purchasing utility's successful effort to
reduce its stranded cost, our revenue, profitability and ability to service our
debt could suffer.
GENERAL OPERATING RISKS -- OPERATING A POWER PLANT INVOLVES RISKS OF EQUIPMENT
FAILURE, FUEL INTERRUPTION AND OTHER OPERATING PROBLEMS THAT COULD RESULT IN
LOST REVENUES OR INCREASED EXPENSES AND THREATEN OUR ABILITY TO SERVICE OUR
DEBT.
The operation of a power plant involves many risks, including the breakdown
or failure of electric generating equipment or other equipment or processes,
fuel interruption, and performance below expected levels of output or
efficiency. While our facilities contain backup components for critical
equipment and we have obtained insurance to protect against operating risks,
that protection may not be adequate to cover lost revenues or increased
expenses, including higher maintenance costs. As a result, a facility may be
unable to perform under its power and steam sales agreements and may be unable
to fund principal and interest payments under its project financing agreements.
Further, each facility may depend on a single or limited number of vendors to
supply water, to supply coal or gas, to transport coal or gas or to wheel
electricity. The failure of a water supplier, coal or gas transporter to fulfill
its contractual obligations to us for a prolonged period of time could
jeopardize our ability to operate a facility, resulting in reduced cash flow and
threatening our ability to service our debt.
We operate 10 of our 25 facilities. With respect to the facilities we do
not operate, we are and will, unless we take over the operations ourselves,
continue to be exposed to the risk that the operator of the facility will fail
to perform, or will perform its duties inadequately, and the operations of the
facility will be adversely affected.
PROJECT DEVELOPMENT AND START-UP UNCERTAINTIES -- DEVELOPING NEW ELECTRIC
GENERATING PLANTS INVOLVES SIGNIFICANT RISKS THAT MAY DELAY COMMENCEMENT OF
COMMERCIAL OPERATION AND RECEIPT OF REVENUES NEEDED TO PAY DEBT SERVICE.
The projects that we develop are complex, and substantial risks affect
their completion schedule. There can be no assurance that we will be able to
obtain new power sales agreements, overcome any local opposition to the
development of new projects, obtain site agreements, fuel supply and ash
disposal agreements, construction contracts, steam sales agreements, licenses
and certifications, environmental and
15
<PAGE> 20
other permits and financing necessary for the successful development of new
projects. These risks may result in us abandoning projects after having incurred
significant project development expenses.
Construction Risks
The construction of an electric generating facility involves many risks,
including material and labor interruption, work stoppages, labor disputes,
weather interferences, unforeseen engineering, environmental and geological
problems and unanticipated cost overruns. There is a risk, that the costs of
delays will exceed negotiated limits on liquidated damages and insurance
coverage or that delays will be caused by events that are not within anyone's
control, as to which there may be no liquidated damages or insurance coverage.
Many power sales agreements permit the electric utility customer to terminate
the agreement in the event milestones, such as commencing commercial operation
of the project, are not met by specified dates.
Start-up Risks
The commencement of operation of a newly-constructed electric generating
plant involves many risks, including the breakdown or failure of equipment or
processes and performance below expected levels of output or efficiency. New
plants may employ recently developed and technologically complex equipment,
especially in the area of environmental emission control. The proceeds of
insurance, warranties or performance guarantees by contractors may not be
adequate to cover lost revenues or increased expenses. As a result, a project
subsidiary may be unable to fund principal and interest payments under its
project financing agreements and may operate at a loss. The project subsidiary
would, therefore, not be able to distribute any funds to Cogentrix Energy to pay
its debt service until its operations generated cash flow available to be
distributed to Cogentrix Energy.
COMPETITION -- THE MARKET FOR DEVELOPMENT OF NEW ELECTRIC GENERATING PLANTS IN
THE UNITED STATES AND FOR ACQUISITION OF EXISTING ELECTRIC GENERATING PLANTS IS
EXTREMELY COMPETITIVE.
There are numerous strong and capable competitors in the electric
generating industry, both domestically and internationally, many of whom have
extensive and diversified developmental or operating experience and financial
resources similar to or greater than ours. In recent years the industry has been
characterized by strong and increasing competition with respect to both the
development of new facilities and the acquisition of existing electric
generating assets. This changing competitive environment includes a trend away
from negotiated transactions and toward competitive bidding. The intensifying
competition has contributed in many areas to a reduction in electricity prices.
Combined with the increasing competition among regulated electric utilities and
the many proposals that are being studied or implemented to deregulate the
electric industry, this reduction in electricity prices has put pressure on
electric utilities to lower their costs, including the cost of purchased
electricity from independent energy producers like us.
RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES -- ECONOMIC AND POLITICAL
CONDITIONS AND THE UNPREDICTABLE LEGAL ENVIRONMENT IN THE COUNTRIES WHERE WE ARE
OR COULD BE EXPLORING DEVELOPMENT OPPORTUNITIES PRESENT RISKS OF CONSTRUCTION
DELAYS, INTERRUPTION OF BUSINESS AND EXPROPRIATION THAT ARE GREATER THAN THOSE
IN THE UNITED STATES AND WHICH COULD REDUCE OUR CASH FLOWS, IMPACT OUR
PROFITABILITY AND IMPAIR OUR ABILITY TO SERVICE OUR DEBT.
The economic and political conditions in countries where we are or could be
exploring development opportunities present risks of construction delays,
interruption of business and expropriation that are greater than those in the
United States and which could reduce our cash flows and impair our ability to
service our debt. The uncertainty of the legal environment in foreign countries
in which we may develop or acquire projects could also impair our ability to
enforce our rights under agreements relating to those projects. Operations in
foreign countries also can present currency exchange, convertibility and
repatriation risks.
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<PAGE> 21
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES -- THERE IS NO EXISTING MARKET FOR
THE EXCHANGE NOTES AND WE DO NOT INTEND TO APPLY FOR THEIR LISTING ON ANY
NATIONAL SECURITIES EXCHANGE.
There has previously been no public market for the outstanding notes. The
exchange notes will constitute a new class of securities with no established
trading market. Although the exchange notes are expected to be eligible for
trading in the Private Offerings, Resales and Trading through Automatic Linkages
market, there can be no assurance as to the development of a market or liquidity
of any market that may develop for the exchange notes, the ability of holders of
the exchange notes to sell their exchange notes, or the price at which holders
would be able to sell their exchange notes. If the exchange notes are traded,
they may trade at a discount from their initial public offering price depending
upon prevailing interest rates, our operating results, the market for similar
securities and other factors. We do not intend to apply for listing of the
exchange notes on any securities exchange or the Nasdaq National Market.
CONSEQUENCES OF FAILURE TO EXCHANGE -- HOLDERS OF OUTSTANDING NOTES WHO DO NOT
PARTICIPATE IN THE EXCHANGE OFFER MAY NOT OFFER OR SELL THEM UNLESS AN EXEMPTION
FROM REGISTRATION IS AVAILABLE TO THEM AND THEY WILL NOT HAVE ANY REGISTRATION
RIGHTS.
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes pursuant to the exchange offer will continue to be bound by
the restrictions on transfer of their outstanding notes discussed in the legend
on the outstanding notes. Outstanding notes not exchanged will continue to
remain outstanding. In general, the outstanding notes may not be offered or sold
unless registered under the Securities Act, except under an exemption from, or
in a transaction not governed by, the Securities Act and applicable state
securities laws. Cogentrix Energy does not currently anticipate that it will
register the outstanding notes under the Securities Act.
As a result of the making of, and upon acceptance for exchange of all
validly tendered outstanding notes under the terms of, this exchange offer,
Cogentrix Energy will have fulfilled a promise contained in the registration
agreements. Cogentrix Energy will not have any obligation to conduct another
exchange offer for any untendered outstanding notes. Holders of outstanding
notes who do not tender their outstanding notes in the exchange offer will
continue to hold their outstanding notes and will be entitled to all the rights
and limitations they previously had, except for any rights they had under the
registration agreements that by their terms terminate or cease to have further
effectiveness as a result of the making of this exchange offer. The restrictions
on transfer included in the indenture under which the outstanding notes were
issued will continue to apply to all untendered outstanding notes. To the extent
that outstanding notes are tendered and accepted in the exchange offer, the
trading market for untendered outstanding notes could become unavailable.
17
<PAGE> 22
CAPITALIZATION
The following table presents as of September 30, 1998, the actual
consolidated capitalization of Cogentrix and the pro forma consolidated
capitalization of Cogentrix as adjusted to give effect to the subsequently
completed offering of the outstanding notes and the application of the net
proceeds. This table should be read in conjunction with "Unaudited Pro Forma
Consolidated Financial Data" and our consolidated financial statements and
related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
SHORT-TERM DEBT:
Current portion of non-recourse project financing debt.... $ 77,641 $ 77,641
---------- ----------
LONG-TERM DEBT:
Non-recourse project financing debt, net of current
portion................................................ 860,621 860,621
2004 senior notes......................................... 100,000 100,000
Corporate credit facility(1).............................. -- --
2008 senior notes......................................... -- 255,000
---------- ----------
Total long-term debt................................... 960,621 1,215,621
---------- ----------
Total indebtedness................................ 1,038,262 1,293,262
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding.................. 130 130
Accumulated earnings...................................... 92,101 92,101
---------- ----------
Total shareholders' equity............................. 92,231 92,231
---------- ----------
Total capitalization and long-term debt................... $1,130,493 $1,385,493
========== ==========
</TABLE>
- ---------------
(1) Cogentrix Energy has a credit agreement with Australia and New Zealand
Banking Group Limited, as agent for a group of lending banks. This corporate
credit facility provides for $125 million of revolving credit availability
in the form of direct advances or the issuance of letters of credit.
Subsequent to September 30, 1998, after repaying outstanding advances,
Cogentrix Energy used $60 million of the availability under this credit
facility to issue $6 million of letters of credit in connection with an
acquisition and to issue a $54 million letter of credit in connection with
its investment in the electric generating plant under construction in
Batesville, Mississippi. See "Business -- New Facility Under Construction in
Batesville, Mississippi." See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Cogentrix Energy's Other
Indebtedness -- Corporate Credit Facility."
18
<PAGE> 23
USE OF PROCEEDS
Cogentrix Energy will not receive any cash proceeds from the issuance of
the exchange notes. The outstanding notes surrendered in exchange for the
exchange notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the exchange notes will not result in any increase in the
indebtedness of Cogentrix Energy.
The proceeds we received from the sale of the outstanding notes were
approximately $255.8 million, consisting of the face amount of the notes of
$255.0 million and the net original issue premium of approximately $0.8 million.
We used the $255.8 million:
- to fund the discount to the initial purchasers and pay estimated
expenses, which in the aggregate were approximately $5.3 million;
- to fund the purchase price of the acquisition of our recent ownership
interests in 12 electric generating plants and a natural gas pipeline
from Bechtel Generating Company, Inc. and related acquisition costs,
which in the aggregate were approximately $189.9 million;
- to pay approximately $22.1 million of settlement costs for an interest
rate hedge agreement related to the offering of the outstanding notes and
- to repay approximately $38.5 million of outstanding debt under a project
subsidiary's revolving credit facility.
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<PAGE> 24
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
Simultaneously with the sale of the outstanding notes on October 20, 1998,
we entered into a registration agreement with the initial purchasers of the
outstanding notes -- Salomon Smith Barney, Inc., Goldman, Sachs & Co. and CIBC
Oppenheimer Corp., and, simultaneously with the sale of additional outstanding
notes on November 25, 1998, we entered into a similar registration agreement
with Salomon Smith Barney, Inc. as the initial purchaser of the outstanding
notes. Under these registration agreements, we agreed to file a registration
statement regarding the exchange of the outstanding notes for notes with terms
identical in all material respects. We also agreed to use our reasonable best
efforts to cause that registration statement to become effective with the
Securities and Exchange Commission. Copies of the registration agreements have
been filed as exhibits to the registration statement of which this prospectus is
a part.
We are conducting the exchange offer to satisfy our contractual obligations
under the registration agreements. The form and terms of the exchange notes are
the same as the form and terms of the outstanding notes, except that the
exchange notes will be registered under the Securities Act. The registration
agreements require, among other things, that we, at our cost, become obligated
to file a registration statement in connection with a registered exchange offer
within 90 days after the date on which the outstanding notes were first issued,
which was October 20, 1998, and use our best efforts to cause the registration
statement relating to such registered exchange offer to become effective within
150 days after October 20, 1998. When the registration statement is declared
effective, we will offer to the holders of the outstanding notes the opportunity
to exchange their outstanding notes for a like principal amount of exchange
notes and will keep the exchange offer open for not less than 30 days and not
more than 45 days after the date notice of the exchange offer is mailed to the
holders, unless applicable law requires the offer to remain open for a longer
period of time. The exchange offer is not extended to outstanding note holders
in any jurisdiction where the exchange offer does not comply with the securities
or blue sky laws of that jurisdiction.
In the event that applicable interpretations of the Staff of the Securities
and Exchange Commission do not permit us to conduct the exchange offer, or if
any holder of the outstanding notes notifies us that the holder is not eligible
to participate in, or would not receive freely tradeable exchange notes in
exchange for tendered outstanding notes in, the exchange offer, we will use our
best efforts to cause to become effective a shelf registration statement with
respect to the resale of the outstanding notes. We have also agreed to use our
best efforts to keep the shelf registration statement effective at least two
years after its date of effectiveness.
The term "holder" as used in this section of the prospectus entitled "The
Exchange Offer" means
(1) any person in whose name the outstanding notes are registered on our
books, or
(2) any other person who has obtained a properly completed bond power from
the registered holder, or
(3) any person whose outstanding notes are held of record by DTC and who
wants to deliver such outstanding notes by book-entry transfer at DTC.
TERMS OF THE EXCHANGE OFFER
We are offering to exchange up to $255,000,000 total principal amount of
exchange notes for a like total principal amount of outstanding notes. The
outstanding notes must be tendered properly on or before the expiration date and
not withdrawn. In exchange for outstanding notes properly tendered and accepted,
we will issue, a like total principal amount of up to $255,000,000 in exchange
notes.
20
<PAGE> 25
The exchange offer is not conditioned upon holders tendering minimum
principal amount of outstanding notes. As of the date of this prospectus,
$255,000,000 aggregate principal amount of notes are outstanding.
If you do not tender outstanding notes or tender outstanding notes that we
do not accept, your outstanding notes will remain outstanding. Any outstanding
notes will be entitled to the benefits of the indenture but will not be entitled
to any further registration rights under the registration agreements, except
under limited circumstances. You should read "Risk Factors -- Consequences of a
Failure to Exchange" for more information regarding notes outstanding after the
exchange offer.
After the expiration date, we will return to you, without cost, any
tendered outstanding notes that we did not accept for exchange.
Holders exchanging outstanding notes will not have to pay brokerage
commissions or fees or transfer taxes if they follow the instructions in the
Letter of Transmittal. We will pay the charges and expenses, other than the
transfer taxes described below, in the exchange offer. See "-- Fees and
Expenses" for further information regarding fees and expenses.
WE DO NOT RECOMMEND YOU TO TENDER OR NOT TENDER OUTSTANDING NOTES IN THE
EXCHANGE OFFER. IN ADDITION, WE HAVE NOT AUTHORIZED ANYONE TO MAKE ANY
RECOMMENDATION. YOU MUST DECIDE WHETHER TO TENDER IN THE EXCHANGE OFFER AND, IF
SO, THE AGGREGATE AMOUNT OF OUTSTANDING NOTES TO TENDER.
The expiration date is 5:00 p.m., New York City time, on , 1999
unless we extend the exchange offer.
We have the right, in accordance with applicable law, at any time:
- to delay the acceptance of the outstanding notes;
- to terminate the exchange offer if we determine that any of the
conditions to the exchange offer have not occurred or have not been
satisfied;
- to extend the expiration date of the exchange offer and keep all
outstanding notes tendered other than those outstanding notes properly
withdrawn; and
- to waive any condition or amend the terms of the exchange offer.
If we materially change the exchange offer, or if we waive a material
condition of the exchange offer, we will promptly file a post-effective
amendment to the registration statement disclosing the change or waiver. We also
will extend the exchange offer as required by Rule 14e-1 under the Exchange Act.
If we exercise any of the rights listed above, we will promptly give oral
or written notice of the action to the exchange agent and will issue a release
to an appropriate news agency, which is the only method of communication that we
are obligated to use. In the case of an extension, an announcement will be made
no later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration date.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
We will issue to the exchange agent exchange notes for outstanding notes
tendered and accepted and not withdrawn promptly after the expiration date. The
exchange agent might not deliver the exchange notes to all tendering holders at
the same time. The timing of delivery depends upon when the exchange agent
receives and processes the required documents.
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<PAGE> 26
We will be deemed to have exchanged outstanding notes validly tendered and
not withdrawn when we give oral or written notice to the exchange agent of our
acceptance. The exchange agent is our agent for receiving tenders of outstanding
notes, letters of transmittal and related documents. The exchange agent is also
your agent for receiving outstanding notes, letters of transmittal and related
documents and transmitting exchange notes to you who validly tender. If for any
reason, we
(1) delay the acceptance or exchange of any outstanding notes,
(2) extend the exchange offer or
(3) are unable to accept or exchange outstanding notes,
then the exchange agent may, on our behalf and subject to Rule 14e-1(c) under
the Exchange Act, retain tendered notes. Outstanding notes retained by the
exchange agent may not be withdrawn, except according to the withdrawal
procedures outlined in the section entitled "-- Withdrawal Rights" below.
In tendering outstanding notes, you must warrant in the letter of
transmittal or in an agent's message, meaning a message transmitted to the
exchange agent by DTC stating that you agree to be bound by the terms of the
letter of transmittal, that
- you have full power and authority to tender, exchange, sell, assign and
transfer outstanding notes,
- we will acquire good, marketable and unencumbered title to the tendered
outstanding notes, free and clear of all liens, restrictions, charges and
other encumbrances, and
- the outstanding notes tendered for exchange are not subject to any
adverse claims or proxies. You also must warrant and agree that you will,
upon request, execute and deliver any additional documents requested by
us or the exchange agent to complete the exchange, sale, assignment, and
transfer of the outstanding notes.
PROCEDURES FOR TENDERING
Valid Tender
You may tender your outstanding notes by book-entry transfer or by other
means. For book-entry transfer, you must deliver to the exchange agent either a
completed and signed letter of transmittal or an agent's message. You must
deliver your letter of transmittal or agent's message by mail, facsimile, hand
delivery or overnight carrier to the exchange agent on or before the expiration
date. In addition, to complete a book-entry transfer, you must also either have
DTC transfer the outstanding notes into the exchange agent's account at DTC
using DTC's Automated Tender Offer Program procedures for transfer, and obtain a
confirmation of such a transfer, or follow the guaranteed delivery procedures
described below under "-- Guaranteed Delivery."
If you tender fewer than all of your outstanding notes, you should fill in
the amount of notes tendered in the appropriate box on the letter of
transmittal. If you do not indicate the amount tendered in the appropriate box,
we will assume you are tendering all outstanding notes that you hold.
For tendering your outstanding notes other than by book-entry transfer, you
must deliver a completed and signed letter of transmittal to the exchange agent.
Again, you must deliver the letter of transmittal by mail, facsimile, hand
delivery or overnight carrier to the exchange agent on or before the expiration
date. In addition, to complete a valid tender you must either deliver your
outstanding notes to the exchange agent on or before the expiration date, or
follow the guaranteed delivery procedures set forth below under "-- Guaranteed
Delivery."
DELIVERY OF REQUIRED DOCUMENTS BY WHATEVER METHOD YOU CHOOSE IS AT YOUR
SOLE RISK. DELIVERY IS COMPLETE WHEN THE EXCHANGE AGENT ACTUALLY RECEIVES THE
ITEMS TO BE DELIVERED. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH DTC'S
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN
OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ENSURE TIMELY DELIVERY.
22
<PAGE> 27
Signature Guarantees
You do not need to endorse certificates for the outstanding notes or
provide signature guarantees on the letter of transmittal, unless
(1) someone other than the registered holder tenders the certificate or
(2) you complete the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" in the letter of transmittal.
In the case of (1) or (2) above, you must sign your outstanding note or
provide a properly executed bond power, with the signature on the bond power and
on the letter of transmittal guaranteed by a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as an eligible guarantor institution.
Eligible guarantor institutions include:
(1) a bank;
(2) a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer;
(3) a credit union;
(4) a national securities exchange, registered securities association or
clearing agency; or
(5) a savings association that is a participant in a securities transfer
association.
Guaranteed Delivery
If a holder wants to tender outstanding notes in the exchange offer and
- the certificates for the outstanding notes are not immediately available
or all required documents are unlikely to reach the exchange agent on or
before the expiration date or
- a book-entry transfer cannot be completed in time, the outstanding notes
may be tendered if the holder complies with the following guaranteed
delivery procedures:
(1) the tender is made by or through an eligible guarantor institution;
(2) you deliver a properly completed and signed notice of guaranteed
delivery, like the form provided with the letter of transmittal, to the
exchange agent on or before the expiration date; and
(3) you deliver the certificates or a confirmation of book-entry transfer
and a properly completed and signed letter of transmittal to the
exchange agent within three (3) New York Stock Exchange trading days
after the notice of guaranteed delivery is executed.
You may deliver the notice of guaranteed delivery by hand, facsimile or
mail to the exchange agent and must include a guarantee by an eligible guarantor
institution in the form described in the notice.
Our acceptance of properly tendered outstanding notes is a binding
agreement between you and us upon the terms and subject to the conditions of the
exchange offer.
Determination of Validity
We will resolve all questions regarding the form of documents, validity,
eligibility and acceptance for exchange of any tendered outstanding notes. Our
resolution of these questions as well as our interpretation of the terms and
conditions of the exchange offer, including the letter of transmittal, is final
and binding on all parties. A tender of outstanding notes is invalid until all
irregularities have been cured or waived. Neither we, any of our affiliates or
assigns, the exchange agent nor any other person is under any obligation to give
notice of any irregularities in tenders nor will we or they be liable for
failing to give any such notice. We reserve the absolute right, in our sole
discretion, to reject any tenders determined to be in improper form or unlawful.
We also reserve the absolute right to waive any of the conditions of the
exchange offer or any condition or irregularity in the tender of outstanding
notes by any holder. We need not waive similar conditions or irregularities in
the case of other holders.
23
<PAGE> 28
If any letter of transmittal, endorsement, bond power, power of attorney,
or any other document required by the letter of transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
that person must indicate that capacity when signing. In addition, unless we
give a waiver, the person must submit proper evidence satisfactory to us, in our
sole discretion, of his or her authority to so act.
A beneficial owner of outstanding notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian should contact that entity promptly if the beneficial owner wants to
participate in the exchange offer.
RESALES OF EXCHANGE NOTES
We are exchanging the outstanding notes for exchange notes based upon the
staff of the Securities and Exchange Commission's position set forth in
interpretive letters to third parties in other similar transactions. We will not
seek our own interpretive letter. As a result, we cannot assure you that the
staff will take the same position for this exchange offer as it did in
interpretive letters to other parties. Based on the staff's letters to other
parties, we believe that holders of exchange notes, other than broker-dealers,
can offer the notes for resale, resell and otherwise transfer the exchange notes
without delivering a prospectus to prospective purchasers. However, holders of
the outstanding notes who intend to participate in the exchange offer must
acquire the exchange notes in the ordinary course of business and have no
intention of engaging in a distribution of the exchange notes, as a
"distribution" is defined under the Securities Act.
Any holder of outstanding notes who is an "affiliate" of Cogentrix Energy
or who intends to distribute exchange notes, or any broker-dealer who purchased
outstanding notes directly from Cogentrix Energy or an "affiliate" of Cogentrix
Energy:
- cannot rely on the Staff's interpretations in the above mentioned
interpretive letters and
- must comply with the registration and prospectus delivery requirements of
the Securities Act to transfer the outstanding notes, unless the sale is
exempt.
In this situation, a broker-dealer must deliver a prospectus that contains
a plan of distribution that names the broker-dealer as a selling security holder
in connection with any resale of outstanding notes or exchange notes, unless the
resale is exempt under the Securities Act.
In addition, if any broker-dealer acquired outstanding notes for its own
account as a result of market-making or other trading activities and exchanges
the outstanding notes for exchange notes, the broker-dealer must deliver a
prospectus with any resales of the exchange notes.
If you want to exchange your outstanding notes for exchange notes, you will
be required to affirm that:
- you are not an "affiliate" of Cogentrix Energy;
- you are acquiring the exchange notes in the ordinary course of your
business;
- you have no arrangement or understanding with any person to participate
in a distribution of the exchange notes, as "distribution" is defined
under the Securities Act and
- you are not a broker-dealer, not engaged in, and do not intend to engage
in, a distribution of the exchange notes, as "distribution" is defined
under the Securities Act.
In addition, we may require you to provide information regarding the number
of "beneficial owners," within the meaning of Rule 13d-3 under the Exchange Act,
of the outstanding notes that are held in your name. Each broker-dealer that
receives exchange notes for its own account may be deemed to be an "underwriter"
under the Securities Act. These broker-dealers must also acknowledge that it
acquired the outstanding notes for its own account as the result of
market-making activities or other trading activities and agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of exchange notes. The letter of transmittal
indicates that by making this acknowledgment
24
<PAGE> 29
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" under the Securities Act. Based on the staff's position
enunciated in interpretive letters to other parties, we believe that
broker-dealers who acquired outstanding notes for their own accounts as a result
of market-making activities or other trading activities may fulfill their
prospectus delivery requirements with respect to the exchange notes with a
prospectus meeting the requirements of the Securities Act. Accordingly, a
broker-dealer may use this prospectus to satisfy such requirements. We have
agreed to allow a broker-dealer to use this prospectus, as it may be amended or
supplemented from time to time, for a period starting on the expiration date and
ending on the close of business on the first anniversary of the expiration date.
You should read "Plan of Distribution" for further information. A broker-dealer
intending to use this prospectus in the resale of exchange notes must notify us,
on or prior to the expiration date, that it intends to participate in the
exchange offer. This notice may be given in the letter of transmittal or may be
delivered to the exchange agent.
WITHDRAWAL RIGHTS
You can withdraw tenders of outstanding notes at any time on or before the
expiration date.
For a withdrawal to be effective, you must deliver a written, telegraphic,
telex or facsimile transmission of a notice of withdrawal to the exchange agent
on or before the expiration date. The notice of withdrawal must specify the name
of the person tendering the outstanding notes to be withdrawn, the total
principal amount of outstanding notes withdrawn, and the name of the registered
holder of the outstanding notes if different from the person tendering the
outstanding notes. If you delivered outstanding notes to the exchange agent, you
must submit the serial numbers of the outstanding notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an eligible
guarantor institution, except in the case of outstanding notes tendered for the
account of an eligible guarantor institution. If you tendered outstanding notes
as a book-entry transfer, the notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawal of outstanding
notes and you must deliver the notice of withdrawal to the exchange agent by
written, telegraphic, telex or facsimile transmission. You may not rescind
withdrawals of tender. Outstanding notes properly withdrawn may again be
tendered at any time on or before the expiration date.
We will determine all questions regarding the validity, form and
eligibility of withdrawal notices. Our determination will be final and binding
on all parties. Neither we, any of our affiliates or assigns, the exchange agent
nor any other person is under any obligation to give notice of any
irregularities in any notice of withdrawal, nor will we or they be liable for
failing to give any such notice. Withdrawn outstanding notes will be returned to
the holder after withdrawal, without cost to the holder.
INTEREST ON EXCHANGE NOTES
The exchange notes will bear interest at a rate of 8.75% per annum, payable
semi-annually, on April 15 and October 15 of each year, commencing April 15,
1999. Holders of exchange notes will receive interest on April 15, 1999 from the
date of initial issuance of the exchange notes, plus an amount equal to the
accrued interest on the outstanding notes. Interest on the outstanding notes
accepted for exchange will cease to accrue upon issuance of the exchange notes.
CONDITIONS TO THE EXCHANGE OFFER
We do not have to exchange any outstanding notes, may terminate the
exchange offer or may waive any conditions to the exchange offer or amend the
exchange offer, if any of the following conditions have occurred:
- the staff no longer allows the exchange notes to be offered for resale,
resold and otherwise transferred by any of the holders without compliance
with the registration and prospectus delivery provisions of the
Securities Act,
25
<PAGE> 30
- a governmental body passes any law, statute, rule or regulation which, in
our opinion, prohibits or prevents the exchange offer,
- the Securities and Exchange Commission or any state securities authority
issues a stop order suspending the effectiveness of the registration
statement or initiates or threatens to initiate a proceeding to suspend
the effectiveness of the registration statement, or
- we are unable to obtain any governmental approval that we believe is
necessary to complete the exchange offer.
If we reasonably believe that any of the above conditions has occurred, we
may
(1) terminate the exchange offer and return all tendered outstanding notes
to the tendering holders,
(2) waive any condition to the exchange offer,
(3) extend the expiration date of the exchange offer and keep all
outstanding notes tendered other than those outstanding notes properly
withdrawn or
(4) amend the terms of the exchange offer in any respect. If our waiver or
amendment materially changes the exchange offer, we will promptly file
a post-effective amendment to the registration statement, disclosing
the change or waiver. We also will extend the exchange offer as
required by Rule 14e-1 of the Exchange Act.
EXCHANGE AGENT
First Union National Bank has been appointed as exchange agent for the
exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or of the letter of
transmittal and requests for the notice of guaranteed delivery to the exchange
agent addressed as follows:
By Registered, Certified or Overnight Mail: Facsimile:
First Union National Bank 704-590-7628
Corporate Trust Reorganization
1525 West W.T. Harris Boulevard, 3C3
Charlotte, North Carolina 28288-1153
Attention: Mike Klotz
By Hand: Telephone Number:
First Union National Bank 704-590-7408
40 Broad Street
5th Floor, Suite 550
New York, New York 10004
IF YOU DELIVER LETTERS OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS TO
AN ADDRESS OR FACSIMILE NUMBER OTHER THAN THE THOSE LISTED ABOVE, YOUR TENDER IS
INVALID.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders for the exchange offer. We
will principally solicit tenders for the exchange offer by mail or overnight
courier, although our officers and regular employees may additionally solicit in
person by telephone or facsimile.
We have not retained any dealer-manager in connection with the exchange
offer and will not pay any brokers, dealers or other persons soliciting
acceptances of the exchange offer. We, however, will pay the exchange agent
reasonable and customary fees for its services and its reasonable out-of-pocket
expenses.
26
<PAGE> 31
We may also pay brokerage houses and other custodians, nominees and fiduciaries
their reasonable out-of-pocket expenses for sending copies of this prospectus,
letters of transmittal and related documents to holders of the outstanding
notes, and in handling or tendering outstanding notes for their customers.
We will pay the expenses for the exchange offer, including fees and
expenses of the exchange agent and trustee and accounting and legal fees and
expenses.
We will pay the transfer taxes for the exchange of the outstanding notes in
the exchange offer. If, however, exchange notes are delivered to or issued in
the name of a person other than the registered holder, or if a transfer tax is
imposed for any reason other than the exchange of outstanding notes in the
exchange offer, then the tendering holder will pay the transfer taxes. If a
tendering holder does not submit satisfactory evidence of payment of such taxes
or exemption from taxes with the letter of transmittal, the taxes will be billed
directly to the tendering holder.
ACCOUNTING TREATMENT
The exchange notes will be recorded at the same carrying value as the
outstanding notes. Accordingly, we will not recognize any gain or loss for
accounting purposes. We will amortize expenses of the exchange offer over the
term of the exchange notes under generally accepted accounting principles.
27
<PAGE> 32
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following table presents selected consolidated financial information as
of September 30, 1998 and for the nine-month periods ended September 30, 1997
and 1998, as of December 31, 1997 and for the six-month periods ended December
31, 1996 and 1997 and each of the five fiscal years in the period ended June 30,
1997, which should be read in conjunction with our consolidated financial
statements and related notes thereto included elsewhere in this prospectus and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The selected consolidated financial information as of and for the six-month
period ended December 31, 1997 and each of the five fiscal years in the period
ended June 30, 1997 presented below has been derived from our consolidated
financial statements, which were audited by Arthur Andersen LLP, independent
public accountants. The information for the six-month period ended December 31,
1996, the nine-month periods ended September 30, 1997 and 1998 and as of
September 30, 1998 has been derived from our unaudited consolidated financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the
consolidated financial position and consolidated results of operations for these
periods. The unaudited interim consolidated results of operations are not
necessarily indicative of the consolidated results of operations for any other
interim period or for any fiscal year as a whole.
Effective January 1, 1998, we changed our fiscal year to commence on
January 1 and conclude on December 31 of each year. Our fiscal year previously
commenced each July 1, concluding on June 30 of the following calendar year.
<TABLE>
<CAPTION>
SIX-MONTH NINE-MONTH
PERIODS ENDED PERIODS ENDED
FISCAL YEARS ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ---------------------- -------------------
1993 1994 1995 1996 1997 1996 1997 1997 1998
-------- -------- -------- -------- -------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenue:
Electric.................. $338,645 $351,892 $357,674 $356,459 $315,203 $162,909 $154,810 $234,652 $231,200
Steam..................... 22,637 22,254 23,320 27,703 26,686 13,284 12,721 19,451 19,325
Lease revenue............. 0 0 0 0 0 0 0 0 23,567
Service revenue under
sales-type capital
leases.................. 0 0 0 0 0 0 0 0 25,955
Income from unconsolidated
investments in power
projects................ 0 0 1,116 3,862 574 348 1,186 623 2,626
Other..................... 1,037 1,939 2,992 22,522 10,343 4,608 9,229 8,463 14,855
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
revenue........... 362,319 376,085 385,102 410,546 352,806 181,149 177,946 263,189 317,528
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Operating costs........... 236,568 239,225 235,006 245,582 204,446 108,348 93,689 143,993 112,081
Cost of services under
sales-type capital
leases.................. 0 0 0 0 0 0 0 0 29,358
General, administrative
and development......... 25,116 26,664 30,499 29,983 39,425 16,017 18,242 31,547 27,765
Depreciation and
amortization............ 28,851 36,290 37,642 37,842 40,047 18,610 20,407 31,583 31,382
Loss on impairment and
cost of removal of
cogeneration
facilities.............. 0 0 0 0 65,628 65,628 0 0 0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses.......... 290,535 302,179 303,147 313,407 349,546 208,603 132,338 207,123 200,586
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)..... 71,784 73,906 81,955 97,139 3,260 (27,454) 45,608 56,066 116,942
</TABLE>
28
<PAGE> 33
<TABLE>
<CAPTION>
SIX-MONTH NINE-MONTH
PERIODS ENDED PERIODS ENDED
FISCAL YEARS ENDED JUNE 30, DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ---------------------- -------------------
1993 1994 1995 1996 1997 1996 1997 1997 1998
-------- -------- -------- -------- -------- ----------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other income (expense):
Interest expense.......... (45,479) (50,736) (59,621) (58,354) (56,328) (28,144) (25,680) (41,419) (51,993)
Investment and other
income.................. 4,110 4,335 8,269 7,478 13,184 7,729 4,334 7,378 5,169
Equity in net income
(loss) of affiliates,
net..................... 0 (650) 8,696 (1,758) (813) (1,088) (1,813) (410) (3,242)
Minority interests in income
before extraordinary
loss...................... (2,514) (3,089) (4,789) (4,749) (4,013) (1,614) (2,273) (3,763) (9,800)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes, extraordinary gain
(loss) and cumulative
effect of change in
accounting principle...... 27,901 23,766 34,510 39,756 (44,710) (50,571) 20,176 17,852 57,076
Benefit (provision) for
income taxes.............. (11,508) (9,307) (13,337) (15,961) 17,112 18,895 (7,971) (6,756) (22,374)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary gain (loss)
and cumulative effect of
change in accounting
principle................. 16,393 14,459 21,173 23,795 (27,598) (31,676) 12,205 11,096 34,702
Extraordinary gain (loss) on
early extinguishment of
debt, net................. 0 3,055 0 0 (703) (703) (1,502) 0 (743)
Cumulative effect of change
in method of accounting
for income taxes.......... 0 (875) 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ 16,393 $ 16,639 $ 21,173 $ 23,795 $(28,301) $(32,379) $ 10,703 $ 11,096 $ 33,959
======== ======== ======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges (unaudited)(1).... 1.5x 1.4x 1.6x 1.6x .2x (.7)x 1.7x 1.4x 2.0x
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF AS OF
---------------------------------------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities...... $ 29,669 $118,218 $ 41,540 $ 33,351 $ 84,090 $113,951 $ 29,638
Total assets........................ 868,369 944,185 930,733 921,641 859,828 822,974 1,307,270
Project financing debt(2)........... 723,435 702,736 661,891 616,588 591,694 567,705 938,262
Parent debt(3)...................... 32,037 100,000 100,000 100,000 100,000 100,000 100,000
Total shareholders' equity.......... 33,725 46,560 63,618 83,010 49,709 58,298 92,231
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH NINE-MONTH
FISCAL YEARS ENDED JUNE 30, PERIOD ENDED PERIOD ENDED
----------------------------------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA (UNAUDITED)(4):
Parent EBITDA........................... $24,029 $33,603 $31,068 $34,271 $59,854 $35,388 $30,441
Parent Fixed Charges.................... 3,328 3,261 8,530 8,472 8,222 4,203 6,423
Parent EBITDA/Parent Fixed Charges...... 7.2x 10.3x 3.6x 4.0x 7.3x 8.4x 4.7x
</TABLE>
- ---------------
(1) For purposes of this ratio, earnings include income before taxes,
extraordinary gain (loss) and cumulative effect of change in accounting
principle and fixed charges excluding capitalized interest. Fixed charges
include interest, whether capitalized or expensed, amortization of deferred
financing costs and interest elements of rentals.
(2) Project financing debt with respect to each of our facilities is
non-recourse to Cogentrix Energy and its other project subsidiaries. For a
discussion of the term "non-recourse," see "Prospectus Summary -- Project
Financing Arrangements for our Electric Generating Plants."
(3) Parent debt represents obligations of Cogentrix Energy only and does not
include non-recourse obligations of our project subsidiaries.
(4) Parent EBITDA represents cash flow to Cogentrix Energy prior to debt service
and income taxes of Cogentrix Energy. Parent Fixed Charges include cash
payments made by Cogentrix Energy related to outstanding indebtedness of
Cogentrix Energy and the cost of funds associated with Cogentrix Energy's
guarantees of some of its subsidiaries' indebtedness. Parent EBITDA is not
presented here as a measure of operating results. Our management believes
Parent EBITDA is a useful measure of Cogentrix Energy's ability to service
debt. Parent EBITDA should not be construed as an alternative either (i) to
operating income (determined in accordance with generally accepted
accounting principles) or (ii) to cash flows from operating activities
(determined in accordance with generally accepted accounting principles).
29
<PAGE> 34
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated condensed balance sheet as
of September 30, 1998 gives effect to the following transactions as if such
transactions had occurred on September 30, 1998: (1) the Bechtel Acquisition and
(2) the sale of the 8.75% Senior Notes due 2008 and the application of the net
proceeds. The following unaudited pro forma consolidated condensed statements of
operations for the nine-month period ended September 30, 1998, for the six-month
period ended December 31, 1997 and for the twelve-month period ended June 30,
1997 give effect to the following transactions as if such transactions had
occurred on July 1, 1996: (1) the Whitewater/Cottage Grove Acquisition, (2) the
Bechtel Acquisition and (3) the sale of the 8.75% Senior Notes due 2008 and the
application of the net proceeds.
The pro forma consolidated financial data and accompanying notes should be
read in conjunction with Cogentrix's consolidated financial statements and
related notes thereto contained in our Report on Form 10-K for the six-month
transition period ended December 31, 1997. The pro forma adjustments are based
upon available information and assumptions that management believes are
reasonable and are described in the notes accompanying the pro forma
consolidated financial data. The pro forma consolidated financial data is
presented for informational purposes only and does not purport to represent what
our consolidated results of operations or financial position would actually have
been had such transactions in fact occurred at such dates, or to project our
consolidated results of operations or financial position at any future date or
for any future period. In the opinion of management, all adjustments necessary
to present fairly such pro forma consolidated financial data have been made.
References to the "Partnerships" in the notes accompanying the pro forma
consolidated financial data mean Logan Generating Company, L.P., Northampton
Generating Company, L.P., Chambers Cogeneration Limited Partnership and
Scrubgrass Generating Company, L.P., collectively. References to the "Holding
Companies" mean Palm Power Corporation, Hickory Power Corporation, Birch Power
Corporation and Panther Creek Leasing, Inc., collectively. References to "Beale"
mean Beale Generating Company (formerly J. Makowski Company, Inc.). For further
information regarding specific projects that are referenced in the notes, see
"Business -- The October 1998 Bechtel Acquisition."
30
<PAGE> 35
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR ADJUSTMENTS FOR
BECHTEL SALE OF
ACTUAL (1) ACQUISITION NOTES PRO FORMA
---------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 29,638 $(189,851)(2) $189,931(7) $ 29,718
Restricted cash........................... 53,688 -- -- 53,688
Accounts receivable....................... 65,718 -- -- 65,718
Other current assets...................... 23,744 -- -- 23,744
---------- --------- -------- ----------
Total current assets.............. 172,788 (189,851) 189,931 172,868
PROPERTY, PLANT AND EQUIPMENT, NET.......... 480,077 -- -- 480,077
LAND AND IMPROVEMENTS....................... 3,574 -- -- 3,574
DEFERRED FINANCING, START-UP AND
ORGANIZATION COSTS, NET................... 31,218 -- 5,263(8) 36,481
NET INVESTMENT IN LEASE..................... 497,966 -- -- 497,966
NATURAL GAS RESERVES........................ 1,748 -- -- 1,748
INVESTMENTS IN UNCONSOLIDATED AFFILIATES.... 72,846 182,484(4) -- 255,330
OTHER ASSETS................................ 47,053 24,875(5) -- 71,928
---------- --------- -------- ----------
$1,307,270 $ 17,508 $195,194 $1,519,972
========== ========= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......... $ 77,641 $ -- $ -- $ 77,641
Other current liabilities................. 55,516 -- -- 55,516
---------- --------- -------- ----------
Total current liabilities......... 133,157 -- -- 133,157
LONG-TERM DEBT.............................. 960,621 195,194(9) 1,155,815
DEFERRED INCOME TAXES....................... 37,004 11,166(6) -- 48,170
MINORITY INTERESTS.......................... 60,728 -- -- 60,728
OTHER LONG-TERM LIABILITIES................. 23,529 6,342(3) -- 29,871
---------- --------- -------- ----------
1,215,039 17,508 195,194 1,427,741
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares
authorized; 282,000 shares issued and
outstanding............................ 130 -- -- 130
Accumulated earnings...................... 92,101 -- -- 92,101
---------- --------- -------- ----------
92,231 -- -- 92,231
---------- --------- -------- ----------
$1,307,270 $ 17,508 $195,194 $1,519,972
========== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated condensed balance sheet.
31
<PAGE> 36
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
Cogentrix is accounting for the Whitewater/Cottage Grove Acquisition and the
Bechtel Acquisition using the purchase method of accounting. In connection with
the Bechtel Acquisition we acquired direct ownership interests in the
Partnerships ranging from 10% to 49%, 10.9% of the outstanding common stock of
Beale and 100% of the outstanding common stock of the Holding Companies. Current
asset and liability balances as of September 30, 1998 of the Holding Companies
have not been reflected in the accompanying pro forma consolidated condensed
balance sheet due to the distribution of the assets and the satisfaction of
liabilities prior to the closing of the Bechtel Acquisition.
(1) This column represents our historical consolidated condensed balance sheet
as of September 30, 1998 which reflects the Whitewater/Cottage Grove
Acquisition as such acquisition was consummated on March 20, 1998. The
purchase price for our approximate 74% interest in the Whitewater and
Cottage Grove Facilities was approximately $174.7 million including the
pre-funding of a $16.7 million distribution to the previous owners. Direct
costs related to the Whitewater/Cottage Grove Acquisition amounted to
approximately $.5 million. The purchase price has been allocated to the
assets and liabilities acquired based on their fair market values at the
date of consummation. An adjustment in the amount of $22.2 million was
recorded to reflect our portion of the excess of the fair value of the
Partnerships' fixed rate debt over its historical carrying value. This fair
value adjustment, or "debt premium", will be amortized to income over the
life of the debt acquired using the effective interest method. The
historical book values of the remaining assets and liabilities approximated
their fair values at the date of consummation. The excess of the purchase
price over the fair value of the net assets acquired of approximately $27.7
million has been recorded as goodwill and is included in "other assets" in
the accompanying pro forma consolidated condensed balance sheet as of
September 30, 1998. Goodwill is being amortized on a straight-line basis
over the terms of the power purchase agreements for the two facilities.
(2) Represents cash outflows used to fund (1) the Bechtel Acquisition purchase
price of $187.2 million and (2) related acquisition costs of $2.7 million.
(3) Represents unearned lease income acquired by Cogentrix related to the
undivided lessor interest in Panther Creek Leasing, Inc.
(4) Represents our equity investment in the Partnerships and Beale as well as
equity investments of the Holding Companies. This amount is comprised of
aggregate equity investments of $118.1 million and a net purchase premium of
$64.4 million. Investments in affiliates include purchase price premiums or
discounts resulting from the difference between the Bechtel Acquisition
purchase price, inclusive of the related acquisition costs, and the net
assets acquired.
(5) Represents a $10.4 million receivable related to our investment in Cedar Bay
and an investment in a leveraged lease of $14.5 million related to the
undivided lessor interest in Panther Creek Leasing, Inc.
(6) Reflects the deferred tax effects of the Bechtel Acquisition.
(7) Represents $255.8 million of cash proceeds from the sale of the notes
including a net original issue premium of $.8 million, reduced by (1) $5.3
million of issuance costs associated with the offering of the notes, (2)
$22.1 million of settlement costs for an interest rate hedge agreement
related to the offering of the notes and (3) $38.5 million of proceeds used
to repay outstanding indebtedness under a subsidiary's revolving credit
facility.
(8) Represents issuance costs associated with the notes.
(9) Represents the issuance of $255 million aggregate principal amount of notes,
issued at a net premium of $.8 million, reduced by deferred settlement costs
of $22.1 million for an interest rate hedge agreement associated with the
notes and $38.5 million of subsidiary indebtedness repaid with proceeds from
the notes.
32
<PAGE> 37
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER COMMON SHARE)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
WHITEWATER/ ADJUSTMENTS FOR ADJUSTMENTS FOR
COTTAGE GROVE BECHTEL SALE OF
ACTUAL ACQUISITION(1) ACQUISITION NOTES PRO FORMA
-------- --------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electric............................. $231,200 $ -- $ -- $ -- $231,200
Steam................................ 19,325 -- -- -- 19,325
Lease revenue........................ 23,567 9,793 -- -- 33,360
Service revenue under sales-type
capital leases..................... 25,955 8,561 -- -- 34,516
Income from unconsolidated
investments in power projects...... 2,626 -- 12,035(4) -- 14,661
Other................................ 14,855 1,056 1,174(5) -- 17,085
-------- ------- ------- -------- --------
317,528 19,410 13,209 -- 350,147
-------- ------- ------- -------- --------
OPERATING EXPENSES:
Fuel expense......................... 62,500 -- -- -- 62,500
Operations and maintenance........... 49,581 149 -- -- 49,730
General, administrative and
development expenses............... 27,765 -- 387(5) -- 28,152
Depreciation and amortization........ 31,382 227 (185)(5) 395(6) 31,819
Cost of services under sales-type
capital leases..................... 29,358 10,601 -- -- 39,959
-------- ------- ------- -------- --------
200,586 10,977 202 395 212,160
-------- ------- ------- -------- --------
OPERATING INCOME....................... 116,942 8,433 13,007 (395) 137,987
OTHER INCOME (EXPENSE):
Interest expense..................... (51,993) (6,449)(2) -- (16,202)(8) (74,644)
Investment and other income, net..... 5,169 (738)(3) 452(5) -- 4,883
Equity in net loss of affiliates,
net................................ (3,242) -- -- -- (3,242)
-------- ------- ------- -------- --------
INCOME BEFORE MINORITY INTERESTS IN
INCOME AND INCOME TAXES.............. 66,876 1,246 13,459 (16,597) 64,984
MINORITY INTERESTS IN INCOME........... (9,800) (890) -- -- (10,690)
-------- ------- ------- -------- --------
INCOME BEFORE INCOME TAXES............. 57,076 356 13,459 (16,597) 54,294
(PROVISION) BENEFIT FOR INCOME TAXES... (22,374) (139) (7) (5,370)(7) 6,622(7) (21,261)
-------- ------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS...... $ 34,702 $ 217 $ 8,089 $ (9,975) $ 33,033
======== ======= ======= ======== ========
EARNINGS PER COMMON SHARE:
Income from continuing operations.... $ 123.06 $ 117.14
======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.......................... 282,000 282,000
======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated condensed statement of operations.
33
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
Cogentrix is accounting for the Whitewater/Cottage Grove Acquisition and the
Bechtel Acquisition using the purchase method of accounting.
(1) The pro forma adjustments for the Whitewater/Cottage Grove Acquisition
consist of (1) recognition of the operating results of the LSP-Cottage
Grove, L.P. and LSP-Whitewater Limited Partnership (the "LS Power
Partnerships"), (2) the minority partner's interest in the net income of
the LS Power Partnerships, (3) our cost of funds utilized to fund the
purchase price of the Whitewater/ Cottage Grove Acquisition, (4)
amortization of goodwill resulting from the Whitewater/Cottage Grove
Acquisition and (5) the tax effect of the pro forma adjustments using our
historical effective tax rate for the period presented.
(2) Reflects the recognition of interest expense for the period from January 1,
1998 to March 20, 1998 (the closing date of the Whitewater/Cottage Grove
Acquisition) on (1) Cottage Grove and Whitewater's combined non-recourse
project financing debt totalling $332 million at a blended interest rate
including the impact of amortization of deferred financing costs of
approximately 8.1%, and (2) additional borrowings used to finance a portion
of the Whitewater/Cottage Grove Acquisition purchase price and related
acquisition costs. Interest expense on the project financing debt is
reduced by approximately $.34 million amortization of a debt premium
recorded by Cogentrix to state the debt acquired at fair value in
accordance with APB No. 16. The additional borrowings included $50 million
of indebtedness incurred under the corporate credit facility and $20
million of indebtedness incurred under a subsidiary's revolving credit
facility. Interest expense on the additional borrowings is computed using a
blended interest rate of approximately 6.4%.
(3) Reflects a reduction in our investment income of approximately $1.3 million
for the period from January 1, 1998 to March 20, 1998, the closing date of
the Whitewater/Cottage Grove Acquisition, as a result of the utilization of
cash and marketable securities totalling approximately $105.1 million to
fund a portion of the Whitewater/Cottage Grove Acquisition purchase price
and related acquisition costs, partially offset by other income of
approximately $.5 million recognized by Cottage Grove and Whitewater. The
reduction in investment income is computed using an investment yield of
5.62%.
(4) Represents (1) equity earnings from the Partnerships of approximately $9.9
million (2) equity loss from Beale of $41,000 and (3) equity earnings from
Indiantown, Gilberton and Morgantown, which are the equity investees of the
Holding Companies, of approximately $4.1 million. Equity earnings from
affiliates is shown net of amortization of purchase price premiums or
discounts resulting from the difference between our purchase price
inclusive of the related acquisition costs and the net assets acquired.
This amortization resulted in a reduction in equity earnings of
approximately $1.9 million for the period presented. These premiums or
discounts will be amortized over the remaining life of the facilities or
over the remaining term of the power purchase agreement using July 1, 1996
as the measurement date for estimated remaining life or remaining term.
(5) Represents operating results of the Holding Companies.
(6) Represents amortization of issuance costs of approximately $5.3 million
associated with the issuance of the notes that are capitalized and
amortized over the ten-year life of the notes.
(7) Represents the income tax effect of the pro forma adjustments using our
historical effective tax rate of approximately 40% for the period
presented.
(8) Represents (1) the recognition of interest expense of approximately $14.3
million on $217.2 million of the proceeds of the notes used to finance the
acquisition and settle an interest rate hedge agreement, (2) interest
expense of approximately $1.3 million on $37.8 million of note proceeds
that would have replaced subsidiary borrowings, (3) a reduction in interest
expense of approximately $.970 million on $37.8 million of subsidiary
borrowings that would not have been required had the proceeds from the
offering been available, (4) amortization of deferred settlement costs of
approximately $1.7 million on an interest rate hedge agreement related to
the notes and (5) amortization of the original issue net premium on the
notes of $63,000. The original issue net premium and the settlement costs
related to the interest rate hedge agreement are deferred and amortized
over the term of the notes.
34
<PAGE> 39
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER COMMON SHARE)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
WHITEWATER/ ADJUSTMENTS FOR ADJUSTMENTS FOR
COTTAGE GROVE BECHTEL SALE OF
ACTUAL ACQUISITION(1) ACQUISITION NOTES PRO FORMA
-------- --------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electric............................. $154,810 $ -- $ -- $ -- $154,810
Steam................................ 12,721 -- -- -- 12,721
Lease revenue........................ -- 11,844 -- -- 11,844
Service revenue under sales-type
capital leases..................... -- 10,823 -- -- 10,823
Income from unconsolidated
investments in power projects...... 1,186 -- 5,348(4) -- 6,534
Other................................ 9,229 1,419 1,225(5) -- 11,873
-------- ------- ------- ------- --------
177,946 24,086 6,573 -- 208,605
-------- ------- ------- ------- --------
OPERATING EXPENSES:
Fuel expense......................... 60,500 -- -- -- 60,500
Operations and maintenance........... 33,189 799 -- -- 33,988
General, administrative and
development expenses............... 18,242 -- 439(5) -- 18,681
Depreciation and amortization........ 20,407 265 (125)(5) 263(6) 20,810
Cost of services under sales-type
capital leases..................... -- 12,799 -- -- 12,799
-------- ------- ------- ------- --------
132,338 13,863 314 263 146,778
-------- ------- ------- ------- --------
OPERATING INCOME....................... 45,608 10,223 6,259 (263) 61,827
OTHER INCOME (EXPENSE):
Interest expense..................... (25,680) (8,970)(2) -- (10,567)(8) (45,217)
Investment and other income, net..... 4,334 (2,322)(3) 881(5) -- 2,893
Equity in net loss of affiliates,
net................................ (1,813) -- -- -- (1,813)
-------- ------- ------- ------- --------
INCOME BEFORE MINORITY INTERESTS IN
INCOME AND INCOME TAXES.............. 22,449 (1,068) 7,140 (10,830) 17,690
MINORITY INTERESTS IN INCOME........... (2,273) (1,085) -- -- (3,358)
-------- ------- ------- ------- --------
INCOME BEFORE INCOME TAXES............. 20,176 (2,154) 7,140 (10,830) 14,332
(PROVISION) BENEFIT FOR INCOME TAXES... (7,971) 851(7) (2,828)(7) 4,289(7) (5,659)
-------- ------- ------- ------- --------
INCOME FROM CONTINUING OPERATIONS...... $ 12,205 $(1,303) $ 4,312 $(6,541) $ 8,673
======== ======= ======= ======= ========
EARNINGS PER COMMON SHARE:
Income from continuing operations.... $ 43.28 $ 30.76
======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.......................... 282,000 282,000
======== ========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated condensed statement of operations.
35
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1997
Cogentrix is accounting for the Bechtel Acquisition using the purchase method of
accounting.
(1) The pro forma adjustments for the Whitewater/Cottage Grove Acquisition
consist of (1) recognition of the operating results of the LSP-Cottage
Grove, L.P. and LSP-Whitewater Limited Partnership (the "LS Power
Partnerships"), (2) the minority partner's interest in the net income of
the LS Power Partnerships, (3) our cost of funds utilized to fund the
purchase price of the Whitewater/Cottage Grove Acquisition, (4)
amortization of goodwill resulting from the Whitewater/Cottage Grove
Acquisition and (5) the tax effect of the pro forma adjustments using our
historical effective tax rate for the period presented. The pro forma
consolidated condensed statement of operations for the six-month period
ended December 31, 1997 does not give effect to a full period of operating
results of the acquired facilities since the Whitewater facility and the
Cottage Grove facility did not commence commercial operations until
September 18, 1997 and October 1, 1997, respectively. In addition, the pro
forma adjustments for the six-month period ended December 31, 1997 do not
include a gain on sales-type capital leases recorded for the Whitewater and
Cottage Grove facilities at their respective commercial operation dates.
These gains are non-recurring items which will not have a continuing impact
on the statement of operations.
(2) Reflects the recognition of interest expense of approximately $7.1 million
on Cottage Grove and Whitewater's combined non-recourse project financing
debt totalling $332 million at a blended average interest rate including
the impact of amortization of deferred financing costs of approximately
8.1% in addition to the recognition of interest expense on the additional
borrowings we used to finance a portion of the Whitewater/Cottage Grove
Acquisition purchase price and related acquisition costs. Interest expense
on the project financing debt is reduced by approximately $.37 million of
amortization of a debt premium recorded by Cogentrix to state the debt
acquired at fair value in accordance with AP No. 16. The additional
borrowings included $50 million of indebtedness we incurred under the
corporate credit facility and $20 million of indebtedness incurred under a
subsidiary's revolving credit facility. Interest expense on the additional
borrowings is computed using a blended interest rate of approximately 6.4%.
The Whitewater and Cottage Grove facilities capitalized interest costs
through the commercial operation dates of the facilities on September 18,
1997 and October 1, 1997, respectively.
(3) Reflects a reduction in our investment income of approximately $3.1 million
for the period as a result of the utilization of cash and marketable
securities totalling approximately $105.1 million to fund a portion of the
Whitewater/Cottage Grove Acquisition purchase price and related acquisition
costs, partially offset by other income of approximately $.7 million
recognized by Cottage Grove and Whitewater. The reduction in investment
income is computed using an investment yield of approximately 5.8%.
(4) Represents our equity earnings from (1) the Partnerships of approximately
$4.6 million, (2) Beale of approximately $.3 million and (3) Indiantown,
Gilberton and Morgantown, which are the equity investees of the Holding
Companies, of approximately $1.8 million. Equity earnings from affiliates
is shown net of amortization of purchase price premiums or discounts
resulting from the difference between our purchase price inclusive of the
related acquisition costs and the net assets acquired. This amortization
resulted in a reduction in equity earnings of approximately $1.3 million
for the period presented. These premiums or discounts will be amortized
over the remaining life of the facilities or over the remaining term of the
power purchase agreement using July 1, 1996 as the measurement date for
estimated remaining life or remaining term.
(5) Represents operating results of the Holding Companies.
(6) Represents amortization of issuance costs of approximately $5.3 million
associated with the issuance of the notes that are capitalized and
amortized over the ten-year life of the notes.
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<PAGE> 41
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS -- (CONTINUED)
(7) Represents the income tax effect of the pro forma adjustments using our
historical effective tax rate of approximately 40% for the period
presented.
(8) Represents the recognition of interest expense on the notes of
approximately $9.5 million and amortization of deferred settlement costs on
an interest rate hedge agreement related to the notes of approximately $1.1
million reduced by amortization of original issue net premium on the notes
of $42,000. Interest expense of approximately $9.5 million is only
recognized on the portion of the proceeds of the notes used to fund the
Bechtel Acquisition purchase price of approximately $187.2 million, related
acquisition costs of approximately $2.7 million, issuance costs of
approximately $5.3 million associated with the notes and settlement costs
of approximately $22.1 million for an interest rate hedge agreement related
to the notes, at the stated interest rate of 8.75%. The original issue net
premium and the settlement costs related to the interest rate hedge
agreement are deferred and amortized over the term of the notes.
37
<PAGE> 42
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE-MONTH PERIOD ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER COMMON SHARE)
<TABLE>
<CAPTION>
ADJUSTMENTS FOR
WHITEWATER/ ADJUSTMENTS FOR ADJUSTMENTS FOR
COTTAGE GROVE BECHTEL SALE OF
ACTUAL ACQUISITION(1) ACQUISITION NOTES PRO FORMA
-------- --------------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electric............................. $315,203 $ -- $ -- $ -- $ 315,203
Steam................................ 26,686 -- -- -- 26,686
Lease revenue........................ -- -- -- -- --
Service revenue under sales-type
capital leases..................... -- -- -- -- --
Income from unconsolidated
investments in power projects...... 574 -- 14,827(4) -- 15,401
Other................................ 10,343 -- 2,490(5) -- 12,833
-------- ------- ------- -------- ---------
352,806 -- 17,317 -- 370,123
-------- ------- ------- -------- ---------
OPERATING EXPENSES:
Fuel expense......................... 131,405 -- -- -- 131,405
Operations and maintenance........... 73,041 -- -- -- 73,041
General, administrative and
development expenses............... 39,425 -- 640(5) -- 40,065
Depreciation and amortization........ 40,047 -- (249)(5) 526(6) 40,324
Cost of services under sales-type
capital leases..................... -- -- -- -- --
Loss on impairment and cost of
removal............................ 65,628 -- -- -- 65,628
-------- ------- ------- -------- ---------
349,546 -- 391 526 350,463
-------- ------- ------- -------- ---------
OPERATING INCOME....................... 3,260 -- 16,926 (526) 19,660
OTHER INCOME (EXPENSE):
Interest expense..................... (56,328) (4,347)(2) -- (21,133)(8) (81,808)
Investment and other income, net..... 13,184 (5,585)(3) 327(5) -- 7,926
Equity in net loss of affiliates,
net................................ (813) -- -- -- (813)
-------- ------- ------- -------- ---------
LOSS BEFORE MINORITY INTERESTS IN
INCOME AND INCOME TAXES.............. (40,697) (9,932) 17,253 (21,659) (55,035)
MINORITY INTERESTS IN INCOME........... (4,013) -- -- -- (4,013)
-------- ------- ------- -------- ---------
LOSS BEFORE INCOME TAXES............... (44,710) (9,932) 17,253 (21,659) (59,048)
BENEFIT (PROVISION) FOR INCOME TAXES... 17,112 3,923(7) (6,608)(7) 8,296(7) 22,723
-------- ------- ------- -------- ---------
LOSS FROM CONTINUING OPERATIONS........ $(27,598) $(6,009) $10,645 $(13,363) $ (36,325)
======== ======= ======= ======== =========
EARNINGS PER COMMON SHARE:
Loss from continuing operations...... $ (97.87) $ (128.81)
======== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING.......................... 282,000 282,000
======== =========
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
consolidated condensed statement of operations.
38
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS
FOR THE TWELVE-MONTH PERIOD ENDED JUNE 30, 1997
Cogentrix is accounting for the Bechtel Acquisition using the purchase method of
accounting.
(1) The pro forma adjustments for the Whitewater/Cottage Grove Acquisition
consist of (1) recognition of the operating results of the LSP-Cottage
Grove, L.P. and LSP-Whitewater Limited Partnership (the "LS Power
Partnerships"), (2) the minority partner's interest in the net income of
the LS Power Partnerships, (3) our cost of funds utilized to fund the
purchase price of the Whitewater/Cottage Grove Acquisition, (4)
amortization of goodwill resulting from the Whitewater/Cottage Grove
Acquisition and (5) the tax effect of the pro forma adjustments using our
historical effective tax rate for the period presented. The pro forma
consolidated condensed statement of operations for the twelve-month period
ended June 30, 1997 does not give effect to a full period of operating
results of the acquired facilities since the Whitewater facility and the
Cottage Grove facility did not commence commercial operations until
September 18, 1997 and October 1, 1997, respectively.
(2) Reflects the recognition of interest expense on the additional borrowings
used to finance a portion of the Whitewater/Cottage Grove Acquisition
purchase price and related acquisition costs. These additional borrowings
included $50 million of indebtedness incurred under the corporate credit
facility and $20 million of indebtedness incurred under a subsidiary's
revolving credit facility. Interest expense on the additional borrowings is
computed using a blended interest rate of approximately 6.2%. The
Whitewater and Cottage Grove facilities capitalized interest costs through
the commercial operation dates of the facilities on September 18, 1997 and
October 1, 1997, respectively.
(3) Reflects a reduction in our investment income for the period as a result of
the utilization of cash and marketable securities totalling approximately
$105.1 million to fund a portion of the Whitewater/Cottage Grove
Acquisition purchase price and related acquisition costs. The reduction in
investment income is computed using an investment yield of approximately
5.3%.
(4) Represents the Company's equity earnings from (1) the Partnerships of
approximately $12.3 million, (2) Beale of approximately $.7 million and (3)
Indiantown, Gilberton and Morgantown, which are the equity investees of the
Holding Companies, of approximately $4.4 million. Equity earnings from
affiliates is shown net of amortization of purchase price premiums or
discounts resulting from the difference between the purchase price
inclusive of the related acquisition costs and the net assets acquired.
This amortization resulted in a reduction in equity earnings of
approximately $2.6 million for the period presented. These premiums or
discounts will be amortized over the remaining life of the facilities or
over the remaining term of the power purchase agreement using July 1, 1996
as the measurement date for estimated remaining life or remaining term.
(5) Represents operating results of the Holding Companies.
(6) Represents amortization of issuance costs of approximately $5.3 million
associated with the issuance of the notes that are capitalized and
amortized over the ten-year life of the notes.
(7) Represents the income tax effect of the pro forma adjustments using our
historical effective tax rate of approximately 40% for the period
presented.
(8) Represents the recognition of interest expense on the notes of
approximately $19 million, and amortization of deferred settlement costs of
approximately $2.2 million on an interest rate hedge agreement related to
the notes reduced by amortization of original issue net premium on the
notes of $83,000. Interest expense of approximately $19 million is only
recognized on the portion of the proceeds of the notes used to fund the
Bechtel Acquisition purchase price of approximately $187.2 million, related
acquisition costs of approximately $2.7 million, issuance costs of
approximately $5.3 million associated with the notes and settlement costs
of approximately $22.1 million for an interest rate hedge agreement related
to the notes, at the stated interest rate of 8.75%. The original issue net
premium and the settlement costs related to the interest rate hedge
agreement are deferred and amortized over the term of the notes.
39
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TRENDS AFFECTING OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Effect of Recent Power Purchase Agreement Restructurings on our Revenues,
Expenses and Cash Flow
Each of our electric generating facilities produces electricity for sale to
a utility and thermal energy for sale to an industrial user. The electricity and
thermal energy generated by these facilities are typically sold under long-term
power or steam sales agreements.
A number of the generating facilities we developed ourselves originally
sold electricity under long-term contracts that obligated the electric utility
to purchase all electricity generated by the facility. During the last two
years, we negotiated amendments to the majority of these contracts to provide
the electric utility the ability to suspend or reduce its purchases of
electricity from each facility if the electric utility determines the utility
can operate its system for a designated period of time more economically.
The amended power purchase agreements are structured so that we continue to
receive -- during any period the utility exercises its ability to suspend or
reduce purchases of electricity -- fixed payments that are designed in part to
cover the facility's debt service and its fixed operating costs. These fixed
payments also make up a substantial portion of the profit component of each
power purchase agreement.
When the electric utility exercises its right to suspend or reduce
purchases of electricity from us, we do not, receive, or receive only in reduced
amounts, the variable payments for electricity produced that are intended
primarily to cover our variable operating and maintenance costs, as well as our
coal and rail transportation costs. Because we are not producing electricity, or
are producing electricity in reduced amounts, these variable costs are
correspondingly reduced.
Despite the reduced variable payments we receive when an electric utility
suspends or reduces its purchases of electricity from us, we generally recognize
an increase in cash flows. The increase in cash flows is a result of both the
lower operating and maintenance costs during the period of suspension or
reduction and the amount of the fixed payments the utility must continue to make
during the period.
The restructuring of these power purchase agreements represents a positive
development for the electric utilities and Cogentrix. Even when the fixed
payments the utilities must make to us are combined with their cost of obtaining
electricity from alternative sources, those payments still represent a
significant reduction from the rates the electric utilities would have paid for
electricity generated by our facilities had the power purchase agreements not
been restructured.
In response to the reduction in fuel requirements at some of the facilities
at which we have restructured the power sales agreements, the facilities coal
suppliers have instituted various legal proceedings against Cogentrix seeking to
recover damages. The ultimate disposition of those proceedings, in the judgement
of our management, will not have a material adverse affect on our consolidated
results of operations or financial position. See "Business -- Legal
Proceedings," herein for a more detailed discussion of these matters.
Termination Dates of Seven of our Power Sales Agreements
The power sales agreements at seven of our facilities either terminate in
years 2000 through 2002 or provide for a significant reduction in fixed payments
received under such agreements after 2002. Accordingly, revenues recognized by
us under these power sales agreements after 2002 will be eliminated or
significantly reduced. We believe, however, that our project subsidiaries and
unconsolidated affiliates will generate sufficient cash flow to allow them to
pay management fees and dividends to Cogentrix Energy periodically in sufficient
amounts to allow Cogentrix Energy to pay all required debt service on the 2004
notes and the 2008 notes, fund a significant portion of our development
activities and permit Cogentrix Energy to meet its other obligations.
40
<PAGE> 45
Legislative Proposals to Restructure the Electric Generating Industry
The domestic electric generating industry is currently going through a
period of significant change as many states are implementing or considering
regulatory initiatives designed to increase competition. In addition to
restructuring activities in various states, there have also been several
industry restructuring bills introduced in Congress. We cannot predict the final
form or timing of the proposed restructurings and the impact, if any, that such
restructurings would have on our existing business or consolidated results of
operations. Because these restructuring proposals have generally included a
grandfathering provision for contracts entered into prior to repeal of existing
legislation we believe that any such restructuring would not have a material
adverse effect on our power sales agreements. Accordingly, we believe that our
existing business and results of consolidated operations would not be materially
adversely affected, although there can be no assurance in this regard.
Recent Acquisitions and Changes in our Portfolio of Generating Plants
As a result of the Whitewater/Cottage Grove Acquisition and the Bechtel
Acquisition, we have substantially increased our electric production capability.
As a result, our financial condition, and results of operations should be
significantly impacted in the coming years. The Whitewater/Cottage Grove
Acquisition will impact the lease and service revenues, as well as the cost of
services under sales type leases. The Bechtel Acquisition should significantly
impact the income from unconsolidated power projects. Both acquisitions were
financed with debt, and, as a result, will impact our interest expense reported
in our results of operations.
RESULTS OF OPERATIONS
Nine-Month Period Ended September 30, 1998 as compared to the Nine-Month
Period Ended September 30, 1997
Total operating revenues for the nine-month period ended September 30, 1998
increased 20.6% to $317.5 million as compared to $263.2 million for the
nine-month period ended September 30, 1997. This increase was primarily
attributable to the $49.5 million aggregate amount of lease revenue and service
revenue earned under the power sales agreements for the Cottage Grove and
Whitewater facilities in which we acquired interests in March 1998. Electric
revenue for the nine-month period ended September 30, 1998 also increased $5.9
million as compared to the same period for fiscal 1997, as a result of an
increase in megawatt hours sold to the purchasing utility at the Lumberton,
Rocky Mount, Richmond and Southport facilities. This increase in electric
revenue was partially offset, however, by a $10.6 million decrease in electric
revenue resulting from the restructuring of our power sales agreements on the
Portsmouth facility in December 1997 and the Hopewell facility in February 1998
to give the purchasing utility the right to suspend or reduce purchases of
energy from these facilities. The increase in total operating revenues also
related to an increase in income from unconsolidated investments in power
facilities resulting primarily from a $1.5 million increase in earnings
recognized from our ownership interest in the Birchwood project and a $6.4
million increase in other operating revenue. The increase in other operating
revenue was primarily the result of a $4.3 million construction management fee
received in August 1998 related to cost savings realized on the completion of
construction of a 248 megawatt gas-fired electric generating facility for Public
Utility District Number 1 of Clark County, Washington. Other operating revenue
also increased $2.5 million as a result of excess fuel sales to third parties at
the Cottage Grove and Whitewater facilities.
Total operating costs decreased 1.8% to $141.4 million for the nine-month
period ended September 30, 1998 as compared to $144.0 million for the nine-month
period ended September 30, 1997. This decrease resulted primarily from the $26.6
million decrease in fuel expense at the Hopewell and Portsmouth facilities as a
result of the restructuring of their power sales agreements, and a $3.7 million
reduction in the operating costs of ReUse Technology. The decrease in operating
costs for the nine-month period ended September 30, 1998 were partially offset
by $29.4 million increase in cost of services related to the Whitewater/Cottage
Grove Acquisition. The decrease was further offset by a $2.6 million increase
41
<PAGE> 46
in fuel expense at the Richmond and Rocky Mount facilities associated with an
increase in megawatt hours sold and a $.9 million increase in routine
maintenance expense at the Rocky Mount facility.
General, administrative and development expenses for the nine-month period
ended September 30, 1998 decreased 12.0% to $27.8 million as compared to $31.5
million for the nine-month period ended September 30, 1997. The decrease was
primarily the result of $10.7 million of expense recognized in the nine-month
period ended September 30, 1997 related to the restructuring or terminating of
incentive compensation arrangements for some of our employees, as well as $0.8
million of expense incurred related to severance payments to executive officers
terminated within the period. The decrease was also due to a $1.4 million
decrease in salary expense during the nine-month period ended September 30, 1998
as a result of a restructuring completed by us in the prior year. This decrease
was partially offset by an increase of $5.0 million in incentive compensation
expense related to our profit-sharing plan as a result of the increase in our
profitability for the nine-month period ended September 30, 1998, as well as
$2.2 million expense recognized in the second quarter of 1998 related to the
restructuring of a retirement plan with a former executive officer. We also
incurred additional travel and consulting expense related to increased project
development efforts.
Interest expense increased 27.5% to $52.8 million for the nine-month period
ended September 30, 1998 as compared to $41.4 million for the nine-month period
ended September 30, 1997. Our average long-term debt increased to $968 million,
with a weighted average interest rate of 7.27%, for the nine-month period ended
September 30, 1998 as compared to average long-term debt of $700 million, with a
weighted average interest rate of 7.9%, for the nine-month period ended
September 30, 1997. The increases in interest expense and weighted average debt
outstanding are related to the inclusion of the project finance debt of the
Cottage Grove and Whitewater facilities acquired in March 1998 and the increase
in project finance debt outstanding at the Portsmouth facility, which was
refinanced in December 1997, and the Hopewell facility, which was refinanced in
February 1998. The increases also related to outstanding borrowings under the
corporate credit facility. The increase in interest expense discussed above was
partially offset by a decrease in interest expense at several of our project
subsidiaries due to the scheduled amortization of outstanding project finance
debt. The decrease in weighted average interest rate related primarily to the
expiration of an interest rate swap agreement on the Richmond facility's project
debt in September 1997, a decrease in interest rates during the period for a
portion of our debt that is subject to floating rate fluctuations, and the
refinancing of the project debt at the Portsmouth and Hopewell facilities on
more favorable interest rate terms.
The increase in the equity in net loss of affiliates for the nine-month
period ended September 30, 1998, relates to an increase in losses recognized by
the partnerships operating tomato greenhouses in the states of New York and
Texas. These losses result from the delayed start-up of the New York greenhouse
and production problems experienced at the Texas greenhouses. In addition, the
tomato market has experienced lower than normal pricing due primarily to
increased competition.
The increase in minority interests in income for the nine-month period
ended September 30, 1998 as compared to the corresponding period of the prior
year relates to the recognition of the minority partner's share of earnings in
the Cottage Grove and Whitewater facilities, and an increase in earnings at the
Hopewell facility as a result of that facility's restructured power sales
agreement.
The extraordinary loss on early extinguishment of debt for the nine-month
period ended September 30, 1998 related to the refinancing of the Hopewell
facility's project debt in January 1998. The loss consisted of a write-off of
the deferred financing costs on the Hopewell facility's original project debt
and a swap termination fee on an interest rate swap agreement hedging the
original project debt.
Six-Month Period Ended December 31, 1997 as compared to the Six-Month
Period Ended December 31, 1996
Total operating revenues decreased 1.8% to $177.9 million for the six-month
period ended December 31, 1997 as compared to $181.1 million for the six-month
period ended December 31, 1996. This decrease was primarily attributable to the
significant decrease in electric revenues resulting from the
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<PAGE> 47
amendment in September 1996 of our power sales agreements with Carolina Power &
Light Company on 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 customers. These
decreases in operating revenues were partially offset by a $4.5 million
construction management fee we earned in December 1997, related to the
construction of the Clark facility, as well as a $3.1 million increase in
electric revenues at the Rocky Mount and Portsmouth facilities. The increase in
electric revenues at the Rocky Mount facility was due to an increase in on-peak
megawatt hours provided to the purchasing utility, while the increase in
electric revenues at the Portsmouth facility was mainly attributable to the
restructured power sales agreement with the purchasing utility eliminating
Portsmouth's accrued obligation to return previously disallowed fixed payments
to the purchasing utility. The decreases in operating revenues were also offset
by a $0.8 million increase in income from unconsolidated investments in electric
generating facilities that was primarily the result of earnings generated by our
investment in the Birchwood facility, which commenced commercial operations in
November 1996. This increase in earnings was partially offset by the impact of
us selling our investment in Bolivian Power Company Limited in December 1996. We
recognized approximately $427,000 in income from unconsolidated investments in
electric generating facilities during the six-month period ended December 31,
1996 related to our investment in Bolivian Power.
Operating costs decreased 13.5% to $93.7 million for the six-month period
ended December 31, 1997 as compared to $108.3 million for the six-month period
ended December 31, 1996. This decrease resulted primarily from the decrease in
fuel expense of approximately $14.5 million at the Elizabethtown, Lumberton,
Kenansville, Roxboro, and Southport facilities resulting from their reduced
sales of electricity to Carolina Power & Light Company. The decrease in
operating costs was also due to a reduction in maintenance costs of
approximately $1.8 million at the Rocky Mount facility, at which facility we
performed routine maintenance during the six-month period ended December 31,
1996. The decrease in operating costs was also related to transaction costs of
approximately $0.5 million incurred in connection with project debt refinancings
completed during the six-month period ended December 31, 1996 and severance
costs of approximately $0.5 million incurred by the Lumberton, Elizabethtown,
Kenansville, Roxboro, and Southport facilities in the six-month period ended
December 31, 1996 associated with the reduction of the workforce at those
facilities due to the amendment of their power sales agreements. These decreases
were partially offset by an increase in operating costs incurred by ReUse
Technology of approximately $2.0 million related to an increase in third-party
ash services activity during the six-month period ended December 31, 1997 and an
increase in maintenance costs at the Portsmouth facility of approximately $.6
million related to routine maintenance performed during the six-month period
ended December 31, 1997.
General, administrative and development expenses increased 13.9% to $18.2
million for the six-month period ended December 31, 1997 as compared to $16.0
million for the six-month period ended December 31, 1996. The increase in
general, administrative and development expenses related primarily to incentive
compensation expense incurred in December 1997 related to the successful
completion of the Clark facility. The increase was also attributable to
severance costs incurred during the six-month period ended December 31, 1997
related to the reduction of the workforce at the corporate office.
During the six-month period ended December 31, 1996, we undertook an
analysis of the projected operating results for all of its facilities in light
of the dramatic market changes taking place in the electric generating industry.
As a result of this analysis, we recorded a loss on impairment of cogenerating
facilities of $57.3 million and recognized an $8.3 million liability related to
our estimated cost of removal obligations under the land leases which had
removal obligations. See discussion below under "Fiscal Year Ended June 30, 1997
as compared to Fiscal Year Ended June 30, 1996". Also, as part of this analysis
we reviewed the depreciable lives of its operating facilities and concluded
that, effective January 1, 1997, the Lumberton, Elizabethtown, Kenansville,
Roxboro, and Southport facilities would be depreciated over the remaining terms
of these facilities' power sales agreements. The 9.7% increase in depreciation
and amortization expense in the six-month period ended December 31, 1997 as
compared to the six-month
43
<PAGE> 48
period ended December 31, 1996 related primarily to this change in the estimated
useful lives of these facilities.
The decrease in investment and other income for the six-month period ended
December 31, 1997 as compared to the six-month period ended December 31, 1996
was due to our recognition of a one-time gain on the sale of our investment in
Bolivian Power in December 1996. We sold our investment in Bolivian Power to NRG
Generating Holdings (No. 9), B.V., a wholly owned subsidiary of NRG Energy, Inc.
pursuant to a cash tender offer which NRG Energy, Inc. made for all outstanding
common stock of Bolivian Power at a price of $43 per share. We recognized a $3.1
million gain on the sale of our investment in Bolivian Power, net of transaction
costs, which included payments made to unaffiliated individuals who performed
development activities for Bolivian Power.
Interest expense decreased 8.75% to $25.7 million for the six-month period
ended December 31, 1997 as compared to $28.1 million for the six-month period
ended December 31, 1996. The decrease in interest expense was primarily
attributable to a decrease in the weighted average debt outstanding from $719
million for the six-month period ended December 31, 1996 to $680 million for the
six-month period ended December 31, 1997. The decrease in weighted average debt
outstanding related to regularly scheduled repayments of principal on our
project financing debt.
Equity in net loss of affiliates increased to $1.8 million for the
six-month period ended December 31, 1997 as compared to $1.1 million for the
six-month period ended December 31, 1996. The increase in equity in net loss was
primarily attributable to our recognition of our share of losses from our
investments in greenhouse facilities in Texas, Pennsylvania and New York during
the six-month period ended December 31, 1997. These greenhouse facilities were
either (a) not yet in commercial operation, (b) had just started commercial
operation or (c) for the six-month period ended December 31, 1996, not yet an
investment interest of Cogentrix. The increase in equity in net loss of
affiliates was partially offset by a reduction in development costs associated
with the termination in December 1996 of funding for a partnership pursuing
development opportunities in Latin America.
The increase in minority interest in income of joint venture for the
six-month period ended December 31, 1997 as compared to the six-month period
ended December 31, 1996 related to an increase in the net income of the Hopewell
facility. The increase in net income of the Hopewell facility related primarily
to a reduction of maintenance costs incurred at the Hopewell facility during the
six-month period ended December 31, 1997 as compared to the six-month period
ended December 31, 1996. The increase in net income was also due to a reduction
in the amount of interest expense incurred during the six-month period ended
December 31, 1997 as compared to the six-month period ended December 31, 1996
related to a decrease in the amount of project debt outstanding at the Hopewell
facility and transaction costs incurred in connection with the refinancing of
Hopewell's project debt during the six-month period ended December 31, 1996.
The extraordinary loss on early extinguishment of debt for the six-month
period ended December 31, 1997 related to the refinancing of the Portsmouth
facility's project debt in December 1997. The loss consisted of a write-off of
the deferred financing costs on the Portsmouth facility's original project debt
and net swap termination fees on interest rate swap agreements hedging the
original project debt. The extraordinary loss on early extinguishment of debt
for the six-month period ended December 31, 1996 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.
The provision for income taxes for the six-month period ended December 31,
1997 represented an effective rate of 39.6% of income before income taxes as
compared to an effective rate of 38.3% of loss before benefit for income taxes
for the six-month period ended December 31, 1996. The increase in effective rate
for the six-month period ended December 31, 1997 related to a reduced
recognition of losses for state income tax purposes in the prior year. A more
complete discussion of income taxes is included in Note 7 of "Notes to
Consolidated Financial Statements."
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Fiscal Year Ended June 30, 1997 as compared to Fiscal Year Ended June 30, 1996
Total operating revenues decreased 14.1% to $352.8 million for fiscal 1997
as compared to $410.5 million for fiscal 1996. This decrease was primarily
attributable to the significant decreases in electric revenues resulting from
reduced electricity sales and consequently reduced variable payments from, the
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities. The
decrease in operating revenues was also attributable to the absence of revenue
in fiscal 1997 comparable to (a) the payment received in fiscal 1996 upon the
execution of a joint development agreement with China Light & Power related to
the development of our India project, (b) the $5 million fee we earned in fiscal
1996 related to the pre-construction development phase of the Clark facility and
(c) the $7.5 million payment received in fiscal 1996 from the utility purchasing
the electrical output of the Hopewell facility in connection with such utility's
buydown of the Hopewell facility's declared production capability. To a lesser
extent, the decrease in operating revenues was also attributable to a $1.5
million decrease in steam revenues at the Hopewell, Kenansville and Richmond
facilities resulting from a decrease in demand for steam by these facilities'
steam customers and a $1.0 million decrease in electric revenue at the Richmond
facility resulting from a decrease in megawatt hours sold to the purchasing
utility. The decrease in operating revenues was also due to a net decrease in
income from unconsolidated investments in electric generating facilities, which
was primarily attributable to the sale of our investment in Bolivian Power in
December 1996. We recognized approximately $3.9 million in income from
unconsolidated investments in power projects in fiscal 1996 related to Bolivian
Power, which included our share of a one-time gain recognized by Bolivian Power
on the sale of its distribution assets. This decrease in income from
unconsolidated investments was partially offset by earnings generated by our
investment in the Birchwood Facility, which commenced commercial operations in
November 1996. These decreases in operating revenues were partially offset by a
$4.6 million increase in electric revenues at the Hopewell and Portsmouth
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.
Operating costs decreased 16.8% to $204.4 million for fiscal 1997 as
compared to $245.6 million for fiscal 1996. This decrease resulted primarily
from the significant decrease in fuel expense of approximately $38.0 million at
the Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities
resulting from their reduced electricity sales to Carolina Power & Light Company
as a result of the amendment of their power sales agreements as well as a
decrease in fuel expense of approximately $2.7 million at the Richmond and Rocky
Mount facilities associated with a decrease in megawatt hours sold. The decrease
in operating costs was also due to reductions in maintenance costs of
approximately $5.2 million at the Hopewell, Portsmouth and Southport facilities
at which facilities we performed routine maintenance during fiscal 1996. These
decreases were partially offset by an increase in maintenance costs at the
Richmond facility of approximately $1.5 million associated with routine
maintenance performed in fiscal 1997, an increase in operating costs incurred by
ReUse Technology of approximately $3.5 million related to third-party agreements
and $1.9 million of expense incurred by ReUse Technology associated with a
payment due to a deceased officer's beneficiary in fiscal 1997.
General, administrative and development expenses increased 31.5% to $39.4
million for fiscal 1997 as compared to $29.9 million for fiscal 1996. The
increase was primarily the result of $10.7 million of expense incurred in
connection with restructuring or terminating 15 employees' vested incentive
compensation arrangements since the arrangements no longer met Cogentrix
Energy's compensation philosophy. The increase in general, administrative and
development expenses was also due to an increase in performance bonuses paid and
severance payments made to certain executive officers in fiscal 1997. These
increases were partially offset by a reduction in payments made under the
profit-sharing plan due to a net loss before tax, a reduction in development
expenses incurred on a project we are developing in Idaho, and a general
reduction in consulting expenses related to development.
During fiscal 1997, we undertook an analysis of the projected operating
results for all of its facilities in light of the dramatic market changes in the
electric generating industry. The analysis included assumptions regarding future
levels of operations, operating costs and market prices for equivalent
generation available from other sources. As a part of this analysis, in
accordance with the Statement of Financial Accounting
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Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," we assessed whether any impairment of our
facilities had occurred. This assessment included a comparison of the projected
future cash flows to be provided by these assets to the net book value of such
assets. Based on this assessment, we determined that an impairment loss had
occurred on the Elizabethtown, Lumberton, Kenansville and Ringgold facilities.
This loss on impairment of cogenerating facilities of $57.3 million (recorded in
fiscal 1997) represented the excess of the net book value of these cogenerating
facilities over their current fair value, determined by discounting to present
value the projected future cash flows to be provided by such assets. We believe
that our projections of future cash flows are based upon reasonable assumptions
about the future performance of these assets. Because of the risks and
uncertainties associated with any projections, there can be no assurances,
however, that actual events will be consistent with the assumptions made, and
future cash flows may be greater or less than those projected.
Our analysis of the projected operating results for all of our facilities
also resulted in the recognition of an $8.3 million liability related to our
estimated cost of removal obligations under the land leases for the
Elizabethtown, Lumberton and Kenansville facilities. The total impairment loss
and cost of removal of $65.6 million has been reflected in the statement of
operations for the year ended June 30, 1997. Also in connection with the overall
assessment of the projected operating results for its cogenerating facilities,
we concluded that, effective January 1, 1997, the Lumberton, Elizabethtown,
Kenansville, Roxboro and Southport facilities would be depreciated over the
remaining term of these facilities' power sales agreements. The 5.8% increase in
depreciation and amortization expense in fiscal 1997 as compared to fiscal 1996
related primarily to this change in the estimated useful lives of these
facilities.
Annual depreciation expense, in the aggregate, is expected to increase
approximately $4.8 million per year as a result of the changes in estimated
useful lives of the Lumberton, Elizabethtown, Kenansville, Roxboro and Southport
facilities, as well as the impairment loss recognized during fiscal 1997 at the
Lumberton, Elizabethtown, Kenansville and Ringgold facilities.
The 3.5% decrease in interest expense was a result of the decrease in the
weighted average debt outstanding from $739 million in fiscal 1996 to $704
million in fiscal 1997. The decrease in weighted average debt outstanding, which
related to regularly scheduled payments of principal on our project finance debt
and the repayment of the subordinated debt at the Elizabethtown, Lumberton and
Kenansville facilities, was partially offset by an increase in project debt
outstanding at the Hopewell facility and the Roxboro and Southport facilities,
which related to refinancings completed during fiscal 1997.
Investment income increased 76.3% to $13.2 million for fiscal 1997 as
compared to fiscal 1996. The increase in investment income was related to larger
cash and investment balances we maintained during fiscal 1997 as compared to
fiscal 1996, the recognition of a net loss on the sale of marketable securities
of approximately $900,000 during fiscal 1996, and the $3.1 million gain on the
sale of an investment (discussed below) during fiscal 1997.
In December 1996, we sold our investment in Bolivian Power pursuant to a
cash tender offer made for all outstanding common stock of Bolivian Power at a
price of $43 per share. We recognized a $3.1 million gain on the sale of its
investment in Bolivian Power, net of transaction costs, which included payments
made to unaffiliated individuals who performed development activities for
Bolivian Power.
The decrease in equity in net loss of affiliates to $800,000 for fiscal
1997 as compared to equity in net loss of $1.8 million in fiscal 1996 was
primarily due to a reduction in development costs associated with the
termination in December 1996 of funding for a partnership pursuing development
opportunities in Latin America. The decrease in equity in net loss in fiscal
1997 was also due to earnings we generated with an investment in a greenhouse
facility in Texas which commenced commercial operations in November 1996.
The decrease in minority interest in income of joint venture in fiscal 1997
as compared to fiscal 1996 related to the decrease in net income of the Hopewell
facility. The decrease in net income of the Hopewell facility in turn resulted
primarily from the absence of revenue in fiscal 1997 comparable to the $7.5
million
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contract buydown payment received in fiscal 1996 from the utility purchasing the
electrical output of the Hopewell facility. This decrease was partially offset
by a reduction in maintenance costs incurred at the Hopewell facility in fiscal
1997 as compared to fiscal 1996.
The benefit for income taxes for fiscal 1997 represented an effective rate
of 38.3% of loss before benefit for income taxes as compared to an effective
rate of 40.1% of income before income taxes for fiscal 1996. The decrease in the
effective rate in fiscal 1997 related to the reduced recognition of current year
losses for state income tax purposes. A more complete discussion of income taxes
is included in Note 7 of "Notes to Consolidated Financial Statements."
The extraordinary loss on early extinguishment of debt in 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.
Fiscal Year Ended June 30, 1996 as compared to Fiscal Year June 30, 1995
Total operating revenues increased $25.4 million (6.6%) in fiscal 1996 as
compared to fiscal 1995. This increase in operating revenues was primarily
attributable to the $7.5 million payment received from the utility purchasing
the electrical output of the Hopewell facility in connection with such utility's
buydown of the Hopewell facility's declared production capability capacity from
100 to 88.5 megawatts, the $5 million fee we earned related to the
pre-construction development phase of the Clark facility, and the payment we
received upon the execution in July 1995 of the joint development agreement with
China Light & Power related to the development of our India project. The
increase in operating revenues for 1996 also related to the increase in megawatt
hours sold by the Elizabethtown, Kenansville, Richmond and Rocky Mount
facilities, the 168% increase in steam revenue at the Hopewell facility
associated with an increase in steam demand by the industrial customer and the
escalation/inflation adjustment provisions in some of our power sales
agreements. The increase in revenues for fiscal 1996 was partially offset by a
$10.2 million decrease in electric revenues at the Hopewell facility related to
the significant, unscheduled maintenance performed at the facility which
resulted in a decrease in megawatt hours delivered to the purchasing utility in
fiscal 1996.
Operating costs for fiscal 1996 increased 4.5% to $245.6 million as
compared to $235 million in fiscal 1995. This increase relates primarily to a
significant increase in maintenance costs at the Hopewell facility related to
the boiler outages associated with replacing the tubing in all of the facility
boilers. The increase in operating costs also relates to routine turbine and
boiler maintenance performed at the Rocky Mount and Richmond facilities. The
increases in operating costs were partially offset by significant decreases in
fiscal 1996 in routine maintenance costs at the Portsmouth, Lumberton and
Kenansville facilities, at which facilities we performed routine turbine and
boiler maintenance during fiscal 1995.
General, administrative and development expenses decreased 1.7% to $30.0
million in fiscal 1996 as compared to $30.5 million in fiscal 1995. The decrease
for fiscal 1996 related primarily to a decrease in performance bonuses paid in
fiscal 1996, severance payments accrued in fiscal 1995 related to some of our
former participants in our incentive compensation plan and a buyout of an
unrelated long-term consulting agreement in fiscal 1995 related to the Ringgold
facility. The decrease in general, administrative and development expenses for
fiscal 1996 also related to a general decrease in outside consulting expenses
associated with our international development efforts, which was partially
attributable to the direct development expenses related to the India project
being shared equally with China Light & Power commencing in July 1995. These
decreases were partially offset by an increase in the incentive compensation
accrual for fiscal 1996 due to an increase in net income before taxes, expenses
associated with our deferred compensation plan, which commenced in January 1995,
and development expenses incurred on a project in Idaho which commenced
development in December 1994.
The 2.1% decrease in interest expense is a result of the decrease in the
weighted average debt outstanding from $782 million in fiscal 1995 to $739
million in fiscal 1996. The decrease in weighted average debt outstanding
related primarily to regularly scheduled repayments of principal on our project
finance debt. The decrease in interest expense was partially offset by an
increased expense associated with
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an increase in the weighted average interest rate from 7.62% in fiscal 1995 to
7.89% for fiscal 1996. This increase in the weighted average interest rate
related primarily to a new interest rate swap agreement on the Portsmouth
facility project debt and an increase in the interest rate floor on an interest
rate hedge agreement on the Richmond facility project debt.
Investment income decreased 9.6% to $7.5 million for fiscal 1996 as
compared to fiscal 1995. This decrease related primarily to a net loss on the
sale of marketable securities of approximately $900,000 during fiscal 1996. This
decrease in investment income was partially offset by increases in investment
income associated with larger cash and investment balances maintained by us
during fiscal 1996 as compared to fiscal 1995.
The decrease in equity in net income of affiliates was related to the $10.7
million gain recognized during fiscal 1995 on the termination of the power sales
agreement between Consumers Power Company and Michigan Cogeneration Partners
Limited Partnership (a joint venture between us and Wolverine Energy, Inc.).
This decrease in equity in net income of affiliates was partially offset by an
increase in the equity in net income of affiliates associated with the equity in
net income of our investment in Bolivian Power, which was acquired in November
1994. We recognized approximately $3.9 million in equity in net income of
affiliates during fiscal 1996 related to Bolivian Power, $2.3 million of which
was associated with the gain recognized by Bolivian Power on the sale of its
distribution subsidiaries.
The minority interest in income of joint venture for fiscal 1996 was
similar to that recognized for the same period of fiscal 1995. However, during
fiscal 1996 the Hopewell facility recognized a significant increase in operating
costs from the unscheduled outages associated with the boiler retubing
maintenance and from the related routine maintenance performed during these
outages. This significant increase in operating costs during fiscal 1996 was
offset by a decrease in fuel expense associated with the Hopewell facility
operating at lower levels in fiscal 1996 and an increase in revenues associated
with the $7.5 million contract buydown payment received from the utility
purchasing the electrical output of the Hopewell facility in fiscal 1996.
The provision for income taxes in fiscal 1996 represented an effective rate
of 40.1% of income before income taxes as compared to an effective rate of 38.6%
of income before income taxes in fiscal 1995. This increase in the effective tax
rate related to the reduced recognition of state net operating loss
carryforwards calculated under the apportionment method in fiscal 1996. A more
complete discussion of income taxes is included in Note 7 of "Notes to
Consolidated Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The principal components of operating cash flow for the nine-month period
ended September 30, 1998 were net income of $33.7 million, increases due to
adjustments for depreciation and amortization of $30.9 million, deferred income
taxes of $11.0 million, a write-off of deferred financing costs of $2.1 million
and equity in net income (loss) of unconsolidated affiliates, net of dividends
of $7.2 million, which were partially offset by amortization of unearned lease
income, net of minimum lease payments received of $1.3 million, minority
interests in income, net of dividends, of $14.9 million and a net $15.6 million
use of cash reflecting changes in other working capital assets and liabilities.
Cash flow provided by operating activities of $53.1 million, proceeds from
borrowings of $170.9 million, proceeds from the sale of marketable securities of
$42.1 million, and $9.8 million of cash escrows released were primarily used to
acquire interests in facilities of $155.3 million, purchase property plant and
equipment of $4.5 million, make investments in affiliates of $1.0 million, repay
project finance borrowings of $155.6 million, and pay deferred financing costs
of $1.7 million.
The principal components of operating cash flow for the six-month period
ended December 31, 1997 were generated by net income of $10.7 million, increases
due to adjustments for depreciation and amortization of $20.4 million, deferred
income taxes of $4.6 million, a write-off of deferred financing costs of $1.4
million, minority interest in income of joint venture of $0.8 million, and
distributions from and equity in net loss of unconsolidated affiliates of $9.1
million, which were partially offset by a net $5.2 million use of cash
reflecting changes in other working capital assets and liabilities. Cash flow
provided by
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operating activities of $41.8 million, proceeds from project finance borrowings
of $62.7 million, and $3.1 million of cash escrows released were primarily used
to purchase property, plant and equipment additions of $0.7 million, to purchase
marketable securities of $0.8 million, to make investments in a greenhouse
facility of $2.7 million, to provide $0.9 million of funds to a development
joint venture company, to pay deferred financing costs of $1.5 million, to repay
project finance borrowings of $86.8 million and to pay a dividend to common
shareholders of $5.0 million.
The principal components of operating cash flow for the fiscal year ended
June 30, 1997 were generated by a net loss of $28.3 million, increases due to
adjustments for depreciation and amortization of $40 million, loss on impairment
and cost of removal of cogenerating facilities of $65.6 million, extraordinary
loss on early extinguishment of debt of $1.2 million, distributions from and
equity in net loss of unconsolidated affiliates of $7.4 million and a net $16.5
million source of cash reflecting changes in other working capital assets and
liabilities, which were partially offset by deferred taxes of $27.6 million,
gain on the sale of the investment in Bolivian Power of $3.1 million and
minority interest in income of joint venture, net of dividends, of $7.7 million.
Cash flow provided by operating activities of $64 million, net of proceeds from
the sale of the investment in Bolivian Power of $25.4 million, proceeds from
project finance borrowings of $70.7 million, and $55 million of cash escrows and
restricted marketable securities released were primarily used to purchase
equipment of $3.0 million, to make investments in marketable securities of $21.5
million, to make investments in affiliates of $58.2 million, to repay project
finance borrowings of $95.5 million, to pay deferred financing costs of $2.9
million and to pay common stock dividends of $4.8 million.
The principal components of cash flow provided by operating activities for
fiscal year ended June 30, 1996 were generated by net income of $23.8 million,
increases due to adjustments for depreciation and amortization of $37.8 million,
deferred income taxes of $8.6 million, minority interest in income of joint
venture of $3.4 million, net of dividends, loss on the sale of securities, net
of $0.9 million, and a net $5.5 million source of cash reflecting changes in
other working capital assets and liabilities which were partially offset by $1.5
million of equity in net income of affiliates net of dividends received from
unconsolidated affiliates. Cash flow provided by operating activities of $78.5
million and proceeds from project finance borrowings of $0.4 million were
primarily used to purchase property, plant and equipment of $1.6 million, to
purchase marketable securities of $12.5 million, to make investments in
affiliates of $6.5 million, to repay project finance borrowings of $46.6
million, to fund cash escrows of $7.5 million and to pay a dividend to common
shareholders of $4.2 million.
The principal components of cash flow provided by operating activities for
fiscal year ended June 30, 1995 were generated by net income of $21.2 million,
increases due to adjustments for depreciation and amortization of $37.6 million,
deferred income taxes of $7.7 million, dividends received from unconsolidated
affiliates, net of equity in net income of such affiliates, of $3.8 million and
minority interest in income of joint venture of $3.7 million, net of dividends,
which were partially offset by a net $2.5 million use of cash reflecting changes
in other working capital assets and liabilities. Cash flow provided by operating
activities of $71.5 million, net proceeds from sale of marketable securities of
$1.5 million, proceeds from project finance borrowings of $1.6 million, and
$27.8 million of cash escrows released were primarily used to purchase property,
plant and equipment of $8.2 million, to fund deferred organizational and
financing costs of $0.1 million, to repay project finance borrowings of $42.5
million, to make investments in affiliates of $48.3 million and to pay a
dividends to common shareholders of $3.3 million.
Historically, we have 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 some cases, the capital
stock of or the partnership interest in that project subsidiary. This type of
financing is generally referred to as "project financing." The project financing
debt of our subsidiaries and joint ventures (aggregating $939 million as of
September 30, 1998) is non-recourse to Cogentrix Energy and its other project
subsidiaries, except in connection with transactions where Cogentrix Energy has
agreed to limited guarantees and other obligations with respect to such
projects. These limited guarantees and other obligations include agreements for
the benefit of the
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project lenders to three project subsidiaries to fund cash deficits the projects
may experience as a result of incurring some types of costs, subject to an
aggregate cap of $51.9 million.
In addition, Cogentrix Inc., which is our indirect subsidiary of Cogentrix
Energy, has guaranteed two project subsidiaries' obligations to the purchasing
utility under five power sales agreements. Three of these power sales agreements
provide that in the event of early termination that is not for cause, the
project subsidiary must pay the utility a termination charge equal to the excess
paid for capacity and energy over what would have been paid to the utility under
the utility's published five-year capacity credit and variable energy rates plus
interest. The remaining two power sales agreements provide that in the event of
early termination, the project subsidiary must pay the utility the cost of
replacing the electricity from a third party for the remainder of the
agreement's term. Because these project subsidiaries' obligations do not by
their terms stipulate a maximum dollar amount of liability, the aggregate amount
of potential exposure under these guarantees cannot be quantified. If we or our
subsidiary were required to satisfy all of these guarantees and other
obligations or even one or more of the significant ones, it could impair
Cogentrix Energy's ability to service its outstanding debt.
Any project we develop in the future, and those electric generating
facilities it may seek to acquire, are likely to require substantial capital
investment. Our ability to arrange financing on a non-recourse basis and the
cost of such capital are dependent on numerous factors. In order to access
capital on a non-recourse basis in the future, we may have to make larger equity
investments in, or provide more financial support for, the project entity.
The ability of our project subsidiaries to pay dividends and management
fees periodically to Cogentrix Energy is subject to limitations in their
respective project credit documents that generally require that: (a) project
debt service payments be current, (b) project debt service coverage ratios be
met, (c) all project debt service and other reserve accounts be funded at
required levels and (d) 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.
Management does not believe that such restrictions or limitations will adversely
affect its ability to meet its debt obligations. See "Business -- Project
Agreements, Financing and Operating Arrangements for Our Facilities Owned Before
the Bechtel Acquisition" and "-- Description of Facilities in Operation Before
the Bechtel Acquisition" herein.
As of September 30, 1998, we had long-term debt (including the current
portion thereof) of approximately $1.0 billion. With the exception of the $100
million of 2004 notes issued in March 1994, substantially all of such
indebtedness is project financing debt, a large portion of which is non-recourse
to Cogentrix Energy. Future annual maturities of long-term debt range from $78.1
million to $90.0 million in the five-year period ending December 31, 2002. We
believe that our project subsidiaries and the project entities in which we have
an investment 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 periodically in sufficient amounts to allow
Cogentrix Energy to pay all required debt service on outstanding balances under
the corporate credit facility, the 2004 notes and the 2008 notes and to fund a
significant portion of its development activities and meet its other
obligations. If, as a result of unanticipated events, our ability to generate
cash from operating activities is significantly impaired, we could be required
to curtail our development activities to meet its debt service obligations.
On October 29, 1998, we amended and restated the corporate credit facility
to provide for direct advances to, or the issuance of letters of credit for, the
benefit of Cogentrix in an amount up to $125 million. The corporate credit
facility is unsecured and imposes covenants on us substantially the same as the
covenants contained in the indentures as well as financial condition covenants.
See "Description of Cogentrix Energy's Material Indebtedness." We have used
approximately $60 million of the credit availability under the corporate credit
facility for letters of credit issued in connection with the Bechtel Acquisition
and the Batesville Acquisition. See "Business -- New Facility Under Construction
in Batesville, Mississippi." The balance of the commitment under the corporate
credit facility is available, subject to any limitations imposed by the
covenants contained therein and in the indentures, to be drawn upon by us to
repay other outstanding indebtedness or for general corporate purposes,
including equity
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investments in new projects or acquisitions of existing electric generating
facilities or those under development.
In December 1997, we substantially completed construction of the Clark
Facility and earned a construction management fee of $4.5 million. In August
1998, we earned an additional $4.3 million, which represents an additional
construction management fee of $0.5 million and our share ($3.8 million) of cost
savings in constructing the Clark Facility.
In December 1997, we renegotiated the project financing arrangements for
our Portsmouth facility. The amended agreements resulted in an extension of the
final maturity date of the loan by three months and an increase in the amount of
commitment provided by the project lenders in the form of a $40.5 million
revolving credit facility. The revolving credit facility is available to be
drawn by the project subsidiary owning the Portsmouth facility at any time for
general corporate purposes, including paying dividends to Cogentrix Energy. In
March 1998, the project subsidiary borrowed $20 million under the revolving
credit facility and distributed such amount to Cogentrix Energy for purposes of
funding a portion of the purchase price related to the Whitewater/Cottage Grove
Acquisition. In July 1998, the project subsidiary borrowed an additional $20.5
million under the revolving credit facility and distributed such amount to
Cogentrix Energy for purposes of paying down the outstanding balance under the
corporate credit facility. In November 1998, we utilized a portion of the
proceeds from the sale of the outstanding notes together with corporate cash
balances to pay down the outstanding balance under the Portsmouth facility's
revolving credit facility.
In February 1998, we renegotiated the project financing arrangements for
our Hopewell facility, in which we own a 50% interest. The amended agreements
resulted in a $34.6 million increase in outstanding indebtedness of the project
subsidiary owning and operating the facility, and extended the final maturity
date of the loan by six months. The project subsidiary transferred substantially
all of the additional funds borrowed (net of transaction costs) to its partners.
The distribution received by Cogentrix Energy related to the refinancing was
approximately $16.6 million.
In March 1998, we acquired from LS Power Corporation an approximate 74%
ownership interest in the Whitewater facility and the Cottage Grove facility.
Each of the Cottage Grove and Whitewater facilities is a 245-megawatt gas-fired,
combined-cycle cogenerating facility. Commercial operations of the facilities
commenced in the last half of calendar 1997. The aggregate acquisition price for
the equity interest in the Cottage Grove and Whitewater facilities was $158.0
million. In addition, we pre-funded a $16.7 million distribution to the previous
owners. This distribution represented unused construction contingency and cash
flows that were accumulated by the Cottage Grove and Whitewater facilities prior
to January 1, 1998. Cogentrix Energy received a distribution of $15.7 million in
April 1998 and expects to receive a distribution of the remaining $1.0 million
in 1999. The purchase price was funded with the proceeds of the corporate credit
facility and corporate cash balances.
In August 1998, we acquired an approximate 52% interest in the Batesville
facility. We have committed to provide an equity contribution to the project
subsidiary of approximately $54 million upon the earliest to occur of (a) the
incurrence of construction costs after all project financing has been expended,
(b) an event of default under the project subsidiary's financing arrangements
and (c) June 30, 2001. This equity commitment is supported by a $54 million
letter of credit, which is provided under the corporate credit facility. We
expect the Batesville facility, which we will operate, to begin operation in
June 2000. Electricity generated by the Batesville facility will be sold under
long-term power purchase agreements with two investment-grade utilities.
In October 1998, we acquired Bechtel Generating Company, Inc.'s ownership
interests in 12 electric generating facilities, comprising a net equity interest
of approximately 365 megawatts, and one interstate natural gas pipeline. The
aggregate acquisition price for the Bechtel Acquisition including acquisition
costs was approximately $189.9 million. The purchase price was funded with a
portion of the proceeds from the sale of the 2008 notes.
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<PAGE> 56
For the fiscal year ended June 30, 1997, our board of directors declared a
dividend on our outstanding common stock of $5.0 million, which was paid in
September 1997. Our board of directors declared a dividend on its outstanding
common stock of $2.1 million for the six-month period ended December 31, 1997,
which was paid in March 1998. The board of directors' policy, which is subject
to change at any time, provides for a dividend payout ratio of no more than 20%
of our net income for the immediately preceding fiscal year. In addition, under
the terms of the indentures of the 2004 notes and the corporate credit facility,
our ability to pay dividends and make other distributions to our 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 therefore tend to fluctuate significantly.
Through various hedging mechanisms, we have 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 our project
subsidiaries receive from the utility purchasing the electricity generated by
the facility.
Under our power sales agreements energy payments are indexed, subject to
various caps, to reflect the purchasing utility's solid fuel cost of producing
electricity or 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 us. 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, we attempt to hedge 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 on a portion of its
indebtedness.
Although hedged to a significant extent, our 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 us is
dependent, in part, on each counterparty's ability to perform in accordance with
the provisions of the relevant contracts. We have sought to reduce our risk by
entering into contracts with creditworthy organizations.
Interest Rate Sensitivity
The following tables provide information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, including interest rate swaps, interest rate caps and debt
obligations.
The table below contains information on the interest rate sensitivity of
our debt portfolio. This table presents principal cash flows and related
weighted average interest rates by expected maturity dates for all of our debt
obligations as of December 31, 1997. This table does not reflect scheduled
future interest rate adjustments. The weighted average interest rates disclosed
in the table are calculated based on interest rates as of December 31, 1997.
Future interest rates are likely to vary from those disclosed in the table.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------------------------------
1998 1999 2000 2001 2002 THEREAFTER TOTAL
------- ------- ------- ------- ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term Debt
Fixed Rate............. $ 2,339 $ 3,241 $ 3,890 $25,186 $25,186 $165,919 $225,761
Weighted average
interest rate..... 7.58% 7.58% 7.58% 7.52% 7.52% 7.55%
Variable Rate............ $71,976 $75,582 $77,552 $53,913 $36,231 $126,690 $441,944
Weighted average
interest rate..... 6.96% 6.93% 6.93% 6.98% 7.04% 7.17%
--------
$667,705
========
</TABLE>
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<PAGE> 57
The following tables contain information regarding interest rate swap and
interest rate cap agreements entered into by some of our project subsidiaries to
manage interest rate risk on their variable-rate project financing debt. The
notional amounts of debt covered by these agreements as of December 31, 1997 was
$259,191,000. These agreements effectively changed the interest rate, including
applicable margins, on the portion of debt covered by the notional amounts from
a weighted average variable rate of 7.06% to a weighted average effective rate
of 7.29% at December 31, 1997.
FIXED RATE PAY/VARIABLE RATE RECEIVE INTEREST RATE SWAPS
<TABLE>
<CAPTION>
HEDGED FIXED VARIABLE FAIR
NOTIONAL EFFECTIVE MATURITY RATE RATE MARKET
AMOUNT DATE DATE PAY RECEIVE(1) VALUE
-------- --------- -------- ----- ---------- ------
<S> <C> <C> <C> <C> <C>
$ 8,800,000 8/30/90 8/30/00 9.503% 5.750% $ (688,471)
29,490,000 3/2/94 9/30/00 6.260% 5.935% (124,911)
86,000,000 7/31/00 7/31/02 6.995% 5.920% (299,277)
64,477,000 12/20/95 1/31/02 6.078% 5.920% (208,254)
-----------
$(1,320,913)
===========
</TABLE>
INTEREST RATE CAPS
<TABLE>
<CAPTION>
HEDGED MAXIMUM ACTUAL FAIR
NOTIONAL EFFECTIVE MATURITY INTEREST INTEREST MARKET
AMOUNT DATE DATE RATE RATE(1) VALUE
-------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
$ 6,321,375 6/30/93 12/31/98 8.375% 5.94% $ --
6,321,375 12/31/96 12/31/98 8.375% 5.94% --
11,262,750 12/31/96 03/31/01 7.500% 5.94% 13,487
46,518,000 2/20/97 6/28/02 6.500% 5.94% 203,109
86,000,000 10/7/92 9/18/99 9.000% 5.92% 945
86,000,000 9/18/99 7/31/00 9.000% 5.92% 14,865
86,000,000 7/31/00 7/31/02 9.000% 5.92% 38,981
-----------
$ 271,387
===========
</TABLE>
- ---------------
(1) The "variable rate receive" and "actual interest rate" are based on the
interest rates in effect as of December 31, 1997. Interest rates in the
future are likely to vary from those disclosed in the tables above.
In addition to the instruments listed in the table above, a project
subsidiary entered into a 5.5850% "pay fixed/receive variable" swap agreement
effective January 15, 1998 and maturing in March, 2001, covering a notional
amount of approximately $61.5 million.
Our unrealized loss on derivative financial instruments is approximately
$2.7 million as of December 31, 1997. This unrealized loss is comprised of the
estimated cost of approximately $1.1 million to liquidate our interest rate
swaps and interest rate caps (see fair market value in the tables above) and the
carrying cost on our balance sheet of unamortized premiums on interest rate caps
of approximately $1.6 million.
YEAR 2000 COMPLIANCE
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two digit rather than
four digit date fields to designate an applicable year. As a result, the systems
and applications may not properly recognize the year 2000 or process data which
includes such date, potentially causing data miscalculations or inaccuracies or
operational malfunctions or failures. Cogentrix initiated assessments in 1997 to
identify the issues required to be resolved to assure business critical systems
successfully operate upon and beyond the turn of the
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<PAGE> 58
century. The assessments include reviewing information technology and systems
utilizing embedded technology. Plans for achieving Year 2000 compliance were
finalized during 1998 and remediation work is underway. We have identified the
following systems and applications to focus our efforts to ensure Year 2000
compliance:
- corporate applications, which include core business systems;
- embedded technology systems, which include the plants operating and
control systems and
- business partner and vendor systems.
Non-compliance in the embedded technology systems or business partner and vendor
systems could result in temporary shutdown of the facilities, and potential
equipment damage.
Replacement of our core financial systems which included corporate
applications such as purchasing, accounts payable and general ledger, with Year
2000 compliant client-server software is virtually complete. We expect to
complete the updating of its human resources and internal payroll systems by
June 30, 1999. We do not expect any disruptions in corporate applications as a
result of the Year 2000 issue.
Investigation, analysis, remediation and contingency planning for embedded
technology such as plant operating control systems, telecommunications and
facilities-based equipment at all of our power generation facilities have been
completed. The investigation and analysis have identified no significant Year
2000 issues. For those insignificant issues that have been identified as
non-compliant, we have established a remediation plan to address the areas of
non-compliance. The remediation of these systems is expected to be completed by
June 30, 1999. The costs to replace our core financial systems, update our human
resources and internal payroll systems and bring the operating systems at the
plant facilities fully compliant with Year 2000 are currently expected to be
approximately $2.8 million, of which $2.4 million has already been incurred.
We are communicating with critical suppliers, vendors, joint venture
partners and major customers verbally, in writing and through other
representations made by the organizations to assess their compliance efforts and
our exposure resulting from Year 2000 issues. Of major concern to us are the
fuel suppliers and transporters, and the electric and steam customers. We
produce revenue by selling the power we produce to major utilities. We depend on
fuel suppliers and transporters to deliver our fuel to power the generating
facilities. We also rely on transmission and distribution facilities to deliver
our power to the electric and steam customers. At this time, based on our review
of responses we have received, we do not expect a major impact from
non-compliant Year 2000 suppliers, vendors, joint venture partners or major
customers. However, an incomplete or incorrect assessment of the Year 2000
issues by the suppliers and transporters, transmission and distribution
facilities, as well as the utility customers, could adversely effect our
financial results and operations.
We have developed contingency plans for the critical systems. We developed
these plans to address our most likely worst case scenario, the inability of our
plants to produce and distribute power. The contingency plans include turning
back the date on all date critical systems at the plant to ensure the continuous
operation of the generating facilities. These plans have been tested and appear
to be adequate.
We expect that our business critical systems will be Year 2000 compliant by
December 31, 1999, and we do not anticipate costs associated with the Year 2000
issue to have a material impact on our consolidated results of operations or
financial position. Currently, we have not entered into any material contracts
with external contractors to complete the Year 2000 compliance projects. We have
dedicated two headquarters level employees to oversee, develop and test systems
to ensure Year 2000 readiness. Managers at each plant location are also
responsible for various components of the Year 2000 testing. Despite
management's current expectations, there can be no assurances that there will
not be interruptions or other limitations of financial and operating systems
functionality or that we will not ultimately incur significant unplanned costs
to avoid such interruptions or limitations.
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<PAGE> 59
CHANGE OF CORPORATE FISCAL YEAR
Effective January 1, 1998, we changed our fiscal year to commence on
January 1 and conclude on December 31 of each year. Our fiscal year previously
commenced each July 1, concluding on June 30 of the following calendar year.
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<PAGE> 60
BUSINESS
This prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act including,
in particular, the statements below about our plans, strategies, and prospects
under the subheading "Our Development and Acquisition Strategy." Although we
believe that our plans, intentions and expectations reflected in or suggested by
such forward-looking statements are reasonable, we can give no assurance that
such plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this prospectus are discussed under the heading "Risk
Factors" and elsewhere in this prospectus.
GENERAL
The following description of our business provides information about:
- Trends affecting the domestic electric generating industry and our
business
- Our development and acquisition strategy
- Our recent acquisitions of interests in electric generating plants
- Each of our 25 electric generating plants in operation and our plant
under construction
- Our principal electric utility customers
- The regulatory environment in which we and our competitors conduct
business.
Before reading this detailed description of our business, you should, if
you have not already done so, read the "Prospectus Summary" section of this
prospectus. It contains an overview of our business that to eliminate
redundancy, is not repeated here. For a complete understanding of our business
and our competitive strengths and weaknesses, you should also read the sections
of this prospectus entitled "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
TRENDS AFFECTING THE DOMESTIC ELECTRIC GENERATING INDUSTRY AND OUR BUSINESS
Increasing Competition in the Domestic Electric Generating Industry
In response to increasing customer demand for access to low-cost
electricity and enhanced services, new regulatory initiatives are currently
being adopted or considered at both state and federal levels to increase
competition in the domestic electric generating industry. We believe that
industry trends and these regulatory initiatives will lead to the transformation
of the existing regulated market, which sells to a captive customer base, to a
more competitive market in which end users may purchase electricity from a
variety of suppliers. These suppliers will include non-utility generators, power
marketers, public utilities and others. Our management believes that these
market trends will create significant new business opportunities for us because
we have demonstrated our ability to construct and operate efficient, low-cost
electric generating facilities.
Growing Market for Sale of Electric Generating Assets
Regulatory requirements to restructure the United States electric industry
have led to the development of a growing market for the sale of electric
generating assets principally by utilities, but also by independent power
producers and industrial companies. Even when not required to do so by
regulatory pressure, some utilities' managements have decided for strategic
reasons to sell some or all of their generating assets and to concentrate on the
transmission and distribution segments of the power supply market. If this trend
continues, it may create additional investment opportunities for us. In
connection with acquiring -- entirely or in part -- any additional electric
generating assets, we expect to reduce our exposure to electric market price
risk by entering into contractual arrangements with fuel suppliers, utilities
and/or power marketers under which they would assume some or all of the risks
associated with fluctuations in energy prices.
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<PAGE> 61
Passage of the Energy Policy Act has expanded our Options
The passage of the Energy Policy Act by the United States Congress in 1992
significantly expanded the options available to independent power producers,
particularly with respect to siting a generating facility. Among other things,
this law enables independent power producers to obtain an order from the Federal
Energy Regulatory Commission requiring an intermediary utility to give access to
its transmission lines to transmit, or "wheel" electric power from a generating
plant to its utility purchaser. The availability of wholesale transmission
"wheeling" could be an important aspect in the development of new projects. For
example, we may be able to develop a project in one utility's service territory
and "wheel" the electric power produced by the project through the transmission
lines of that utility to a second utility or another wholesale purchaser. The
Energy Policy Act also created a new class of generator -- exempt wholesale
generators -- that, unlike qualifying facilities, are not required to use
alternative or renewable fuels or to have useful thermal energy output. See
"-- Regulation -- Energy Regulations" herein.
OUR DEVELOPMENT AND ACQUISITION STRATEGY
We intend to remain among the leaders in the independent power industry by
developing and constructing or acquiring -- entirely or in part -- electric
generating facilities in the United States and in selected foreign countries
where the political climate is conducive to increased foreign investment.
We have targeted three market segments for our future acquisition and
development activities. They are:
- Acquiring interests in existing domestic electric generating plants
- Developing, owning, managing and operating on-site cogenerating
facilities for large industrial customers with significant energy needs
- Developing new, electric generating facilities using natural gas as fuel
Acquiring Interests in Existing Domestic Electric Generating Plants. Our
candidates for future acquisitions will generally already have power sales
contracts with electric utilities or other customers whose senior unsecured debt
carries investment-grade credit ratings. We may also seek to acquire interests
in electric generating facilities that do not have contracts in place but are
nonetheless highly efficient, low-cost providers that can take advantage of
opportunities in a rapidly deregulating energy market. If we do, we would expect
to protect Cogentrix against the risk of changes in the market price for
electricity by entering into contracts at the time of acquisition with fuel
suppliers, utilities or power marketers which reduce or eliminate our exposure
to this risk by establishing future prices and quantities for the electricity
produced independent of the short-term market.
Developing New or Managing Existing Plants for Industrial Customers. Many
large, industrial customers with significant energy needs own on-site facilities
for generating the electricity and producing the steam they require for their
manufacturing, refining or other operations. We believe that cogenerating
facilities with state-of-the-art technology developed by us could replace or
upgrade existing facilities employing older technology that many of these
industrial companies currently operate themselves. We expect that many
industrial companies choosing not to replace their existing facilities will seek
to contract with companies like Cogentrix to manage and operate their existing
facilities.
Developing New Electric Generating Plants. We intend to pursue domestic
development of new, highly-efficient, low-cost plants, concentrating on
mid-sized facilities that use natural gas as fuel. We expect to have long-term
contractual arrangements for these plants in place with fuel suppliers, electric
utilities or power marketers. These contractual arrangements will provide us a
scheduled and/or indexed payment for electricity and result in the fuel
supplier, electric utility or power marketer accepting the risks associated with
energy price fluctuations. We also intend to pursue international project
development opportunities on a highly selective basis. We expect to do so only
in those countries where demand for power is growing rapidly, private investment
is encouraged and favorable financing conditions exist.
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<PAGE> 62
We are concentrating on opportunities to develop or acquire interests in
mid-sized electric generating facilities which use low-cost, state-of-the-art
proven technology. We target projects that will allow us to capitalize on our
reputation as a low-cost, efficient and reliable provider. We seek to manage the
risks associated with owning and operating electric generating plants by
emphasizing diversification and balance among our investments in terms of the
following criteria:
- the geographic location of the facilities in which we have an ownership
interest
- the electric utility customers for the electricity we generate and the
industrial customers for the steam we produce
- the technology we employ to generate electricity and produce steam
- the coal, gas and other fuel suppliers to our plants
We also intend whenever practicable to reduce the risks associated with the
development of any new projects by developing them on a joint venture basis with
one or more strategic partners instead of doing so on our own.
OUR RECENT ACQUISITIONS OF INTERESTS IN ELECTRIC GENERATING PLANTS
A key part of Cogentrix's business strategy is to acquire interests in
domestic electric generating assets. We completed three material acquisitions in
1998 that expanded our operations from four to nine states in the eastern U.S.
and into two states in the upper Midwest. These recent acquisitions strengthen
our competitive position and diversify our operations with regard to fuel source
and dependence on any single project or customer.
- October 1998. The "Bechtel Acquisition" resulted in our acquiring
ownership interests ranging from 3.3% to 49% in 12 domestic electric
generating plants. The acquisition of these interests gives us an
aggregate net equity interest of approximately 365 megawatts in a diverse
portfolio of electric generating plants that comprises approximately
2,400 megawatts in total production capability. The plants are located in
New Jersey, New York, Pennsylvania, West Virginia, Massachusetts and
Florida. The aggregate purchase price was approximately $189.9 million,
including related acquisition costs. We have accounted for this
acquisition using the purchase method of accounting. We will account for
our ownership interests in these generating facilities using the equity
method of accounting.
- August 1998. The "Batesville Acquisition" resulted in our acquiring an
approximate 52% interest in an 800-megawatt, gas-fired electric
generating plant under construction in Batesville, Mississippi. We have
committed to provide an equity contribution to the project subsidiary of
approximately $54 million. The equity commitment is supported by a $54
million letter of credit provided under our corporate credit facility. We
expect this generating plant, which we will operate when construction is
completed, will begin operation in June 2000. Two electric utilities have
agreed to purchase the electricity produced at this plant under long-term
power purchase agreements. Both utilities have senior, unsecured debt
outstanding that nationally-recognized credit rating agencies have rated
investment grade. We will account for our interest in this generating
facility using the equity method of accounting, because we anticipate
that our ownership will be less than 50% when the plant begins operation.
- March 1998. The "Whitewater/Cottage Grove Acquisition" resulted in our
acquiring approximate 74% interests in each of two electric generating
plants located in Whitewater, Wisconsin and Cottage Grove, Minnesota. The
aggregate purchase price for the plants was $158.0 million. In addition,
we pre-funded a $16.7 million distribution to the previous owners, $16.7
million of which we have already received in return. Each facility is a
245-megawatt, gas-fired plant. Commercial operations began at both
facilities in the last six months of 1997. The plant in Cottage Grove has
a 30-year power purchase agreement with Northern States Power Company.
The plant in Whitewater has a 25-year power purchase agreement with
Wisconsin Electric Power Company. We have
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<PAGE> 63
accounted for this acquisition using the purchase method of accounting.
We will account for our ownership interests in these generating
facilities using the consolidation method.
PROJECT AGREEMENTS, FINANCING AND OPERATING ARRANGEMENTS FOR OUR FACILITIES
OWNED BEFORE THE BECHTEL ACQUISITION
Before we completed the Bechtel Acquisition in October 1998, we owned -- in
whole or in part -- 13 electric generating facilities. We acquired our interests
in two of these facilities -- Whitewater and Cottage Grove -- in March 1998. We
developed nine of them ourselves; two were developed with joint venture
partners. For a description of these 13 facilities, see the table and text that
appear in this description of our business under the subheading "Description of
Facilities In Operation Before the Bechtel Acquisition."
Project Agreements
Each of these 13 project subsidiaries sells electricity to an electric
utility under long-term power sales agreements. A facility's revenue from a
power sales agreement usually consists of two components: variable payments,
which are variable in accordance with the amount of energy the facility
produces, and fixed payments, which are received in the same amounts whether or
not the facility is producing energy. Variable payments, which are generally
intended to cover the costs of actually generating electricity, such as fuel
costs and variable operation and maintenance expense, are based on a facility's
net electrical output measured in kilowatt hours. Variable payment rates are
either scheduled or indexed to the fuel costs of the purchasing utility.
Fixed payments, which are intended to compensate us for the costs incurred
by the project subsidiary whether or not it is generating electricity, such as
debt service on the project financing, are more complex and are calculated based
on a declared production capability of a facility. Declared production
capability is the electric generating capability of a plant in megawatts that
the project subsidiary contractually agrees to make available to the utility
purchasing its electricity. It is generally less than 100% of the facility's
design production capability dictated by its equipment and design
specifications. Fixed payments are based either on a facility's net electrical
output and paid on a kilowatt-hour basis or on the facility's declared
production capability and can be adjusted if actual production capability varies
significantly from declared production capability.
Many power sales agreements permit the purchasing utility to direct the
facility to deliver a variable amount of electrical output within limited
parameters. This means the utility may within those parameters direct the
facility to reduce or suspend the delivery of electricity to the utility. The
power sales agreements of substantially all our facilities provide the
purchasing utilities with the right to reduce or suspend their purchases of
electricity whenever they determine that they can obtain lower cost power either
by generating power at their own plants or by purchasing electricity in bulk
from others. The power sales agreements for these facilities are structured in a
manner such that when the amount of electrical output is reduced, the facility
continues to receive the fixed payments, which cover fixed operating costs and
debt service requirements and provide substantially all of the project
subsidiary's profits. The variable payments, which cover the operating,
maintenance and fuel costs incurred to generate electricity, are received only
for each kilowatt hour delivered.
With the exception of three of the thirteen facilities, which produce hot
water for use by commercial greenhouses, all of these plants produce process
steam for use by an industrial customer which has a manufacturing or other
facility located nearby. Our industrial customers, which include textile
manufacturing companies, pharmaceutical manufacturing companies, chemical
producers and synthetic fiber plants, use the process steam in their
manufacturing processes. Our steam sales contracts with these industrial
customers generally are long-term contracts that provide payment on a per
thousand pound basis for steam delivered and a minimum annual payment if the
industrial customer's plant is shut down. All contracts require steam purchases
during their initial terms to be adequate to allow maintenance of the qualifying
facility status of our plant. See "-- Regulation -- Energy Regulations."
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<PAGE> 64
Each of these project subsidiaries purchases fuel under long-term supply
agreements. The fuel supply contracts are structured so that the scheduled
increases in the fuel cost are generally matched by increases in the variable
payments received by the project subsidiary for electricity under its power
sales agreement. This matching is typically effected by having the fuel prices
escalate as a function of the solid fuel index of the purchasing utility. The
matching is sometimes affected by contracting for scheduled increases in the
variable payments under our power sales agreements designed to offset scheduled
increases in fuel prices.
Project Financing
Each facility is financed primarily under financing arrangements at the
project subsidiary level which, except as noted below, require the loans to be
repaid solely from the project subsidiary's revenues. They also generally
provide that the repayment of the loans and payment of interest is secured
solely by the physical assets, agreements, cash flow and, in some cases, the
capital stock of or partnership interests in that project subsidiary. This type
of financing is generally referred to as "project financing."
Project financing transactions are generally structured so that all
revenues of a project are deposited directly with a bank or other financial
institution acting as escrow or security deposit agent. These funds are then
payable in a specified order of priority to assure that, to the extent
available, they are used first to pay operating expenses, senior debt service
and taxes and to fund reserve accounts. Then, subject to satisfying debt service
coverage ratios and other conditions, any available funds may be disbursed to
Cogentrix Energy and its other partners in the case of jointly-owned facilities
in the form of management fees or dividends or for the payment of subordinated
debt service, where there are subordinated lenders.
These facilities are financed using a high proportion of debt to equity.
This leveraged financing permits us to develop projects with a limited equity
base but also increases the risk that a reduction in revenues could adversely
affect a particular project's ability to meet its debt or lease obligations. The
lenders to each project subsidiary have security interests covering some or all
of the aspects of the project, including the facility, related facility support
agreements, the stock or partnership interest of our project subsidiaries,
licenses and permits necessary to operate the facility and the cash flow derived
from the facility. In the event of a foreclosure after a default, the project
subsidiary would only retain an interest in the property remaining, if any,
after all debts and obligations were paid.
In addition, the debt of each operating project may reduce the liquidity of
our interest in such project since any sale or transfer of its interest would,
in most cases, be subject both to a lien securing such project debt and to
transfer restrictions in the relevant financing agreements. Also, our ability to
transfer or sell our interest in some of our projects is restricted by purchase
options we have granted to an industrial steam customer and to a utility and
rights of first refusal we have granted in favor of our power and steam
purchasers.
Because the project debt is "non-recourse", the lenders under these project
financing structures cannot look to the Cogentrix Energy or its other projects
for repayment unless Cogentrix Energy or another project subsidiary expressly
agrees to undertake liability. Cogentrix Energy has agreed to undertake limited
financial support for some of its project subsidiaries in the form of limited
obligations and contingent liabilities. These obligations and contingent
liabilities take the form of guarantees, indemnities, capital infusions and
agreements to pay debt service deficiencies. To the extent Cogentrix Energy
becomes liable under such guarantees and other agreements with respect to a
particular project, distributions received by Cogentrix Energy from other
projects may be used by Cogentrix Energy to satisfy these obligations. To the
extent of these obligations, the lenders to a project have recourse to Cogentrix
Energy and the distributions to Cogentrix Energy from other projects. The
aggregate contractual liability of Cogentrix Energy to its project lenders is,
in each case, a small portion of the aggregate project debt. Thus the project
financing structures are generally described throughout this prospectus as being
"non-recourse" to Cogentrix Energy and its other projects. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The indentures under which Cogentrix Energy has senior debt outstanding
permit the incurrence of debt, guarantees and liens jointly by any future
project subsidiaries or joint ventures with respect to the
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<PAGE> 65
future development of electric generating facilities. To the extent we take
advantage of these provisions of the indentures, the project lenders will have
recourse to several of the Company's facilities instead of having their recourse
limited to the facility or facilities owned by a single project subsidiary.
Our plants are insured in accordance with covenants in each project's debt
financing agreements. Coverages for each plant include workers' compensation,
commercial general liability, supplemented by primary and excess umbrella
liability, and a master property insurance program including property, boiler
and machinery and business interruption.
Operating Arrangements
Unlike many independent power producers who contract with third-party
operators, we operate many of our facilities. When we do, our project subsidiary
employs directly the persons required to operate the facility. We invest in
training our operating personnel and structure our plant bonus program to reward
efficient and cost-effective operation of the facilities. Our management meets
several times a year with the facilities' managers and conducts on-site facility
performance reviews with each facility manager.
We have established a strong record of efficiency and reliability in
operating our electric generating plants, which is measured in the industry by a
generating plant's "availability" to generate and sell electricity. The table
below shows the average "availability" of the 10 plants we currently operate for
the periods indicated.
<TABLE>
<CAPTION>
PERIOD AVERAGE AVAILABILITY
------ --------------------
<S> <C>
Twelve months ended June 30, 1998........................ 97.4%
Fiscal year ended June 30, 1997.......................... 96.9%
Fiscal year ended June 30, 1996.......................... 96.4%
</TABLE>
We provide to the facilities we operate administrative and management
services for a periodic fee, which in some cases is adjusted annually by an
inflation factor. The ability of a project subsidiary to pay these management
fees is contingent upon the continuing compliance by the project subsidiary with
covenants under its project financing agreements and may be subordinated to the
payment of obligations under those agreements. We have earned and will continue
to earn incentive compensation from our Hopewell facility, in which Cogentrix
Energy holds a 50% general partnership interest and is, through a subsidiary,
the managing general partner, if the facility achieves the contractually
specified net income levels.
In addition, we serve as a third-party operator under the terms of a
two-year operations and maintenance agreement for the generating facility we
developed for Public Utility District Number 1 of Clark County, Washington.
Ash Removal
Project subsidiaries owning eight of our coal-fired plants contract with
our subsidiary, ReUse Technology, to remove coal ash generated by such
facilities. As an alternative to disposing of coal ash in landfills, ReUse
Technology has developed the use of coal ash as structural fill material and in
the manufacturing and production of various ash derived products for resale.
FACILITY UNDER CONSTRUCTION IN BATESVILLE, MISSISSIPPI
In August 1998, we acquired an approximate 52% interest in an 800-megawatt,
gas-fired facility under construction in Batesville, Mississippi. We expect this
plant, which we will operate, to begin operation in June 2000. Electricity
generated by the plant will be sold under long-term power purchase agreements
with two utilities. Both of these utilities have senior, unsecured debt
outstanding that nationally-recognized credit rating agencies have rated
investment grade.
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DESCRIPTION OF FACILITIES IN OPERATION BEFORE THE BECHTEL ACQUISITION
Set forth in the following table and the text that follows the table are
descriptions of our 13 electric generating facilities in operation before the
Bechtel Acquisition. We developed nine of these facilities, which included
siting, permitting and financing activities. For a description of the facilities
in which we acquired our interests in October 1998 as a result of the Bechtel
Acquisition, see the table and text that appears in this description of our
business under the subheading "The October 1998 Bechtel Acquisition."
Each of our facilities described below 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 six-month period ended December 31, 1997, two
regulated utilities, accounted for approximately 85% of our consolidated
revenues. The failure of either of these utility customers to fulfill its
contractual obligations for a prolonged period of time would have a material
adverse effect on our primary source of revenues. Both of these utilities have
senior, unsecured debt outstanding that nationally-recognized credit rating
agencies have rated investment grade. As a result of the acquisitions we made in
1998, our operations have become more diverse with regard to both geography and
fuel source and less dependent on any single project or customer.
<TABLE>
<CAPTION>
COMPANY'S
PERCENT NET EQUITY
PLANT OWNERSHIP INTEREST IN PLANT POWER
PROJECT LOCATION FUEL MEGAWATTS INTEREST MEGAWATTS PURCHASING UTILITY
------- -------- ---- --------- ---------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Elizabethtown Elizabethtown, NC Coal 35 100% 35 CP&L*
Lumberton Lumberton, NC Coal 35 100 35 CP&L*
Kenansville Kenansville, NC Coal 35 100 35 CP&L*
Roxboro Roxboro, NC Coal 60 100 60 CP&L*
Southport Southport, NC Coal 120 100 120 CP&L*
Hopewell Hopewell, VA Coal 120 50 60 Virginia Power
Portsmouth Portsmouth, VA Coal 120 100 120 Virginia Power
Rocky Mount Rocky Mount, NC Coal 120 100 120 Virginia Power
Ringgold Ringgold, PA Gas 15.5 100 15.5 Pennsylvania
Electric Company
Richmond Richmond, VA Coal 240 100 240 Virginia Power
Birchwood King George, VA Coal 240 50 120 Virginia Power
Cottage Grove Cottage Grove, MN Gas 245 73.2 179.3 Northern States
Power Company
Whitewater Whitewater, WI Gas 245 74.2 181.8 Wisconsin Electric
Power Corporation
</TABLE>
- ---------------
* Commonly-used acronym for Carolina Power & Light Company
Elizabethtown, Lumberton and Kenansville, North Carolina Facilities
Our subsidiary, Cogentrix Eastern Carolina Corporation, owns and operates
three 35-megawatt stoker, coal-fired cogeneration plants in Elizabethtown,
Lumberton and Kenansville, North Carolina.
The Elizabethtown, Lumberton and Kenansville facilities sell electricity to
CP&L under separate power sales agreements, which were amended effective in
September 1996. Under the amended terms, the power sales agreements for the
Elizabethtown and Lumberton facilities each has an initial term expiring in
November 2000, and the power sales agreement for the Kenansville facility has an
initial term expiring in September 2001. Each of the facilities may operate at a
declared production capability of up to approximately 33 megawatts. Another
subsidiary, Cogentrix, Inc., has guaranteed the performance of CECC under the
power sales agreements. Alamac Knit Fabrics, Inc. purchases steam for its
apparel fabrics division mills from the Lumberton facility and the Elizabethtown
facility under separate steam sales agreements. Guilford Mills, Inc. purchases
steam from the Kenansville facility for use in its textile manufacturing plant.
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Each of the power sales agreements provides that in the event of a
termination prior to the expiration of the initial term of the power sales
agreements, our project subsidiary must pay CP&L a termination charge. This
penalty does not apply in the event of an early termination by our project
subsidiary that is the result of a material breach by the utility. When it does
apply, the termination charge is an amount equal to the excess paid for capacity
and energy over what would have been paid to our project subsidiary under the
state utilities commission's published rates plus interest.
If the average production capability or electricity generated or made
available during any 12-month period falls below 80% of the established contract
level, a special charge will be imposed by CP&L equal to a percentage of the
termination charge described above. In addition, if our project subsidiary
desires to terminate the power sales agreement prior to its expiration and a
substitute operator satisfactory to the utility is not secured, our project
subsidiary must pay to the utility the termination charge described above plus
an amount equal to the depreciated installed cost of the interconnection
facilities relating to the plant.
Roxboro and Southport, North Carolina Facilities
Our subsidiary, Cogentrix of North Carolina, Inc., operates two stoker
coal-fired cogeneration plants in Roxboro and Southport, North Carolina, which
are owned by another wholly-owned project subsidiary of the Company.
The Roxboro and Southport facilities sell electricity under separate power
sales agreements, each having an initial term expiring in December 2002. The
60-megawatt Roxboro facility may operate at a declared production capability of
up to 56 megawatts and the 120-megawatt Southport facility may operate at a
declared production capability of up to 107 megawatts. Another subsidiary,
Cogentrix, Inc., has guaranteed the performance of our project subsidiary under
the power sales agreements. Collins & Aikman Corporation purchases process steam
for its textile manufacturing facility from the Roxboro Facility and
Archer-Daniels-Midland Company purchases steam for its pharmaceutical and
chemical manufacturing company from the Southport facility.
Each of the power sales agreements provides that in the event our project
subsidiary desires to terminate the power sales agreement or abandons the
Roxboro or Southport facility, our project subsidiary must pay the utility a
termination charge. Such termination charge will be equal to the sum of the
following:
- the depreciated installed cost of the interconnection facilities relating
to the plant
- the cost incurred by the utility to replace the production capability
provided by the Roxboro or Southport facility in excess of the fixed
payments which would have been made to our project subsidiary for the
Roxboro or Southport facility
- a carrying charge equal to the overall pretax cost of capital allowed to
the utility by the retail rate order of the state utilities commission in
effect during the time the energy credits were received.
Hopewell, Virginia Facility
Our facility, located in Hopewell, Virginia, is a 120-megawatt stoker
coal-fired cogeneration facility owned and operated by a general partnership, in
which a 50% general partnership interest is owned by one of our subsidiaries.
The remaining 50% partnership interest is owned by Capistrano Cogeneration
Company, a subsidiary of Edison Mission Energy.
The Hopewell facility provides declared production capability of up to 92.5
megawatts to Virginia Power under a power sales agreement which expires in
January 2008. If the power sales agreement is terminated prior to the end of its
initial or any subsequent term other than due to a default by Virginia Power,
the project partnership must pay a penalty to Virginia Power. The amount of the
penalty is the difference between payments for production capability already
made and those that would have been allowable under the applicable "avoided
cost" schedules of the utility plus interest. Allied-Signal Corporation
purchases steam from the Hopewell Facility.
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Portsmouth, Virginia Facility
Our facility located in Portsmouth, Virginia is a 120-megawatt stoker
coal-fired cogeneration facility. The Portsmouth facility provides Virginia
Power declared production capability of up to 115 megawatts under a power sales
agreement which expires in June 2008. The Portsmouth facility also sells process
steam to Clariant Corporation.
If the power sales agreement for this facility is terminated prior to the
end of its initial or any subsequent term other than due to a default by
Virginia Power, then our project subsidiary must pay a penalty to Virginia
Power. The amount of the penalty is the difference between payments for
production capability already made and those that would have been allowable
under the applicable "avoided cost" schedules of Virginia Power plus interest.
Rocky Mount, North Carolina Facility
Our facility located near Rocky Mount, North Carolina is a 120-megawatt
stoker coal-fired cogeneration plant. Under a power sales agreement with North
Carolina Power Company, a division of Virginia Power, the Rocky Mount facility
provides declared production capability of 115.5 megawatts of electricity for an
initial term expiring in October 2015. In addition, steam from the Rocky Mount
facility is sold to Abbott Laboratories.
The power sales agreement for this facility provides that in the event the
state utility commission prohibits North Carolina Power from recovering from its
customers payments made by North Carolina Power under the power sales agreement
to our project subsidiary, our project subsidiary would recognize a reduction in
payments received under the power sales agreement after the 18th anniversary of
commencement of commercial operations of the facility to the extent necessary to
repay North Carolina Power the amount disallowed by the utility commission with
interest. In light of this provision in the power sales agreement, the project
lender for the Rocky Mount facility has established a reserve account, which is
required to be funded at any time a disallowance of payments made occurs or,
from and after January 1, 2004, any meritorious filing with the utility
commission challenging the pass-through of payments made by the utility under
the power sales agreement is made.
If a disallowance event occurs during the period from 1998 through 2002,
then 25% of cash flow from the facility must be deposited to the regulatory
disallowance reserve account until the balance of such account is equal to the
amount required to be funded. If a disallowance event occurs during the period
from 2003 through 2013, then 100% of the cash flow from the facility must be
deposited to the reserve account until the balance of the reserve account is
equal to the amount required to be funded. The amount required to be funded in
such account is an amount equal to the lesser of:
- Projected reduction in cash flows from 2009 through 2013 as a result of
the disallowance of payments made by the utility and,
- The amount of our project subsidiary's debt outstanding at September 30,
2008.
If the number of days in any year in which the Rocky Mount facility is
unable to generate electricity in an amount equal to its declared production
capability is more than the greater of 25 days or ten percent of the total
number of days the facility was required by North Carolina Power to operate,
then the fixed payments under the contract for that period will be reduced by
four percent for each excess day. In the event testing indicates that the Rocky
Mount facility's dependable production capability is less than 90% of the
declared production capability, our project subsidiary will be obligated to pay
annual liquidated damages to North Carolina Power. A letter of credit has been
posted by our project subsidiary in favor of North Carolina Power to secure its
obligations to perform under the power sales agreement.
Ringgold, Pennsylvania Facility
Our facility located in Ringgold, Pennsylvania, is a 15.5-megawatt
gas-fired cogeneration facility using an internal combustion engine fueled
primarily by natural gas. Pennsylvania Electric Company purchases
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energy from the facility. Under the power sales agreement, failure of our
subsidiary that owns and operates the plant to generate and sell electricity
throughout the term of the agreement at an annual average level which is at
least equal to 85% of the average output achieved during a rolling three-year
period of operation would result in the payment of a penalty.
In January 1998, we signed an agreement with Pennsylvania Electric Company
to terminate this facility's power purchase agreement. This termination
agreement was the result of a request for proposals from the utility to buy-back
or restructure power sales agreements issued to all major operating independent
power projects in its territory in April 1997. The termination agreement
provides for a payment to our project subsidiary of approximately $23 million,
which will be sufficient to retire all of the project subsidiary's outstanding
debt. The buy-back of the power purchase agreement is subject to the issuance of
a satisfactory order by the Pennsylvania Public Utility Commission granting
Pennsylvania Electric Company the authority to fully recover from its customers
the consideration paid under the buyout agreement. We do not expect the
termination of this facility's power purchase agreement, if it occurs, to have
an adverse impact on our consolidated results of operations or financial
position.
The Ringgold facility provides hot water to a 10-acre greenhouse owned by
our project subsidiary which is leased to and operated by an unaffiliated
company -- Keystone Village Farms, Inc. The lease has a ten-year term, which may
be extended with our consent.
Richmond, Virginia Facility
Our 240-megawatt stoker coal-fired cogeneration plant in Richmond, Virginia
provides 209 megawatts of declared production capability to Virginia Power under
two 25-year power sales agreements expiring in 2017. Our Richmond facility also
provides steam to E. I. DuPont de Nemours & Company.
The power sales agreement provides that in the event the state utilities
commission prohibits Virginia Power from recovering from its customers payments
made by Virginia Power to our project subsidiary, our subsidiary would recognize
a reduction in payments received under the power sales agreement after the 18th
anniversary of commencement of commercial operations of the facility to the
extent necessary to repay the amount of the disallowed payments to Virginia
Power with interest.
If the number of days in any year in which the Richmond facility is unable
to generate electricity in an amount equal to its declared production capability
is more than the greater of 25 days or ten percent of the total number of days
the facility was required by Virginia Power to operate, the fixed payments under
the contract for that period will be reduced by four percent for each excess
day. In the event testing indicates that the facility's dependable production
capability is less than 90% of the declared production capability, our
subsidiary will be obligated to pay annual liquidated damages to Virginia Power.
Our project subsidiary has letters of credit in favor of Virginia Power to
secure its obligations to perform under the power sales agreements.
Our project subsidiary purchased one of the power sales agreements from WV
Hydro, Inc. In connection with the purchase and in consideration of certain
consulting arrangements, our subsidiary has continuing obligations to make
payments to an affiliate of WV Hydro, in an aggregate amount ranging from
$250,000 to $750,000, each year through 2003, from excess facility cash flow. If
excess facility cash flow for any year is insufficient to pay the $250,000
minimum amount, the deficiency will be carried forward and is payable from
excess facility cash flow, if any, in future years. In addition, our subsidiary
is obligated to pay an amount ranging from 3 to 3.5 percent of the net proceeds
payable to our subsidiary upon any sale, disposition or refinancing of the
Richmond facility after payment of senior and subordinated project financing
debt and expenses.
Birchwood, Virginia Facility
Through an indirect, wholly-owned subsidiary we have a 50% interest in a
partnership that owns a 240-megawatt stoker coal-fired cogeneration plant in
King George, Virginia. The Southern Company, a public utility holding company,
owns the remaining 50% of the facility. The 36-acre greenhouse located
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adjacent to the facility, which is jointly owned by us and The Southern Company,
uses steam from the facility. An affiliate of The Southern Company operates and
maintains the Birchwood facility.
The Birchwood facility provides up to 202 megawatts of declared production
capability to Virginia Power under a power sales agreement which expires in
2021. The power sales agreement provides that in the event the state utilities
commission prohibits Virginia Power from recovering from its customers payments
made by Virginia Power to our project subsidiary, the partnership that owns the
facility would recognize a reduction in payments received under the power sales
agreement after the 20th anniversary of commencement of commercial operations of
the facility to the extent necessary to repay the amount of the disallowed
payments to Virginia Power with interest.
If this facility is unable to operate within the parameters established by
Virginia Power under the power sales agreement, the fixed payments under the
agreement for the period the facility is not able to do so are subject to
reduction. In the event testing indicates that the facility's dependable
production capability is less than 90% of the declared production capability,
the partnership will be obligated to pay annual liquidated damages to Virginia
Power. The partnership has posted a letter of credit in favor of Virginia Power
to secure its obligations to perform under the power sales agreement.
Cottage Grove, Minnesota Facility
Our Cottage Grove facility is a 245-megawatt combined-cycle, natural
gas-fired cogeneration facility in Cottage Grove, Minnesota. One of our
wholly-owned indirect subsidiaries is the sole general partner of the
partnership that owns the facility with a 1% partnership interest. Another
wholly-owned indirect subsidiary of ours owns an approximate 72.2% limited
partnership interest in Cottage Grove. An affiliate of Tomen Power Corporation
owns the remaining approximate 26.8% limited partnership interest.
The Cottage Grove facility provides 245 megawatts of declared production
capability to Northern States Power Company measured at summer conditions and
262 megawatts of declared production capability measured at winter conditions
under a power sales agreement which expires in 2027. Fixed payments are subject
to adjustment on the basis of performance-based factors which reflect the
Cottage Grove facility's semiannually tested production capability and its
rolling 12-month average and on-peak availability. Fixed payments are also
adjusted for transmission losses or gains relative to a reference plant. The
Cottage Grove facility also sells steam to Minnesota Mining and Manufacturing
Company.
Currently, Northern States Power Company is permitted full recovery from
its customers of payments made under the power sales agreement. The power sales
agreement provides, however, that following the tenth anniversary of the
commercial operation date, if Northern States Power Company fails to obtain or
is denied authorization by any governmental authority having jurisdiction over
its retail rates and charges, granting it the right to recover from its
customers any payments made under the power sales agreement, the disallowed
amounts will be monitored in a tracking account and the unpaid balance in the
tracking account shall accrue interest. Within 30 days after the first mortgage
bonds issued to finance the construction of the facility have been fully
retired, Northern States Power Company may begin reducing payments to the
partnership that owns the facility to ensure the payments are in line with
Minnesota Public Utility Commission rates and begin amortizing the balance in
the tracking account. Should Northern States Power Company exercise its right to
reduce payments, the maximum reduction is 75% of the payment otherwise due for
the period.
We manage and administer the partnership's business with respect to the
Cottage Grove facility, and provide certain management and administrative
services to the general partner. Westinghouse Operating Services Company, Inc.
operates the Cottage Grove facility.
Whitewater, Wisconsin Facility
Our Whitewater facility is a 245-megawatt combined-cycle, natural gas-fired
cogeneration facility in Whitewater, Wisconsin. One of our wholly-owned indirect
subsidiaries is the sole general partner of the general partnership that owns
the facility with a 1% general partnership interest. Another wholly-owned
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indirect subsidiary of ours owns an approximate 73.2% limited partnership
interest. An affiliate of Tomen Power Corporation owns the remaining approximate
25.8% limited partnership interest.
The Whitewater facility provides approximately 236.5 megawatts of declared
production capability to Wisconsin Electric Power Company under a power sales
agreement which expires in 2022. The Whitewater facility may also sell to third
parties up to 12 megawatts of electric production capability and any energy
which the utility does not dispatch. Fixed payments from the utility are subject
to adjustment on the basis of performance-based factors which reflect the
Whitewater facility's semiannual tested production capability and average and
on-peak availability for the preceding contract year.
The fixed payments from the utility may be reduced to the extent that the
utility's senior debt is downgraded by any two of Standard & Poor's Corporation,
Moody's Investors Services, Inc. and Duff & Phelps as a result of the utility's
long-term power purchase obligations under the power purchase agreement for the
Whitewater facility. So long as the partnership's first mortgage bonds issued to
finance construction of the facility are outstanding, the reduction may not
exceed the level necessary to cause the partnership's debt service coverage
ratio to be less than 1.4 in any one month, with such ratio calculated on a
rolling average of the four fiscal quarters immediately preceding the proposed
adjustment. After the partnership's first mortgage bonds have been repaid, the
reduction may not exceed 50% of the partnership's revenues minus expenses.
Reductions precluded by application of these limitations are accumulated in a
tracking account with interest accruing at a specified rate. Tracking account
balances are to be repaid when possible, subject to the limitations described
above, or may be applied to the price of the utility's option to purchase the
Whitewater facility at the expiration of the power sales agreement.
Currently, Wisconsin Electric Power Company is permitted full recovery from
its customers of payments made under the power sales agreement. The power sales
agreement provides, however, if at any time the utility is denied rate recovery
from its customers of any payment to be made under the power sales agreement by
an applicable regulatory authority, the utility's payments may be
correspondingly reduced, subject to contractually specified limitations. While
the partnership's first mortgage bonds are outstanding, the fixed payments may
be reduced by the annual regulatory disallowance provided that the reduction may
not cause the partnership's debt service coverage ratio to be less than 1.4 in
any month calculated on a rolling average of the four fiscal quarters preceding
the proposed adjustment. After the outstanding first mortgage bonds are repaid,
reductions may not exceed 50% of the Whitewater facility's revenues minus
expenses. Reductions precluded by these restrictions are accumulated in a
tracking account with repayment subject to the same provisions as for bond
downgrading adjustments discussed above.
The Whitewater facility sells steam to the University of
Wisconsin -- Whitewater under a steam supply agreement expiring in 2005. The
facility also sells hot water to a greenhouse located adjacent to the facility.
FloriCulture, Inc., an affiliate of the partnership that owns the Whitewater
facility, has entered into an operational services agreement pursuant to which
FloriCulture provides all services necessary to produce, market and sell
horticulture products and to operate and maintain the greenhouse facility.
We manage and administer the partnership's business with respect to the
Whitewater facility, and provide management and administrative services to the
general partner of the partnership. Westinghouse Operating Services Company,
Inc. operates the Whitewater facility.
THE OCTOBER 1998 BECHTEL ACQUISITION
In October 1998, we acquired ownership interests in 12 electric generating
plants and a natural gas pipeline from Bechtel Generating Company, Inc. Nine of
these electric generating facilities were developed and are managed by U.S.
Generating Company, LLC, an indirect, wholly-owned subsidiary of PG&E
Corporation, and are owned in part by its affiliates. This acquisition provides
Cogentrix with a net equity interest of approximately 365 megawatts in a diverse
portfolio of generating plants that comprises approximately 2,400 megawatts in
total production capability. The plants are located in New Jersey, New York,
Pennsylvania, West Virginia, Massachusetts and Florida.
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The following table provides information about the 12 electric generating
facilities and the 375-mile natural gas transmission line.
<TABLE>
<CAPTION>
PERCENT NET
OWNERSHIP EQUITY INTEREST
PLANT INTEREST IN PLANT
PROJECT LOCATION FUEL MEGAWATTS ACQUIRED MEGAWATTS POWER PURCHASING UTILITY
- ------- -------- ---- --------- --------- --------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Logan Logan Township, NJ Coal 218 49.0% 106.8 Atlantic City Electric
Northampton Northampton County, PA Waste coal 110 49.0 53.9 Metropolitan Edison
Indiantown Martin County, FL Coal 380 10.0 38.0 Florida Power & Light
Carneys Point Carneys Point, NJ Coal 262 10.0 26.2 Atlantic City Electric
Panther Creek Carbon County, PA Waste coal 83 12.2 10.1 Metropolitan Edison
Scrubgrass Scrubgrass Township, PA Waste coal 85 20.0 17.0 Pennsylvania Electric
Selkirk Albany, NY Gas 396 5.1 20.2 Con Edison & Niagara
Mohawk
Cedar Bay Jacksonville, FL Coal 260 16.0 41.6 Florida Power & Light
Mass Power Springfield, MA Gas 258 3.3 8.5 Boston Edison
Gilberton Frackville, PA Waste coal 82 19.6 16.1 Pennsylvania Power &
Light
Pittsfield Pittsfield, MA Gas 173 10.9 18.9 New England Power
Morgantown Morgantown, WV Coal/Waste 62 15.0 9.3 Monongahela Power
coal
Iroquois Gas Long Island, NY to -- -- 0.5 -- --
Transmission Waddington, NY
System
</TABLE>
The portion of the purchase price we allocated to the first four plants
described in the table represented approximately 74% of the total purchase
price. The text that follows provides a more detailed description of the first
four plants.
Logan Facility
A Delaware limited partnership owns the Logan facility, which is a
218-megawatt pulverized coal-fired cogeneration generating plant located on the
Delaware River in Logan Township, New Jersey. The partnership leases the Logan
facility to another Delaware limited partnership. An indirect, wholly-owned
subsidiary of Cogentrix, owns a 49% general partnership interest in each of the
first limited partnership and each of the partners of the second limited
partnership. The remaining 1% interest is held by an indirect subsidiary of
Bechtel Generating Company, Inc. as a limited partnership interest. Pursuant to
a put agreement, Bechtel Generating Company, Inc. has the right to require us to
purchase, at fair market value, the 1% limited partnership interest within the
30-day period following November 20, 1999. If Bechtel Generating Company, Inc.
exercises such put right, the 1% limited partnership interest will automatically
convert to a general partnership interest upon transfer to us. An indirect,
wholly-owned subsidiary of PG&E is the sole limited partner in each of the first
partnership and the partners of the second limited partnership, owning a 1%
limited partnership interest. The PG&E subsidiary also owns a 49% general
partnership interest in each of the first partnership and each of the partners
of the second limited partnership.
The Logan facility, which began operation in September 1994, provides up to
200 megawatts of declared production capability to Atlantic City Electric
Company under a power sales agreement which expires in 2024. The Logan facility
has the capability to provide up to approximately 15 megawatts of excess
production capability and energy to third parties. The Logan Facility sells
steam to Solutia, Inc.
If the net deliverable production capability of the Logan facility falls
below 190,000 kilowatts, then the partnership that owns the facility must pay
liquidated damages to the utility in an amount calculated
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using a formula that reflects both the amount of the deficiency and the rate
those mid-Atlantic electric utilities who are members of a mid-Atlantic regional
power pool and fail to satisfy their capacity obligations to the pool must pay
to the other members who make up the deficiency.
An affiliate of U.S. Generating Company operates the Logan Facility
pursuant to an operation and maintenance agreement with initial term expiring in
2004. U.S. Generating Company provides management services pursuant to a
management services agreement which expires in 2027.
Northampton Facility
A Delaware limited partnership owns this 110-megawatt anthracite waste
coal-fired electric generating facility in Northampton County, Pennsylvania. An
indirect, wholly-owned subsidiary of Cogentrix owns a 49% general partnership
interest in this partnership. The remaining 1% interest is held by an indirect
subsidiary of Bechtel Generating Company, Inc. as a limited partnership
interest. Pursuant to a put agreement, Bechtel Generating Company, Inc. has the
right to require us to purchase, at fair market value, the 1% limited
partnership interest within the 30-day period following November 20, 1999. If
Bechtel Generating Company, Inc. exercises such put right, the 1% limited
partnership interest will automatically convert to a general partnership
interest upon transfer to our subsidiary. An indirect, wholly-owned subsidiary
of PG&E owns an aggregate 50% equity interest in the partnership that owns this
project, which consists of a 48% general partnership interest and 2% limited
partnership interest.
The Northampton facility, which began operation in September 1995, provides
electric energy to Metropolitan Edison Company pursuant to a power sales
agreement which expires in 2020. Capacity in excess of 89 megawatts may be sold
to third parties, but no energy from the Northampton facility may be sold to any
entity other than Metropolitan Edison.
The Northampton facility is not directly interconnected to Metropolitan
Edison's electric system and accordingly requires an electric utility that is
interconnected with Metropolitan Edison's electric system to transmit the
Northampton facility's output to Metropolitan Edison. Pursuant to a transmission
service agreement (which expires in 2020) with Pennsylvania Power & Light
Company, that utility transmits the Northampton Facility's net electric energy
to Metropolitan Edison's existing electric system.
In the event the Northampton facility's annual average delivery of
electricity for any year following the commercial operation date during on-peak
hours is less than 85% of the Northampton facility's annual average delivery of
electricity during the on-peak hours for the prior three years, the partnership
that owns the facility is obligated to make a penalty payment to Metropolitan
Edison. During the first 11 years of the power sales agreement commencing with
the commercial operation date, the penalty payment will equal the difference
between 85% of the annual average on-peak electricity delivered in the prior
three years and the actual on-peak electricity delivered in the year to which
the penalty relates times 3.4c per kWh. After the eleventh year of the power
sales agreement, the penalty payment will be calculated as above, except that
the rate of 3.4c per kWh shall be adjusted annually according to changes in the
Gross Domestic Product Implicit Price Deflator.
Based on its use of waste coal as its primary fuel source, the Federal
Energy Regulatory Commission has certified the Northampton Facility as a
"qualifying small power production facility". The Northampton facility produces
and sells steam to Ponderosa Fibers, but steam sales are not required in order
to maintain the Northampton facility's regulatory status.
An affiliate of U.S. Generating Company operates and maintains the
Northampton facility pursuant to an operation and maintenance agreement with an
initial term expiring in 2020. U.S. Generating Company, LLC provides management
and administration services for the Northampton facility pursuant to a
management services agreement with an initial term expiring in 2020.
In addition to the partners' original equity contributions to the
partnership that owns the Northampton facility, the partners have posted letters
of credit or corporate guarantees in an aggregate amount of $9 million as a
standby equity commitment to be used for some types of fuel-related costs. They
have also posted a letter of credit in the amount of $2.2 million as a standby
equity commitment to be used solely to
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establish the bank debt service reserve fund for the exclusive benefit of the
banks. In connection with the Bechtel Acquisition, the Company provided letters
of credit or corporate guarantees for 50% of those standby equity commitments.
Indiantown Facility
A Delaware limited partnership owns this 380-megawatt pulverized coal-fired
cogeneration facility located in Martin County, Florida. An indirect,
wholly-owned subsidiary of PG&E owns a 50% general partnership interest in the
partnership, an indirect, wholly-owned subsidiary of General Electric Capital
Corporation owns a 40% limited partnership interest in the partnership, and we
own a 10% general partnership interest. The Indiantown facility began operation
in December 1995 and sells steam to Caulkins Indiantown Citrus Company.
The Indiantown facility provides 330 megawatts of declared production
capability to Florida Power & Light Company under a power sales agreement which
expires in 2025. Fixed payments by Florida Power & Light are subject to
adjustment on the basis of the Indiantown facility's actual production
capability.
Currently, Florida Power & Light is permitted full recovery from its
customers of payments made under the power sales agreement. The power sales
agreement contains a provision, which provides that if Florida Power & Light at
any time is denied authorization to recover from its customers any payments to
be made under the power sales agreement, Florida Power & Light may, in its sole
discretion, adjust payments under the power sales agreement to the amount it is
authorized to recover from its customers. The utility may also require the
partnership that owns the facility to return payments subsequently disallowed by
the regulatory agency. If the obligations of Florida Power & Light and the
partnership that owns the facility are materially altered due to the operation
of this provision in the agreement, the partnership may terminate the power
sales agreement upon 60 days' notice. The partnership and Florida Power & Light
must then in good faith attempt to negotiate a new power sales agreement or any
agreement for transmission of the Indiantown facility's capacity and energy to
another investor-owned, municipal, or cooperative electric utility
interconnected with Florida Power & Light in Florida.
An affiliate of U.S. Generating Company provides operation and maintenance
services for the Indiantown facility pursuant to an operating agreement which
expires in 2025. U.S. Generating Company manages and administers the business of
the partnership that owns the facility pursuant to a management service
agreement which expires in 2029.
Carneys Point Facility
A Delaware limited partnership owns this 262-megawatt pulverized coal-fired
cogeneration facility located within the grounds of the DuPont Chamber Works, a
chemical complex in Carneys Point, New Jersey. The partnership leases the
Carneys Point facility to a partnership of wholly-owned subsidiaries of U.S.
Generating Company. Lease payments are structured to equal project cash flow and
the lessee partnership derives no net cash flow or benefit from the lease. We
own a 10% general partnership interest in the limited partnership that owns the
facility. The other general partner is an indirect, wholly-owned subsidiary of
PG&E, which owns a 50% general partnership interest. The sole limited partner is
an indirect, wholly-owned subsidiary of General Electric Capital Corporation,
which owns a 40% limited partnership interest.
The Carneys Point facility began operation in March 1994. The facility
provides Atlantic City Electric Company with 187.6 megawatts in the summer
months and 173.2 megawatts in the winter months for an annual average of 180.4
megawatts. If the actual available production capability falls below 95% of the
respective production capability requirement for the winter or summer period,
the partnership that owns the facility must make a deficiency payment to the
utility until actual production capability for such period reaches 95% of the
production capability requirements for the period.
Under an energy services agreement, the Carneys Point facility sells steam
and up to 40 megawatts of electricity to DuPont. The Carneys Point facility has
the capability to sell an average of approximately 30 megawatts of excess
production capability and energy to third parties.
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An affiliate of U.S. Generating Company operates the Carneys Point facility
under an operation and maintenance agreement with an initial term expiring in
2004. U.S. Generating Company provides management services for the facility
pursuant to a management services agreement with a term expiring in 2018.
PRINCIPAL CUSTOMERS
Electric utility customers accounting for more than ten percent of our
revenue for the six-month period ended December 31, 1997 and for each of the
last three fiscal years were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, SIX-MONTH
-------------------- PERIOD ENDED
1995 1996 1997 DECEMBER 31, 1997
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
CP&L........................................... 34% 33% 25% 22%
Virginia Power................................. 57 55 62 63
</TABLE>
As a result of the acquisitions we completed in 1998, our operations will
become more diverse with regard to both geography and fuel source and less
dependent on any single project or customer. For the year ended December 31,
1997, on a pro forma basis after giving effect to the Whitewater/Cottage Grove
Acquisition and the Bechtel Acquisition, CP&L and Virginia Power would have
accounted for 13% and 45%, respectively, of our operating revenues (including
our pro rata share of revenues of the unconsolidated affiliates in which some of
our subsidiaries hold investments).
REGULATION
General
The discussion that follows in this section of our prospectus is a brief
summary of complex energy and environmental regulations. To reduce the length of
the summary and the frequent repetition of the names of federal energy and
environmental statutes and the regulatory agencies charged with administering
them, we have used acronyms both for the names of the statutes and the federal
regulatory agencies. For the same reasons, we have also used, within this
section of the prospectus only, defined terms for complex regulatory concepts.
Our plants are subject to federal, state and local energy and environmental
laws and regulations applicable to the development, ownership and operation of
electric generating facilities. Federal laws and regulations govern transactions
with utilities, types of fuel utilized, the type of energy produced and power
plant ownership. State regulatory commissions must approve the rates and, in
some instances, other terms under which utilities purchase electricity from
independent producers. These state commissions may have broad jurisdiction over
non-utility owned power plants. Power plants also are subject to laws and
regulations governing environmental emissions and other substances produced by a
plant, along with the geographical location, zoning, land use and operation of a
plant. Applicable federal environmental laws typically have state and local
enforcement and implementation provisions. These environmental laws and
regulations generally require that a wide variety of permits and other approvals
be obtained before construction or operation of a power plant commences and that
the power plant operates in compliance with them. We strive to comply with all
environmental laws, regulations, permits and licenses but, despite such efforts,
at times we have been in non-compliance.
Energy Regulations
QFS UNDER THE PUBLIC UTILITY REGULATORY POLICIES ACT OF 1978. All of our
current operating facilities are classified as a qualifying facility ("QF")
under the Public Utility Regulatory Policies Act of 1978 ("PURPA"). QFs are
relieved of compliance with extensive federal, state and local regulations that
control the development, financial structure and operation of power plants and
cost-of-service based ratemaking to determine the prices at which electric
generating facilities sell energy. In order to be a QF, a cogeneration facility
must sequentially produce both electricity and useful thermal energy for non-
mechanical or non-electrical uses in specified proportions to the facility's
total useful energy output. A QF utilizing oil or natural gas as fuel also must
meet energy efficiency standards. A small power production
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facility may be a QF if it uses alternative fuels as its primary energy input,
subject to limitations on fossil fuel input and size for the facility. Finally,
a QF must not be controlled or more than 50% owned by an electric utility or by
an electric utility holding company, or a subsidiary of either or any
combination thereof.
PURPA exempts QFs from the Public Utility Holding Company Act of 1935
("PUHCA"), most provisions of the Federal Power Act (the "FPA") and, except
under limited circumstances, state rate and financial regulations. These
exemptions are important to us and our competitors.
In the absence of a power sales agreement, regulations adopted by the
Federal Energy Regulatory Commission ("FERC") require utilities to purchase
electricity generated by QFs at a price based on the purchasing utility's full
"avoided cost," and that the utility sell back-up power to the QF on a non-
discriminatory basis. Avoided costs are the incremental costs to a utility of
electric energy or capacity, or both, which, but for the purchase from QFs, the
utility would generate for itself or purchase from another source. Due to
increasing competition for utility contracts, the current practice is for most
power sales agreements to be awarded below avoided cost.
We endeavor to minimize the risk of our facilities losing their QF status.
The occurrence of events outside our control, such as loss of a steam customer,
could jeopardize QF status. While the facilities usually would be able to react
in a manner to avoid the loss of QF status by, for example, by replacing the
steam customer or finding another use for the steam which meets PURPA's
requirements, there is no certainty that the alternative implemented would be
practicable or economic.
If one of our facilities were to lose its status as a QF, the subsidiary
would lose its exemptions from PUHCA and the FPA and from state laws and
regulations. This could subject the subsidiary to regulation under the FPA and,
in such event, would result in Cogentrix Energy inadvertently becoming a public
utility holding company. Our other facilities could in turn lose their QF
status. Moreover, loss of QF status could result in utility customers
terminating their power sales agreement with the nonqualifying facility. If loss
of QF status were threatened for a facility, we could avoid holding company
status and thereby protect the QF status of our other facilities by applying to
the FERC to obtain exempt wholesale generator ("EWG") status for the owner of
the nonqualifying facility. See "EWGs under the Energy Policy Act" herein.
Alternatively, the FERC may grant a limited waiver to the QF that would provide
continued exemption under PUHCA, provided the facility's rates were regulated
under the FPA.
EWGS UNDER THE ENERGY POLICY ACT. The passage of the Energy Policy Act has
significantly expanded the options available to independent power producers with
respect to their regulatory status. In addition to or in lieu of QF status, an
independent power producer selling exclusively at wholesale now can also apply
to the FERC to be granted status as an EWG. Except for existing cost-of-service
based facilities for which state consents are required, any owner of a facility
may apply for status as an EWG. An EWG, like a QF, is exempt from regulation
under PUHCA. However, EWG status does not exempt a facility from FERC and state
public utility commission ("PUC") regulatory reviews, which may be more
expansive than those applicable to QFs. Owners of the Birchwood facility and the
Logan facility, each of which is a QF, have also been determined to be EWGs.
FOREIGN INVESTMENTS UNDER THE ENERGY POLICY ACT. The Energy Policy Act has
also expanded the options for companies that wish to invest in foreign
enterprises that own power production facilities outside the United States.
Amendments to PUHCA in the Energy Policy Act provide that a domestic company
making such an investment may avoid "holding company" status or other regulation
under PUHCA, if the foreign enterprise obtains EWG status or files a notice with
the Securities and Exchange Commission that it is a foreign utility company
("FUCO").
PUHCA. Under PUHCA, any entity owning or controlling ten percent or more
of the voting securities of a "public utility company" is a "holding company"
and is subject to registration with the Securities and Exchange Commission and
regulation under PUHCA, unless eligible for an exemption. Under the Energy
Policy Act and PURPA, EWGs, FUCOs, and owners and operators of QFs are deemed
not to be public utility companies under PUHCA. Momentum is growing in Congress
for the repeal of
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PUHCA, as more legislators adopt the view that this statute has outlived its
purpose. Elimination of PUHCA would enable more companies to consider owning
generating and transmission assets, would permit "single state" utility systems
to expand beyond their state borders, and would permit companies that are
currently in registered holding company systems to diversify their investments
to a greater extent than now permitted. This could attract more competitors to
the power development and power marketing business. We believe that we are well
positioned, however, to meet stronger competition and, indeed, may be able to
pursue more investment opportunities made available by the repeal of PUHCA.
FPA. The FPA grants the FERC exclusive rate-making jurisdiction over
wholesale sales of electricity in interstate commerce, including ongoing as well
as initial rate jurisdiction, which enables the FERC to revoke or modify
previously approved rates. While QFs under PURPA typically are exempt from the
traditional rate-making and various other provisions of the FPA, projects not
qualifying for QF status, for example, most EWGs, are subject to the FPA and to
FERC rate making jurisdiction. Power marketers are also subject to FERC review
of their wholesale rates, and to FERC oversight of various business dealings
such as corporate reorganizations. Pursuant to the FPA, our power marketing
subsidiary has filed its wholesale electric power rates with the FERC and
obtained authorization to sell electric power at rates set by supply and demand
in the marketplace. In addition, the Logan facility has filed its rates with the
FERC and obtained authorization to sell all of its power pursuant to those
rates.
STATE REGULATION. PUCs regulate retail rates of electric utilities and, in
many states, power sales agreements from independent power producers. In
addition, states have been delegated the authority to determine utilities'
avoided costs under PURPA. PUCs often will pre-approve agreements with prices
that do not exceed avoided costs, because such contracts often have been
acquired through a competitive or market-based process. Recognizing the
competitive nature of the acquisition process, many PUCs will permit utilities
to "pass through" expenses associated with a power sales agreement with an
independent power producer. In addition, retail sales of electricity or steam by
an independent power producer may be subject to PUC regulation, depending on
state law.
EWGs are subject to broad regulation by PUCs, ranging from the requirement
of certificates of public convenience and necessity to regulation of
organizational, accounting, financial and other corporate matters. In addition,
states may assert jurisdiction over the siting and construction of EWGs as well
as QFs and over the issuance of securities and the sale or other transfer of
assets by these facilities. Many state utility commissions and state
legislatures are actively seeking ways to lower electric power costs at the
retail level, including options that would permit or compel competition at the
retail level. Federal legislation that would require states to permit retail
competition is also being given serious consideration. An opening of the retail
market would create tremendous opportunities for companies that have until now
been limited to the wholesale market. At the same time, state commissions are
pressuring the utilities they regulate to cut purchased power costs through
strict enforcement of existing contracts with QFs and EWGs, many of which are
considered to be overpriced. State commissions are also encouraging efforts by
utilities to buy out or buy down such contracts.
PROPOSED LEGISLATION. In addition to federal legislative initiatives, the
state commissions or state legislatures of many states are considering, or have
considered, whether to open the retail electric power market to competition.
These initiatives are generally called "retail access" or "customer choice".
Such "customer choice" plans typically allow customers to choose their
electricity suppliers by a date that is specified in the initiative. Retail
competition is possible when a customer's local utility agrees, or is required,
to "unbundle" its distribution service, that is, the delivery of electric power
to retail customers through its local distribution lines, from its transmission
and generating service.
The competitive price environment that will result from retail competition
may cause utilities to experience revenue shortfalls and deteriorating
creditworthiness. However, most, if not all, state plans will insure that
utilities receive sufficient revenues, through a distribution surcharge if
necessary, to pay their obligations under existing long-term power purchase
contracts with QFs and EWGs, including the above-market rates, or "stranded
investment" costs, provided for in such contracts. Many states will also provide
that the stranded investment costs will be "securitized" through new financial
instruments. On the other
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hand, QFs and EWGs may be subject to pressure to lower their contract prices or
to renegotiate contracts in an effort to reduce the "stranded investment" costs
of their utility customers.
Retail access programs may provide Cogentrix with additional opportunities
to provide power from our projects to industrial users or power marketers.
TRANSMISSION AND WHEELING. Under the FPA, the FERC regulates the rates,
terms and conditions for electricity transmission in interstate commerce. The
FERC's authority under the FPA to require electric utilities to provide
transmission service to QFs and EWGs was significantly expanded by the Energy
Policy Act. Except when market factors such as an exceptional site or power
sales opportunity warrant it, we generally attempt to site our facilities within
the utility customer's service area, and thus avoid the need to utilize
wheeling. The new provisions of the Energy Policy Act, however, and actions
taken by the FERC under the FPA have improved transmission access and pricing
for independent power producers like us.
In April 1996, the FERC issued a rulemaking order under the FPA, Order 888,
requiring all jurisdictional public utilities to file "open access" transmission
tariffs. Compliance with Order 888 has been virtually universal. However, many
utilities are seeking permission from the FERC to recover for "stranded
investment" through add-ons to their transmission rates. To the extent that the
FERC permits such charges, the cost of transmission may be too high on some
systems to be of practical use to wholesale sellers like Cogentrix. Therefore,
the full value of Order 888 remains to be determined.
The FERC is also encouraging the voluntary restructuring of transmission
operations through the use of independent system operators and regional
transmission groups. Such entities may create efficiencies for traditional
utilities, but are not likely to have a substantial impact on power developers
and power marketers like Cogentrix.
Environmental Regulations -- United States
The construction and operation of power projects are subject to extensive
environmental protection and land use regulation in the United States. Those
regulations applicable to Cogentrix primarily involve the discharge of emissions
into the water and air and the use of water, but can also include wetlands
preservation, endangered species, waste disposal and noise regulation. These
laws and regulations often require a lengthy and complex process of obtaining
and renewing licenses, permits and approvals from federal, state and local
agencies. If such laws and regulations are changed and our facilities are not
grandfathered, extensive modifications to power project technologies and
facilities could be required.
Although a number of major environmental statutes are scheduled for
reauthorization, we expect that environmental regulations will continue to
become more stringent as environmental regulations previously passed become
implemented. Accordingly, we plan to continue a strong emphasis on
implementation of environmental standards and procedures at the facilities we
operate and at our other facilities to minimize the environmental impact of
energy generation at these facilities.
CLEAN AIR ACT. In late 1990, Congress passed the Clean Air Act Amendments
of 1990 (the "1990 Amendments") which affect existing facilities as well as new
project development. The original Clean Air Act of 1970 set guidelines for
emissions standards for major pollutants from newly-built sources. All of the
facilities we operate perform at levels better than federal performance
standards mandated for such facilities under the Clean Air Act. The 1990
Amendments attempt to reduce emissions from existing sources -- particularly
large older facilities that were exempted from some of the regulations under the
original Clean Air Act.
The 1990 Amendments create a marketable commodity called a sulfur dioxide
("SO(2)") "allowance." All non-exempt facilities over 25 megawatts that emit
SO(2), including independent power plants, must obtain allowances in order to
operate after 1999. Each allowance gives the owner the right to emit one ton of
SO(2). The 1990 Amendments exempt from the SO(2) allowance provisions all
independent power projects which were operating, under construction or with
power sales agreements or letters of intent as of November 15, 1990, as well as
facilities outside the contiguous 48 states. As a result, most of the facilities
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we operate are exempt. The non-exempt facilities we operate have determined
their need for allowances and have accounted for these requirements in their
operating budgets and financial forecasts. In the future, the facilities we
expect to develop will continue to rely on "clean low sulfur coal," with flue
gas desulfurization technology or natural gas technology. We believe that the
additional costs of obtaining the number of allowances needed for future
projects should not materially affect our ability to develop such projects.
There has also been an oversupply of allowances in the market resulting in a
significant decrease in allowance prices.
The 1990 Amendments also require states to impose annual operating permit
fees. While such permit fees may be substantial and will be greater for
coal-fired projects than for those burning gas or other fuels, such fees are not
expected to significantly increase our costs at the plants we operate.
The 1990 Amendments also contain other provisions that could affect our
projects. Provisions dealing with geographical areas the EPA has designated as
in "nonattainment" with national ambient air quality standards require that
existing sources of air pollutants in a nonattainment area be retrofit with
reasonably available control technology ("RACT") for all pollutants for which an
area is designated nonattainment. The technology currently installed at the
plants we operate should uniformly meet or exceed RACT for those pollutants. The
nonattainment provisions also require that each new or expanded source of air
pollutants in newly designated nonattainment areas which has not submitted a
complete air permit application before November 15, 1992 must obtain emissions
reductions from existing sources that more than offset the emissions from the
new or expanded source. While the "offset" requirements may hamper new project
development in some geographical areas, development of new projects has and will
likely continue, particularly as markets for "offsets" develop.
The 1990 Amendments also provide an extensive new operating permit program
for existing sources called the Title V permitting program. Because all of the
facilities we operate were permitted under the Prevention of Significant
Deterioration New Source Review Process, the permitting impact to Cogentrix
under the 1990 Amendments at those facilities is expected to be minimal.
Continuous emission monitoring systems may need to be upgraded at some
facilities while the permit fees will increase operating expenses. The costs of
applying for and obtaining operating air permits are not anticipated to be
significant.
The hazardous air pollutant provisions of the 1990 Amendments presently
exclude electric steam generating facilities, such as our facilities. Three
studies of the emissions from such facilities are, however, in progress. Until
all of these studies are completed and Congress either amends the Clean Air Act
further or the EPA promulgates regulations, the federal hazardous air pollutants
emissions restrictions, which will be applied to our facilities and other
electric steam generating facilities, will remain uncertain.
In July 1997, the EPA promulgated more restrictive ambient air quality
standards for ozone and particulate matter: less than 25 microns in
diameter -- PM-2.5. These new standards will likely increase the number of
nonattainment areas for both ozone and PM-2.5. If our facilities are in these
new nonattainment areas, further emission reduction requirements could result in
the installation of additional control technology.
In addition, the Ozone Transport Assessment Group ("OTAG"), composed of
state and local air regulatory officials from the 37 eastern states, has
recommended additional NO(x) emission reductions that go beyond current federal
standards. These recommendations include reductions from utility and industrial
boilers. In the fall of 1998, the EPA adopted regulations requiring revisions to
state implementation plans ("SIPs"). These regulations implement some of the
OTAG's recommendations and goes beyond some of the OTAG's recommendations for
reductions in NO(x) emissions. As a result of these more stringent NO(x)
emission standards, we may be required to install additional NO(x) emission
control technologies and/or obtain allowances from other emitters. The State of
North Carolina -- where six of the plants we operate are located -- has,
however, proposed to the EPA an alternative NO(x) reduction plan that does not
include any of those plants.
The 1990 Amendments expand the enforcement authority of the federal
government by increasing the range of civil and criminal penalties for
violations of the Clean Air Act, enhancing administrative civil
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penalties, and adding a citizen suit provision. These enforcement provisions
also include enhanced monitoring, recordkeeping and reporting requirements for
existing and new facilities. On February 13, 1997, the EPA issued a regulation
providing for the use of "any credible evidence or information" in lieu of, or
in addition to, the test methods prescribed by regulation to determine the
compliance status of permitted sources of air pollution. This rule may
effectively make emission limits previously established for many air pollution
sources, including ours, more stringent.
The Kyoto Protocol regarding greenhouse gas emissions and global warming
was signed by the U.S., committing to significant reductions in greenhouse gas
emissions. The U.S. Senate must ratify the agreement for the protocol to take
effect. The Clinton Administration has proposed a package of legislative and
administrative policies to curb greenhouse gases, none of which are affected by
the need for Senate ratification. Management believes that none of these
policies will have a material effect on the consolidated results of operations
or financial position of Cogentrix. Future initiatives on this issue and the
effects on Cogentrix are unknown at this time.
CLEAN WATER ACT. Our facilities are subject to a variety of state and
federal regulations governing existing and potential water/wastewater and
stormwater discharges from the facilities. Generally, federal regulations
promulgated through the Clean Water Act govern overall water/wastewater and
stormwater discharges through National Pollutant Discharge Elimination System
permits. Under current provisions of the Clean Water Act, existing permits must
be renewed every five years, at which time permit limits are under extensive
review and can be modified to account for more stringent regulations. In
addition, the permits have re-opener clauses which can be used to modify a
permit at anytime. Several of the facilities we operate have either recently
gone through permit renewal or will be renewed within the next few years. Based
upon recent renewals, we do not anticipate more stringent monitoring
requirements for any of the facilities we operate.
EMERGENCY PLANNING AND COMMUNITY RIGHT-TO-KNOW ACT. In April of 1997, the
EPA expanded the list of industry groups required to report the Toxic Release
Inventory under Section 313 of the Emergency Planning and Community
Right-to-Know Act to include electric utilities. Our operating facilities will
be required to complete a toxic chemical inventory release form for each listed
toxic chemical manufactured, processed or otherwise used in excess of threshold
levels for the 1998 reporting year. The purpose of this requirement is to inform
the EPA, states, localities and the public about releases of toxic chemicals to
the air, water and land that can pose a threat to the community.
Environmental Regulations -- International
Although the type of environmental laws and regulations applicable to
independent power producers and developers varies widely from country to
country, many foreign countries have laws and regulations relating to the
protection of the environment and land use which are similar to those found in
the United States. Laws applicable to the construction and operation of electric
generating facilities in foreign countries generally regulate discharges and
emissions into water and air and also regulate noise levels.
Air pollution laws in foreign jurisdictions often limit the emissions of
particulates, dust, smoke, carbon monoxide, sulfur dioxide, nitrogen oxide and
other pollutants. Water pollution laws in foreign countries generally limit
wastewater discharges into municipal sewer systems and require treatment of
wastewater which does not meet established standards. New projects and
modifications to existing projects are also subject, in many cases, to land use
and zoning restrictions imposed in the foreign country. In addition, developers
of foreign independent power projects often conduct environmental impact
assessments of proposed projects pursuant to existing legislative requirements.
Lenders to international development projects may impose their own requirements
relating to the protection of the environment.
We believe that the level of environmental awareness and enforcement is
growing in most countries, including most of the countries in which we intend to
develop and operate new projects. As a result, plants built overseas will likely
include pollution control equipment that is required in the United States.
Therefore, based on current trends, we believe that the nature and level of
environmental regulation that we are subject to will become increasingly
stringent, whether we undertake new projects in foreign countries or in the
United States.
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EMPLOYEES
At September 30, 1998, we employed 477 people, none of whom is covered by a
collective bargaining agreement.
PROPERTIES
In addition to our properties listed and described in the section entitled
"Business -- Facilities in Operation," we lease our principal executive office,
a single 61,024 square foot building, located at 9405 Arrowpoint Boulevard in
Charlotte, North Carolina. We lease the building and related land from a
partnership comprised of four shareholders of Cogentrix Energy. The building
lease has an initial term ending in 2004, with optional renewals through 2047.
The term of the land lease extends through 2047. See "Transactions with Related
Parties -- Leases and Real Property."
We also lease office space in Prince George, Virginia; Portland, Oregon;
Singapore; Bangalore, India; Mangalore, India; and New Delhi, India.
We believe that our facilities and properties have been satisfactorily
maintained, are in good condition, and are suitable for our operations.
LEGAL PROCEEDINGS
Under the terms of the amended power sales agreements for our
Elizabethtown, Lumberton, Kenansville, Roxboro and Southport facilities, the
purchasing utility has exercised its right to suspend or reduce purchases of
energy resulting in significantly reduced fuel requirements at each of these
facilities. Coal is supplied to the Elizabethtown, Lumberton and Kenansville
facilities by James River Coal Sales, Inc. and one of its affiliates. Coal was
supplied to the Southport facility until November 1997 when the contract term
expired by Coastal Coal Sales, Inc. The coal sales agreements for the
Elizabethtown, Lumberton and Kenansville facilities provide for the sale and
purchase of the coal requirements of those facilities through September 2001.
Under the amended power sales agreement for our Portsmouth facility,
Virginia Power has from time to time since December 1997 exercised its right to
suspend or reduce purchases of energy resulting in significantly reduced fuel
requirements at the facility. Coal is supplied to the Portsmouth facility by
Arch Coal Sales Company, Inc. The coal sales agreement provides for the sale and
purchase of the coal requirements of the Portsmouth facility through 2002.
As a result of the purchasing utility exercising its right to suspend or
reduce purchases of energy from these facilities and the consequent reduction in
fuel requirements, our project subsidiaries operating these facilities are
purchasing significantly less coal. The suppliers are seeking to recover damages
and, in some cases, seeking injunctive relief. A summary of each of these
pending disputes is set forth below.
Dispute with James River Coal (Elizabethtown, Lumberton and Kenansville
Facilities)
In November 1996, James River Coal instituted an action against our project
subsidiary in the United States District Court for the Eastern District of
Kentucky claiming breach of contract and fraud in the inducement based on the
reduction in coal requirements. In this complaint, James River Coal sought
specific performance and, in the alternative, an unspecified amount of damages.
In April 1998, after the case was transferred to the United States District
Court for the Western District of North Carolina, the fraud in the inducement
claim was dismissed by the court with prejudice.
The contract with James River Coal contains an arbitration provision
requiring contract disputes to be submitted to arbitration in Charlotte, North
Carolina. After we filed a motion to compel arbitration of the contract claim,
James River Coal consented to, and filed a demand for, arbitration of the claim.
In March 1999, the dispute regarding the terms of the contract was submitted to
arbitration before a three-member panel of arbitrators in Charlotte, North
Carolina. We have not yet received a notice of award from the American
Arbitration Association.
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Dispute with Coastal Coal Sales (Supplier to Southport Facility)
In October 1996, Coastal Coal Sales initiated an arbitration proceeding
against our project subsidiary through the American Arbitration Association in
Charlotte, North Carolina. The notice of arbitration alleged breach of contract
based on the reduction in coal requirements at our Southport facility. In
October 1997, a three-member panel of arbitrators ruled in our favor, denying
any recovery to the coal supplier.
The successor company to Coastal Coal Sales subsequently challenged the
arbitrator's ruling in the United States District Court for the Western District
of North Carolina on grounds of arbitrator partiality. In April 1998, the court
issued an order vacating the ruling of the arbitration panel and directing that
a new arbitration be conducted. We are appealing the court's decision to the
United States Court of Appeals for the Fourth Circuit.
Dispute with Arch Coal Sales (Supplier to our Portsmouth Facility)
In February 1998, this coal supplier filed a complaint against our project
subsidiary in the United States District Court for the Southern District of West
Virginia alleging breach of contract and seeking a determination that the
subsidiary is obligated to purchase approximately 360,000 tons of coal per year,
breached the coal sales agreement by wrongfully reducing its requirements of
coal, and violated a duty of good faith and fair dealing owed to the coal
supplier. In the alternative, this coal supplier seeks damages for the
subsidiary's failure to purchase such quantities of coal. This agreement also
contains an arbitration clause that requires any disputes between the parties to
be resolved by arbitration in Charlotte, North Carolina. In June 1998, the
District Court issued an order staying the litigation proceeding pending
arbitration of the issues raised in the complaint.
On March 11, 1999, our project subsidiary entered into a comprehensive
settlement agreement with this coal supplier, which is subject to the approval
of their and our board of directors and to the approval of the lenders to our
project subsidiary. The agreement also reflects that we have not yet reached
final agreement with the coal supplier on the potential impact of the provisions
of our steam sales agreements at the Portsmouth Facility on the settlement
agreement's payment terms. If we reach final agreement on that issue and the
required board consents and lender approvals are obtained, the settlement
agreement will obligate our project subsidiary to make payments over the next
five years in amounts that we believe will not have a material adverse effect on
the projected aggregate amount of cash flow to Cogentrix Energy from its project
subsidiaries and unconsolidated affiliates. The payments we expect to make under
this settlement agreement should not, therefore, have a material adverse impact
on Cogentrix Energy's ability to service its outstanding debt.
Summary of Coal Purchase Agreement Disputes
Based upon the advice of Dennis W. Alexander, Group Senior Vice President,
General Counsel and Secretary of Cogentrix Energy, after consultation with
various counsel retained to represent us in these matters, management believes
that the ruling in our favor by the panel of arbitrators in the dispute with the
coal supplier to the Southport facility will be upheld on appeal, and that there
is no basis for some of the claims and there are meritorious defenses as to the
remainder in the disputes with the coal suppliers to the other facilities. We
intend to vigorously contest the claims made by each of these suppliers and
believe that they will be resolved in our favor. We have established reserves
which our management believes to be adequate to cover any costs which may result
from these matters. The ultimate disposition of these proceedings, in the
judgment of our management, will not have a material adverse impact on our
consolidated results of operations or financial position.
Other Routine Litigation
In addition to the litigation described above, we experience routine
litigation in the normal course of business. Our management is of the opinion
that none of this routine litigation will have a material adverse impact on our
consolidated financial position or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF COGENTRIX ENERGY
The directors and executive officers of Cogentrix Energy are as set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
George T. Lewis, Jr.................... 71 Chairman of the Board and Director
David J. Lewis......................... 42 Vice Chairman, Chief Executive Officer and Director
Mark F. Miller......................... 44 President, Chief Operating Officer and Director
James E. Lewis......................... 35 Executive Vice President and Director
Dennis W. Alexander.................... 52 Group Senior Vice President, General Counsel,
Secretary and Director
James R. Pagano........................ 39 Group Senior Vice President -- Development, Mergers &
Acquisitions
Betty G. Lewis......................... 69 Director
Robert W. Lewis........................ 45 Director
W. E. "Bill" Garrett................... 68 Director
John A. Tillinghast.................... 71 Director
</TABLE>
GEORGE T. LEWIS, JR., our founder, has been Chairman of the Board and a
Director of Cogentrix Energy since its formation in 1993 and Chief Executive
Officer of Cogentrix Energy from December 1993 to August 1995, prior to which he
was Chief Executive Officer and a Director of Cogentrix, Inc. from 1983 to 1993,
Chairman of the Board of Cogentrix, Inc. since 1990 and President of Cogentrix,
Inc. from 1983 to 1989. Mr. Lewis previously served for over 18 years with Chas
T. Main, Inc., an engineering firm headquartered in Boston. In 1971, he became a
Senior Vice President responsible for that firm's work with the utility
industry. From 1978 through 1980, he headed that firm's Southern District office
located in Charlotte, North Carolina and directed its involvement in the area of
coal-fired industrial power plants. In 1980, Mr. Lewis was promoted to Group
Vice President and director and returned to Boston to assume responsibility for
all corporate marketing and sales. George Lewis is the father of David J. Lewis,
James E. Lewis and Robert W. Lewis and the spouse of Betty G. Lewis.
DAVID J. LEWIS has been a Director of Cogentrix Energy since its formation
and was appointed Vice Chairman of the Board and Chief Executive Officer in
August 1995. Prior to August 1995, Mr. Lewis was Executive Vice President --
Marketing and Development, Chief Executive Officer -- Elect since June 1994,
Group Senior Vice President -- Marketing and Development with Cogentrix, Inc.
since September 1993 and a Director of Cogentrix, Inc. since 1988. From 1989
until September 1993, he was Senior Vice President -- CGX Environmental Systems
and President and Chief Operating Officer -- CGX Environmental Systems Division
of Cogentrix, Inc. From 1987 to 1989, he was Vice President -- Administration of
Cogentrix, Inc. from 1986 to 1987, he was Resident Construction Manager and from
1985 to 1986, he was Assistant Construction Manager. Prior to joining Cogentrix,
Inc. in 1985, he was Operations Manager with Bartex Corporation, an export
management company headquartered in Portland, Oregon. David Lewis is a son of
George T. Lewis, Jr. and Betty G. Lewis.
MARK F. MILLER was appointed President, Chief Operating Officer and a
Director of Cogentrix Energy in May 1997. Prior to joining Cogentrix Energy, Mr.
Miller was Vice President for Northrop Grumman in Bethpage, New York. He joined
Northrop Grumman in 1982 and held successive positions in the material, law and
contracts departments before being named Vice President, Contracts and Pricing
at Northrop's B-2 Division in 1991. In 1993, he became Vice President-Business
Management at the B-2 Division. In 1994, Northrop acquired the Grumman
Corporation and Mr. Miller was named Vice President-Business Management for the
newly formed Electronics and Systems Integration Division, a position he held
until his move to Cogentrix Energy. From 1980 to 1982, he was an Associate with
the law firm of Dolack, Hansler.
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<PAGE> 84
JAMES E. LEWIS has been Executive Vice President and a Director of
Cogentrix Energy since its formation, prior to which he was Executive Vice
President of Cogentrix, Inc. since November 1992 and a Director of Cogentrix,
Inc. since 1988. From 1991 to 1992, he was Senior Vice President of Operations
responsible for the daily operations of Cogentrix, Inc.'s facilities. From 1989
to 1991, Mr. Lewis was Vice President -- Utility Operations. Mr. Lewis joined
Cogentrix in 1986 and in 1987, he was selected as Assistant Project Manager
responsible for the construction of the Portsmouth facility. James Lewis is a
son of George T. Lewis, Jr. and Betty G. Lewis.
DENNIS W. ALEXANDER has been Group Senior Vice President, General Counsel,
Secretary and a Director since joining Cogentrix Energy in February 1994.
Immediately prior to joining Cogentrix Energy, Mr. Alexander was Vice
President/General Counsel of Wheelabrator Environmental Systems Inc., the
waste-to-energy and cogeneration subsidiary of Wheelabrator Technologies Inc.,
an independent power and environmental services and products company, as well as
Director, Environmental, Health and Safety Audit Program for Wheelabrator
Technologies Inc. From 1988 to 1990, Mr. Alexander was Vice President/General
Counsel -- Operations of Wheelabrator Environmental Systems Inc. and from 1986
to 1988 was Vice President/General Counsel of Wheelabrator Energy Systems, a
cogeneration project development subsidiary. From 1984 to 1986, he served as
Group General Counsel for The Signal Company and from 1980 to 1984 as Division
General Counsel of Wheelabrator-Frye Inc., each a diversified public company.
JAMES R. PAGANO has been Group Senior Vice President -- Development,
Mergers & Acquisitions since February 1999. From May 1997 until then he was
Group Senior Vice President -- Chief Financial Officer of Cogentrix Energy,
prior to which he was Senior Vice President -- Project Finance since February
1995 and Vice President -- Project Finance since Cogentrix Energy's formation.
Previously, Mr. Pagano was Vice President -- Project Finance of Cogentrix, Inc.
since July 1993, Vice President -- Legal and Finance from July 1992 to July
1993, and from January 1992 to July 1992, Mr. Pagano was Vice President and
Assistant General Counsel of Cogentrix, Inc. Prior to joining Cogentrix, Inc. he
was Vice President of The Deerpath Group, Inc., a financial advisory firm. From
1987 to 1990, Mr. Pagano was an Associate with the law firm of Simpson Thacher &
Bartlett.
BETTY G. LEWIS has been a Director of Cogentrix Energy since September
1994. Betty Lewis is the spouse of George T. Lewis, Jr.
ROBERT W. LEWIS has been a Director of Cogentrix Energy since its
formation, prior to which he was a Director of Cogentrix, Inc. since 1988. In
April 1991, Mr. Lewis resigned from his positions of Vice Chairman and Secretary
of Cogentrix, Inc. which he had held since March 1991. Since his resignation as
an officer, Mr. Lewis has served as a consultant to us. From October 1990 to
March 1991, Mr. Lewis was Executive Vice President and Secretary. From March
1988 to October 1990, Mr. Lewis was Senior Vice President -- Corporate
Development and Secretary, in which position Mr. Lewis was in charge of
Cogentrix, Inc.'s development efforts. From March 1987 to March 1988, Mr. Lewis
was Senior Vice President -- Administration and Secretary. From September 1983
to March 1987, Mr. Lewis was Vice President -- Administration and Secretary. Mr.
Lewis joined Cogentrix, Inc. in April 1983 and served as Secretary through
September 1983. Robert Lewis is a son of George T. Lewis, Jr. and Betty G.
Lewis.
W. E. "BILL" GARRETT has been a Director of Cogentrix Energy since its
formation and became a Director of Cogentrix, Inc. in September 1993. Mr.
Garrett served on the staff of the National Geographic Society for 36
years -- the last 10 as Editor-in-Chief of the magazine. As a member of the
Board of Trustees of the National Geographic Society and its Research and
Exploration Committee, he was instrumental in the Society's emergence as the
world's largest educational and scientific institution. He resigned in 1990 and
became the President of the La Ruta Maya Conservation Foundation, which is
involved in cultural and conservation work with the Maya Indians. Mexico,
Guatemala and Italy have honored him with prestigious awards for his work in the
region. Mr. Garrett currently serves on the boards of the National Capital
Bicentennial Celebration, the American Land Conservancy, and Partners for
Livable Communities.
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<PAGE> 85
JOHN A. TILLINGHAST was elected a Director of Cogentrix Energy on March 19,
1998, filling a position left vacant since the death of former board member T.
Louis Austin, Jr. last year. Mr. Tillinghast served from 1994 to April 1998 as
President, Chairman and CEO of Great Bay Power Corporation, a public utility in
Dover, New Hampshire, and since April 1998 has continued to serve as Chairman.
He also has served since 1997 as the President, Chairman and CEO of BayCorp
Holdings, Ltd., the holding company for Great Bay Power Corporation. After
graduating from Columbia University in 1949 with BS and MS degrees in mechanical
engineering, Mr. Tillinghast began a 30-year career with American Electric Power
Company, rising through the engineering ranks to become Vice Chairman of the
Board in charge of engineering and construction. Prior to his current position
at Great Bay Power Corporation, he served as Chairman of the Energy Engineering
Board of the National Academy of Sciences and Director of the Edison Electric
Institute. Mr. Tillinghast is a Fellow of the American Society of Mechanical
Engineers, a registered professional engineer in nine states and a holder of two
U.S. and seven foreign patents.
EXECUTIVE COMPENSATION
The following table sets forth information for the calendar year ended
December 31, 1997 and for each of the two fiscal years in the period ended June
30, 1997 concerning the annual compensation paid or accrued by Cogentrix to or
for the account of each of the following: (1) the only person who served as the
chief executive officer of Cogentrix during the calendar year ended December 31,
1997 and (2) the four most highly compensated executive officers of Cogentrix
incumbent at December 31, 1997, other than the chief executive officer, for the
year then ended (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER COMPENSATION
-------------------------------
MATCHING TERMINATION OF
ANNUAL COMPENSATION CONTRIBUTIONS INCENTIVE
NAME AND TWELVE-MONTH --------------------------------- SUPPLEMENTAL/ COMPENSATION
PRINCIPAL POSITION PERIOD ENDING SALARY(1) BONUS(2) TOTAL RETIREMENT(3) AGREEMENTS(4)
------------------ ----------------- --------- -------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
George T. Lewis, Jr..... December 31, 1997 $674,086 $332,080 $1,006,166 $40,445 $915,179
Chairman of the Board June 30, 1997 666,647 332,080 998,727 58,212 936,780
June 30, 1996 649,100 381,810 1,030,910 60,960 --
David J. Lewis.......... December 31, 1997 613,960 841,239 1,455,199 58,157 862,329
Vice Chairman and June 30, 1997 565,317 695,824 1,261,141 67,657 862,171
Chief Executive Officer June 30, 1996 351,720 359,500 711,220 45,040 --
James E. Lewis.......... December 31, 1997 364,524 415,163 779,687 25,831 884,692
Executive Vice President June 30, 1997 360,347 345,124 705,471 44,191 884,692
June 30, 1996 349,720 279,950 629,670 37,380 --
James R. Pagano......... December 31, 1997 223,532 345,033 568,565 28,412 --
Group Senior Vice June 30, 1997 194,498 180,000 374,498 28,912 --
President -- Development, June 30, 1996 155,243 137,367 292,610 17,570 --
Mergers & Acquisitions
Dennis W. Alexander..... December 31, 1997 284,086 175,033 459,119 21,845 --
Group Senior Vice June 30, 1997 272,068 70,000 342,068 21,472 --
President and June 30, 1996 220,946 198,840 419,786 15,332 --
General Counsel
</TABLE>
- ---------------
(1) Amounts listed in this column include all fees for service on Cogentrix's
board of directors.
(2) Amounts listed in this column reflect annual performance bonuses and annual
distributions under our profit-sharing plan and facility cash flow incentive
compensation agreements discussed below. The amounts listed do not include
the distributions made under such plan and agreements to the Named Executive
Officers during any fiscal year in which such distribution was earned in the
previous fiscal year.
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<PAGE> 86
(3) The amounts shown in this column include Cogentrix's matching contributions
on behalf of the Named Executive Officers to Cogentrix's 401(k) savings plan
in which all Cogentrix employees are eligible to participate and to a
non-qualified Supplemental Retirement Savings Plan in which approximately 35
employees, including all of the Named Executive Officers participate.
(4) The amounts shown in this column include the payments made to David J.
Lewis, James E. Lewis and George T. Lewis, Jr. related to the termination of
the facility cash flow incentive compensation agreements, net of the awards
each of these Named Executive Officers would have otherwise received under
these plans for the fiscal year ended June 30, 1997, which amounts are
included under the column heading "Bonuses."
COMPENSATION PURSUANT TO INCENTIVE COMPENSATION PLANS
Profit-Sharing Plan
We have a profit-sharing plan which is a non-qualified incentive
compensation plan for the benefit of approximately 42 employees of Cogentrix.
Under our profit-sharing plan, we have entered into arrangements with each of
our executive officers, which provide for annual cash compensation distribution
awards to each participant equal to a designated percentage of our adjusted net
income before taxes each fiscal year plus the amount of any accrual for payments
to be made under our profit-sharing plan, with the designated percentage
determined annually at the discretion of our Chief Executive Officer or Chief
Operating Officer based on criteria they deem appropriate. No payments were made
under our profit-sharing plan for the fiscal year ended June 30, 1997. For the
twelve-month period ended December 31, 1997, David J. Lewis earned $190,065,
James E. Lewis earned $114,039, and James R. Pagano and Dennis W. Alexander each
earned $95,033 under our profit sharing plan, all of which were earned during
the six-month period ended December 31, 1997.
In the event a participant in our profit-sharing plan terminates his or her
employment with Cogentrix, for a reason other than death, total disability,
retirement or termination by Cogentrix for willful misconduct, the participant
is entitled to receive a severance benefit equal to a percentage -- ranging from
100% after six years of full-time employment to a maximum of 200% after ten
years or more of full-time employment -- of the most recent annual distribution
to which the employee is then entitled. In the event of a participant's death or
total disability, the participant, or his or her beneficiary, is entitled to
receive from zero to five years of annual distribution awards thereafter,
depending upon the participant's length of service with the Company.
Executive Incentive Bonus Plan
In addition to the annual cash compensation distribution awards payable
under our profit-sharing plan or the facility cash flow incentive compensation
agreements described below, some of our executive officers, including David J.
Lewis, James E. Lewis, Mark F. Miller, Dennis W. Alexander and James R. Pagano
may receive additional incentive cash compensation awards, determined on a
sliding scale, if we achieve contractually specified levels of net income before
income tax targets for a given fiscal year. No additional incentive cash
compensation awards were earned during the fiscal year ended June 30, 1997 or
during the twelve-month period ended December 31, 1997.
Facility Cash Flow Incentive Compensation Agreements
We had entered into non-qualified incentive compensation agreements with
three of the Named Executive Officers, David J. Lewis, James E. Lewis and George
T. Lewis, Jr., each of whom is a director and a shareholder of Cogentrix Energy.
These agreements provided for each of these Named Executive Officers to receive,
through June 30, 2007, annual distributions equal to a designated percentage of
the net cash flow for the fiscal year of one or both of two of our facilities.
In the fiscal year ended June 30, 1997, we terminated the facility cash flow
incentive compensation agreements with these Named Executive Officers. In
connection with the termination of these plans, David J. Lewis, James E. Lewis
and George T. Lewis, Jr. were paid $1,157,996, $1,119,816 and $1,247,259,
respectively.
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<PAGE> 87
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
David J. Lewis
In August 1995, the board of directors elected David J. Lewis Vice Chairman
and Chief Executive Officer of Cogentrix. George T. Lewis, Jr., the former Chief
Executive Officer, will continue to serve as Chairman of the Board. We have an
employment agreement with David J. Lewis through August 2000 which provides for
a base annual salary for each fiscal year at least equal to the base salary for
the immediately preceding fiscal year. In addition to the base salary, Mr. Lewis
is entitled to receive annual incentive compensation in an amount determined by
the board of directors, which amount, when combined with the base salary payable
to him, shall be at least sufficient to provide him with total annual
compensation that is competitive with total annual compensation offered by other
similarly situated companies to their employees in comparable positions.
Upon our giving notice, the employment agreement is terminable in the event
a majority of the board of directors terminates Mr. Lewis' employment for cause.
In addition, we may terminate the agreement at any time at our option in the
event that the board determines in its reasonable, good faith judgment, and by a
vote of at least two-thirds of the directors then in office, that the continued
service of Mr. Lewis as Chief Executive Officer of Cogentrix would not be in our
best interest because there has occurred a continued failure by him, whether or
not such failure resulted from his physical or mental incapacity, substantially
to perform his duties, responsibilities or obligations as Chief Executive
Officer after having been given written notice of such failure to perform and
after having failed to improve such performance within the time period specified
in such notice. Mr. Lewis may terminate his employment agreement at any time at
his option in the event of a change of control of Cogentrix.
George T. Lewis, Jr.
In August 1995, we entered into a five-year employment and noncompetition
agreement with George T. Lewis, Jr., a shareholder and Chairman of the Board.
Under the terms of the agreement, Mr. Lewis is required to be fully available to
us during customary business hours for consultations, either in person or by
telephone, with respect to our business and affairs as we may reasonably call on
him to furnish. In addition, the restrictive covenants of the agreement
substantially limit Mr. Lewis' ability to engage in consulting arrangements for
other companies and prohibit his support of any company in the energy industry.
Pursuant to the agreement, Mr. Lewis will receive base compensation of $618,000,
adjusted annually based on an inflationary index, as well as performance
bonuses, the amount of which will be determined in accordance with our policy by
the Chief Executive Officer in consultation with the Chief Operating Officer.
Mr. Lewis received base compensation of $646,000 for the year ended December 31,
1997.
In the event of Mr. Lewis' death or inability to provide services due to
disability, the agreement shall terminate and we are obligated to continue
making payments to him or to his estate for a period of six months after such
termination. We may terminate this agreement for cause at any time, and Mr.
Lewis may voluntarily terminate this agreement at any time. In either case, Mr.
Lewis shall not be entitled to any further payments or benefits under the
consulting agreement. In the event we terminate this agreement without cause,
Mr. Lewis is entitled to receive all payments and benefits which would have been
earned throughout the term of this consulting agreement.
Dennis W. Alexander
When he joined Cogentrix in January 1994, we entered into an employment
agreement with Dennis W. Alexander to serve as Senior Vice President, General
Counsel and Secretary and as a member of the Board of Directors. Under the
employment agreement, Mr. Alexander is entitled to a minimum base annual salary
of $180,000, subject to adjustment in future years. He is also entitled to
participate in our profit sharing plan, at a level of no less than 0.3% of net
income before taxes, and our executive incentive bonus plan. The employment
agreement is for a one-year term that renews automatically at the end of
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<PAGE> 88
each calendar year unless we previously exercise our right to terminate Mr.
Alexander's employment. We have the right to terminate Mr. Alexander's
employment upon 30 days' written notice. A material change in his title,
authority, duties or current compensation following a change in control of
Cogentrix constitutes a de facto termination by us. In the event we terminate
his employment, Mr. Alexander is entitled to receive, within 30 days of his
termination, a severance payment in an amount equal to his total compensation
received in the prior calendar year, including any fees he received for serving
as a member of the Board of Directors.
James R. Pagano
In January 1999, we entered into an employment agreement with James R.
Pagano, Group Senior Vice President -- Development, Mergers & Acquisitions.
Under the employment agreement, Mr. Pagano is entitled to an annual base salary
of $306,000, which may be increased in 1999 or in future years. He is also
entitled to participate in our profit sharing plan, at a level of no less than
0.5% of net income before taxes, and our executive incentive bonus plan. The
employment agreement is for a one-year term that renews automatically at the end
of each calendar year unless we previously exercise our right to terminate Mr.
Pagano's employment. We have the right to terminate Mr. Pagano's employment upon
30 days' written notice. Following a change in control of Cogentrix, we will be
deemed to have terminated Mr. Pagano as the result of
(1) a change in his title, authority, duties or location of workplace and
responsibilities,
(2) a reduction in his annual base salary or profit sharing participation
or
(3) our failure to make any other payment to Mr. Pagano.
In the event we terminate his employment, Mr. Pagano is entitled to receive,
within 30 days of his termination, a severance payment in an amount equal to
250% of his total compensation received in the prior calendar year, including
salary, bonuses and profit sharing.
DIRECTORS' COMPENSATION AND CONSULTING AGREEMENTS
Directors, including employee directors, receive an annual retainer of
$25,000 for service on the board of directors. In addition, for each meeting
attended, each director receives a fee of $1,000. During the year ended December
31, 1997, there were five meetings of Cogentrix Energy's board of directors.
We have entered into consulting agreements with Messrs. Garrett and
Tillinghast each of which provides for payment of $15,000 annually for
consulting services to be rendered to us.
While Robert W. Lewis was employed as an executive officer, Cogentrix
entered into a non-qualified incentive compensation agreement with him similar
to the agreements described above under "-- Facility Cash Flow Incentive
Compensation Agreements" providing for him to receive incentive compensation
annually equal to a designated percentage of the net cash flow for the fiscal
year of two of our facilities. Our obligation to make such annual payments to
him continues through June 30, 2007. We have agreed to pay him an annual minimum
payment of $200,000 regardless of whether his actual annual distribution would
yield such amount. Robert W. Lewis must repay to Cogentrix, on or before January
31, 2008, an amount equal to the aggregate amount of minimum payments made in
excess of the actual annual distributions which he was entitled to receive. The
actual amount of the distribution Mr. Lewis received pursuant to his facility
cash flow compensation agreement for the six-month period ended December 31,
1997 was $100,000.
If at any time through June 1, 2007 Mr. Lewis sells or transfers any of the
shares of common stock of Cogentrix Energy held by him to anyone other than
other designated members of the Lewis family without granting Cogentrix Energy a
right of first refusal with respect to the shares sold or transferred, he will
forfeit his right to the annual distributions under his facility cash flow
incentive compensation agreement and the right to the annual minimum payment of
$200,000.
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<PAGE> 89
PRINCIPAL STOCKHOLDERS
All of the issued and outstanding shares of common stock of Cogentrix
Energy are beneficially owned by George T. Lewis, Jr., Betty G. Lewis and their
three sons: David J. Lewis, James E. Lewis and Robert W. Lewis. The number of
shares and the percentage of the total number of shares beneficially owned by
each are shown below.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME SHARES OWNERSHIP
- ---- --------- ----------
<S> <C> <C>
George T. Lewis, Jr.(1)..................................... 73,320 26%
John C. Fennebresque(2)..................................... 73,320 26
Betty G. Lewis.............................................. 73,320 26
David J. Lewis.............................................. 45,120 16
James E. Lewis.............................................. 45,120 16
Robert W. Lewis............................................. 45,120 16
</TABLE>
- ---------------
(1) George T. Lewis, Jr.'s shares are held of record by a revocable grantor
trust that may be revoked by Mr. Lewis at any time prior to his death, in
which event the shares held by it would be transferred to him. Accordingly,
he is deemed to be the beneficial owner of the shares held by the trust.
(2) The 73,320 shares shown as beneficially owned by Mr. Fennebresque are all
held of record by the trust described in Note 1 above. Mr. Fennebresque is
deemed to be the beneficial owner of these shares, because he is the sole
trustee of the trust and, as such, has the power to vote and invest the
shares held by it. Since George T. Lewis, Jr. is also deemed to be the
beneficial owner of these shares, they are also included in the amount shown
for the number of shares beneficially owned by George T. Lewis, Jr.
TRANSACTIONS WITH RELATED PARTIES
The transactions described or referred to below were entered into between
related parties. In connection with the public offering of Cogentrix Energy's
2004 senior notes in March 1994, Cogentrix Energy's board of directors adopted a
policy that all subsequent material transactions with related parties must be on
terms no less favorable than could be obtained from third parties and that any
variance from this policy is subject to approval by a majority of Cogentrix
Energy's disinterested directors. The indentures and the covenants of the
corporate credit facility place limitations on Cogentrix Energy's ability to
enter into material transactions with related parties as well.
LEASES AND REAL PROPERTY TRANSACTIONS
Equipment Leasing Partners ("ELP"), a North Carolina general partnership
consisting of four of Cogentrix Energy's shareholders, George T. Lewis, Jr.,
David J. Lewis, James E. Lewis and Robert W. Lewis, owns and leases equipment to
Cogentrix Energy's project subsidiaries related to the operations of their
facilities. Each of the partners in ELP is a member of Cogentrix Energy's board
of directors. David J. Lewis, James E. Lewis and George T. Lewis, Jr. are also
executive officers of Cogentrix Energy. Total rent paid by us to ELP under such
equipment leases was $329,892 for the six-month period ended December 31, 1997,
$1,021,400 for the fiscal year ended June 30, 1997, $1,112,000 for the fiscal
year ended June 30, 1996 and $1,244,000 for the fiscal year ended June 30, 1995.
ELP also owns and leases to us our executive offices under a long-term
lease with an initial term expiring in 2004. Total rent paid by us to ELP under
such lease was $398,526 for the six-month period ended December 31, 1997,
$834,000 for the fiscal year ended June 30, 1997, $817,000 in the fiscal year
ended June 30, 1996, and $801,000 for the fiscal year ended June 30, 1995.
ELP leases the land on which our executive offices are located under a
long-term ground lease from an unrelated third party with an initial term
expiring in 2047, all payments under which are guaranteed by Cogentrix, Inc., an
indirect subsidiary of Cogentrix Energy. Total amounts paid by ELP under such
lease
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were $56,000 for the six-month period ended December 31, 1997 and $112,000 for
each of the fiscal years ended June 30, 1997, 1996 and 1995.
INDEBTEDNESS OF MANAGEMENT
Cogentrix Energy has from time to time made loans and advances to some of
its shareholders, each of whom is also a director of Cogentrix Energy. The
largest aggregate amount of indebtedness outstanding exceeding $60,000 at any
time during the six-month period ended December 31, 1997 for such shareholders
was $140,000 in the case of George T. Lewis, Jr., and the outstanding balance of
the loan to Mr. Lewis at December 31, 1997 was $28,000. This loan was made to
Mr. Lewis and related to the financing of a personal residence. The loan to Mr.
Lewis was payable upon demand and accrued interest at the prime rate plus 1%
(9.50% as of December 31, 1997). Mr. Lewis has subsequently repaid the full
amount of this loan.
Cogentrix, Inc. has also from time to time made loans to ELP for the
purpose of financing purchases of equipment. These loans were made at variable
rates of interest equal to the prime rate of designated banks plus approximately
two percentage points. The largest aggregate amount of indebtedness of ELP to
Cogentrix, Inc. outstanding during the six-month period ended December 31, 1997
was $44,000. ELP had no indebtedness to Cogentrix, Inc. as of December 31, 1997.
FACILITY CASH FLOW INCENTIVE COMPENSATION AGREEMENTS
We have entered into agreements with four of the beneficial owners of
Cogentrix Energy's outstanding shares of common stock, three of whom are
executive officers of Cogentrix and the fourth of whom was a former executive
officer and each of whom is a director, that provide for them to receive annual
distributions equal to a designated percentage of the net cash flow for each
fiscal year of one or both of two of our facilities. During the fiscal year
ended June 30, 1997, we terminated these agreements for the three executive
officers. See "Management -- Executive Compensation,"
"Management -- Compensation Pursuant to Incentive Compensation Plans -- Facility
Cash Flow Incentive Compensation Agreements" and "Management -- Directors'
Compensation and Consulting Agreements."
SHAREHOLDER STOCK TRANSFER AGREEMENT
In August 1994, George T. Lewis, Jr. entered into an agreement with Betty
G. Lewis ("Ms. Lewis") providing for, among other things, the transfer by George
T. Lewis, Jr. of a portion of his shares of Cogentrix Energy's common stock to
Ms. Lewis. In accordance with the agreement, if Ms. Lewis desires to transfer or
otherwise dispose of any of her shares of common stock of Cogentrix Energy, she
must first offer to sell them to Cogentrix Energy at a price equal to a bona
fide offer from an unrelated party. Any shares, the offer of sale of which is
not accepted by Cogentrix Energy after receipt of the written offer, must be
offered by Ms. Lewis at the same price to the other shareholders, who have the
right to purchase such shares on a pro rata basis determined in accordance with
the then current stock ownership of those shareholders. In the event neither
Cogentrix Energy nor the other shareholders notify Ms. Lewis of its or their
intention to purchase her shares within 15 days after receipt of the written
offer, Ms. Lewis shall have the right for 90 days thereafter to consummate the
sale of her shares with the unrelated party who provided the bona fide offer.
DESCRIPTION OF EXCHANGE NOTES
You cannot understand this description of the exchange notes without first
reading and understanding the definitions of the defined terms that are used in
this description. You can find the definitions of terms used in this description
under the subheading "-- Important Definitions" on page 106 of this prospectus."
Cogentrix Energy will issue the exchange notes, and the outstanding notes
were issued, under the indenture between itself and First Union National Bank,
as trustee. The terms of the exchange notes
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include those stated in the indenture and those made part of the indenture by
reference to the Trust Indenture Act of 1939, as amended.
THE FOLLOWING DESCRIPTION IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE
INDENTURE. IT DOES NOT RESTATE THIS AGREEMENT IN ITS ENTIRETY. WE URGE YOU TO
READ THE INDENTURE BECAUSE IT, AND NOT THIS DESCRIPTION, DEFINES YOUR RIGHTS AS
HOLDERS OF THE EXCHANGE NOTES. WE HAVE FILED A COPY OF THE INDENTURE AS AN
EXHIBIT TO THE REGISTRATION STATEMENT WHICH INCLUDES THIS PROSPECTUS.
BRIEF DESCRIPTION OF THE EXCHANGE NOTES
The exchange notes:
- are general, unsecured obligations of Cogentrix Energy only and, with one
exception, are not guaranteed by any of its subsidiaries and
- are equal in right of payment with all existing and future unsecured
senior indebtedness of Cogentrix Energy.
Assuming Cogentrix Energy had completed the offering of the outstanding
notes on September 30, 1998 and applied the proceeds as it subsequently did,
Cogentrix Energy would have had approximately $405 million of unsecured senior
indebtedness outstanding on that date, including letters of credit outstanding
under its corporate credit facility.
HOLDING COMPANY STRUCTURE
Cogentrix Energy's ability to pay principal of, premium, if any, and
interest on the exchange notes will be dependent upon the receipt of sufficient
funds from its current and future consolidated project subsidiaries and its
unconsolidated affiliates. The terms of their existing project financing
arrangements restrict their ability to distribute funds to Cogentrix Energy in
the form of dividends, management fees, principal, interest, loans or otherwise.
Substantially all of the indebtedness of Cogentrix Energy's project subsidiaries
and unconsolidated affiliates is, however, non-recourse project financing
secured by the assets of the project subsidiaries and unconsolidated affiliates
of Cogentrix Energy. Assuming Cogentrix Energy had completed the offering of the
outstanding notes on September 30, 1998 and applied the proceeds as it
subsequently did, approximately $938 million of outstanding indebtedness of
Cogentrix Energy's project subsidiaries would be effectively senior to the
exchange notes. In addition, as of the same date, approximately $770 million of
outstanding indebtedness of Cogentrix Energy's unconsolidated affiliates would
be effectively senior to the exchange notes.
PRINCIPAL, MATURITY AND INTEREST
In this exchange offer, Cogentrix Energy will issue exchange notes in
denominations of $1,000 and integral multiples of $1,000 with a maximum
aggregate principal amount of $255.0 million. All exchange notes will mature on
October 15, 2008.
Interest on the exchange notes will accrue at the rate of 8.75% per annum
and will be payable semi-annually in arrears on April 15 and October 15,
commencing on April 15, 1999. Cogentrix Energy will make each interest payment
to the Holders of record of the exchange notes at the close of business on the
immediately preceding April 1 and October 1.
Interest on the exchange notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Interest on overdue principal and -- to the
extent permitted by applicable law -- on overdue installments of interest shall
accrue at a rate of 1% in excess of the rate per annum borne by the exchange
notes.
The indenture, however, allows Cogentrix Energy to issue up to $165.0
million aggregate principal amount of additional exchange notes in the event
Cogentrix Energy later issues any additional add-on notes in a private
placement. Any additional exchange notes Cogentrix Energy issues in the future
in
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exchange for additional add-on notes issued in a private placement shall have
the same terms, including the same interest rates and interest payment dates, as
the exchange notes offered in this exchange offer. Any additional exchange notes
that Cogentrix Energy may issue shall be a part of the same series as the
exchange notes offered in this exchange offer.
In addition to authorizing up to $165.0 million aggregate principal amount
of additional exchange notes, the indenture does not limit, except as described
below under "Important Negative Covenants -- Debt," the amount of additional
securities that may be issued under the indenture, and securities may be issued
under it in one or more series.
METHODS OF RECEIVING PAYMENTS ON THE EXCHANGE NOTES
Cogentrix Energy will pay principal, interest and premium, if any, on the
exchange notes at the office or agency of Cogentrix Energy in Charlotte, North
Carolina or by mailing a check to the Holder of the exchange notes. The exchange
notes may be presented at the office or agent of the trustee in New York City
for forwarding to the trustee. However, if a Holder of the exchange notes has
given wire transfer instructions to Cogentrix Energy and its paying agent,
Cogentrix Energy will make all principal, premium, if any, and interest payments
on the exchange notes in accordance with those instructions. All payments of
principal, premium, if any, and interest with respect to the exchange notes
represented by the permanent global note registered in the name of or held by
DTC or its nominee will be made by wire transfer of immediately available funds
to DTC or its nominee as the registered owner thereof. See "-- Book Entry;
Delivery and Form."
THE TRUSTEE
First Union National Bank is the trustee under the indenture.
REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any exchange notes are outstanding, Cogentrix Energy will furnish to the
Holders of exchange notes, within the time periods specified in the Securities
and Exchange Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Securities and Exchange
Commission on Forms 10-Q and 10-K if Cogentrix Energy were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual
information only, a report on the annual financial statements by Cogentrix
Energy's certified independent accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Cogentrix Energy were
required to file such reports.
Cogentrix Energy is currently meeting these requirements.
In addition, whether or not required by the Securities and Exchange
Commission, Cogentrix Energy will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the trustee and with the
Securities and Exchange Commission for public availability within the time
periods specified in the Securities and Exchange Commission's rules and
regulations, unless the Securities and Exchange Commission will not accept such
a filing, and make such information available to securities analysts and
prospective investors upon request.
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OPTIONAL REDEMPTION
The exchange notes may be redeemed in whole or in part at Cogentrix
Energy's option at any time prior to maturity, upon not less than 30 nor more
than 60 days' prior notice, at a redemption price equal to:
(1) the then outstanding principal amount of the exchange notes being
redeemed plus accrued and unpaid interest thereon to the date of redemption
plus
(2) a premium equal to the excess of:
(A) the present value at the time of redemption of the principal
amount of the exchange notes being redeemed plus any required interest
payments due on the exchange notes being redeemed through Stated
Maturity computed using a discount rate equal to the Treasury Rate plus
50 basis points over
(B) the then outstanding principal amount of the exchange notes
being redeemed.
IMPORTANT NEGATIVE COVENANTS
Unless waived or amended, the covenants in the indenture, including the
ones summarized below, will, unless the events described under "-- Changes in
Covenants When Exchange Notes are Rated Investment Grade" occur, be applicable
so long as any of the exchange notes are outstanding.
These covenants are for your benefit and, among other things, restrict our
ability, with exceptions that are described below, to
- incur additional debt or permit our subsidiaries to do so,
- pay dividends and make other distributions,
- make investments,
- engage in transactions with affiliates,
- create encumbrances to secure debt,
- dispose of our assets, or
- merge or consolidate with or into, or sell or otherwise transfer our
properties and assets as an entirety to, another entity.
Debt
Cogentrix Energy shall not Incur any Debt, including Acquisition Debt,
unless, after giving effect to the Incurrence of such Debt and the receipt and
application of the proceeds therefrom, the Fixed Charge Ratio of Cogentrix
Energy would be equal to or greater than 2.0 to 1.
Despite the preceding sentence, Cogentrix Energy may Incur each and all of
the following:
(1) Debt issued in exchange for, or the proceeds of which are used to
refinance, outstanding exchange notes or other Debt of Cogentrix Energy in
an amount -- or, if such new Debt provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, with an original issue price -- not to exceed the
amount so exchanged or refinanced (plus accrued interest and fees and
expenses related to such exchange or refinancing), the amount so exchanged
or refinanced being equal to the lesser of:
(A) the principal amount or involuntary liquidation preference of
the Debt so exchanged or refinanced and
(B) if the Debt being exchanged or refinanced was issued with an
original issue discount, the accreted value thereof, as determined in
accordance with GAAP, at the time of such refinancing; provided that
such Debt of Cogentrix Energy will rank equal with or expressly
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subordinated in right of payment to the exchange notes and the Average
Life of the new Debt shall be equal to or greater than the Average Life
of the Debt to be exchanged or refinanced;
(2) Debt of Cogentrix Energy to any of its Subsidiaries and to any
Joint Ventures in which Cogentrix Energy is a direct or indirect partner,
shareholder, member or other participant if such Debt of Cogentrix Energy
is expressly subordinated in right of payment to the exchange notes;
provided that any transfer of such Debt by a Subsidiary or a Joint
Venture -- other than to another Subsidiary or Joint Venture -- will be
deemed to be an Incurrence of Debt;
(3) Debt issued under or in respect of Permitted Working Capital
Facilities;
(4) Debt in an aggregate principal amount not to exceed $10 million at
any one time outstanding;
(5) Debt in respect of Currency Protection Agreements or Interest Rate
Protection Agreements; and
(6) Debt outstanding as of the date of original issuance of the
exchange notes.
Guarantees of Debt, and obligations with respect to letters of credit
supporting Debt, which are normally included in the definition of Debt below
under "-- Important Definitions," shall not be included for purposes of
determining any particular amount of Debt under this covenant. For purposes of
determining compliance with this covenant, in the event that an item of Debt
meets the criteria of more than one of the types of Debt described in the above
clauses, Cogentrix Energy, in its sole discretion, shall classify such item of
Debt and only be required to include the amount and type of such Debt in one of
such clauses.
Subsidiary Debt
Cogentrix Energy shall not permit any Subsidiary to Incur, assume or
otherwise cause or suffer to exist, directly or indirectly, any Debt.
Despite the preceding sentence, each and all of the following Debt may be
Incurred by a Subsidiary:
(1) Debt outstanding as of the date of the original issuance of the
exchange notes;
(2) Debt owed by a Subsidiary to Cogentrix Energy;
(3) Debt Incurred to finance the development, acquisition,
construction or operation of a Power Generation Facility in which such
Subsidiary has a direct or indirect interest; provided that such Debt shall
be permitted under this clause (3) only to the extent of the amount thereof
which is Non-Recourse to Cogentrix Energy and is Non-Recourse to any other
Subsidiary with a direct or indirect interest in any other Power Generation
Facility;
(4) Debt issued in exchange for, or the proceeds of which are used to
refinance, outstanding Debt of such Subsidiary otherwise permitted under
the indenture in an amount -- or, if such new Debt provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, with an original issue price -- not to
exceed the amount so exchanged or refinanced plus accrued interest and fees
and expenses related to such exchange or refinancing, the amount so
exchanged or refinanced being equal to the lesser of:
(A) the principal amount or involuntary liquidation preference of
the Debt so exchanged or refinanced and
(B) if the Debt being exchanged or refinanced was issued with an
original issue discount, the accreted value thereof, as determined in
accordance with GAAP, at the time of such refinancing; provided that
(x) the new Debt shall be Non-Recourse to Cogentrix Energy to no
lesser extent than the Debt to be exchanged or refinanced,
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(y) the new Debt shall be Non-Recourse to any other Subsidiary
with a direct or indirect interest in any other Power Generation
Facility to no lesser extent than the Debt to be exchanged or
refinanced, and
(z) the Average Life of the new Debt shall be equal to or
greater than the Average Life of the Debt to be exchanged or
refinanced;
(5) Debt issued in exchange for, or the proceeds of which are used to
refinance, outstanding Debt of such Subsidiary otherwise permitted under
the indenture in an amount -- or, if such new Debt provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, with an original issue price -- in
excess of the amount so exchanged or refinanced plus accrued interest and
fees and expenses related to such exchange or refinancing. The provisions
of this clause (5) shall only apply if:
(A) the new Debt shall be Non-Recourse to Cogentrix Energy to no
lesser extent than the Debt to be exchanged or refinanced,
(B) the new Debt shall be Non-Recourse to any other Subsidiary with
a direct or indirect interest in any other Power Generation Facility to
no lesser extent than the Debt to be exchanged or refinanced,
(C) the Average Life of the new Debt shall be equal to or greater
than the Average Life of the Debt to be exchanged or refinanced and
(D) after giving effect to the incurrence of such new Debt and the
retirement of the Debt to be exchanged or refinanced, the Fixed Charge
Ratio of Cogentrix Energy would be equal to or greater than 2.0 to 1;
(6) Debt issued in exchange for, or the proceeds of which are used to
refinance, outstanding Debt which is not Non-Recourse to the Company or to
any other Subsidiary in an amount -- or if such new Debt provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration or acceleration thereof, with an original issue price -- not to
exceed the amount so exchanged or refinanced plus accrued interest and fees
and expenses related to such exchange or refinancing. In order for clause
(6) to apply, the amount so exchanged or refinanced shall be equal to the
lesser of
(A) the principal amount of the Debt so exchanged or refinanced and
(B) if the Debt being so exchanged or refinanced was issued with an
original issue discount, the accreted value thereof -- as determined in
accordance with GAAP -- at the time of such refinancing.
Additionally, this clause (6) shall not apply unless the Average Life of
the new Debt shall be equal to or greater than the Average Life of the Debt
to be exchanged or refinanced;
(7) Debt Incurred to support the performance obligations of a
Subsidiary engaged in providing construction management or operating
services to a Power Generation Facility; provided that such Debt shall be
permitted under this clause (7) only to the extent of the amount thereof
which is Non-Recourse to Cogentrix Energy and is Non-Recourse to any other
Subsidiary with a direct or indirect interest in any other Power Generation
Facility;
(8) Debt of a Subsidiary, provided that after giving effect to the
incurrence of such new Debt and the retirement of any Debt to be exchanged
or refinanced, the Fixed Charge Ratio of Cogentrix Energy would be equal to
or greater than 2.0 to 1;
(9) Debt Incurred by a Person prior to the time:
(A) such Person became a Subsidiary of Cogentrix Energy;
(B) such Person merges with or into a Subsidiary of Cogentrix
Energy; or
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(C) another Subsidiary of Cogentrix Energy merges with or into such
Person in a transaction in which such Person becomes a Subsidiary of
Cogentrix Energy; provided that, giving effect to such transaction, such
Debt could have been Incurred at the time of such merger or acquisition
by Cogentrix Energy pursuant to the covenant described in the first
paragraph of "-- Debt" above or by the Subsidiary pursuant to either of
the covenants described in clauses (3) or (4) of this paragraph;
(10) Debt Incurred by a Subsidiary of which at least 80% of each class
of Common Stock is owned, directly or indirectly, by Cogentrix Energy, to
another Subsidiary of which at least 80% of each class of Common Stock is
owned, directly or indirectly, by Cogentrix Energy; and
(11) Debt issued by Cogentrix Delaware Holdings, Inc. under or in
respect of Permitted Working Capital Facilities.
Guarantees of Debt, and obligations with respect to letters of credit
supporting Debt, which are normally included in the definition of Debt below
under "-- Important Definitions," shall not be included for purposes of
determining any particular amount of Debt under this covenant. For purposes of
determining compliance with this covenant, in the event that an item of Debt
meets the criteria of more than one of the types of Debt described in the above
clauses, Cogentrix Energy, in its sole discretion, shall classify such item of
Debt and only be required to include the amount and type of such Debt in one of
such clauses.
Restricted Payments
Cogentrix Energy will not, and will not permit any Subsidiary to, directly
or indirectly, make any Restricted Payment after the date of the original
issuance of the exchange notes if at the time of such Restricted Payment and
after giving effect thereto:
(1) an Event of Default or an event that, after the giving of notice
or lapse of time or both, would become an Event of Default shall have
occurred and be continuing;
(2) Cogentrix Energy could not Incur at least $1 of Debt under the
covenant described in the first paragraph of "-- Debt" above;
(3) the aggregate amount of all Restricted Payments made by Cogentrix
Energy and its Subsidiaries -- the amount so made, if other than in cash,
to be determined in good faith by the Board of Directors, as evidenced by a
Board resolution -- after the date of original issuance of the exchange
notes shall exceed the sum, without duplication, of:
(A) $25 million plus 50% of the Net Income of Cogentrix Energy and
its consolidated Subsidiaries for the period, taken as one accounting
period, beginning on the first day of the fiscal quarter during which
the exchange notes are issued and ending on the last day of the fiscal
quarter immediately prior to the date of such calculation; provided that
if Net Income for such period is less than zero, then minus 100% of the
amount of such net loss; plus
(B) the aggregate net proceeds, including the fair market value of
proceeds other than cash, as determined in good faith by the Board of
Directors, received by Cogentrix Energy from and after the date of
original issuance of the exchange notes from the issuance and sale other
than to a Subsidiary of its Capital Stock -- excluding Redeemable Stock,
but including Capital Stock other than Redeemable Stock issued upon
conversion of, or in exchange for, Redeemable Stock or securities other
than its Capital Stock -- and warrants, options and rights to purchase
its Capital Stock other than Redeemable Stock, but excluding the net
proceeds from the issuance, sale, exchange, conversion or other
disposition of its Capital Stock convertible -- whether at the option of
Cogentrix Energy or the holder thereof or upon the happening of any
event -- into
(x) any security other than its Capital Stock or
(y) its Redeemable Stock; plus
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(C) the net reduction in Investments of the type specified in
clause (4) of the definition of Restricted Payment resulting from
payments of interest on Debt, dividends, repayments of loans or
advances, or other transfers of assets to Cogentrix Energy or other
Person that made the original Investment from the Person in which such
Investment was made; provided that such payment shall not exceed the
amount of the original Investment; plus
(D) any amount previously included as a Restricted Payment on
account of an obligation by Cogentrix Energy or any Subsidiary to make a
Restricted Payment which has not actually been made by Cogentrix Energy
or any Subsidiary and which is no longer required to be made by
Cogentrix Energy or any Subsidiary; provided that the foregoing clause
(3) shall not prevent the payment of any dividend within 60 days after
the date of its declaration if such dividend could have been paid on the
date of its declaration without violation of the provisions of the
"-- Restricted Payments" covenant.
The indenture defines Restricted Payments to exclude Permitted Payments
which include Permitted Investments. See "-- Important Definitions" below.
Dividends and Other Payment Restrictions Affecting Subsidiaries
Cogentrix Energy will not, and will not permit any Subsidiary to, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Subsidiary owned by Cogentrix
Energy directly or indirectly,
(2) make payments in respect of any Debt owed to Cogentrix Energy or
any other Subsidiary of Cogentrix Energy,
(3) make loans or advances to Cogentrix Energy or any other Subsidiary
of the Company or
(4) transfer any of its Property to Cogentrix Energy or any other
Subsidiary, other than those encumbrances and restrictions created or
existing
(A) on the date of the original issuance of the exchange notes,
(B) pursuant to the indenture,
(C) in connection with the Incurrence of any Debt permitted under
the covenant described in clauses (3) and (7) of the second paragraph of
"Subsidiary Debt" above; provided that the President or the Chief
Financial Officer of Cogentrix Energy determines in good faith, as
evidenced by an Officers' Certificate, that such encumbrances or
restrictions are required in order to effect such financing and are not
materially more restrictive, taken as a whole, on the ability of the
applicable Subsidiary to make the payments, distributions, loans,
advances or transfers referred to in clauses (1) through (4) above than
encumbrances and restrictions, taken as a whole, customarily
accepted -- or, in the absence of any industry custom, reasonably
acceptable -- in comparable transactions,
(D) in connection with the execution and delivery of an electric
power or thermal energy purchase contract to which such Subsidiary is
the supplying party or other contracts with customers, suppliers and
contractors to which such Subsidiary is a party and where such
Subsidiary is engaged, directly or indirectly, in the development,
construction, acquisition or operation of a Power Generation Facility;
provided that the President or the Chief Financial Officer of Cogentrix
Energy determines in good faith, as evidenced by an Officers'
Certificate, that such encumbrances or restrictions are required in
order to effect such contracts and are not materially more restrictive,
taken as a whole, on the ability of the applicable Subsidiary to make
the payments, distributions, loans, advances or transfers referred to in
clauses (1) through
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(4) above than encumbrances and restrictions, taken as a whole,
customarily accepted -- or, in the absence of any industry custom,
reasonably acceptable -- in comparable transactions,
(E) in connection with any Debt of a Person outstanding when such
Person becomes a Subsidiary permitted under the covenant described in
clause (9) of the second paragraph of "-- Subsidiary Debt" above;
provided that such encumbrance or restriction was not Incurred in
contemplation of such Subsidiary becoming a Subsidiary,
(F) in connection with the Incurrence of any Debt permitted under
clause (4), (5), (6), (8) or (to the extent not covered by (C) above)
(3) of the covenant described in the second paragraph of "-- Subsidiary
Debt" above; provided that the President or the Chief Financial Officer
of Cogentrix Energy determines in good faith, as evidenced by an
Officers' Certificate, that such encumbrances or restrictions taken as a
whole are not materially more restrictive on the ability of the
applicable Subsidiary to make the payments, distributions, loans,
advances or transfers referred to in clauses (1) through (4) above than
those, taken as a whole, customarily accepted -- or, in the absence of
any industry custom, reasonably acceptable -- in comparable financing
transactions of the same nature as the Debt being Incurred, and
(G) customary non-assignment provisions in leases or other
contracts entered into in the ordinary course of business of Cogentrix
Energy or any Subsidiary and
(H) any restrictions imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all of the Capital
Stock or assets of any Subsidiary or Joint Venture that apply pending
the closing of such sale or disposition.
Dispositions
Subject to the provisions of "-- Mergers, Consolidations and Sales of
Assets" below, Cogentrix Energy will not make and will not permit any of its
Subsidiaries to make any Asset Disposition unless Cogentrix Energy or a
Subsidiary receives consideration at the time of each such Asset Disposition at
least equal to the fair market value of the securities or assets sold or
otherwise disposed of, determined in good faith by the Board of Directors, as
evidenced by a Board resolution. Additionally, the indenture requires Cogentrix
Energy to apply any Net Cash Proceeds from Asset Dispositions in the manner
described below.
Within 90 days from the later of the date of such Asset Disposition or the
receipt of Net Cash Proceeds related thereto, Cogentrix Energy must apply the
Net Cash Proceeds of such Asset Disposition to the payment of the principal of
and premium, if any, and interest on any Senior Debt of Cogentrix
Energy -- including to cash collateralize letters of credit -- if required by
the terms, of any Senior Debt. In connection with any such payment, any related
loan commitment, standby facility or the like shall be permanently reduced in an
amount equal to the principal amount so repaid.
To the extent such Net Cash Proceeds are not required by the terms of the
Senior Debt to be applied in accordance with the preceding paragraph or, if
after being so applied there remain Net Cash Proceeds, then at Cogentrix
Energy's election, such Net Cash Proceeds may be applied either:
(A) to the permanent repayment, prepayment or purchase of other senior
indebtedness or invested in the business or businesses of Cogentrix Energy
or any of its Subsidiaries or
(B) in the case of any Asset Disposition by a Subsidiary, to the
payment of any Debt -- or as otherwise required under the terms of such
Debt -- of such Subsidiary or any Wholly-Owned Subsidiary, other than Debt
owed to Cogentrix Energy or another Subsidiary. In connection with any such
payment, any related loan commitment, standby facility or the like shall be
permanently reduced by an amount equal to the principal amount so repaid.
For purposes of this paragraph, Cogentrix Energy must apply the Net Cash
Proceeds within 365 days from the later of the date of such Asset Disposition or
the receipt of the Net Cash Proceeds related thereto.
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To the extent of any Net Cash Proceeds from Asset Dispositions that are not
applied as provided in the immediately preceding two paragraphs above, the
balance of such Net Cash Proceeds shall be applied to make a tender offer to
purchase any outstanding 2004 notes pursuant and subject to the conditions of
the 2004 indenture at a purchase price equal to 100% of the principal amount
thereof plus accrued and unpaid interest to the purchase date.
Any Net Cash Proceeds from Asset Dispositions that are not applied as
provided in the immediately preceding three paragraphs above shall constitute
"Excess Proceeds." In the event the Company or any Subsidiary shall receive any
Excess Proceeds, such Excess Proceeds shall be applied in the manner described
below to make a tender offer to purchase the then outstanding exchange notes.
In the event of an Asset Disposition that requires the purchase of exchange
notes, Cogentrix Energy will be required to make an offer to all holders of the
exchange notes to purchase the maximum principal amount of exchange notes that
may be purchased out of the Excess Proceeds. The offering price shall be payable
in cash and shall be equal to 100% of the principal amount of the exchange notes
tendered in the offer plus accrued and unpaid interest, if any, to the date of
purchase in accordance with the procedures set forth in the indenture. Cogentrix
Energy may use any remaining Excess Proceeds for general corporate purposes. If
the aggregate purchase price of the exchange notes tendered in the offer exceeds
the amount of Excess Proceeds, Cogentrix Energy shall purchase tendered exchange
notes on a pro rata basis. Cogentrix Energy will not be required to make an
offer if the Excess Proceeds available therefor are less than $10 million. Any
lesser amounts will be carried forward and cumulated for each 36 consecutive
month period for purposes of determining whether an offer is required with
respect to any Excess Proceeds of any subsequent Asset Dispositions. Any lesser
amounts so carried forward and cumulated need not be segregated or reserved and
may be used for general corporate purposes.
Cogentrix Energy will make such required offer by mailing written notice to
each Holder of the exchange notes, within 30 days from the receipt of any Excess
Proceeds. The notice shall specify the purchase date, which shall be not less
than 10 days nor more than 60 days after the date of such notice. The notice
shall contain information concerning the business of Cogentrix Energy which
Cogentrix Energy believes in good faith will enable the Holders of the exchange
notes to make an informed decision. Holders electing to have their exchange
notes purchased will be required to surrender such exchange notes at least one
Business Day prior to the purchase date.
In the event Cogentrix Energy is unable to purchase exchange notes from
Holders in an offer because of provisions of applicable law, Cogentrix Energy
need not make an offer.
Cogentrix Energy will comply with all applicable tender offer rules,
including without limitation Rule 14e-1 under the Exchange Act, in connection
with an offer under the provisions of this covenant.
To the extent that any or all of the Net Cash Proceeds of any Foreign Asset
Disposition is prohibited or delayed by applicable local law from being
repatriated to the United States, the portion of such Net Cash Proceeds so
affected shall not be required to be applied at the time provided above, but may
be retained by the applicable Subsidiary so long, but only so long, as the
applicable local law will not permit repatriation to the United States.
Cogentrix Energy will agree to promptly take or cause the applicable Subsidiary
to promptly take all actions required by the applicable local law to permit such
repatriation. Once such repatriation of any of such affected Net Cash Proceeds
is permitted under the applicable local law, such repatriation shall be promptly
effected and such repatriated Net Cash Proceeds will be applied in the manner
set forth in this provision as if such Asset Disposition had occurred on the
date of such repatriation.
To the extent that the Board of Directors determines, in good faith, that
repatriation of any or all of the Net Cash Proceeds of any Foreign Asset
Disposition would have a material adverse tax consequence to Cogentrix Energy,
the Net Cash Proceeds so affected may be retained outside of the United States
by the applicable Subsidiary for so long as such material adverse tax
consequence would continue.
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Transactions with Affiliates
Cogentrix Energy will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into any transaction after the date of the
original issuance of the exchange notes, including the sale, purchase or lease
of any assets or properties or the rendering of any services, involving
aggregate consideration with respect to such transaction in excess of $2 million
with any Affiliate or holder of 5% or more of any class of Capital Stock of
Cogentrix Energy except for transactions, including, subject to the covenant
described in the first paragraph of "-- Restricted Payments" above, any loans or
advances by or to, or guarantee on behalf of, any Affiliate or holder, made in
good faith the terms of which:
(1) are fair and reasonable to Cogentrix Energy or a Subsidiary; and
(2) are at least as favorable as the terms which could be obtained by
Cogentrix Energy or a Subsidiary in a comparable transaction made on an
arm's-length basis with Persons who are not such a holder or Affiliate.
If a transaction with an Affiliate or holder of 5% or more of any class of
Capital Stock of Cogentrix Energy is approved by a majority of the members of
the Board of Directors of Cogentrix Energy, including a majority of Cogentrix
Energy's independent directors, and the related resolutions of the Board of
Directors specifically state that such directors have found the transaction to
be on terms which are fair and reasonable to Cogentrix Energy or any of its
Subsidiaries and on terms which are at least as favorable as the terms which
could be obtained on an arm's-length basis with Persons who are not such a
holder or Affiliate, then such transaction shall be presumed to be on such
terms. The fairness, reasonableness and arm's-length nature of the terms of any
transaction which is part of a series of related transactions may be determined
on the basis of the terms of the series of related transactions taken as a
whole.
With respect to the purchase or disposition of assets of Cogentrix Energy
or any of its Subsidiaries having a net book value in excess of $10 million, in
addition to such approval of its Board of Directors, Cogentrix Energy shall
obtain a written opinion of an Independent Financial Advisor stating that the
terms of such transaction are fair to Cogentrix Energy or its Subsidiary, as the
case may be, from a financial point of view.
This covenant shall not apply to:
(1) transactions between Cogentrix Energy or any of its Subsidiaries
and any employee of Cogentrix Energy or any of its Subsidiaries who is not
a holder of 5% or more of any class of Capital Stock of Cogentrix Energy,
or a member of such holder's immediate family, that are approved by the
Board of Directors or any committee of the Board of Directors consisting of
Cogentrix Energy's independent directors,
(2) the payment of reasonable and customary regular fees to directors
of Cogentrix Energy or a Subsidiary of Cogentrix Energy, including
directors who are employees,
(3) any transaction between Cogentrix Energy and any of its
Subsidiaries or between any of its Subsidiaries,
(4) any Permitted Payment and any Restricted Payment not otherwise
prohibited by the covenant described in "-- Restricted Payments" above or
(5) equipment and real property lease transactions with and loans to
ELP outstanding on the date of the indenture, indebtedness of the
shareholders of Cogentrix Energy outstanding on the date of the indenture
and the agreements with George T. Lewis, Jr., David J. Lewis and Robert W.
Lewis.
Liens
PROHIBITED LIENS. Cogentrix Energy may not Incur any Debt which is
secured, directly or indirectly, with, nor will Cogentrix Energy grant or cause
or suffer to exist, a Lien on the Property of Cogentrix Energy now owned or
hereafter acquired unless contemporaneous therewith or prior thereto the
exchange notes are equally and ratably secured.
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PERMITTED LIENS. Despite the preceding sentence, each and all of the
following Debt may be Incurred by Cogentrix Energy, and Cogentrix Energy may
grant or cause to suffer to exist, each and all of the following Liens on its
Property now owned or hereafter acquired:
(1) any such Debt secured by Liens existing on the assets of any
entity at the time such assets are acquired by the Company, whether by
merger, consolidation, purchase of assets or otherwise; provided that such
Liens
(A) are not created, incurred or assumed in contemplation of such
assets being acquired by Cogentrix Energy and
(B) do not extend to any other Property of Cogentrix Energy;
(2) any other Debt required to be equally and ratably secured as a
result of the Incurrence of such Debt;
(3) Liens on Cogentrix Energy's interest in Subsidiaries and Joint
Ventures in which Cogentrix Energy is a partner, shareholder, member or
other participant, which Liens are granted in good faith in connection with
the acquisition of such assets or as part of the financing of a Power
Generation Facility; provided that the President or Chief Financial Officer
of Cogentrix Energy determines in good faith, as evidenced by an Officers'
Certificate that such Liens are required in order to effect such financing
and are not materially more restrictive, taken as a whole, than Liens,
taken as a whole, customarily accepted -- or in the absence of any industry
custom, reasonably acceptable -- in substantially Non-Recourse project
financing;
(4) Liens on the stock or partnership interests of Subsidiaries and
interests in Joint Ventures in which Cogentrix Energy directly or
indirectly becomes a partner, shareholder, member or other participant,
which Liens are granted in good faith as part of a project financing or the
development of a project; provided that the President or Chief Financial
Officer of Cogentrix Energy determines in good faith, as evidenced by an
Officers' Certificate, that such Liens are required in order to effect such
transaction and are not materially more restrictive, taken as a whole, than
Liens, taken as a whole, customarily accepted -- or in the absence of
industry custom, reasonably acceptable -- in substantially Non-Recourse
project financing;
(5) Liens existing on the date of the original issuance of the
exchange notes;
(6) purchase money Liens incurred to secure Debt incurred by Cogentrix
Energy as permitted by the "-- Debt" covenant, which Debt finances the
purchase price of Property acquired in the ordinary course of business, and
which Liens will not cover any property other than that being purchased,
improved or constructed;
(7) Liens on any assets of Cogentrix Energy securing up to $50 million
in obligations pursuant to Permitted Working Capital Facilities and any
Guarantees thereof;
(8) Liens incurred in connection with Capitalized Lease Obligations
incurred by Cogentrix Energy as permitted by the "-- Debt" covenant;
(9) Liens in respect of extensions, renewals, refunding or refinancing
of any Debt secured by the Liens referred to in clauses (1), (2), (3), (4),
(5), (6), (7) or (8) above, provided that the Liens in connection with such
renewal, extension, refunding or refinancing shall be limited to all or
part of the specific Property which was subject to the original Lien; and
(10) any Lien arising by reason of:
(A) any judgment, decree or order or any court, so long as such
Lien is being contested in good faith and is adequately bonded, and any
appropriate legal proceedings which may have been duly initiated for the
review of such judgment, decree or order shall not have been finally
terminated or the period within which such proceedings may be initiated
shall not have expired,
(B) taxes not yet delinquent or which are being contested in good
faith,
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(C) security for payment of worker's compensation or other
insurance,
(D) security for the performance of tenders, contracts other than
contracts for the payment of money or leases,
(E) deposits to secure public or statutory obligations, or to
secure permitted contracts for the purchase or sale of any currency
entered into in the ordinary course of business,
(F) operation of law in favor of carriers, warehousemen, landlords,
mechanics, materialman, laborers, employees or suppliers, incurred in
the ordinary course of business for sums which are not yet delinquent or
being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof,
(G) easements, rights-of-way, zoning and similar covenants and
restrictions and other similar encumbrances or title defects which, in
the aggregate, are not material, and which do not in any case materially
detract from the value of the Property subject thereto or materially
interfere with the ordinary conduct of the business of Cogentrix Energy
or
(H) leases and subleases of real property which do not interfere
with the ordinary conduct of the business of Cogentrix Energy, and which
are made on customary and usual terms applicable to similar properties;
or
(I) Liens in addition to the foregoing, provided that the amount of
the obligations secured by such Liens does not exceed in the aggregate
$1 million.
Repurchase of Exchange Notes Upon a Change of Control
If a Change of Control occurs, each Holder of the exchange notes shall have
the right to require Cogentrix Energy to repurchase the Holder's exchange notes.
The repurchase price shall be payable in cash and shall be equal to 101% of the
principal amount of exchange notes repurchased plus accrued and unpaid interest
thereon, if any, to the date of repurchase. After giving effect to a transaction
that, except for this sentence, would constitute a Change of Control, a Change
of Control shall not be deemed to have occurred if the exchange notes are rated
BB+ or better by Standard & Poor's Corporation and Ba1 or better by Moody's
Investors Service, Inc.
The trustee or the Board of Directors may not waive the Change of Control
provisions, and any modification thereof must be approved by each Holder.
Nevertheless, the Change of Control provisions will not necessarily afford
protection to Holders, including protection against an adverse effect on the
value of the exchange notes, in the event that Cogentrix Energy or its
Subsidiaries Incur additional Debt, whether through recapitalizations or
otherwise.
Within 30 days following any Change of Control, Cogentrix Energy shall mail
a notice to each Holder with a copy to the trustee stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require Cogentrix Energy to repurchase such Holder's exchange
notes at a repurchase price in cash equal to 101% of the principal amount
thereof plus accrued interest, if any, to the date of repurchase;
(2) the circumstances and relevant facts regarding such Change of
Control, including information with respect to pro forma historical income,
cash flow and capitalization after giving effect to such Change of Control;
(3) the repurchase date, which shall be a Business Day and be not
earlier than 30 days or later than 60 days from the date such notice is
mailed;
(4) that interest on any exchange note not tendered will continue to
accrue;
(5) that interest on any exchange note accepted for payment in a
repurchase shall cease to accrue after the repurchase date;
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(6) that Holders electing to have a exchange note purchased will be
required to surrender the exchange note, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the exchange note completed, to
the paying agent at the address specified in the notice prior to the close
of business on the repurchase date;
(7) that Holders will be entitled to withdraw their election if the
paying agent receives, not later than the close of business on the third
Business Day, or such shorter periods as may be required by applicable law,
preceding the repurchase date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of
exchange notes the Holder delivered for purchase, and a statement that such
Holder is withdrawing his election to have such exchange notes purchased;
and
(8) that Holders which elect to have their exchange notes purchased
only in part will be issued new exchange notes in a principal amount equal
to the unpurchased portion of the exchange notes surrendered.
On the Business Day preceding the repurchase date, Cogentrix Energy shall
(1) accept for payment exchange notes or portions thereof tendered
pursuant to the Change of Control,
(2) deposit with the trustee money sufficient to pay the purchase
price of all exchange notes or portions thereof so tendered and
(3) deliver or cause to be delivered to the trustee exchange notes so
accepted together with an Officers' Certificate identifying the exchange
notes or portions thereof tendered to Cogentrix Energy.
The trustee shall promptly mail to the Holders of the exchange notes so
accepted payment in an amount equal to the purchase price, and promptly
authenticate and mail to such Holders a new exchange note in a principal amount
equal to any unpurchased portion of the exchange notes surrendered. Cogentrix
Energy will publicly announce the results of any repurchases of exchange notes
upon a Change of Control on or as soon as practicable after the repurchase date.
Cogentrix Energy will comply with all applicable tender offer rules,
including without limitation Rule 14e-1 under the Exchange Act, in connection
with any repurchases of exchange notes upon a Change of Control.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
Cogentrix Energy may not consolidate with, merge with or into, or transfer
all or substantially all of its assets, as an entirety or substantially an
entirety in one transaction or a series of related transactions, to any Person
unless:
(1) Cogentrix Energy shall be the continuing Person, or, if Cogentrix
Energy is not the continuing Person, the Person formed by such
consolidation or into which Cogentrix Energy is merged or to which
properties and assets of Cogentrix Energy are transferred shall:
(A) be a corporation organized and existing under the laws of the
U.S. or any State thereof or the District of Columbia and
(B) expressly assume in writing all the obligations of Cogentrix
Energy under the Indenture and the exchange notes;
(2) immediately after giving effect to such transaction, no Event of
Default or event or condition which through the giving of notice or lapse
of time or both would become an Event of Default shall have occurred and be
continuing;
(3) the Net Worth of Cogentrix Energy or the surviving entity, as the
case may be, on a pro forma basis after giving effect to such transaction,
is not less than the Net Worth of Cogentrix Energy immediately prior to
such transaction; and
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(4) immediately after giving effect to such transaction on a pro forma
basis, Cogentrix Energy or the surviving entity would be able to Incur at
least $1 of Debt under the first paragraph of the "-- Debt" covenant
described above.
If a transaction does not have as one of its purposes the evasion of the
limitations imposed by the covenant described in this paragraph, then clause (4)
of this covenant shall not prohibit a transaction, the principal purpose of
which is, as determined in good faith by the Board of Directors and evidenced by
a Board resolution, to change the state of incorporation of Cogentrix Energy.
CHANGE IN COVENANTS WHEN EXCHANGE NOTES ARE RATED INVESTMENT GRADE
Following the first date upon which the exchange notes are rated Investment
Grade and provided that no Event of Default -- or event which with notice or
passage of time would constitute an Event of Default -- shall exist on the date
of rating, substantially all of the provisions and covenants described under
"-- Important Negative Covenants" above will no longer apply to the exchange
notes. The provisions and covenants of "-- Transactions with Affiliates" and
"-- Liens" and clause (4) under "-- Mergers, Consolidations and Sales of Assets"
will, however, continue to apply. In addition to the covenants and provisions
that will remain applicable, the covenant described below under "-- Sale/
Leaseback Transactions" will also apply. There can be no assurance the exchange
notes will be rated Investment Grade or, if they are rated Investment Grade,
that the exchange notes will continue to be rated Investment Grade. If, after
the exchange notes are rated Investment Grade, an Event of Default -- or event
which with notice or passage of time would constitute an Event of
Default -- shall exist with respect to the exchange notes, the provisions and
covenants contained in the indenture at the time of issuance of the exchange
notes that cease to apply after the exchange notes are rated Investment Grade
will not be reinstated. Additionally, if after the exchange notes are rated
Investment Grade, the exchange notes are rated less than Investment Grade, the
provisions and covenants contained in the indenture at the time of the issuance
of the exchange notes that cease to apply after the exchange notes are rated
Investment Grade will not be reinstated.
Sale/Leaseback Transactions
Following the first date upon which the exchange notes are rated Investment
Grade, so long as any of the exchange notes remain outstanding, neither
Cogentrix Energy nor any Subsidiary shall enter into any sale and leaseback
transaction unless:
(1) such transaction involves a lease for a term, including renewals,
of not more than three years;
(2) such transaction is between Cogentrix Energy or a Subsidiary, on
the one hand, and a Subsidiary of Cogentrix Energy on the other hand;
(3) Cogentrix Energy would be entitled to incur Debt secured by a Lien
on the assets or property involved in such transaction at least equal in
amount to the Attributable Debt with respect to such sale and leaseback
transaction, without equally and ratably securing the exchange notes,
pursuant to "-- Liens" above; or
(4) (A) Cogentrix Energy or a Subsidiary, receives consideration at
the time of each sale and leaseback transaction at least equal to the fair
market value of the property sold or otherwise disposed of, as determined
by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board resolution, and
(B) Cogentrix Energy or a Subsidiary within 365 days following the
later of the date of sale and leaseback transaction or the receipt of
Net Cash Proceeds related thereto, regardless of whether such sale or
transfer may have been made by Cogentrix Energy or such Subsidiary, as
the case may be, applies, in the case of a sale or transfer for cash, an
amount equal to the Net Cash Proceeds thereof and, in the case of a sale
or transfer otherwise than for cash, an amount equal to the fair value
of the assets so leased at the time of entering into such arrangement,
as
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determined by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board resolution, to
(x) the retirement of Indebtedness of Cogentrix Energy or any
Subsidiary owed to a Person other than an Affiliate of Cogentrix
Energy or
(y) investment in properties or assets that will be used in the
business of Cogentrix Energy or a Subsidiary, as the case may be,
existing on the date that the exchange notes are issued or in
businesses reasonably related thereto.
To the extent that any or all of the Net Cash Proceeds of any Foreign
Sale/Leaseback Transaction is prohibited or delayed by applicable local law from
being repatriated to the United States, the portion of such Net Cash Proceeds so
affected shall not be required to be applied at the time provided above, but may
be retained by the applicable Subsidiary so long, but only so long, as the
applicable local law will not permit repatriation to the United States.
Cogentrix Energy will agree to promptly take or cause the applicable Subsidiary
to promptly take all actions required by the applicable local law to permit such
repatriation. Once such repatriation of any of such affected Net Cash Proceeds
is permitted under the applicable local law, such repatriation shall be promptly
effected and such repatriated Net Cash Proceeds will be applied in the manner
set forth in this provision as if such Foreign Sale/Leaseback Transaction had
occurred on the date of such repatriation.
To the extent that the Board of Directors determines, in good faith, that
repatriation of any or all of the Net Cash Proceeds of any Foreign
Sale/Leaseback Transaction would have a material adverse tax consequence to
Cogentrix Energy, the Net Cash Proceeds so affected need not be repatriated to
the United States by the applicable Subsidiary for so long as such material
adverse tax consequence would continue.
MODIFICATION OF THE INDENTURE
With the consent of the Holders of not less than a majority in aggregate
principal amount of the outstanding exchange notes, Cogentrix Energy and the
trustee, may modify the indenture or any supplemental indenture or the rights of
the Holders of the exchange notes. However, in addition, no modification shall:
(1) without the consent of the Holder of each of the exchange notes so
affected:
(A) extend the final maturity of any of the exchange notes,
(B) reduce the principal amount thereof,
(C) reduce the rate or extend the time of payment of interest
thereon,
(D) reduce any amount payable on redemption thereof,
(E) impair or affect the right of any Holder to institute suit for
the payment thereof or
(F) make any change in the covenant regarding a Change of Control,
or
(2) without the consent of the Holders of all outstanding exchange
notes, reduce the percentage of outstanding exchange notes which is
referred for any such modification.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default as to the payment of principal, the Change of Control
purchase price or premium, if any, when due on any exchange note;
(2) default as to the payment of interest on any exchange note 30 days
after payment is due;
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(3) default on any other Debt of Cogentrix Energy or any Significant
Subsidiary if either
(A) such default results from failure to pay principal of such Debt
in excess of $10 million at final maturity of such Debt, or
(B) as a result of such default, the maturity of such Debt has been
accelerated, so that the same shall be or becomes due and payable prior
to the date on which the same would otherwise have become due and
payable and such acceleration shall not be rescinded or annulled within
30 days, and the principal amount of such Debt, together with the
principal amount of any other Debt of Cogentrix Energy or any
Significant Subsidiary in default, or the maturity of which has been
accelerated, aggregates $10 million or more; provided that such default
shall not be an Event of Default if:
(x) such Debt is Debt of a Significant Subsidiary,
(y) is Non-Recourse to Cogentrix Energy in respect of the
amounts not paid or due upon acceleration and
(z) Cogentrix Energy could, at the time of default, Incur at
least $1 of Debt under the covenant described in the first paragraph
of "-- Debt" above;
(4) default in the performance, or breach, of any other of the
covenants or agreements contained in the indenture and the exchange notes
and such failure continues for 30 days after written notice is given to
Cogentrix Energy by the trustee or the Holders of at least 25% in principal
amount of the outstanding exchange notes, as provided in the indenture,
(5) the entry by a court of one or more judgments or orders against
Cogentrix Energy or any Significant Subsidiary for the payment of money
which in the aggregate exceeds $3 million, excluding the amount thereof
covered by insurance or by a bond written by third parties, and which
judgments or orders have not been vacated, discharged or satisfied or
stayed pending appeal within 30 days from the entry thereof; provided, that
such a judgment or order shall not be an Event of Default if such judgment
or order is against a Significant Subsidiary and does not require any
payment by Cogentrix Energy and Cogentrix Energy could, at the expiration
of the applicable 30 day period, Incur at least $1 of Debt under the
covenant described in the first paragraph of "-- Debt" above; and
(6) some events involving bankruptcy, insolvency or reorganization of
Cogentrix Energy.
If the trustee considers it in the interest of Holders to do so, it may
withhold notice to the Holders of any default, except in payment of principal
of, premium, if any, the Change of Control purchase price or interest on the
exchange notes.
If an Event of Default, other than an event of bankruptcy, insolvency or
reorganization of Cogentrix Energy, shall have occurred and be continuing,
either the trustee or the Holders of not less than 25% in principal amount of
the outstanding exchange notes may declare the principal of all exchange notes
to be due and payable immediately. Upon some conditions specified in the
indenture, such declaration may be annulled and the Holders of a majority in
principal amount of the then outstanding exchange notes may waive past defaults
except, unless theretofore cured, a default in payment of principal of, or
Change of Control purchase price or premium, if any, or interest on the exchange
notes. If an Event of Default due to the bankruptcy, insolvency or
reorganization of Cogentrix Energy occurs, all unpaid principal, premium, if
any, and interest will become immediately due and payable.
The Holders of a majority in principal amount of the then outstanding
exchange notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee with respect
to the exchange notes, subject to limitations specified in the indenture, if the
Holders of the exchange notes shall have offered to the trustee reasonable
indemnity against expenses and liabilities. Cogentrix Energy is required to file
annually with the trustee a written statement as to compliance with the
principal covenants contained in the indenture.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Cogentrix Energy, may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding exchange notes
("Legal Defeasance") except for, among other matters, obligations:
(1) to register the transfer or exchange of the exchange notes,
(2) to replace stolen, lost or mutilated exchange notes,
(3) to maintain paying agencies and
(4) to hold monies for payment in trust.
In addition, Cogentrix Energy may, at its option and at any time, elect to
have the obligations of Cogentrix Energy released with respect to the covenants
described in clauses (3) and (4) under "-- Mergers, Consolidations and Sales of
Assets" and all of the covenants described herein under "-- Important Negative
Covenants," "-- Changes in Covenants When Exchange Notes are Rated Investment
Grade" and clause (4) under "-- Events of Default and Remedies" with respect to
the covenants described therein and with respect to clauses 3 and (4) under
"-- Mergers, Consolidations and Sales of Assets" ("Covenant Defeasance"). In the
event Covenant Defeasance occurs, clauses (3) and (5) under "-- Events of
Default and Remedies" shall not be deemed to be Events of Default under the
indenture.
In order to exercise either Legal Defeasance or Covenant Defeasance, the
following must occur as applicable:
(1) Cogentrix Energy has deposited with the trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the exchange notes, on the Stated Maturity of such
payments in accordance with the terms of the indenture and the exchange
notes,
(2) in the case of Legal Defeasance, Cogentrix Energy has delivered to
the trustee:
(A) either
(x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a
result of Cogentrix Energy's exercise of its option under the
"Defeasance" provision of the indenture and will be subject to
federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such legal defeasance
had not occurred, which Opinion of Counsel must be based upon a
ruling of the Internal Revenue Service to the same effect or a change
in applicable federal income tax law or related treasury regulations
after the date of the indenture or
(y) a ruling directed to the trustee received from the Internal
Revenue Service to the same effect as the Opinion of Counsel
described in (x) above and
(B) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the 123rd day following the deposit, the trust fund will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally,
(3) in the case of Covenant Defeasance, Cogentrix Energy has delivered
to the trustee an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the 123rd day following the deposit, the trust fund will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally,
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(4) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which Cogentrix Energy is a party or by
which Cogentrix Energy is bound,
(5) if at such time the exchange notes are listed on a national
securities exchange, Cogentrix Energy has delivered to the trustee an
Opinion of Counsel to the effect that the exchange notes will not be
delisted as a result of such deposit, defeasance and discharge, and
(6) in the case of Covenant Defeasance, Cogentrix Energy has delivered
to the trustee an Opinion of Counsel to the effect that, among other
things, the Holders of the exchange notes will not recognize income, gain
or loss for federal income tax purposes as a result of such deposit and
defeasance of the covenants included in the definition of Covenant
Defeasance and Events of Default and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred.
Legal Defeasance and Covenant Defeasance will not occur until the 123rd day
after the deposit referred to above has been made.
If Cogentrix Energy exercises its option to omit compliance with the
covenants and provisions of the indenture with respect to the exchange notes as
described in the immediately preceding paragraph and the exchange notes are
declared due and payable because of the occurrence of an Event of Default that
remains applicable, the amount of money and/or U.S. Government Obligations on
deposit with the trustee will be sufficient to pay amounts due on the exchange
notes at the time of their Stated Maturity, but may not be sufficient to pay
amounts due on the exchange notes at the time of acceleration resulting from
such Event of Default. Cogentrix Energy will, however, remain liable for such
payments.
GOVERNING LAW
The indenture and the exchange notes are governed by, and construed in
accordance with, the law of the State of New York.
BOOK-ENTRY; DELIVERY AND FORM
The outstanding notes are, and the exchange notes will be, represented by
one permanent global note in definitive, fully registered form without interest
coupons. The global note will be deposited on the date of the acceptance for
exchange of the outstanding votes and the issuance of the exchange notes with
the trustee as custodian for DTC and registered in the name of a nominee of DTC.
Except in the limited circumstances described below, owners of beneficial
interests in the global note will not be entitled to receive physical delivery
of individual notes in registered form without coupons. The outstanding notes
are not issuable, and the exchange notes will not be issuable, in bearer form.
Upon the issuance of the global note, DTC or the custodian will credit, on
its internal system, the respective principal amount of the individual
beneficial interest represented by the global note to the accounts of Persons
who have accounts with such depository. Ownership of beneficial interests in the
global note will be limited to Persons who have accounts with DTC
("participants") or Persons who hold interests through participants. Ownership
of beneficial interests in the global note will be shown on, and the transfer of
that ownership will be effected only through, records maintained by DTC or its
nominee, with respect to interests of participants, and the records of
participants, with respect to interests of persons other than participants.
Persons who are not participants may beneficially own securities held by or
behalf of DTC indirectly through organizations which are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of the
global note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the exchange notes represented by the global note for
all purposes under the indenture and the exchange notes. Unless DTC
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notifies Cogentrix Energy that it is unwilling or unable to continue as
depository for the global note, or ceases to be a "Clearing Agency" registered
under the Exchange Act, owners of beneficial interests in the global note will
not be entitled to have any portions of such global note registered in their
names, will not receive or be entitled to receive physical delivery of exchange
notes in individual definitive form and will not be considered the owners or
holders of the global note, or any exchange notes represented thereby, under the
indenture or the exchange notes. In addition, no beneficial owner of an interest
in the global note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
indenture.
Payments of the principal of, premium, if any, and interest on, the global
note will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. Neither Cogentrix Energy, the trustee nor any paying agent will
have any responsibility or liability for any aspect of the records relating to
or payments made for beneficial ownership interests in the global note or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Cogentrix Energy expects that DTC or its nominee, upon receipt of any
payment of principal, premium, if any, or interest in respect of the global
note, will credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of the global
note as shown on the records of DTC or its nominee. Cogentrix Energy also
expects that payments by participants to owners of beneficial interests in the
global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in next-day funds. If a Holder
requires physical delivery of individual notes for any reason, including to sell
exchange notes to Persons in states which require delivery of the exchange notes
or to pledge the exchange notes, such Holder must transfer its interest in the
global note in accordance with the normal procedures of DTC and the procedures
set forth in the indenture.
Cogentrix Energy understands that DTC will take any action permitted to be
taken by a Holder only at the direction of one or more participants to whose
account the DTC interests in the global note is credited and only in respect of
such portion of the aggregate principal amount of exchange notes as to which
such participant or participants has or have given such direction. However, if
there is an Event of Default under the indenture, DTC will exchange the global
note for certificated notes which it will distribute to its participants.
Cogentrix Energy understands that DTC is a limited-purpose trust company
that was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and other similar organizations. Indirect access to the DTC system is available
to others such as banks, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the global note among participants of DTC, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither Cogentrix Energy nor the
trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of its respective obligations
under the rules and procedures governing its operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depository for
the global note and Cogentrix Energy does not appoint a successor depository
within 90 days, Cogentrix will issue certificated notes in exchange for the
global note.
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IMPORTANT DEFINITIONS
Set forth below is a summary of the defined terms used in this description.
Reference is made to the indenture for the full definitions of all such terms as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquisition Debt" is defined to mean Debt of any Person existing at the
time such Person became a Subsidiary of Cogentrix Energy -- or such Person is
merged into Cogentrix Energy or one of its Subsidiaries -- or assumed in
connection with the acquisition of assets from any such Person, other than
assets acquired in the ordinary course of business, including Debt Incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary of
Cogentrix Energy -- but excluding Debt of such Person which is extinguished,
retired or repaid in connection with such Person becoming a Subsidiary of
Cogentrix Energy.
"Adjusted Consolidated Net Income" is defined to mean for any period, for
any Person the aggregate Net Income or loss of such Person and its consolidated
Subsidiaries for such period determined in conformity with GAAP plus the Net
Income of any Subsidiary of such Person for prior periods to the extent such Net
Income is actually paid in cash to such Person during such period plus the Net
Income of such Person, other than a Subsidiary thereof, in which any third
Person has a joint interest for prior periods to the extent such Net Income is
actually paid in cash to such Person during such period; provided that the
following items shall be excluded in computing Adjusted Consolidated Net Income
without duplication:
(1) the Net Income or loss of such Person, other than a Subsidiary
thereof, in which any third Person has a joint interest, except to the
extent of the amount of dividends or other distributions actually paid in
cash to such Person during such period by such Person in which the joint
interest is held, which dividends and distributions shall be included in
such computation;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to the covenant described in clause
(3)(A) or (3)(B) of the first paragraph of "-- Restricted Payments"
above -- and in such case, except to the extent includable pursuant to
clause (1) above -- Net Income, if positive, such Person accrued prior to
the date it becomes a Subsidiary of any other Person or is merged into or
consolidated with such other Person or any of its Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by
such other Person or any of its Subsidiaries;
(3) the Net Income of any Subsidiary of such Person, except to the
extent that (A) such Net Income, if positive, is actually paid in cash to
such Person during such period and (B) such Net Income, if negative, is
actually paid in cash to such Subsidiary during such period;
(4) any gains or losses on an after-tax basis attributable to Asset
Sales;
(5) the cumulative effect of a change in accounting principle; and
(6) any amounts paid or accrued as dividends on Preferred Stock of
such Person or Preferred Stock of any Subsidiary of such Person.
"Affiliate" of any Person is defined to mean any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control,"
including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with," when used with respect to any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean:
(1) an investment by Cogentrix Energy or any of its Subsidiaries in
any other Person pursuant to which such Person shall become a Subsidiary of
Cogentrix Energy or any of its Subsidiaries or shall be merged into or
consolidated with Cogentrix Energy or any of its Subsidiaries or
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(2) an acquisition by Cogentrix Energy or any of its Subsidiaries of
the Property of any Person other than Cogentrix Energy or any of its
Subsidiaries that constitutes substantially all of an operating unit or
business of such Person.
"Asset Disposition" is defined to mean, with respect to any Person, any
sale, transfer, conveyance, lease or other disposition, including by way of
merger, consolidation or sale-leaseback, by such Person or any of its
Subsidiaries to any Person, other than to such Person or a Subsidiary of such
Person and other than in the ordinary course of business, of:
(1) any Property of such Person or any of its Subsidiaries or
(2) any shares of Capital Stock of such Person's Subsidiaries. For
purposes of this definition, any disposition in connection with directors'
qualifying shares or investments by foreign nationals mandated by
applicable law shall not constitute an Asset Disposition. In addition, the
term "Asset Disposition" shall not include
(1) any sale, transfer, conveyance, lease or other disposition of
the Capital Stock or assets of Subsidiaries pursuant to the terms of any
power sales agreements or steam sales agreements to which such
Subsidiaries are parties on the date of the original issuance of the
exchange notes or pursuant to the terms of any power sales agreements or
steam sales agreements to which such Subsidiaries become a party after
such date if the Board of Directors determines in good faith, as
evidenced by a Board resolution, that such provisions are necessary in
order to effect such agreements and are reasonable,
(2) any sale, transfer, conveyance, lease or other disposition of
assets governed by the "-- Mergers, Consolidations and Sales of Assets"
covenant described above,
(3) the sale, transfer, conveyance, lease or other disposition of
the Capital Stock or assets of Cogentrix of Pennsylvania, Inc. and ReUse
Technology, Inc. and
(4) any transaction or series of related transactions consisting of
the sale, transfer, conveyance, lease or other disposition of Capital
Stock or assets with a fair market value aggregating less than $5
million.
The term "Asset Disposition" also shall not include (1) the grant of a Lien by
any Person in any assets or shares of Capital Stock securing a borrowing by, or
contractual performance obligation of, such Person or any Subsidiary of such
Person or any Joint Venture in which such Person has an interest, which Lien is
not prohibited under the covenant described in "-- Liens" above or the exercise
of remedies thereunder or (2) a sale-leaseback transaction involving
substantially all of the assets of a Power Generation Facility where a
Subsidiary of Cogentrix Energy sells the Power Generation Facility to a Person
in exchange for the assumption by that Person of the Debt financing the Power
Generation Facility and the Subsidiary leases the Power Generation Facility from
such Person.
"Asset Sale" is defined to mean the sale or other disposition by Cogentrix
Energy or any of its Subsidiaries, other than to Cogentrix Energy or another
Subsidiary of Cogentrix Energy, of
(1) all or substantially all of the Capital Stock of any Subsidiary of
Cogentrix Energy or
(2) all or substantially all of the Property that constitutes an
operating unit or business of Cogentrix Energy or any of its Subsidiaries.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as of
the time of determination, the present value discounted at the interest rate
assumed in making calculations in accordance with GAAP of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction, including any period for which such
lease has been extended.
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"Attributable Value" means, as to a Capitalized Lease Obligation under
which any Person is at the time liable and at any date as of which the amount
thereof is to be determined, the capitalized amount thereof that would appear on
the face of a balance sheet of such Person in accordance with GAAP.
"Average Life" is defined to mean, at any date of determination with
respect to any Debt security or Preferred Stock, the quotient obtained by
dividing
(1) the sum of the product of
(A) the number of years from such date of determination to the
dates of each successive scheduled principal or involuntary liquidation
value payment of such Debt security or Preferred Stock, respectively,
multiplied by
(B) the amount of such principal or involuntary liquidation value
payment by
(2) the sum of all such principal or involuntary liquidation value
payments.
"Board of Directors" is defined to mean either the Board of Directors of
Cogentrix Energy or any committee of such Board duly authorized to act on behalf
of such Board.
"Business Day" is defined to mean a day which in the city, or in any of the
cities, if more than one, where amounts are payable in respect of the exchange
notes is neither a legal holiday nor a day on which banking institutions are
authorized or required by law or regulation to close.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents however designated,
whether voting or non-voting, of, or interests in, the equity of such Person
which is outstanding or issued on or after the date of the indenture, including,
without limitation, all Common Stock and Preferred Stock and partnership and
joint venture interests of such Person.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any Property of which the discounted present value of the rental obligations
of such Person as lessee, in conformity with GAAP, is required to be capitalized
on the balance sheet of such Person.
"Capitalized Lease Obligation" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Debt represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Change of Control" is defined to mean the occurrence of one or more of the
following events:
(1) prior to the initial Public Equity Offering Consummation Date, any
"person," as such term is used in Sections 13(d) and 14(d) of the Exchange
Act, other than one or more Permitted Holders, is or becomes the
"beneficial owner," as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of
all shares that any such person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time,
directly or indirectly, or has the absolute power to direct the vote of,
with respect to the election of directors of Cogentrix Energy, shares of
Capital Stock entitled to cast more than the greater of 35% or the Original
Group Percentage of the votes entitled to be cast with respect to the
election of directors of Cogentrix Energy. The "Original Group Percentage"
shall mean, as of any date of determination, the percentage of the votes
entitled to be cast with respect to the election of directors of the
Company, by the Permitted Holders and by persons who have agreed to vote as
directed by the Permitted Holders with respect to the election of such
directors;
(2) subsequent to the initial Public Equity Offering Consummation
Date, any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, other than one or more Permitted Holders, is or becomes the
beneficial owner, as defined in clause (1) above, directly or indirectly,
of more than 35% of the total voting power of the Voting Stock of Cogentrix
Energy; provided, however,
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that the Permitted Holders "beneficially own," directly or indirectly, in
the aggregate a lesser percentage of the total voting power of the Voting
Stock of Cogentrix Energy than such other person and do not have the right
or ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors, for the purposes of this
clause (2), any person shall be deemed to beneficially own any Voting Stock
of a corporation (the "specified corporation") held by any other
corporation (the "parent corporation"), if such person "beneficially
owns" -- as so defined -- directly or indirectly, more than 35% of the
voting power of the Voting Stock of such parent corporation and the
Permitted Holders "beneficially own" -- as so defined -- directly or
indirectly, in the aggregate a lesser percentage of the voting power of the
Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation;
or
(3) during any one-year period, individuals who at the beginning of
such period constituted the Board of Directors -- together with any new
directors elected by such Board of Directors or nominated for election by
the shareholders of Cogentrix Energy by a vote of at least a majority of
the directors of Cogentrix Energy then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved -- cease for any reason to
constitute a majority of the Board of Directors then in office.
Notwithstanding the foregoing, a Change of Control shall not be deemed to
have occurred if one or more of the above events occur or circumstances exist
and, after giving effect thereto, the exchange notes are rated Ba1 or better by
Moody's Investors Service, Inc. and BB+ or better by Standard & Poor's
Corporation.
"Common Stock" is defined to mean with respect to any Person, Capital Stock
of such Person that does not rank prior, as to the payment of dividends or as to
the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Consolidated EBITDA" of any Person for any period is defined to mean the
Adjusted Consolidated Net Income of such Person, plus:
(1) income taxes, excluding income taxes -- either positive or
negative -- attributable to extraordinary and nonrecurring gains or losses
or Asset Sales, all determined on a consolidated basis for such Person and
its consolidated Subsidiaries in accordance with GAAP,
(2) Consolidated Fixed Charges,
(3) depreciation and amortization expense, all determined on a
consolidated basis for such Person and its consolidated Subsidiaries in
accordance with GAAP,
(4) all other non-cash items reducing Adjusted Consolidated Net Income
for such period, all determined on a consolidated basis for such Person and
its consolidated Subsidiaries in accordance with GAAP and
(5) the aggregate amount actually received in cash by such Person
during such period relating to non-cash items increasing Adjusted
Consolidated Net Income for prior periods, and less:
(A) all non-cash items increasing Adjusted Consolidated Net Income
during such period and
(B) the aggregate amount actually paid in cash by such Person
during such period relating to non-cash items reducing Adjusted
Consolidated Net Income for prior periods; provided that depreciation
and amortization expense of any Subsidiary of such Person and any other
non-cash item of any Subsidiary of such Person that reduces Adjusted
Consolidated Net Income shall be excluded without duplication in
computing Consolidated EBITDA, except to the extent that the positive
cash flow associated with such depreciation and amortization expense and
other non-cash items is actually distributed in cash to such Person
during such period.
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"Consolidated Fixed Charges" of any Person is defined to mean, for any
period, the aggregate of
(1) Consolidated Interest Expense,
(2) the interest component of Capitalized Leases, determined on a
consolidated basis for such Person and its consolidated Subsidiaries in
accordance with GAAP excluding any interest component of Capitalized Leases
in respect of that portion of a Capitalized Lease Obligation of a
Subsidiary that is Non-Recourse to such Person and
(3) cash and noncash dividends due whether or not declared on the
Preferred Stock of any Subsidiary of such Person and any Redeemable Stock
of such Person.
"Consolidated Interest Expense" of any Person is defined to mean, for any
period, the aggregate interest expense in respect of Debt, including
amortization or original issue discount and non-cash interest payments or
accruals, of such Person and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, including all commissions,
discounts, other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and net costs associated with Interest Rate
Agreements and any amounts paid during such period in respect of such interest
expense, commissions, discounts, other fees and charges that have been
capitalized; provided that Consolidated Interest Expense of Cogentrix Energy
shall not include any interest expense, including all commissions, discounts,
other fees and charges owed with respect to letters of credit and bankers'
acceptance financing and net costs associated with Interest Rate Agreements, in
respect of that portion of Debt of a Subsidiary of Cogentrix Energy that is
Non-Recourse to Cogentrix Energy; and provided further that Consolidated
Interest Expense of Cogentrix Energy in respect of a Guarantee by Cogentrix
Energy of Debt of a Subsidiary shall be equal to the commissions, discounts,
other fees and charges that would be due with respect to a hypothetical letter
of credit issued under a bank credit agreement that can be drawn by the
beneficiary thereof in the amount of the Debt so guaranteed if
(1) Cogentrix Energy is not actually making directly or indirectly
interest payments on such Debt and
(2) GAAP does not require Cogentrix Energy on an unconsolidated basis
to record such Debt as a liability of Cogentrix Energy.
"Consolidated Total Assets" is defined to mean, with respect to any Person
at any time, the total assets of such Person and its consolidated Subsidiaries
at such time determined in conformity with GAAP.
"Currency Protection Agreement" is defined to mean with respect to any
Person any foreign exchange contract, currency swap agreement or other similar
agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in currency values to or under which such
Person or any of its Subsidiaries is a party or a beneficiary on the date of the
indenture or becomes a party or a beneficiary thereafter.
"Debt" is defined to mean, with respect to any Person at any date of
determination without duplication,
(1) all indebtedness of such Person for borrowed money,
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments,
(3) all obligations of such Person in respect of letters of credit or
bankers' acceptance or other similar instruments or reimbursement
obligations with respect thereto,
(4) all obligations of such Person to pay the deferred purchase price
of property or services, except Trade Payables,
(5) the Attributable Value of all obligations of such Person as lessee
under Capitalized Leases,
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(6) all Debt of others secured by a Lien on any asset of such Person,
whether or not such Debt is assumed by such Person; provided that, for
purposes of determining the amount of any Debt of the type described in
this clause, if recourse with respect to such Debt is limited to such
asset, the amount of such Debt shall be limited to the lesser of the fair
market value of such asset or the amount of such Debt,
(7) all Debt of others Guaranteed by such Person to the extent such
Debt is Guaranteed by such Person,
(8) all Redeemable Stock valued at the greater of its voluntary or
involuntary liquidation preference plus accrued and unpaid dividends and
(9) to the extent not otherwise included in this definition, all
obligations of such Person under Currency Protection Agreements and
Interest Rate Protection Agreements.
"Excess Cash Flow" of any Person for any period is defined to mean
Consolidated EBITDA less Consolidated Fixed Charges less any income taxes
actually paid during such period.
"Fixed Charge Ratio" is defined to mean the ratio, on a pro forma basis, of
(1) the aggregate amount of Consolidated EBITDA of any Person for the
Reference Period immediately prior to the date of the transaction giving
rise to the need to calculate the Fixed Charge Ratio (the "Transaction
Date") to
(2) the aggregate Consolidated Fixed Charges of such Person during
such Reference Period; provided that for purposes of such computation, in
calculating Consolidated EBITDA and Consolidated Fixed Charges,
(A) the Incurrence of the Debt giving rise to the need to calculate
the Fixed Charge Ratio and the application of the proceeds therefrom
shall be assumed to have occurred on the first day of the Reference
Period,
(B) Asset Sales and Asset Acquisitions which occur during the
Reference Period or subsequent to the Reference Period and prior to the
Transaction Date -- but including any Asset Acquisition to be made with
the Debt Incurred pursuant to (1) above -- shall be assumed to have
occurred on the first day of the Reference Period,
(C) the Incurrence of any Debt during the Reference Period or
subsequent to the Reference Period and prior to the Transaction Date and
the application of the proceeds therefrom shall be assumed to have
occurred on the first day of such Reference Period,
(D) Consolidated Interest Expense attributable to any Debt, whether
existing or being Incurred, computed on a pro forma basis and bearing a
floating interest rate shall be computed as if the rate in effect on the
date of computation had been the applicable rate for the entire period
unless such Person or any of its Subsidiaries is a party to an Interest
Rate Protection Agreement, which shall remain in effect for the twelve
month period after the Transaction Date, which has the effect of fixing
the interest rate on the date of computation, in which case such rate
whether higher or lower shall be used and
(E) there shall be excluded from Consolidated Fixed Charges any
Consolidated Fixed Charges related to any amount of Debt which was
outstanding during and subsequent to the Reference Period but is not
outstanding on the Transaction Date, except for Consolidated Fixed
Charges actually incurred with respect to Debt borrowed, as adjusted
pursuant to clause (D),
(x) under a revolving credit or similar arrangement to the
extent the commitment thereunder remains in effect on the Transaction
Date or
(y) pursuant to the covenant described in clause (3) in the
second paragraph of "-- Debt" above.
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For the purpose of making this computation, Asset Sales and Asset
Acquisitions which have been made by any Person which has become a
Subsidiary of Cogentrix Energy or been merged with or into Cogentrix
Energy or any Subsidiary of Cogentrix Energy during the Reference
Period, or subsequent to the Reference Period and prior to the
Transaction Date shall be calculated on a pro forma basis, including all
of the calculations referred to in clauses (A) through (E) above
assuming such Asset Sales or Asset Acquisitions occurred on the first
day of the Reference Period.
"Foreign Asset Disposition" means an Asset Disposition in respect of the
Capital Stock or assets of a Foreign Subsidiary or a Foreign Joint Venture to
the extent that the proceeds of such Asset Disposition are received by a Person
subject in respect of such proceeds to the tax laws of a jurisdiction other than
the United States of America or any State thereof or the District of Columbia.
"Foreign Joint Venture" means a Joint Venture organized under the laws of a
jurisdiction other than the United States of America or a State thereof or the
District of Columbia.
"Foreign Sale/Leaseback Transaction" means a Sale/Leaseback Transaction in
respect of the Capital Stock or assets of a Foreign Subsidiary or a Foreign
Joint Venture to the extent that the proceeds of such Sale/Leaseback Transaction
are received by a Person subject in respect of such proceeds to the tax laws of
a jurisdiction other than the United States of America or any State thereof or
the District of Columbia.
"Foreign Subsidiary" means a Subsidiary that is organized under the laws of
a jurisdiction other than the United States of America or a State thereof or the
District of Columbia.
"GAAP" is defined to mean generally accepted accounting principles in the
U.S. as in effect as of the date of the indenture applied on a basis consistent
with the principles, methods, procedures and practices employed in the
preparation of Cogentrix Energy's audited financial statements, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay or advance or supply funds for the purchase or
payment of such Debt or other obligation of such other Person, whether
arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, or to
take-or-pay, or to maintain financial statement conditions or otherwise, or
(2) entered into for purposes of assuring in any other manner the
obligee of such Debt or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
"Holder", "holder of exchange notes" and other similar terms are defined to
mean the registered holder of any exchange note.
"Incur" is defined to mean with respect to any Debt, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such Debt;
provided that neither the accrual of interest, whether such interest is payable
in cash or kind, nor the accretion of original issue discount shall be
considered an Incurrence of Debt.
"Independent Financial Advisor" is defined to mean a nationally recognized
investment banking firm (1) which does not, and whose directors, officers,
employees and Affiliates do not, have a direct or indirect
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material financial interest in Cogentrix Energy and (2) which, in the sole
judgment of the Board of Directors, is otherwise independent and qualified to
perform the task for which such firm is being engaged.
"Interest Rate Protection Agreement" is defined to mean, with respect to
any Person, any interest rate protection agreement, interest rate future
agreement, interest rate option agreement, interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate hedge
agreement or other similar agreement or arrangement designed to protect such
Person or any of its Subsidiaries against fluctuations in interest rates to or
under which such Person or any of its Subsidiaries is a party or a beneficiary
on the date of the indenture or becomes a party or a beneficiary thereafter.
"Investment" in a Person is defined to mean any investment in, loan or
advance to, Guarantee on behalf of, directly or indirectly, or other transfer of
assets to, such Person.
"Investment Grade" is defined to mean, with respect to the exchange notes,
a rating of Baa3 or better by Moody's Investors Service, Inc. and a rating of
BBB- or better by Standard & Poor's Corporation.
"Joint Venture" is defined to mean a joint venture, partnership or other
similar arrangement, whether in corporate, partnership or other legal form;
provided that, as to any such arrangement in corporate form, such corporation
shall not, as to any Person of which such corporation is a Subsidiary, be
considered to be a Joint Venture to which such Person is a party.
"Lien" is defined to mean, with respect to any Property, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such Property; provided, however, that the term "Lien" shall not mean any
easements, rights-of-way, restrictions and other similar encumbrances and
encumbrances consisting of zoning restrictions, leases, subleases, licenses,
sublicenses, restrictions on the use of property or defects in the title
thereto. For purposes of the indenture, Cogentrix Energy shall be deemed to own
subject to a Lien any Property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such Property.
"Net Cash Proceeds" from an Asset Disposition or a Sale/Leaseback
Transaction is defined to mean cash payments received -- including any cash
payments received by way of a payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received, including
any cash received upon sale or disposition of such note or receivable, excluding
any other consideration received in the form of assumption by the acquiring
Person of Debt or other obligations relating to the Property disposed of in such
Asset Disposition or Sale/Leaseback Transaction, as the case may be, or received
in any other noncash form -- therefrom, in each case, net of all legal, title
and recording tax expenses, commissions and other fees and expenses incurred or
payable, and all federal, state, provincial, foreign and local taxes required to
be accrued as a liability under GAAP:
(1) as a consequence of such Asset Disposition or Sale/Leaseback
Transaction, as the case may be,
(2) as a result of the repayment of any Debt in any jurisdiction other
than the jurisdiction where the Property disposed of was located or
(3) as a result of any repatriation to the U.S. of any proceeds of
such Asset Disposition or Sale/ Leaseback Transaction, as the case may be,
and in each case net of a reasonable reserve for the after-tax-cost of any
indemnification payments fixed and contingent attributable to seller's
indemnities to the purchaser undertaken by Cogentrix Energy or any of its
Subsidiaries in connection with such Asset Disposition or Sale/Leaseback
Transaction, as the case may be, but excluding any payments, which by the
terms of the indemnities will not, under any circumstances, be made prior
to the Stated Maturity of the exchange notes, and net of all payments made
on any Debt which is secured by such Property, in accordance with the terms
of any Lien upon or with respect to such Property or which must by its
terms or by applicable law be repaid out of the proceeds from such Asset
Disposition or Sale/Leaseback Transaction, as the case may be, and net of
all distributions and other payments
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made to holders of minority interests in Subsidiaries or Joint Ventures as
a result of such Asset Disposition or Sale/Leaseback Transaction, as the
case may be.
"Net Income" of any Person for any period is defined to mean the net income
(loss) of such Person for such period, determined in accordance with GAAP,
except that extraordinary and non-recurring gains and losses as determined in
accordance with GAAP shall be excluded.
"Net Worth" of any Person is defined to mean, as of any date the aggregate
of capital, surplus and retained earnings, including any cumulative translation
adjustment, of such Person and its consolidated Subsidiaries as would be shown
on a consolidated balance sheet of such Person and its consolidated Subsidiaries
prepared as of such date in accordance with GAAP.
"Non-Recourse" to a Person as applied to any Debt or portion thereof is
defined to mean that such Person is not, directly or indirectly, liable to make
any payments with respect to such Debt or portion thereof, that no Guarantee of
such Debt or portion thereof has been made by such Person other than a Guarantee
limited in recourse to the Capital Stock of the Person incurring such Debt -- or
any shareholder, partner, member or participant of such Person -- and that such
Debt or portion thereof is not secured by a Lien on any asset of such Person
other than the Capital Stock of the Person incurring such Debt -- or any
shareholder, partner, member or participant of such Person -- or of the Person
whose obligations were Guaranteed, provided that for purposes of this definition
the status of a Subsidiary as a general partner of a partnership or Joint
Venture shall not, without more, cause such Person to be, directly or
indirectly, liable to make payments with respect to such Debt or constitute a
Guarantee of such Debt for purposes of determining whether Debt is Non-Recourse,
and provided further that none of the following shall cause any Debt to fail to
be Non-Recourse: the incurrence of Debt, Guarantees or Liens jointly by
(1) Cogentrix Eastern Carolina Corporation and Cogentrix of North
Carolina, Inc., or a successor to the merger or other combination of such
entities, with respect to the cogeneration facilities located at
Elizabethtown, Kenansville, Lumberton, Southport and Roxboro, North
Carolina;
(2) Cogentrix Virginia Leasing Corporation and James River
Cogeneration Company, or a successor to the merger or other combination of
such entities, with respect to the cogeneration facilities located at
Portsmouth and Hopewell, Virginia; and
(3) Subsidiaries or Joint Ventures in which Cogentrix Energy or one of
its Subsidiaries is a partner, shareholder, member or other participant,
which become such after the date of the indenture, incurred thereafter with
respect to the future development or acquisition of multiple Power
Generation Facilities.
"Officers' Certificate" is defined to mean a certificate signed by the
Chairman of the Board of Directors or any Vice Chairman of the Board of
Directors or the President or any Vice President or by the Chief Financial
Officer or the Secretary or any Assistant Secretary of Cogentrix Energy and
delivered to the trustee. Each such certificate shall comply with Section 314 of
the Trust Indenture Act and include the statements provided for in the indenture
if and to the extent required thereby.
"Opinion of Counsel" is defined to mean an opinion in writing signed by
legal counsel satisfactory to the trustee, who may be an employee of or counsel
to Cogentrix Energy. Each such opinion shall comply with Section 314 of the
Trust Indenture Act and include the statements provided for in the indenture, if
and to the extent required thereby.
"Permitted Holders" is defined to mean George T. Lewis, Jr., Betty G.
Lewis, Robert W. Lewis, David J. Lewis, James E. Lewis (collectively, the
"Current Holders"), members of the immediate families of the Current Holders,
trusts for the benefit of the Current Holders or members of the immediate
families of the Current Holders, and a non-profit corporation or foundation
controlled by any of the Permitted Holders. Members of a Person's "immediate
family" shall mean such Person's parents, brothers, sisters, spouse and lineal
descendants.
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"Permitted Investment" is defined to mean any Investment of the type
specified in clause (4) of the definition of Restricted Payment which is made
directly or indirectly by the Company and its Subsidiaries; provided that the
Person in which the Investment is made is:
(1) a Subsidiary which, directly or indirectly, is or will be engaged
in the development, construction, marketing, management, acquisition,
ownership or operation of a Power Generation Facility or
(2) a Joint Venture; provided further, that, in the case of an
Investment in a Joint Venture:
(A) at the time such Investment is made, Cogentrix Energy could
Incur at least $1 of Debt under the covenant described in "-- Debt"
above;
(B) at the time such Investment is made, no Event of Default or
event that, after the giving of notice or lapse of time or both would
become an Event of Default, shall have occurred and be continuing; and
(C) such Investment is in a Joint Venture which, directly or
indirectly, is or will be engaged in the development, construction,
marketing, management, acquisition, ownership or operation of a Power
Generation Facility.
"Permitted Payments" is defined to mean with respect to Cogentrix Energy or
any of its Subsidiaries:
(1) any dividend on shares of Capital Stock payable or to the extent
paid solely in shares of Capital Stock, other than Redeemable Stock, or in
options, warrants or other rights to purchase Capital Stock, other than
Redeemable Stock;
(2) any dividend or other distribution payable to Cogentrix Energy by
any of its Subsidiaries or by a Subsidiary to a Wholly-Owned Subsidiary;
(3) the repurchase or other acquisition or retirement for value of any
shares of Cogentrix Energy's Capital Stock, or any option, warrant or other
right to purchase shares of Cogentrix Energy's Capital Stock with
additional shares of, or out of the proceeds of a substantially
contemporaneous issuance of, Capital Stock other than Redeemable Stock,
unless the redemption provisions of such Redeemable Stock prohibit the
redemption thereof prior to the date on which the Capital Stock to be
acquired or retired was by its terms required to be redeemed;
(4) any defeasance, redemption, repurchase or other acquisition for
value of any Debt which by its terms ranks subordinate in right of payment
to the exchange notes with the proceeds from the issuance of
(A) Debt which is also subordinate to the exchange notes at least
to the extent and in the manner as the Debt to be defeased, redeemed,
repurchased or otherwise acquired is subordinate in right of payment to
the exchange notes; provided that such subordinated Debt provides for no
payments of principal by way of sinking fund, mandatory redemption or
otherwise including defeasance by Cogentrix Energy -- including, without
limitation, at the option of the holder thereof other than an option
given to a holder pursuant to an "asset disposition" or a "change of
control" covenant which is no more favorable to the holders of such Debt
than the provisions contained in the "-- Dispositions" or the "-- Change
of Control" covenants described above and such Debt provides that the
Company will not repurchase such Debt pursuant to such provisions prior
to Cogentrix Energy's repurchase of the exchange notes required to be
repurchased by Cogentrix Energy pursuant to the "-- Repurchase of
Exchange Notes Upon a Change of Control" or the "-- Dispositions"
covenants described above -- prior to, or in an amount greater than, any
Stated Maturity of the Debt being replaced and the proceeds of such
subordinated Debt are utilized for such purpose within 45 days of
issuance or
(B) Capital Stock, other than Redeemable Stock;
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(5) in respect of any actual payment on account of an Investment,
other than a Permitted Investment, which is not fixed in amount at the time
when made, the amount determined by the Board of Directors to be a
Restricted Payment on the date such Investment was originally deemed to
have been made (the "Original Restricted Payment Charge") plus an amount
equal to the interest on a hypothetical investment in a principal amount
equal to the Original Restricted Payment Charge assuming interest at a rate
of 7% per annum compounded annually for a period beginning on the date the
Investment was originally deemed to have been made and ending with respect
to any portion of the Original Restricted Payment Charge actually paid on
the date of actual payment less any actual payments previously made on
account of such Investment; provided that the Permitted Payment under this
clause (5) shall in no event exceed the payment actually made;
(6) any amount required to be paid with respect to an obligation
outstanding on the date of the original issuance of the exchange notes or
(7) a Permitted Investment.
"Permitted Working Capital Facilities" is defined to mean one or more
credit agreements providing for the extension of credit to Cogentrix Energy
and/or its Subsidiary Cogentrix Delaware Holdings, Inc. for working capital
purposes in an aggregate principal amount at any one time outstanding not to
exceed $125 million, provided, however, that such limit shall not apply
following the Rating Event Date.
"Person" is defined to mean an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Power Generation Facility" is defined to mean an electric power or thermal
energy generation or cogeneration facility or related facilities, including
residual waste management and, to the extent such facilities are in existence on
the date of original issuance of the exchange notes or are required by contract
or applicable law, rule or regulation, facilities that use thermal energy from a
cogeneration facility, and its or their related electric power transmission,
fuel supply and fuel transportation facilities, together with its or their
related power supply, thermal energy and fuel contracts and other facilities,
services or goods that are ancillary, incidental, necessary or reasonably
related to the marketing, development, construction, management or operation of
the foregoing, as well as other contractual arrangements with customers,
suppliers and contractors.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents however designated,
whether voting or non-voting, of preferred or preference stock of such Person
which is outstanding or issued on or after the date of original issuance of the
exchange notes.
"Property" of any Person is defined to mean all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person under
GAAP.
"Public Equity Offering" means a public offering, registered under the
Securities Act, of Common Stock of Cogentrix Energy made after the date of
original issuance of the exchange notes.
"Public Equity Offering Consummation Date" means the date on which
Cogentrix Energy receives any proceeds from a Public Equity Offering.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is
(1) required to be redeemed prior to the Stated Maturity of the
exchange notes,
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the exchange
notes or
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(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Debt having a scheduled maturity prior to the
Stated Maturity of the exchange notes;
provided that any Capital Stock that would not constitute Redeemable Stock but
for provisions thereof giving holders thereof the right to require Cogentrix
Energy to repurchase or redeem such Capital Stock upon the occurrence of an
"asset disposition" or a "change of control" occurring prior to the Stated
Maturity of the exchange notes shall not constitute Redeemable Stock if the
"asset sale" or "change of control" provision applicable to such Capital Stock
is no more favorable to the holders of such Capital Stock than the provisions
contained in the covenants described in "-- Dispositions" and "-- Repurchase of
Exchange Notes Upon a Change of Control" above and such Capital Stock
specifically provides that Cogentrix Energy will not repurchase or redeem any
such Capital Stock pursuant to such provisions prior to Cogentrix Energy's
repurchase of the exchange notes required to be repurchased by Cogentrix Energy
under the covenants described in "-- Dispositions" and "-- Repurchase of
Exchange Notes Upon a Change of Control" above.
"Reference Period" is defined to mean the four complete fiscal quarters for
which financial information is available preceding the date of a transaction
giving rise to the need to make a financial calculation.
"Restricted Payment" is defined to mean, with respect to any Person:
(1) any dividend or other distribution on any shares of such Person's
Capital Stock;
(2) any payment on account of the purchase, redemption, retirement or
acquisition for value of such Person's Capital Stock;
(3) any defeasance, redemption, repurchase or other acquisition or
retirement for value prior to the Stated Maturity of any Debt ranked
subordinate in right of payment to the exchange notes; and
(4) any Investment made in an Affiliate, other than Cogentrix Energy
or Cogentrix Delaware Holdings. Notwithstanding the foregoing, "Restricted
Payment" shall not include any Permitted Payment.
"Senior Debt" is defined to mean the principal of and interest on all Debt
of Cogentrix Energy whether created, Incurred or assumed before, on or after the
date of original issuance of the exchange notes, other than the exchange notes;
provided that Senior Debt shall not include:
(1) Debt that, when Incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, was Non-Recourse to
Cogentrix Energy,
(2) Debt of Cogentrix Energy to any Affiliate and
(3) any Debt of Cogentrix Energy which by the terms of the instrument
creating or evidencing the same is specifically designated as not being
senior in right of payment to the exchange notes.
"Significant Subsidiary" of a Person is defined to mean, as of any date,
any Subsidiary, or two or more Subsidiaries taken together in the event of a
cross-collateralization of such multiple Subsidiaries' Debt, which has two or
more of the following attributes:
(1) it contributes 20% or more of such Person's Excess Cash Flow for
its most recently completed fiscal quarter or
(2) it contributed 15% or more of Net Income before tax of such Person
and its consolidated Subsidiaries for such Person's most recently completed
fiscal quarter or
(3) it constituted 20% or more of Consolidated Total Assets of such
Person at the end of such Person's most recently completed fiscal quarter.
"Stated Maturity" is defined to mean, with respect to any debt security or
any installment of interest thereon, the date specified in such debt security as
the fixed date on which any principal of such debt security or any such
installment of interest is due and payable.
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"Subsidiary" is defined to mean, with respect to any Person, any
corporation or other entity of which a majority of the Capital Stock or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.
"Trade Payables" is defined to mean, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors created, assumed or Guaranteed by such Person or any of its
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity -- as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) that
has become publicly available at least two business days prior to the date fixed
for redemption, or if such Statistical Release is no longer published, any
publicly available source of similar market data -- most nearly equal to the
then remaining years to Stated Maturity of the exchange notes; provided that if
the number of years to Stated Maturity of the exchange notes is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation, calculated to the nearest one-twelfth of a year, from the weekly
average yields of United States Treasury securities for which such yields are
given except that if the average life to Stated Maturity of the exchange notes
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"U.S. Government Obligations" is defined to mean securities which are
(1) direct obligations of the U.S. for the payment of which its full
faith and credit is pledged or
(2) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the U.S., the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the
U.S., which, in either case are not callable or redeemable at the option of
the issuer thereof, and shall also include a depository receipt issued by a
bank or trust company as custodian with respect to any such U.S. Government
Obligations or a specific payment of interest on or principal of any such
U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt, provided that, except as required by law,
such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the
specific payment of interest on or principal of the U.S. Government
Obligation evidenced by such depository receipt.
"Voting Stock" is defined to mean, with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors, or persons fulfilling similar responsibilities, of such Person.
"Wholly-Owned Subsidiary" is defined to mean, with respect to any Person,
any Subsidiary of such Person if all of the Capital Stock or other ownership
interests in such Subsidiary having ordinary voting power to elect the entire
board of directors or entire group of other persons performing similar
functions -- other than any director's qualifying shares or Investments by
foreign nationals mandated by applicable law -- is owned directly or indirectly,
by one or more Wholly-Owned Subsidiaries of such Person's Wholly-Owned
Subsidiaries, by such Person.
DESCRIPTION OF NON-OPERATING SUBSIDIARY GUARANTEE
THE FOLLOWING DESCRIPTION IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE
SUBSIDIARY GUARANTEE. YOU SHOULD READ THE GUARANTEE BECAUSE IT, AND NOT THIS
DESCRIPTION, DEFINES YOUR RIGHTS AS THIRD-PARTY BENEFICIARIES OF THE GUARANTEE.
WE HAVE FILED A COPY OF THE GUARANTEE AS AN EXHIBIT TO THE REGISTRATION
STATEMENT WHICH INCLUDES THIS PROSPECTUS.
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Cogentrix Delaware Holdings has guaranteed all of the existing and future
senior, unsecured outstanding indebtedness for borrowed money of Cogentrix
Energy, including as specifically referenced in the guarantee, the exchange
notes. In the event Cogentrix Energy is unable to make payments on its senior,
unsecured indebtedness when due, whether at the stated maturity, or otherwise,
Cogentrix Delaware Holdings will be obligated to make these payments instead.
Cogentrix Delaware Holdings will not be required to satisfy its obligations
under the guarantee unless it has assets in excess of $150,000, except for
assets constituting investments in subsidiaries, on the day it is required to
satisfy these obligations. The maximum liability of Cogentrix Delaware Holdings
under the guarantee will also be limited as necessary to prevent the guarantee
from constituting a fraudulent conveyance under applicable law. Unless Cogentrix
Energy's corporate credit facility is renewed or letters of credit issued to
Cogentrix Energy by the lenders under its corporate credit facility remain
outstanding, the guarantee terminates by its terms upon the expiration of
Cogentrix Energy's corporate credit facility in 2001. See "Risk Factors -- Risk
Related to Termination of Guarantee of Exchange Notes by Non-operating
Subsidiary of Cogentrix Energy."
The guarantee contains negative covenants for the direct benefit of the
lenders under Cogentrix Energy's corporate credit facility and the indirect
benefit of the other holders of Cogentrix Energy's senior, unsecured
indebtedness for borrowed money. These negative covenants limit, among other
things, Cogentrix Delaware Holdings' ability to:
- incur additional debt and liens other than non-recourse project financing
debt secured by liens on Cogentrix Delaware Holdings' interests in these
project subsidiaries or joint ventures
- restrict its ability to transfer assets to Cogentrix Energy, including
the payment of dividends
- extend credit or make investments other than investments in any
subsidiary of Cogentrix Delaware Holdings and other limited permitted
investments.
The terms or provisions of the guarantee may be waived, amended,
supplemented or otherwise modified at any time and from time to time by
Cogentrix Delaware Holdings and the agent bank for Cogentrix Energy's corporate
credit facility. Any waiver, amendment, supplement or modification will be
effective against all holders of Cogentrix Energy's senior unsecured outstanding
indebtedness for borrowed money, including the holders of the exchange notes,
the trustee under the indenture for the exchange notes and the trustee under the
2004 indenture, despite any reliance by them, or any of them, on the guarantee.
DESCRIPTION OF COGENTRIX ENERGY'S OTHER MATERIAL INDEBTEDNESS
THE 2004 SENIOR NOTES
On March 15, 1994, Cogentrix Energy issued $100 million aggregate principal
amount of 8.10% senior notes due 2004 in an underwritten public offering. The
2004 senior notes are unsecured obligations of Cogentrix Energy and will rank
equally in right of payment with the exchange notes offered in the exchange
offer.
The 2004 senior notes bear interest at a rate of 8.10% per annum payable
semiannually on March 15 and September 15 of each year and mature on March 15,
2004. They are redeemable at any time at the option of Cogentrix Energy at a
redemption price equal to
(1) the then outstanding principal amount of the 2004 senior notes
plus accrued and unpaid interest thereon to the date of redemption plus
(2) a premium equal to the excess of
(A) the present value at the time of redemption of the principal
amount of the 2004 senior notes plus any required interest payments due
on the 2004 senior notes through Stated Maturity, as defined in the 2004
indenture, computed using a discount rate equal to the Treasury Rate, as
defined in the 2004 indenture, plus 50 basis points over
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(B) the then outstanding principal amount of the 2004 senior notes.
Upon a Change of Control, as defined in the 2004 indenture, each holder
of 2004 senior notes will have the right to require Cogentrix Energy to
repurchase such 2004 senior notes at a repurchase price in cash equal to
101% of the principal amount thereof plus accrued interest, if any, to
the date of repurchase. The 2004 indenture contains negative covenants
that are substantially the same as the negative covenants contained in
the indenture and which, among other things, limit
- the incurrence of additional debt by Cogentrix Energy,
- the payment of dividends on and redemptions of capital stock by
Cogentrix Energy,
- the use of proceeds from the sale of assets and subsidiary stock,
- transactions with affiliates,
- the incurrence of liens,
- sale and leaseback transactions and
- consolidations, mergers and some transfers of assets.
The foregoing description is a summary of the material provisions of the
2004 indenture and the 2004 senior notes. You should read the 2004 indenture
because it, and not this description, defines the rights of the holders of the
2004 senior notes. A copy of the 2004 indenture is available upon request made
to Cogentrix Energy or any of the initial purchasers of the outstanding notes.
The foregoing summary does not purport to be complete and is subject to and is
qualified in its entirety by reference to the 2004 indenture and the form of
2004 senior notes.
CORPORATE CREDIT FACILITY
Australia and New Zealand Banking Group Limited, as agent for a group of
lending banks, has extended Cogentrix Energy a revolving credit facility that
provides for direct advances to, or the issuance of letters of credit for, the
benefit of Cogentrix Energy in an amount up to $125 million. This corporate
credit facility is unsecured and imposes covenants on Cogentrix Energy
substantially the same as the covenants contained in the indentures and
financial condition covenants. Cogentrix Energy has used approximately $60
million of the credit availability under the corporate credit facility for
letters of credit issued in connection with the Bechtel Acquisition and its
investment in the electric generating plant under construction in Batesville,
Mississippi. See "Business -- New Facility Under Construction in Batesville,
Mississippi." The balance of the commitment under the corporate credit facility
is available, subject to any limitations imposed by the covenants contained
therein and in the indentures, to be drawn upon by Cogentrix Energy to repay
other outstanding indebtedness or for general corporate purposes, including
equity investments in new projects or acquisitions of existing electric
generating facilities or those under development.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The discussion set forth in this summary is based on the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and
proposed Treasury regulations thereunder ("Treasury Regulations"), and
administrative and judicial interpretations thereof, all as in effect on the
date hereof and all of which are subject to change, including possibly on a
retroactive basis. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could affect the tax consequences to
holders of outstanding notes and exchange notes.
This summary addresses the material federal income tax consequences that
may be applicable to a holder of outstanding notes or exchange notes. The tax
treatment of a holder of outstanding notes or exchange notes may, however, vary
depending on its particular situation. For example, some holders, including
individual retirement and other tax-deferred accounts, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and individuals who are not citizens or residents of the United
States, may be subject to special rules not discussed below. In addition, this
discussion addresses the tax consequences to the initial holders of the
outstanding notes and not the tax consequences to subsequent transferees of the
outstanding notes or exchange notes.
EACH HOLDER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL
INCOME TAX CONSEQUENCES SET FORTH BELOW AND ANY OTHER FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES FOR EXCHANGE NOTES AND
OF HOLDING AND DISPOSING OF THE OUTSTANDING NOTES AND EXCHANGE NOTES.
EXCHANGE OFFER
Under Section 1001 of the Code, modifications in debt instruments may be
deemed to constitute a taxable exchange of the existing debt instrument for a
new debt instrument. The IRS has issued Regulations providing rules for
determining when a modification of a debt instrument constitutes a taxable
exchange. Because the terms of the exchange notes are identical to the terms of
the outstanding notes, except that the exchange notes will not contain terms
with respect to transfer restrictions, each exchange note will be viewed as a
continuation of the corresponding outstanding note. As a result, the issuance of
the exchange note will be disregarded for federal income tax purposes, and a
holder exchanging an outstanding note for an exchange note, as well as a
non-exchanging holder, will not recognize any gain or loss as a result of the
exchange.
STATED INTEREST
A holder of an outstanding note or an exchange note will be required to
report as income for federal income tax purposes interest earned on an
outstanding note or an exchange note in accordance with the holder's method of
tax accounting. A holder of an outstanding note or an exchange note using the
accrual method of accounting for tax purposes is, as a general rule, required to
include interest in ordinary income as such interest accrues, while a cash basis
holder must include interest income when cash payments are received, or made
available for receipt, by such holder.
ORIGINAL ISSUE DISCOUNT -- OUTSTANDING NOTES ISSUED ON OCTOBER 20, 1998
Because the outstanding notes issued on October 20, 1998 were issued with
original issue discount ("OID") within the meaning of Sections 1272 and 1273 of
the Code and the pertinent Treasury Regulations, holders of these outstanding
notes and exchange notes generally will be required to include OID in gross
income as it accrues. The total amount of OID with respect to each outstanding
note issued on October 20, 1998 or corresponding exchange note is the excess of
its "stated redemption price at maturity" over its "issue price". The "issue
price" of the outstanding notes issued on October 20, 1998 and corresponding
exchange notes was 99.518% of the aggregate principal amount of outstanding
notes and exchange notes outstanding which was the first price at which a
substantial amount of outstanding notes were sold. The "stated redemption price
at maturity" of the outstanding notes issued on October 20, 1998 or
corresponding exchange notes is the sum of all payments provided by these
outstanding notes or exchange notes other than "qualified stated interest"
payments. The term "qualified stated interest"
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<PAGE> 126
generally means stated interest that is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually at a
single fixed rate. A holder of an outstanding note issued on October 20, 1998 or
a corresponding exchange note is required to include the OID in income for
federal income tax purposes as it accrues under a "constant yield method"
regardless of such holder's method of accounting for tax purposes. Cogentrix
will furnish to the IRS and to record holders of the outstanding notes and the
exchange notes information with respect to the OID accruing during the calendar
year, as well as interest paid during that year.
AMORTIZABLE BOND PREMIUM -- OUTSTANDING NOTES ISSUED ON NOVEMBER 25, 1998
The outstanding notes issued on November 25, 1998 were issued to holders at
a price which exceeded the amount payable at maturity of these outstanding
notes. The "issue price" of the outstanding notes issued on November 25, 1998
and corresponding exchange notes was 105.397% of the aggregate principal amount
of outstanding notes and exchange notes outstanding which was the first price at
which a substantial amount of then outstanding notes were sold. If a holder
holds the outstanding notes issued on November 25, 1998 and corresponding
exchange notes as a "capital asset" within the meaning of Section 1221 of the
Code, the holder may elect under Section 171 of the Code to amortize the premium
under a constant yield method that reflects compounding based on the interval
between payments on the outstanding notes and exchange notes. This election is
revocable only with the consent of the IRS and applies to all obligations owned
or acquired by the holder on or after the first day of the taxable year to which
the election applies. To the extent that amounts are deducted as amortizable
bond premium, the holder's adjusted tax basis in the outstanding notes issued on
November 25, 1998 and the corresponding exchange notes will be reduced. The IRS
recently published final Treasury Regulations covering the amortization of bond
premiums. These Treasury Regulations describe the constant yield method for
amortizing premium and provide that the holder may offset the premium against
corresponding interest income only as that interest income is taken into account
under the holder's regular method of accounting. For instruments that may be
called or prepaid prior to maturity, a holder will be deemed to exercise its
option and an issuer will be deemed to exercise its redemption right in a manner
that maximizes the holder's yield. Purchasers of the outstanding notes issued on
November 25, 1998 and the corresponding exchange notes should consult their tax
advisors regarding the election to amortize premium and the method to be
employed.
SALE, EXCHANGE, OR REDEMPTION OF AN OUTSTANDING NOTE OR AN EXCHANGE NOTE
Except for transfers in the exchange offer as discussed above, upon the
sale, exchange, or redemption of an outstanding note or an exchange note, a
holder will recognize taxable gain or loss equal to the difference between
- the amount of cash -- other than amounts received attributable to
interest not previously taken into account, which amount will be treated
as interest received -- and the fair market value of property received
and
- the holder's adjusted tax basis in the outstanding note or exchange note.
A holder's adjusted tax basis in an outstanding note or exchange note
generally will equal the cost of the outstanding note or exchange note to the
holder, increased by the amount of any OID previously included in income by the
holder with respect to the outstanding note or exchange note and reduced by any
payments previously received by the holder with respect to the outstanding note
or exchange note, other than qualified stated interest payments, and by any
premium amortization deductions previously claimed by the holder. Provided that
the outstanding note or exchange note is a capital asset in the hands of the
holder and has been held for more than one year, any gain or loss recognized by
the holder will generally be a long-term capital gain or loss.
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<PAGE> 127
BACKUP WITHHOLDING
Under the backup withholding rules, a holder of an outstanding note or an
exchange note may be subject to a backup withholding at the rate of 31% on
interest paid on the outstanding note or exchange note or on any cash payment
with respect to the sale or redemption of the outstanding note or exchange note
unless such holder is a corporation or comes under other exempt categories and
when required demonstrates this fact or such holder provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules in the Treasury Regulations.
Cogentrix will report to the holders of the outstanding notes and exchange
notes and to the IRS the amount of any "reportable payments" for each calendar
year and the amount of tax withheld, if any, with respect to payments on the
outstanding notes and exchange notes.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against the holder's federal income tax liability, provided
that the required information in furnished to the IRS.
THE FOREGOING DISCUSSION OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED
TO BE, LEGAL OR TAX ADVICE WITH RESPECT TO THE CONSEQUENCES OF THE EXCHANGE,
OWNERSHIP, AND DISPOSITION OF THE OUTSTANDING NOTES AND EXCHANGE NOTES INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for outstanding notes where
the outstanding notes were acquired for the broker-dealer's own account as a
result of market-making activities or other trading activities, other than
outstanding notes acquired directly from Cogentrix Energy or an "affiliate" of
Cogentrix Energy. Cogentrix Energy has agreed that it will make this prospectus,
as it may be amended or supplemented from time to time, available to any
broker-dealer for use in connection with any such resale for a period starting
on the expiration date and ending on the close of business on the first
anniversary of the expiration date. A broker-dealer intending to use this
prospectus in the resale of exchange notes must notify Cogentrix Energy on or
before the expiration date, that it intends to use this prospectus. This notice
may be given in the space provided for in the letter of transmittal or may be
delivered to the exchange agent. Cogentrix Energy has agreed that, for a period
starting on the expiration date and ending on the close of business on the first
anniversary of the expiration date, it will make this prospectus, and any
amendment or supplement to this prospectus, available to any broker-dealer that
requests these documents in the letter of transmittal. See "The Exchange
Offer -- Resales of Exchange Notes" for more information.
Cogentrix Energy will not receive any proceeds from any sale of exchange
notes. Broker-dealers acquiring exchange notes for their own accounts in the
exchange offer may sell the exchange notes in one or more transactions in the
over-the-counter market or, in negotiated transactions, through the writing of
options on the exchange offer or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any resale may be made directly
to purchasers or to or through brokers or dealers who may receive compensation
in the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any of the exchange notes.
Any broker-dealer that resells exchange notes that it received for its own
account in the exchange offer and any broker-dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act. Any profit on any such resale of exchange
notes and any commissions or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The letter of
transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the expiration date, Cogentrix Energy will
promptly send additional copies of this prospectus, and any amendment or
supplement to this prospectus, to any broker-dealer that requests such documents
in the letter of transmittal. Cogentrix Energy has agreed to pay all expenses
incident to the exchange offer, including the expenses of one counsel for the
holders of the securities, other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the securities, including any
broker-dealers, against liabilities specified in the registration agreements,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the exchange notes offered hereby will be passed upon for
Cogentrix Energy by Moore & Van Allen, PLLC, Charlotte, North Carolina.
EXPERTS
The consolidated financial statements of Cogentrix Energy, Inc. as of
December 31, 1997 and June 30, 1997 and 1996 and for the six-month period ended
December 31, 1997 and for each of the three fiscal years in the period ended
June 30, 1997 included in this prospectus have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto. In this
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<PAGE> 129
report, that firm states that with respect to the summarized financial data for
Bolivian Power Company Limited, its opinion is based on the report of other
independent public accountants, namely PricewaterhouseCoopers LLP. The
consolidated financial statements referred to above have been included herein in
reliance upon the authority of those firms as experts in giving said reports.
The consolidated financial statements of Cogentrix Delaware Holdings, Inc.
as of December 31, 1997 and June 30, 1997 and 1996 and for the six-month period
ended December 31, 1997 and for each of the three fiscal years in the period
ended June 30, 1997 included in this prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The financial statements of LSP-Cottage Grove L.P. and LSP-Whitewater
Limited Partnership as of December 31, 1997 and for the year then ended included
in this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The financial statements of LSP-Cottage Grove L.P. and LSP-Whitewater
Limited Partnership as of December 31, 1996 and for each of the two fiscal years
in the period ended December 31, 1996 included in this prospectus have been
audited by KPMG LLP, independent public accountants, as stated in their report
appearing herein, and upon the authority of said firm as experts in accounting
and auditing.
The combined financial statements of Logan Generating Company, L.P.,
Keystone Urban Renewal Limited Partnership, Northampton Generating Company, L.
P. and its subsidiaries, Chambers Cogeneration Limited Partnership and
Scrubgrass Generating Company, L.P. and its subsidiaries as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The combined financial statements of Birch Power Corporation, Cedar Power
Corporation, Hickory Power Corporation, Palm Power Corporation and Panther Creek
Leasing, Inc. as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants. In this report, that firm states that with respect to the financial
statements of Gilberton Power Company, Cedar Bay Generating Company, L.P.,
Morgantown Energy Associates or Indiantown Cogeneration, L.P., its opinion is
based on the reports of other independent auditors, namely Ernst & Young, LLP,
Arthur Andersen LLP and Deloitte & Touche LLP. The combined financial statements
referred to above have been included herein in reliance upon such reports given
on the authority of those firms as experts in accounting and auditing.
The combined financial statements of Indiantown Cogeneration, L.P. and
Cedar Bay Generating, L.P. as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997 included in this prospectus
have been audited by Arthur Andersen, LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated financial statements of J. Makowski Company, Inc. as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 included in this prospectus have been audited by Arthur
Andersen, LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The combined financial statements of Selkirk Cogen Partners, LP and Mass
Power as of December 31, 1997 and 1996 and for each of the three fiscal years in
the period ended December 31, 1997 included in this prospectus have been audited
by Arthur Andersen, LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
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<PAGE> 130
WHERE YOU CAN FIND MORE INFORMATION
Notwithstanding that it is not required to remain subject to the
informational reporting requirements of the Exchange Act, Cogentrix Energy has
covenanted in the indentures to, and, in accordance therewith, files, and will
continue to file, reports, proxy statements and other information with the
Securities and Exchange Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Securities and
Exchange Commission's Regional Offices in New York at Seven World Trade Center,
13th Floor, New York, New York 10048, and in Chicago at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
materials may be obtained from the Public Reference Section of the Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Information on the public reference facilities maintained by
the Securities and Exchange Commission may be obtained by calling the Securities
and Exchange Commission at 1-800-SEC-0330. In addition, the Securities and
Exchange Commission maintains a site on the world wide web at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically.
This prospectus constitutes part of a registration statement on Form S-4
and amendments to it filed by Cogentrix Energy with the Securities and Exchange
Commission under the Securities Act. This prospectus omits some of the
information set forth in the registration statement. Reference is hereby made to
the registration statement and to its exhibits for further information with
respect to Cogentrix Energy and the securities offered hereby. Statements
contained herein concerning the provisions of contracts or other documents are
not necessarily complete, and each statement is qualified in its entirety by
reference to the copy of the applicable contract or other document filed with
the Securities and Exchange Commission. Copies of the registration statement and
the exhibits thereto are on file at the offices of the Securities and Exchange
Commission and may be obtained upon payment of the fee prescribed by the
Securities and Exchange Commission, or may be examined without charge at the
public reference facilities of the Securities and Exchange Commission described
above. The registration statement and the exhibits that are filed with the
registration statement relating thereto may also be viewed at the Securities and
Exchange Commission's site on the world wide web at http://www.sec.gov.
INCORPORATION OF PREVIOUSLY FILED DOCUMENTS BY REFERENCE
Cogentrix Energy has filed with the Securities and Exchange Commission its
Annual Report on Form 10-K for the fiscal year ended June 30, 1997, its
Transition Report on Form 10-K for the six-month period ended December 31, 1997,
its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
1998, June 30, 1998, and September 30, 1998, its Current Reports on Form 8-K
filed January 12, 1998, March 10, 1998 and March 23, 1998, April 6, 1998,
September 4, 1998 and November 4, 1998 and its Current Reports on Form 8-K/A
filed June 2, 1998 and November 12, 1998 and are incorporated herein by
reference.
All documents filed by Cogentrix Energy with the Securities and Exchange
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date hereof and prior to the termination of any offering of exchange
notes made by this prospectus shall be deemed to be incorporated by reference
into this prospectus and to be a part of this prospectus from the respective
dates of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement or document so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this prospectus.
Cogentrix will furnish without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the documents described above
that are incorporated by reference herein other than exhibits to such documents
which are not specifically incorporated by reference in such documents. Written
or telephone requests should be directed to: Cogentrix Energy, 9405 Arrowpoint
Boulevard, Charlotte, North Carolina 28273, telephone number (704) 525-3800.
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<PAGE> 131
INDEX TO
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets at December 31, 1997, June 30,
1997 and June 30, 1996.................................... F-4
Consolidated Statements of Operations for the Six-Month
Periods Ended December 31, 1997 and 1996 (unaudited), and
the Years Ended June 30, 1997, 1996 and 1995.............. F-5
Consolidated Statements of Changes in Shareholders' Equity
for the Six-Month Period Ended December 31, 1997, and the
Years Ended June 30, 1997, 1996 and 1995.................. F-6
Consolidated Statements of Cash Flows for the Six-Month
Periods Ended December 31, 1997 and 1996 (unaudited), and
the Years Ended June 30, 1997, 1996 and 1995.............. F-7
Notes to Consolidated Financial Statements.................. F-8
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997......................... F-25
Consolidated Statements of Income for the Nine Months Ended
September 30, 1998 and 1997 (unaudited)................... F-26
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited)............. F-27
Notes to Consolidated Condensed Financial Statements
(unaudited)............................................... F-28
</TABLE>
F-1
<PAGE> 132
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO COGENTRIX ENERGY, INC.:
We have audited the accompanying consolidated balance sheets of Cogentrix
Energy, Inc. (a North Carolina corporation) and subsidiary companies as of
December 31, 1997, June 30, 1997 and June 30, 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for the
six-month period ended December 31, 1997 and for each of the three years in the
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The summarized financial data for
Bolivian Power Company Limited contained in Note 4 are based on the financial
statements of Bolivian Power Company Limited which were audited by other
auditors. Their report has been furnished to us and our opinion, insofar as it
relates to the data in Note 4, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Cogentrix Energy, Inc. and subsidiary companies as of
December 31, 1997, June 30, 1997 and June 30, 1996, and the results of their
operations and their cash flows for the six-month period ended December 31, 1997
and for each of the three years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
March 20, 1998
F-2
<PAGE> 133
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS:
Compania Boliviana de Energia Electrica S.A. -- Bolivian Power Company Limited
We have audited the consolidated financial statements of Compania Boliviana
de Energia Electrica S.A. -- Bolivian Power Company Limited and its subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
income of cash flows and of shareholders' equity for each of the three years in
the period ended December 31, 1996 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of Compania Boliviana
de Energia Electrica S.A. -- Bolivian Power Company Limited and its subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with accounting principles generally accepted in the United States of
America.
PRICEWATERHOUSECOOPERS LLP
La Paz, Bolivia
February 28, 1997
F-3
<PAGE> 134
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997, AND JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 71,833 $ 62,596 $ 33,351
Restricted cash........................................... 27,742 30,888 42,203
Marketable securities..................................... 42,118 21,494 0
Restricted investments.................................... 0 20,000 0
Accounts receivable....................................... 49,781 57,880 57,331
Inventories............................................... 15,210 15,723 19,086
Other current assets...................................... 2,465 5,779 2,883
-------- -------- --------
Total current assets.............................. 209,149 214,360 154,854
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: $206,961; December 31, 1997, $188,227; June
30, 1997, $169,761; June 30, 1996, $156,215............... 496,589 514,449 604,491
LAND AND IMPROVEMENTS....................................... 2,540 2,540 2,424
DEFERRED FINANCING, START-UP AND ORGANIZATION COSTS, net of
accumulated amortization: $13,681; December 31, 1997,
$16,592; June 30, 1997, $17,509; June 30, 1996, $19,653... 21,085 22,601 25,105
RESTRICTED INVESTMENTS...................................... 0 0 63,695
NATURAL GAS RESERVES........................................ 2,384 2,829 3,611
INVESTMENTS IN UNCONSOLIDATED AFFILIATES.................... 79,072 84,599 56,028
OTHER ASSETS................................................ 12,155 18,450 11,433
-------- -------- --------
$822,974 $859,828 $921,641
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 74,680 $ 62,370 $ 48,416
Accounts payable.......................................... 13,755 22,147 21,453
Accrued compensation...................................... 4,923 12,290 4,393
Accrued interest payable.................................. 2,935 3,308 4,063
Accrued dividends payable................................. 2,140 5,000 4,759
Other accrued liabilities................................. 8,182 13,040 8,816
-------- -------- --------
Total current liabilities......................... 106,615 118,155 91,900
LONG-TERM DEBT.............................................. 595,112 631,624 670,900
DEFERRED INCOME TAXES....................................... 25,872 23,074 46,971
MINORITY INTERESTS.......................................... 15,131 14,354 22,044
OTHER LONG-TERM LIABILITIES................................. 21,946 22,912 6,816
-------- -------- --------
764,676 810,119 838,631
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 10)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding.................. 130 130 130
Net unrealized gain on available for sale securities...... 26 0 0
Accumulated earnings...................................... 58,142 49,579 82,880
-------- -------- --------
58,298 49,709 83,010
-------- -------- --------
$822,974 $859,828 $921,641
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
F-4
<PAGE> 135
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED) AND
THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS (LOSS) PER COMMON SHARE)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------- ------------------------------
1997 1996 1997 1996 1995
-------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE
Electric.......................................... $154,810 $162,909 $315,203 $356,459 $357,674
Steam............................................. 12,721 13,284 26,686 27,703 23,320
Income from unconsolidated investments in power
projects........................................ 1,186 348 574 3,862 1,116
Other............................................. 9,229 4,608 10,343 22,522 2,992
-------- -------- -------- -------- --------
177,946 181,149 352,806 410,546 385,102
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Fuel expense...................................... 60,500 71,350 131,405 171,310 168,184
Operations and maintenance........................ 33,189 36,998 73,041 74,272 66,822
General, administrative and development
expenses........................................ 18,242 16,017 39,425 29,983 30,499
Depreciation and amortization..................... 20,407 18,610 40,047 37,842 37,642
Loss on impairment and cost of removal of
cogeneration facilities......................... 0 65,628 65,628 0 0
-------- -------- -------- -------- --------
132,338 208,603 349,546 313,407 303,147
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)............................. 45,608 (27,454) 3,260 97,139 81,955
OTHER INCOME (EXPENSE):
Interest expense.................................. (25,680) (28,144) (56,328) (58,354) (59,621)
Investment and other income....................... 4,334 7,729 13,184 7,478 8,269
Equity in net income (loss) of unconsolidated
affiliates, net................................. (1,813) (1,088) (813) (1,758) 8,696
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTERESTS IN INCOME,
INCOME TAXES AND EXTRAORDINARY LOSS............... 22,449 (48,957) (40,697) 44,505 39,299
MINORITY INTERESTS IN INCOME BEFORE EXTRAORDINARY
LOSS.............................................. (2,273) (1,614) (4,013) (4,749) (4,789)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS.............................................. 20,176 (50,571) (44,710) 39,756 34,510
BENEFIT (PROVISION) FOR INCOME TAXES................ (7,971) 18,895 17,112 (15,961) (13,337)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS............. 12,205 (31,676) (27,598) 23,795 21,173
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of minority interest and income tax benefit... (1,502) (703) (703) 0 0
-------- -------- -------- -------- --------
NET INCOME (LOSS)................................... $ 10,703 $(32,379) $(28,301) $ 23,795 $ 21,173
======== ======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary loss........... $ 43.28 $(112.32) $ (97.87) $ 84.38 $ 75.08
Extraordinary loss................................ (5.33) (2.49) (2.49) 0.00 0.00
-------- -------- -------- -------- --------
$ 37.95 $(114.81) $(100.36) $ 84.38 $ 75.08
======== ======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.......... 282,000 282,000 282,000 282,000 282,000
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-5
<PAGE> 136
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED
DECEMBER 31, 1997, AND THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT FOR DIVIDENDS PER COMMON SHARE)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
COMMON AVAILABLE FOR ACCUMULATED
STOCK SALE SECURITIES EARNINGS TOTAL
------ --------------- ----------- --------
<S> <C> <C> <C> <C>
Balance, June 30, 1994.................... $130 $(476) $ 46,906 $ 46,560
Net unrealized gain on available for sale
securities, net of deferred income tax
provision of $34........................ 0 120 0 120
Net income................................ 0 0 21,173 21,173
Common stock dividends ($15.01 per common
share).................................. 0 0 (4,235) (4,235)
---- ----- -------- --------
Balance, June 30, 1995.................... 130 (356) 63,844 63,618
Net unrealized gain on available for sale
securities, net of deferred income tax
provision of $256....................... 0 356 0 356
Net income................................ 0 0 23,795 23,795
Common stock dividends ($16.88 per common
share).................................. 0 0 (4,759) (4,759)
---- ----- -------- --------
Balance, June 30, 1996.................... 130 0 82,880 83,010
Net loss.................................. 0 0 (28,301) (28,301)
Common stock dividends ($17.73 per common
share).................................. 0 0 (5,000) (5,000)
---- ----- -------- --------
Balance, June 30, 1997.................... 130 0 49,579 49,709
Net unrealized gain on available for sale
securities, net of deferred income tax
provision of $14........................ 0 26 0 26
Net income................................ 0 0 10,703 10,703
Common stock dividends ($7.59 per common
share).................................. 0 0 (2,140) (2,140)
---- ----- -------- --------
Balance, December 31, 1997................ $130 $ 26 $ 58,142 $ 58,298
==== ===== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-6
<PAGE> 137
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
AND THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
---------------------- ------------------------------
1997 1996 1997 1996 1995
-------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $ 10,703 $(32,379) $(28,301) $ 23,795 $ 21,173
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 20,407 18,610 40,047 37,842 37,642
Loss on impairment and cost of removal of
cogeneration facilities................. 0 65,628 65,628 0 0
Deferred income taxes...................... 4,628 (24,192) (27,585) 8,569 7,718
Extraordinary loss on early extinguishment
of debt, non-cash portion............... 1,395 1,173 1,173 0 0
Minority interests in income, net of
dividends............................... 777 (8,848) (7,690) 3,407 3,680
Gain on sale of investment in Bolivian
Power................................... 0 (3,243) (3,137) 0 0
Equity in net (income) loss of
unconsolidated affiliates............... 627 740 239 (2,104) (11,057)
Dividends received from unconsolidated
affiliates.............................. 8,491 288 7,152 617 14,853
Loss on sale of securities, net............ 0 0 0 890 0
Decrease (increase) in accounts
receivable.............................. 8,099 4,113 (549) (795) (1,313)
Decrease (increase) in inventories......... 958 718 4,145 667 317
Increase (decrease) in accounts payable.... (8,392) 1,792 (61) 1,628 (2,708)
Increase (decrease) in accrued
liabilities............................. (12,598) (1,731) 12,121 3,809 585
Decrease (increase) in other............... 6,710 (550) 866 141 564
-------- -------- -------- -------- --------
Net cash flows provided by operating
activities................................. 41,805 22,119 64,048 78,466 71,454
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions.... (732) (837) (2,956) (1,555) (8,171)
Decrease (increase) in marketable
securities.............................. (834) 0 22,201 (12,456) 1,506
Investments in affiliates.................. (3,591) (750) (58,222) (6,516) (48,323)
Acquisition of Facilities, net of cash
acquired................................ 0 0 0 0 0
Proceeds from sale of investment in
Bolivian Power, net..................... 0 25,504 25,398 0 0
Decrease (increase) in restricted cash..... 3,146 12,929 11,315 (8,190) (4,157)
-------- -------- -------- -------- --------
Net cash flows provided by (used in)
investing activities....................... (2,011) 36,846 (2,264) (28,717) (59,145)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable and long-term
debt.................................... 62,728 67,750 70,661 406 1,622
Repayments of notes payable and long-term
debt.................................... (86,761) (63,535) (95,552) (46,642) (42,513)
Increase in deferred financing costs....... (1,524) (2,584) (2,889) 0 (93)
Common stock dividends paid................ (5,000) (4,759) (4,759) (4,235) (3,328)
-------- -------- -------- -------- --------
Net cash flows (used in) provided by
financing activities....................... (30,557) (3,128) (32,539) (50,471) (44,312)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 9,237 55,837 29,245 (722) (32,003)
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 62,596 33,351 33,351 34,073 66,076
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period....... $ 71,833 $ 89,188 $ 62,596 $ 33,351 $ 34,073
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-7
<PAGE> 138
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cogentrix Energy, Inc. and subsidiary companies (collectively, the
"Company") is principally engaged in the business of acquiring, developing,
owning and operating independent power generating facilities (individually, a
"Facility," or collectively, the "Facilities"). As of December 31, 1997, the
Company owned or had interests in eleven Facilities in the United States with an
aggregate installed capacity of approximately 1,140 megawatts. Two of the eleven
Facilities are owned 50% by the Company and 50% by other independent power
producers. Electricity generated by each Facility is sold to an electric utility
(the "Utility") and steam is sold to an industrial company (the "Steam
Purchaser"), all under long-term contractual agreements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation -- The accompanying
consolidated 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. and its subsidiary companies and its consolidated joint
venture have been eliminated in the accompanying consolidated financial
statements.
Information presented for the six-month period ended December 31, 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 results of operations and cash flows for the six-month period ended
December 31, 1996. The results of operations for this interim period is not
necessarily indicative of results which may be expected for any other interim
period or for the year as a whole.
Cash and Cash Equivalents -- Cash and cash equivalents include bank
deposits, commercial paper, government securities and certificates of deposit
that mature within three months of their purchase. Amounts in debt service
accounts which might otherwise be considered cash equivalents are treated as
current restricted cash.
Marketable Securities -- Marketable securities include commercial paper,
corporate obligations, government securities, and certificates of deposit with
maturity dates in excess of three months from their date of purchase. All
investments in debt securities held by the Company are classified as available
for sale securities and are reported at fair value. Realized gains or losses are
determined on the specific identification method and are reflected in income.
Unrealized gains and losses are reported net of taxes as a separate component of
shareholders' equity, except those unrealized losses that are deemed to be other
than temporary, which are reflected in income.
Construction Agreement -- 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"). The Company is
accounting for the construction under the completed-contract method, and, as
such, all third-party construction costs and reimbursements are deferred until
the contract is completed. Costs incurred as of December 31, 1997, June 30, 1997
and June 30, 1996 of $121,396,000, $104,960,000 and $37,117,000, respectively,
are netted against the related reimbursed costs of $120,531,000, $99,552,000 and
$35,572,000, respectively, and the difference is included in accounts receivable
on the accompanying consolidated balance sheets.
Inventories -- Coal inventories consist of the contract purchase price of
coal and all transportation costs incurred to deliver the coal to each Facility.
Gas inventories represent the cost of natural gas purchased as fuel
F-8
<PAGE> 139
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reserves for a Facility that is forecasted to be consumed during the next fiscal
year. Spare parts inventories consist of major equipment and recurring
maintenance supplies required to be maintained in order to facilitate routine
maintenance activities and minimize unscheduled maintenance outages. As of
December 31, 1997, June 30, 1997 and June 30, 1996, fuel and spare parts
inventories are comprised of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Coal................................................... $ 8,230 $ 8,274 $11,951
Natural gas............................................ 700 700 700
Spare parts............................................ 6,280 6,749 6,435
------- ------- -------
$15,210 $15,723 $19,086
======= ======= =======
</TABLE>
Coal inventories at certain Facilities are recorded at last-in, first-out
("LIFO") cost, with the remaining Facilities' coal inventories recorded at
first-in, first-out ("FIFO") cost. The cost of coal inventories recorded on a
LIFO basis was $427,000, $900,000 and $1,458,000 less than the cost of these
inventories on a FIFO basis as of December 31, 1997, June 30, 1997 and June 30,
1996, respectively. Spare parts inventories are recorded at average cost.
Property, Plant and Equipment -- Property, plant and equipment is recorded
at actual cost. Substantially all property, plant and equipment consists of
cogeneration facilities which are depreciated on a straight-line basis over
their estimated useful lives (ranging from 9 to 30 years). Other property and
equipment is depreciated on a straight-line basis over the estimated economic or
service lives of the respective assets (ranging from 3 to 10 years). Maintenance
and repairs are charged to expense as incurred. Emergency and rotatable spare
parts inventories are included in plant and are depreciated over the useful life
of the related components.
Deferred Financing, Start-up and Organization Costs -- Financing costs,
consisting primarily of legal and other direct costs incurred to obtain
financing for the Facilities, are deferred and amortized over the permanent
financing term. Start-up and organization costs include payroll costs and fees
paid to consultants, technicians and vendors associated with the formation of
each entity and the start-up of the Facilities. All start-up costs were fully
amortized as of June 30, 1997.
Natural Gas Reserves -- Natural gas reserves consist of the cost of natural
gas purchased as long-term fuel reserves for a Facility. These reserves are
recorded at cost.
Investments in Affiliates -- Investments in affiliates include investments
in unconsolidated entities which own or derive revenues from power projects
currently in operation, investments in unconsolidated entities which own and
operate greenhouses, and investments in unconsolidated development joint venture
entities. The Company's share of income or loss from investments in operating
power projects is included in operating revenues in the accompanying
consolidated statements of operations. The Company's share of income or loss
from investments in greenhouses and development joint venture entities is
included in other income (expense) in the accompanying consolidated statements
of operations.
Project Development Costs -- Project development costs represent costs
incurred after executing a power sales contract or obtaining a viable project
site or signing a letter of intent and prior to obtaining project financing and
starting physical construction. These costs represent amounts incurred for
professional services, salaries, permits, options and other direct and
incremental costs and are included in construction in progress when project
financing is obtained or expensed at the time the Company determines the project
will not be developed.
Revenue Recognition -- Revenues from the sale of electricity and steam are
recorded based upon output delivered and capacity provided at rates specified
under contract terms. Significant portions of the Company's
F-9
<PAGE> 140
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revenues have been derived from certain electric utility customers. Two
customers accounted for 63% and 22% of revenues in the six-month period ended
December 31, 1997, 62% and 25% of revenues in the year ended June 30, 1997, 55%
and 33% of revenues in the year ended June 30, 1996, and 57% and 34% of revenues
in the year ended June 30, 1995.
Interest Rate Protection Agreements -- The Company enters into
interest-rate protection agreements with major financial institutions to fix or
limit the volatility of interest rates on its variable-rate, long-term debt. The
differential paid or received is recognized as an adjustment to interest
expense. Any premiums associated with interest rate protection agreements are
capitalized and amortized to interest expense over the term of the agreement.
Unamortized premiums are included in other assets in the accompanying
consolidated balance sheets.
Income Taxes -- Deferred income tax assets and liabilities are recognized
for the estimated future income tax effects of temporary differences between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets are also established for the estimated future
effect of net operating loss and tax credit carryforwards when it is more likely
than not that such assets will be realized. Deferred taxes are calculated based
on provisions of the enacted tax law.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This pronouncement
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. This statement
will be adopted by the Company effective January 1, 1998. The Company believes
this pronouncement will not have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This pronouncement
establishes standards for reporting information about operating segments in
annual and interim financial statements. SFAS No. 131 will be adopted by the
Company effective January 1, 1998. The Company believes this pronouncement will
not have a material effect on its financial statements.
Change of Fiscal Year -- Effective January 1, 1998, the Company changed its
fiscal year to commence on January 1 and conclude on December 31 of each year.
The Company's fiscal year previously commenced each July 1, concluding on June
30 of the following calendar year.
Reclassifications -- Certain amounts included in the accompanying
consolidated financial statements for the fiscal years ended June 30, 1997, 1996
and 1995 have been reclassified from their original presentation to conform with
the presentation for the six-month period ended December 31, 1997.
3. INVESTMENT IN DEBT SECURITIES
At December 31, 1997, investments in debt securities included in marketable
securities in the accompanying consolidated balance sheet consisted of
government securities and corporate obligations. The Company's net unrealized
gain of $40,000 on its investment in debt securities is reported in the
accompanying consolidated statements of changes in shareholders' equity, net of
$14,000 in deferred income taxes.
F-10
<PAGE> 141
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1997, investments in debt securities included in restricted
cash and marketable securities in the accompanying consolidated balance sheet
consisted of government securities and corporate obligations. These securities
are recorded at their fair market value which approximates cost. Restricted
investments consist of an investment in a certificate of deposit which
collateralizes the Company's obligation under a letter of credit (Note 10).
At June 30, 1996, there were no debt securities held in restricted cash or
marketable securities. Restricted investments consisted of investments in
certificates of deposit which collateralized the Company's obligations under
certain letters of credit.
At June 30, 1995, the Company's net unrealized loss of $834,000 on its
investment in debt securities is reported in the accompanying consolidated
statements of changes in shareholders' equity, net of $222,000 allocated to
minority interest in joint venture and net of $256,000 in deferred income taxes.
4. INVESTMENTS IN UNCONSOLIDATED POWER PROJECTS
Bolivian Power Company Limited
In November 1994, the Company acquired 719,206 shares of common stock of
Bolivian Power Company Limited ("Bolivian Power"), representing approximately
17.1% of Bolivian Power's issued and outstanding shares of common stock, for a
purchase price of approximately $18 million. In conjunction with the
transaction, three executive officers of the Company were elected to the
seven-member board of directors of Bolivian Power. In addition, the Company was
providing to Bolivian Power general administrative and management services, as
well as significant advisory services with respect to financial, regulatory and
governmental matters, pursuant to a management agreement. The investment in
Bolivian Power was accounted for using the equity method, because the Company
had the ability to exercise significant influence over Bolivian Power's
operating and financial policies.
In January 1996, Bolivian Power closed the sale of its distribution
subsidiaries, realizing an after-tax gain of approximately $13.5 million. The
Company's share of this gain was approximately $2.3 million. In December 1996,
the Company sold its investment in Bolivian Power pursuant to a cash tender
offer made for all of the outstanding common stock of Bolivian Power at a price
of $43 per share. The Company received proceeds from the sale of $25.4 million,
net of transaction costs, which included payments to certain unaffiliated
individuals who performed development activities for Bolivian Power. The
resulting book gain of $3.1 million is included in investment and other income
in the accompanying consolidated statement of operations for the year ended June
30, 1997. The Company recognized approximately $0.4 million, $3.9 million and
$1.1 million in income from unconsolidated investments in power projects in the
accompanying consolidated statements of operations for the years ended June 30,
1997, 1996 and 1995, respectively, related to its investment in Bolivian Power.
The following table presents summarized financial information for Bolivian Power
as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Current assets............................................ $ 72,550 $ 54,686
Noncurrent assets......................................... 81,211 93,849
-------- --------
Total assets...................................... $153,761 $148,535
======== ========
Current liabilities....................................... $ 12,818 $ 12,237
Noncurrent liabilities.................................... 15,036 20,138
Shareholders' equity...................................... 125,907 116,160
-------- --------
$153,761 $148,535
======== ========
</TABLE>
F-11
<PAGE> 142
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues................................... $ 20,009 $ 52,874 $ 45,969
Operating income (loss).............................. (4,159) 6,929 5,848
Net income........................................... 8,434 7,963 7,712
</TABLE>
Birchwood Power Partners, L.P.
In December 1994, the Company acquired a 50% interest in Birchwood Power
Partners, L.P. ("Birchwood Power"), a partnership formed to construct and own a
240-megawatt coal-fired cogeneration facility (the "Birchwood Facility") in King
George County, Virginia, from two indirect wholly-owned subsidiaries of The
Southern Company. The Company initially paid $29.5 million for its 50% interest
in Birchwood Power. In addition, pursuant to the equity funding obligation under
Birchwood Power's project financing arrangements, the Company provided an equity
contribution to Birchwood Power of approximately $43.7 million in March 1997.
The initial distribution of $6.9 million received by the Company from Birchwood
Power in April 1997 was also subsequently paid to a subsidiary of The Southern
Company in accordance with the terms of the original transaction agreement and
was treated as part of the purchase price of the Company's interest in Birchwood
Power.
The Birchwood Facility, which commenced commercial operations in November
1996, sells electricity to a utility and provides thermal energy to a 36-acre
greenhouse under long-term contracts. The Birchwood Facility is operated by an
affiliate of The Southern Company under a long-term operations and maintenance
agreement. The Company has 50% representation on Birchwood Power's management
committee, which must approve all material transactions of Birchwood Power. The
Company is accounting for its investment in Birchwood Power under the equity
method. The Company's share of net income of Birchwood Power is recorded net of
the amortization of the $36.4 million premium paid to purchase the Company's 50%
share interest in Birchwood Power. This premium is being amortized on a
straight-line basis over the estimated useful life of the Birchwood Facility.
The Company recognized approximately $1,727,000 and $147,000 in income from
unconsolidated investments in power projects, net of premium amortization, in
the accompanying consolidated statements of operations for the six-month period
ended December 31, 1997 and for the year ended June 30, 1997, respectively,
related to its investment in Birchwood Power. The following table presents
summarized financial information for Birchwood Power as of and for the years
ended December 31, 1997, 1996, and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets....................................... $ 30,577 $ 25,701 $ 1,234
Noncurrent assets.................................... 374,560 385,171 313,402
-------- -------- --------
Total assets................................. $405,137 $410,872 $314,636
======== ======== ========
Current liabilities.................................. $ 6,818 $ 89,599 $ 92,968
Noncurrent liabilities............................... 335,134 321,247 221,668
Partners' capital.................................... 63,185 26 0
-------- -------- --------
$405,137 $410,872 $314,636
======== ======== ========
INCOME STATEMENT DATA:
Operating revenues................................... $ 69,275 $ 9,745 $ 0
Operating income..................................... 35,087 4,527 0
Net income........................................... 6,451 26 0
</TABLE>
F-12
<PAGE> 143
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENT IN OTHER UNCONSOLIDATED AFFILIATES
DEVELOPMENT JOINT VENTURES
Michigan Cogeneration Partners -- In partnership with Wolverine Energy,
Inc., an indirect subsidiary of Northern States Power Company, a Minnesota-based
investor-owned electric utility, the Company pursued the development of a
65-megawatt cogeneration power facility in Michigan. Development of this project
began in September 1993 when the Company and its joint venture partner (the
"Michigan Partnership") purchased from another developer a power sales agreement
with Consumers Power Company providing for the sale of up to 65 megawatts of
electric power. In July 1994, the Michigan Partnership joined with Consumers
Power Company to terminate the power sales agreement pursuant to terms under
which the Partnership received $29.9 million. The Company, which owns a 50%
interest in the Michigan Partnership, recognized its share of the Michigan
Partnership's net income of $22.9 million for the year ended June 30, 1995,
which was comprised solely of the proceeds received from this transaction net of
project development costs. The Company recorded the $10.2 million gain from this
transaction, which consisted of the Company's share of the net income of the
Michigan Partnership net of corporate incentive compensation costs related to
the transaction, as equity in net income of affiliates in the accompanying
consolidated statement of operations for the year ended June 30, 1995. The
Michigan Partnership was dissolved in June 1996.
Other Development Joint Ventures -- The Company makes investments in other
joint venture partnerships whose purpose is to develop power projects. The
Company utilizes the equity method of accounting for those partnerships in which
it holds an ownership interest between 20% and 50%. The Company recognized
approximately $103,000 in equity losses for the six-month period ended December
31, 1997, and $1,257,000, $1,758,000 and $1,546,000 in equity losses for the
years ended June 30, 1997, 1996 and 1995, respectively, related to its
investments in these partnerships. These losses are reflected in equity in
income (loss) of affiliates in the accompanying consolidated statements of
operations.
GREENHOUSES
The Company has entered into an agreement with Agro Power Development,
Inc., a developer and operator of greenhouse facilities, to make investments in
partnerships which develop, construct and operate greenhouses which produce
tomatoes. As of December 31, 1997, the Company held a 50% interest in four
limited partnerships which had a combined 107 acres of production capacity in
operation. The Company is accounting for its investment in these partnerships
under the equity method. The Company recognized approximately $1,710,000 in
equity losses and $444,000 in equity income from affiliates in the accompanying
consolidated statements of operations for the six-month period ended December
31, 1997 and the year ended June 30, 1997, respectively, related to its
investments in these partnerships.
6. LONG-TERM DEBT
The following long-term debt was outstanding as of December 31, 1997, June
30, 1997, and June 30, 1996, respectively (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
PROJECT FINANCING DEBT:
HOPEWELL FACILITY:
As of December 31, 1997 and June 30, 1997 -- Note
payable to banks; As of June 30,
1996 -- commercial paper notes payable, net of
unamortized issue discount of $87............. $ 45,417 $ 49,513 $ 42,403
PORTSMOUTH FACILITY:
Note payable to banks............................ 61,489 60,500 68,250
</TABLE>
F-13
<PAGE> 144
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
ROCKY MOUNT FACILITY:
Note payable to financial institution............ $125,761 $ 126,409 $ 127,576
RINGGOLD FACILITY:
Note payable to banks............................ 15,737 16,900 18,799
RICHMOND FACILITY:
Commercial paper notes payable, net of
unamortized issue discount of $365, $409 and
$319, respectively, and tax-exempt bonds...... 198,113 203,651 214,379
ELIZABETHTOWN, LUMBERTON AND KENANSVILLE
FACILITIES:
Notes payable to banks........................... 26,716 31,688 44,464
ROXBORO AND SOUTHPORT FACILITIES:
Note payable to banks............................ 93,036 102,074 99,750
OTHER.............................................. 1,436 959 967
-------- --------- ---------
Total Project Financing Debt....................... 567,705 591,694 616,588
SENIOR NOTES (including unamortized gain on hedge
transaction of $2,087, $2,300 and $2,728,
respectively).................................... 102,087 102,300 102,728
-------- --------- ---------
Total Long-Term Debt............................... 669,792 693,994 719,316
Less: Current portion.............................. (74,680) (62,370) (48,416)
-------- --------- ---------
Long-term portion.................................. $595,112 $ 631,624 $ 670,900
======== ========= =========
</TABLE>
Information related to each of these borrowings is as follows:
HOPEWELL FACILITY
In July 1996, the Hopewell Facility's project debt agreement was amended,
which effectively replaced commercial paper notes with a note payable to banks
and resulted in a $13,000,000 increase in the amount of outstanding
indebtedness. The amended project debt accrues interest at an annual rate equal
to the applicable London Interbank Offering Rate ("LIBOR") as chosen by the
Company, plus .875% per annum through July 1999 and 1.125% thereafter (6.81% at
December 31, 1997). Principal is payable quarterly with interest payable the
earlier of the maturity of the applicable LIBOR term or quarterly through June
2002. The Hopewell Facility's project debt agreement was amended in February
1998 (see Note 14).
PORTSMOUTH FACILITY
The Portsmouth Facility's project debt agreement was amended in December
1997, resulting in the extension of the final maturity of the loan by three
months to December 31, 2002. The amended terms of the loan agreement also
increased the outstanding credit commitment from the project lenders by $40.5
million in the form of a revolving credit facility. As of December 31, 1997,
there were no outstanding balances under this credit facility. The amended terms
of the loan agreement provide for interest to accrue at an annual rate equal to
the applicable LIBOR rate, as chosen by the Company, plus an additional margin
of .875% through December 1998 and 1.0% thereafter (6.845% at December 31,
1997). The banks' outstanding credit commitment under the loan agreement is
reduced quarterly, with interest payable the earlier of the maturity of the
applicable LIBOR term or quarterly through December 2002. The loan agreement
also provides for a $6 million letter of credit to secure the project's
obligations to pay debt service. Cogentrix Energy, Inc. has indemnified the
lenders of the senior credit facility for any cash deficits the Portsmouth
Facility could experience as a result of incurring certain costs, subject to a
cap of $30 million.
An extraordinary loss of $2,458,000 was recorded in the six-month period
ended December 31, 1997 related to the write-off of unamortized deferred
financing costs from the original senior loan of $1,395,000 and net swap
termination fees of $1,063,000 related to interest rate swap agreements hedging
the original project
F-14
<PAGE> 145
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt. This extraordinary loss is shown net of a tax benefit of $956,000 in the
accompanying consolidated statements of operations.
ROCKY MOUNT FACILITY
The note payable to financial institution consists of a $125,761,000 senior
loan which accrues interest at a fixed annual rate of 7.58%. Payment of
principal and interest is due quarterly through December 2013.
RINGGOLD FACILITY
The note payable to banks consists of a $15,737,000 senior loan which
accrues interest at an annual rate equal to the applicable LIBOR rate, as chosen
by the Company, plus .95% to 1.35% per annum (6.9% at December 31, 1997).
Interest is payable the earlier of the maturity of the applicable LIBOR term or
quarterly in arrears. Payments of principal under the senior loan are due
semiannually through April 2004.
RICHMOND FACILITY
Commercial paper notes outstanding are supported by an irrevocable,
direct-pay letter of credit provided by a syndicate of banks (the "Banks"). The
maximum amount of commercial paper notes supported by the letter of credit is
$150,114,000 as of December 31, 1997. The annual interest rate incurred is the
yield on the commercial paper notes plus a 1.25% to 1.50% per annum fee
(weighted average rate of 7.17% at December 31, 1997) paid to the Banks for
providing the letter of credit.
Tax-exempt industrial development bonds (the "Bonds") have been issued to
support the purchase of certain pollution control and solid waste disposal
equipment for a Facility ($48,000,000 outstanding at December 31, 1997).
Principal and interest payments on the Bonds are supported by an irrevocable,
direct-pay letter of credit provided by the Banks. The annual interest rate is
the yield on the Bonds plus a 1.25% to 1.50% per annum fee (6.875% at December
31, 1997). The letters of credit described above are part of one credit facility
(the "Credit Facility"). The Credit Facility provides for commitment reductions
through September 2007.
ELIZABETHTOWN, LUMBERTON AND KENANSVILLE FACILITIES
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 in
September 1996 with the proceeds of a $39 million senior credit facility and
$5.5 million capital contribution by the Company. 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 (6.94% at
December 31, 1997). 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 was recorded in the fiscal year ended June
30, 1997 related to the write-off of unamortized deferred financing costs from
the original senior loan and subordinated credit facility. This extraordinary
loss is shown net of a tax benefit of $470,000 in the accompanying consolidated
statements of operations.
ROXBORO AND SOUTHPORT FACILITIES
The project debt agreement for the Roxboro and Southport Facilities was
amended in September 1996, resulting in an $18.4 million increase in the amount
of outstanding indebtedness. The revised 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% thereafter through September 2001 and
1.125% thereafter (6.94% at December 31, 1997). Principal is payable quarterly
with interest payable at the earlier of the maturity of the
F-15
<PAGE> 146
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Cogentrix Energy, Inc. has indemnified the
lenders of the senior credit facility for any cash deficits the Roxboro and
Southport Facilities could experience as a result of incurring certain costs,
subject to a cap of $11.3 million.
INTEREST RATE PROTECTION AGREEMENTS
The Company has entered into interest rate cap, interest rate collar and
interest rate swap agreements (Note 12) to manage its interest rate risk on its
variable-rate project financing debt. The notional amounts of debt covered by
these agreements as of December 31, 1997 and June 30, 1997 are $259,191,000 and
$391,371,000, respectively. The agreements effectively change the interest rate
on the portion of debt covered by the notional amounts from a weighted average
variable rate of 7.06% to a weighted average effective rate of 7.29% at December
31, 1997. These agreements expire at various dates through July 2006.
SENIOR NOTES
On March 15, 1994, the Company issued $100 million of registered, unsecured
senior notes due 2004 (the "Senior Notes") in a public debt offering. The Senior
Notes were priced at par to yield 8.10%. In February 1994, the Company entered
into a forward sale of ten-year U.S. Treasury Notes in order to protect against
a possible increase in the general level of interest rates prior to the
completion of the Senior Notes offering. This hedge transaction resulted in the
recognition of a gain which has been deferred and included as part of the Senior
Notes on the accompanying consolidated balance sheets. This deferred gain will
be recognized over the term of the Senior Notes, reducing the effective rate of
interest on the Senior Notes to 7.5%. The Senior Notes require annual sinking
fund payments beginning in March 2001. The impact of the sinking fund
requirements has been reflected in the schedule of future maturities of
long-term debt contained herein.
CORPORATE CREDIT FACILITY
In May 1997, the Company entered into a credit agreement with Australia and
New Zealand Banking Group Limited, as Agent, which provides for a $50,000,000
revolving credit facility with an initial term of three years (the "Corporate
Credit Facility"). The Corporate Credit Facility allows for direct advances or
the issuance of letters of credit. The outstanding balance at the end of the
three-year term (May 2000) is payable over two years in four equal semiannual
repayments of direct advances or collateralization of letters of credit.
Borrowings bear interest at LIBOR plus an applicable margin based on the credit
rating on the Company's Senior Notes. Commitment fees related to the Corporate
Credit Facility are currently 30 basis points per annum, payable each quarter on
the outstanding unused portion of the Corporate Credit Facility. As of December
31, 1997, the Company had no borrowings or letters of credit outstanding.
The project financing debt is substantially non-recourse to the Company (as
parent). The project financing agreements of the Company's subsidiaries, the
Indenture for the Senior Notes and the Corporate Credit Facility agreement
contain certain covenants which, among other things, place limitations on the
payment of dividends, limit additional indebtedness, and restrict the sale of
assets. The project financing agreements also require certain cash to be held
with a trustee as security for future debt service payments. In addition, the
Facilities, as well as the long-term contracts which support them, are pledged
as collateral for the Company's obligations under the project financing
agreements.
The ability of the Company's project subsidiaries to pay dividends and
management fees periodically to the Company (as parent) 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,
F-16
<PAGE> 147
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and (iv) there be no default or event of default under the relevant project
credit documents. Dividends, when permitted, are declared and paid immediately
to the Company at the end of such period.
The Company's ability to pay dividends to its shareholders is restricted by
certain covenants of the Indenture for the Senior Notes and the Corporate Credit
Facility agreement. These covenants did not restrict the Company's ability to
declare a $2.1 million dividend to the Company's shareholders for the six-month
period ended December 31, 1997.
Future maturities of long-term debt at December 31, 1997, net of
unamortized issue discounts on commercial paper notes and excluding the
unamortized balance of the deferred gain on the Senior Notes hedge transaction,
are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998................................................... $ 74,680
1999................................................... 78,823
2000................................................... 81,442
2001................................................... 79,099
2002................................................... 61,417
Thereafter.................................................. 292,244
--------
$667,705
========
</TABLE>
Cash paid for interest on the Company's long-term debt amounted to
$29,249,000, $54,458,000, $58,253,000 and $58,952,000 for the six-month period
ended December 31, 1997 and the years ended June 30, 1997, 1996 and 1995,
respectively.
7. INCOME TAXES
The provision (benefit) for income taxes for the six-month period ended
December 31, 1997 and the years ended June 30, 1997, 1996 and 1995 consists of
the following (dollars in thousands):
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------------
1997 1997 1996 1995
------------ -------- ------- -------
<S> <C> <C> <C> <C>
Current
Federal..................................... $1,047 $ 9,025 $ 6,893 $ 5,264
State....................................... 1,340 978 499 355
------ -------- ------- -------
2,387 10,003 7,392 5,619
------ -------- ------- -------
Deferred
Federal..................................... 4,917 (23,085) 6,406 6,191
State....................................... (289) (4,500) 2,163 1,527
------ -------- ------- -------
4,628 (27,585) 8,569 7,718
------ -------- ------- -------
$7,015 $(17,582) $15,961 $13,337
====== ======== ======= =======
Statements of Operations Captions
Tax effect of extraordinary loss............ $ (956) $ (470) $ 0 $ 0
Provision (benefit) for income taxes........ 7,971 (17,112) 15,961 13,337
------ -------- ------- -------
$7,015 $(17,582) $15,961 $13,337
====== ======== ======= =======
</TABLE>
F-17
<PAGE> 148
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations between the federal statutory income tax rate and the
Company's effective income tax rate are as follows:
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1997 1997 1996 1995
------------ ----- ---- ----
<S> <C> <C> <C> <C>
Federal statutory tax rate....................... 35.0% (35.0)% 35.0% 35.0%
State income taxes, net of loss carryforwards and
federal tax impact............................. 3.3 (5.0) 4.6 4.2
Other............................................ 1.3 1.7 .5 (.6)
---- ----- ---- ----
Effective tax rate............................... 39.6% (38.3)% 40.1% 38.6%
==== ===== ==== ====
</TABLE>
The net current and noncurrent components of deferred income taxes
reflected in the accompanying consolidated balance sheets as of December 31,
1997, June 30, 1997 and June 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Net current deferred tax (asset) liability... $(1,615) $(3,460) $ 228
Net noncurrent deferred tax liability........ 25,872 23,074 46,971
------- ------- -------
Net deferred tax liability................... $24,257 $19,614 $47,199
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss and tax credit carryforwards. Significant components of the
Company's net deferred tax liability as of December 31, 1997, June 30, 1997 and
June 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation/amortization and book/tax basis
differences...................................... $60,072 $60,575 $ 86,246
Book/tax timing differences on joint venture
interest......................................... 11,727 8,528 8,656
Other............................................... 5,323 5,592 6,554
------- ------- --------
77,122 74,695 101,456
------- ------- --------
Deferred tax assets:
Depreciation/amortization and book/tax basis
differences...................................... 11,626 10,873 6,697
Operating loss carryforwards........................ 2,726 2,194 16,762
Accrued expenses not currently deductible........... 7,066 8,721 3,005
Investment tax credit carryforwards................. 2,291 749 5,127
Alternative minimum tax credit
carryforwards......................................... 23,537 25,537 17,227
Other............................................... 5,619 7,007 5,439
------- ------- --------
52,865 55,081 54,257
------- ------- --------
Net deferred tax liability.......................... $24,257 $19,614 $ 47,199
======= ======= ========
</TABLE>
At December 31, 1997, the Company had federal investment tax carryforwards
of approximately $1,086,000 expiring 2002 and $1,205,000 expiring in 2006 and
alternative minimum tax credit carryforwards of approximately $23,537,000 with
no expiration date available to reduce its future federal income tax
liabilities.
F-18
<PAGE> 149
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid for income taxes amounted to $4,142,000, $8,271,000, $7,023,000
and $4,664,000 for the six-month period ended December 31, 1997 and the years
ended June 30, 1997, 1996 and 1995, respectively.
8. LEASE COMMITMENTS
The Company leases an office building and land from Equipment Leasing
Partners ("ELP"), a partnership formed by several of the Company's shareholders,
with remaining initial lease terms of 7 years and 50 years, respectively. The
Company also leases certain equipment from ELP used to transport and handle coal
and ash at certain Facilities. Future minimum lease payments under the
agreements with ELP and agreements with other equipment providers at December
31, 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
OTHER
YEAR ENDED EQUIPMENT
DECEMBER 31, ELP PROVIDERS TOTAL
------------ ------ --------- ------
<S> <C> <C> <C>
1998..................................................... $1,633 $411 $2,044
1999..................................................... 1,316 317 1,633
2000..................................................... 1,275 257 1,532
2001..................................................... 1,260 93 1,353
2002..................................................... 1,260 0 1,260
Thereafter................................................. 6,073 0 6,073
</TABLE>
9. LOSS ON IMPAIRMENT AND COST OF REMOVAL OF COGENERATION FACILITIES
During the fiscal year ended June 30, 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 that are taking place in the
power generation industry. The analysis included assumptions regarding future
levels of operations, operating costs and market prices for equivalent
generation available from other sources. As a part of this analysis, in
accordance with the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company assessed whether any impairment of the Company's
Facilities had occurred. This assessment included comparing the projected future
cash flows to be provided by these assets to the net book value of such assets.
Based on this assessment, the Company determined that an impairment loss had
occurred on the Elizabethtown, Lumberton, Kenansville and Ringgold Facilities.
This loss on impairment of cogeneration facilities of $57.3 million represents
the excess of the net book value of these cogeneration facilities over their
current fair value, determined by discounting to present value projected future
cash flows to be provided by such assets. The Company believes that its
projections of future cash flows are based upon reasonable assumptions about the
future performance of these assets. Because of the risks and uncertainties
associated with any projections, there can be no assurances, however, that
actual events will be consistent with the assumptions made, and future cash
flows may be greater or less than those projected. The analysis also resulted in
the recognition of an $8.3 million liability related to the Company's estimated
cost of removal obligations under the land leases for the Elizabethtown,
Lumberton and Kenansville Facilities. The total impairment loss and cost of
removal of $65.6 million has been reflected in the accompanying consolidated
statements of operations for the year ended June 30, 1997.
Also in connection with the overall assessment of the post-contract
operating environment for its cogeneration facilities, the Company concluded
that the estimated useful lives of the Elizabethtown, Lumberton, Kenansville,
Roxboro and Southport Facilities should be adjusted to reflect the economic
lives of the plants as determined by the remaining terms of their respective
power purchase agreements. The annual depreciation expense for these five
facilities, in aggregate, increased approximately $6.1 million per year as a
result of the changes in estimated useful lives and the impairment loss
recognized during the fiscal year ended June 30, 1997.
F-19
<PAGE> 150
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Long-Term Contracts -- The Company has several long-term contractual
commitments that comprise a significant portion of its financial obligations.
These contractual commitments with original terms varying in length from 10 to
25 years are the basis for a major portion of the revenue and operating expenses
recognized by the Company and provide for specific services to be provided at
fixed or indexed prices. The major long-term contractual commitments are as
follows:
(i) The Company is required to sell electricity generated by each
Facility to a Utility and the Utility is required to purchase this
electricity at pre-established or annually escalating prices.
(ii) The Company is required to sell and the Steam Purchaser is
required to purchase a minimum amount of process steam from each Facility
for each contract year. The Steam Purchaser is generally required to
purchase its entire steam requirements from the Company. The purchase price
of steam under these contracts escalates annually or is fixed and
determinable during the term of the contracts.
(iii) The Company is obligated to purchase and fuel suppliers are
required to supply all the fuel requirements of each Facility. Fuel
requirements include the quality and estimated quantity of fuel required to
operate each Facility. The price of fuel escalates annually for the term of
each contract. In addition, the Company has transportation contracts with
various entities to deliver the fuel to each Facility. These contracts also
provide for annual escalations throughout the term of the contracts.
Effective 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 eliminated the purchase options which the utility
held related to the Roxboro and Southport Facilities.
Effective December 1997, the Company amended the power sales agreement on
its Portsmouth Facility. This amendment provided the purchasing utility
additional rights related to the dispatch of the Facility. The terms of the
amended power sales agreement also eliminated Portsmouth's accrued obligation to
return previously disallowed capacity payments to the purchasing utility.
Under terms of contracts with one Utility, the Company is obligated to pay
up to $8,850,000 in liquidated damages to the Utility if two of the Company's
Facilities do not demonstrate certain operating and reliability standards. A
bank has issued letters of credit in favor of the Utility which secure the
Company's obligations to the Utility under this provision of the contracts.
Under certain contracts with one Utility, the Utility is permitted,
subsequent to the maturity date of the original project financing debt, to
reduce future payments or recover certain payments previously made in the event
that a state utility commission prohibits the Utility from recovering such
payments made under a power sales agreement.
Construction Agreement -- In October 1995, the Company delivered to Clark a
$20 million letter of credit, provided by a bank, which was collateralized with
a pledge of marketable securities. This letter of credit supported certain
contingent obligations of the Company under the Construction Agreement. In
December 1997, the Company substantially completed construction of the Clark
Facility and earned a construction fee of $4.5 million, which is included in
other operating revenue in the accompanying consolidated statement of operations
for the six-month period ended December 31, 1997. The $20 million letter of
credit was also released to the Company at this time. Upon final completion of
the Clark Facility and acceptance by the owner, the Company will earn an
additional $500,000 fee. 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
incurred in constructing the Clark Facility.
F-20
<PAGE> 151
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management Incentive Compensation Plans -- The Company has entered into
various incentive compensation plans with certain employees which provide for
compensation to the employees (during the period of employment) equal to a
percentage, as determined by the board of directors, of the Company's income
before income taxes or certain subsidiaries' cash flow. The Company incurred
expense under these plans of $3,710,000 for the fiscal year ended June 30, 1996
and $3,950,000 for the fiscal year ended June 30, 1995. During the fiscal year
ended June 30, 1997, the Company incurred $10.7 million of expenses in
connection with the restructuring or termination of these incentive compensation
plans. During the six-month period ended December 31, 1997, the Company incurred
$1,067,000 of expense related to these incentive compensation plans.
Employee Benefit Plans -- The Company sponsors a defined contribution
401(k) savings plan for its full-time employees. The Company matches employees'
contributions to the plan up to specified limitations. Company contributions to
the plan were $804,000 in the six-month period ended December 31, 1997,
$1,618,000 in the fiscal year ended June 30, 1997, $1,629,000 in fiscal 1996 and
$1,612,000 in fiscal 1995.
The Company has a non-qualified Supplemental Retirement Plan agreement with
certain directors and officers. Under the plan, the participants may elect to
have up to 35% of their compensation deferred. In addition, the Company will
credit the participant's deferral account, up to specified limitations, with an
amount equal to the participant deferral. The participants' account balances are
distributable upon termination of employment or death. The Company purchases
insurance on the participants' lives (cash surrender value of $2,685,000 at
December 31, 1997) which is used to fully fund the liability under the plan on
an annual basis. The Company is owner and beneficiary of the policies.
Guarantees -- In connection with its substantially non-recourse project
financings and certain other subsidiary contracts, the Company and its
subsidiary, Cogentrix, Inc. have expressly undertaken certain limited
obligations and commitments, most of which will only be effective or will be
terminated upon the occurrence of future events. These obligations and
commitments include guarantees by Cogentrix, Inc. of a certain subsidiary's
obligation capped at $1.5 million and certain subsidiaries' performance under
their contracts with one Utility. In addition, Cogentrix Energy, Inc. has
indemnified the project lenders of certain subsidiaries for any cash deficits
such subsidiaries could experience as a result of incurring certain costs,
subject to an aggregate cap of $51.9 million, which includes the impact of the
JRCC refinancing in February 1998 (see Note 14).
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
filed a civil action against certain subsidiaries of the Company. The
arbitration proceeding was completed in October, 1997, with the arbitration
panel denying any recovery to the coal supplier. The coal supplier subsequently
challenged the arbitration panel's ruling. Management believes that the coal
supplier's claims provide no basis by which a court could vacate an arbitration
ruling. With respect to the civil action filed by the other coal supplier,
management believes that there is no basis for certain claims and there are
meritorious defenses as to the remainder. The Company intends to vigorously
defend the pending civil action.
Effective December 1997, the Company amended the power sales agreement on
its Portsmouth facility. Under the amended terms, the purchasing utility has
exercised its right of economic dispatch which has led to significant reductions
in that facility's fuel requirements. In response to the reduced fuel
requirements, the coal supplier for the Portsmouth facility has filed a civil
action against a subsidiary of the Company. Management believes that there is no
basis for certain claims of the coal supplier and there are meritorious defenses
as to the remainder. The Company intends to vigorously defend the pending civil
action.
F-21
<PAGE> 152
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has established reserves which management believes to be
adequate to cover any costs resulting from these matters. Management believes
that the resolution of these disputes will not have a material adverse impact on
the Company's consolidated financial position or results of operations.
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.
11. FUNDS HELD BY TRUSTEES
The majority of revenue received by the Company is required by the terms of
various credit agreements to be deposited in accounts administered by certain
banks (the "Trustees"). The Trustees invest funds held in these accounts at the
direction of the Company. These accounts are established for the purpose of
depositing all receipts and monitoring all disbursements of each Facility. In
addition, special accounts are established to provide debt service payments and
income taxes. The funds in these accounts are pledged as security under the
project financing agreements of each subsidiary.
Funds held by the Trustees were $42,170,000 at December 31, 1997,
$49,187,000 at June 30, 1997,and $59,287,000 at June 30, 1996. Debt service
account balances are reflected as restricted cash, whereas all other accounts
are classified as cash and cash equivalents in the accompanying consolidated
balance sheets.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS
The Company invests its temporary cash balances in U.S. government
obligations, corporate obligations and financial instruments of highly-rated
financial institutions. A substantial portion of the Company's accounts
receivable are from two major regulated electric utilities and the associated
credit risks are limited.
The carrying values reflected in the accompanying consolidated balance
sheets at December 31, 1997, June 30, 1997, and June 30, 1996 approximate the
fair values for cash and cash equivalents and variable-rate long-term debt.
Investments in debt securities and certificates of deposit included in
restricted cash, marketable securities and restricted investments are also
reported at fair market value, which approximates cost, at December 31, 1997,
June 30, 1997, and June 30, 1996 (Note 3). The fair value of the Company's
fixed-rate borrowings at December 31, 1997 is $8,376,000 greater than the
historical carrying value of $225,761,000. At June 30, 1997, the fair value of
the Company's fixed-rate borrowings was $1,759,000 lower than the historical
carrying value of $226,409,000, and at June 30, 1996, the fair value of the
Company's fixed-rate borrowings was $3,631,000 lower than the historical
carrying value of $238,018,000. In making such calculations, the Company
utilized credit reviews, quoted market prices and discounted cash flow analyses,
as appropriate.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to the Company's interest rate protection
agreements (Note 6). The Company does not obtain collateral or other security to
support such agreements but continually monitors its positions with, and the
credit quality of, the counterparties to such agreements. As of December 31,
1997, the gross unrealized loss on the interest rate protection agreements was
$2,670,000. As of June 30, 1997, the gross unrealized gains and losses on the
Company's interest rate protection agreements were $3,130,000 and $2,102,000,
respectively, resulting in an estimated net unrealized gain of $1,028,000, and
as of June 30, 1996, the gross unrealized gains and losses on the Company's
interest rate protection agreements were $4,984,000 and $4,185,000,
respectively, resulting in an estimated net unrealized gain of $799,000.
13. RELATED PARTY TRANSACTIONS
The Company has notes receivable and advances due from shareholders and an
affiliated entity of approximately $118,000, $450,000 and $678,000 as of
December 31, 1997, June 30, 1997 and June 30, 1996,
F-22
<PAGE> 153
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The notes receivable bear interest at various rates, all of which
are in excess of the prime rate in effect from time to time, and have specified
repayment terms. These notes have been classified as other assets in the
accompanying consolidated balance sheets.
The Company leases certain equipment, its principal executive office
building and land from an affiliated entity. Payments by the Company under these
lease agreements were approximately $869,000, $1,968,000, $2,041,000, and
$2,158,000 for the six-month period ended December 31, 1997 and the years ended
June 30, 1997, 1996 and 1995, respectively.
In September 1991, the Company entered into a consulting agreement with a
shareholder, director and former executive officer to provide consulting
services related to general business matters. The agreement provided for monthly
payments of $12,500 through December 1995 and monthly payments of $8,333
thereafter through December 1996. In addition, the shareholder was a participant
in management incentive compensation plans (Note 10) while employed as an
executive officer of the Company and continues to receive incentive compensation
annually pursuant to such plans equal to a percentage of net cash flow, as
defined, of certain subsidiaries. Total compensation to the shareholder under
the consulting agreement and incentive compensation plans was approximately
$100,000, $374,000, $442,000, and $510,000 for the six-month period ended
December 31, 1997 and the years ended June 30, 1997, 1996 and 1995,
respectively.
Three shareholders, who are also employees of the Company, terminated their
participation in certain management incentive compensation plans during the
fiscal year ended June 30, 1997 (Note 10). The Company recognized $3.5 million
of expense related to the termination of the shareholders' participation in
these plans.
14. SUBSEQUENT EVENTS
COGENTRIX OF PENNSYLVANIA, INC.
In January 1998, the Company signed an agreement with Pennsylvania Electric
Company ("Penelec") to terminate the Ringgold Facility's power purchase
agreement. This termination agreement was the result of a request for proposals
to buy-back or restructure power sales agreements issued to all operating IPP
projects in Penelec's territory in April 1997. The termination agreement with
Penelec provides for a payment to the Company of approximately $25 million which
will be sufficient to retire all of Cogentrix of Pennsylvania, Inc.'s ("CPA")
outstanding project debt. The buy-back of the power purchase agreement is
subject to the issuance of an order by the Pennsylvania Public Utility
Commission granting Penelec the authority to fully recover from its customers
the consideration paid to CPA under the buyout agreement. Management does not
expect this event to have an adverse impact on the Company's consolidated
results of operations or financial position.
JAMES RIVER COGENERATION COMPANY
Effective February 1998, James River Cogeneration Company ("James River"),
a joint venture owned 50% by the Company, which owns a cogeneration facility
located in Hopewell, Virginia (the "Hopewell Facility"), amended its power sales
agreement with Virginia Power to provide Virginia Power additional rights
related to the dispatch of the Hopewell Facility. In connection with the
amendment of the power sales agreement, the Company amended the terms of the
existing project debt on the Hopewell Facility.
The amended terms of the Hopewell project debt resulted in an extension of
the final maturity of the note payable by six months to December 31, 2002 and
increased outstanding borrowings $34.6 million, the proceeds of which (net of
transaction costs) were paid as a distribution to the James River partners. The
amended note payable accrues interest at an annual rate equal to the applicable
LIBOR rate, as chosen by the Company, plus an additional margin of .875% through
February 1998 and 1.00% thereafter. The amended note payable also provides for a
$5 million letter of credit to secure the project's obligation to pay debt
service. Cogentrix Energy, Inc. has indemnified the lenders of the note payable
for any cash deficits the Hopewell
F-23
<PAGE> 154
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Facility could experience as a result of incurring certain costs, subject to a
cap of $10.6 million. An extraordinary loss of $2.4 million will be recorded in
the first quarter of 1998 related to the write-off of unamortized deferred
financing costs from the original project debt and a swap termination fee on an
interest rate swap agreement hedging the original project debt.
The pro forma future maturities of long-term debt as of December 31, 1997,
excluding unamortized issue discounts on commercial paper notes and the
unamortized balance of the deferred gain on the Senior Notes hedge transaction
and taking into account the amended project debt agreement for the Hopewell
Facility, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1998................................................... $ 78,261
1999................................................... 85,625
2000................................................... 87,663
2001................................................... 84,578
2002................................................... 73,553
Thereafter.................................................. 292,608
--------
$702,288
========
</TABLE>
WHITEWATER AND COTTAGE GROVE TRANSACTION
In March 1998, the Company acquired from LS Power Corporation an
approximate 74% ownership interest in two power generation facilities in
Whitewater, Wisconsin (the "Whitewater Facility") and in Cottage Grove,
Minnesota (the "Cottage Grove Facility"). Each of the Cottage Grove and
Whitewater Facilities are 245-megawatt gas-fired, combined-cycle cogeneration
facilities. Commercial operations of the facilities commenced in the last half
of calendar 1997. The Cottage Grove Facility sells capacity and energy to
Northern States Power Company under a 30-year power sales contract terminating
in 2027. The Whitewater Facility sells capacity and energy to Wisconsin Electric
Power Company under a 25-year power sales contract terminating in 2022. The
aggregate acquisition price for the equity interest in the Cottage Grove and
Whitewater Facilities was $158.0 million. In addition, the Company pre-funded a
$16.7 million distribution to the previous owners. This distribution represented
unused construction contingency and cash flows that were accumulated by the
Cottage Grove and Whitewater Facilities prior to January 1, 1998. Cogentrix
Energy, Inc. will be entitled to a distribution of the $16.7 million in calendar
1998. The purchase price was funded with proceeds of the Corporate Credit
Facility and corporate cash balances.
BGCI ACQUISITION
In March 1998, the Company signed an agreement with Bechtel Generating
Company, Inc. ("BGCI") to acquire an ownership interest in 12 electric
generating facilities, comprising a net equity interest of approximately 365
megawatts, and one interstate natural gas pipeline in the United States (the
"BGCI Acquisition"). The closing of the BGCI Acquisition, which is subject to
customary conditions including the obtaining of certain consents and regulatory
approvals, is currently expected to occur in calendar 1998. Management
anticipates accounting for these investments under the equity method.
In connection with the BGCI Acquisition, the Company plans to issue up to
$250 million of senior notes in a Rule 144A offering with a covenant to register
exchange notes with the U.S. Securities and Exchange Commission. These senior
notes will be unsecured and will rank pari passu with the Company's $100 million
of outstanding Senior Notes due 2004. The proceeds will be used by the Company
to finance the BGCI Acquisition and to repay the outstanding borrowings under
the Corporate Credit Facility. In connection with this anticipated debt
offering, the Company executed an interest rate agreement in March 1998 covering
a notional amount of $237 million to hedge against fluctuations in interest
rates prior to the completion of the debt offering.
F-24
<PAGE> 155
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 29,638 $ 71,833
Restricted cash........................................... 53,688 27,742
Marketable securities..................................... -- 42,118
Accounts receivable....................................... 65,718 49,781
Inventories............................................... 19,869 15,210
Other current assets...................................... 3,875 2,465
---------- --------
Total current assets.............................. 172,788 209,149
NET INVESTMENT IN LEASES.................................... 497,966 --
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation: September 30, 1998, $216,415; December 31,
1997, $188,227............................................ 480,077 496,589
LAND AND IMPROVEMENTS....................................... 3,574 2,540
DEFERRED FINANCING AND ORGANIZATION COSTS, net of
accumulated amortization: September 30, 1998, $14,550;
December 31, 1997, $16,592................................ 31,218 21,085
NATURAL GAS RESERVES........................................ 1,748 2,384
INVESTMENTS IN UNCONSOLIDATED AFFILIATES.................... 72,846 79,072
OTHER ASSETS................................................ 47,053 12,155
---------- --------
$1,307,270 $822,974
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 77,641 $ 74,680
Accounts payable.......................................... 26,244 13,755
Accrued compensation...................................... 5,893 4,923
Accrued interest payable.................................. 7,930 2,935
Accrued dividends payable................................. -- 2,140
Other accrued liabilities................................. 15,449 8,182
---------- --------
Total current liabilities......................... 133,157 106,615
LONG-TERM DEBT.............................................. 960,621 595,112
DEFERRED INCOME TAXES....................................... 37,004 25,872
MINORITY INTERESTS.......................................... 60,728 15,131
OTHER LONG-TERM LIABILITIES................................. 23,529 21,946
---------- --------
1,215,039 764,676
---------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares authorized;
282,000 shares issued and outstanding.................. 130 130
Net unrealized gain on available for sale securities...... -- 26
Accumulated earnings...................................... 92,101 58,142
---------- --------
92,231 58,298
---------- --------
$1,307,270 $822,974
========== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated balance sheets.
F-25
<PAGE> 156
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER COMMON SHARE)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING REVENUE:
Electric.................................................. $231,200 $234,652
Steam..................................................... 19,325 19,451
Lease revenue............................................. 23,567 --
Service revenue under capital leases...................... 25,955 --
Income from unconsolidated investments in power
projects............................................... 2,626 623
Other..................................................... 14,855 8,463
-------- --------
317,528 263,189
-------- --------
OPERATING EXPENSES:
Fuel expense.............................................. 62,500 91,254
Operations and maintenance................................ 49,581 52,739
Cost of services under capital leases..................... 29,358 --
General, administrative and development expenses.......... 27,765 31,547
Depreciation and amortization............................. 31,382 31,583
-------- --------
200,586 207,123
-------- --------
OPERATING INCOME............................................ 116,942 56,066
OTHER INCOME (EXPENSE):
Interest expense.......................................... (51,993) (41,419)
Investment and other income, net.......................... 5,169 7,378
Equity in net loss of affiliates, net..................... (3,242) (410)
-------- --------
INCOME BEFORE MINORITY INTERESTS IN INCOME, INCOME TAXES AND
EXTRAORDINARY LOSS........................................ 66,876 21,615
MINORITY INTERESTS IN INCOME BEFORE EXTRAORDINARY LOSS...... (9,800) (3,763)
-------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........... 57,076 17,852
PROVISION FOR INCOME TAXES.................................. (22,374) (6,756)
-------- --------
INCOME BEFORE EXTRAORDINARY LOSS............................ 34,702 11,096
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of
minority interest and income tax benefit of $473.......... (743) --
-------- --------
NET INCOME.................................................. $ 33,959 $ 11,096
======== ========
EARNINGS PER COMMON SHARE:
Income before extraordinary loss.......................... $ 123.06 $ 39.35
Extraordinary loss........................................ (2.64) --
-------- --------
$ 120.42 $ 39.35
======== ========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated statements.
F-26
<PAGE> 157
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 33,959 $ 11,096
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 31,382 31,583
Deferred income taxes.................................. 11,132 2,349
Extraordinary loss on early extinguishment of debt,
non-cash portion...................................... 2,067 --
Minority interests in income, net of dividends......... (14,933) 2,522
Equity in net loss (income) of unconsolidated
affiliates, net of dividends.......................... 7,232 (213)
Minimum lease payments received........................ 22,242 --
Amortization of unearned lease income.................. (23,567) --
Decrease (increase) in accounts receivable............. (6,410) 869
Decrease (increase) in inventories..................... (2,392) 3,460
Decrease in accounts payable........................... (3,479) (3,806)
Increase in accrued liabilities........................ 3,073 2,444
Increase in other liabilities.......................... 1,557 6,806
Increase in other...................................... (30,134) (5,902)
---------- ----------
Net cash flows provided by operating activities........... 31,729 51,208
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions................ (4,510) (1,591)
Decrease in marketable securities...................... 42,118 12,684
Investments in affiliates.............................. (1,000) (53,443)
Acquisition of facilities, net of cash acquired........ (155,324) --
Decrease in restricted cash............................ 9,868 2,179
---------- ----------
Net cash flows used in investing activities............... (108,848) (40,171)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt......................... 192,310 2,618
Repayments of debt..................................... (155,673) (48,976)
Increase in deferred financing costs................... (1,713) (581)
Common stock dividend paid............................. -- (5,000)
---------- ----------
Net cash flows provided by (used in) financing
activities............................................. 34,924 (51,939)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (42,195) (40,902)
CASH AND CASH EQUIVALENTS, beginning of period.............. 71,833 89,188
---------- ----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 29,638 $ 48,286
========== ==========
</TABLE>
The accompanying notes to consolidated condensed financial statements are an
integral part of these consolidated statements.
F-27
<PAGE> 158
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 wholly-owned and
majority-owned 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, 1998 and for the nine months
ended September 30, 1998 and 1997 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, 1998, and the results of operations for the
nine-month periods ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997. 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.
These unaudited consolidated condensed financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's most recent Report on Form 10-K for the
Six-Month Transition Period Ended December 31, 1997, which was filed with the
United States Securities and Exchange Commission on March 31, 1998.
2. COGENTRIX OF PENNSYLVANIA, INC.
In January 1998, the Company signed an agreement with Pennsylvania Electric
Company ("Penelec") to terminate the Ringgold Facility's power purchase
agreement. This termination agreement was the result of a request for proposals
to buyback or restructure power sales agreements issued to all major operating
independent power producer projects in Penelec's territory in April 1997. The
termination agreement with Penelec provides for a payment to the Company of
approximately $24 million, which will be sufficient to retire all of Cogentrix
of Pennsylvania, Inc.'s ("CPA") outstanding project debt. The buyback of the
power purchase agreement is subject to the issuance of an order (satisfactory to
Penelec) by the Pennsylvania Public Utility Commission granting Penelec the
authority to fully recover from its customers the consideration paid to CPA
under the buyout agreement. Management does not expect the termination of the
Ringgold Facility's power purchase agreement with Penelec, if it occurs, to have
an adverse impact on the Company's consolidated results of operations, cash
flows or financial position.
3. JAMES RIVER COGENERATION COMPANY
Effective February 1998, James River Cogeneration Company ("JRCC"), a joint
venture owned 50% by the Company, which owns a cogeneration facility located in
Hopewell, Virginia (the "Hopewell Facility"), amended its power sales agreement
with Virginia Electric and Power Company ("Virginia Power") to provide Virginia
Power additional rights related to the dispatch of the Hopewell Facility. In
connection with the
F-28
<PAGE> 159
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
amendment of the power sales agreement, the Company amended the terms of the
existing project debt on the Hopewell Facility.
The amended terms of the JRCC project debt resulted in an extension of the
final maturity of the note payable by six months to December 31, 2002 and an
increase in the amount of outstanding borrowings of $34.6 million, the proceeds
of which (net of transaction costs) were distributed to the JRCC partners. The
amended note payable accrues interest at an annual rate equal to the applicable
LIBOR rate, as chosen by the Company, plus an additional margin of .875% through
February 1999 and 1.00% thereafter. The amended credit facility also provides
for a $5 million letter of credit to secure the project's obligation to pay debt
service. Cogentrix Energy, Inc. has indemnified the lenders of the credit
facility for any cash deficits the Hopewell Facility could experience as a
result of incurring certain costs, subject to a cap of $10.6 million. An
extraordinary loss of $2.4 million was recorded in the first quarter of 1998
related to the write-off of unamortized deferred financing costs from the
original project debt and a swap termination fee on an interest rate swap
agreement hedging the original project debt.
4. WHITEWATER AND COTTAGE GROVE ACQUISITION
In March 1998, the Company acquired from LS Power Corporation (the "LS
Power Acquisition") an approximate 74% ownership interest in two partnerships
which own and operate electric generating facilities located in Whitewater,
Wisconsin, (the "Whitewater Facility") and Cottage Grove, Minnesota (the
"Cottage Grove Facility"). Each of the Cottage Grove and Whitewater Facilities
is a 245-megawatt gas-fired, combined-cycle cogeneration facility. Commercial
operations of both of these facilities commenced in the last half of calendar
1997. The Cottage Grove Facility sells capacity and energy to Northern States
Power Company under a 30-year power sales contract terminating in 2027. The
Whitewater Facility sells capacity and energy to Wisconsin Electric Power
Company under a 25-year power sales contract terminating in 2022. Each of the
power sales contracts has characteristics similar to a lease in that the
agreement gives the purchasing utility the right to use specific property, plant
and equipment. As such, each of the power sales contracts is accounted for as a
"sales-type" capital lease in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases."
The aggregate acquisition price for the equity interests in the Cottage
Grove and Whitewater Facilities acquired by the Company was $158.0 million. In
addition, the Company pre-funded a $16.7 million distribution to the previous
owners, which represented unused construction contingency and cash flows that
were accumulated by the Cottage Grove and Whitewater Facilities prior to January
1, 1998. Cogentrix Energy, Inc. received $15.7 million of this distribution in
April 1998 and expects to receive a distribution of the remaining $1 million in
calendar 1998. The purchase price was funded with proceeds of the Company's
corporation credit facility and corporate cash balances.
The Company accounted for the LS Power Acquisition using the purchase
method of accounting. The purchase price has been allocated to the assets and
liabilities acquired based on their fair market values at the date of
consummation. An adjustment in the amount of $22.2 million was recorded to
reflect the Company's portion of the excess of the fair value of the
Partnerships' fixed rate debt over its historical carrying value. This Fair
Value adjustment or "debt premium", will be amortized to income over the life of
the debt acquired using the effective interest method. The historical book
values of the remaining assets and liabilities approximated their fair values at
the date of consummation. The excess of the purchase price over the fair value
of the net assets acquired of approximately $27.7 million has been recorded as
goodwill. Goodwill is being amortized on a straight-line basis over the lives of
the PPAs for the two facilities. The minority owner's share of each
partnership's net assets is included in "minority interests" on the accompanying
consolidated balance sheet as of September 30, 1998. The accompanying
consolidated statement of income for the nine months ended September 30, 1998
include the results of operations of the acquired facilities since the closing
date of the LS Power Acquisition (March 20, 1998).
F-29
<PAGE> 160
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma consolidated results for the Company for
the nine months ended September 30, 1998 give effect to the LS Power Acquisition
as if the transaction had occurred on January 1, 1998 (in thousands, expect per
share amount).
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenues................................................ $336,938
Net Income.............................................. $ 34,066
Earnings per share...................................... $ 120.80
</TABLE>
5. BECHTEL ASSET ACQUISITION
In October 1998, the Company acquired from Bechtel Generating Company, Inc.
("BGCI") ownership interests in 12 electric generating facilities, comprising a
net equity interest of approximately 365 megawatts, and one interstate natural
gas pipeline in the United States (the "BGCI Acquisition"). The aggregate
acquisition price, including acquisition costs, for the equity interests in the
BGCI assets was approximately $189.9 million. The BGCI Acquisition will be
accounted for using the purchase method of accounting. Management will account
for each of the underlying projects using the equity method.
In connection with the BGCI Acquisition, the Company issued $220 million of
senior notes due 2008 in a Rule 144A offering (the "2008 Senior Notes") with a
covenant to register exchange notes with the U.S. Securities and Exchange
Commission. These senior notes are unsecured and rank pari passu with the
Company's $100 million of outstanding senior notes due 2004 (the "2004 Senior
Notes"). The Company used the net proceeds to finance the BGCI Acquisition and
related transaction costs, to pay settlement costs for an interest rate hedge
agreement related to the offering of the 2008 Senior Notes, and for general
corporate purposes.
6. BATESVILLE FACILITY ACQUISITION
In August 1998, the Company acquired an approximate 52% interest in an
800-megawatt, gas-fired electric generating facility (the "Batesville Facility")
under construction in Batesville, Mississippi (the "Batesville Acquisition").
The Company has committed to provide an equity contribution to the project
subsidiary of approximately $54 million upon the earliest to occur of (i) the
incurrence of construction costs after all project financing has been expended,
(ii) an event of default under the project subsidiary's financing arrangements
and (iii) June 30, 2001. This equity commitment is supported by a $54 million
letter of credit provided under the Company's corporate credit facility. The
Company expects the Batesville Facility, which will be operated by the Company,
to commence commercial operation in June 2000. Electricity generated by the
Batesville Facility will be sold under long-term power purchase agreements with
two investment-grade utilities.
7. 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 filed a civil action against certain
subsidiaries of the Company. The arbitration proceeding was completed in October
1997, with the arbitration panel denying any recovery to the coal supplier. The
coal supplier subsequently challenged the arbitration panel's ruling on grounds
of partiality by the neutral arbitrator. On April 15, 1998, the federal district
court issued an order vacating the arbitration award and directing a new
arbitration be conducted. The Company has appealed this decision to the United
States Court of Appeals for the Fourth Circuit. The Company believes that the
district court action was in error, that the arbitration award is valid and will
be upheld on appeal. With respect to the civil action filed by the other coal
supplier, one count has been
F-30
<PAGE> 161
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
dismissed with prejudice and the court has directed the remaining claim be
resolved by arbitration conducted in Charlotte, North Carolina. The Company
intends to vigorously contest the arbitration and is confident it will prevail.
Effective December 1997, the Company amended the power sales agreement on
its Portsmouth Facility. Under the amended terms, the purchasing utility has
exercised its right of economic dispatch which has led to significant reductions
in that facility's fuel requirements. In response to the reduced fuel
requirements, the coal supplier for the Portsmouth Facility filed a civil action
in federal district court against a subsidiary of the Company. Upon motion by
the Company, the court has stayed the action pending arbitration of the claims
in Charlotte, North Carolina. The Company intends to vigorously contest the
claims in arbitration and is confident it will prevail.
The Company has established reserves which management believes to be
adequate to cover any costs resulting from these matters. Management believes
that the resolution of these disputes will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheets as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized in current earnings unless specified hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
Early adoption is allowed. SFAS No. 133 must be applied to derivative
instruments and certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
the consolidated financial statements and has not determined the timing or
method of adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
In April 1998, the American Institute of Certified Public Accounts
("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs
of Start-Up Activities" which is effective for financial statements for fiscal
years beginning after December 15, 1998. SOP No. 98-5 requires costs incurred
for start-up activities to be expensed as incurred. For purposes of this SOP,
start-up activities are defined broadly as those one-time activities related to
opening a new facility, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing a new operation. Start-up activities
include activities related to organizing a new entity (commonly referred to as
organization costs). The Company will adopt SOP No. 98-5 as of January 1, 1999.
The Company has determined that SOP No. 98-5 will not have a material impact on
the consolidated financial statements for the project subsidiaries the Company
controls.
9. SALES TYPE CAPITAL LEASE
The power purchase agreements acquired by the Company as a result of the LS
Power Acquisition have characteristics similar to leases in that the agreements
confer to the purchasing utility the right to use specific property, plant and
equipment. At the commercial operations date, the partnerships accounted for the
power
F-31
<PAGE> 162
COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
purchase agreements as "sales-type" capital leases in accordance with Statement
of Financial Accounting Standards (SFAS) No. 13, "Accounting for Leases".
Upon the commercial operations dates of the Cottage Grove and Whitewater
Facilities, the partnerships acquired by the Company recognized a gain on sales
type lease of approximately $184.1 million reflecting the difference between the
estimated fair market value ($495.3 million) and the historical cost ($311.2
million).
The components of the net investment in the leases at September 30, 1998
are as follows (dollars in thousands):
<TABLE>
<S> <C>
Gross Investment in Leases $1,192,408
Unearned Income on Leases (674,442)
----------
Net Investment in Leases $ 497,966
==========
</TABLE>
Gross investment in leases represent total capacity payments receivable
over the term of the power purchase agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
Estimated minimum lease payments over the remaining term of the power
purchase agreements as of December 31, 1997, are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 42,001
1999........................................................ 43,119
2000........................................................ 45,176
2001........................................................ 45,190
2002........................................................ 47,249
Thereafter.................................................. 960,169
----------
Total............................................. $1,182,904
==========
</TABLE>
F-32
<PAGE> 163
INDEX TO
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-34
Consolidated Balance Sheets at December 31, 1997, June 30,
1997 and June 30, 1996.................................... F-35
Consolidated Statements of Operations For the Six-Month
Periods Ended December 31, 1997 and 1996 (unaudited) and
the Years Ended June 30, 1997, 1996 and 1995.............. F-36
Consolidated Statements of Changes in Shareholder's Equity
For the Six-Month Period Ended December 31, 1997 and the
Years Ended June 30, 1997, 1996 and 1995.................. F-37
Consolidated Statements of Cash Flows For the Six-Month
Periods Ended December 31, 1997 and 1996 (unaudited) and
the Years Ended June 30, 1997, 1996 and 1995.............. F-38
Notes to Consolidated Financial Statements.................. F-39
Financial Statement Schedules:
Schedule I - Condensed Financial Information of the
Registrant........................................... F-54
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997......................... F-55
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and 1997 (unaudited)............. F-56
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited)............. F-57
Notes to Consolidated Condensed Financial Statements
(unaudited)............................................... F-58
</TABLE>
F-33
<PAGE> 164
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO COGENTRIX DELAWARE HOLDINGS, INC.:
We have audited the accompanying consolidated balance sheets of
Cogentrix Delaware Holdings, Inc. (a Delaware corporation) and subsidiary
companies as of December 31, 1997, June 30, 1997 and June 30, 1996, and the
related consolidated statements of operations, changes in shareholder's equity
and cash flows for the six-month period ended December 31, 1997 and for each of
the three years in the period ended June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present
fairly, in all material respects, the financial position of Cogentrix Delaware
Holdings, Inc. and subsidiary companies as of December 31, 1997, June 30, 1997
and June 30, 1996, and the results of their operations and their cash flows for
the six-month period ended December 31, 1997 and for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
March 20, 1998.
F-34
<PAGE> 165
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997, June 30, 1997 and June 30, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
December June June
31, 1997 30, 1997 30, 1996
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 63,205 $ 51,958 $ 21,389
Restricted cash 25,331 29,199 40,486
Marketable securities 42,118 21,494 --
Accounts receivable 48,305 51,719 56,369
Inventories 15,210 15,723 19,086
Other current assets 2,391 3,420 2,530
--------- --------- ---------
Total current assets 196,560 173,513 139,860
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated depreciation: December 31, 1997, $186,514; June 30,
1997, $168,209; June 30, 1996, $155,108 496,183 513,936 603,866
LAND AND IMPROVEMENTS 2,540 2,540 2,424
DEFERRED FINANCING, START-UP AND ORGANIZATION COSTS,
net of accumulated amortization: December 31, 1997, $13,970; June 30, 1997,
$15,101; June 30, 1996, $18,777 18,876 20,178 22,461
RESTRICTED INVESTMENTS -- -- 43,695
NATURAL GAS RESERVES 2,384 2,829 3,611
INVESTMENTS IN AFFILIATES 79,072 85,345 34,227
NOTES RECEIVABLE FROM AFFILIATES 44,405 54,675 69,890
OTHER ASSETS 6,943 16,292 8,229
--------- --------- ---------
$ 846,963 $ 869,308 $ 922,263
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 74,680 $ 62,370 $ 48,416
Accounts payable 11,589 13,510 18,308
Payable to Parent 5,537 5,709 938
Income taxes payable to Parent 20,191 22,160 21,934
Other accrued liabilities 10,095 11,388 7,133
--------- --------- ---------
Total current liabilities 122,092 115,137 96,729
LONG-TERM DEBT 493,025 529,323 568,172
NOTES PAYABLE TO PARENT 6,233 761 905
DEFERRED INCOME TAXES 80,735 77,485 91,091
MINORITY INTEREST IN JOINT VENTURE 15,131 14,354 22,044
OTHER LONG-TERM LIABILITIES 10,853 12,681 3,319
--------- --------- ---------
728,069 749,741 782,260
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 1 AND 9)
SHAREHOLDER'S EQUITY:
Common stock 1 1 1
Additional paid-in capital 224,069 199,937 157,595
Net unrealized gain on available for sale securities 26 -- --
Accumulated deficit (105,202) (80,371) (17,593)
--------- --------- ---------
118,894 119,567 140,003
--------- --------- ---------
$ 846,963 $ 869,308 $ 922,263
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-35
<PAGE> 166
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six-Month Periods Ended December 31, 1997 and 1996 (Unaudited)
And the Years Ended June 30, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Six-Month
Period Ended
December 31, Year Ended June 30,
------------------------ ---------------------------------------
1997 1996 1997 1996 1995
--------- --------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electric $ 154,810 $ 162,909 $ 315,203 $ 356,459 $ 357,674
Steam 12,721 13,284 26,686 27,703 23,320
Income from unconsolidated investment
in power projects 1,186 348 574 3,862 1,116
Other 7,370 4,556 10,450 17,710 4,710
--------- --------- --------- --------- ---------
176,087 181,097 352,913 405,734 386,820
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Fuel expense 60,500 71,350 131,405 171,310 168,184
Operations and maintenance 33,189 36,998 73,041 74,272 66,822
General, administrative and development expenses 10,988 8,056 19,568 12,142 13,725
Depreciation and amortization 19,741 18,179 38,775 36,656 35,768
Loss on impairment and cost of removal
of cogeneration facilities -- 65,628 65,628 -- --
--------- --------- --------- --------- ---------
124,418 200,211 328,417 294,380 284,499
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) 51,669 (19,114) 24,496 111,354 102,321
OTHER INCOME (EXPENSE):
Interest expense (21,828) (24,319) (47,340) (50,752) (51,899)
Investment and other income 4,424 4,821 9,739 8,100 8,516
Equity in net (loss) income of affiliates, net (1,710) (1,242) (814) (5,315) 8,824
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTERESTS IN INCOME OF
JOINT VENTURE, INCOME TAXES AND EXTRAORDINARY LOSS 32,555 (39,854) (13,919) 63,387 67,762
MINORITY INTERESTS IN INCOME OF JOINT VENTURE (2,273) (1,614) (4,013) (4,749) (4,789)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 30,282 (41,468) (17,932) 58,638 62,973
(PROVISION) BENEFIT FOR INCOME TAXES (11,992) 15,494 6,868 (23,514) (24,308)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 18,290 (25,974) (11,064) 35,124 38,665
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT (1,502) (703) (703) -- --
--------- --------- --------- --------- ---------
NET INCOME (LOSS) $ 16,788 $ (26,677) $ (11,767) $ 35,124 $ 38,665
========= ========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-36
<PAGE> 167
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the Six-Month Period Ended
December 31, 1997, and the Years Ended June 30, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain (Loss) On
Common Paid-in Available for Accumulated
Stock Capital Sale Securities Deficit Total
------ ---------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $ 1 $116,607 $(476) $ (8,882) $ 107,250
Net unrealized gain on available
for sale securities, net of
deferred income tax provision
of $34 -- -- 120 -- 120
Net income -- -- -- 38,665 38,665
Capital contribution -- 3,950 -- -- 3,950
Dividends paid to Cogentrix
Energy, Inc. -- -- -- (37,952) (37,952)
--- -------- ----- --------- ---------
Balance, June 30, 1995 1 120,557 (356) (8,169) 112,033
Net unrealized gain on available
for sale securities, net of
deferred income tax
provision of $256 -- -- 356 -- 356
Net income -- -- -- 35,124 35,124
Capital contribution -- 37,038 -- -- 37,038
Dividends paid to Cogentrix
Energy, Inc. -- -- -- (44,548) (44,548)
--- -------- ----- --------- ---------
Balance, June 30, 1996 1 157,595 -- (17,593) 140,003
Net loss -- -- -- (11,767) (11,767)
Capital contribution -- 42,342 -- -- 42,342
Dividends paid to Cogentrix
Energy, Inc. -- -- -- (51,011) (51,011)
--- -------- ----- --------- ---------
Balance, June 30, 1997 1 199,937 -- (80,371) 119,567
Net income -- -- -- 16,788 16,788
Net unrealized gain on available
for sale securities, net of
deferred income tax provision
of $14 -- -- 26 -- 26
Capital contribution -- 24,132 -- -- 24,132
Dividends paid to Cogentrix
Energy, Inc. -- -- -- (41,619) (41,619)
--- -------- ----- --------- ---------
Balance, December 31, 1997 $ 1 $224,069 $ 26 $(105,202) $ 118,894
=== ======== ===== ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-37
<PAGE> 168
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six-Month Periods Ended December 31, 1997 and 1996 (Unaudited)
and the Years Ended June 30, 1997, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Six-Month
Period Ended
December 31, Year Ended June 30,
----------------------- --------------------------------------
1997 1996 1997 1996 1995
-------- --------- ---------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,788 $ (26,677) $ (11,767) $ 35,124 $ 38,665
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 19,741 18,179 38,775 36,656 35,768
Increase in unrealized gain on investments 26 -- -- 356 120
Loss on impairment and cost of removal of
cogeneration facilities -- 65,628 65,628 -- --
Deferred income taxes 3,250 (18,961) (13,606) 3,717 11,225
Extraordinary loss on early extinguishment
of debt, non cash portion 1,395 1,173 1,173 -- --
Minority interest in income of joint venture,
net of dividends 777 (8,848) (7,690) 3,636 3,680
Equity in net (income) loss of unconsolidated
affiliates 524 894 240 1,453 (9,940)
Dividends received from unconsolidated affiliates 8,491 288 7,152 617 14,853
Loss on sale of securities, net -- -- -- 449 --
Decrease (increase) in accounts receivable 3,414 8,616 4,650 6,850 (8,260)
Decrease in inventories 958 718 4,145 667 317
Decrease (increase) in other assets 10,378 (2,105) (8,953) 2,006 418
(Decrease) increase in accounts payable (2,093) (888) (27) (27,999) 3,778
(Decrease) increase in accrued liabilities (3,262) (7,689) 4,481 13,100 8,613
(Increase) decrease in other (1,828) 456 1,364 (1,309) 877
-------- --------- --------- -------- ---------
Net cash flows provided by operating activities 58,559 30,784 85,565 75,323 100,114
-------- --------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (553) (718) (2,761) (1,137) (6,835)
(Increase) decrease in marketable securities (20,624) -- 22,201 7,847 975
Investments in affiliates (2,742) (658) (58,510) (7,092) (31,457)
Decrease (increase) in restricted cash 3,868 13,601 11,287 (9,590) (3,504)
-------- --------- --------- -------- ---------
Net cash flows (used in) provided by investing
activities (20,051) 12,225 (27,783) (9,972) (40,821)
-------- --------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable and long-term debt 62,773 210,072 210,271 656 1,622
Repayments of notes payable and long-term debt (86,761) (205,775) (235,166) (46,641) (42,467)
Increase in deferred financing costs (1,528) (2,779) (2,720) -- (224)
Decrease (increase) in notes from affiliate, net 15,742 16,809 9,071 (13,856) (17,109)
Capital contributions 24,132 21,280 42,342 37,038 3,950
Dividends paid (41,619) (38,942) (51,011) (44,192) (37,952)
-------- --------- --------- -------- ---------
Net cash flows (used in) provided by financing
activities (27,261) 665 (27,213) (66,995) (92,180)
-------- --------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,247 43,674 30,569 (1,644) (32,887)
CASH AND CASH EQUIVALENTS, beginning of period 51,958 21,389 21,389 23,033 55,920
-------- --------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 63,205 $ 65,063 $ 51,958 $ 21,389 $ 23,033
======== ========= ========= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-38
<PAGE> 169
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Cogentrix Delaware Holdings, Inc. is a Delaware holding company whose
subsidiary companies are principally engaged in the business of acquiring,
developing, owning and operating independent power generating facilities
(individually, a "Facility," or collectively, the "Facilities"). Cogentrix
Delaware Holdings, Inc. and subsidiary companies are collectively referred
to as the "Company". As of December 31, 1997, the Company owned or had interests
in eleven Facilities in the United States with an aggregate installed capacity
of approximately 1,120 megawatts. Two of the eleven Facilities are owned 50% by
the Company and 50% by other independent power producers. Electricity generated
by each Facility is sold to an electric utility (the "Utility") and steam is
sold to an industrial company (the "Steam Purchaser"), all under long-term
contractual agreements.
Cogentrix Delaware Holdings, Inc. is a wholly-owned subsidiary of
Cogentrix Energy, Inc. (the "Parent") and has guaranteed all of the Parent's
existing and future senior unsecured debt for borrowed money (Note 9). This
guarantee was given to the lenders under the Parent's corporate credit facility
and terminates, unless the term of the credit agreement is extended, when the
credit agreement for the corporate credit facility terminates in 2001. As of
December 31, 1997, the Parent had $100 million of senior notes outstanding due
2004 and had no borrowings outstanding under the corporate credit facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation -- The
accompanying consolidated financial statements include the accounts of Cogentrix
Delaware Holdings, 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 Delaware Holdings, Inc. and its subsidiary companies
and its consolidated joint venture have been eliminated in the accompanying
consolidated financial statements.
Information presented for the six-month period ended December 31, 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 results of operations and cash flows for the six-month period
ended December 31, 1996. The results of operations for this interim period is
not necessarily indicative of results which may be expected for any other
interim period or for the year as a whole.
Cash and Cash Equivalents -- Cash and cash equivalents include bank
deposits, commercial paper, government securities and certificates of deposit
that mature within three months of their purchase. Amounts in debt service
accounts which might otherwise be considered cash equivalents are treated as
current restricted cash.
Marketable Securities -- Marketable securities include commercial
paper, corporate obligations, government securities, and certificates of deposit
with maturity dates in excess of three months from their date of purchase. All
investments in debt securities held by the Company are classified as available
for sale securities and are reported at fair value. Realized gains or losses are
determined on the specific identification method and are reflected in income.
Unrealized gains and losses are reported net of taxes as a separate component of
shareholders' equity, except those unrealized losses that are deemed to be other
than temporary, which are reflected in income.
Inventories -- Coal inventories consist of the contract purchase price
of coal and all transportation costs incurred to deliver the coal to each
Facility. Gas inventories represent the cost of natural gas purchased as fuel
reserves for a Facility that is forecasted to be consumed during the next fiscal
year. Spare parts inventories consist of major equipment and recurring
maintenance supplies required to be maintained in order to facilitate routine
maintenance activities and minimize unscheduled maintenance outages. As of
December 31, 1997, June 30, 1997 and June 30, 1996, fuel and spare parts
inventories are comprised of the following (dollars in thousands):
F-39
<PAGE> 170
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1997 1997 1996
------------ -------- --------
<S> <C> <C> <C>
Coal $ 8,230 $ 8,274 $11,951
Natural gas 700 700 700
Spare parts 6,280 6,749 6,435
------- ------- -------
$15,210 $15,723 $19,086
======= ======= =======
</TABLE>
Coal inventories at certain Facilities are recorded at last-in, first-out
("LIFO") cost, with the remaining Facilities' coal inventories recorded at
first-in, first-out ("FIFO") cost. The cost of coal inventories recorded on a
LIFO basis was $427,000, $900,000 and $1,458,000 less than the cost of these
inventories on a FIFO basis as of December 31, 1997, June 30, 1997 and June 30,
1996, respectively. Spare parts inventories are recorded at average cost.
Property, Plant and Equipment -- Property, plant and equipment is
recorded at actual cost. Substantially all property, plant and equipment
consists of cogeneration facilities which are depreciated on a straight-line
basis over their estimated useful lives (ranging from 9 to 30 years). Other
property and equipment is depreciated on a straight-line basis over the
estimated economic or service lives of the respective assets (ranging from 3 to
10 years). Maintenance and repairs are charged to expense as incurred. Emergency
and rotatable spare parts inventories are included in plant and are depreciated
over the useful life of the related components.
Deferred Financing, Start-up and Organization Costs -- Financing costs,
consisting primarily of legal and other direct costs incurred to obtain
financing for the Facilities, are deferred and amortized over the permanent
financing term. Start-up and organization costs include payroll costs and fees
paid to consultants, technicians and vendors associated with the formation of
each entity and the start-up of the Facilities. All start-up costs were fully
amortized as of June 30, 1997.
Natural Gas Reserves -- Natural gas reserves consist of the cost of
natural gas purchased as long-term fuel reserves for a Facility. These reserves
are recorded at cost.
Investments in Affiliates - Investments in affiliates include
investments in unconsolidated entities which own or derive revenues from power
projects currently in operation, investments in unconsolidated entities which
own and operate greenhouses, and investments in unconsolidated development joint
venture entities. The Company's share of income or loss from investments in
operating power projects is included in operating revenues in the accompanying
consolidated statements of operations. The Company's share of income or loss
from investments in greenhouses and development joint venture entities is
included in other income (expense) in the accompanying consolidated statements
of operations.
Revenue Recognition -- Revenues from the sale of electricity and steam
are recorded based upon output delivered and capacity provided at rates
specified under contract terms. Significant portions of the Company's revenues
have been derived from certain electric utility customers. Two customers
accounted for 64% and 22% of revenues in the six-month period ended December 31,
1997, 62% and 25% of revenues in the year ended June 30, 1997, 55% and 33% of
revenues in the year ended June 30, 1996, and 57% and 34% of revenues in the
year ended June 30, 1995.
Interest Rate Protection Agreements -- The Company enters into
interest-rate protection agreements with major financial institutions to fix or
limit the volatility of interest rates on its variable-rate, long-term debt. The
differential paid or received is recognized as an adjustment to interest
expense. Any premiums associated with interest rate protection agreements are
capitalized and amortized to interest expense over the term of the agreement.
Unamortized premiums are included in other assets in the accompanying
consolidated balance sheets.
Income Taxes - The Company files a consolidated federal tax return with
the Parent, but records its income tax provisions on a separate-entity basis for
financial reporting purposes. Deferred income tax assets and liabilities are
recognized for the estimated future income tax effects of temporary differences
between the tax bases of assets and liabilities and their reported amounts in
the financial statements. Deferred tax assets are also established for the
estimated future effect of net operating loss and tax credit carryforwards when
it is more likely than not that such assets will be realized. Deferred taxes are
calculated based on provisions of the enacted tax law.
F-40
<PAGE> 171
Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This pronouncement
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. This statement
will be adopted by the Company effective January 1, 1998. The Company believes
this pronouncement will not have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This pronouncement
establishes standards for reporting information about operating segments in
annual and interim financial statements. SFAS No. 131 will be adopted by the
Company effective January 1, 1998. The Company believes this pronouncement will
not have a material effect on its financial statements.
Change of Fiscal Year - Effective January 1, 1998, the Company changed
its fiscal year to commence on January 1 and conclude on December 31 of each
year. The Company's fiscal year previously commenced each July 1, concluding on
June 30 of the following calendar year.
3. INVESTMENT IN DEBT SECURITIES
At December 31, 1997, investments in debt securities included in
marketable securities in the accompanying consolidated balance sheet consisted
of government securities and corporate obligations. The Company's net unrealized
gain of $40,000 on its investment in debt securities is reported in the
accompanying consolidated statements of changes in shareholder's equity, net of
$14,000 in deferred income taxes.
At June 30, 1997, investments in debt securities included in restricted
cash and marketable securities in the accompanying consolidated balance sheet
consisted of government securities and corporate obligations. These securities
are recorded at their fair market value which approximates cost.
At June 30, 1996, there were no debt securities held in restricted cash
or marketable securities. Restricted investments consisted of investments in
certificates of deposit which collateralized the Company's obligations under
certain letters of credit.
At June 30, 1995, the Company's net unrealized loss of $834,000 on its
investment in debt securities is reported in the accompanying consolidated
statements of changes in shareholder's equity, net of $222,000 allocated to
minority interest in joint venture and net of $256,000 in deferred income taxes.
F-41
<PAGE> 172
4. INVESTMENT IN UNCONSOLIDATED POWER PROJECT
Birchwood Power Partners, L.P.
In December 1994, the Company acquired a 50% interest in Birchwood
Power Partners, L.P. ("Birchwood Power"), a partnership formed to construct and
own a 220 megawatt coal-fired cogeneration facility (the "Birchwood Facility")
in King George County, Virginia, from two indirect wholly-owned subsidiaries of
The Southern Company. The Company initially paid $29.5 million for its 50%
interest in Birchwood Power. In addition, pursuant to the equity funding
obligation under Birchwood Power's project financing arrangements, the Company
provided an equity contribution to Birchwood Power of approximately $43.7
million in March 1997. The initial distribution of $6.9 million received by the
Company from Birchwood Power in April 1997 was also subsequently paid to a
subsidiary of The Southern Company in accordance with the terms of the original
transaction agreement and was treated as part of the purchase price of the
Company's interest in Birchwood Power.
The Birchwood Facility, which commenced commercial operations in
November 1996, sells electricity to a utility and provides thermal energy to a
36-acre greenhouse under long-term contracts. The Birchwood Facility is operated
by an affiliate of The Southern Company under a long-term operations and
maintenance agreement. The Company has 50% representation on Birchwood Power's
management committee, which must approve all material transactions of Birchwood
Power. The Company is accounting for its investment in Birchwood Power under the
equity method. The Company's share of net income of Birchwood Power is recorded
net of the amortization of the $36.4 million premium paid to purchase the
Company's 50% share interest in Birchwood Power. This premium is being amortized
on a straight-line basis over the estimated useful life of the Birchwood
Facility. The Company recognized approximately $1,727,000 and $147,000 in income
from unconsolidated investments in power projects, net of premium amortization,
in the accompanying consolidated statements of operations for the six-month
period ended December 31, 1997 and for the year ended June 30, 1997,
respectively, related to its investment in Birchwood Power. The following table
presents summarized financial information for Birchwood Power as of and for the
years ended December 31, 1997, 1996, and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 30,577 $ 25,701 $ 1,234
Noncurrent assets 374,560 385,171 313,402
-------- -------- --------
Total assets $405,137 $410,872 $314,636
======== ======== ========
Current liabilities $ 6,818 $ 89,599 $ 92,968
Noncurrent liabilities 335,134 321,247 221,668
Shareholders' equity 63,185 26 0
-------- -------- --------
$405,137 $410,872 $314,636
======== ======== ========
INCOME STATEMENT DATA:
Operating revenues $ 69,275 $ 9,745 $ 0
Operating income 35,087 4,527 0
Net income 6,451 26 0
</TABLE>
F-42
<PAGE> 173
5. INVESTMENT IN OTHER UNCONSOLIDATED AFFILIATES
Development Joint Ventures
Michigan Cogeneration Partners -- In partnership with Wolverine Energy,
Inc., an indirect subsidiary of Northern States Power Company, a Minnesota-based
investor-owned electric utility, the Company pursued the development of a 65
megawatt cogeneration power facility in Michigan. Development of this project
began in September 1993 when the Company and its joint venture partner (the
"Michigan Partnership") purchased from another developer a power sales agreement
with Consumers Power Company providing for the sale of up to 65 megawatts of
electric power. In July 1994, the Michigan Partnership joined with Consumers
Power Company to terminate the power sales agreement pursuant to terms under
which the Partnership received $29.9 million. The Company, which owns a 50%
interest in the Michigan Partnership, recognized its share of the Michigan
Partnership's net income of $22.9 million for the year ended June 30, 1995,
which was comprised solely of the proceeds received from this transaction net of
project development costs. The Company recorded the $10.2 million gain from this
transaction, which consisted of the Company's share of the net income of the
Michigan Partnership net of corporate incentive compensation costs related to
the transaction, as equity in net income of affiliates in the accompanying
consolidated statement of operations for the year ended June 30, 1995. The
Michigan Partnership was dissolved in June 1996.
GREENHOUSES
The Company has entered into an agreement with Agro Power Development,
Inc., a developer and operator of greenhouse facilities, to make investments in
partnerships which develop, construct and operate greenhouses which produce
tomatoes. As of December 31, 1997, the Company held a 50% interest in four
limited partnerships which had a combined 107 acres of production capacity in
operation. The Company is accounting for its investment in these partnerships
under the equity method. The Company recognized approximately $1,710,000 in
equity losses and $444,000 in equity income from affiliates in the accompanying
consolidated statements of operations for the six-month period ended December
31, 1997 and the year ended June 30, 1997, respectively, related to its
investments in these partnerships.
6. LONG-TERM DEBT
The following long-term debt was outstanding as of December 31, 1997,
June 30, 1997, and June 30, 1996, respectively (dollars in thousands):
<TABLE>
<CAPTION>
December June June
31, 1997 30, 1997 30, 1996
--------- ---------- ---------
<S> <C> <C> <C>
Project Financing Debt:
HOPEWELL FACILITY:
As of December 31, 1997 and June 30, 1997 - Note
payable to banks;
As of June 30, 1996 - commercial paper notes
payable, net of unamortized issue
discount of $87 $ 45,417 $ 49,513 $ 42,403
PORTSMOUTH FACILITY:
Note payable to banks 61,489 60,500 68,250
ROCKY MOUNT FACILITY:
Note payable to financial institution 125,761 126,409 127,576
RINGGOLD FACILITY:
Note payable to banks 15,737 16,900 18,799
RICHMOND FACILITY:
Commercial paper notes payable, net of unamortized
issue discount of $365, $409 and $319,
respectively, and tax-exempt bonds 198,113 203,651 214,379
ELIZABETHTOWN, LUMBERTON AND KENANSVILLE FACILITIES:
Notes payable to banks 26,716 31,688 44,464
ROXBORO AND SOUTHPORT FACILITIES:
Note payable to banks 93,036 102,074 99,750
OTHER 1,436 958 967
--------- --------- ---------
Total Long-Term Debt 567,705 591,693 616,588
Less: Current portion (74,680) (62,370) (48,416)
--------- --------- ---------
Long-term portion $ 493,025 $ 529,323 $ 568,172
========= ========= =========
</TABLE>
F-43
<PAGE> 174
Information related to each of these borrowings is as follows:
HOPEWELL FACILITY:
In July 1996, the Hopewell Facility's project debt agreement
was amended, which effectively replaced commercial paper notes with a
note payable to banks and resulted in a $13,000,000 increase in the
amount of outstanding indebtedness. The amended project debt accrues
interest at an annual rate equal to the applicable London Interbank
Offering Rate ("LIBOR") as chosen by the Company, plus .875% per annum
through July 1999 and 1.125% thereafter (6.81% at December 31, 1997).
Principal is payable quarterly with interest payable the earlier of the
maturity of the applicable LIBOR term or quarterly through June 2002.
The Hopewell Facility's project debt agreement was amended in February
1998 (see Note 13).
PORTSMOUTH FACILITY:
The Portsmouth Facility's project debt agreement was amended
in December 1997, resulting in the extension of the final maturity of
the loan by three months to December 31, 2002. The amended terms of the
loan agreement also increased the outstanding credit commitment from
the project lenders by $40.5 million in the form of a revolving credit
facility. As of December 31, 1997, there were no outstanding balances
under this credit facility. The amended terms of the loan agreement
provide for interest to accrue at an annual rate equal to the
applicable LIBOR rate, as chosen by the Company, plus an additional
margin of .875% through December 1998 and 1.0% thereafter (6.845% at
December 31, 1997). The banks' outstanding credit commitment under the
loan agreement is reduced quarterly, with interest payable the earlier
of the maturity of the applicable LIBOR term or quarterly through
December 2002. The loan agreement also provides for a $6 million letter
of credit to secure the project's obligations to pay debt service.
Cogentrix Energy, Inc. has indemnified the lenders of the senior credit
facility for any cash deficits the Portsmouth Facility could experience
as a result of incurring certain costs, subject to a cap of $30
million.
An extraordinary loss of $2,458,000 was recorded in the
six-month period ended December 31, 1997 related to the write-off of
unamortized deferred financing costs from the original senior loan of
$1,395,000 and net swap termination fees of $1,063,000 related to
interest rate swap agreements hedging the original project debt. This
extraordinary loss is shown net of a tax benefit of $956,000 in the
accompanying consolidated statements of operations.
ROCKY MOUNT FACILITY:
The note payable to financial institution consists of a
$125,761,000 senior loan which accrues interest at a fixed annual rate
of 7.58%. Payment of principal and interest is due quarterly through
December 2013.
RINGGOLD FACILITY:
The note payable to banks consists of a $15,737,000 senior
loan which accrues interest at an annual rate equal to the applicable
LIBOR rate, as chosen by the Company, plus .95% to 1.35% per annum
(6.9% at December 31, 1997). Interest is payable the earlier of the
maturity of the applicable LIBOR term or quarterly in arrears. Payments
of principal under the senior loan are due semiannually through April
2004.
RICHMOND FACILITY:
Commercial paper notes outstanding are supported by an
irrevocable, direct-pay letter of credit provided by a syndicate of
banks (the "Banks"). The maximum amount of commercial paper notes
supported by the letter of credit is $150,114,000 as of December 31,
1997. The annual interest rate incurred is the yield on the commercial
paper notes plus a 1.25% to 1.50% per annum fee (weighted average rate
of 7.17% at December 31, 1997) paid to the Banks for providing the
letter of credit.
Tax-exempt industrial development bonds (the "Bonds") have
been issued to support the purchase of certain pollution control and
solid waste disposal equipment for a Facility ($48,000,000 outstanding
at December 31, 1997). Principal and interest payments on the Bonds are
supported by an irrevocable, direct-pay letter of credit provided by
the Banks. The annual interest rate is the yield on the Bonds plus a
1.25% to 1.50% per annum fee (6.875% at December 31, 1997). The letters
of credit described above are part of one credit facility (the "Credit
Facility"). The Credit Facility provides for commitment reductions
through September 2007.
ELIZABETHTOWN, LUMBERTON AND KENANSVILLE FACILITIES:
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 in September 1996 with the proceeds of a
$39 million senior credit facility and $5.5 million capital
contribution by the Company. 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 (6.94% at December 31, 1997). 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 was recorded in the fiscal year ended June 30, 1997
related to the write-off of unamortized deferred financing costs from
the original senior loan and subordinated credit facility. This
extraordinary loss is shown net of a tax benefit of $470,000 in the
accompanying consolidated statements of operations.
F-44
<PAGE> 175
ROXBORO AND SOUTHPORT FACILITIES:
The project debt agreement for the Roxboro and Southport
Facilities was amended in September 1996, resulting in an $18.4 million
increase in the amount of outstanding indebtedness. The revised 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% thereafter through September 2001 and 1.125%
thereafter (6.94% at December 31, 1997). 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. Cogentrix Energy, Inc. has
indemnified the lenders of the senior credit facility for any cash
deficits the Roxboro and Southport Facilities could experience as a
result of incurring certain costs, subject to a cap of $11.3 million.
INTEREST RATE PROTECTION AGREEMENTS:
The Company has entered into interest rate cap, interest rate
collar and interest rate swap agreements to manage its interest rate
risk on its variable-rate project financing debt. The notional amounts
of debt covered by these agreements as of December 31, 1997 and June
30, 1997 are $259,191,000 and $391,371,000, respectively. The
agreements effectively change the interest rate on the portion of debt
covered by the notional amounts from a weighted average variable rate
of 7.06% to a weighted average effective rate of 7.29% at December 31,
1997. These agreements expire at various dates through July 2006.
The project financing debt is substantially non-recourse to Cogentrix
Delaware Holdings, Inc. The project financing agreements of the subsidiaries
place limitations on the payment of dividends, limit additional indebtedness,
and restrict the sale of assets. The project financing agreements also require
certain cash to be held with a trustee as security for future debt service
payments. In addition, the Facilities, as well as the long-term contracts which
support them, are pledged as collateral for the Company's obligations under the
project financing agreements.
The ability of the project subsidiaries to pay dividends periodically
to Cogentrix Delaware Holdings, 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. Dividends, when permitted, are
declared and paid immediately to Cogentrix Delaware Holdings, Inc. at the end of
such period.
Future maturities of long-term debt at December 31, 1997, net of
unamortized issue discounts on commercial paper notes are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1998 $ 74,680
1999 78,823
2000 81,442
2001 79,099
2002 61,417
Thereafter 192,244
--------
$567,705
========
</TABLE>
Cash paid for interest on the Company's long-term debt amounted to
$25,199,000, $46,358,000, $50,153,000 and $50,852,000 for the six-month period
ended December 31, 1997 and the years ended June 30, 1997, 1996 and 1995,
respectively.
7. INCOME TAXES
The Company files a consolidated federal tax return with the Parent,
but records its income tax provisions on a separate-entity basis for financial
reporting purposes. Deferred income tax assets and liabilities are recognized
for the estimated future income tax effects of temporary differences between the
tax bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets are also established for the estimated future
effect of net operating loss and tax credit carryforwards when it is more likely
than not that such assets will be realized. Deferred taxes are calculated based
on provisions of the enacted tax law.
F-45
<PAGE> 176
The net current and noncurrent components of deferred income taxes
reflected in the accompanying consolidated balance sheets as of December 31,
1997, June 30, 1997 and June 30, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December June June
31, 1997 30, 1997 30, 1996
-------- -------- --------
<S> <C> <C> <C>
Net current deferred tax (asset) liability $ (1,684) $ (1,388) $ 469
Net noncurrent deferred tax liability 80,735 77,485 91,091
-------- -------- -------
Net deferred tax liability $ 79,051 $ 76,097 $91,560
======== ======== =======
</TABLE>
Reconciliations between the federal statutory income tax rate and the
Company's effective income tax rate are as follows:
<TABLE>
<CAPTION>
Six-Month
Period Ended Year Ended June 30,
December --------------------------------
31, 1997 1997 1996 1995
------------ ----- ------ ------
<S> <C> <C> <C> <C>
Federal statutory tax rate 35.0% (35.0)% 35.0% 35.0%
State income taxes, net of loss
carryforwards and federal tax impact 3.3 (5.0) 4.6 4.2
Other 1.3 1.7 .5 (.6)
------ ----- ----- -----
Effective tax rate 39.6% (38.3)% 40.1% 38.6%
====== ===== ===== =====
</TABLE>
Cash paid for income taxes amounted to $1,771,500, $369,000, $26,000
and $64,000 for the six-month period ended December 31, 1997 and the years ended
June 30, 1997, 1996 and 1995, respectively.
8. LOSS ON IMPAIRMENT AND COST OF REMOVAL OF COGENERATION FACILITIES
During the fiscal year ended June 30, 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 that are taking place in the
power generation industry. The analysis included assumptions regarding future
levels of operations, operating costs and market prices for equivalent
generation available from other sources. As a part of this analysis, in
accordance with the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company assessed whether any impairment of the Company's
Facilities had occurred. This assessment included comparing the projected future
cash flows to be provided by these assets to the net book value of such assets.
Based on this assessment, the Company determined that an impairment loss had
occurred on the Elizabethtown, Lumberton, Kenansville and Ringgold Facilities.
This loss on impairment of cogeneration facilities of $57.3 million represents
the excess of the net book value of these cogeneration facilities over their
current fair value, determined by discounting to present value projected future
cash flows to be provided by such assets. The Company believes that its
projections of future cash flows are based upon reasonable assumptions about the
future performance of these assets. Because of the risks and uncertainties
associated with any projections, there can be no assurances, however, that
actual events will be consistent with the assumptions made, and future cash
flows may be greater or less than those projected. The analysis also resulted in
the recognition of an $8.3 million liability related to the Company's estimated
cost of removal obligations under the land leases for the Elizabethtown,
Lumberton and Kenansville Facilities. The total impairment loss and cost of
removal of $65.6 million has been reflected in the accompanying consolidated
statements of operations for the year ended June 30, 1997.
Also in connection with the overall assessment of the post-contract
operating environment for its cogeneration facilities, the Company concluded
that the estimated useful lives of the Elizabethtown, Lumberton, Kenansville,
Roxboro and Southport Facilities should be adjusted to reflect the economic
lives of the plants as determined by the remaining terms of their respective
power purchase agreements. The annual depreciation expense for these five
facilities, in aggregate, increased approximately $6.1 million per year as a
result of the changes in estimated useful lives and the impairment loss
recognized during the fiscal year ended June 30, 1997.
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<PAGE> 177
9. COMMITMENTS AND CONTINGENCIES
Parent Debt Guaranteed by the Cogentrix Delaware Holdings, Inc. --
Cogentrix Delaware Holdings, Inc. has guaranteed all of the Parent's existing
and future senior unsecured debt for borrowed money. This guarantee was given to
the lenders under the Parent's corporate credit facility and terminates, unless
the term of the credit agreement is extended, when the credit agreement for the
corporate credit facility terminates in 2001 (Note 1). The agreement under which
the guarantee was given provides that the terms or provisions of the guarantee
may be waived, amended, supplemented or otherwise modified at any time and from
time to time by Cogentrix Delaware Holdings, Inc. and the agent bank for the
lenders under the credit agreement.
Senior Notes:
On March 15, 1994, the Parent issued $100 million of
registered, unsecured senior notes due 2004 (the "Senior Notes") in a
public debt offering. The Senior Notes were priced at par to yield
8.10%. The Senior Notes require annual sinking fund payments beginning
in March 2001.
Corporate Credit Facility:
In May 1997, the Parent entered into a credit agreement with
Australia and New Zealand Banking Group Limited, as Agent, which
provides for a $50,000,000 revolving credit facility with an initial
term of three years (the "Corporate Credit Facility"). The Corporate
Credit Facility allows for direct advances or the issuance of letters
of credit. As of December 31, 1997, the Parent had no borrowings or
letters of credit outstanding.
Long-Term Contracts -- The Company has several long-term contractual
commitments that comprise a significant portion of its financial obligations.
These contractual commitments with original terms varying in length from 10 to
25 years are the basis for a major portion of the revenue and operating expenses
recognized by the Company and provide for specific services to be provided at
fixed or indexed prices. The major long-term contractual commitments are as
follows:
(i) The Company is required to sell electricity generated by each
Facility to a Utility and the Utility is required to purchase this
electricity at pre-established or annually escalating prices.
(ii) The Company is required to sell and the Steam Purchaser is
required to purchase a minimum amount of process steam from each
Facility for each contract year. The Steam Purchaser is generally
required to purchase its entire steam requirements from the Company.
The purchase price of steam under these contracts escalates annually or
is fixed and determinable during the term of the contracts.
(iii) The Company is obligated to purchase and fuel suppliers are
required to supply all the fuel requirements of each Facility. Fuel
requirements include the quality and estimated quantity of fuel
required to operate each Facility. The price of fuel escalates annually
for the term of each contract. In addition, the Company has
transportation contracts with various entities to deliver the fuel to
each Facility. These contracts also provide for annual escalations
throughout the term of the contracts.
Effective 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 eliminated the purchase options
which the utility held related to the Roxboro and Southport Facilities.
Effective December 1997, the Company amended the power sales agreement
on its Portsmouth Facility. This amendment provided the purchasing utility
additional rights related to the dispatch of the Facility. The terms of the
amended power sales agreement also eliminated Portsmouth's accrued obligation to
return previously disallowed capacity payments to the purchasing utility.
Under terms of contracts with one Utility, the Company is obligated to
pay up to $8,850,000 in liquidated damages to the Utility if two of the
Company's Facilities do not demonstrate certain operating and reliability
standards. A bank has issued letters of credit in favor of the Utility which
secure the Company's obligations to the Utility under this provision of the
contracts.
Under certain contracts with one Utility, the Utility is permitted,
subsequent to the maturity date of the original project financing debt, to
reduce future payments or recover certain payments previously made in the event
that a state utility commission prohibits the Utility from recovering such
payments made under a power sales agreement.
F-47
<PAGE> 178
Employee Benefit Plans -- The Parent sponsors a defined contribution
401(k) savings plan for its full-time employees. The Company matches employees'
contributions to the plan up to specified limitations. Company contributions to
the plan were $487,000 in the six-month period ended December 31, 1997,
$1,064,000 in the fiscal year ended June 30, 1997, $1,119,000 in fiscal 1996 and
$1,034,000 in fiscal 1995.
Guarantees -- In connection with its substantially non-recourse
project financings and certain other subsidiary contracts, the Parent and a
subsidiary of the Company, Cogentrix, Inc. have expressly undertaken certain
limited obligations and commitments, most of which will only be effective or
will be terminated upon the occurrence of future events. These obligations and
commitments include guarantees by Cogentrix, Inc. of a certain subsidiary's
obligation capped at $1.5 million and certain subsidiaries' performance under
their contracts with one Utility.
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
filed a civil action against certain subsidiaries of the Company. The
arbitration proceeding was completed in October, 1997, with the arbitration
panel denying any recovery to the coal supplier. The coal supplier subsequently
challenged the arbitration panel's ruling. Management believes that the coal
supplier's claims provide no basis by which a court could vacate an arbitration
ruling. With respect to the civil action filed by the other coal supplier,
management believes that there is no basis for certain claims and there are
meritorious defenses as to the remainder. The Company intends to vigorously
defend the pending civil action.
Effective December 1997, the Company amended the power sales agreement
on its Portsmouth facility. Under the amended terms, the purchasing utility has
exercised its right of economic dispatch which has led to significant reductions
in that facility's fuel requirements. In response to the reduced fuel
requirements, the coal supplier for the Portsmouth facility has filed a civil
action against a subsidiary of the Company. Management believes that there is no
basis for certain claims of the coal supplier and there are meritorious defenses
as to the remainder. The Company intends to vigorously defend the pending civil
action.
The Company has established reserves which management believes to be
adequate to cover any costs resulting from these matters. Management believes
that the resolution of these disputes will not have a material adverse impact on
the Company's consolidated financial position or results of operations.
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.
10. FUNDS HELD BY TRUSTEES
The majority of revenue received by the Company is required by the
terms of various credit agreements to be deposited in accounts administered by
certain banks (the "Trustees"). The Trustees invest funds held in these accounts
at the direction of the Company. These accounts are established for the purpose
of depositing all receipts and monitoring all disbursements of each Facility. In
addition, special accounts are established to provide debt service payments and
income taxes. The funds in these accounts are pledged as security under the
project financing agreements of each subsidiary.
Funds held by the Trustees were $42,170,000 at December 31, 1997,
$49,187,000 at June 30, 1997,and $59,287,000 at June 30, 1996. Debt service
account balances are reflected as restricted cash, whereas all other accounts
are classified as cash and cash equivalents in the accompanying consolidated
balance sheets.
F-48
<PAGE> 179
11. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS
The Company invests its temporary cash balances in U.S. government
obligations, corporate obligations and financial instruments of highly-rated
financial institutions. A substantial portion of the Company's accounts
receivable are from two major regulated electric utilities and the associated
credit risks are limited.
The carrying values reflected in the accompanying consolidated balance
sheets at December 31, 1997, June 30, 1997, and June 30, 1996 approximate the
fair values for cash and cash equivalents and variable-rate long-term debt.
Investments in debt securities and certificates of deposit included in
restricted cash, marketable securities and restricted investments are also
reported at fair market value, which approximates cost, at December 31, 1997,
June 30, 1997, and June 30, 1996. The fair value of the Company's fixed-rate
borrowings at December 31, 1997 is $5,594,000 greater than the historical
carrying value of $125,761,000. At June 30, 1997, the fair value of the
Company's fixed-rate borrowings was $1,263,000 lower than the historical
carrying value of $126,409,000, and at June 30, 1996, the fair value of the
Company's fixed-rate borrowings was $1,931,000 lower than the historical
carrying value of $138,018,000. In making such calculations, the Company
utilized credit reviews, quoted market prices and discounted cash flow analyses,
as appropriate.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties to the Company's interest rate protection
agreements (Note 6). The Company does not obtain collateral or other security to
support such agreements but continually monitors its positions with, and the
credit quality of, the counterparties to such agreements. As of December 31,
1997, the gross unrealized loss on the interest rate protection agreements was
$2,670,000. As of June 30, 1997, the gross unrealized gains and losses on the
Company's interest rate protection agreements were $3,130,000 and $2,102,000,
respectively, resulting in an estimated net unrealized gain of $1,028,000, and
as of June 30, 1996, the gross unrealized gains and losses on the Company's
interest rate protection agreements were $4,984,000 and $4,185,000,
respectively, resulting in an estimated net unrealized gain of $799,000.
12. RELATED-PARTY TRANSACTIONS
The Company has had transactions in the normal course of business with
various affiliate corporations including the Parent. The Company had notes
receivable due from affiliates of $44.4 million, $54.7 million and $63.9
million as of December 31, 1997, June 30, 1997 and June 30, 1996, respectively.
These notes accrue interest at the prime rate and principal and interest are
due upon demand. The Company also had note payables due to the Parent of $6.2
million, $.8 million and $.9 million as of December 31, 1997, June 30, 1997 and
June 30, 1996. These notes consist primarily of working capital loans which
accrue interest at the prime rate. Principal and interest of these notes are
due upon demand.
F-49
<PAGE> 180
13. SUBSEQUENT EVENTS
COGENTRIX OF PENNSYLVANIA, INC.
In January 1998, the Company signed an agreement with Pennsylvania
Electric Company ("Penelec") to terminate the Ringgold Facility's power purchase
agreement. This termination agreement was the result of a request for proposals
to buy-back or restructure power sales agreements issued to all operating IPP
projects in Penelec's territory in April 1997. The termination agreement with
Penelec provides for a payment to the Company of approximately $25 million which
will be sufficient to retire all of Cogentrix of Pennsylvania, Inc.'s ("CPA")
outstanding project debt. The buy-back of the power purchase agreement is
subject to the issuance of an order by the Pennsylvania Public Utility
Commission granting Penelec the authority to fully recover from its customers
the consideration paid to CPA under the buyout agreement. Management does not
expect this event to have an adverse impact on the Company's consolidated
results of operations or financial position.
JAMES RIVER COGENERATION COMPANY
Effective February 1998, James River Cogeneration Company ("James
River"), a joint venture owned 50% by the Company, which owns a cogeneration
facility located in Hopewell, Virginia (the "Hopewell Facility"), amended its
power sales agreement with Virginia Power to provide Virginia Power additional
rights related to the dispatch of the Hopewell Facility. In connection with the
amendment of the power sales agreement, the Company amended the terms of the
existing project debt on the Hopewell Facility.
The amended terms of the Hopewell project debt resulted in an extension
of the final maturity of the note payable by six months to December 31, 2002 and
increased outstanding borrowings $34.6 million, the proceeds of which (net of
transaction costs) were paid as a distribution to the James River partners. The
amended note payable accrues interest at an annual rate equal to the applicable
LIBOR rate, as chosen by the Company, plus an additional margin of .875% through
February 1998 and 1.00% thereafter. The amended note payable also provides for a
$5 million letter of credit to secure the project's obligation to pay debt
service. Cogentrix Energy, Inc. has indemnified the lenders of the note payable
for any cash deficits the Hopewell Facility could experience as a result of
incurring certain costs, subject to a cap of $10.6 million. An extraordinary
loss of $2.4 million will be recorded in the first quarter of 1998 related to
the write-off of unamortized deferred financing costs from the original project
debt and a swap termination fee on an interest rate swap agreement hedging the
original project debt.
The pro forma future maturities of long-term debt as of December 31,
1997, excluding unamortized issue discounts on commercial paper notes and the
unamortized balance of the deferred gain on the Senior Notes hedge transaction
and taking into account the amended project debt agreement for the Hopewell
Facility, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
<S> <C>
1998 $ 78,261
1999 85,625
2000 87,663
2001 84,578
2002 73,553
Thereafter 192,608
--------
$602,288
========
</TABLE>
WHITEWATER AND COTTAGE GROVE TRANSACTION
In March 1998, the Company acquired from LS Power Corporation an
approximate 74% ownership interest in two power generation facilities in
Whitewater, Wisconsin (the "Whitewater Facility") and in Cottage Grove,
Minnesota (the "Cottage Grove Facility"). Each of the Cottage Grove and
Whitewater Facilities are 245 megawatt gas-fired, combined-cycle cogeneration
facilities. Commercial operations of the facilities commenced in the last half
of calendar 1997. The Cottage Grove Facility sells capacity and energy to
Northern States Power Company under a 30-year power sales contract terminating
in 2027. The Whitewater Facility sells capacity and energy to Wisconsin Electric
Power Company under a 25-year power sales contract terminating in 2022. The
aggregate acquisition price for the equity interest in the Cottage Grove and
Whitewater Facilities was $158.0 million. In addition, the Company pre-funded a
$16.7 million distribution to the previous owners. This distribution represented
unused construction contingency and cash flows that were accumulated by the
Cottage Grove and Whitewater Facilities prior to January 1, 1998. The Company
will be entitled to a distribution of the $16.7 million in calendar 1998. The
purchase price was funded with proceeds of the Corporate Credit Facility and
corporate cash balances.
BECHTEL ASSET ACQUISITION
In March 1998, the Company signed an agreement with Bechtel Generating
Company, Inc. to acquire an ownership interest in 12 electric generating
facilities, comprising a net equity interest of approximately 360 megawatts, and
one interstate natural gas pipeline in the United States (the "Bechtel Asset
Acquisition"). The closing of the Bechtel Asset Acquisition, which is subject to
customary conditions including the obtaining of certain consents and regulatory
approvals, is currently expected to occur in calendar 1998. Management
anticipates accounting for these investments under the equity method.
In connection with the Bechtel Asset Acquisition, the Parent plans to
issue up to $250 million of senior notes in a Rule 144A offering with a covenant
to register exchange notes with the U.S. Securities and Exchange Commission.
These senior notes will be unsecured and will rank pari passu with the Parent's
$100 million of outstanding Senior Notes due 2004. The proceeds will be used by
the Parent to finance the Bechtel Asset Acquisition and to repay the outstanding
borrowings under the Corporate Credit Facility. Cogentrix Delaware Holdings,
Inc. will be a guarantor of these senior notes in accordance with the terms of
the Corporate Credit Facility (Note 1).
F-50
<PAGE> 181
SCHEDULE I
COGENTRIX DELAWARE HOLDINGS, INC.
CONDENSED BALANCE SHEETS OF REGISTRANT
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
------------ -------------------------
1997 1997 1996
------------ --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,213 $ 36,574 $ 11,751
Marketable securities 42,118 21,494 --
Accounts receivable 756 484 9,254
--------- --------- ---------
Total current assets 93,087 58,552 21,005
--------- --------- ---------
INVESTMENT IN SUBSIDIARIES (ON THE EQUITY METHOD) (45,756) (43,041) 9,792
--------- --------- ---------
OTHER ASSETS:
Restricted investments -- 43,695
Notes receivable from affiliates 79,150 104,031 73,441
Other 6,272 11,694 --
--------- --------- ---------
Total other assets 85,422 115,725 117,136
--------- --------- ---------
Total Assets $ 132,753 $ 131,236 $ 147,933
========= ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 29 $ -- $ --
--------- --------- ---------
Total current liabilities 29 -- --
--------- --------- ---------
LONG-TERM LIABILITIES:
Deferred income taxes 13,830 11,669 7,930
--------- --------- ---------
Total long-term liabilities 13,830 11,669 7,930
--------- --------- ---------
--------- --------- ---------
Total liabilities 13,859 11,669 7,930
--------- --------- ---------
SHAREHOLDER'S EQUITY:
Common Stock 1 1 1
Additional Paid-In Capital 224,069 199,937 157,595
Unrealized gain on available
for sale securities 26 -- --
Accumulated deficit (105,202) (80,371) (17,593)
--------- --------- ---------
Total shareholders' equity 118,894 119,567 140,003
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 132,753 $ 131,236 $ 147,933
========= ========= =========
</TABLE>
F-51
<PAGE> 182
SCHEDULE I
COGENTRIX DELAWARE HOLDINGS, INC.
CONDENSED STATEMENTS OF INCOME OF REGISTRANT
(dollars in thousands)
<TABLE>
<CAPTION>
Six-Month
Period Ended
December 31, For the Years Ended June 30,
------------ ----------------------------------------
1997 1997 1996 1995
------------ -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUE -- -- -- --
-------- -------- -------- --------
OPERATING EXPENSES:
General, administrative and development expenses 87 61 98 928
Total operating expenses 87 61 98 928
-------- -------- -------- --------
OPERATING LOSS (87) (61) (98) (928)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense -- -- (48) --
Investment and other income 5,260 9,821 8,800 7,167
-------- -------- -------- --------
Total other income 5,260 9,821 8,752 7,167
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 5,173 9,760 8,654 6,239
-------- -------- -------- --------
INCOME TAX PROVISION 2,048 3,738 3,470 2,409
EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES 13,663 (17,789) 29,940 34,835
-------- -------- -------- --------
NET INCOME (LOSS) $ 16,788 $(11,767) $ 35,124 $ 38,665
======== ======== ======== ========
</TABLE>
F-52
<PAGE> 183
SCHEDULE I
COGENTRIX DELAWARE HOLDINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS OF REGISTRANT
(dollars in thousands)
<TABLE>
<CAPTION>
Six-month
Period Ended Year Ended June 30,
December --------------------------------------
31, 1997 1997 1996 1995
------------ -------- -------- --------
<S> <C> <C> <C> <C>
NET CASH FLOW PROVIDED BY
OPERATING ACTIVITIES $ 29,620 $ 55,798 $ 47,725 $ 50,793
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in restricted investments -- 43,695 5 (43,700)
(Increase) decrease in marketable securities (20,624) (21,494) 7,467 44,676
Investments in subsidiaries (2,751) (13,917) (28,696) (3,798)
-------- -------- -------- --------
Net cash flows (used in) provided by investing activities (23,375) 8,284 (21,224) (2,822)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in notes receivable from affiliates 24,881 (30,590) (18,500) (47,541)
Contributed capital from Parent 24,132 42,342 37,038 3,950
Dividends paid to Parent (41,619) (51,011) (44,548) (37,952)
-------- -------- -------- --------
Net cash flows provided by (used in) financing activities 7,394 (39,259) (26,010) (81,543)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 13,639 24,823 491 (33,572)
CASH AND CASH EQUIVALENTS, beginning of period 36,574 11,751 11,260 44,832
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 50,213 $ 36,574 $ 11,751 $ 11,260
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - - CASH DIVIDENDS RECEIVED $ 19,129 $ 48,961 $ 44,548 $ 46,277
======== ======== ======== ========
</TABLE>
F-53
<PAGE> 184
SCHEDULE I
COGENTRIX DELAWARE HOLDINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
1. SIGNIFICANT ACCOUNTING POLICIES
Accounting for Subsidiaries -- Cogentrix Delaware Holdings, Inc. (the
Company) has accounted for its investment in and earnings of its subsidiaries on
the equity method in the condensed financial information.
Income Taxes -- The provision for income taxes has been computed based
on the Company's consolidated effective income tax rate.
Change of Fiscal Year -- Effective January 1, 1998, the Company changed
its fiscal year to commence on January 1 and conclude on December 31 of each
year. The Company's fiscal year previously commenced each July 1, concluding on
June 30 of the following calendar year.
2. GUARANTEE OF PARENT DEBT
Cogentrix Delaware Holdings, Inc. has directly guaranteed all
existing and future senior unsecured debt for borrowed money of its parent
company, Cogentrix Energy, Inc. (the Parent). This guarantee, provided for in
the credit agreement for the Parent's corporate credit facility, expires by its
terms in 2001, unless the term of the credit agreement is extended. The
agreement under which the guarantee was given provides that the terms or
provisions of the guarantee may be waived, amended, supplemented or otherwise
modified at any time and from time to time by Cogentrix Delaware Holdings, Inc.
and the agent bank for the lenders under the credit agreement. The following
summary provides information regarding Parent debt.
Senior Notes
On March 15, 1994, the Parent issued $100 million of registered,
unsecured senior notes due 2004 (the "Senior Notes") in a public debt offering.
The Senior Notes were priced at par to yield 8.10%. The Senior Notes require
annual sinking fund payments beginning in March 2001.
Future maturities of long-term debt at December 31, 1997 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
<S> <C>
1998 $ 0
1999 0
2000 0
2001 20,000
2002 20,000
Thereafter 60,000
--------
$100,000
========
</TABLE>
Corporate Credit Facility
In May 1997, the Parent entered into a credit agreement with Australia
and New Zealand Banking Group Limited, as Agent, which provides for a
$50,000,000 revolving credit facility (the "Corporate Credit Facility") with an
initial term of three years (the "Revolving Term"). The Corporate Credit
Facility provides for one-year extensions of the Revolving Term, subject to
lender consent. The Corporate Credit Facility allows for direct advances or the
issuance of letters of credit. As of December 31, 1997, the Parent had no
borrowings or letters of credit outstanding.
F-54
<PAGE> 185
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (Unaudited) and December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,865 $ 63,205
Restricted cash 53,348 25,331
Marketable securities -- 42,118
Accounts receivable 62,729 48,305
Inventories 19,869 15,210
Other current assets 4,889 2,391
----------- ---------
Total current assets 163,700 196,560
NET INVESTMENT IN LEASES 497,966 --
PROPERTY, PLANT AND EQUIPMENT,
Net of accumulated depreciation: September 30, 1998, $214,358;
December 31, 1997, $186,514 477,620 496,183
LAND AND IMPROVEMENTS 2,494 2,540
DEFERRED FINANCING, START-UP AND ORGANIZATION COSTS,
Net of accumulated amortization: September 30, 1998, $11,603;
September 30, 1997, $13,970 28,638 18,876
NATURAL GAS RESERVES 1,748 2,384
INVESTMENTS IN AFFILIATES 72,846 79,072
NOTES RECEIVABLE FROM AFFILIATES 84,966 44,405
OTHER ASSETS 41,106 6,943
----------- ---------
$ 1,371,084 $ 846,963
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 77,641 $ 74,680
Accounts payable 25,998 11,589
Payable to Parent 12,009 5,537
Income taxes payable to Parent 22,979 24,710
Other accrued liabilities 20,497 5,576
----------- ---------
Total current liabilities 159,124 122,092
LONG-TERM DEBT 858,855 493,025
NOTES PAYABLE TO PARENT 5,765 6,233
DEFERRED INCOME TAXES 95,030 80,735
MINORITY INTEREST IN JOINT VENTURE 60,728 15,131
OTHER LONG-TERM LIABILITIES 10,677 10,853
----------- ---------
1,190,179 728,069
----------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock 1 1
Additional paid-in capital 320,497 224,069
Net unrealized gain on available-for-sale securities -- 26
Accumulated deficit (139,593) (105,202)
----------- ---------
180,905 118,894
----------- ---------
$ 1,371,084 $ 846,963
=========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-55
<PAGE> 186
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING REVENUE:
Electric $ 231,200 $ 234,652
Steam 19,325 19,451
Lease revenue 23,567 --
Service revenue under capital leases 25,955 --
Income from unconsolidated investment in power projects 2,626 623
Other 14,344 9,255
--------- ---------
317,017 263,981
--------- ---------
OPERATING EXPENSES:
Fuel expense 62,500 89,960
Operations and maintenance 49,581 52,739
Cost of services under capital leases 29,358 --
General, administrative and development expenses 19,812 18,221
Depreciation and amortization 30,469 30,584
--------- ---------
191,720 191,504
--------- ---------
OPERATING INCOME 125,297 72,477
OTHER INCOME (EXPENSE):
Interest expense (45,437) (34,310)
Investment and other income 5,854 6,993
Equity in net loss of affiliates, net (3,017) (35)
--------- ---------
INCOME BEFORE MINORITY INTEREST IN INCOME OF
JOINT VENTURE, INCOME TAXES AND EXTRAORDINARY LOSS 82,697 45,125
MINORITY INTEREST IN INCOME OF JOINT VENTURE (8,584) (3,764)
--------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 74,113 41,361
PROVISION FOR INCOME TAXES (29,057) (15,653)
--------- ---------
INCOME BEFORE EXTRAORDINARY LOSS 45,056 25,708
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
NET OF INCOME TAX BENEFIT (2,432) (470)
--------- ---------
NET INCOME $ 42,624 $ 25,238
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-56
<PAGE> 187
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 42,624 $ 25,238
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,469 30,584
Decrease in unrealized gain on investments (26) --
Deferred income taxes 14,295 21,024
Extraordinary loss on early extinguishment of debt, non cash portion 2,067 --
Minority interest in income of joint venture, net of dividends (14,933) 2,522
Equity in net loss of unconsolidated affiliates, net of dividends 7,234 (213)
Minimum lease payments received 22,242 --
Amortization of unearned lease income (23,567)
Increase in accounts receivable (4,897) (2,815)
(Increase) decrease in inventories (3,028) 4,067
(Increase) decrease in other assets (9,880) 49
Increase in accounts payable 4,913 3,963
Increase in accrued liabilities 5,171 3,467
Decrease in other liabilities (176) (9,553)
--------- --------
Net cash flows provided by operating activities 72,508 78,333
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment additions (378) (1,464)
Decrease in marketable securities 42,118 6,423
Investments in affiliates (1,007) (53,725)
Acquisition of facilities, net of cash acquired (155,324) --
Decrease in restricted cash 7,797 128
--------- --------
Net cash flows used in investing activities (106,794) (48,638)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable and long-term debt 120,900 2,618
Repayments of notes payable and long-term debt (105,036) (48,656)
Increase in deferred financing costs (1,540) (135)
(Increase) decrease in notes receivable from affiliates (39,791) 932
Capital contributions 96,428 24,172
Common stock dividends paid (77,015) (37,681)
--------- --------
Net cash flows used in financing activities (6,054) (58,750)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (40,340) (29,055)
CASH AND CASH EQUIVALENTS, beginning of period 63,205 65,063
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 22,865 $ 36,008
========= ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-57
<PAGE> 188
COGENTRIX DELAWARE HOLDINGS, 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 Delaware Holdings, Inc. and its wholly-owned
and majority-owned 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 Delaware Holdings, 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, 1998 and for the nine months
ended September 30, 1998 and 1997 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, 1998, and the results of operations for the
nine-month periods ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997. 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.
2. COGENTRIX OF PENNSYLVANIA, INC.
In January 1998, the Company signed an agreement with Pennsylvania Electric
Company ("Penelec") to terminate the Ringgold Facility's power purchase
agreement. This termination agreement was the result of a request for proposals
to buyback or restructure power sales agreements issued to all major operating
independent power producer projects in Penelec's territory in April 1997. The
termination agreement with Penelec provides for a payment to the Company of
approximately $24 million, which will be sufficient to retire all of Cogentrix
of Pennsylvania, Inc.'s ("CPA") outstanding project debt. The buyback of the
power purchase agreement is subject to the issuance of an order (satisfactory to
Penelec) by the Pennsylvania Public Utility Commission granting Penelec the
authority to fully recover from its customers the consideration paid to CPA
under the buyout agreement. Management does not expect the termination of the
Ringgold Facility's power purchase agreement with Penelec, if it occurs, to have
an adverse impact on the Company's consolidated results of operations, cash
flows or financial position.
3. JAMES RIVER COGENERATION COMPANY
Effective February 1998, James River Cogeneration Company ("JRCC"), a joint
venture owned 50% by the Company, which owns a cogeneration facility located in
Hopewell, Virginia (the "Hopewell Facility"), amended its power sales agreement
with Virginia Electric and Power Company ("Virginia Power") to provide Virginia
Power additional rights related to the dispatch of the Hopewell Facility. In
connection with the amendment of the power sales agreement, the Company amended
the terms of the existing project debt on the Hopewell Facility.
F-58
<PAGE> 189
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The amended terms of the JRCC project debt resulted in an extension of the
final maturity of the note payable by six months to December 31, 2002 and an
increase in the amount of outstanding borrowings of $34.6 million, the proceeds
of which (net of transaction costs) were distributed to the JRCC partners. The
amended note payable accrues interest at an annual rate equal to the applicable
LIBOR rate, as chosen by the Company, plus an additional margin of .875% through
February 1999 and 1.00% thereafter. The amended credit facility also provides
for a $5 million letter of credit to secure the project's obligation to pay debt
service. An extraordinary loss of $2.4 million was recorded in the first quarter
of 1998 related to the write-off of unamortized deferred financing costs from
the original project debt and a swap termination fee on an interest rate swap
agreement hedging the original project debt.
4. WHITEWATER AND COTTAGE GROVE ACQUISITION
In March 1998, the Company acquired from LS Power Corporation (the "LS
Power Acquisition") an approximate 74% ownership interest in two partnerships
which own and operate electric generating facilities located in Whitewater,
Wisconsin, (the "Whitewater Facility") and Cottage Grove, Minnesota (the
"Cottage Grove Facility"). Each of the Cottage Grove and Whitewater Facilities
is a 245-megawatt gas-fired, combined-cycle cogeneration facility. Commercial
operations of both of these facilities commenced in the last half of calendar
1997. The Cottage Grove Facility sells capacity and energy to Northern States
Power Company under a 30-year power sales contract terminating in 2027. The
Whitewater Facility sells capacity and energy to Wisconsin Electric Power
Company under a 25-year power sales contract terminating in 2022. Each of the
power sales contracts has characteristics similar to a lease in that the
agreement gives the purchasing utility the right to use specific property, plant
and equipment. As such, each of the power sales contracts is accounted for as a
"sales-type" capital lease in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13, "Accounting for Leases."
The aggregate acquisition price for the equity interests in the Cottage
Grove and Whitewater Facilities acquired by the Company was $158.0 million. In
addition, the Company pre-funded a $16.7 million distribution to the previous
owners, which represented unused construction contingency and cash flows that
were accumulated by the Cottage Grove and Whitewater Facilities prior to January
1, 1998. The Company received $15.7 million of this distribution in April 1998
and expects to receive a distribution of the remaining $1 million in calendar
1998.
The Company accounted for the LS Power Acquisition using the purchase
method of accounting. The purchase price has been allocated to the assets and
liabilities acquired based on their fair market values at the date of
consummation. An adjustment in the amount of $22.2 million was recorded to
reflect the Company's portion of the excess of the fair value of the
Partnerships' fixed rate debt over its historical carrying value. This Fair
Value adjustment or "debt premium", will be amortized to income over the life of
the debt acquired using the effective interest method. The historical book
values of the remaining assets and liabilities approximated their fair values at
the date of consummation. The excess of the purchase price over the fair value
of the net assets acquired of approximately $27.7 million has been recorded as
goodwill. Goodwill is being amortized on a straight-line basis over the lives of
the PPAs for the two facilities. The minority owner's share of each
partnership's net assets is included in "minority interests" on the accompanying
consolidated balance sheet as of September 30, 1998. The accompanying
consolidated statement of income for the nine months ended September 30, 1998
include the results of operations of the acquired facilities since the closing
date of the LS Power Acquisition (March 20, 1998).
F-59
<PAGE> 190
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma consolidated results for the Company for
the nine months ended September 30, 1998 give effect to the LS Power Acquisition
as if the transaction had occurred on January 1, 1998 (in thousands, expect per
share amount).
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
<S> <C>
Revenues................................................ $336,427
Net Income.............................................. $ 42,731
</TABLE>
5. BECHTEL ASSET ACQUISITION
In October 1998, the Company acquired from Bechtel Generating Company, Inc.
("BGCI") ownership interests in 12 electric generating facilities, comprising a
net equity interest of approximately 365 megawatts, and one interstate natural
gas pipeline in the United States (the "BGCI Acquisition"). The aggregate
acquisition price, including acquisition costs, for the equity interests in the
BGCI assets was approximately $189.9 million. The BGCI Acquisition will be
accounted for using the purchase method of accounting. Management will account
for each of the underlying projects using the equity method.
In connection with the BGCI Acquisition, Cogentrix Energy, Inc. (the
"Parent") issued $220 million of senior notes due 2008 in a Rule 144A offering
(the "2008 Senior Notes") with a covenant to register exchange notes with the
U.S. Securities and Exchange Commission. These senior notes are unsecured and
rank pari passu with the Parent's $100 million of outstanding senior notes due
2004 (the "2004 Senior Notes"). Cogentrix Delaware Holdings, Inc. will be a
guarantor of the 2008 Senior Notes pursuant to the terms of the Parent's
corporate credit facility.
6. BATESVILLE FACILITY ACQUISITION
In August 1998, the Company acquired an approximate 52% interest in an
800-megawatt, gas-fired electric generating facility (the "Batesville Facility")
under construction in Batesville, Mississippi (the "Batesville Acquisition").
The Company has committed to provide an equity contribution to the project
subsidiary of approximately $54 million upon the earliest to occur of (i) the
incurrence of construction costs after all project financing has been expended,
(ii) an event of default under the project subsidiary's financing arrangements
and (iii) June 30, 2001. This equity commitment is supported by a $54 million
letter of credit provided under the Parent's corporate credit facility. The
Company expects the Batesville Facility, which will be operated by the Company,
to commence commercial operation in June 2000. Electricity generated by the
Batesville Facility will be sold under long-term power purchase agreements with
two investment-grade utilities.
7. 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 filed a civil action against certain
subsidiaries of the Company. The arbitration proceeding was completed in October
1997, with the arbitration panel denying any recovery to the coal supplier. The
coal supplier subsequently challenged the arbitration panel's ruling on grounds
of partiality by the neutral arbitrator. On April 15, 1998, the federal district
court issued an order vacating the arbitration award and directing a new
arbitration be conducted. The Company has appealed this decision to the United
States Court of Appeals for the Fourth Circuit. The Company believes that the
district court action was in error, that the arbitration award is valid and will
be
F-60
<PAGE> 191
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
upheld on appeal. With respect to the civil action filed by the other coal
supplier, one count has been dismissed with prejudice and the court has directed
the remaining claim be resolved by arbitration conducted in Charlotte, North
Carolina. The Company intends to vigorously contest the arbitration and is
confident it will prevail.
Effective December 1997, the Company amended the power sales agreement on
its Portsmouth Facility. Under the amended terms, the purchasing utility has
exercised its right of economic dispatch which has led to significant reductions
in that facility's fuel requirements. In response to the reduced fuel
requirements, the coal supplier for the Portsmouth Facility filed a civil action
in federal district court against a subsidiary of the Company. Upon motion by
the Company, the court has stayed the action pending arbitration of the claims
in Charlotte, North Carolina. The Company intends to vigorously contest the
claims in arbitration and is confident it will prevail.
The Company has established reserves which management believes to be
adequate to cover any costs resulting from these matters. Management believes
that the resolution of these disputes will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheets as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized in current earnings unless specified hedge
accounting criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
Early adoption is allowed. SFAS No. 133 must be applied to derivative
instruments and certain derivative instruments embedded in hybrid contracts that
were issued, acquired, or substantively modified after December 31, 1997.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
the consolidated financial statements and has not determined the timing or
method of adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
In April 1998, the American Institute of Certified Public Accounts
("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs
of Start-Up Activities" which is effective for financial statements for fiscal
years beginning after December 15, 1998. SOP No. 98-5 requires costs incurred
for start-up activities to be expensed as incurred. For purposes of this SOP,
start-up activities are defined broadly as those one-time activities related to
opening a new facility, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, or commencing a new operation. Start-up activities
include activities related to organizing a new entity (commonly referred to as
organization costs). The Company will adopt SOP No. 98-5 as of January 1, 1999.
The Company has determined that SOP No. 98-5 will not have a material impact on
the consolidated financial statements for the project subsidiaries the Company
controls.
9. SALES TYPE CAPITAL LEASE
The power purchase agreements acquired by the Company as a result of the LS
Power Acquisition have characteristics similar to leases in that the agreements
confer to the purchasing utility the right to use specific
F-61
<PAGE> 192
COGENTRIX DELAWARE HOLDINGS, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
property, plant and equipment. At the commercial operations date, the
partnerships accounted for the power purchase agreements as "sales-type" capital
leases in accordance with Statement of Financial Accounting Standards (SFAS) No.
13, "Accounting for Leases".
Upon the commercial operations dates of the Cottage Grove and Whitewater
Facilities, the partnerships acquired by the Company recognized a gain on sales
type lease of approximately $184.1 million reflecting the difference between the
estimated fair market value ($495.3 million) and the historical cost ($311.2
million).
The components of the net investment in the leases at September 30, 1998
are as follows (dollars in thousands):
<TABLE>
<S> <C>
Gross Investment in Leases $1,192,408
Unearned Income on Leases (674,442)
----------
Net Investment in Leases $ 497,966
==========
</TABLE>
Gross investment in leases represent total capacity payments receivable
over the term of the power purchase agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
Estimated minimum lease payments over the remaining term of the power
purchase agreements as of December 31, 1997, are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 42,001
1999........................................................ 43,119
2000........................................................ 45,176
2001........................................................ 45,190
2002........................................................ 47,249
Thereafter.................................................. 960,169
----------
Total............................................. $1,182,904
==========
</TABLE>
F-62
<PAGE> 193
INDEX TO
HISTORICAL FINANCIAL STATEMENTS OF RECENT ACQUISITIONS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
LS POWER ACQUISITION
I. LSP-Cottage Grove, L.P.
Financial Statements as of September 30, 1998 (unaudited),
December 31, 1997 and 1996 and for the Nine-Month Periods
Ended September 30, 1998 (unaudited) and 1997 (unaudited)
and for the Years Ended December 31, 1997, 1996, and 1995... F-66
II. LSP-Whitewater Limited Partnership
Financial Statements as of September 30, 1998 (unaudited),
December 31, 1997 and 1996 and for the Nine-Month Periods
Ended September 30, 1998 (unaudited) and 1997 (unaudited)
and for the Years Ended December 31, 1997, 1996 and 1995.... F-81
BGCI ACQUISITION
I. Logan Generating Company, L.P., Keystone Urban Renewal
Limited Partnership, Northampton Generating Company L.P. and
Subsidiaries, Chambers Cogeneration Limited Partnership, and
Scrubgrass Generating Company, L.P. and Subsidiaries
Combined Financial Statements as of September 30, 1998
(unaudited), December 31, 1997 and 1996 and for the
Nine-Month Periods Ended September 30, 1998 (unaudited) and
1997 (unaudited) and for the Years Ended December 31, 1997,
1996 and 1995............................................... F-96
II. Birch Power Corporation, Cedar Power Corporation, Hickory
Power Corporation, Palm Power Corporation, and Panther Creek
Leasing, Inc.
Combined Financial Statements as of September 30, 1998
(unaudited), December 31, 1997 and 1996 and for the
Nine-Month Period Ended September 30, 1998 (unaudited) and
for the Years Ended December 31, 1997, 1996 and 1995........ F-122
III. Indiantown Cogeneration, L.P., Cedar Bay Generating Company,
L.P.
Combined Financial Statements as of September 30, 1998
(unaudited), December 31, 1997 and 1996 and for the
Nine-Month Periods Ended September 30, 1998 (unaudited) and
1997 (unaudited) and for the Years Ended December 31, 1997,
1996 and 1995............................................... F-132
IV. J. Makowski Company, Inc.
Consolidated Financial Statements as of September 30, 1998
(unaudited), December 31, 1997 and 1996 and for the
Nine-Month Periods Ended September 30, 1998 (unaudited) and
1997 (unaudited) and for the Years Ended December 31, 1997,
1996 and 1995............................................... F-151
V. Selkirk Cogen Partners L.P., Mass Power
Combined Financial Statements as of September 30, 1998
(unaudited), December 31, 1997 and 1996 and for the Nine
Months Ended September 30, 1998 (unaudited) and 1997
(unaudited) and for the Years Ended December 31, 1997, 1996
and 1995.................................................... F-172
</TABLE>
F-63
<PAGE> 194
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Partners
LSP-Cottage Grove, L.P.:
We have audited the accompanying balance sheet of LSP-Cottage Grove, L.P.
(a Delaware limited partnership) as of December 31, 1997 and the related
statements of income, changes in partners' capital, and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the financial position of LSP-Cottage Grove, L.P. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
April 9, 1998.
F-64
<PAGE> 195
INDEPENDENT AUDITORS' REPORT
The Partners
LSP-Cottage Grove, L.P.:
We have audited the accompanying balance sheet of LSP-Cottage Grove, L.P.
as of December 31, 1996, and the related statements of income, changes in
partners' capital and cash flows for each of the years in the two-year period
ended December 31, 1996. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LSP-Cottage Grove, L.P. as
of December 31, 1996, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 1996, in conformity
with generally accepted accounting principles.
KPMG LLP
Billings, Montana,
February 13, 1997.
F-65
<PAGE> 196
LSP-COTTAGE GROVE, L.P.
BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1998 1997 1996
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 516 $ 8,816 $ 103
Restricted cash........................................ 17,764 11,475 28,108
Accounts receivable -- trade........................... 4,892 4,598 0
Accounts receivable -- other........................... -- 3,012 0
Fuel inventories....................................... 1,776 1,869 0
Spare parts inventories................................ 317 443 0
Other current assets................................... 121 53 0
-------- -------- --------
Total current assets........................... 25,386 30,266 28,211
-------- -------- --------
Net investment in lease (Notes 2 and 6).................. 235,170 234,034 0
Construction in process.................................. -- 0 125,597
Debt issuance and financing costs, net of accumulated
amortization of $801 (unaudited), $605 and $348........ 6,321 6,517 6,774
Investment in unconsolidated affiliate................... 1 1 1
-------- -------- --------
Total assets................................... $266,878 $270,818 $160,583
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable....................................... $ 5,965 $ 8,360 $ 5,582
Accrued expenses....................................... 4,818 72 0
-------- -------- --------
Total current liabilities...................... 10,783 8,432 5,582
First Mortgage Bonds payable............................. 155,000 155,000 155,000
-------- -------- --------
Total liabilities.............................. 165,783 165,783 160,582
Commitments and contingencies (Note 11)
Partners' capital........................................ 101,095 107,386 1
-------- -------- --------
Total liabilities and partners' capital........ $266,878 $270,818 $160,583
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-66
<PAGE> 197
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF INCOME
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------
1998 1997 1997 1996 1995
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Lease revenue....................... $15,842 $ 0 $ 5,265 $ 0 $ 0
Service revenue..................... 15,296 0 4,879 0 0
Other............................... 3,054 0 594 0 0
------- ------- ------- ------- -------
34,192 0 10,738 0 0
------- ------- ------- ------- -------
Operating expenses:
Cost of services.................... 19,577 0 5,851 0 0
------- ------- ------- ------- -------
Operating income...................... 14,615 0 4,887 0 0
Non-operating income (expense):
Gain on sales-type capital lease.... 0 0 87,056 0 0
Interest expense.................... (9,239) 0 (3,087) 0 0
Interest income..................... 861 0 362 0 0
------- ------- ------- ------- -------
Net income............................ $ 6,237 $ 0 $89,218 $ 0 $ 0
======= ======= ======= ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-67
<PAGE> 198
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
-------------- ------- --------
<S> <C> <C> <C>
Capital contributions at inception.......................... $ 1 $ 0 $ 1
-------- ---- --------
Balance, December 31, 1995 and 1996......................... 1 0 1
Capital contributions....................................... 18,167 0 18,167
Net income.................................................. 88,326 892 89,218
-------- ---- --------
Balance, December 31, 1997.................................. 106,494 892 107,386
Partner distributions....................................... (12,486) (42) (12,528)
Net income.................................................. 6,175 62 6,237
-------- ---- --------
Balance, September 30, 1998 (unaudited)..................... $100,183 $912 $101,095
======== ==== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-68
<PAGE> 199
LSP-COTTAGE GROVE, L.P.
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- --------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................. $ 6,237 $ 0 $ 89,218 $ 0 $ 0
Adjustments to reconcile net income to net
cash used in operating activities
Gain on sales-type capital lease........... 0 0 (87,056) 0 0
Amortization of unearned lease income...... (15,842) 0 (5,265) 0 0
Amortization of debt issuance and financing
costs.................................... 196 0 66 0 0
Minimum lease payments received............ 14,706 0 4,866 0 0
(Increase) decrease in accounts
receivable -- trade...................... 2,718 0 (4,598) 0 0
(Increase) decrease in fuel inventories.... 93 0 (1,648) 0 0
(Increase) decrease in spare parts
inventories.............................. 126 0 (134) 0 0
Increase in other current assets........... (68) 0 (53) 0 0
Increase (decrease) in accounts payable.... (2,395) 0 2,032 0 0
Increase in accrued expenses............... 4,746 0 72 0 0
-------- -------- --------- -------- ---------
Cash provided by (used in) operating
activities................................. 10,517 0 (2,500) 0 0
-------- -------- --------- -------- ---------
Cash Flows from Investing Activities:
Acquisition of land and improvements....... 0 0 0 0 (97)
Payments on construction in process........ 0 (25,339) (24,771) (87,157) (40,289)
Investments held by Trustee................ 0 (18,167) (18,167) 0 (155,000)
Investments drawn.......................... 0 25,607 35,984 87,358 47,410
Investment in Funding...................... 0 0 0 0 (1)
Increase in restricted cash................ (6,289) 0 0 0 0
-------- -------- --------- -------- ---------
Cash provided by (used in) investing
activities................................. (6,289) (17,899) (6,954) 201 (147,977)
-------- -------- --------- -------- ---------
Cash Flows from Financing Activities:
Debt issuance and financing costs.......... 0 0 0 (153) (6,969)
Proceeds from First Mortgage Bonds......... 0 0 0 0 155,000
Capital contributions...................... 0 18,167 18,167 0 0
Partner distributions...................... (12,528) 0 0 0 0
-------- -------- --------- -------- ---------
Cash provided by (used in) financing
activities................................. (12,528) 18,167 18,167 (153) 148,031
-------- -------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents................................ (8,300) 268 8,713 48 54
Cash and cash equivalents, beginning of
period..................................... 8,816 103 103 55 1
-------- -------- --------- -------- ---------
Cash and cash equivalents, end of period..... $ 516 $ 371 $ 8,816 $ 103 $ 55
======== ======== ========= ======== =========
RECONCILIATION OF CHANGES IN CONSTRUCTION IN
PROCESS
Decrease (increase) in total construction in
process.................................... 0 $(21,979) $ 125,499 $(82,877) $ (42,622)
Construction in process sold in lease
transaction................................ 0 0 (146,481) 0 0
Amortization of debt issuance and financing
costs...................................... 0 191 191 239 109
Interest income on investments held by
Trustee.................................... 0 (1,181) (1,184) (4,163) (3,713)
Increase in accounts receivable -- other..... 0 (4,851) (3,012) 0 0
Decrease (increase) in other current
assets..................................... 0 0 0 13 (13)
Increase in fuel inventories................. 0 0 (221) 0 0
Increase in spare parts inventories.......... 0 0 (309) 0 0
Pre-operation cash receipts.................. 0 (5,023) 0 0 0
Increase in interest payable................. 0 3,021 0 0 0
Increase (decrease) in accounts payable...... 0 4,483 746 (369) 5,950
-------- -------- --------- -------- ---------
Payments on construction in process.......... $ 0 $(25,339) $ (24,771) $(87,157) $ (40,289)
======== ======== ========= ======== =========
Supplemental disclosure of cash flow
information:
Cash paid for interest during the year....... $ 12,085 $ 12,085 $ 6,043
========= ======== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-69
<PAGE> 200
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
LSP-Cottage Grove, L.P. (the "Partnership") is a Delaware limited
partnership that was formed on December 14, 1993 to develop, finance, construct
and own a gas fired cogeneration facility with a design capacity of
approximately 245 megawatts located in Cottage Grove, Minnesota (the
"Facility"). Construction and start-up of the Facility was substantially
completed and commercial operation commenced October 1, 1997 (the "Commercial
Operations Date"). As of December 31, 1997, the 1% general partner of the
Partnership was LSP-Cottage Grove, Inc., a wholly owned subsidiary of Granite
Power Partners, L.P., a Delaware limited partnership ("Granite"). Granite and
TPC Cottage Grove, Inc., a Delaware corporation ("TPC"), were the sole limited
partners of the Partnership, owning approximately 72% and 27% limited
partnership interests, respectively. The general partner of Granite is LS Power
Corporation ("LS Power"), a Delaware corporation. See Note 15 for discussion of
a change in ownership which occurred on March 20, 1998.
The Partnership holds a 50% equity ownership interest in LS Power Funding
Corporation ("Funding"), which was established on June 23, 1995 as a special
purpose funding corporation to issue debt securities (the "Senior Secured
Bonds") in connection with financing construction of the Facility and a similar
gas fired cogeneration facility located in Whitewater, Wisconsin (the
"Whitewater Facility"). On June 30, 1995, a portion of the proceeds from the
offering and sale of the Senior Secured Bonds issued by Funding was used to
purchase $155 million of First Mortgage Bonds issued simultaneously by the
Partnership.
All of the electric capacity and energy generated by the Facility is sold
to Northern States Power Company ("NSP" or, as the context requires, the
"Utility") under a 30-year power purchase agreement (the "Power Purchase
Agreement"). The thermal energy generated by the Facility is sold in the form of
steam to Minnesota Mining and Manufacturing Company ("3M" or, as the context
requires, the "Steam Purchaser") under a 30-year thermal energy sales agreement
(the "Steam Supply Agreement").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The financial statements as of September 30, 1998 and for the periods ended
September 30, 1998 and 1997 are unaudited and are presented pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the accompanying financial statements reflect all adjustments
(which are of normal recurring nature) necessary to present fairly the financial
position and results of operations and cash flows for the interim periods, but
are not necessarily indicative of the results of operations for a full fiscal
year.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include unrestricted
short-term investments with original maturities of three months or less.
RESTRICTED INVESTMENTS
Restricted Investments represent overnight repurchase obligations secured
by U.S. Treasury notes. These investments are carried at cost, which
approximated market at December 31, 1997 and 1996. Amounts held by the trustee
under the trust indenture for the First Mortgage Bonds (the "Trustee") in
accounts designated for debt service, major maintenance and construction, which
might otherwise be considered cash equivalents, are treated as restricted
investments.
F-70
<PAGE> 201
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMMENCEMENT OF POWER PURCHASE AGREEMENT
The Power Purchase Agreement described in Note 11 has characteristics
similar to a lease in that the agreement confers to the purchasing utility the
right to use specific property, plant and equipment. At the Commercial
Operations Date, the Partnership accounted for the Power Purchase Agreement as a
"sales-type" capital lease in accordance with Statement of Financial Accounting
Standards (SFAS) No. 13, "Accounting for Leases" (see Note 6).
CONSTRUCTION IN PROCESS
Prior to commercial operation, all costs incurred to develop and construct
the Facility, including net costs associated with performance testing prior to
the Commercial Operation Date, as well as interest costs (including amortization
of debt issuance and financing costs), net of interest income on excess
proceeds, were capitalized and classified as construction in process.
In recording the Partnership's gain on sales-type capital lease, all
construction in process costs were included in the historical cost basis of the
Facility. All interest costs subsequent to the Commercial Operations Date have
been charged to expense. As of December 31, 1996, capitalized interest including
amortization of debt issuance and financing costs was $10,600,000, ($10,251,000,
before amortization).
DEBT ISSUANCE AND FINANCING COSTS
Debt issuance and other financing costs are deferred and amortized over the
term of the related debt. Amortization of deferred financing costs was
capitalized as part of construction in process prior to commercial operations
and is included in interest expense subsequent to commercial operations in the
accompanying financial statements.
CURRENT LIABILITIES
As of December 31, 1997 and 1996, $6,328,000 and $5,582,000 of current
liabilities were considered project costs and were eligible for payment from
funds held by the Trustee included in restricted investments in the accompanying
balance sheets.
LEASE REVENUE
Lease revenue represents the amortization of unearned income on lease using
the effective interest rate method as well as contingent rentals that result
from changes in payment escalators occurring subsequent to the Commercial
Operations Date. These contingent rentals are not expected to materially change
the lease revenue recognized over the life of the Power Purchase Agreement.
SERVICE REVENUE
Service revenue represents reimbursement to the Partnership of costs
incurred to operate the Facility and to provide variable electric energy to the
Utility and thermal energy to the Steam Purchaser.
OTHER REVENUES
Other revenues consist primarily of commodity sales of excess natural gas
fuel inventory, including amounts remarketed directly to third parties.
COST OF SERVICES
Cost of services represent expenses related to operating the Facility and
providing variable electric energy to the Utility as well as thermal energy to
the Steam Purchaser.
F-71
<PAGE> 202
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Under current tax laws, income or loss of partnerships is included in the
income tax returns of the partners. Accordingly, the Partnership makes no
provision for federal and state income taxes. The tax returns of the Partnership
are subject to examination by federal and state taxing authorities. If such
examinations occur and result in changes with respect to the Partnership
qualification, or in changes in distributable partnership income or loss, the
tax liability of the partners would be changed accordingly.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This pronouncement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. This statement will be adopted by the
Partnership effective January 1, 1998. The Partnership believes this
pronouncement will not have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This pronouncement
establishes standards for reporting information about operating segments in
annual and interim financial statements. SFAS No. 131 will be adopted by the
Partnership effective January 1, 1998. The Partnership believes this
pronouncement will not have a material effect on its financial statements.
3. ACCOUNTS RECEIVABLE -- OTHER
Accounts Receivable-Other represents amounts due from Westinghouse Electric
Corporation ("Westinghouse Electric"), the Partnership's construction
contractor, for delay liquidated damages and extension fees due as a result of
Westinghouse Electric's failure to complete the construction and start-up of the
Facility by May 31, 1997. Such liquidated damages and extension fees were
capitalized as a reduction of construction in process.
4. FUEL INVENTORIES
Fuel inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Natural Gas................................................. $1,490 $0
Fuel Oil.................................................... 379 0
------ --
$1,869 $0
====== ==
</TABLE>
Natural Gas is stated at weighted average cost and fuel oil is stated at
cost based on the first-in first-out method.
F-72
<PAGE> 203
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. RESTRICTED INVESTMENTS
Restricted investments consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Overnight repurchase obligations............................ $19,908 $28,108
Less: Unrestricted accounts................................. (8,433) 0
------- -------
Restricted accounts......................................... $11,475 $28,108
======= =======
</TABLE>
Overnight repurchase obligations are secured by U.S. Treasury notes. The
majority of revenue received by the Partnership is required to be deposited into
accounts administered by the Trustee. The Trustee invests funds held in these
accounts at the direction of the Partnership. These accounts are established for
the purpose of depositing all receipts and monitoring all disbursements of the
Partnership. In addition, special accounts are established to provide for debt
service reserves and payments and major maintenance reserves. The use of funds
held by the Trustee prior to the Commercial Operations Date was restricted to
payment of project costs, including payment of interest on the First Mortgage
Bonds. Debt service reserves, major maintenance reserves and construction fund
account balances are reflected as restricted investments, whereas all other
account balances are classified as cash and cash equivalents in the accompanying
balance sheets.
6. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Facility, the Partnership
recognized a gain on sales-type capital lease of $87.1 million reflecting the
difference between the estimated fair market value ($233.6 million) and the
historical cost ($146.5 million) of the Facility. The interest rate implicit in
the lease is 9.01%. The estimated residual value of the Facility at the end of
the lease term is $0. The components of the net investment in lease at December
31, 1997, are as follows (dollars in thousands):
<TABLE>
<S> <C>
Gross Investment in Lease................................... $ 567,415
Unearned Income on Lease.................................... (333,381)
---------
Net Investment in Lease..................................... $ 234,034
=========
</TABLE>
Gross investment in lease represents total capacity payments receivable
over the life of the Power Purchase Agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
Estimated minimum lease payments over the remaining term of the Power
Purchase Agreement as of December 31, 1997, are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 19,609
1999........................................................ 20,175
2000........................................................ 21,140
2001........................................................ 21,058
2002........................................................ 22,109
Thereafter.................................................. 463,324
--------
Total............................................. $567,415
========
</TABLE>
F-73
<PAGE> 204
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investment in unconsolidated affiliate represents the Partnership's 50%
ownership interest in Funding. The Partnership's investment in Funding is
accounted for using the equity method. The following is summarized financial
information for Funding (dollars in thousands):
STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED INCEPTION (JUNE 23, 1995)
DECEMBER 31,1997 DECEMBER 31, 1996 TO DECEMBER 31, 1995
------------------ ------------------ -------------------------
<S> <C> <C> <C>
Interest income....................... $25,886 $25,886 $12,943
Interest expense...................... 25,886 25,886 12,943
------- ------- -------
Net income............................ $ 0 $ 0 $ 0
======= ======= =======
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
1997 AND 1996
-------------
<S> <C>
Current assets.............................................. $ 1
Investment in First Mortgage Bonds.......................... 332,000
--------
Total assets...................................... $332,001
========
Senior Secured Bonds payable................................ $332,000
Stockholders' equity........................................ 1
--------
Total liabilities and stockholders' equity........ $332,001
========
</TABLE>
8. FIRST MORTGAGE BONDS PAYABLE
First Mortgage Bonds payable consists of the following at December 31, 1997
and 1996 (dollars in thousands):
<TABLE>
<S> <C>
7.19% First Mortgage Bonds
due June 30, 2010 ("2010 Bonds").......................... $ 49,278
8.08% First Mortgage Bonds
due December 30, 2016 ("2016 Bonds")...................... 105,722
--------
$155,000
========
</TABLE>
On June 30, 1995, the Partnership issued and sold $155,000,000 of First
Mortgage Bonds to Funding. The bonds are secured by substantially all assets of
the Partnership. Interest is payable semi-annually on June 30 and December 30 of
each year, commencing December 30, 1995. Principal on the First Mortgage Bonds
is also payable semi-annually in varying amounts beginning on June 30, 2000 for
the 2010 Bonds, and beginning
F-74
<PAGE> 205
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
on December 30, 2010 for the 2016 Bonds. Collective future maturities of the
First Mortgage Bonds as of December 31, 1997, are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 0
1999........................................................ 0
2000........................................................ 1,084
2001........................................................ 1,547
2002........................................................ 2,129
Thereafter.................................................. 150,240
--------
$155,000
========
</TABLE>
The trust indenture and other financing documents for the First Mortgage
Bonds include a number of covenants with which the Partnership must comply.
These covenants include, among others, compliance with certain reporting
requirements and limitations of activities relating to the bond proceeds,
additional debt, new and existing agreements, partnership distributions and
other activities. The trust indenture also describes events of default of the
First Mortgage Bonds which include, among others, certain events involving
bankruptcy of the Partnership and failure to maintain and comply with agreements
made by the Partnership.
9. CREDIT AGREEMENT
The Partnership has a Credit Agreement which provides for working capital
loans of up to $3,000,000 and letter of credit commitments of up to $5,500,000.
The interest rate for loans made under the Credit Agreement is based upon
various short-term indices at the Partnership's option and is determined
separately for each draw. These commitments expire on June 30, 2000. The Credit
Agreement includes commitment fees, payable quarterly in arrears, ranging from
.25% to .375% on the daily average unused amount of the commitment until the
Credit Agreement is terminated. For all periods through December 31, 1997, no
working capital loans had been issued under the Credit Agreement. In October
1997, a $500,000 letter of credit, in favor of NSP pursuant to the Power
Purchase Agreement, was issued under the Credit Agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS
The majority of the Company's accounts receivables are from a major
regulated utility (NSP) and the associated credit risk is considered limited.
The carrying amounts of the Partnership's cash and cash equivalents, accounts
receivables, restricted investments held by Trustee, accounts payable and
accrued expenses approximate fair value. The fair value of the Partnership's
First Mortgage Bonds at December 31, 1997, is $14,181,000 higher than the
historical carrying value of $155,000,000. At December 31, 1996, the fair value
of the Partnership's First Mortgage Bonds approximated carrying value.
11. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION
The Partnership has a $107 million turnkey construction contract (inclusive
of executed change orders) with Westinghouse Electric. Westinghouse Electric had
committed to complete the construction and start-up of the Facility to specified
performance levels by May 31, 1997 and is required under the contract to
reimburse the Partnership for extension fees paid under the Power Purchase
Agreement with NSP, and to pay certain liquidated damages in the event of a
delay. During 1997, Westinghouse Electric was required to pay $1,333,000 and
$5,073,000 of reimbursable extension fees and delay liquidated damages,
respectively. The Partnership has recorded receivables from Westinghouse
Electric of $3,012,000 at December 31, 1997, which is comprised of reimbursable
extension fees of $267,000 and delay liquidated damages of $2,745,000 (see Note
3).
F-75
<PAGE> 206
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
POWER PURCHASE AGREEMENT
Under and subject to the terms of the Power Purchase Agreement, the Utility
is obligated to purchase all of the electric capacity made available to it and
all associated energy which the Utility chooses to dispatch from the Facility
beginning on the Commercial Operations Date. Payments by the Utility to the
Partnership under the Power Purchase Agreement consist of capacity payments and
energy payments which fluctuate based upon published indices and/or a fixed
schedule.
THERMAL ENERGY SALES
The Steam Supply Agreement obligates the Partnership to supply all of the
Steam Purchaser's steam requirements up to a maximum of 664 million pounds of
steam annually at a rate not to exceed 190,000 pounds per hour when the
Facility's cogeneration process is operating and 160,000 pounds per hour when
the steam is generated by the Facility's auxiliary boilers.
GAS SUPPLY
The Partnership has 20-year gas supply contracts with two fuel suppliers to
provide 100% of the Facility's natural gas requirements. The gas supply
contracts each provide for the sale of up to 17,060 MMBtu per day of gas to the
Partnership. The price paid by the Partnership under the gas supply contracts
fluctuates based upon published indices.
Under the gas supply contracts, the Partnership is subject to annual
minimum take requirements which may be satisfied by delivering gas to the
Facility, taking gas into storage or remarketing gas to third parties.
GAS TRANSPORTATION
The Partnership has various gas transportation agreements with fuel
transportation companies which provide for delivery of gas to the Facility. The
price paid by the Partnership under the gas transportation contracts fluctuate
based on published indices.
OPERATIONS AND MAINTENANCE
The Facility is operated and maintained under an operations and maintenance
agreement with Westinghouse Operating Services Company, Inc. ("Westinghouse
Services"). Under the terms of the operations and maintenance agreement, the
Partnership is required to pay Westinghouse Services an annual management fee of
$350,000 as well as reimbursement of payroll, fringe benefits, insurance and
certain subcontractor costs and a bonus based on a targeted plant performance.
If targeted plant performance is not attained, Westinghouse Services is required
to pay a performance penalty to the Partnership. The management fee is adjusted
annually based on certain published indices. The term of the operations and
maintenance agreement extends for an initial period of seven years (through
October, 2004). The Partnership has the option to extend the term of the
agreement for two additional seven-year terms, provided that the Partnership and
Westinghouse Services mutually agree in writing as to the terms of such
extension.
PARTS AGREEMENT
The Partnership has a spare parts agreement (the "Parts Agreement") with
Westinghouse Electric. Under the terms of the Parts Agreement, Westinghouse
Electric provides (i) certain combustion turbine parts and refurbishment
services, (ii) other spare parts at discounted prices and (iii) other repair
services at direct cost plus a percent mark-up to the Partnership. The
compensation payable to Westinghouse Electric is an annual fee of $977,000
(escalated annually based on published indices) payable for 12 years.
F-76
<PAGE> 207
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Partnership 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 financial position or results of
operations of the Partnership.
12. DEPENDENCE ON THIRD PARTIES
The Partnership is highly dependent on a single utility for purchases of
electric generating capacity and energy from its Facility, a single operator to
perform the operation and maintenance of its Facility, and a single steam
purchaser for purchases of thermal energy. In addition, the Partnership has
contracted with two gas companies to supply the gas requirements of the
Facility, and has contracted with a single interstate gas transporter to
transport gas. Any material breach by any one of these parties of their
respective obligations to the Partnership could affect the ability of the
Partnership to make payments under its First Mortgage Bonds. In addition,
bankruptcy or insolvency of certain other parties or defaults by such parties
relative to their contractual or regulatory obligations could adversely affect
the ability of the Partnership to make payments under its First Mortgage Bonds.
If an agreement were to be terminated due to a breach of such agreement, the
Partnership's ability to enter into a substitute agreement having substantially
equivalent terms and conditions, or with an equally creditworthy third party, is
uncertain.
13. RELATED PARTY TRANSACTIONS
The initial costs incurred to develop the Facility, consisting principally
of site development costs, engineering fees, legal fees, permitting costs,
interest and LS Power employee costs, were incurred by Granite. At June 30,
1995, the Partnership paid development fees and reimbursed certain costs
totaling approximately $11,730,000 to Granite. These payments were capitalized
and included in construction in process.
LS Power provided certain management services to the Partnership pursuant
to management services agreements. Under these agreements, LS Power managed the
business affairs of the Partnership during construction and operation of the
Cottage Grove Project. As compensation for its services, LS Power received a
monthly management fee of $60,000 during construction, and $50,000 during
operation (both in 1995 dollars). These fees were escalated annually beginning
on January 1, 1996 pursuant to the rate of change in a consumer-price related
index. LS Power was also reimbursed for its reasonable and necessary expenses
incurred in performing its services, including salaries of its personnel to the
extent related to services provided under the agreements. Under these
agreements, the Partnership incurred expenses of approximately $1,406,000,
$1,391,000 and $515,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997 and 1996, the Partnership recorded accounts
payable to LS Power of approximately $231,000 and $57,000, respectively. See
Note 15 for discussion of assignment of the management services agreements which
occurred on March 20, 1998.
14. PARTNERS' CAPITAL
In 1997, TPC contributed $18,167,000 of equity for financing the
construction of the Facility. TPC received a limited partner interest in the
Partnership of approximately 27% and equity commitment fees of $350,000.
Profits, losses and distributions will be allocated based on the respective
partnership interests. Distributions will be made in accordance with the trust
indenture and other financing documents. Such distributions are subject to the
prior satisfaction of a number of conditions including, among others,
maintenance of required funding levels in various Trustee accounts and
compliance with minimum levels of current and projected debt service coverage.
F-77
<PAGE> 208
LSP-COTTAGE GROVE, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENT -- CHANGE IN CONTROL
On March 6, 1998, LS Power and Granite (collectively, the "Sellers")
entered into a Securities Purchase Agreement (the "Securities Purchase
Agreement") with Cogentrix Mid America, Inc. (CMA) and Cogentrix Cottage Grove,
LLC (collectively, the "Purchasers") and Cogentrix Energy, Inc. ("Cogentrix
Energy") which controls each of the Purchasers as wholly -- owned indirect
subsidiaries.
On March 20, 1998, pursuant to the Securities Purchase Agreement, the
Sellers sold all of the Sellers' capital stock of LSP Cottage Grove, Inc., and
all of the Sellers' limited partnership interest in the Partnership to the
Purchasers. As a result, Cogentrix Cottage Grove, LLC, a wholly-owned subsidiary
of CMA, acquired all of the capital stock of LSP-Cottage Grove, Inc., the 1%
general partner of the Partnership, as well as a 72.22% limited partnership
interest in the Partnership for a combined total ownership interest of 73.22% in
the Partnership.
On the same date that the wholly-owned indirect subsidiaries of Cogentrix
Energy identified above acquired their ownership interests in the Partnership,
Cogentrix Energy and LS Power entered into an Assignment and Assumption
Agreement, by the terms of which LS Power assigned, and Cogentrix Energy
assumed, all of the rights and obligations of LS Power under certain management
services agreements between LS Power and each of LSP-Cottage Grove, Inc. and the
Partnership.
16. SUBSEQUENT EVENT -- EXTENSION FEES AND LIQUIDATED DAMAGES -- UNAUDITED
At December 31, 1997, the Partnership had receivables of $3,012,000
included in Accounts Receivable -- Other. This amount represented reimbursable
extension fees and delay liquidated damages Westinghouse Electric was required
to pay in the event of delay of start-up of the Facility. During 1998, these
amounts were received as a reduction of the final construction payment.
F-78
<PAGE> 209
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Partners
LSP-Whitewater Limited Partnership:
We have audited the accompanying balance sheet of LSP-Whitewater Limited
Partnership (a Delaware limited partnership) as of December 31, 1997 and the
related statements of income, changes in partners' capital, and cash flows for
the year then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LSP-Whitewater Limited
Partnership as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
April 9, 1998.
F-79
<PAGE> 210
INDEPENDENT AUDITORS' REPORT
The Partners
LSP-Whitewater Limited Partnership:
We have audited the accompanying balance sheet of LSP-Whitewater Limited
Partnership as of December 31, 1996 and the related statements of income,
changes in partners' capital and cash flows for each of the years in the
two-year period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LSP-Whitewater Limited
Partnership as of December 31, 1996 and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 1996,
in conformity with generally accepted accounting principles.
KPMG LLP
Billings, Montana,
February 13, 1997.
F-80
<PAGE> 211
LSP-WHITEWATER LIMITED PARTNERSHIP
BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1998 1997 1996
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 1,207 $ 7,749 $ 101
Restricted cash........................................ 18,115 13,752 34,415
Accounts receivable -- trade........................... 5,657 4,983 0
Accounts receivable -- other........................... 643 2,195 0
Fuel inventories....................................... 948 1,361 0
Spare parts inventories................................ 620 432 0
Other current assets................................... 439 682 1
-------- -------- --------
Total current assets........................... 27,629 31,154 34,517
-------- -------- --------
Net investment in lease (Notes 2 and 6).................. 262,796 262,072 0
Construction in process.................................. 0 0 149,232
Greenhouse facility, net................................. 8,257 8,281 0
Debt issuance and finance costs, net of accumulated
amortization of $816 (unaudited), $616 and $355........ 6,407 6,607 6,868
Investment in unconsolidated affiliate................... 1 1 1
-------- -------- --------
Total assets................................... $305,090 $308,115 $190,618
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable....................................... $ 6,116 $ 11,492 $ 13,617
Accrued expenses....................................... 6,677 64 0
-------- -------- --------
Total current liabilities...................... 12,793 11,556 13,617
First Mortgage Bonds payable............................. 177,000 177,000 177,000
-------- -------- --------
Total liabilities.............................. 189,793 188,556 190,617
Commitments and contingencies (Note 12)
Partners' capital........................................ 115,297 119,559 1
-------- -------- --------
Total liabilities and partners' capital........ $305,090 $308,115 $190,618
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-81
<PAGE> 212
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------------- -----------------------
1998 1997 1997 1996 1995
----------- ----------- ------- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Lease revenue............................ $17,518 $ 752 $ 6,579 $ 0 $ 0
Service revenue.......................... 19,219 641 5,944 0 0
Greenhouse revenue....................... 1,530 0 0 0 0
Other.................................... 950 0 825 0 0
------- ------- ------- ---- ----
39,217 1,393 13,348 0 0
------- ------- ------- ---- ----
Operating expenses:
Cost of services......................... 21,102 254 6,948 0 0
Greenhouse operating expenses............ 1,153 376 799 0 0
------- ------- ------- ---- ----
22,255 630 7,747 0 0
------- ------- ------- ---- ----
Operating income........................... 16,962 763 5,601 0 0
Non-operating income (expense):
Gain on sales-type capital lease......... 0 97,042 97,042 0 0
Interest expense......................... (10,551) 508 (4,024) 0 0
Interest income.......................... 700 7 383 0 0
------- ------- ------- ---- ----
Net income................................. $ 7,111 $97,304 $99,002 $ 0 $ 0
======= ======= ======= ==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-82
<PAGE> 213
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LIMITED GENERAL
PARTNERS PARTNER TOTAL
-------- ------- --------
<S> <C> <C> <C>
Capital contributions at inception.......................... $ 1 $ 0 $ 1
-------- ------ --------
Balance, December 31, 1995 and 1996......................... 1 0 1
Capital contributions....................................... 20,556 0 20,556
Net income.................................................. 98,012 990 99,002
-------- ------ --------
Balance, December 31, 1997.................................. 118,569 990 119,559
Partner distributions....................................... (11,332) (41) (11,373)
Net income.................................................. 7,040 71 7,111
-------- ------ --------
Balance, September 30, 1998 (unaudited)..................... $114,277 $1,020 $115,297
======== ====== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-83
<PAGE> 214
LSP-WHITEWATER LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------- --------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................ $ 7,111 $ 97,304 $ 99,002 $ 0 $ 0
Adjustments to reconcile net income to net cash
used in operating activities
Gain on sales-type capital lease................ -- (97,042) (97,042) 0 0
Amortization of unearned lease income........... (17,518) (752) (6,579) 0 0
Amortization of debt issuance and finance
costs......................................... 200 10 76 0 0
Minimum lease payments received................. 16,794 721 6,247 0 0
Depreciation.................................... 208 14 112 0 0
(Increase) decrease in accounts
receivable -- trade........................... 873 (1,362) (4,983) 0 0
(Increase) decrease in fuel inventories......... 413 (1,196) (984) 0 0
Increase in spare parts inventories............. (188) 0 (136) 0 0
Increase (decrease) in other current assets..... 243 0 (682) 0 0
Increase (decrease) in accounts payable......... (5,376) 895 2,865 0 0
Increase in accrued expenses.................... 6,613 0 64 0 0
--------- --------- --------- -------- ---------
Net cash provided by (used in) operating
activities................................ 9,378 (1,408) (2,040) 0 0
--------- --------- --------- -------- ---------
Cash Flows from Investing Activities:
Sales (acquisition) of land and improvements...... 0 939 939 (146) (3,394)
Payments on construction in process............... 0 (35,128) (33,847) (96,746) (43,983)
Investments held by Trustee....................... 0 (20,556) (20,556) 0 (177,000)
Investments drawn................................. 0 35,793 42,596 97,075 54,518
Investment in Funding............................. 0 0 0 0 (1)
Purchases of equipment............................ (184) 0 0 0 0
Decrease in restricted cash....................... (4,363) 0 0 0 0
--------- --------- --------- -------- ---------
Net cash provided by (used in) investing
activities................................ (4,547) (18,952) (10,868) 183 (169,860)
--------- --------- --------- -------- ---------
Cash Flows from Financing Activities:
Debt issuance and financing costs................. 0 0 0 (153) (7,070)
Proceeds from First Mortgage Bonds................ 0 0 0 0 177,000
Capital contributions............................. 0 20,556 20,556 0 0
Partner distributions............................. (11,373) 0 0 0 0
--------- --------- --------- -------- ---------
Net cash provided by (used in) financing
activities................................ (11,373) 20,556 20,556 (153) 169,930
--------- --------- --------- -------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... (6,542) (196) 7,648 30 70
Cash and cash equivalents, beginning of year........ 7,749 101 101 71 1
--------- --------- --------- -------- ---------
Cash and cash equivalents, end of year.............. $ 1,207 $ 297 $ 7,749 $ 101 $ 71
========= ========= ========= ======== =========
RECONCILIATION OF CHANGES IN
CONSTRUCTION IN PROCESS
Decrease (increase) in total construction in
process......................................... $ 0 $ 145,694 $ 145,694 $(99,555) $ (46,139)
Construction in process sold in lease
transaction..................................... 0 (170,142) (170,493) 0 0
Amortization of debt issuance and financing
costs........................................... 0 185 185 244 111
Increase in accounts receivable -- other.......... 0 (2,632) (2,195) 0 0
Interest income on investments held by Trustee.... 0 (1,272) (1,375) (4,802) (4,206)
Increase in fuel inventories...................... 0 0 (378) 0 0
Increase in spare parts inventories............... 0 0 (296) 0 0
Decrease in other current assets.................. 0 1 1 0 1
Pre-operation cash receipts....................... 0 (5,859) 0 0 0
Increase in interest payable...................... 0 3,450 0 0 0
Increase (decrease) in accounts payable........... 0 (4,553) (4,990) 7,367 6,250
--------- --------- --------- -------- ---------
Payments on construction in process............... $ 0 $ (35,128) $ (33,847) $(96,746) $ (43,983)
========= ========= ========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest during the year............ $ 13,801 $ 13,801 $ 6,900
========= ======== =========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-84
<PAGE> 215
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
LSP-Whitewater Limited Partnership (the "Partnership") is a Delaware
limited partnership that was formed on December 14, 1993 to develop, finance,
construct and own a gas-fired cogeneration facility with a design capacity of
approximately 245 megawatts located in Whitewater, Wisconsin (the "Facility").
Construction and start-up of the Facility was substantially completed and
commercial operation commenced September 18, 1997 (the "Commercial Operations
Date"). As of December 31, 1997, the 1% general partner of the Partnership was
LSP-Whitewater I, Inc., a wholly owned subsidiary of Granite Power Partners,
L.P., a Delaware limited partnership ("Granite"). Granite and TPC Whitewater,
Inc., a Delaware corporation ("TPC"), were the sole limited partners of the
Partnership, owning approximately 73% and 26% limited partnership interests,
respectively. The general partner of Granite is LS Power Corporation ("LS
Power"), a Delaware corporation. See Note 16 for discussion of a change in
ownership which occurred on March 20, 1998.
The Partnership holds a 50% equity ownership interest in LS Power Funding
Corporation ("Funding"), which was established on June 23, 1995 as a special
purpose Delaware corporation to issue debt securities (the "Senior Secured
Bonds") in connection with financing construction of the Facility and a similar
gas-fired cogeneration facility located in Cottage Grove, Minnesota (the
"Cottage Grove Facility"). On June 30, 1995, a portion of the proceeds from the
offering and sale of the Senior Secured Bonds issued by Funding was used to
purchase $177 million of First Mortgage Bonds issued simultaneously by the
Partnership.
The Partnership sells up to 236.5 megawatts of electric capacity and
associated energy generated by the Facility to Wisconsin Electric Power Company
("WEPCO" or, as the context requires, the "Utility") pursuant to a 25-year power
purchase agreement (the "Power Purchase Agreement"). The Partnership may also
sell to third parties up to 12 megawatts of electric capacity and any energy
which is not dispatched by WEPCO. The thermal energy generated by the Facility
is provided in the form of steam to the University of Wisconsin-Whitewater under
a steam supply agreement expiring on June 30, 2005 and in the form of hot water
to a greenhouse (the "Greenhouse") owned by the Partnership (collectively, the
"Steam Purchasers").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The financial statements as of September 30, 1998 and for the periods ended
September 30, 1998 and 1997 are unaudited and are presented pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the accompanying financial statements reflect all adjustments
(which are of normal recurring nature) necessary to present fairly the financial
position and results of operations and cash flows for the interim periods, but
are not necessarily indicative of the results of operations for a full fiscal
year.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include unrestricted
short-term investments with original maturities of three months or less.
RESTRICTED INVESTMENTS
Restricted investments represent overnight repurchase obligations secured
by U.S. Treasury notes. These investments are carried at cost, which
approximated market at December 31, 1997 and 1996. Amounts held by the trustee
under the trust indenture for the First Mortgage Bonds (the "Trustee") in
accounts designated for debt service, major maintenance and construction, which
might otherwise be considered cash equivalents, are treated as restricted
investments.
F-85
<PAGE> 216
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMMENCEMENT OF POWER PURCHASE AGREEMENT
The Power Purchase Agreement described in Note 12 has characteristics
similar to a lease in that the agreement confers to the purchasing utility the
right to use specific property, plant and equipment. At the Commercial
Operations Date, the Partnership accounted for the Power Purchase Agreement as a
sales type capital lease in accordance with Statement of Financial Accounting
Standards (SFAS) No. 13, "Accounting for Leases" (see Note 6).
CONSTRUCTION IN PROCESS
Prior to commercial operation, all costs incurred to develop and construct
the Facility, including net costs associated with performance testing prior to
the Commercial Operation Date, as well as interest costs (including amortization
of debt issuance and financing costs), net of interest income on excess
proceeds, were capitalized and classified as construction in process.
In recording the Partnership's gain on sales-type capital lease, all
construction in process costs related to the Facility were included in the
historical cost basis of the Facility. All interest costs subsequent to the
Commercial Operations Date have been charged to expense. As of December 31,
1996, capitalized interest including amortization of debt issuance and financing
costs was $12,048,000 ($11,694,000, before amortization).
GREENHOUSE FACILITY
Depreciation on the Greenhouse Facility and related equipment is computed
using the straight-line method over 25 years and 10 years, respectively (see
Note 7).
DEBT ISSUANCE AND FINANCING COSTS
Debt issuance and financing costs are deferred and amortized over the term
of the related debt. Amortization of deferred financing costs was capitalized as
part of construction in process prior to commercial operations and is included
in interest expense subsequent to commercial operations in the accompanying
financial statements.
CURRENT LIABILITIES
As of December 31, 1997 and 1996, $8,632,000 and $13,617,000 of current
liabilities were considered project costs and were eligible for payment from
funds held by the Trustee included in restricted investments in the accompanying
balance sheets.
LEASE REVENUE
Lease revenue represents the amortization of unearned income on lease using
the effective interest rate method as well as contingent rentals that result
from changes in payment escalators occurring subsequent to the Commercial
Operations Date. These contingent rentals are not expected to materially change
the lease revenue recognized over the life of the Power Purchase Agreement.
SERVICE REVENUE
Service revenue represents reimbursement to the Partnership of costs
incurred to operate the Facility and to provide variable electric energy to the
Utility and thermal energy to the Steam Purchasers.
F-86
<PAGE> 217
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER REVENUES
Other revenues consist primarily of commodity sales of excess natural gas
fuel inventory, including amounts remarketed directly to third parties, as well
as sales of horticultural products produced by the Partnership's Greenhouse
Facility.
COST OF SERVICES
Cost of services represent expenses related to operating the Facility and
providing variable electric energy to the Utility as well as thermal energy to
the Steam Purchasers.
GREENHOUSE OPERATING EXPENSES
Greenhouse operating expenses include all operating costs specifically
related to greenhouse activities including depreciation on the Greenhouse
Facility.
INCOME TAXES
Under current tax laws, income or loss of partnerships is included in the
income tax returns of the partners. Accordingly, the Partnership makes no
provision for federal and state income taxes. The tax returns of the Partnership
are subject to examination by federal and state taxing authorities. If such
examinations occur and result in changes with respect to the Partnership
qualification, or in changes in distributable partnership income or loss, the
tax liability of the partners would be changed accordingly.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This pronouncement establishes standards for the
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is defined as the total of net income and all
other non-owner changes in equity. This statement will be adopted by the
Partnership effective January 1, 1998. The Partnership believes this
pronouncement will not have a material effect on its financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This pronouncement
establishes standards for reporting information about operating segments in
annual and interim financial statements. SFAS No. 131 will be adopted by the
Partnership effective January 1, 1998. The Partnership believes this
pronouncement will not have a material effect on its financial statements.
3. ACCOUNTS RECEIVABLE -- OTHER
Accounts Receivable -- Other represents amounts due from Westinghouse
Electric Corporation ("Westinghouse Electric"), the Partnership's construction
contractor, for delay liquidated damages and extension fees due as a result of
Westinghouse Electric's failure to complete the construction and start-up of the
Facility
F-87
<PAGE> 218
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
by May 31, 1997. Such liquidated damages and extension fees were capitalized as
a reduction of construction in process.
4. FUEL INVENTORIES
Fuel inventories consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Natural Gas................................................. $ 983 $0
Fuel Oil.................................................... 378 0
------ --
$1,361 $0
====== ==
</TABLE>
Natural gas inventory is stated at weighted average cost and fuel oil
inventory is stated at cost based on the first-in first-out method.
5. RESTRICTED INVESTMENTS
Restricted investments consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Overnight repurchase obligations............................ $21,070 $34,415
Less: Unrestricted accounts................................. (7,318) 0
------- -------
Restricted accounts......................................... $13,752 $34,415
======= =======
</TABLE>
Overnight repurchase obligations are secured by U.S. Treasury notes. The
majority of revenue received by the Partnership is required to be deposited into
accounts administered by the Trustee. The Trustee invests funds held in these
accounts at the direction of the Partnership. These accounts are established for
the purpose of depositing all receipts and monitoring all disbursements of the
Partnership. In addition, special accounts are established to provide for debt
service reserves and payments and major maintenance reserves. The use of funds
held by the Trustee prior to the Commercial Operations Date was restricted to
payment of project costs, including payment of interest on the First Mortgage
Bonds. Debt service reserves, major maintenance reserves and construction fund
account balances are reflected as restricted investments, whereas all other
account balances are classified as cash and cash equivalents in the accompanying
balance sheets.
6. SALES-TYPE CAPITAL LEASE
Upon the Commercial Operations Date of the Facility, the Partnership
recognized a gain on sale-type capital lease of $97.0 million reflecting the
difference between the estimated fair market value ($261.7 million) and the
historical cost ($164.7 million) of the Facility. The interest rate implicit in
the lease is 8.93%. The estimated residual value of the Facility at the end of
the lease term is $0. The components of the net investment in lease at December
31, 1997, are as follows (dollars in thousands):
<TABLE>
<S> <C>
Gross Investment in Lease................................... $615,489
Unearned Income on Lease.................................... (353,417)
--------
Net Investment in Lease..................................... $262,072
========
</TABLE>
Gross investment in lease represents total capacity payments receivable
over the life of the Power Purchase Agreement, net of executory costs, which are
considered minimum lease payments in accordance with SFAS No. 13.
F-88
<PAGE> 219
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Estimated minimum lease payments over the remaining term of the Power
Purchase Agreement as of December 31, 1997, are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 22,392
1999........................................................ 22,944
2000........................................................ 24,036
2001........................................................ 24,132
2002........................................................ 25,140
Thereafter.................................................. 496,845
--------
Total............................................. $615,489
========
</TABLE>
7. GREENHOUSE FACILITY
Greenhouse Facility consists of (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Building.................................................... $7,488
Equipment................................................... 905
------
8,393
Less: Accumulated Depreciation.............................. (112)
------
$8,281
======
</TABLE>
Building and equipment comprise the cost of the Greenhouse under a turnkey
construction contract inclusive of change orders and interest capitalized during
the construction period.
8. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Investment in unconsolidated affiliate represents the Partnership's 50%
ownership interest in Funding. The Partnership's investment in Funding is
accounted for using the equity method. The following is summarized financial
information for Funding (dollars in thousands):
STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR INCEPTION
ENDED ENDED (JUNE 23, 1995)
DECEMBER 31, 1997 DECEMBER 31, 1996 TO DECEMBER 31, 1995
----------------- ----------------- --------------------
<S> <C> <C> <C>
Interest income..................... $25,886 $25,886 $12,943
Interest expense.................... 25,886 25,886 12,943
------- ------- -------
Net income.......................... $ 0 $ 0 $ 0
======= ======= =======
</TABLE>
F-89
<PAGE> 220
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
1997 AND 1996
-------------
<S> <C>
Current assets.............................................. $ 1
Investment in First Mortgage Bonds.......................... 332,000
--------
Total assets...................................... $332,001
========
Senior Secured Bonds payable................................ $332,000
Stockholders' equity........................................ 1
--------
Total liabilities and stockholders' equity........ $332,001
========
</TABLE>
9. FIRST MORTGAGE BONDS PAYABLE
First Mortgage Bonds payable consists of the following at December 31, 1997
and 1996 (dollars in thousands):
<TABLE>
<S> <C>
7.19% First Mortgage Bonds due June 30, 2010 ("2010
Bonds")................................................... $ 56,273
8.08% First Mortgage Bonds due December 30, 2016 ("2016
Bonds")................................................... 120,727
--------
$177,000
========
</TABLE>
On June 30, 1995, the Partnership issued and sold $177,000,000 of First
Mortgage Bonds to Funding. The bonds are secured by substantially all assets of
the Partnership. Interest is payable semi-annually on June 30 and December 30 of
each year, commencing December 30, 1995. Principal on the First Mortgage Bonds
is also payable semi-annually in varying amounts beginning on June 30, 2000 for
the 2010 Bonds, and beginning on December 30, 2010 for the 2016 Bonds.
Collective future maturities of the First Mortgage Bonds as of December 31,
1997, are as follows (dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 0
1999........................................................ 0
2000........................................................ 1,239
2001........................................................ 1,767
2002........................................................ 2,430
Thereafter.................................................. 171,564
--------
$177,000
========
</TABLE>
The trust indenture and other financing documents for the First Mortgage
Bonds include a number of covenants with which the Partnership must comply.
These covenants include, among others, compliance with certain reporting
requirements and limitations of activities relating to the bond proceeds,
additional debt, new and existing agreements, partnership distributions and
other activities. The trust indenture also describes events of default of the
First Mortgage Bonds which include, among others, certain events involving
bankruptcy of the Partnership and failure to maintain and comply with agreements
made by the Partnership.
10. CREDIT AGREEMENT
The Partnership has entered into a Credit Agreement which provides for
working capital loans of up to $3,000,000 and letter of credit commitments of up
to $5,000,000. The interest rate for loans made under the Credit Agreement is
based upon various short-term indices at the Partnership's option and is
determined separately for each draw. These commitments expire on June 30, 2000.
The Credit Agreement includes commitment fees, payable quarterly in arrears,
ranging from .25% to .375% on the daily average unused amount of the commitment
until the Credit Agreement is terminated. There were no letters of credit
F-90
<PAGE> 221
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
outstanding under the Credit Agreement at December 31, 1997 and 1996. For all
periods through December 31, 1997, no working capital loans had been made to the
Partnership under the Credit Agreement.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS
The majority of the Company's accounts receivables are from a major
regulated utility (WEPCO) and the associated credit risk is considered limited.
The carrying amounts of the Partnership's cash and cash equivalents, accounts
receivables, restricted investments, accounts payable and accrued expenses
approximate fair value. The fair value of the Partnership's First Mortgage Bonds
at December 31, 1997, is $16,194,000 higher than the historical carrying value
of $177,000,000. At December 31, 1996, the fair value of the Partnership's First
Mortgage Bonds approximated carrying value.
12. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION
The Partnership has a $115 million turnkey construction contract (inclusive
of executed change orders) with Westinghouse Electric. Westinghouse Electric had
committed to complete the construction and start-up of the Facility to specified
performance levels by May 31, 1997 and is required under the contract to
reimburse the Partnership for extension fees paid under its Power Purchase
Agreement with WEPCO, and to pay certain liquidated damages in the event of a
delay. During 1997, Westinghouse Electric was required to pay $110,000 and
$4,539,000 of reimbursable extension fees and delay liquidated damages,
respectively. The Partnership has recorded receivables from Westinghouse
Electric of $2,195,000 at December 31, 1997, which is comprised of reimbursable
extension fees of $35,000 and delay liquidated damages of $2,160,000 (see Note
3).
POWER PURCHASE AGREEMENT
Under and subject to the terms of the Power Purchase Agreement, the Utility
is obligated to purchase the electric capacity made available to it up to 236.5
megawatts and associated energy which the Utility chooses to dispatch from the
Facility beginning on the Commercial Operations Date. Payments by the Utility to
the Partnership under the Power Purchase Agreement consist of capacity payments
and energy payments which fluctuate based upon published indices and/or a fixed
schedule.
In accordance with the Power Purchase Agreement, the Partnership was
responsible for reimbursing the Utility for the actual increased costs of
capacity and energy acquired to replace the capacity and energy, which were to
be provided by the Facility. The Partnership's obligation to reimburse the
Utility for these "Replacement Power" costs began on June 23, 1997 and continued
through September 17, 1997. The Partnership had an obligation for Replacement
Power costs if the Utility's actual costs of capacity and energy exceeded the
amounts, which would have been paid to the Partnership under the Power Purchase
Agreement. For the period from June 23, 1997 through September 17, 1997, the
Partnership was required to pay the Utility approximately $3,300,000 for
Replacement Power costs. The Partnership has recorded remaining accounts payable
to the Utility of $2,060,000 at December 31, 1997 for Replacement Power in the
accompanying balance sheet.
THERMAL ENERGY SALES
The Partnership has a thermal energy sales agreement with the Department of
Administration of the State of Wisconsin ("DOA") which provides for the
Partnership to supply the steam requirements of UWW (the "Thermal Energy
Agreement"). The initial term of the agreement runs through June 30, 2005. The
DOA has the option to extend the agreement for up to four extension periods of
four years each. The Thermal Energy Agreement obligates the Partnership to
supply all of UWW's steam requirements up to a maximum of 350 million pounds of
steam annually at a rate not to exceed 100,000 pounds per hour.
F-91
<PAGE> 222
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GAS SUPPLY
The Partnership has 20-year gas supply agreements with two fuel suppliers
to provide 100% of the Facility's natural gas requirements. The gas supply
contracts provide for the sale of up to 11,855 MMBtu per day of gas to the
Partnership. The price paid by the Partnership to the fuel suppliers under the
gas supply contracts fluctuate based on published indices.
Under the gas supply contracts, the Partnership is subject to annual
minimum take requirements which may be satisfied by delivering gas to the
Facility, taking gas into storage or remarketing gas to third parties.
GAS TRANSPORTATION
The Partnership has entered into various gas transportation agreements with
fuel transportation companies which provide for delivery of gas to the Facility.
The price paid by the Partnership under the gas transportation contracts
fluctuate based upon published indices.
OPERATIONS AND MAINTENANCE
The Facility is operated and maintained under an operations and maintenance
agreement with Westinghouse Operating Services Company, Inc. ("Westinghouse
Services"). Under the terms of the operations and maintenance agreement, the
Partnership is required to pay Westinghouse Services an annual management fee of
$350,000, reimbursement of payroll, fringe benefits, insurance, and certain
subcontractor costs and a bonus based on target plant performance. If targeted
plant performance is not attained, Westinghouse Services is required to pay a
performance penalty to the Partnership. The management fee is adjusted annually
based on certain published indices. The term of the operations and maintenance
agreement extends for an initial period of seven years (through September,
2004). The Partnership has the option to extend the term of the agreement for
two additional seven-year terms, provided that the Partnership and Westinghouse
Services mutually agree in writing as to the terms of such extension.
PARTS AGREEMENT
The Partnership has a spare parts agreement (the "Parts Agreement") with
Westinghouse Electric. Under the terms of the Parts Agreement, Westinghouse
Electric provides (i) certain combustion turbine parts and refurbishment
services, (ii) other spare parts at discounted prices and (iii) other repair
services at direct cost plus a percent mark-up to the Partnership. The
compensation payable to Westinghouse Electric is an annual fee of $977,000
(escalated annually based upon published indices) payable for 12 years.
GREENHOUSE
Construction of the Greenhouse was substantially complete on June 2, 1997.
The Partnership has an operational services agreement with Floriculture, Inc.
("Floriculture"), an affiliate of the Partnership, which operates the Greenhouse
for the benefit of the Partnership. Under the terms of the operational services
agreement, Floriculture is required to provide all the services to produce,
market, and sell horticulture products and maintain the Greenhouse. As
compensation for its services Floriculture is reimbursed on a monthly basis for
its approved costs in connection with conducting the Greenhouse business and
operating the Greenhouse, and will receive an annual management fee equal to 12%
of the Partnership's net profit from the operation of the Greenhouse. The term
of the operational services agreement will expire on May 31, 2002. For the year
ended December 31, 1997, Floriculture received payments pursuant to the
operations services agreement of approximately $669,000. The Partnership has
recorded accounts payable to Floriculture of approximately $197,000 at December
31, 1997.
F-92
<PAGE> 223
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Partnership 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 financial position or results of
operations of the Partnership.
13. DEPENDENCE ON THIRD PARTIES
The Partnership is highly dependent on a single utility for purchases of
electric generating capacity and energy from its Facility, and a single operator
to perform the operation and maintenance of its Facility. In addition, the
Partnership has contracted with two gas companies to supply the gas requirements
of the Facility, and has contracted with a single interstate gas transporter to
transport gas. Any material breach by any one of these parties of their
respective obligations to the Partnership could affect the ability of the
Partnership to make payments under its First Mortgage Bonds. In addition,
bankruptcy or insolvency of certain other parties or defaults by such parties
relative to their contractual or regulatory obligations could adversely affect
the ability of the Partnership to make payments under its First Mortgage Bonds.
If an agreement were to be terminated due to a breach of such agreement, the
Partnership's ability to enter into a substitute agreement having substantially
equivalent terms and conditions, or with an equally creditworthy third party, is
uncertain.
14. RELATED PARTY TRANSACTIONS
The initial costs incurred to develop the Facility, consisting principally
of site acquisition and development costs, engineering fees, legal fees,
permitting costs, interest and LS Power employee and office costs, were incurred
by Granite. At June 30, 1995, the Partnership paid development fees and
reimbursed certain costs totaling approximately $12,160,000 to Granite. These
payments were capitalized and included in construction in process.
LS Power provided certain management services to the Partnership pursuant
to management services agreements. Under these agreements, LS Power managed the
business affairs of the Partnership during construction and operation of the
Whitewater Project. As compensation for its services, LS Power received a
monthly management fee of $60,000 during construction, and $50,000 during
operation (both in 1995 dollars). These fees were escalated annually beginning
on January 1, 1996 pursuant to the rate of change in a consumer-price related
index. LS Power was also reimbursed for its reasonable and necessary expenses
incurred in performing its services, including salaries of its personnel to the
extent related to services provided under the agreements. Under these
agreements, the Partnership incurred expenses of approximately $1,534,000,
$1,392,000 and $544,000 during the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997 and 1996, the Partnership recorded accounts
payable to LS Power of approximately $235,000 and $53,000, respectively. See
Note 16 for discussion of assignment of the management services agreements which
occurred on March 20, 1998.
15. PARTNERS' CAPITAL
In 1997, TPC, contributed $20,556,000 of equity for financing the
construction of the Facility. TPC received a limited partner interest in the
Partnership of approximately 26% and equity commitment fees of $350,000.
Profits, losses and distributions will be allocated based on the respective
partnership interests. Distributions will be made in accordance with the trust
indenture and other financing documents. Such distributions are subject to the
prior satisfaction of a number of conditions including, among others,
maintenance of required funding levels in various Trustee accounts and
compliance with minimum levels of current and projected debt service coverage.
F-93
<PAGE> 224
LSP-WHITEWATER LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. SUBSEQUENT EVENT -- CHANGE IN CONTROL
On March 6, 1998, LS Power and Granite (collectively, the "Sellers")
entered into a Securities Purchase Agreement (the "Securities Purchase
Agreement") with Cogentrix Mid American, Inc. (CMA) and Cogentrix Cottage Grove,
LLC (collectively, the "Purchasers") and Cogentrix Energy, Inc. ("Cogentrix
Energy") which controls each of the Purchasers as wholly-owned indirect
subsidiaries.
On March 20, 1998, pursuant to the Securities Purchase Agreement, the
Sellers sold all of the Sellers' capital stock of Floriculture, Inc.
("Floriculture") and LSP-Whitewater I, Inc., as well as all of the Sellers'
limited partnership interest in the Partnership to the Purchasers. As a result,
CMA acquired all of the capital stock of Floriculture, and Cogentrix Whitewater,
LLC, a wholly-owned subsidiary of CMA, acquired all of the capital stock of
LSP-Whitewater I, Inc., the 1% general partner of the Partnership, as well as a
73.17% limited partnership interest in the Partnership for a combined total
ownership interest of 74.17% in the Partnership.
On the same date that the indirect subsidiaries of Cogentrix Energy
identified above acquired their ownership interests in the Partnership,
Cogentrix Energy and LS Power entered into an Assignment and Assumption
Agreement, by the terms of which LS Power assigned, and Cogentrix Energy
assumed, all of the rights and obligations of LS Power under certain management
service agreements between LS Power and LSP-Whitewater, Inc. and the
Partnership.
17. SUBSEQUENT EVENT -- EXTENSION FEES AND LIQUIDATED DAMAGES -- UNAUDITED
At December 31, 1997, the Partnership had receivables of $2,195,000
included in Accounts Receivable -- Other. This amount represented reimbursable
extension fees and delay liquidated damages Westinghouse Electric was required
to pay in the event of delay of start-up of the Facility. During 1998, these
amounts were received as a reduction of the final construction payment.
F-94
<PAGE> 225
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Logan Generating Company, L.P.,
Keystone Urban Renewal Limited Partnership,
Northampton Generating Company, L.P.,
Chambers Cogeneration Limited Partnership, and
Scrubgrass Generating Company, L.P.:
We have audited the accompanying combined balance sheets of Logan
Generating Company, L.P. (a Delaware limited partnership), Keystone Urban
Renewal Limited Partnership (a Delaware limited partnership), Northampton
Generating Company, L.P. (a Delaware limited partnership) and subsidiaries,
Chambers Cogeneration Limited Partnership (a Delaware limited partnership) and
Scrubgrass Generating Company, L.P. (a Delaware limited partnership) and
subsidiaries as of December 31, 1997 and 1996, and the related combined
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Logan Generating Company,
L.P., Keystone Urban Renewal Limited Partnership, Northampton Generating
Company, L.P. and subsidiaries, Chambers Cogeneration Limited Partnership and
Scrubgrass Generating Company, L.P. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 15, 1998
F-95
<PAGE> 226
LOGAN GENERATING COMPANY, L.P.
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES
CHAMBERS COGENERATION LIMITED PARTNERSHIP
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1998 1997 1996
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 12,458 $ 8,559 $ 3,459
Restricted cash....................................... 6,099 4,171 4,539
Accounts receivable................................... 29,428 28,735 27,138
Notes and loans receivable -- current portion......... 2 912 385
Fuel inventory........................................ 7,584 7,603 7,691
Prepaid expenses and other............................ 7,016 3,332 4,651
---------- ---------- ----------
Total current assets.......................... 62,587 53,312 47,863
INVESTMENTS HELD BY TRUSTEE............................. 30,290 25,509 29,469
RESTRICTED CASH......................................... -- 1,208 31,792
NET INVESTMENT IN LEASE................................. 230,640 228,936 226,228
LAND AND EASEMENTS...................................... 15,646 15,646 15,646
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,301,486 (unaudited), $106,282 and
$76,376, respectively................................. 1,170,787 1,192,523 1,216,839
LONG-TERM NOTES RECEIVABLE.............................. 2,806 4,400 2,312
DEFERRED FINANCING COSTS, net of accumulated
amortization of $13,829 (unaudited), $13,706 and
$10,531, respectively................................. 17,977 21,347 22,365
OTHER CAPITALIZABLE COSTS, net of accumulated
amortization of $697, $11,991 and $8,970,
respectively.......................................... 368 490 654
OTHER LONG-TERM ASSETS.................................. 226 463 445
---------- ---------- ----------
$1,531,327 $1,543,834 $1,593,613
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt..................... $ 28,523 $ 35,262 $ 40,366
Accounts payable...................................... 8,159 6,537 7,688
Interest payable...................................... 14,088 10,743 11,517
Accrued liabilities................................... 10,015 9,263 6,125
---------- ---------- ----------
Total current liabilities..................... 60,785 61,805 65,696
MAJOR MAINTENANCE RESERVE............................... 7,123 5,682 4,024
LONG-TERM DEBT.......................................... 1,190,934 1,209,802 1,226,723
---------- ---------- ----------
Total liabilities............................. 1,258,842 1,277,289 1,296,443
PARTNERS' CAPITAL....................................... 272,485 266,545 297,170
---------- ---------- ----------
$1,531,327 $1,543,834 $1,593,613
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-96
<PAGE> 227
LOGAN GENERATING COMPANY, L.P.
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES
CHAMBERS COGENERATION LIMITED PARTNERSHIP
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUE:
Electric capacity and capacity
bonus............................. $ 76,592 $ 75,738 $101,001 $100,112 $ 94,683
Electric energy revenue.............. 90,381 85,996 117,015 113,243 76,420
Steam revenue........................ 6,045 7,064 9,423 9,318 9,662
Interest rate mode agreement......... 21,903 22,899 30,628 31,336 33,719
Lease revenues....................... 12,366 12,307 16,172 17,151 18,474
Other revenue........................ 8,937 8,759 2,374 2,205 --
-------- -------- -------- -------- --------
216,224 212,763 276,613 273,365 232,958
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Fuel and ash......................... 44,309 44,409 63,957 62,675 52,686
Operating and maintenance............ 37,857 35,136 35,246 33,059 26,149
General and administrative........... 4,452 3,806 5,248 6,116 4,189
Insurance and taxes.................. 5,183 5,422 7,136 7,749 7,229
Depreciation and amortization........ 24,837 24,930 30,176 37,667 32,725
-------- -------- -------- -------- --------
116,638 113,703 141,763 147,266 122,978
-------- -------- -------- -------- --------
OPERATING INCOME....................... 99,586 99,060 134,850 126,099 109,980
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense..................... (62,989) (67,891) (96,362) (97,702) (85,798)
Other................................ (3,019) 761 3,124 3,805 4,361
-------- -------- -------- -------- --------
(66,008) (67,130) (93,238) (93,897) (81,437)
-------- -------- -------- -------- --------
NET INCOME BEFORE INCOME TAXES......... 33,578 31,930 41,612 32,202 28,543
BENEFIT (PROVISION) FOR INCOME TAXES... -- (2) 42 (41) --
-------- -------- -------- -------- --------
NET INCOME............................. $ 33,578 $ 31,928 $ 41,654 $ 32,161 $ 28,543
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-97
<PAGE> 228
LOGAN GENERATING COMPANY, L.P.
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES
CHAMBERS COGENERATION LIMITED PARTNERSHIP
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
PARTNERS' CAPITAL, DECEMBER 31, 1994........................ $245,421
Capital contributions..................................... 15,658
Net income................................................ 28,543
--------
PARTNERS' CAPITAL, DECEMBER 31, 1995........................ 289,622
Capital distributions..................................... (24,613)
Net income................................................ 32,161
--------
PARTNERS' CAPITAL, DECEMBER 31, 1996........................ 297,170
Capital distributions..................................... (72,279)
Net income................................................ 41,654
--------
PARTNERS' CAPITAL, DECEMBER 31, 1997........................ 266,545
Capital distributions..................................... (27,638)
Net income................................................ 33,578
--------
PARTNERS' CAPITAL, SEPTEMBER 30, 1998 (UNAUDITED)........... $272,485
========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-98
<PAGE> 229
LOGAN GENERATING COMPANY, L.P.
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES
CHAMBERS COGENERATION LIMITED PARTNERSHIP
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 33,578 $ 31,928 $ 41,654 $ 32,161 $ 28,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 24,910 24,714 33,342 40,510 33,465
Amortization of unearned lease income......... (14,071) (1,581) (18,384) (17,888) (17,855)
Decrease in restricted cash................... (1,928) 24,311 83 763 3,332
(Increase) decrease in accounts receivable.... 14,923 51 14,179 14,578 (3,947)
Decrease (increase) in fuel inventory......... 18 871 88 (1,450) 1,153
Decrease (increase) in deposits............... (6) -- (18) (133) 2,265
Decrease (increase) in prepaid expenses....... (891) (3,184) 1,319 (464) (1,058)
Increase in notes receivable.................. (497) 435 (2,615) (1,068) (20)
Increase (decrease) in accounts payable and
other accrued liabilities................... 2,372 4,020 1,987 (4,005) 2,215
Increase in major maintenance reserve......... 1,439 (462) 84 1,556 2,396
Increase (decrease) in interest payable....... 3,346 (3,768) 800 (472) 844
-------- -------- -------- -------- ---------
Net cash provided by operating
activities............................. 63,193 77,335 72,519 64,088 51,333
-------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investment held by trustee.......... (4,783) 5,466 3,960 2,643 27,123
Payment for construction in progress, including
capitalized interest.......................... -- -- -- -- (32,991)
Additions to property, plant and equipment...... (2,394) (1,343) (5,597) (2,720) (74,541)
Adjustments to property, plant and equipment.... -- -- -- 120 --
-------- -------- -------- -------- ---------
Net cash (used in) provided by investing
activities............................. (7,177) 4,123 (1,637) 43 (80,409)
-------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted cash for
financing..................................... 1,208 -- 30,869 (4,801) (7,930)
Decrease (increase) in deferred financing
costs......................................... -- (161) (2,347) 14 (2,547)
Proceeds from long-term debt.................... -- 3,383 19,775 8,662 415,496
Repayment of long-term debt..................... (25,606) (17,291) (41,800) (41,630) (396,086)
Increase in other equity........................ (81) (82) -- -- --
Capital (distributions) contributions........... (27,638) (59,157) (72,279) (24,613) 15,658
-------- -------- -------- -------- ---------
Net cash (used in) provided by financing
activities............................. (52,117) (73,308) (65,782) (62,368) 24,591
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 3,899 8,150 5,100 1,763 (4,485)
CASH AND CASH EQUIVALENTS, beginning of year...... 8,559 3,459 3,459 1,696 6,181
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, end of year............ $ 12,458 $ 11,609 $ 8,559 $ 3,459 $ 1,696
======== ======== ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 89,398 $ 91,951 $ 96,249
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-99
<PAGE> 230
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND BUSINESS
LOGAN GENERATING COMPANY, L.P.
Logan Generating Company, L.P. ("Logan"), formerly Keystone Energy Service
Company, L.P., is a Delaware limited partnership formed on October 4, 1991. The
general partners of Logan are Aspen Power Corporation ("Aspen"), a Delaware
corporation and a wholly owned subsidiary of Bechtel Generating Company, Inc.
("BGCI") and Eagle Power Corporation ("Eagle"), a California corporation and a
wholly-owned subsidiary of PG&E Generating Company ("PGC"). Eagle is also a
limited partner of Logan.
PGC will transfer its entire ownership interest in Eagle to U.S. Generating
Company, LLC ("USGenLLC") pending approval by the Federal Energy Regulatory
Commission ("FERC"). The transfer will be retroactive to December 31, 1997.
The net operating profits and losses of Logan are allocated to Aspen and
Eagle (collectively, the "Logan Partners") based on the following ownership
percentages:
<TABLE>
<S> <C>
GENERAL PARTNERS:
Aspen..................................................... 50%
Eagle..................................................... 49%
LIMITED PARTNER:
Eagle..................................................... 1%
</TABLE>
All distributions other than liquidating distributions will be made based
on the Logan Partners' percentage interests as shown above, in accordance with
the project documents and at such times and in such amounts as the Board of
Control of Logan determines.
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP
Keystone Urban Renewal Limited Partnership ("Urban") is a Delaware limited
partnership formed on September 13, 1991. The general partner of Urban is
Keystone Cogeneration Company Limited Partnership ("Keystone"), a Delaware
limited partnership whose general partners are Aspen (50%) and Eagle (49%), and
whose limited partner is Eagle (1%). The limited partner of Urban is Granite
Generating Company, L.P. ("Granite"), a Delaware limited partnership whose
general partners are Aspen (50%) and Eagle (49%), and whose limited partner is
Eagle (1%).
The operating profits and losses of Urban are allocated to Keystone and
Granite based on the following ownership percentages:
<TABLE>
<S> <C>
GENERAL PARTNER:
Keystone.................................................. 99%
LIMITED PARTNER:
Granite................................................... 1%
</TABLE>
All distributions other than liquidating distributions will be made based
on the percentage interests as shown above, in accordance with the project
documents and at such times and in such amounts as the general partner
determines.
F-100
<PAGE> 231
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Logan and Urban (collectively, the "Logan Partnerships") were formed to
develop, construct, own and operate a 217 megawatt ("mw") pulverized coal-fired
cogeneration station (the "Logan Project") in the Township of Logan, New Jersey.
Urban holds title to the land upon which the Logan Project is situated as well
as the Logan Project itself. Logan leases the Logan Project from Urban pursuant
to a facilities lease agreement dated April 1, 1992. The lease commenced on the
first funding date of the Logan Project's construction, and will terminate upon
1) the merger of the Logan Partnerships, 2) mutual consent between the Logan
Partnerships and the Township of Logan, or 3) final payment of the Logan
Partnerships' obligations incurred to finance the Logan Project. The Logan
Project is designed to produce electricity for sale to Atlantic City Electric
Company ("ACEC") and process steam for sale to Monsanto Chemical Company
("Monsanto") for use in its industrial operations. Logan assigned the Monsanto
steam and electricity sales agreement to ACEC effective September 24, 1996. The
Logan Project entered commercial operations and achieved final completion in
1994.
NORTHAMPTON GENERATING COMPANY, L.P.
Northampton Generating Company, L. P. ("Northampton") is a Delaware limited
partnership formed on July 2, 1991. The partners are Jaeger Power Corporation
("Jaeger"), a wholly-owned indirect subsidiary of USGenLLC and Poplar Power
Corporation ("Poplar"), a wholly-owned subsidiary of BGCI.
Northampton was formed to construct, own and operate a 98 mw anthracite
waste coal-fired electric generating project (the "Northampton Project") located
in Northampton, Pennsylvania. The Northampton Project is designed to produce
electricity for sale to Metropolitan Edison Company. The Northampton Project
also sells a minimum of 104 million pounds per year of process steam to an
unrelated third party for use in its industrial operations.
The net operating profits and losses of Northampton are allocated to Jaeger
and Poplar (collectively, the "Northampton Partners") based on the following
ownership percentages:
<TABLE>
<S> <C>
Jaeger...................................................... 50%
Poplar...................................................... 50%
</TABLE>
All distributions other than liquidating distributions will be made based
on the Northampton Partners' percentage interests as shown above, in accordance
with the Northampton Project documents and at such times and in such amounts as
the Board of Control of the partnership determines. The Northampton Partners
have entered into equity commitment agreements which require funding up to
$11,225,000 for certain Northampton Project conditions defined in the
Northampton Project documents.
Northampton Fuel Supply Company, Inc. (the "Fuel Company") is a
wholly-owned subsidiary of Northampton. The Fuel Company was formed to (1)
obtain, hold or dispose of culm, silt, tailings or other fuel components for the
Northampton Project, (2) to build, construct, own or lease, operate, maintain,
repair, replace or refurbish facilities, equipment, systems, components, parts,
supplies or other materials necessary to obtain, handle or process or prepare
such fuel components, and (3) to provide such fuel components to Northampton or
any other owner or operator of the Northampton Project.
Northampton Water Company, Inc. (the "Water Company") is a wholly-owned
subsidiary of Northampton. The Water Company was formed to own, lease or
otherwise acquire certain rights and interests and to perform certain
obligations relating to the water supply for the Northampton Project.
F-101
<PAGE> 232
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CHAMBERS COGENERATION LIMITED PARTNERSHIP
Chambers Cogeneration Limited Partnership ("Chambers") is a Delaware
limited partnership formed on August 17, 1988. The general partners of Chambers
are Peregrine Power Corporation ("Peregrine"), a California corporation and a
wholly-owned indirect subsidiary of USGenLLC, and Maple Power Corporation
("Maple"), a Delaware corporation and a subsidiary of BGCI. TIFD III-T, Inc.
("TIFD"), a wholly-owned subsidiary of General Electric Capital Corporation
("GECC"), is a limited partner. Chambers is not to continue in existence beyond
December 31, 2028.
Chambers was formed to construct, own and operate a 262 mw coal-fired
cogeneration station (the "Chambers Project") at DuPont's Chambers Works
chemical complex near Carneys Point, New Jersey. The Chambers Project is
designed to produce electricity for sale to ACEC, and electricity and process
steam for sale to E.I. DuPont de Nemours & Company ("DuPont") for use in its
industrial operations. The Chambers Project entered commercial operations and
achieved final completion in 1994.
Chambers is managed by U.S. Generating Company ("USGen") pursuant to a
Management Services Agreement (the "MSA"). The Facility is operated by U.S.
Operating Services Company ("USOSC") pursuant to an Operation and Maintenance
Agreement (the "O&M Agreement"). USGen and USOSC are general partnerships
originally formed between affiliates of PG&E Enterprises and Bechtel
Enterprises. On September 19, 1997, USGen and USOSC each separately redeemed
Bechtel Enterprises' interests in USGen and USOSC so that PG&E Enterprises now
indirectly owns all of the interests in USGen and USOSC. This will not affect
USGen's obligations under the MSA or USOSC's obligations under the O&M
Agreement. In addition, on September 19, 1997, Peregrine purchased one-third of
Maple's interest in Chambers, which represents a 5% ownership interest.
The net income and losses of Chambers are allocated to Peregrine, Maple and
TIFD (collectively, the "Chambers Partners") based on the following ownership
percentages.
<TABLE>
<CAPTION>
POST PRE
9/20/97 9/20/97
------- -------
<S> <C> <C>
Peregrine................................................ 50% 45%
Maple.................................................... 10% 15%
TIFD..................................................... 40% 40%
</TABLE>
All distributions other than liquidating distributions are made based on
the Chambers Partners' percentage interests as shown above, in accordance with
the Chambers Project documents and at such times and in such amounts as the
Board of Control of Chambers determines.
SCRUBGRASS GENERATING COMPANY, L.P.
Scrubgrass Generating Company, L.P. ("Scrubgrass") is a Delaware limited
partnership formed on December 1, 1990. The general partners of Scrubgrass are
Falcon Power Corporation ("Falcon"), a California corporation and a wholly-owned
indirect subsidiary of USGenLLC; Scrubgrass Power Corporation ("SPC"), a
Pennsylvania corporation and a wholly-owned subsidiary of Falcon; and Pine Power
Leasing, Inc. ("Pine"), a Delaware corporation and a wholly-owned subsidiary of
BGCI. Falcon is also a limited partner in Scrubgrass. DCC Project Finance Four,
Inc. ("DCC"), a Delaware corporation and a wholly-owned subsidiary of Dana
Commercial Credit Corporation, was admitted as a limited partner after acquiring
a portion of Falcon's interest in Scrubgrass. Scrubgrass is not to continue in
existence after December 31, 2030.
F-102
<PAGE> 233
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The purpose of Scrubgrass is to participate in the developing, financing,
engineering, construction, ownership, operation, maintenance, and leasing of a
waste coal-fired 87 mw (net) electrical generating facility located in Venango
County, Pennsylvania (the "Scrubgrass Project"). The Scrubgrass Project
commenced commercial operations in 1993, and Scrubgrass entered into a lease
agreement with Buzzard Power Corporation ("Buzzard"), a wholly-owned subsidiary
of Environmental Power Corporation ("EPC"), effective June 17, 1994. (See Note
4).
Scrubgrass formed two subsidiaries: Clearfield Properties, Inc.
("Clearfield"), for the purpose of purchasing a 175-acre site in Clearfield
County, Pennsylvania, and acquiring access to certain coal fines material, and
Leechburg Properties, Inc. ("Leechburg"), for the purpose of acquiring access
rights to certain waste coal sites.
The net operating profits and losses of Scrubgrass are allocated to Falcon,
SPC, Pine, and DCC (collectively, the "Scrubgrass Partners") based on the
following sharing ratios, in accordance with the amended partnership agreement:
<TABLE>
<S> <C>
GENERAL PARTNERS:
Falcon.................................................... 24.63%
SPC....................................................... 24.87%
Pine...................................................... 20.00%
LIMITED PARTNERS:
Falcon.................................................... 0.50%
DCC....................................................... 30.00%
</TABLE>
Distributions are made pursuant to the amended partnership agreement.
Generally, distributions of basic rent (contractually scheduled payments in the
lease) are made in accordance with the Scrubgrass Partners' sharing ratios as
shown above, and distributions of additional rent (variable based on Buzzard's
monthly distributable residual operating cash) are to be 20 percent to Pine and
80 percent to Falcon. During 1996, as a result of the expiration of the bond
interest rate swap (see Note 3), Falcon began sharing a portion of its
additional rent with DCC based on a formula of the lesser of 10 percent of the
Falcon distribution or 4 percent of the savings differential between bond
interest calculated at 6.5 percent per annum and the actual monthly all-in cost
of the bonds including actual interest, the cost of credit support and
remarketing fees payable by Scrubgrass.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRESENTATION
The accompanying financial statements of Logan, Urban, Northampton,
Chambers, and Scrubgrass (collectively, the "Partnerships") are presented on a
combined basis due to the common management of the underlying projects of the
Partnerships. All inter-partnership transactions have been eliminated in
combination.
The accompanying combined financial statements were prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and
F-103
<PAGE> 234
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INTERIM FINANCIAL STATEMENTS
Information presented as of September 30, 1998 and for the six-month
periods ended September 30, 1998 and 1997 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 combined entities as of September 30, 1998 and the results of their
operations and cash flows for the six-month periods ended September 30, 1998 and
1997. 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 years as a whole.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, cash equivalents include
short-term investments with original maturities of three months or less.
RESTRICTED CASH
Restricted cash includes cash and cash equivalent amounts, as defined
above, which are restricted under the terms of certain of the Partnerships'
agreements. Restricted cash includes amounts restricted for debt service, major
maintenance, subordinated operations and maintenance costs, and amounts escrowed
with the Township of Logan and Logan Municipal Utilities Authority. Restricted
cash amounts held for long-term use are classified as non-current assets.
FUEL INVENTORY
Fuel inventory is stated at the lower of cost or market using the average
cost method.
PREPAID EXPENSES
Prepaid expenses include $358,101 and $540,644 of prepaid insurance
expenses related to property damage and other general liability policies,
$1,751,573 and $2,436,563 of advance funding for expenses related to operations
and maintenance, $57,500 and $60,597 of prepaid agency and bond rating fees,
$886,582 and $343,511 in prepaid fuel and ash site development costs, $132,418
and $978,300 in future relocation reserves, and $145,933 and $292,025 in other
prepaid expenses at December 31, 1997 and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, which consist primarily of the projects, are
recorded at actual cost. The projects are depreciated on a straight-line basis
over 35 years. As of January 1, 1997, two of the Partnerships prospectively
revised their calculation of depreciation to include a residual value on the
projects approximating 25 percent of the gross project costs. This change
increased net income for 1997 by approximately $7.9 million.
Other property, plant and equipment are depreciated on a straight-line
basis over the estimated remaining economic or service lives of the respective
assets (ranging from 5 to 10 years). Routine maintenance and repairs are charged
to expense as incurred.
F-104
<PAGE> 235
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE ACCOUNTING
The lease described in Note 4 meets the criteria for a "sales-type" capital
lease. Accordingly, the investment in lease, unearned lease income, and lease
revenues are accounted for in conformity with Statement of Financial Accounting
Standards No. 13, "Accounting for Leases" ("SFAS 13").
RIGHT TO FUEL INVENTORY
Scrubgrass amortizes the right to remove fuel from their fee property
located in Clearfield County over the estimated minimum life of available waste
fuel fines using the straight-line method. For the years ended December 31,
1997, 1996 and 1995, $161,000 of annual amortization related to these costs has
been included in amortization in the accompanying combined statements of
operations.
ORGANIZATION COSTS
The Partnerships amortize organization costs over the life of the projects
using the straight-line method. Annual amortization of these costs has been
included in amortization expense in the accompanying combined statements of
operations.
DEFERRED FINANCING COSTS
Financing costs, consisting primarily of the costs incurred to obtain
project financing, are deferred and amortized using the effective interest rate
method over the term of financing. Financing costs related to the Debt Service
Reserve Letter of Credit (see Note 3) were capitalized and accrued in 1995.
Actual total costs were less than estimated; accordingly, deferred financing
costs were reduced by $175,750 in 1996. Deferred financing costs incurred to
obtain the Bond Letter of Credit, the Working Capital Loan commitment and the
Debt Service Loan commitment are amortized on a straight-line basis over the
term of the related commitment, which is not materially different from the
effective interest rate method.
MAJOR MAINTENANCE RESERVE
The major maintenance reserve represents an accrual for anticipated
expenditures for scheduled significant maintenance of the projects. The accrual
is recognized ratably over the maintenance cycle of the related equipment.
REVENUE RECOGNITION
Revenues from the sale of electricity and steam are recorded based on
monthly output delivered as specified under contractual terms.
INTEREST INCOME
In 1995, interest income included a $513,966 gain related to the sale of
zero coupon bonds.
INCOME TAXES
Under current law, no Federal or state income taxes are paid directly by
the Partnerships. All items of income and expense of the Partnerships are
allocable to and reportable by the partners in their respective
F-105
<PAGE> 236
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
income tax returns. Accordingly, no provision is made in the accompanying
combined financial statements for Federal or state income taxes. Income taxes
reported on the accompanying combined financial statements are Federal and State
income taxes paid or accrued by Clearfield and Leechburg.
3. BONDS AND LOANS PAYABLE
The following represents the total amounts of bonds and notes payable for
the Partnerships. All bonds and loans payable are secured by the assets of the
projects or the real estate covered by ground leases.
NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY ("NJEDA") BONDS
The NJEDA issued and sold $190,000,000 of its Exempt Facility Revenue Bonds
(the "Bonds") in order to finance a portion of the costs of constructing and
equipping both the Logan and Chambers Projects. The issuance of the Bonds was
made pursuant to an Indenture of Trust, which named First Fidelity, N.A. and
Citibank, N.A., respectively, as the bond trustees. The proceeds were lent to
the Partnerships pursuant to the NJEDA Authority Loan Agreement. The Bonds,
which are secured by an irrevocable letter of credit, provide for interest at
variable rates. The weighted-average interest rates on the Bonds were 3.59% and
3.40% at December 31, 1997 and 1996, respectively.
RESOURCE RECOVERY REVENUE BONDS
In 1994, in order to finance a portion of the costs of constructing and
equipping the Northampton Project and the culm facility, Northampton issued and
sold $205 million of Resource Recovery Revenue Bonds through the Pennsylvania
Economic Development Financing Authority. The bonds were issued in three series
and feature maturity dates ranging from January 1, 2007 to January 1, 2021 and
interest rates ranging from 6.40% to 6.95%.
VIDA BONDS
In order to finance a portion of the costs of constructing and equipping
the Scrubgrass Project, the Venango Industrial Development Authority ("VIDA")
issued and sold $135,600,000 of its resource recovery revenue bonds (Series 1990
A and B, and Series 1993 -- Scrubgrass Project). For the years ended December
31, 1997, 1996 and 1995, tax exempt interest was incurred on the outstanding
bonds at an average rate of 3.68 percent, 3.72 percent and 4.00 percent,
respectively.
CREDIT AND REIMBURSEMENT AGREEMENTS
Pursuant to the Third Amended and Restated Reimbursement and Loan Agreement
(the "Reimbursement and Loan Agreement") dated as of November 1, 1995, the Logan
Partnerships entered into a financing facility with a group of banks (the
"Senior Lenders"). Funding from the financing facility is drawn on Union Bank of
Switzerland, New York ("UBS"), as the agent for the Senior Lenders. The
financing facility provides for a construction/term loan, a bond letter of
credit, a debt service reserve letter of credit and a working capital loan. The
Reimbursement and Loan Agreement is secured by the Logan Project.
On January 1, 1994, in order to finance a portion of the costs of
constructing and equipping the Northampton Project and the culm facility,
Northampton entered into a Credit and Reimbursement Agreement with a group of
banks (the "Northampton Banks") wherein the Northampton Banks would
F-106
<PAGE> 237
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
provide Northampton with a financing facility. Funding from the financing
facility is drawn on ABN AMRO Bank N. V., as the agent for the Northampton
Banks.
In order to finance a portion of the costs of constructing and equipping
the Chambers Project, Chambers entered into a credit agreement (the "Original
Credit Agreement") in 1991 with a group of banks (the "Chambers Banks"), wherein
the Chambers Banks provided Chambers with a financing facility. Funding from the
financing facility was drawn on Swiss Bank Corporation, New York ("Swiss Bank")
as the agent for the Chambers Banks. The financing facility provided for a
construction loan commitment, which was converted to a term loan commitment in
1994 (the "Chambers Conversion Date"), a supplemental loan commitment and a
letter of credit commitment.
On June 9, 1997 the Original Credit Agreement was amended (the "Amendment")
and restated (the "Amended and Restated Credit Agreement"). The Amendment
replaced Swiss Bank Corporation, New York with ING (U.S.) Capital Corporation
("ING") as the agent bank. The Amendment increased the amount of the debt by
$7,939,750, extended the maturity of the debt five years from 2009 to 2014, and
consolidated the term loans (the "Term Loans").
Chambers incurred $3,759,664 in financing costs in conjunction with the
Amended and Restated Credit Agreement. Of this total, $2,346,219 representing
creditor bank fees (including creditor legal costs) was capitalized as deferred
financing costs and is being amortized using the effective interest rate method
over the term of the debt as prescribed in EITF 96-19. The remainder was
expensed as required by EITF 96-19.
In order to finance a portion of the costs of constructing and equipping
the Scrubgrass Project, Scrubgrass entered into the Reimbursement and Loan
Agreement (the "Original RLA") with a group of banks (the "Scrubgrass Banks"),
wherein the Scrubgrass Banks would provide Scrubgrass with various financing
facilities. Funding from the financing facilities was initially drawn on
National Westminster Bank, PLC, New York ("NatWest"), as the Agent for the
Scrubgrass Banks. In December 1995, Scrubgrass entered into the Amended and
Restated Reimbursement and Loan Agreement (the "New RLA") which provided a new
term loan facility of $12,000,000.
On May 22, 1997, Scrubgrass entered into an agreement to amend the New RLA
which restructured the Debt Service Loan Commitment of $6,000,000. As defined in
the New RLA, an applicable margin is added to the base component of interest
rates for each type of loan under each of the loan facilities provided in the
New RLA. The applicable margins consist of a Eurodollar and a base component and
range from 1.50% to 1.75% over the term of the New RLA.
CONSTRUCTION AND TERM LOANS
The Logan term loan commitment was entered into on January 24, 1995 (the
"Logan Conversion Date") and was drawn to repay the outstanding balance on the
construction loan. The interest rate on the term loan is based upon various
short-term indices at the Logan Partnerships' option and may be changed
periodically, also at the Logan Partnerships' option.
Upon the construction loan maturity date of September 22, 1995 (the
"Construction Loan Maturity Date"), the Term Loan commitment was made available
to Northampton and was drawn upon to repay the Construction Loan.
F-107
<PAGE> 238
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The interest rate is based upon various short-term indices at Northampton's
option and may be changed periodically, also at Northampton's option. It is
calculated as set forth in the Credit and Reimbursement Agreement. For the three
years ending September 30, 1998, interest is either (1) the base rate, which
approximates the prime rate of interest plus a margin of 0.750 percent, (2) the
London Interbank Offering Rate ("LIBOR") plus a margin of 1.500 percent, or (3)
the CD rate plus a margin of 1.625 percent. At December 31, 1997 and 1996, the
Term Loan interest rate was 7.44 and 7.32 percent respectively.
The original Chambers term loan was drawn in 1994 to repay the construction
loan and the supplemental loan was drawn in late 1994 to fund additional
construction costs. An additional term loan amount of $7,939,750 was drawn in
1997. The June 1997 Amendment combined the three outstanding loan facilities
into one term loan facility ("Term Loan"). The interest on the Term Loan is
based upon various short-term rates at Chamber's option and may be changed
periodically, also at Chamber's option, within certain limitations as set forth
in the Amendment.
The term loan commitment became available to Scrubgrass on June 30, 1994
(the "Scrubgrass Conversion Date") and was drawn to repay the construction loan.
Principal repayments, based on percentages of the outstanding balance ranging
from 0.100 percent to 1.617 percent, will be due monthly between July 1995 and
January 2006 according to an amortization schedule provided in the New RLA. Type
and term for each loan under the facility is determined at Scrubgrass's option.
The interest is determined as set forth in the New RLA and is either the
Eurodollar rate plus the applicable margin, or a base rate, which is the higher
of the Agent's prime rate or the federal funds rate, plus the applicable margin.
BOND LETTER OF CREDIT
In order to support certain payments of the NJEDA bonds, the Logan
Partnerships requested the Senior Lenders to issue an irrevocable letter of
credit. The committed amount of the letter of credit is reduced in the same
amounts as the related bond principal is repaid. The expiration date may be
extended for one-year periods, annually, at the sole discretion of the Senior
Lenders.
Draws upon the letter of credit are to be used for the payment of principal
or interest on the bonds and are to be made only when funds are not available or
adequate from the debt service fund or the bond redemption fund, as established
in the Bond Indenture of Trust dated April 1, 1992. The Logan Partnerships do
not expect a draw on the letter of credit. If any draws are made, however,
interest is calculated at a default rate that approximates the prime rate of
interest plus a margin of 2.0 percent. If there is any balance outstanding on
the letter of credit, the Logan Partnerships also have the option of drawing on
a liquidity commitment and a refunding notes commitment by the Senior Lenders.
Interest on these draws is based on various short-term interest rates as chosen
by the Logan Partnerships, plus an applicable margin. The refunding notes are
used to repay the liquidity notes. The refunding notes are to be repaid
according to amortization schedules set forth in the Reimbursement and Loan
Agreement, with final payment on September 30, 2009.
In order to support certain payments of its NJEDA bonds, Chambers requested
the Chambers Banks to issue an irrevocable letter of credit. Interest is
calculated at a base rate which approximates the prime rate of interest plus 2.0
percent and is payable upon demand. The letter of credit secures the NJEDA
bonds. The letter of credit currently expires June 9, 2007. Upon request of
Chambers, the expiration date of the letter of credit may be extended at the
sole discretion of the Chambers Banks.
F-108
<PAGE> 239
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In order to support principal and interest payments on the VIDA bonds,
NatWest has issued an irrevocable letter of credit to Scrubgrass. In 1995,
Credit Lyonnais became the Agent, replacing NatWest. Interest on the drawn
portion is calculated as a base rate that approximates the prime rate of
interest plus an additional margin as defined in the New RLA.
TERM LETTER OF CREDIT
At the beginning of commercial operations on August 28, 1995 (the
"Commercial Operation Date"), Northampton established an irrevocable letter of
credit with a full commitment amount available up to $66.6 million and a stated
amount, at the Commercial Operation Date of $7.154 million, determined pursuant
to the Power Purchase Agreement. This letter of credit secures the balance in a
suspense account, which balance is determined by factoring projected energy
deliveries for each generation year (the anniversary of the Commercial Operation
Date) by the excess of the contract energy sales rate over a projected rate. The
suspense account and the letter of credit will be provided until the balance in
the suspense account becomes a negative amount or until the end of the sixteenth
generation year, whichever occurs earlier. If at the end of the sixteenth year a
positive balance remains, Northampton will pay the utility the amount of the
balance. In accordance with the terms of the Power Purchase Agreement, the
stated amount of the term letter of credit was increased to $36,582,155 in
January of 1997, and $36,983,156 in January of 1998. No draws were made against
the term letter of credit during 1997 or 1996.
DEBT SERVICE RESERVE LETTERS OF CREDIT
In order to release $15,624,000 from a debt service reserve, the Logan
Partnerships requested the Senior Lenders to consent to and issue a $20,000,000
letter of credit in its stead. The Senior Lenders consented and the letter of
credit was integrated into the existing financing structure, creating the
Reimbursement and Loan Agreement. The funds released were used to pay amounts
due the construction contractor, costs to achieve the letter of credit and
distributions to the Partners. The initial expiration date was November 15,
2000, with an annual provision of extending the five-year term at the sole
discretion of the providers of the letter of credit. The letter of credit
currently expires November 15, 2002.
In accordance with Chambers' Amended and Restated Credit Agreement, the
$25,000,000 debt service reserve account was replaced with a $22,750,000 letter
of credit issued by the Chambers Banks. Interest on any outstanding balance is
payable quarterly and is calculated based on various short-term rates selected
by Chambers for each draw. The letter of credit currently expires June 9, 2004.
Upon request of Chambers, the expiration date of the letter of credit may be
extended at the sole discretion of the Chambers Banks.
In order to fund general debt service, the Banks have provided Scrubgrass
with a debt service loan commitment. The commitment of $6,303,000 under the
Original RLA has been reduced to $6,000,000 under the New RLA. On May 22, 1997,
Scrubgrass entered into an agreement to amend the New RLA which restructured the
debt service loan commitment of $6,000,000. Credit Lyonnais assumed from NatWest
a debt service (Series A/B) loan commitment of $3,000,000. At December 31, 1997
Scrubgrass and Buzzard had drawn $3,000,000 on this commitment. This amount has
been included as a debt service loan receivable in the accompanying combined
balance sheets.
The debt service (Series A) principal of this loan commitment must be
reduced in increments of $600,000 every six months beginning on or before July
1, 1998 and ending on or before July 3, 2000. Principal reductions of the Credit
Lyonnais debt service (Series A) loan will result in an increase in the
outstanding
F-109
<PAGE> 240
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
commitment value of the Credit Lyonnais debt service (Series B) loan until it
becomes a $3,000,000 commitment on or before July 3, 2000. The $3,000,000 debt
service (Series B) loan commitment balance remained with NatWest. Type and term
for each loan under the facility is determined at Scrubgrass's option. The
interest is determined as set forth in the New RLA and is either the Eurodollar
rate plus the applicable margin, or a base rate, which is the higher of the
Agent's prime rate or the federal funds rate, plus the applicable margin.
WORKING CAPITAL LOANS
A working capital loan commitment provides up to $9,500,000 for the
seasonal working capital requirements of the Logan Project. The Logan
Partnerships are required to pay down the loan to zero for a minimum of one week
per year. Interest on any outstanding balance is payable quarterly and is
calculated based on various short-term indices at the Logan Partnerships' option
and is determined separately for each draw.
A working capital loan commitment ("Working Capital Loan") provided for the
initial working capital requirements of the Northampton Project. The interest
rate is based upon various short-term indices at Northampton's option and is
determined separately for each draw. On the Construction Loan Maturity Date, the
working capital loan commitment was increased by $3 million and extends for a
period of four years from the Construction Loan Maturity Date. No draws were
made against the working capital loan commitment during 1997 and 1996.
The Chambers' Amended and Restated Credit Agreement provides for a working
capital loan commitment from the Chambers Banks of up to $5,000,000 to fund
operation and maintenance expense requirements of the Project. Chambers is
required to repay and maintain a zero balance for a minimum of one week per
year. Interest on any outstanding balance is payable quarterly and is calculated
based on various short-term rates selected by Chambers, for each draw. The full
amount of the principal is due at the earlier of June 9, 2004 or on the date on
which all loans under the Amended and Restated Credit Agreement are due in full.
Pursuant to the New RLA, the working capital loan provides for seasonal
working capital requirements of the lessee, occurring after the Conversion Date.
The Chambers Banks agreed to make a portion of the working capital facility
available to fund net startup costs prior to the Conversion Date; $1,600,000 of
proceeds from the new term loan were used to repay these borrowings. Type and
term for each working capital loan under the New RLA is determined at
Scrubgrass's option. The interest is either the Eurodollar rate plus the
applicable margin, or a base rate, which is the higher of the Agent's prime rate
or the federal funds rate, plus the applicable margin.
Pursuant to the New RLA, the core component was set at $2,000,000. The
outstanding loan balance is required to be paid down to the core level for 20
consecutive days each calendar year. A commitment fee of 0.125 percent was
applied to the undrawn loan commitment through December 31, 1995.
In 1994, Scrubgrass entered into a lessee working capital loan agreement
with Buzzard whereby Scrubgrass is to provide Buzzard with funds for seasonal
working capital requirements with regard to the Scrubgrass Project. The terms
and conditions set forth in this agreement are consistent with those above for
Scrubgrass's working capital loan facility with the Scrubgrass Banks. The
commitment extends to any undrawn amounts on Scrubgrass's working capital loan
as described above. Pursuant to the New RLA, the lessee working capital loan
agreement was amended to maintain consistency with the terms of Scrubgrass's
F-110
<PAGE> 241
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
working capital loan facility. At December 31, 1997 and 1996, Buzzard had drawn
$2,311,666 and $2,696,143, respectively, on this commitment. These amounts have
been included as a note receivable in the accompanying combined balance sheets.
JUNIOR LOAN AGREEMENT
On November 1, 1993, in order to finance a portion of the costs of
constructing and equipping the Logan Project, the Logan Partnerships
renegotiated a junior loan agreement (the "Junior Loan Agreement") with Foster
Wheeler Energy Corporation (the "Junior Lender") in the amount of $4,800,000. No
cash was advanced to the Logan Partnerships by the Junior Lender. The advances
were made by deferring the final $4,800,000 payment due to the Junior Lender
from BPC under the construction subcontract between the Junior Lender and BPC.
In addition, accrued interest of $143,205 was added to the principal outstanding
at the Conversion Date. Interest is due quarterly at the rate equal to the
Treasury rate, as defined, plus 4.95 percent. Principal payments are due
quarterly between March 31, 1996 and December 31, 2009, according to an
amortization schedule provided in the Junior Loan Agreement.
TRANSMISSION LINE INTERCONNECTION LETTER OF CREDIT
At Funded Closing, which occurred on February 1, 1994, Northampton provided
an irrevocable letter of credit in the amount of $100,000 pursuant to the
Transmission Service Agreement. This letter of credit secures Northampton's
obligation to reimburse the utility owning the transmission line for any
improvements, changes or repairs to its regional transmission system that are
necessitated by the interconnection of the Project to the system. The
transmission line interconnection letter of credit will be maintained throughout
the term of the Transmission Service Agreement, which extends until 25 years
from the Commercial Operation Date.
CONTRACT LETTER OF CREDIT
In order to support obligations of Scrubgrass pursuant to the power sales
agreement with Pennsylvania Electric Company ("Penelec"), the Scrubgrass Banks
have provided Scrubgrass with a contract letter of credit commitment. At
December 31, 1997 and 1996, the contract letter of credit had a stated value of
$7,410,000 and $10,700,000, respectively. The letter of credit was issued to
Penelec during 1993, and it will be drawn only if liquidated damages are due to
Penelec. Repayment of any draw is due immediately, at a default rate that
approximates the prime rate of interest plus 2.00 percent. Effective January 1,
1997, Amendment Number One to the New RLA assigned all of Credit Lyonnais's
rights and obligations as contract letter of credit issuer to Landesbank
Hessen-Thuringen Girozentrale Bank ("Helaba"). The stated amount of the contract
letter of credit was reduced to $4,100,000 by Helaba on January 1, 1998, as
required by Penelec under the power sales agreement.
F-111
<PAGE> 242
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
VENDOR LOANS
Vendor loans at December 31, 1997 and 1996, which were entered into at
lease commencement and subsequently restructured in December 1995, are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
To USGen, $900,000 with interest payable at eight percent,
payable in forty-eight equal monthly installments of
principal and interest, commencing January 1996........... $504,413 $ 718,337
To USGen, $429,000 with interest payable at eight percent,
payable in two annual installments of principal and
interest, commencing January 1997......................... 157,610 429,000
To EPC, $452,000 with interest payable at eight percent,
principal and interest payable on demand, commencing
January 1996.............................................. 85,190 121,319
-------- ----------
Total............................................. $747,213 $1,268,656
======== ==========
</TABLE>
Payment of principal and interest on these loans is subordinated to the
VIDA bonds and the loans under the New RLA.
NOTE AND MORTGAGE PAYABLE
On December 22, 1993, in order to finance the purchase of several waste
fuel sites, the Fuel Company entered into a $6 million Promissory Note and
Purchase Money Mortgage with unrelated third parties.
FUTURE MINIMUM PAYMENTS
Future minimum principal payments at December 31, 1997, required by the
debt instruments outstanding are as follows (in thousands):
<TABLE>
<S> <C>
1998..................................................... $ 35,262
1999..................................................... 39,187
2000..................................................... 45,731
2001..................................................... 50,511
2002..................................................... 53,511
Thereafter............................................... 1,020,862
----------
Total.......................................... $1,245,064
==========
</TABLE>
INTEREST RATE SWAP AGREEMENTS
The Partnerships have entered into a total of sixteen interest rate swap
agreements, with an aggregate notional balance of $349,574,000, to manage
interest costs and the risk associated with changing interest rates. The
agreements have effectively converted the variable rate tax-exempt bond debt
into fixed rate debt, as they require the Partnerships to pay fixed rates under
the agreements and receive variable rate-based payments in return. Total swap
interest cost was $10,329,241, $10,924,438 and $8,867,209 in 1997, 1996 and
1995, respectively. Refer to Note 8 for fair value information related to the
swap agreements.
F-112
<PAGE> 243
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Counterparties to the interest rate swap agreements are major financial
institutions. While the Partnerships may be exposed to credit losses in the
event of nonperformance by these counterparties, they do not anticipate losses.
4. LEASE AND SUBLEASE AGREEMENTS
GENERAL
Certain of the Partnerships have long-term lease agreements with third
parties for the use of land and equipment and for certain other services. These
leases have initial terms expiring between October 1999 and July 2020. Future
minimum lease payments under these lease agreements are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 1,208
1999........................................................ 1,218
2000........................................................ 1,079
2001........................................................ 836
2002........................................................ 639
Thereafter.................................................. 13,903
-------
Total............................................. $18,883
=======
</TABLE>
PROJECT LEASE
Buzzard agreed to lease the Scrubgrass Project facility and sublease the
project site from Scrubgrass (the "Lease") for a term of 22 years with a renewal
option for an additional three years. The residual value of the property at the
end of the lease term is $0. Estimated minimum lease payments over the term
(including the renewal period) of the Lease as of December 31, 1997 are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998........................................................ $ 16,602
1999........................................................ 16,857
2000........................................................ 17,581
2001........................................................ 17,317
2002........................................................ 18,673
Thereafter.................................................. 414,489
--------
Total............................................. $501,519
========
</TABLE>
The implicit rate in the Lease is 8.34 percent. The components of the net
investment in lease at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Gross investment in lease................................... $501,519
Unearned income............................................. (272,583)
--------
Net investment in lease................................... $228,936
========
</TABLE>
F-113
<PAGE> 244
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. SUPPLY AGREEMENTS
COAL SUPPLY
Certain of the Partnerships have long-term coal supply agreements with
third parties to supply the coal requirements of the respective electric
generating facilities. These contracts have initial terms of 20 years and do not
require the Partnerships to purchase any minimum quantities. Prices under the
agreements are either nominated on a periodic basis based on expected dispatch
or increase periodically based on price index formulas as defined in the
respective agreements.
LIME SUPPLY
Certain of the Partnerships have long-term lime purchase agreements with
third parties to supply the lime requirements of the respective electric
generating facilities. These agreements have contract periods ranging from 10 to
25 years. One of the agreements requires the purchase of a minimum of 1,500 tons
of limestone per year, at an initial delivered cost of $76 per ton. Prices under
the agreements generally increase based on price index formulas as defined in
the respective agreements.
OTHER
Certain of the Partnerships have long-term agreements for ash management
services with third parties. These contracts have terms ranging from 15 to 20
years and prices under the agreements generally increase annually based on price
index formulas as defined in the respective agreements.
6. SALES AGREEMENTS
POWER PURCHASE AGREEMENTS
Each of the Partnerships has a long-term power purchase agreement with a
public utility for sales of the respective electric generating facilities' power
output. These agreements have contract terms ranging from 25 to 30 years and
generally provide for both capacity and energy payments. Prices paid by the
utilities generally escalate annually based on formulas contained in the
respective agreements. One of the Partnerships has entered into a cost-based
dispatch agreement with its purchasing utility with a guaranteed minimum
dispatch level. Another of the Partnerships has entered into an excess capacity
and energy sales agreement with its purchasing utility under which the pricing
of capacity and energy is negotiated at market prices. Another of the
Partnerships has entered into an agreement that allows its purchasing utility to
decide interest rate elections available to the Partnership from time to time
under certain loan and bond agreements. The purchasing utility in turn makes
payments to the Partnership sufficient to cover interest costs based upon these
elections.
STEAM AND ELECTRICITY SALES AGREEMENTS
Certain of the Partnerships have steam and electric sales agreements with
third parties which have contract terms ranging from 15 to 30 years. Prices
under the agreements are generally adjusted periodically based on formulas
contained in the respective agreements.
F-114
<PAGE> 245
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER
One of the Partnerships has a 25-year contract with a public utility to
provide for the transmission of that facility's electrical output to the
ultimate purchasing utility under the power purchase agreement.
7. RELATED-PARTY TRANSACTIONS
CONSTRUCTION CONTRACT
Urban and Northampton entered into separate turnkey construction contracts
with Bechtel Power Corporation ("BPC"), an affiliate of BGCI, for the design,
engineering, procurement, construction, start-up and testing of their respective
projects. The Urban contract provided for certain bonuses and fees in addition
to the fixed price for the plant. The contract also provided BPC a 50 percent
share in net profits, as defined in the contract, from the sale of any excess
energy entered into within 2 years of final acceptance, December 19, 1994, for
the lesser of the initial term of the excess power sales agreement or 5 years.
This provision applies to the Excess Capacity and Energy Sales Agreements
described in Note 6. Logan incurred $13,727, $60,234 and $41,079 of expense in
1997, 1996 and 1995, which is included in other accrued liabilities in the
accompanying combined balance sheets, related to this provision of the contract.
Construction of the Northampton Project commenced in October 1993.
Substantial completion occurred on August 26, 1995 and final completion on
December 22, 1995. All construction contract payments including retainage have
been made as of December 31, 1996. A warranty claim receivable to BGCI for items
totaling $61,120 is outstanding as of December 31, 1997 and is included in
accounts receivable in the accompanying combined balance sheets.
MANAGEMENT SERVICES AGREEMENT
The Partnerships have separate management services agreements with USGen, a
wholly owned indirect subsidiary of USGenLLC. The agreement provides for USGen
to provide day-to-day management and administration of the Partnerships'
business relating to the projects. The agreement will continue for 33 years from
commencement for Logan, 25 years from commencement for Northampton, and until
either party terminates the agreement for Chambers. Compensation to USGen under
the agreements includes an annual base fee totalling approximately $1,200,000,
escalated annually, wages and benefits for employees working on behalf of the
Partnerships and other costs directly related to the Partnerships. Total
payments to USGen were $4,951,578, $5,345,169 and $4,648,625 in 1997, 1996 and
1995, respectively. At December 31, 1997 and 1996, the Partnerships owed USGen
$658,539 and $779,884, respectively, which is included in accounts payable in
the accompanying combined balance sheets.
OPERATIONS AND MAINTENANCE AGREEMENT
The Partnerships have separate operations and maintenance agreements with
USOSC, a wholly owned indirect subsidiary of USGenLLC, for operations and
maintenance of the Projects during construction and for 10 to 25 years after
substantial completion of construction of the Projects. Thereafter, the
agreement will be automatically renewed for periods of 5 years for the three of
the Projects until terminated by either party with at least 6 to 12 months
notice. Compensation to USOSC includes the reimbursement of direct and indirect
operational expenses, a base fee totaling $2,115,900 per year, additional fees
based on targeted plant performance, safety bonuses of up to approximately
$425,000 per year and an employee incentive bonus.
F-115
<PAGE> 246
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
These fees are adjusted annually by a measure of inflation as defined in the
agreement. If targeted plant performance is not reached, USOSC will pay
liquidated damages to the Partnership. Total payments to USOSC were $24,390,226,
$25,514,646 and $19,848,237 in 1997, 1996 and 1995, respectively. At December
31, 1997 and 1996, the Partnerships owed USOSC $2,777,214 and $2,964,606,
respectively, which are included in other accrued liabilities in the
accompanying combined balance sheets. At December 31, 1997, $446,000 had been
advanced to USOSC and is included in prepaid expenses.
POWER BROKERING/MARKETING AGREEMENT
The Partnerships of Logan and Chambers have a power brokering/marketing
agreement with PG&E ET. The agreement provides for PG&E ET to provide certain
services to the Partnerships related to the sale of capacity and energy as well
as other power-related services, including but not limited to spinning reserves,
operating reserves and emission allowances from the Partnerships to various
electric utilities and other entities. The agreements both commenced on April 7,
1995 and shall expire automatically three years from the commencement date;
provided, however, that either party may terminate the agreement upon 60 days'
prior written notice to the other party. Compensation to PG&E ET is negotiated
on a deal-by-deal basis. Payments of $0, $67,341 and $69,830 were made to PG&E
ET in 1997, 1996 and 1995, respectively. Payments of $3,969,879, $2,956,473 and
$0 were received from PG&E ET in 1997, 1996 and 1995, respectively. At December
31, 1997 and 1996, PG&E ET owed the Partnerships $352,769 and $380,718,
respectively, which is included in accounts receivable in the accompanying
combined balance sheets.
LEASE AGREEMENT
Chambers has a lease agreement with Carneys Point Generating Company, L.P.
("CPGC"), which is owned 50% by Topaz Power Corporation and 50% by Garnet Power
Corporation, both subsidiaries of USGen. CPGC agreed to lease the plant and
sublease the site from Chambers. In addition, certain contracts and agreements
related to Chambers are assigned to CPGC by Chambers. The lease commenced upon
the Chambers Conversion Date pertaining to the Credit Agreement for a period of
24 years.
WASTE DISPOSAL AGREEMENT
In December 1993, Northampton entered into a Waste Disposal Agreement with
the Fuel Company. Under the terms of the agreement, the Partnership will dispose
of anthracite coal refuse material which the Fuel Company will make available to
Northampton from waste coal sites leased and owned by the Fuel Company.
Northampton will supply ash to the Fuel Company for use in the reclamation of
the waste coal sites and ash disposal areas. The Fuel Company presently has
access to waste coal supplies sufficient to supply approximately 17.8 years of
waste coal to Northampton. Northampton is required to reimburse the Fuel Company
for all expenses incurred in the excavation, handling and loading of the waste
coal and in the unloading and handling of ash. During 1997, 1996 and 1995, this
reimbursement amounted to $8,686,684, $9,276,824 and $1,923,560, respectively.
FUEL SERVICES AGREEMENT
The Fuel Company entered into a Fuel Services Agreement with USOSC
effective January 1, 1996. The agreement is effective for five years from the
agreement date. At the sole discretion of the Fuel Company, the agreement may be
extended for up to two additional 10 year terms. Under the terms of the
agreement,
F-116
<PAGE> 247
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USOSC will staff and operate the fuel, ash and silt sites and manage the
operation and maintenance of the culm facility. Compensation to USOSC includes
the reimbursement of direct and indirect operational expenses. In addition, a
base fee of $250,000 is paid annually. If targeted plant performance for each
operating year based on fuel recoveries is reached, a recovery earned fee shall
be paid by the Fuel Company to USOSC. Liquidated damages shall be paid by USOSC
to the Fuel Company if the targeted fuel recoveries are not met. Similarly, if
targeted cost incentives are met, an earned fee shall be paid by the Fuel
Company to USOSC. If not met, liquidated damages shall be incurred by USOSC. The
cost incentive fee or related liquidated damages were not effective for 1996 and
were not incurred in 1997. Payment of the base fee, earned fees, and
discretionary fees are subordinated to debt service on the Project. During 1997,
1996 and 1995, $3,032,351, $2,210,991 and $0, respectively, in cost
reimbursement and fees was incurred and is included in fuel inventory in the
accompanying consolidated balance sheets and fuel expense in the accompanying
consolidated statements of operations. At December 31, 1997, $103,400 had been
advanced to USOSC and is carried as a prepaid expense on the accompanying
combined balance sheets.
In December 1993, the Fuel Company entered into a fuel services agreement
with an unrelated third party, which was replaced by the agreement described
above. During 1995, $2,507,181 in cost reimbursements and fees was capitalized
as part of the Fuel Company cost of construction. Cost reimbursement and fees of
$1,349,822 incurred during the 4th quarter of 1995 are included in fuel expense
in the accompanying combined statement of operations.
EXCESS CAPACITY SALES AGREEMENT
In June 1996, Northampton entered into an excess capacity sales agreement
with PG&E ET. The sales agreement became effective June 1, 1996 and is to extend
through May 31, 1998. The agreement states that Northampton will supply to PG&E
ET an amount of installed capacity up to 24mw. During 1997, 1996 and 1995,
$229,950, $94,050 and $0, respectively, was received from PG&E ET under the
provisions of the agreement.
INTERCOMPANY LOAN
During the period from July through September 1995, Scrubgrass received
$375,028 of equity rents from Buzzard. These funds were restricted pending
release by the Scrubgrass Banks, which occurred during December 1995. Scrubgrass
borrowed $375,028 from USOSC during 1995 to fund scheduled distributions to the
Partners. Pursuant to an agreement between USOSC, Scrubgrass and the Agent,
restricted cash of this amount was paid directly to USOSC in January 1996.
CONSULTING AND OTHER SERVICES
In 1996 and 1995, respectively, Chambers incurred and recorded expenses for
consulting and other services in the amount of $228 and $6,068 from BGCI and
$28,352 and $15,073 from Bechtel Power Corporation, an affiliate of BGCI. No
such expenses were incurred in 1997.
Northampton entered into a services agreement with BGCI to provide
management, administrative, procurement, environmental and financial services to
the Partnership. Compensation to BGCI includes reimbursement for personnel and
other direct costs as defined in the agreement. Payments for 1997, 1996 and 1995
were $416,993, $408,770 and $61,581, respectively, and are included in general
and administrative expenses in the accompanying combined statement of
operations. At December 31, 1997 and 1996, the
F-117
<PAGE> 248
LOGAN GENERATING COMPANY, L.P.,
KEYSTONE URBAN RENEWAL LIMITED PARTNERSHIP,
NORTHAMPTON GENERATING COMPANY, L.P. AND SUBSIDIARIES,
CHAMBERS COGENERATION LIMITED PARTNERSHIP
AND
SCRUBGRASS GENERATING COMPANY, L.P. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Partnership owed BGCI $33,750 and $91,719 respectively, which is included in
other accrued liabilities in the accompanying combined balance sheet.
8. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of the Partnerships' cash and cash equivalents,
restricted cash, accounts receivable, prepaid expenses, accounts payable,
interest payable, accrued financing and acquisition costs, working capital loan
and other accrued liabilities approximate fair value because of the short
maturities of these instruments.
The carrying amounts of the Partnerships' bonds payable, term loan payable
and junior loan payable are equal to their fair value because of the variable
nature of the interest obligations thereon. The fair value of the vendor loans
approximates their carrying value because market rates of interest approximate
the actual rates on these loans. The fair value on other long-term debt is
estimated based on currently quoted market prices for similar types of borrowing
arrangements and is also considered to approximate its carrying value.
The fair value of interest rate swap agreements, which are not carried on
the accompanying combined balance sheets, is estimated by determining the
difference between the fixed payments on the agreements and what the fixed
payments would be based on current market fixed rates for the appropriate
maturity, then calculating the present value of that difference for the
remaining terms of the agreements at current fixed market rates. The estimated
fair value of the interest rate swap agreements is a liability of approximately
$18.1 million and $27.4 million, respectively, at December 31, 1997 and 1996.
F-118
<PAGE> 249
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Bechtel Enterprises, Inc.
San Francisco, California
We have audited the accompanying combined balance sheets of Birch Power
Corporation, Cedar Power Corporation, Hickory Power Corporation, Palm Power
Corporation, and Panther Creek Leasing, Inc. (collectively, the "Entities") as
of December 31, 1997 and 1996 and the related combined statements of operations,
changes in stockholder's equity, and cash flows for the years ended December 31,
1997, 1996, and 1995. These financial statements are the responsibility of the
Entities' management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Gilberton Power Company; Cedar Bay Generating Company, L.P.;
Morgantown Energy Associates (a partnership); or Indiantown Cogeneration, L.P.
(collectively, the "Investees"). The Entities' combined investment in the
Investees was $23,583,000 and $29,895,000 at December 31, 1997 and 1996,
respectively. The Entities' combined equity income (loss) in the Investees was
$801,000, $394,000 and $(2,216,000) for the years ended December 31, 1997, 1996,
and 1995, respectively. The financial statements of the Investees were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for the Investees, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Birch Power
Corporation, Cedar Power Corporation, Hickory Power Corporation, Palm Power
Corporation, and Panther Creek Leasing, Inc. as of December 31, 1997 and 1996,
and the combined results of their operations and their combined cash flows for
the years ended December 31, 1997, 1996, and 1995 in conformity with generally
accepted accounting principles.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
June 8, 1998
F-119
<PAGE> 250
REPORT OF INDEPENDENT AUDITORS
Board of Control
Gilberton Power Company
We have audited the balance sheets of Gilberton Power Company as of
December 31, 1997 and 1996, and the related statements of income, partners'
capital, and cash flows for each of the three years in the period ended December
31, 1997 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gilberton Power Company at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Harrisburg, Pennsylvania
January 16, 1998
F-120
<PAGE> 251
INDEPENDENT AUDITORS' REPORT
To the Partners of Morgantown Energy Associates:
We have audited the balance sheets of Morgantown Energy Associates (a
"Partnership") as of December 31, 1997 and 1996, and the related statements of
operations, partners' capital and cash flows for each of the three years in the
period ended December 31, 1997 (not presented separately herein). These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Morgantown Energy Associates at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Richmond, Virginia
February 25, 1998
F-121
<PAGE> 252
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 3,587 $ 23,268 $ 6,593
Accounts and notes receivable from investees... 18,921 17,088 17,732
-------- -------- --------
Total current assets................... 22,508 40,356 24,325
Equity in investees.............................. 21,308 23,583 29,895
Investment in leveraged lease.................... 18,497 18,831 31,036
-------- -------- --------
Total assets........................... $ 62,313 $ 82,770 $ 85,256
======== ======== ========
LIABILITIES
Current liabilities:
Accounts payable............................... $ 735 $ 242 $ 106
Accrued expenses............................... 642 588 633
Income taxes payable........................... 4,345 4,009 399
-------- -------- --------
Total current liabilities.............. 5,722 4,839 1,138
Unearned and deferred income..................... 6,342 7,120 13,575
Deferred income taxes............................ 20,940 19,462 20,088
Minority interest................................ 14,920 15,010 17,217
-------- -------- --------
Total liabilities...................... 47,924 46,431 52,018
-------- -------- --------
Commitments and contingencies (Note 7)
STOCKHOLDER'S EQUITY
Common stock..................................... 50 50 50
Additional paid-in capital....................... 24,816 48,379 48,379
Accumulated deficit.............................. (10,477) (12,090) (15,191)
-------- -------- --------
Total stockholder's equity............. 14,389 36,339 33,238
-------- -------- --------
Total liabilities and
stockholder's equity............ $ 62,313 $ 82,770 $ 85,256
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-122
<PAGE> 253
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------
1998 1997 1997 1996 1995
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating income:
Income (loss) from investees............ $ 1,438 $ 1,497 $ 801 $ 394 $(2,216)
Income from leveraged lease............. 778 1,397 1,885 2,018 2,201
Service revenue from investees.......... 708 800 1,081 954 407
------- ------- ------- ------- -------
2,924 3,694 3,767 3,366 392
------- ------- ------- ------- -------
Operating expenses:
General and administrative expenses..... 167 255 373 323 337
Service costs........................... 454 603 755 604 269
------- ------- ------- ------- -------
621 858 1,128 927 606
------- ------- ------- ------- -------
Net operating income (loss)..... 2,303 2,836 2,639 2,439 (214)
Other income (expense):
Gain on partial sale of equity in
investees............................ -- 2,721 2,721 -- --
Loss on partial sale of investment in
leveraged lease...................... -- (1,919) (1,919) -- --
Interest from investees, net............ 2,293 2,079 3,397 2,616 3,664
Other income (expenses)................. 9 2 (81) (62) (213)
------- ------- ------- ------- -------
Income before minority interest........... 4,605 5,719 6,757 4,993 3,237
Minority share in loss.................... 90 74 238 218 329
------- ------- ------- ------- -------
Income before income taxes................ 4,695 5,793 6,995 5,211 3,566
Provision for income taxes................ (3,082) (5,147) (3,894) (1,338) (4,021)
------- ------- ------- ------- -------
Net income (loss)............... $ 1,613 $ 646 $ 3,101 $ 3,873 $ (455)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-123
<PAGE> 254
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995...................... $50 $48,379 $ (9,865) $38,564
Net loss...................................... -- -- (455) (455)
--- ------- -------- -------
Balance, December 31, 1995.................... 50 48,379 (10,320) 38,109
Net income.................................... -- -- 3,873 3,873
Common stock dividends........................ -- -- (8,744) (8,744)
--- ------- -------- -------
Balance, December 31, 1996.................... 50 48,379 (15,191) 33,238
Net income.................................... -- -- 3,101 3,101
--- ------- -------- -------
Balance, December 31, 1997.................... 50 48,379 (12,090) 36,339
Net income (Unaudited)........................ -- -- 1,613 1,613
Distribution to stockholder, return of
additional paid in capital (Unaudited)...... -- (23,563) -- (23,563)
--- ------- -------- -------
Balance, September 30, 1998 (Unaudited)....... $50 $24,816 $(10,477) $14,389
=== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-124
<PAGE> 255
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------
1998 1997 1997 1996 1995
------------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 1,613 $ 646 $ 3,101 $ 3,873 $ (455)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority share of losses.......................... (90) (74) (238) (218) (329)
Deferred income taxes............................. 1,478 2,895 (626) 300 4,587
Equity in net income (loss) of investees.......... (1,438) (1,497) (801) (394) 2,216
Income from leveraged lease....................... (778) (1,397) (1,885) (2,018) (2,201)
Leveraged lease payment received.................. 334 115 115 133 1,219
Gain on partial sale of equity in investees....... -- (2,721) (2,721) -- --
Loss on partial sale of investment in leveraged
lease........................................... -- 1,919 1,919 -- --
Dividends received from investees................. 3,713 3,702 4,831 5,972 3,834
Decrease (increase) in accounts and notes
receivable from investees....................... (1,833) (55) 644 (2,239) (2,206)
Increase in accounts payable...................... 493 6 136 93 12
Increase (decrease) in accrued liabilities........ 54 (285) (45) 200 225
Increase (decrease) in income taxes payable....... 336 2,631 3,610 455 (1,168)
-------- ------- ------- ------- --------
Net cash flows provided by operating
activities................................. 3,882 5,885 8,040 6,157 5,734
-------- ------- ------- ------- --------
Cash flows from investing activities:
Additional investment in investees.................. -- (23) (23) (24) (16,811)
Proceeds from partial sale of equity in investees... -- 5,027 5,027 -- --
Proceeds from partial sale of investment in
leveraged lease................................... -- 5,600 5,600 -- --
Proceeds from sale of equipment..................... -- -- -- -- 2,022
-------- ------- ------- ------- --------
Net cash flows provided by (used in)
investing activities....................... -- 10,604 10,604 (24) (14,789)
-------- ------- ------- ------- --------
Cash flows from financing activities:
Common stock dividends.............................. -- -- -- (8,744) --
Distribution to stockholder, return of additional
paid in capital................................... (23,563) -- -- -- --
Partial redemption of minority interest............. -- (1,546) (1,969) -- --
-------- ------- ------- ------- --------
Net cash flows used in financing
activities................................. (23,563) (1,546) (1,969) (8,744) --
-------- ------- ------- ------- --------
Net increase (decrease) in cash.............. (19,681) 14,943 16,675 (2,611) (9,055)
Cash at beginning of period........................... 23,268 6,593 6,593 9,204 18,259
-------- ------- ------- ------- --------
Cash at end of period................................. $ 3,587 $21,536 $23,268 $ 6,593 $ 9,204
======== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for taxes................. $ 1,255 $ 228 $ 910 $ 583 $ 602
======== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-125
<PAGE> 256
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. NATURE OF BUSINESS
The accompanying combined financial statements of Birch Power Corporation,
Cedar Power Corporation, Hickory Power Corporation, Palm Power Corporation, and
Panther Creek Leasing, Inc. (collectively, the Entities) represent a combination
of these five Entities which are each wholly-owned subsidiaries of Bechtel
Enterprises, Inc. (Parent). Four of these entities hold interests in power
plants through equity investments in investees and one holds an interest in a
leveraged lease of a power plant through a partnership investment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Information presented as of September 30, 1998 and for the nine-month
periods ended September 30, 1998 and 1997 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 Entities as of September 30, 1998 and the results of operations and cash
flows for the nine-month periods ended September 30, 1998 and 1997. The results
of operations for this interim period are not necessarily indicative of results
which may be expected for any other interim period or for the year as a whole.
EQUITY IN INVESTEES
Equity in investees are investments in entities which own or derive
revenues from power projects. The investees are accounted for on the equity
basis due to the Entities' ability to exercise significant influence over them.
Each Entity's share of income or loss from equity in investees is included in
operating revenues in the combined statements of operations.
INCOME TAXES
The Entities were included in the consolidated federal income tax return of
Bechtel Group, Inc. (BGI) in 1996 and 1995 and Bechtel Generating Company, Inc.
(BGCI) in 1997. It is the policy of BGI and BGCI to allocate their consolidated
current income tax liability to each profitable company in the group on the
basis of the ratio of each profitable company's current income tax liability to
the total consolidated current income tax liability, except for companies with
separate tax-sharing agreements. No current tax benefit is allocated to loss
companies of the consolidated group other than companies with separate tax
sharing agreements with BGI in 1996 and 1995 and BGCI in 1997.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred taxes are
calculated based on provisions of enacted tax law.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
F-126
<PAGE> 257
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income. This pronouncement establishes standards for the reporting
and display of comprehensive income and its components in financial statements.
Comprehensive income is defined as the total of net income and all other
nonowner changes in equity. This statement was adopted by the Entities effective
January 1, 1998 with no effect to the financial statements.
3. EQUITY IN INVESTEES
The following table summarizes each Entity's percentage equity in investees
as of September 30, 1998 (unaudited), December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------
ENTITY AFFILIATE 1998 1997 1996 1995
- ------ --------- ------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Birch Power Corporation Gilberton Power Company 19% 19% 19% 19%
Cedar Power Corporation Cedar Bay Generating Company,
L.P. 16 16 16 16
Hickory Power Corporation Morgantown Energy Associates
(a partnership) 15 15 15 15
Palm Power Corporation Indiantown Cogeneration, L.P. 10 10 12 12
</TABLE>
In September 1997, Palm Power Corporation decreased its ownership from 12%
to 10% of its equity in Indiantown Cogeneration, L.P. for $5,027 with a gain of
$2,721.
The following table presents summarized financial information for the above
four Investees in which the Entities hold interests:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
Balance sheet data:
Current assets............................................ $ 95,341 $ 108,830
Noncurrent assets......................................... 1,401,621 1,441,600
---------- ----------
Total assets...................................... $1,496,962 $1,550,430
========== ==========
Current liabilities....................................... $ 104,538 $ 99,947
Noncurrent liabilities.................................... 1,209,134 1,242,895
Partners' equity.......................................... 183,290 207,588
---------- ----------
Total liabilities and partners' equity............ $1,496,962 $1,550,430
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Statement of operations data:
Operating revenues................................... $367,311 $362,857 $199,300
Net income (loss).................................... 12,363 7,160 (11,675)
The Entities' share of net income (loss)............. 801 394 (2,216)
</TABLE>
4. INVESTMENT IN LEVERAGED LEASE
Panther Creek Leasing, Inc. (Panther) is the lessor in a leveraged lease
agreement entered into in 1993 under which a power plant having an estimated
economic life of 20 years was leased for a term of 19.5 years.
F-127
<PAGE> 258
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Panther's equity investment represented 21 percent of the purchase price; the
remaining 79 percent was furnished by third-party financing in the form of
long-term debt that provides for no recourse against Panther and is
collateralized by a first lien on the property. At the end of the lease term,
the power plant will be turned back to Panther. The residual value at that time
is estimated to be 20 percent of the cost.
Panther's net investment in the leveraged lease is composed of the
following elements at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
Rentals receivable (net of principal and interest on the
nonrecourse debt)......................................... $13,441 $ 22,186
Estimated residual value of leased assets................... 5,390 8,850
Less: Unearned and deferred income.......................... (7,120) (13,575)
------- --------
Investment in leveraged lease............................... 11,711 17,461
Less: Deferred taxes........................................ (4,917) (8,580)
------- --------
Net investment in leveraged lease........................... $ 6,794 $ 8,881
======= ========
</TABLE>
In December 1997, Panther sold 39.1% of its investment in the leveraged
lease for $5,600 at a loss of $1,919.
5. COMMON STOCK
The common stock of the Entities at September 30, 1998 (unaudited),
December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------
PAR VALUE ISSUED AND
PER SHARE AUTHORIZED OUTSTANDING
--------- ---------- -----------
<S> <C> <C> <C>
Birch Power Corporation................................. $1.00 100,000 10,000
Cedar Power Corporation................................. $1.00 10,000 10,000
Hickory Power Corporation............................... $1.00 10,000 10,000
Palm Power Corporation.................................. $1.00 10,000 10,000
Panther Creek Leasing, Inc.............................. $1.00 10,000 10,000
</TABLE>
6. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997, 1996,
and 1995 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................... $4,239 $ 815 $ (893)
State..................................................... 281 223 327
------ ------ ------
4,520 1,038 (566)
------ ------ ------
Deferred:
Federal................................................... (626) 300 4,587
------ ------ ------
$3,894 $1,338 $4,021
====== ====== ======
</TABLE>
F-128
<PAGE> 259
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations between the federal statutory income tax rate and the
Entities' combined effective tax rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal statutory
rate..................... $2,448 35.0% $1,824 35.0% $1,248 35.0%
State income taxes, net of
federal tax effect....... 186 2.7 118 2.2 194 5.4
Effect of consolidated tax
allocation............... 1,311 18.7 (471) (9.0) 2,813 78.9
Other...................... (51) (0.7) (133) (2.5) (234) (6.5)
------ ----- ------ ----- ------ -----
Effective tax rate......... $3,894 55.7% $1,338 25.7% $4,021 112.8%
====== ===== ====== ===== ====== =====
</TABLE>
Significant components of the Entities' net deferred tax liability as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liability:
Tax loss from investees................................... $(19,019) $(15,906)
Leveraged lease........................................... (4,917) (8,580)
Other..................................................... (29) --
-------- --------
(23,965) (24,486)
-------- --------
Deferred tax asset:
Net operating losses...................................... 4,503 4,301
Other..................................................... -- 97
-------- --------
4,503 4,398
-------- --------
Net deferred tax liability.................................. $(19,462) $(20,088)
======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
LINE OF CREDIT
An associate of the Parent has made available to the Entities a total
revolving credit facility of $125,000 at December 31, 1997 against which the
Entities had no borrowings. An associated company has guaranteed the credit
facility which requires the associated company to maintain a minimum level of
stockholder's equity.
GUARANTEES AND LETTERS OF CREDIT
Letters of credit of $762 were outstanding at December 31, 1997.
At December 31, 1997, the Entities have committed to contribute to certain
investee entities capital of $2,012, all of which is contingent upon certain
conditions. The aforementioned capital contributions are secured by letters of
credit or collateral of the Parent and the associated company.
F-129
<PAGE> 260
BIRCH POWER CORPORATION, CEDAR POWER CORPORATION,
HICKORY POWER CORPORATION, PALM POWER CORPORATION,
AND PANTHER CREEK LEASING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TAX CREDITS
The Internal Revenue Service (IRS) has issued a technical advice memorandum
disallowing energy tax credits taken by the partners of Gilberton Power Company
(GPC). GPC is appealing this decision and believes it will prevail. An
unsuccessful appeal could nullify the Birch Limited Partnership (BLP) sharing
ratio change which occurred on April 1, 1993. As a result, Birch Power
Corporation could take a charge to pre-tax book income and owe cash to its BLP
partner, ESI Energy Inc. The maximum potential liability is approximately $1,200
through 1997. This estimate does not include interest or any other charges.
F-130
<PAGE> 261
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Indiantown Cogeneration, L.P. and
Cedar Bay Generating Company, L.P.:
We have audited the accompanying combined balance sheets of Indiantown
Cogeneration, L.P. (a Delaware limited partnership) and Cedar Bay Generating
Company, L.P. (a Delaware limited partnership) as of December 31, 1997 and 1996,
and the related combined statements of operations, changes in partners' capital
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Partnerships'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Indiantown Cogeneration,
L.P. and Cedar Bay Generating Company, L.P. as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
January 19, 1998
F-131
<PAGE> 262
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------
1998 1997 1996
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 1,838 $ 3,342 $ 407
Restricted cash....................................... 7,349 8,584 18,501
Accounts receivable................................... 27,045 27,276 28,191
Inventories........................................... 4,047 1,675 3,784
Prepaid expenses...................................... 1,540 1,861 1,717
Investments held by Trustee, including restricted
funds of $19,231 (unaudited), $2,765 and $3,673,
respectively....................................... 27,299 13,009 18,750
---------- ---------- ----------
Total current assets.......................... 69,118 55,747 71,350
INVESTMENTS HELD BY TRUSTEE, restricted funds........... 13,770 13,501 13,001
DEPOSITS................................................ 70 65 60
LAND.................................................... 8,582 8,582 8,579
PROPERTY, PLANT & EQUIPMENT, net of accumulated
depreciation of $106,606 (unaudited), $84,614 and
$55,084, respectively................................. 1,094,943 1,114,688 1,141,711
FUEL RESERVE............................................ 3,429 3,141 3,592
DEFERRED FINANCING COSTS, net of accumulated
amortization of $51,658 (unaudited), $49,875 and
$47,342, respectively................................. 30,586 32,370 34,903
---------- ---------- ----------
$1,220,498 $1,228,094 $1,273,196
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt..................... $ 18,104 $ 20,052 $ 16,278
Current portion of lease payable...................... 282 267 248
Accounts payable and accrued liabilities.............. 25,401 22,255 24,417
Accrued interest...................................... 16,237 2,337 12,180
---------- ---------- ----------
Total current liabilities..................... 60,024 44,911 53,123
LONG-TERM DEBT:
Interest payable...................................... 38,836 29,703 18,088
Bonds and notes payable............................... 991,787 1,001,234 1,021,286
Retainage payable..................................... 20,000 20,000 20,000
Lease payable -- railcars............................. 4,657 4,871 5,138
---------- ---------- ----------
Total long-term debt.......................... 1,055,280 1,055,808 1,064,512
---------- ---------- ----------
Total liabilities............................. 1,115,304 1,100,719 1,117,635
PARTNERS' CAPITAL....................................... 105,194 127,375 155,561
---------- ---------- ----------
$1,220,498 $1,228,094 $1,273,196
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-132
<PAGE> 263
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, FISCAL YEAR ENDED DECEMBER 31,
------------------------- ------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Electric capacity and capacity
bonus............................. $156,082 $155,292 $206,762 $198,489 $ 83,019
Electric energy revenue.............. 50,827 52,154 68,988 73,068 31,100
Steam revenue........................ 11,811 12,725 15,774 15,355 14,695
-------- -------- -------- -------- --------
218,720 220,171 291,524 286,912 128,814
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Fuel and ash......................... 52,796 58,192 92,485 95,958 51,390
Operating and maintenance............ 39,284 37,548 39,334 32,356 16,484
General and administrative........... 8,508 6,128 13,581 14,483 11,998
Insurance and taxes.................. 8,806 9,380 6,705 7,483 222
Depreciation and amortization........ 23,626 23,594 31,201 34,872 15,433
-------- -------- -------- -------- --------
133,020 134,842 183,306 185,152 95,527
-------- -------- -------- -------- --------
OPERATING INCOME....................... 85,700 85,329 108,218 101,760 33,287
OTHER INCOME (EXPENSE):
Interest expense..................... (81,604) (82,136) (111,867) (112,674) (54,332)
Other................................ 204 724 3,543 5,636 3,390
-------- -------- -------- -------- --------
(81,400) (81,412) (108,324) (107,038) (50,942)
-------- -------- -------- -------- --------
NET INCOME (LOSS)...................... $ 4,300 $ 3,917 $ (106) $ (5,278) $(17,655)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-133
<PAGE> 264
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND THE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
PARTNERS' CAPITAL, DECEMBER 31, 1994........................ $ 74,889
Capital contributions..................................... 140,000
Net loss.................................................. (17,655)
--------
PARTNERS' CAPITAL, DECEMBER 31, 1995........................ 197,234
Capital distributions..................................... (36,395)
Net loss.................................................. (5,278)
--------
PARTNERS' CAPITAL, DECEMBER 31, 1996........................ 155,561
Capital distributions..................................... (28,080)
Net loss.................................................. (106)
--------
PARTNERS' CAPITAL, DECEMBER 31, 1997........................ 127,375
Capital distributions..................................... (26,481)
Net Income................................................ 4,300
--------
PARTNERS' CAPITAL, SEPTEMBER 30, 1998 (UNAUDITED)........... $105,194
========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-134
<PAGE> 265
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED SEPTEMBER 30, FISCAL YEAR ENDED DECEMBER 31,
------------------------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 4,300 $ 3,917 $ (106) $ (5,278) $ (17,655)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization............... 23,776 23,882 32,063 35,747 15,445
Decrease (increase) in restricted cash...... 1,235 (15,175) 9,917 (2,553) 5,566
Decrease (increase) in accounts
receivable............................... 231 (1,705) 915 (7,186) (5,553)
Decrease (increase) in fuel inventory and
reserves................................. (2,660) 1,648 2,560 (1,743) 3,440
(Increase) decrease in deposits and other
prepaid expenses......................... 316 (1,031) (149) 1,017 (32)
Increase (decrease) in accounts payable,
other accrued liabilities, and accrued
interest................................. 24,782 16,648 (389) 695 12,035
-------- -------- -------- -------- ---------
Net cash provided by operating
activities............................. 51,980 28,184 44,811 20,699 13,246
-------- -------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in investment held by trustee.......... (14,559) -- 5,241 40,001 33,218
Cash paid for construction in progress.......... -- -- -- -- (167,448)
Additions to property, plant and equipment...... (2,248) (2,286) (2,511) (12,411) (5,144)
Sale of property, plant and equipment........... -- -- -- -- 7,882
Decrease in retainage payable................... -- -- -- -- (11,946)
-------- -------- -------- -------- ---------
Net cash provided by (used in) investing
activities............................. (16,807) (2,286) 2,730 27,590 (143,438)
-------- -------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deferred financing costs............ -- -- -- -- (5,287)
Proceeds from long-term debt.................... -- -- -- -- 142,045
Repayment of long-term debt..................... (9,982) (9,760) (16,278) (14,200) (145,838)
Decrease in lease payable -- railcars........... (214) -- (248) (231) --
Capital contributions........................... -- -- -- -- 140,000
Capital distributions........................... (26,481) (16,278) (28,080) (36,395) --
-------- -------- -------- -------- ---------
Net cash (used in) provided by
financing.............................. (36,677) (26,038) (44,606) (50,826) 130,920
-------- -------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................ (1,504) (140) 2,935 (2,537) 728
CASH AND CASH EQUIVALENTS, beginning of period.... 3,342 407 407 2,944 2,216
-------- -------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period.......... $ 1,838 $ 267 $ 3,342 $ 407 $ 2,944
======== ======== ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........................ $107,338 $ 99,184 $ 105,723
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-135
<PAGE> 266
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
INDIANTOWN COGENERATION, L.P.
Indiantown Cogeneration, L.P. ("Indiantown") is a special purpose Delaware
limited partnership formed on October 4, 1991. The general partners are Toyan
Enterprises ("Toyan"), a California corporation and a wholly-owned special
purpose indirect subsidiary of U.S. Generating Company LLC ("USGenLLC"), and
Palm Power Corporation ("Palm"), a Delaware corporation and a special purpose
indirect subsidiary of Bechtel Enterprises, Inc. ("BEn"). The sole limited
partner is TIFD III-Y, Inc. ("TIFD"), a special purpose indirect subsidiary of
General Electric Capital Corporation ("GECC"). During 1994, Indiantown formed
its sole, wholly owned subsidiary, Indiantown Cogeneration Funding Corporation
("ICL Funding"), to act as agent for, and co-issuer with, Indiantown in
accordance with the 1994 bond offering discussed in Note 5. ICL Funding has no
separate operations and has only $100 in assets and capitalization.
Indiantown was formed to develop, construct, and operate a 330 megawatt
(net) pulverized coal-fired cogeneration facility (the "Facility") located on
approximately 240 acres in southwestern Martin County, Florida. The Facility was
designed to produce electricity for sale to Florida Power & Light Company
("FP&L") in accordance with the Power Purchase Agreement discussed in Note 7.
The Facility also supplies steam to Caulkins Indiantown Citrus Co. ("Caulkins")
for its plant located near the Facility in accordance with the Energy Services
Agreement discussed in Note 7.
Indiantown was in the development stage through December 21, 1995 and
commenced commercial operations on December 22, 1995 (the "Commercial Operation
Date"). Indiantown's continued existence is dependent on its ability to sustain
successful operations. Management of Indiantown is of the opinion that its
assets are realizable at their current carrying value.
Indiantown is managed by U.S. Generating Company ("USGen") pursuant to a
Management Services Agreement (the "MSA"). The Facility is operated by U.S.
Operating Services Company ("USOSC") pursuant to an Operation and Maintenance
Agreement (the "O&M Agreement"). USGen and USOSC are general partnerships
originally formed between affiliates of PG&E Enterprises and Bechtel
Enterprises. On September 19, 1997, USGen and USOSC each separately redeemed
Bechtel Enterprises' interests in USGen and USOSC so that PG&E Enterprises
through USGenLLC now indirectly owns all of the interests in USGen and USOSC.
This will not affect USGen's obligations under the MSA or USOSC's obligations
under the O&M Agreement. In addition, on September 19, 1997, Toyan purchased
16.67% of Palm's interest in Indiantown, which represents a 2% ownership
interest in the partnership.
The net profits and losses of Indiantown are allocated to Toyan, Palm and
TIFD (collectively, the "Indiantown Partners") based on the following ownership
percentages:
<TABLE>
<CAPTION>
FROM SEPTEMBER 20, 1997 UNTIL SEPTEMBER 20, 1997
----------------------- ------------------------
<S> <C> <C>
Toyan............................... 50% 48%
Palm................................ 10% 12%
TIFD................................ 40% 40%
</TABLE>
All distributions other than liquidating distributions will be made based
on the Indiantown Partners' percentage interest as shown above, in accordance
with the project documents and at such times and in such amounts as the Board of
Control of Indiantown determines. The Indiantown Partners contributed, pursuant
to an equity commitment agreement, approximately $140,000,000 of equity when
commercial operation commenced in December 1995.
F-136
<PAGE> 267
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CEDAR BAY GENERATING COMPANY, L.P.
Cedar Bay Generating Company, L.P. ("Cedar Bay") is a Delaware limited
partnership formed on April 2, 1993. The general partners of Cedar Bay are Cedar
Bay Cogeneration, Inc. ("CBCI"), a California corporation and special purpose
indirect subsidiary of PG&E Enterprises ("PG&EE"), and Cedar II Power
Corporation ("Cedar II"), a Delaware corporation and special purpose indirect
subsidiary of BEn. CBCI is also the limited partner of Cedar Bay.
Cedar Bay was formed to construct, own and operate a 250 megawatt power
plant (the "Project") located in Jacksonville, Florida. The Project produces
electricity for sale to FP&L. The Project sells a minimum of 3,328 million
pounds per year of process steam to Stone Container Corporation ("Stone"),
formerly Seminole Kraft, an unrelated third party, for use in its industrial
operations.
Cedar Bay has incurred significant net losses during the three years ended
December 31, 1997. The Project is experiencing positive operating cash flow from
operations but the level of the operating cash flow is not sufficient to pay
full debt service. When Cedar Bay was formed, it was anticipated that there
would be recurring net losses (declining over time) until 2005. The reduction of
future net losses is the result of gradually increasing rates under the Power
Purchase Agreement discussed in Note 7 with FP&L and the related reduction of
interest expense due to the pay-down of the bonds and notes payable. The amount
of the current net losses has also been impacted negatively by the underpayment
of capacity payments by FP&L. Management believes that capacity payments are
significantly understated as a result of FP&L's breach of the PPA. Cedar Bay has
filed suit against FP&L to recover these additional payments and for declaratory
(future) relief. However, until Cedar Bay obtains substantial discovery from
FP&L concerning the dispatch of its system, it is not possible to precisely
compute the damages claimed (see Note 8). No revenue has been recorded for
disputed capacity payments. Cedar Bay's current projections show that, due to
the increasing energy rates and the decrease in debt service, positive net
earnings will occur in 2003. Cedar Bay's ability to meet its financial
obligations is dependent on its ability to sustain successful operations and the
successful resolution of its litigation with FP&L.
The net operating profits and losses of Cedar Bay are allocated to CBCI and
Cedar II (collectively, the "Cedar Bay Partners") based on the following
ownership percentages:
<TABLE>
<S> <C>
CBCI........................................................ 80%
Cedar II.................................................... 20%
</TABLE>
All distributions other than liquidating distributions will be made based
on the Cedar Bay Partners' percentage interest as shown above, in accordance
with the project documents and at such times and in such amounts as the Board of
Control of Cedar Bay determines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The accompanying financial statements of Indiantown and Cedar Bay,
(collectively the "Partnerships"), are presented on a combined basis due to the
common management of the operating facilities of the Partnerships.
The accompanying combined financial statements were prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-137
<PAGE> 268
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The combined financial statements as of September 30, 1998 and for the
periods ended September 30, 1998 and 1997 are unaudited and are presented
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the accompanying combined financial statements
reflect all adjustments (which are of normal recurring nature) necessary to
present fairly the financial position and results of operations and cash flows
for the interim periods, but are not necessarily indicative of the results of
operations for a full fiscal year.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, cash equivalents include
short-term investments with original maturities of three months or less.
RESTRICTED CASH
Restricted cash, which consists of cash and cash equivalent amounts as
defined above, includes amounts restricted for use in operations and for capital
expenditures.
FUEL INVENTORY
Coal and lime inventories are stated at the lower of cost or market using
the average cost method.
PREPAID EXPENSES
Prepaid expenses of approximately $1,500,000 as of December 31, 1997,
include $968,000 for operation and maintenance funding, $427,000 for insurance
costs related to property damage and other general liability policies and
$97,000 for prepayments of the annual administrative fees for the letters of
credit and for the trustee.
Prepaid expenses of approximately $1,356,000 as of December 31, 1996,
include $363,000 for operation and maintenance funding, $871,000 for insurance
costs related to property damage and other liability policies and $121,000 for
prepayments of the annual administrative fees for the letters of credit and for
the trustee.
DEPOSITS
Deposits are stated at cost plus accrued interest and include amounts
required under certain of Indiantown's agreements, as described in Note 4, and
approximately $168,000 for Cedar Bay utility deposits, as of December 31, 1997
and 1996.
INVESTMENTS HELD BY TRUSTEE
Investments held by the trustee represent bond and equity proceeds held by
a bond trustee/disbursement agent and are carried at cost which approximates
market. All funds are invested in either Nations Treasury Fund-Class A or other
permitted investments for longer periods. The proceeds include $12,501,000 of
restricted tax-exempt debt service reserve to be held long term, as required by
the financing documents.
Indiantown maintains restricted investments covering a portion of debt
principal and interest payable, as required by the financing documents. These
investments are classified as current assets in the accompanying combined
balance sheets. A qualifying facility ("QF") reserve of $1 million is also held
long term (see Note 5).
F-138
<PAGE> 269
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost and is being depreciated
over its useful life, estimated to be 35 years, using the straight-line method.
As of January 1, 1997, Indiantown prospectively revised its calculation of
depreciation to include a residual value on its Facility approximating 25
percent of the gross Facility costs. This charge increased net income for 1997
by approximately $4.5 million.
Other property, plant and equipment are depreciated on a straight-line
basis over the estimated economic or service lives of the respective assets
(ranging from 5 to 7 years). Routine maintenance and repairs are charged to
expense as incurred.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121").
SFAS No. 121, which was adopted by the Partnerships as of January 1, 1996,
establishes criteria for recognizing and measuring impairment losses when
recover of recorded long-lived asset values is uncertain. The adoption of this
pronouncement did not have an impact on the Partnerships' combined financial
condition or results of operations in 1997 or 1996.
FUEL RESERVE
The fuel reserve, carried at cost, represents an approximate thirty-day
supply of coal held for emergency purposes.
DEFERRED FINANCING COSTS
Financing costs, consisting primarily of the costs incurred to obtain
project financing, are deferred and amortized using the effective interest rate
method over the term of the related permanent financing.
MAJOR MAINTENANCE RESERVE
The major maintenance reserve represents an accrual for anticipated
expenditures for scheduled significant maintenance of the projects. The expense
is recognized ratably over the maintenance cycle of the related equipment. The
major maintenance reserve was $865,000 and $1,455,000 at December 31, 1997 and
1996, respectively and is included in accounts payable and accrued liabilities
in the accompanying combined balance sheets.
INCOME TAXES
Under current law, no Federal or state income taxes are paid directly by
the Partnerships. All items of income and expense of the Partnerships are
allocable to and reportable by the Partners in their respective income tax
returns. Accordingly, no provision is made in the accompanying combined
financial statements for Federal or state income taxes.
RECLASSIFICATIONS
Certain 1995 and 1996 balances have been reclassified to conform to the
current year presentation.
3. DETAIL OF PARTNERS' CAPITAL
The detail of Partners' capital as reflected in the accompanying combined
balance sheets as of December 31, 1997 and 1996 is as follows (dollars in
thousands).
F-139
<PAGE> 270
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
INDIANTOWN:
Toyan Enterprises................................. $ 53,063 $ 55,775
Palm Power Corporation............................ 10,613 13,943
TIFD III-Y, Inc................................... 42,450 46,479
-------- --------
Total................................... $106,126 $116,197
CEDAR BAY:
Cedar Bay Cogeneration, Inc....................... $ 16,999 $ 31,491
Cedar II Power Corporation........................ 4,250 7,873
-------- --------
Total................................... 21,249 39,364
-------- --------
Total Partners' Capital................. $127,375 $155,561
======== ========
</TABLE>
4. DEPOSITS
In 1991, in accordance with a contract between Indiantown and Martin
County, Indiantown provided Martin County with a security deposit in the amount
of $149,000 to secure installation and maintenance of required landscaping
materials. This amount is included in current assets as of December 31, 1997 and
1996. The landscaping has been completed and Indiantown has applied to Martin
County for a return of funds in excess of the required deposit as security for
the first year maintenance.
In 1991, in accordance with the Planned Unit Development Zoning Agreement
between Indiantown and Martin County, Indiantown deposited $1,000,000 in trust
with the Board of County Commissioners of Martin County (the "PUD Trustee").
Income from this trust will be used solely for projects benefiting the community
of Indiantown. On July 23, 2025, the PUD Trustee is required to return the
deposit to Indiantown. As of December 31, 1997 and 1996, estimated present
values of this deposit of $65,000 and $60,000, respectively, are included in
deposits in the accompanying combined balance sheets. The remaining balance is
included in deferred financing costs.
5. BONDS AND NOTES PAYABLE
FIRST MORTGAGE BONDS
Indiantown and ICL Funding jointly issued $505,000,000 of First Mortgage
Bonds (the "First Mortgage Bonds") in a public issuance registered with the
Securities and Exchange Commission. Proceeds from the issuance were used to
repay outstanding balances of $273,513,000 on a prior construction loan and to
complete the Facility. The First Mortgage Bonds are secured by a lien on and
security interest in substantially all of the assets of Indiantown. The First
Mortgage Bonds were issued in 10 separate series with interest rates ranging
from 7.38 to 9.77 percent and with maturities ranging from 1996 to 2020.
Interest is payable semi-annually on June 15 and December 15 of each year and
commenced on June 15, 1995. Interest expense related to the First Mortgage Bonds
was $46,800,091, $47,456,604 and $47,513,881 in 1997, 1996 and 1995,
respectively.
TAX EXEMPT FACILITY REVENUE BONDS
Indiantown invested the proceeds from the issuance of $113,000,000 of
Series 1992A and 1992B Industrial Development Revenue Bonds (the "1992 Bonds")
through the Martin County Industrial Development Authority (the "MCIDA") in an
investment portfolio with Fidelity Investments Institutional Services Company.
On November 22, 1994, Indiantown refunded the 1992 Bonds with proceeds from the
issuance of $113,000,000 Series 1994A and of $12,010,000 Series 1994B Tax Exempt
Facility Refunding Revenue Bonds
F-140
<PAGE> 271
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
which were issued on December 20, 1994 (the Series 1994A Bonds and the Series
1994B Bonds, collectively, the "1994 Tax Exempt Bonds").
The 1994 Tax Exempt Bonds were issued by the MCIDA pursuant to an Amended
and Restated Indenture of Trust between the MCIDA and NationsBank of Florida,
N.A. (succeeded by The Bank of New York Trust Company of Florida, N.A.) as
trustee (the "Trustee"). Proceeds from the 1994 Tax Exempt Bonds were loaned to
Indiantown pursuant to the MCIDA Amended and Restated Authority Loan Agreement
dated as of November 1, 1994 (the "Authority Loan"). The Authority Loan is
secured by a lien on and a security interest in substantially all of the assets
of Indiantown. The 1994 Tax Exempt Bonds, which mature December 15, 2025, carry
fixed interest rates of 7.875 percent and 8.05 percent for Series 1994A and
1994B, respectively. Total interest paid related to the 1994 Tax Exempt Bonds
was $9,865,555 for each of the years ended December 31, 1997 and 1996 and
$10,939,752 for the year ended December 31, 1995. The Tax Exempt Bonds and the
First Mortgage Bonds are equal in seniority.
SENIOR PROJECT DEBT
Cedar Bay's Senior Project Debt consists of borrowings from a syndicate of
banks led by Banque Paribas as agent (the "Bank Lenders") and a group of
institutions (the "Institutional Lenders") (collectively, the "Senior Lenders").
Senior Project Debt advances funded by the Bank Lenders are accruing interest at
the London Interbank Offered Rate ("LIBOR") plus 1.50 percent or a Federal Funds
rate plus 0.50 percent. Senior project debt advances funded by the Institutional
Lenders are accruing interest at a fixed rate of approximately 12.14 percent.
Debt due Bank Lenders will be repaid as scheduled quarterly payments
through the year 2009. Debt due Institutional Lenders is scheduled to be repaid
in quarterly installments throughout the year 2013. Prepayments are permitted.
Collateral for the Senior Project Debt consists of the plant and related
facilities and all agreements relating to the operation of the Cedar Bay
Project. The Senior Project Debt also requires maintenance of certain negative
and affirmative covenants.
Cedar Bay pays a commitment fee of 0.5 percent per annum until completion
on the undisbursed portion of the Bank Lenders' commitment. In addition, Cedar
Bay shall pay to the agent a fee of $100,000 per annum, adjusted for inflation.
SUBORDINATED PROJECT DEBT
Cedar Bay's Subordinated Project Debt commitments have been assigned to,
and assumed by, Gray Hawk Power Corporation ("GHPC"), a special purpose indirect
subsidiary of PG&EE, and Cedar I Power Corporation ("Cedar I"), a special
purpose indirect subsidiary of BEn, and the terms of such commitments have been
modified. The principal amount of this debt commenced bearing interest on
January 1, 1994, and bears interest at an annual rate of 15.6 percent thereafter
until the principal amount of such loans is paid in full. The unpaid
subordinated interest accrues interest at the prime commercial lending rate
announced by The Chase Manhattan Bank plus 3 percentage points. Interest on the
Subordinated Project Debt is to be paid at the time cash becomes available to
Cedar Bay. Management does not anticipate a positive cash flow sufficient to
repay the balance of accrued interest outstanding as of December 31, 1997 within
the next twelve months. Accordingly, this amount is classified as a noncurrent
liability in the accompanying combined balance sheets. The Subordinated Project
Debt is scheduled to be repaid by the year 2019.
Future minimum lease payments related to outstanding First Mortgage Bonds,
1994 Tax Exempt Bonds, Senior Project Debt, and Subordinated Project Debt at
December 31, 1997 are as follows (in thousands).
F-141
<PAGE> 272
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
1998............................................. $ 20,052
1999............................................. 17,362
2000............................................. 7,928
2001............................................. 13,045
2002............................................. 11,666
Thereafter....................................... 951,233
----------
Total.................................. $1,021,286
==========
</TABLE>
EQUITY LOAN
In 1994, with proceeds from the issuance of the First Mortgage Bonds, an
equity loan in the amount of $139,000,000 was paid in full and Indiantown and
TIFD entered into an Amended and Restated Equity Loan Agreement (the "Equity
Loan Agreement") for a maximum loan of $139,000,000 to be drawn at Indiantown's
request, incorporating the same terms as the original loan. As of the Commercial
Operation Date, the maximum amount of the loan had been drawn and was
outstanding. This loan was repaid with an equity contribution on December 26,
1995, as discussed below. Indiantown paid $2,813,357 in interest and $2,561,428
in commitment fees during 1995. No such interest or fees related to this loan
were paid in 1997 or 1996.
EQUITY CONTRIBUTION AGREEMENT
Pursuant to an Equity Contribution Agreement, dated as of November 1, 1994,
between TIFD and NationsBank of Florida, N.A. (succeeded by The Bank of New York
Trust Company of Florida, N.A.), the Indiantown Partners contributed
approximately $140,000,000 of equity on December 26, 1995. Proceeds were used to
repay the $139,000,000 outstanding under the Equity Loan Agreement. The
remaining $1,000,000 was deposited with the Trustee according to the
disbursement agreement among Indiantown, the Trustee and the other lenders and
is included in current investments held by trustee in the accompanying combined
balance sheet as of December 31, 1997 and 1996.
REVOLVING CREDIT AGREEMENT
The Revolving Credit Agreement provides for the availability of funds for
the working capital requirements of the Indiantown Facility. It has a term of
seven years from November 1, 1994, subject to extension at the discretion of the
banks party thereto. The interest rate is based upon various short-term indices
chosen at Indiantown's option and is determined separately for each draw. This
credit facility includes commitment fees, to be paid quarterly, of .375 percent
on the unborrowed portion. The face amount of the original working capital
letter of credit was increased in November 1994 from $10 million to $15 million.
Under the original and new working capital credit facilities, Indiantown paid
$57,031, $57,187 and $57,031 in commitment fees in 1997, 1996 and 1995,
respectively. At December 31, 1997 and 1996, no draws for working capital had
been made to Indiantown under the Revolving Credit Agreement.
TERMINATION FEE LETTER OF CREDIT
On or before the Commercial Operation Date, Indiantown was required to
provide FP&L with a letter of credit equal to the total termination fee as
defined in the Power Purchase Agreement in each year not to exceed $50,000,000.
Pursuant to the terms of the Letter of Credit and Reimbursement Agreement,
Indiantown obtained a commitment for the issuance of this letter of credit. At
the Commercial Operation Date, this letter of credit replaced the completion
letter of credit outlined below. The initial amount of $13,000,000 was issued
for the first year of operations and increased to $23,000,000 in January of
1997. During
F-142
<PAGE> 273
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1997, 1996 and 1995 no draws were made on this letter of credit. Commitment fees
of $572,819 and $509,395 were paid on this letter of credit in 1997 and 1996,
respectively.
Cedar Bay has provided FP&L with a letter of credit in the amount of $10
million. The total letter of credit facility is $20 million. FP&L may draw on
this letter of credit in the event a termination fee is due and owed under the
terms of the Power Purchase Agreement (see Note 7).
FP&L COMPLETION LETTER OF CREDIT
At financial closing in October 1992, Indiantown provided to FP&L a letter
of credit in the amount of $9,000,000 pursuant to the Power Purchase Agreement.
This letter of credit was terminated in 1994 and a new one was issued with
essentially the same terms. The Power Purchase Agreement (see Note 7) requires
that Indiantown pay FP&L for each day beyond December 1, 1995, that the Facility
did not achieve commercial operation. Because the commercial operation date did
not occur before December 1, 1995, commencing December 1, 1995 and until
December 22, 1995, FP&L was entitled to draw on the letter of credit in the
amount of $750,000 per calendar month pro-rated for a partial month. In lieu of
drawing on the letter of credit, Indiantown paid FP&L $508,065 in delay damages
on December 22, 1995. Upon issuance of the above Termination Fee Letter of
Credit, the FP&L Completion Letter of Credit was terminated. Commitment fees of
$102,656 were paid on this letter of credit in 1995.
FP&L QF LETTER OF CREDIT
Within 60 days after the Commercial Operation Date, Indiantown was required
to provide a letter of credit for use in the event of a loss of QF status under
the Public Utility Regulatory Policies Act of 1978 ("PURPA"). The initial amount
was $500,000 increasing by $500,000 per agreement year to a maximum of
$5,000,000. Pursuant to the terms of the Letter of Credit and Reimbursement
Agreement, Indiantown obtained a commitment for the issuance of this letter of
credit. The amount will be used by Indiantown as necessary to maintain or
reinstate the Facility's qualifying facility status. Indiantown may, in lieu of
a letter of credit, make regular cash deposits to a dedicated account in amounts
totaling $500,000 per agreement year to a maximum of $5,000,000. In February
1996, Indiantown established a QF account with the trustee. The balance in this
account at December 31, 1997 and 1996, was $1,000,000 and $500,000,
respectively, and is included in noncurrent, restricted investments held by
trustee in the accompanying combined balance sheets.
STEAM HOST LETTER OF CREDIT
At financial closing in October 1992, Indiantown provided Caulkins a letter
of credit in the amount of $10,000,000 pursuant to the Energy Services Agreement
(see Note 7). This letter of credit was terminated in 1994 and a new one was
issued with essentially the same terms. In the event of a default under the
Energy Services Agreement (see Note 7), Indiantown is required to pay liquidated
damages in the amount of $10,000,000. Failure by Indiantown to pay the damages
within 30 days allows the steam host to draw on the letter of credit for the
amount of damages suffered by Caulkins. As of December 31, 1997, 1996 and 1995,
no draws had been made on this letter of credit. Commitment fees of $60,833 were
paid relating to this letter of credit in each of 1997, 1996 and 1995.
DEBT SERVICE RESERVE LETTER OF CREDIT
On November 22, 1994, Indiantown also entered into a debt service reserve
letter of credit and reimbursement agreement with Banque Nationale de Paris
pursuant to which a debt service reserve letter of credit in the amount of
approximately $60 million was issued. Such agreement has a rolling term of five
years subject to extension at the discretion of the banks party thereto.
Drawings on the debt service reserve letter of credit are available to pay
principal and interest on the First Mortgage Bonds, the 1994 Tax-Exempt Bonds
F-143
<PAGE> 274
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and interest on any loans created by drawings on such debt service reserve
letter of credit. Cash and other investments held in the debt service reserve
account will be drawn on prior to any drawings on the debt service reserve
letter of credit. As of December 31, 1997, 1996 and 1995, no draws had been made
on this letter of credit. Commitment fees of $875,496 and $835,435 were paid on
this letter of credit in 1997 and 1996, respectively.
Cedar Bay has issued a letter of credit in favor of Wilmington Trust
Company ("Wilmington Trust"), the trustee, in the amount of $10 million. If, at
any time, funds available are insufficient to pay all amounts required to be
paid to the Senior Lenders, Wilmington Trust shall make a drawing under the debt
service letter of credit. Any payment under the letter of credit converts to a
debt service reimbursement obligation which must be repaid prior to any
subordinated obligations or distributions.
RETAINAGE LETTER OF CREDIT
Cedar Bay has provided Multipower Associates ("MPA") with a letter of
credit in the amount of $20 million to secure the Partnership's obligation to
pay retainage amounts due (see Note 6).
INTEREST RATE SWAP AGREEMENT
Cedar Bay has entered into an interest rate swap agreement having a total
notional principal amount of $156 million. This agreement effectively changes
the interest rate on the portion of the debt covered by the notional amounts to
a fixed rate of 9.58 percent. At December 31, 1997, the notional amount
outstanding under the swap agreement was $130 million. The notional amounts
outstanding will vary according to a fixed schedule that is based on scheduled
amortization of principal amounts. The swap agreement will terminate on December
31, 2000. Total cash paid under the agreement was $5,113,354, $5,412,154 and
$4,451,245 in 1997, 1996 and 1995, respectively.
Counterparties to the interest rate swap agreement are major financial
institutions. While Cedar Bay may be exposed to credit losses in the event of
non-performance by these counterparties, Cedar Bay does not anticipate losses.
6. COMMITMENTS AND CONTINGENCIES
ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT
The final fixed price of Cedar Bay's engineering, procurement and
construction contract with MPA is $319.5 million. The contract provides for $20
million of the retainage to be paid after five years. Cedar Bay's obligation to
pay this amount is secured by a letter of credit (see Note 5). However, Cedar
Bay intends to borrow an additional $20 million from the Senior Lenders in 1999
in order to pay the retainage amount due under this contract. Such additional
advance has been approved by the Senior Lenders as of December 31, 1997.
Cedar Bay has entered into an amended and restated contract dated as of
March 31, 1993 (the "Contract") with MPA. Cedar Bay had informed MPA that MPA
did not complete successfully in January and March 1994 certain performance
tests set forth in the Contract. Cedar Bay had also informed MPA that it has
failed to provide Cedar Bay a functional ash pelletizer system ("APS"). In 1995,
Cedar Bay and MPA reached a settlement which provides a lump sum payment from
MPA of $15 million to settle all claims, other than a specific list of open
warranty items. The settlement amount has been paid through a release of the
$11.9 million held in retention as of December 31, 1994, plus a cash payment of
$3.1 million. $7.3 million of the settlement amount representing recovery of
incremental operating costs was recorded as a reduction in operating and
maintenance expense in 1995. The remaining $7.7 million of the settlement
amount, representing recovery of incremental costs incurred during construction
and start-up testing, was recorded as a
F-144
<PAGE> 275
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reduction in property, plant and equipment as of December 31, 1995. As part of
the settlement, the final performance acceptance was deemed to have been
achieved as of March 11, 1994.
GROUND LEASE AGREEMENT
Commencing April 29, 1991, Stone leased the plant site (approximately 30
acres), along with certain easements, to Cedar Bay for a term of 50 years,
unless extended by mutual agreement. For the first 23 years, the rent is
$500,000 per year, payable in arrears. After the first 23 years, the rent will
be a fair market rate, as defined and as mutually determined by Cedar Bay and
Stone. There is also an additional rent provision which is effective if the
Steam Services Agreement (see Note 7) is terminated through Cedar Bay's breach.
COAL PURCHASE AND TRANSPORTATION AGREEMENT
Indiantown entered into a 30-year purchase contract with Lodestar Energy,
Inc. ("Lodestar") (formerly known as Costain Coal, Inc.), commencing from the
first day of the calendar month following the Commercial Operation Date, for the
purchase of the Facility's annual coal requirements at a price defined in the
agreement, as well as for the disposal of ash residue. Indiantown has no
obligation to purchase a minimum quantity of coal under this agreement.
In 1997, Indiantown entered into an arrangement with Lodestar and the coal
transporter to compensate Indiantown for reduced FP&L revenues when the Facility
runs at minimum load during decommit periods. In exchange for Indiantown's
continued purchase and transportation of coal during these periods, Lodestar and
the coal transporter each pay Indiantown a portion of the foregone FP&L
revenues.
Cedar Bay executed an agreement with Lodestar, for the supply and
transportation of coal and ash waste transportation and disposal services. The
term of the agreement is for 20 years from January 25, 1994. Lodestar will
supply 100 percent of the Project's requirements, expected to be approximately
925,000 tons of coal per year, and the pricing is based on the cost of coal, as
defined in the agreement.
LIME PURCHASE AGREEMENT
On May 1, 1992, Indiantown entered into a lime purchase agreement with
Chemical Lime Company of Alabama, Inc. for supply of the Facility's lime
requirements for the Facility's dry scrubber sulfur dioxide removal system. The
initial term of the agreement is 15 years from the Commercial Operation Date and
may be extended for successive 5-year periods. The agreement may be canceled by
either party after January 1, 2000, upon proper notice. Indiantown has no
obligation to purchase a minimum quantity of lime under the agreement.
7. SALES AND SERVICES AGREEMENTS
INDIANTOWN
Power Purchase Agreement
On May 21, 1990, Indiantown entered into a Power Purchase Agreement with
FP&L for sales of the Facility's electric output. As amended, the agreement is
effective for a 30-year period, commencing with the Commercial Operation Date.
The pricing structure provides for both capacity and energy payments.
Capacity payments remain relatively stable because the amounts do not vary
with dispatch. Price increases are contractually provided. Capacity payments
include a bonus or penalty payment if actual capacity is in excess of or below
specified levels of available capacity. Energy payments are derived from a
contractual formula defined in the agreement based on the actual cost of
domestic coal at another FP&L plant, St. Johns River Power Park.
F-145
<PAGE> 276
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Energy Services Agreement
On September 30, 1992, Indiantown entered into an Energy Services Agreement
with Caulkins. Commencing on the Commercial Operation Date and continuing
throughout the 15-year term of the agreement, Caulkins is required to purchase
the lesser of 525 million pounds of steam per year or the minimum quantity of
steam per year necessary for the Facility to maintain its status as a Qualifying
Facility under PURPA. The Facility provided steam to Caulkins in 1995 during
start-up and testing of the Facility, and declared Commercial Operation with
Caulkins on March 1, 1996.
CEDAR BAY
Power purchase agreement
Cedar Bay has a 31-year Power Purchase Agreement with FP&L for the sale of
the Project's electric power output. On January 25, 1994, the contract was
approved by the Florida Public Service Commission and was effective commencing
with commercial operations, as defined in the agreement. The pricing structure
provides for both capacity and energy payments. Capacity payments remain
relatively stable as the amount does not vary with dispatch and price increases
are contractually provided. Energy payments are based on a formula as defined in
the agreement. Certain obligations under the agreement are secured on a second
lien subordinated basis by all owned assets of Cedar Bay.
Steam services agreement
The Steam Services Agreement ("Steam Agreement") between Cedar Bay and
Stone has an initial contract term of 22 years from January 25, 1994. The
Project will supply up to 380,000 pounds per hour of steam to the Stone mill and
Stone must purchase and productively use at least 600 million pounds of steam
per year, which is sufficient for the Project to maintain its status as a
Qualifying Facility under PURPA. Stone's payments for steam will include a
monthly fixed capacity payment escalating at a fixed rate and an energy payment
based on the amount of steam actually delivered. Stone's energy payment
escalates with the cost of coal delivered to the Project.
If Cedar Bay causes an interruption in Stone's production through loss of
steam supply then Cedar Bay is liable for liquidated damages. At December 31,
1997 and 1996 Cedar Bay owed Stone $226,510 and $289,844, respectively, for
liquidated damages, which are included in accounts payable and other accrued
liabilities in the accompanying combined balance sheets.
Stone has taken the position that Cedar Bay may be in default of its
obligations under the Steam Agreement for an alleged failure by Cedar Bay to
take, utilize, or pay for short recycled fiber rejects. Cedar Bay has informed
Stone that it has met its obligations under the Steam Agreement. Stone has
instituted legal action against Cedar Bay with respect to this matter. As
management of Cedar Bay believes that it currently has no obligation in
connection with the fiber reject materials, no such liability has been recorded
in the accompanying financial statements. See Note 11 for further discussion of
this matter.
Cedar Bay received a letter of credit in the amount of $10 million from
Stone for use in the event of a loss of qualifying status under PURPA. The
amount would be used by Cedar Bay as necessary to maintain or reinstate the
qualifying status.
8. LEGAL MATTERS
In December 1997, Cedar Bay filed an action in Circuit Court for Duval
County, Florida against FP&L. This action seeks damages and declaratory relief
for underpayment of capacity payments arising out of FP&L's breach of the Power
Purchase Agreement between FP&L and Cedar Bay (see Note 6), and FP&L's
F-146
<PAGE> 277
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
breach of the implied covenant of good faith, fair dealing and commercial
reasonableness between the parties. Although Cedar Bay intends to vigorously
pursue this matter to recover amounts owed by FP&L, and to have future capacity
payments made in a manner consistent with the Power Purchase Agreement, the
outcome in this action is uncertain at this time.
9. RELATED PARTY TRANSACTIONS
CONSTRUCTION CONTRACT
Indiantown entered into a construction agreement with Bechtel Power
Corporation ("Bechtel Power"), an affiliate of BEn, for the design, engineering,
procurement, construction, start-up and testing of the Facility (the
"Construction Contract"). As of December 31, 1997, the total contract value was
$440,442,879 including change orders to date. Payments of $440,442,879 have been
made to Bechtel Power under the Construction Contract since inception, including
$450,000 paid in 1997 as a final settlement for punch list items paid in 1997
for which $900,000 had been retained in 1996.
Bechtel Power guaranteed that Substantial Completion of the Indiantown
Facility would occur on or prior to January 21, 1996, the Guaranteed Completion
Date. Substantial Completion is achieved when the Facility demonstrates that it
has met emissions guarantees and has achieved 88 percent of guaranteed net
electrical output during required test periods. A schedule bonus for Substantial
Completion prior to the Guaranteed Completion Date is provided in the
Construction Contract. Substantial Completion was declared as of December 22,
1995 and a $6.1 million schedule bonus was paid on April 4, 1996. Performance
bonuses of $4.5 million were paid on April 4, 1996, as a portion of the estimate
of the total performance bonuses and a final payment of $3.9 million was made on
September 17, 1996. Final completion occurred on December 13, 1996.
CONSULTING SERVICES
In 1997, 1996 and 1995 Indiantown paid engineering consulting fees of $0,
$10,159 and $13,279, respectively, to Bechtel Generating Company, a wholly-owned
subsidiary of BEn.
RAILCAR LEASE
Indiantown entered into a 15 year Car Leasing Agreement with GE Capital
Railcar Services Corporation, an affiliate of GECC, to furnish and lease 72
pressure differential hopper railcars to Indiantown for the transportation of
fly ash and lime. The cars were delivered starting in April 1995, at which time
the lease was recorded as a capital lease. The leased asset of $5,753,375 and
accumulated depreciation of $1,017,347, is included in property, plant and
equipment at December 31, 1997. Payments of $629,856, including principal and
interest, were made in 1997, and the lease obligation of approximately
$5,138,000 at December 31, 1997 is reported as a lease payable in the
accompanying combined balance sheets.
Future minimum payments related to the Car Leasing Agreement at December
31, 1997, are approximately as follows:
<TABLE>
<S> <C>
1998............................................. $ 267,000
1999............................................. 287,000
2000............................................. 309,000
2001............................................. 332,000
2002............................................. 383,000
Thereafter....................................... 3,560,000
----------
Total $5,138,000
==========
</TABLE>
F-147
<PAGE> 278
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DEVELOPMENT COSTS
At the original financial closing in October 1992, Indiantown paid
development fees and reimbursed certain costs, totaling $14.8 million to PG&E
Enterprises, $3.9 million to BEn, $11.1 million to GECC and $1.2 million to
USGen, related to the development of the Facility.
DISTRIBUTION TO PARTNERS
On June 16 and December 15, 1997, as provided in the Partnership Agreement,
Indiantown distributed approximately $16.3 million and approximately $11.8
million, respectively, to the Indiantown Partners. An additional $3 million of
distributable cash was retained for capital projects and is included in cash and
cash equivalents as of December 31, 1997, on the accompanying combined balance
sheet. Funds distributed were from electric and steam revenues collected during
the second full year of commercial operations.
SERVICES AGREEMENT
Cedar Bay entered into a services agreement with BEn to provide management,
administrative, procurement, engineering and financial services to the
Partnership. Compensation to BEn includes reimbursement for personnel and other
direct costs as defined in the agreement. Payments of $414,716, $450,161 and
$412,674 were made to BEn in 1997, 1996 and 1995, respectively. At December 31,
1997 and 1996, Cedar Bay owed BEn $79,785 and $78,816, respectively, which is
included in accounts payable and other accrued liabilities in the accompanying
combined balance sheets.
Cedar Bay entered into a services agreement with Bechtel Power, a related
party of BEn, to provide management, technical, administrative, procurement,
engineering and financial services to the Partnership. Compensation to Bechtel
Power includes reimbursement for personnel and other direct costs as defined in
the agreement. Payments of $1,733, $163,381 and $590,321 were made to Bechtel
Power in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, there
were no amounts owed to Bechtel Power.
MANAGEMENT SERVICES AGREEMENT
Indiantown and Cedar Bay both have separate Management Services Agreements
with USGen. The agreements provide for USGen to provide day-to-day management
and administration of each entity's business relating to their respective
projects. The Cedar Bay agreement will continue for the term of the Power
Purchase Agreement while the Indiantown agreement will last for a term of 34
years. Compensation to USGen under the agreement includes an annual base fee of
$1.5 million for Cedar Bay and $650,000 for Indiantown, wages and benefits for
employees performing work on behalf of the Partnerships and other costs directly
related to the Partnerships. The base fee is subject to an annual adjustment.
Payments of $8.4 million, $3.9 million and $6.3 million were made to USGen in
1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, the
Partnerships' owed USGen $831,741 and $4.3 million, respectively, which is
included in accounts payable and other accrued liabilities in the accompanying
combined balance sheets.
OPERATIONS AND MAINTENANCE AGREEMENT
Indiantown and Cedar Bay both have separate Operation and Maintenance
Agreements with USOSC for periods of 30 and 31 years, respectively. Under the
Indiantown agreement, after the 30 year period the agreement will be
automatically renewed for periods of 5 years until terminated by either party
with 12 months notice. If targeted plant performance is not reached, USOSC will
pay liquidated damages to the Partnerships. Compensation to USOSC under the
agreement includes an annual base fee of $1.5 million ($900,000 of which is
subordinate to debt service and certain other costs) for Indiantown, $1.0
million for Cedar Bay, certain earned fees and bonuses based on the Facility's
performance and reimbursement for certain costs
F-148
<PAGE> 279
INDIANTOWN COGENERATION, L.P.
CEDAR BAY GENERATING COMPANY, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
including payroll, supplies, spare parts, equipment, certain taxes, licensing
fees, insurance and indirect costs expressed as a percentage of payroll and
personnel costs. The fees are adjusted quarterly by a measure of inflation as
defined in the agreement. Payments of $21.0 million, $13.7 million, and $14.7
million were made to USOSC in 1997, 1996 and 1995, respectively. At December 31,
1997 and 1996, Indiantown owed USOSC $212,458 and $61,802 respectively, which is
included in accounts payable and accrued liabilities in the accompanying
combined balance sheets. At December 31, 1997 and 1996, Cedar Bay had prepaid
USOSC $218,423 and $363,124, respectively, which is included in deposits and
other prepaid expenses in the accompanying combined balance sheets.
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Partnerships' cash and cash equivalents,
accounts receivable, deposits, prepaid expenses, investments held by trustee,
accounts payable, accrued liabilities and accrued interest approximate fair
value because of the short maturities of these instruments.
Interest rate swap agreement entered into by Cedar Bay have no carrying
value on the accompanying combined balance sheets. The fair value of Cedar Bay's
swap agreement is based upon estimated market values provided by an independent
investment bank, and is estimated to be a liability of $13,885,900 and
$15,872,638 as of December 31, 1997 and 1996, respectively.
The following table presents the carrying amounts and estimated fair values
of certain of the Partnerships' financial instruments at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
FINANCIAL LIABILITIES CARRYING AMOUNT FAIR VALUE
--------------------- ----------------- ------------
<S> <C> <C>
Tax Exempt Bonds............................................ $125,010,000 $146,016,272
First Mortgage Bonds........................................ $486,504,000 $590,214,789
Senior Project Debt/Subordinated Project Debt............... $409,772,000 $343,798,018
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
FINANCIAL LIABILITIES CARRYING AMOUNT FAIR VALUE
--------------------- ----------------- ------------
<S> <C> <C>
Tax Exempt Bonds............................................ $125,010,000 $143,067,534
First Mortgage Bonds........................................ $496,205,000 $570,178,669
Senior Project Debt/Subordinated Project Debt............... $416,349,000 $380,502,000
</TABLE>
For the Tax Exempt Bonds and First Mortgage Bonds, the fair values of the
Partnerships' bonds payable are based on the stated rates of the Tax Exempt
Bonds and First Mortgage Bonds and current market interest rates to estimate
market values for the Tax Exempt Bonds and the First Mortgage Bonds. For the
Senior Project Debt and Subordinated Project Debt fair values are based upon
current market prices for similar instruments.
10. SUBSEQUENT EVENT
On January 19, 1998, the Florida Department of Environmental Protection
issued a Consent Order which resolved Cedar Bay's dispute with Stone regarding
the short recycled fiber rejects in favor of Cedar Bay. Cedar Bay expects that
Stone will submit an objection to the terms of the order.
F-149
<PAGE> 280
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of J. Makowski Company, Inc.:
We have audited the accompanying consolidated balance sheets of J. Makowski
Company, Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of J. Makowski Company, Inc.
and its subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Washington, D.C. /s/ Arthur Andersen LLP
February 5, 1998
F-150
<PAGE> 281
J. MAKOWSKI COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 10,535 $ 35,377 $ 9,625
Restricted cash........................................... 562 218 243
Accounts receivable....................................... 16,292 19,975 27,336
Due from parent -- income taxes........................... -- 6,437 7,125
Fuel inventory and supplies............................... 3,616 1,855 2,816
Prepaid and other......................................... 493 848 391
-------- -------- --------
Total current assets............................... 31,498 64,710 47,536
-------- -------- --------
Notes Receivable -- Long-term............................... 1,505 1,480 1,696
Equity investments.......................................... 186,736 211,857 219,133
Property, plant and equipment:
Feedline facility, net of accumulated depreciation of
$1,842 (unaudited), $1,543 and $1,173................... 6,264 6,540 6,910
Office and other equipment, net of accumulated
depreciation of $610 (unaudited), $2,805 and $1,592..... 1,453 3,239 3,307
-------- -------- --------
7,717 9,779 10,217
Power sales and other deposits.............................. -- 343 343
Power sales agreements, net of accumulated amortization of
$4,804 and $3,597 in 1997 and 1996, respectively.......... 14,703 15,333 16,540
Goodwill, net of accumulated amortization of $10,795
(unaudited), $9,424 and $6,005............................ 63,182 65,492 68,911
Management service agreements, net of accumulated
amortization of $10,795 and $9,785 in 1997 and 1996,
respectively.............................................. -- 5,900 6,910
-------- -------- --------
Total assets....................................... $305,341 $374,894 $371,286
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,321 $ 11,568 $ 4,057
Accrued expenses.......................................... 14,104 19,085 17,270
Current portion of long-term debt......................... 565 3,040 3,054
Due to affiliate.......................................... 2,530 -- --
Dividend payable.......................................... -- 10,000 --
Notes payable to affiliates............................... 43,804 43,804 43,804
-------- -------- --------
Total current liabilities.......................... 68,324 87,497 68,185
Deferred lease liability.................................... -- -- 1,330
Deferred revenue............................................ 497 125 --
Deferred income taxes....................................... 80,778 92,145 89,984
Long-term debt.............................................. 12,770 22,130 24,195
Other long-term liabilities................................. 5,920 5,022 3,920
Commitments and contingencies............................... -- -- 16,407
Minority interest........................................... 1,836 1,818 1,761
-------- -------- --------
Total liabilities.................................. 170,125 208,737 205,782
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized,
none issued............................................... -- -- --
Class A common stock, $.01 par value; 2,000,000 shares
authorized, 1,094,585 issued.............................. 11 11 11
Additional paid-in capital.................................. 170,694 203,886 202,577
Accumulated deficit......................................... (35,489) (37,740) (37,084)
-------- -------- --------
Total stockholders' equity......................... 135,216 166,157 165,504
-------- -------- --------
Total liabilities and stockholders' equity......... $305,341 $374,894 $371,286
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-151
<PAGE> 282
J. MAKOWSKI COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Steam and power sales............. $61,452 $69,960 $ 94,461 $ 87,812 $ 85,275
Fuel sales........................ 26,132 30,684 35,565 35,366 32,517
Service billings, primarily to
affiliates...................... 1,524 6,340 9,586 13,081 17,791
Equity in earnings of operational
projects........................ 8,903 12,087 17,172 17,813 5,268
------- ------- -------- -------- --------
Total revenues............... 98,011 119,071 156,784 154,072 140,851
------- ------- -------- -------- --------
Operating expenses:
Cost of sales -- steam and
power........................... 27,342 44,561 59,988 56,193 51,072
Fuel costs........................ 25,617 30,684 35,565 35,366 32,517
Cost related to service
billings........................ 591 -- 4,151 4,252 1,905
Operating lease
payments-Pittsfield............. 16,829 16,829 24,350 25,197 22,439
General and administrative........ 7,616 8,239 9,436 13,679 23,567
Depreciation and amortization..... 9,113 8,951 17,452 11,878 11,168
Feasibility and development....... -- 378 258 1,384 8,991
------- ------- -------- -------- --------
Total operating expenses..... 87,108 109,642 151,200 147,949 151,659
------- ------- -------- -------- --------
Operating income....................... 10,903 9,429 5,584 6,123 (10,808)
Interest income........................ 792 1,296 1,533 1,135 764
Interest expense....................... (4,923) (4,151) (5,428) (5,520) (3,140)
Write-down of asset to fair value...... -- -- -- (39,702) --
Other (expense)/income................. (1,932) (3,234) (4,487) 4,344 399
------- ------- -------- -------- --------
Income (loss) before income taxes and
minority interest in earnings........ 4,840 3,340 (2,798) (33,620) (12,785)
Minority interest in earnings.......... (336) (305) (412) (399) (342)
------- ------- -------- -------- --------
Income (loss) before income taxes...... 4,504 3,035 (3,210) (34,019) (13,127)
Provision (benefit) for income taxes... 4,876 1,208 (2,554) (8,846) (4,714)
------- ------- -------- -------- --------
Net income (loss)...................... $ (372) $ 1,827 $ (656) $(25,173) $ (8,413)
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-152
<PAGE> 283
J. MAKOWSKI COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND THE YEARS
ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------- ---------------- ADDITIONAL
NUMBER PAR NUMBER PAR PAID-IN ACCUMULATED
SHARES VALUE SHARES VALUE CAPITAL DEFICIT TOTAL
--------- ----- -------- ----- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... 1,094,585 $11 150,000 $ 2 $237,204 $ (3,498) $233,719
Retirement of Class B
Common Stock........................ -- -- (150,000) (2) (38,048) -- (38,050)
Net loss.............................. -- -- -- -- -- (8,413) (8,413)
--------- --- -------- --- -------- -------- --------
Balance at December 31, 1995.......... 1,094,585 11 -- -- 199,156 (11,911) 187,256
========= === ======== === ======== ======== ========
Contributed capital................... -- -- -- -- 3,421 -- 3,421
Net loss.............................. -- -- -- -- -- (25,173) (25,173)
--------- --- -------- --- -------- -------- --------
Balance at December 31, 1996.......... 1,094,585 11 -- -- 202,577 (37,084) 165,504
========= === ======== === ======== ======== ========
Contributed capital................... -- -- -- -- 16,559 -- 16,559
Dividend, September 1997.............. -- -- -- -- (5,250) -- (5,250)
Dividend, December 1997............... -- -- -- -- (10,000) -- (10,000)
Net loss.............................. -- -- -- -- -- (656) (656)
--------- --- -------- --- -------- -------- --------
Balance at December 31, 1997.......... 1,094,585 11 -- -- 203,886 (37,740) 166,157
========= === ======== === ======== ======== ========
Retained Earnings Adjustment.......... 2,623 2,623
Distribution of MSA's to Bechtel...... -- -- -- -- 8,014 -- 8,014
Other Equity Adjustment............... -- -- -- -- (13,579) -- (13,579)
Dividend, June 1998................... -- -- -- -- (1,027) -- (1,027)
Dividend, July 1998................... (26,600) (26,600)
Net Loss.............................. -- -- -- -- -- (372) (372)
--------- --- -------- --- -------- -------- --------
Balance at September 30, 1998
(Unaudited)......................... 1,094,585 $11 -- $-- $170,694 $(35,489) $135,216
========= === ======== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-153
<PAGE> 284
J. MAKOWSKI COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997
(UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................... $ (372) $ 1,827 $ (656) $(25,173) $ (8,413)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Write-down of asset to fair value..................... -- -- -- 39,702 --
Investment earnings on projects....................... (8,903) (8,132) (17,172) (17,813) (5,268)
Cash distributions from projects...................... 6,912 6,228 19,724 18,834 11,013
Write-off of equity investments, net.................. (332) -- 1,240 -- --
Depreciation and amortization......................... 9,113 6,324 17,452 12,562 11,168
Provision for deferred income taxes................... 4,876 (1,949) 2,161 (12,097) 1,372
Minority interest in earnings......................... 336 203 412 399 342
Gain on sale of investment............................ -- -- -- -- (773)
Loss on sale of Mason Assets.......................... 3,143 -- -- -- --
Other equity adjustments.............................. (16,102) -- -- -- --
Change in assets and liabilities:
Restricted cash..................................... (344) 28 25 697 (705)
Accounts receivable................................. 3,683 (3,700) 7,361 2,099 (11,847)
Due to parent....................................... -- -- -- (2,961) 2,961
Fuel inventory and supplies......................... (1,761) 267 961 (512) (577)
Prepaid and other................................... 355 (224) (457) 983 (545)
Notes receivable long-term.......................... (25) -- -- -- --
Goodwill............................................ -- -- -- 181 --
Accounts payable.................................... (4,247) 9,526 7,511 (1,110) 9,980
Due to Affiliate.................................... (2,530) -- -- -- --
Accrued expenses.................................... (4,981) (1,090) 1,815 (7,063) 617
Due from parent -- income taxes..................... 6,437 3,532 688 2,785 (6,011)
Deferred lease liability............................ -- (592) (1,330) 331 (102)
Other long-term liabilities......................... 898 232 1,102 (1,589) (350)
Deferred revenue.................................... 372 -- 125 -- --
Refundable income taxes............................. -- -- -- --
Commitments and contingencies....................... -- -- (16,407) -- --
-------- ------- -------- -------- ---------
Net cash (used in) provided by operating
activities.................................... (3,472) 12,480 24,555 10,255 2,862
-------- ------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in projects................................. 483 (450) (6,621) (4,215) (10,254)
Proceeds from sale of investments....................... -- -- -- -- 8,050
Plant and equipment..................................... -- (390) (1,057) (980) (1,155)
-------- ------- -------- -------- ---------
Net cash provided by (used in) investing
activities........................................ 483 (840) (7,678) (5,195) (3,359)
-------- ------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to affiliates............... -- -- -- -- 33,804
Proceeds from long-term debt............................ -- -- -- --
Repayment of long-term debt............................. (11,835) (1,025) (2,079) (2,482) (1,494)
Equity contributions.................................... 27,627 -- 16,559 3,421 --
Return of capital....................................... -- -- -- -- (8,050)
Retirement of Class B common stock...................... -- -- -- -- (30,000)
Proceeds from other loans............................... -- -- -- 120 130
Distribution to stockholders............................ (37,627) -- (5,250) -- --
Net increase (decrease) in line of credit............... -- 16 -- (853) 876
Distributions to minority investor...................... (18) (175) (355) (367) (357)
-------- ------- -------- -------- ---------
Net cash (used in) provided by financing
activities........................................ (21,853) (1,184) 8,875 (161) (5,091)
-------- ------- -------- -------- ---------
Net increase (decrease) in cash............................. (24,842) 10,456 25,752 4,899 (5,588)
Cash at beginning of period................................. 35,377 9,625 9,625 4,726 10,314
-------- ------- -------- -------- ---------
Cash at end of period....................................... $ 10,535 $20,081 $ 35,377 $ 9,625 $ 4,726
======== ======= ======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized.................... $ 2,481 $ 3,705 $ 3,128
Income taxes............................................ -- -- 252
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-154
<PAGE> 285
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
J. Makowski Company, Inc. (the "Company" or "JMC") is principally engaged
in the development and management of electric generation and natural gas
projects in which it has an equity ownership interest. The Company also provides
consulting, managerial, administrative and fuel supply services, under
management service agreements, to these projects and other entities engaged in
the generation of electricity and steam and the transportation and management of
natural gas supplies.
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and its majority-owned and controlled
partnerships: Pittsfield Generating Company, L.P. ("Pittsfield") and Berkshire
Feedline Acquisition, L.P. ("BFALP"). Pittsfield leases and operates the
Pittsfield project, a 160-megawatt natural gas-fired cogeneration facility.
BFALP owns and operates the pipeline that connects the natural gas transmission
line of the Tennessee Gas Pipeline Company to the Pittsfield project (the
"Feedline"). All material intercompany accounts and transactions have been
eliminated.
On August 25, 1994, PG&E Enterprises and Bechtel Enterprises through Beale
Generating Company, ("Beale") acquired the stock of the Company. The acquisition
was accounted for under the purchase method and the related adjustments to the
fair value of the assets acquired and liabilities assumed were pushed down to
the Company. See Note 13 for discussion of significant transactions affecting
the Company and Beale in 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
Information presented as of September 30, 1998 and for the nine-month
periods ended September 30, 1998 and 1997 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, 1998 and the results of operations and cash
flows for the nine-month periods ended September 30, 1998 and 1997. The results
of operations for these interim periods is not necessarily indicative of results
which may be expected for any other interim period or for the year as a whole.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid securities with a maturity of three
months or less to be cash equivalents.
FUEL INVENTORY AND SUPPLIES
Inventories are stated at the lower of cost or market. Costs for materials,
supplies and oil inventories are determined by the first-in, first-out method.
EQUITY INVESTMENTS
Most of the Company's investments in projects (see Note 3) are accounted
for under the equity method. Such investments are carried at cost, determined to
be the fair market value assigned at the Beale acquisition
F-155
<PAGE> 286
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in 1994, adjusted for the Company's proportionate share of undistributed
earnings or losses and project distributions during the year and the differences
between the Company's cost and the related underlying book values of the
Company's equity investments which are being amortized on a straight-line basis
over the estimated remaining lives of the projects (as of August 25, 1994), 25
to 38 years.
DEVELOPMENT COSTS
Project development costs (included in equity investments) of $1,467,720
and $221,505 as of December 31, 1997 and 1996, respectively, represent costs
incurred after executing a power sales contract or obtaining a viable project
site or signing a letter of intent and prior to obtaining project financing and
starting physical construction. These costs represent amounts incurred for
professional services, salaries, permits, options and other direct and
incremental costs and are included in construction in progress when the project
financing is obtained or expensed at the time the Company determines the project
will not be developed.
Development costs expensed include project-screening costs associated with
identifying a potential project and include salaries, feasibility studies, legal
and other costs. These costs are expensed as incurred, as they relate to
projects not yet under development.
DEPRECIATION
The cost of property, plant and equipment is depreciated using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Feedline facility........................................ 22 years
Critical spare parts..................................... 16 years
Furniture and fixtures................................... 7 years
Office equipment......................................... 5 years
</TABLE>
CRITICAL SPARE PARTS
Critical spare parts consist of major replacement equipment and recurring
maintenance supplies required to be maintained in order to facilitate routine
maintenance activities and minimize unscheduled maintenance outages. These parts
are included in office and other equipment in the accompanying consolidated
balance sheets and are depreciated using the straight-line method over the
remaining useful life of the operating lease, which expires in 2010.
POWER SALES AGREEMENTS
Power sales agreements are intangible assets resulting from the Beale
acquisition and are being amortized using the straight-line method over the
remaining terms of the agreements (as of August 25, 1994), 15 years.
GOODWILL
Goodwill results from the Beale acquisition and is being amortized on a
straight-line basis over 30 years.
MANAGEMENT SERVICE AGREEMENTS
Management service agreements are an intangible asset resulting from the
Beale acquisition and are being amortized using the straight-line method over
the remaining weighted average term of the agreements (as of August 25, 1994),
17.5 years.
F-156
<PAGE> 287
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 109, deferred income tax assets and liabilities are recorded for the
estimated future tax resulting from differences in the carrying value of assets
and liabilities for tax and financial reporting purposes.
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of", effective for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes accounting standards for the impairment of
long-lived assets and requires that a loss be recognized for those assets if the
sum of the expected future cash flows from the use of the asset and its eventual
disposition (undiscounted) is less that the carrying amount of the asset. The
Company adopted SFAS No. 121 on January 1, 1996.
RECLASSIFICATIONS
Certain 1995 and 1996 amounts have been reclassified to conform to the 1997
presentation.
3. EQUITY INVESTMENTS
The Company holds equity interests in several partnerships, which were
formed to build, own and operate various energy production, gas storage and
transportation facilities. See Note 13 for discussion of the sale of the Ocean
State Power ("OSP") projects in June 1998 and see the discussion later in this
note related to the sale of TBG Cogen ("TBG"). The Company also participates in
a cost-sharing agreement related to the Portland Pipeline project, for which a
partnership has not yet been formed. The investment in the Portland Pipeline
project was dividended to Beale in March 1998 (see Note 13). The Company's
ownership interest in this project was 6.6%. Debt incurred by the partnerships
is nonrecourse to the Company.
The Company generally has developed its cogeneration projects as
"qualifying facilities" ("QF's") under the Public Utility Regulatory Policies
Act of 1978, as amended, so that the projects are not subject to rate and
operational regulation under the Federal Power Act or state laws, and the
Company is not subject to regulation as a public utility holding company under
the Public Utility Holding Company Act of 1935, as amended.
The following is a summary of aggregated financial information for all of
the Company's investments, which are accounted for under the equity method:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(000'S) (000'S)
<S> <C> <C>
COMBINED BALANCE SHEETS
Current assets........................................... $ 280,538 $ 289,478
Development costs........................................ 48,975 49,980
Property and equipment, net.............................. 1,398,750 1,470,130
Other assets............................................. 68,098 55,159
---------- ----------
Total assets..................................... $1,796,361 $1,864,747
========== ==========
Current liabilities...................................... 132,876 149,533
Other liabilities, principally nonrecourse project
indebtedness.......................................... 1,241,654 1,280,052
Equity................................................... 421,831 435,162
---------- ----------
Total liabilities and equity..................... $1,796,361 $1,864,747
========== ==========
The Company's share of equity.............................. $ 57,727 $ 63,686
========== ==========
</TABLE>
F-157
<PAGE> 288
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(000'S) (000'S) (000'S)
<S> <C> <C> <C>
COMBINED STATEMENTS OF OPERATIONS
Net sales..................................... $675,334 $677,814 $626,713
======== ======== ========
Operating profit.............................. $233,527 $242,783 $198,739
======== ======== ========
Earnings before taxes......................... $124,863 $125,154 $ 67,434
======== ======== ========
The Company's share of equity in earnings of
operational projects........................ $ 17,172 $ 17,813 $ 5,268
======== ======== ========
SUMMARY OF INVESTMENTS
The Company's share of equity in the net
assets of projects.......................... $ 57,727 $ 63,686 $ 55,814
Basis difference in carrying value of
investees and Company's investments......... 155,610 157,143 213,200
-------- -------- --------
$213,337 $220,829 $269,014
======== ======== ========
</TABLE>
OPERATIONAL PROJECTS
At December 31, 1997, the Company had investments in six operational
facilities (five electric projects and one pipeline project). See Note 13
related to the sale of two of the operational facilities (the OSP projects and a
pipeline development project). Also see information later in this note related
to the sale of TBG in February 1998. The five electric facilities have
contracted to sell electric generating capacity to utilities and other customers
under long-term power sales agreements. The facilities are fueled primarily by
natural gas purchased under long-term supply agreements and, with a few
exceptions, long-term firm transportation contracts. Generally, changes in
energy payments under a project's power sales contract correspond approximately
to changes in fuel cost, and, in certain cases, prices and costs are directly
linked. Each project, except for the OSP projects, which are not QF facilities,
also sells steam for industrial and other purposes under a long-term contract to
an unaffiliated company located adjacent to the project site. These steam sales
contracts require the purchaser to take at least the minimum steam necessary for
the project to maintain its QF status. The operations of and the rates charged
by the OSP projects and Iroquois Gas Transmission System ("IGTS") are subject to
regulation on the federal and state levels in the United States and certain gas
transportation agreements are subject to regulation on the federal and
provincial levels in Canada. The Company's interests in each of these projects
have been pledged as collateral for each of the projects' respective nonrecourse
financing.
TBG COGEN
On February 5, 1998, Calpine Corporation ("Calpine") acquired JMC's
interest in TBG Cogen. This 10% interest was held by a wholly-owned subsidiary
of JMC. The purchase price included a $125,000 non-refundable good faith deposit
paid prior to December 31, 1997, which is included as deferred revenue in the
accompanying consolidated balance sheet, and $1,125,000 in cash, paid at the
time of sale. Subsequent to the purchase, Calpine assumes all liabilities of the
Company's wholly-owned subsidiary, including the $1,000,000 demand notes
discussed in Note 6. This sale resulted in an immaterial loss to the Company;
accordingly, no adjustments to the Company's investment in TBG Cogen are
included in the accompanying consolidated financial statements.
F-158
<PAGE> 289
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SELKIRK COGEN PARTNERS, L.P. ("SELKIRK")
In October 1995, Niagara Mohawk Power Corporation ("NIMO") filed its "Power
Choice" proposal with the New York State Public Service Commission and filed a
Report on Form 8-K with the Securities and Exchange Commission whereby NIMO
described proposals to restructure the utility's business, including the
reorganization of its assets and the renegotiations of its contracts with
non-regulated generators, like Selkirk. NIMO had proposed that, if it cannot
renegotiate its contracts with the non-regulated generators, it would take
possession of such independent power projects through the power of eminent
domain and subsequently sell such assets. Further, NIMO stated that it had not
ruled out the ultimate possibility of a filing for restructuring under Chapter
11 of the U.S. Bankruptcy Code.
On March 10, 1997, NIMO filed a Form 8-K with the Securities and Exchange
Commission in which it announced an agreement in principle to terminate certain
power purchase contracts. The Company is committed to negotiate to reach
agreement on a restructured power purchase agreement for Selkirk. The Company
cannot definitively determine the effect, if any, the restructured power
purchase agreement will have on the Selkirk project. At this time the Company
believes any agreement with NIMO will not threaten the continued existence of
the Selkirk project.
Given the current facts, the Company believes its investment in Selkirk is
probable of recovery. However, should current facts change, there is a
reasonable possibility of loss. See Note 13 for additional disclosure related to
negotiations with NIMO.
Consolidated Edison ("ConEd"), a power purchaser at Selkirk, by a letter
dated September 19, 1994, claimed the right to acquire a portion of Unit 2's
natural gas supply not used in operating Unit 2 (the "excess gas"), when Unit 2
is dispatched off-line or at less than full capacity. The ConEd power purchase
agreement contains no express language granting ConEd any rights to such excess
gas and Selkirk has stated to ConEd that claims to excess gas are without merit.
To date ConEd has paid all amounts invoiced by Selkirk in accordance with the
ConEd power purchase agreement.
If ConEd were to prevail in its claim to Unit 2's excess natural gas
volumes, Selkirk would lose its ability to engage in lay-off sales of such
volumes at favorable prices relative to their costs, and thus cash flows from
gas resale activities would also be materially and adversely affected. The
Company is unable to determine the outcome of this uncertainty.
On June 20, 1990 and October 29, 1992, Selkirk entered into currency
exchange agreements to hedge against future exchange rate fluctuations which
could result in additional costs incurred under fuel transportation agreements
which are denominated in Canadian dollars. Selkirk is exposed to credit loss
under the currency agreements. In the unlikely event that a counterparty fails
to meet the terms of the agreements, Selkirk's exposure is limited to the
currency exchange rate differential. However, Selkirk does not anticipate
nonperformance by the counterparties.
MASSPOWER
MASSPOWER has entered into interest rate exchange agreements to mitigate
the interest rate risks associated with its floating-rate term loans. The
agreements provide for the exchange of fixed-rate interest payment obligations
for floating-rate interest payment obligations on notional amounts of principal.
In addition, MASSPOWER has three currency exchange agreements with different
banks to mitigate the currency exchange risks associated with MASSPOWER's
Canadian fuel transportation costs. In the event of default by any of the bank
counterparties to the interest rate and currency exchange agreements, MASSPOWER
could be exposed to interest rate and currency exchange rate risks. MASSPOWER
does not anticipate nonperformance by any of the counterparties.
F-159
<PAGE> 290
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEVELOPMENT AND CONSTRUCTION PROJECTS
Altresco Lynn, L.P. ("Riverworks")
At December 31, 1995, Riverworks had an outstanding development loan due to
General Electric Capital Corporation ("GECC") that amounted to $12,568,000,
which was used to finance development and pre-construction costs. The note had
as a maturity date the earlier of March 31, 1996 or the date of construction
financing. The development loan was a liability of Riverworks, the partnership
had no assets, and the loan was nonrecourse to the Company. In March 1996,
Boston Edison Company ("BECO") and GECC negotiated a tentative agreement that
BECO would pay $9.2 million to Riverworks for withdrawing the power bid. In June
1996, $7.025 million was paid to GECC, $700,000 was paid to the Company's former
partners in the West Lynn Creamery project and $1.475 million was retained by
Riverworks. An additional $550,000 related to the Riverworks project was
received by the Company from ComElec. The receipt of $2.025 million by the
Company was recognized as income during 1996 and is included as other income in
the accompanying statements of operations.
Avoca Natural Gas Storage Project ("Avoca")
Brine disposal problems encountered during construction in 1996 caused the
Company to evaluate this project for possible impairment. A write-down of
$39,702,000 was required and included the purchase price premium and allocated
goodwill resulting from the Beale acquisition, cash invested since the Beale
acquisition and a liability reflecting the Company's equity commitments related
to the project. The carrying value of the investment is zero at December 31,
1997 and 1996, and $0 and $16,407,000 is included as a liability to reflect
future equity commitments at December 31, 1997 and 1996, respectively. This
equity commitment was satisfied by a $16,559,000 equity infusion by the Beale
shareholders during May 1997. The Company believes it has accrued the full
extent of the losses incurred or to be incurred with respect to this project.
Avoca and JMC Avoca, Inc. ("JMC Avoca"), a wholly-owned subsidiary of JMC,
filed for protection under Chapter 11 of the U.S. Bankruptcy Code on July 29,
1997 (See Note 10). Management believes this action does not have a material
impact on the JMC consolidated financial statements at December 31, 1997.
F-160
<PAGE> 291
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
From time to time, the Company enters into cost-sharing arrangements to
fund the feasibility and development of various projects, including nonutility
generating projects and gas storage facilities throughout North America. As of
December 31, 1997 the Company's share of the one outstanding project was 6.6%
(see Note 4). On March 1, 1998, the Company dividended to Beale its interest in
this project (See Note 13).
Details of the Company's projects in operations and development are shown
in Table 1.
J. MAKOWSKI COMPANY, INC.
PROJECTS INVESTMENT SCHEDULE
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(000S)
<TABLE>
<CAPTION>
JMC SHARE OF:
-------------------
IN- SIZE JMC INVESTMENT (2) PROJECT EARNINGS
SERVICE IN JMC ------------------- -------------------
PROJECT LOCATION DATE MW TYPE OWNERSHIP % 12/31/97 12/31/96 12/31/97 12/31/96
- ---------------------- ----------- ------- ------ -------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DEVELOPMENT:
Portland(5)........... ME/NH/ N/A N/A Pipeline 6.60% $ 2,242 $ 222 -- --
VT/MA
OPERATIONS:
TBG Cogen(3).......... Bethpage, Aug-89 50 Cogen 10.00% 1,266 1,229 $ (4) $ 154
NY
OSP(4)................ Burrillville, Dec-90 250 Combined 10.10% 12,336 12,726 1,655 1,707
RI Cycle
OSP II(4)............. Burrillville, Oct-91 250 Combined 10.10% 8,393 8,389 1,529 1,565
RI Cycle
IGTS.................. NY/CT Dec-91 N/A Pipeline 4.93% 10,053 9,956 2,808 2,231
Selkirk............... Selkirk, NY Sep-94 344.90 Cogen 47.21%(1) 137,161 146,886 8,039 9,688
MASSPOWER............. Springfield, Sep-93 240 Cogen 30.00% 40,406 39,725 3,145 2,468
MA
Total operational.......................................................... 209,615 218,911 17,172 17,813
Total equity investments................................................... $211,857 $219,133 $ 17,172 $ 17,813
<CAPTION>
JMC SHARE OF:
-------------------
CASH DISTRIBUTIONS
-------------------
PROJECT 12/31/97 12/31/96
- ---------------------- -------- --------
<S> <C> <C>
DEVELOPMENT:
Portland(5)................ -- --
OPERATIONS:
TBG Cogen(3)............... $ -- $ (24)
OSP(4)..................... (1,939) (1,878)
OSP II(4).................. (1,495) (1,980)
IGTS....................... (2,929) (1,774)
Selkirk.................... (11,979) (11,075)
MASSPOWER.................. (1,382) (2,103)
Total operational.......... (19,724) (18,834)
Total equity investments... $(19,724) $(18,834)
</TABLE>
- ---------------
(1) Ownership percentage reflects JMC's effective interest in the project.
(2) Includes the Company's underlying equity in the net assets of each project
and the unamortized portion of the basis difference when Beale purchased the
Company
(3) Sold in February 1998
(4) Sold in June 1998 (See Note 13)
(5) Interest dividended to Beale in March 1998 (See Note 13).
4. RELATED-PARTY TRANSACTIONS
The Company provides consulting, managerial and administrative services to
several entities in which the Company has an interest. Transactions with these
entities represented 84%, 93% and 87% of revenues from service billings for the
years ended December 31, 1997, 1996 and 1995, respectively, and 93% and 65% of
total accounts receivable at December 31, 1997 and 1996, respectively.
During the years ended December 31, 1997 and 1996, Orchard Gas, a
wholly-owned subsidiary of the Company, purchased from unrelated third parties
approximately $35,565,000 and $35,366,000, respectively, in fuel for sale to its
customers. Orchard Gas does not generate a profit on its fuel sales, as all
natural gas is sold at a cost equal to that incurred by the Company.
Approximately 97% and 94% of this fuel was purchased by MASSPOWER, an affiliate
of the Company, during 1997 and 1996, respectively. As of December 31, 1997
F-161
<PAGE> 292
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1996, Orchard Gas was due $2,963,223 and $3,031,279, respectively, from
MASSPOWER for fuel sales. This amount due is included in accounts receivable in
the accompanying consolidated balance sheets.
Employees of JMC were merged into U.S. Generating Company's ("USGen"), an
affiliated entity, payroll and this payroll cost, for management and
administrative services, is billed directly to JMC including a contractual
profit margin. JMC also reimburses USGen for other direct costs incurred on
their behalf during the year. During 1997 and 1996, labor, benefits and other
direct costs incurred by USGen for JMC amounted to $11,778,000 and $11,878,000,
respectively.
The Company funds development costs of projects in which it has an
ownership interest in accordance with certain cost-sharing agreements. For the
periods ended December 31, 1997, 1996 and 1995, $258,000, $1,384,000 and
$5,216,000, respectively, of such costs were incurred by these projects and is
included in feasibility and development expense in the accompanying consolidated
statements of operations. Of these balances, $0 and $112,000 is included in
accounts payable in the accompanying consolidated balance sheets at December 31,
1997 and 1996, respectively.
The Company has demand notes for $10,000,000 and $33,803,800 payable to
Beale and Pentagen Investors, L.P. ("Pentagen"), respectively. Pentagen is an
affiliated partnership and a former subsidiary of the Company whose sole asset
is a 53.02% effective interest in Selkirk. The note to Beale accrues interest at
the prime rate (8.50%, 8.25% and 8.50% at December 31, 1997, 1996 and 1995,
respectively) and interest expense of approximately $844,000, $827,000 and
$879,000 was recorded for the years ended December 31, 1997, 1996 and 1995. The
promissory note to Pentagen issued in June 1995, accrues interest at LIBOR plus
0.5% (6.26%, 6.11% and 6.50% at December 31, 1997, 1996 and 1995, respectively)
and interest expense of approximately $2,103,000, $2,054,000 and $1,185,000 was
recorded for the years ended December 31, 1997, 1996 and 1995, respectively. No
interest has been paid as of December 31, 1997 on either demand note. Under
certain conditions, including bankruptcy or insolvency of the Company, and
notification from the note holder, the unpaid principal may require prepayment
in whole or in part, otherwise the entire principal amount shall be due and
payable in June 2000. Interest is payable quarterly in arrears commencing
September 29, 1995. The note is secured by a pledge of the Company's partnership
interests, via a subsidiary and the affiliated partnership, in the Selkirk
project.
5. INCOME TAXES
For financial reporting purposes, federal income taxes are provided for in
accordance with a federal tax-sharing agreement between the Company and its
parent, which provides, among other things, that the Company will generally pay
the amount required assuming separate Company tax returns were filed. The tax-
sharing agreement also provides that a member of the federal consolidated tax
group can recognize the tax effects of its separate losses to the extent those
losses are used or are expected to be utilized on a consolidated basis. At
December 31, 1997 and 1996, the Company was owed by its parent $6,437,000 and
$7,125,000, respectively, for current federal income taxes.
State income taxes are provided for based on amounts, which the Company
anticipates paying separately to various states. The Company is currently not
operating under any tax sharing agreements relating to state taxes.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. A valuation allowance of $10,961,000 has been established. Of
this total, $ 4,316,000 was created at the Beale acquisition date as a result of
certain restrictions on utilization of tax assets due to ownership change
limitations and the Company's uncertainty of its ability to realize the tax
benefits on a portion of its net operating loss and credit carryforwards. Any
subsequent reversal of the valuation allowance relating to net operating losses
existing at the acquisition date will first reduce goodwill related to the
Company's acquisition, then other noncurrent intangible assets related to the
acquisition, and then income tax expense.
F-162
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J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company has unused net investment credits, which
may be used to offset future federal taxes payable, of approximately $972,000
which expire in year 2004. The Company also has federal net operating loss
carryforwards of approximately $7,804,000 that begin to expire in year 2004.
Approximately $3,300,000 of those net operating loss carryforwards resulted from
the period prior to the Beale acquisition.
At December 31, 1997, the Company has Massachusetts net operating loss
carryforwards of approximately $27,000,000 which may be used to offset future
Massachusetts taxable income and which will expire in years 1997-2000.
The significant components of net deferred income tax liabilities as of
December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred income tax liabilities:
Partnership differences................................... $ 4,147 $ --
Allocation of premium..................................... 91,301 91,908
-------- --------
Total deferred tax liabilities.................... 95,448 91,908
Deferred income tax assets:
Development costs......................................... 1,487 1,723
Partnership differences................................... -- 2,244
Deferred state taxes...................................... 6,173 (302)
Other..................................................... 683 510
Net operating losses...................................... 4,425 7,454
Investment tax credit..................................... 972 1,163
Alternative minimum tax credit............................ 524 524
-------- --------
Total deferred tax assets......................... 14,264 13,316
Valuation allowance......................................... (10,961) (11,392)
-------- --------
Net deferred tax asset................................. 3,303 1,924
-------- --------
Net deferred tax liability.................................. $ 92,145 $ 89,984
======== ========
</TABLE>
Significant components of the Company's income tax expense (benefit)
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(000'S) (000'S) (000'S)
<S> <C> <C> <C>
Current
Federal.......................................... $(4,588) $ 3,189 $(5,954)
State............................................ (127) 59 (20)
------- -------- -------
Total current............................... (4,715) 3,248 (5,974)
Deferred
Federal.......................................... 2,848 (12,356) 1,888
State............................................ (687) 262 (628)
------- -------- -------
Total deferred.............................. 2,161 (12,094) 1,260
Total income tax benefit.................... $(2,554) $ (8,846) $(4,714)
======= ======== =======
</TABLE>
F-163
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J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the differences between the U.S. statutory rate and
the effective tax rate based on income before taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory income tax rate............. (35.00)% (35.00)% (35.00)%
Items that affect tax expense:
State taxes, net of federal effect.......... (16.48) (.55) (5.75)
Amortization of goodwill.................... 25.71 5.76 4.84
Other permanent differences................. .95 -- --
True-up of prior year taxes................... (54.74) 3.79 --
------ ------ ------
Effective tax rate............................ (79.56)% (26.00)% (35.91)%
====== ====== ======
</TABLE>
6. DEBT
SENIOR SECURED NOTES PAYABLE
In November 1992, a subsidiary of the Company obtained $19,000,000 through
the issuance of 12-year senior secured notes to fund its equity commitments to
OSP. These notes bear interest, payable quarterly, at a fixed rate of 7.42%. The
notes amortize quarterly over the life of the loan and mature on December 31,
2004.
The subsidiary entered into a collateral agency agreement whereby all
distributions from OSP and OSP II are remitted to a cash collateral account and
pledged to the agent bank. All required quarterly principal and interest
payments are deducted from the account by the bank and any excess is remitted to
the subsidiary. The Company pledged all rights, title and interest in the
capital stock of the subsidiary to the security agent and the subsidiary
assigned all rights, title and interest in the partnerships. The notes are
nonrecourse to the Company.
MORTGAGE LOAN PAYABLE
In March 1993, BFALP obtained a $10,000,000 mortgage loan in order to
refinance the remaining construction costs related to the Feedline. The mortgage
loan carries a per annum floating rate of interest equal to the 30-day rate for
commercial paper, in effect at the end of the month, plus 6.07% (11.65% and
12.02% at December 31, 1997 and 1996, respectively). Interest was payable
monthly on the outstanding balance through December 31, 1995. Subsequent to
December 31, 1995, principal and interest are due monthly, with a maturity date
of December 31, 2010.
The loan is secured by a first mortgage on the Feedline and collateralized
by all the outstanding shares of a subsidiary of the Company and the pledge of
all partnership interests. In addition, each of the partners has guaranteed
$500,000 of the mortgage loan.
TERM LOAN PAYABLE
Pittsfield has a term loan agreement with GECC. The loan, which expires in
2009, has a fixed interest rate of 10.38%. Principal and interest are payable
quarterly in arrears.
OTHER
The Company is obligated, as a result of one of its equity investments, to
fund $1,000,000 in an escrow account in favor of one of the power purchasers,
which will be returned in the years 2003 and 2004. These fundings are financed
by noninterest-bearing demand notes, are included in accounts receivable on the
accompanying consolidated balance sheets and totaled $1,000,000 at both December
31, 1997 and 1996.
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J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 and 1996, the Company's long-term debt consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
(000'S) (000'S)
<S> <C> <C>
Senior secured notes payable, interest payable quarterly at
7.42%..................................................... $10,429 $11,949
Mortgage loan payable, interest payable monthly at
commercial paper rate plus 6.07%.......................... 9,435 9,745
Term loan payable, interest payable quarterly at 10.38%..... 4,306 4,508
Other....................................................... 1,000 1,047
------- -------
25,170 27,249
Less current portion........................................ 3,040 3,054
------- -------
$22,130 $24,195
======= =======
</TABLE>
Following are maturities of long-term debt for each of the next five years
(in thousands):
<TABLE>
<S> <C>
1998....................................................... 3,040
1999....................................................... 2,109
2000....................................................... 2,181
2001....................................................... 2,262
2002....................................................... 2,354
Thereafter................................................. 13,224
-------
Total............................................ $25,170
=======
</TABLE>
7. DISCLOSURE OF FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, restricted cash,
accounts receivable, accounts payable, accrued expenses, notes payable to
affiliates and long-term debt. The fair value of these financial instruments,
with the exception of the senior secured notes payable and the term loan
payable, approximate their carrying value as of December 31, 1997 and 1996. The
fair value of the senior secured notes payable and the term loan payable as of
December 31, 1997 and 1996 was approximately $13,542,000 and $15,150,000,
respectively. The fair value was estimated using discounted cash flows analysis,
based on the Company's current incremental borrowing rate. The carrying value of
these two notes is $14,735,000 and $16,457,000 at December 31, 1997 and 1996,
respectively.
8. STOCKHOLDERS' EQUITY
COMMON STOCK
The declaration and payment of dividends on the Class A common stock and
the amount thereof, are solely at the discretion of the Board of Directors, and
holders of such stock are not entitled to any rights of conversion. In December
1997, the Company declared a $10,000,000 dividend. See Note 13 for discussion of
subsequent payment of this dividend.
9. COMMITMENTS
PITTSFIELD
Operating lease
The Pittsfield project lease with GECC has been accounted for as an
operating lease. The lease has an initial term of 20 years, with two five-year
renewal options, exercisable by the Company. Rent is due in quarterly
installments of approximately $5,610,000. Supplemental rent is due under certain
circumstances and remitted in the form of lessor distributions. The Company has
the option to purchase the plant during years 12
F-165
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J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 20 of the lease agreement; in year 12, at the higher of its then fair market
value or the stipulated loss value (as defined in the lease) and in year 20, at
its then fair market value.
For the years ended December 31, 1997, 1996 and 1995, rent expense amounted
to $24,349,916, $25,196,731 and $22,445,667, respectively (of which $1,911,000,
$2,758,000 and $6,389,000, respectively, is related to supplemental rents) all
of which is included in rent under operating lease payments-Pittsfield in the
accompanying consolidated statements of operations.
Future minimum lease payments (in thousands), at December 31, 1997, under
the operating lease are as follows:
<TABLE>
<S> <C>
1998...................................................... 22,439
1999...................................................... 22,439
2000...................................................... 22,439
2001...................................................... 22,439
2002...................................................... 22,439
Thereafter................................................ 173,905
--------
Total........................................... $286,100
========
</TABLE>
In accordance with the lease, GECC provided a funding mechanism for the
estimated remaining costs of completing the Pittsfield project (the completion
fund). At December 31, 1997 and 1996, approximately $435,000 and $436,000,
respectively, was available from GECC in their completion fund for remaining
facility costs. These funds are available to the Pittsfield project, subject to
GECC approval.
The Pittsfield project lease is collateralized by the assignment of the
Company's rights, title and interest in all project contracts and the pledge of
all Company interests to the trustee and is nonrecourse to the individual
partners.
Certain operative documents related to the lease contain warranties and
covenants including, among others, a restriction on Company distributions and
additional indebtedness. In addition, a lease reserve account is required to be
maintained due to lease covenants under certain circumstances. On an annual
basis, the funding requirement if any is determined based on the terms of the
disbursement and security agreement. This account is not currently required.
Power sales agreements -- electricity
Pittsfield has a power sales agreement, as amended, with New England Power
Company ("NEPCO") to sell 65.6% of the net electric output of the project
through 2010, subject to one six-year extension. In accordance with the
agreement, Pittsfield has agreed to provide NEPCO with a security interest in a
specified portion of its electric revenues. Should Pittsfield experience an
event of default under the terms of the power sales agreement and NEPCO
terminates the agreement, Pittsfield is obligated to pay NEPCO the total amount
accumulated as liquidated damages. As of December 31, 1997 and 1996, the amount
totaled approximately $34,307,000 and $49,612,000 respectively. In January 1995,
the liquidating damages began to decline and will continue until eliminated.
In addition, Pittsfield is required to provide an irrevocable letter of
credit to NEPCO to secure payment of liquidated damages in the event of
nonperformance under the power sales agreement. The letter of credit increases
monthly to the extent of 4% of NEPCO electric revenues received by Pittsfield
until the letter of credit equals the lesser of the amount of liquidating
damages or $18,000,000. At December 31, 1997 and 1996, the letter of credit
totaled approximately $18,000,000 and $18,071,000, respectively.
Pittsfield has power sales agreements with Cambridge Electric Light Company
and Commonwealth Electric Company to sell a total of 34.4% of the net electric
output of the Pittsfield project. Delivery of this net
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J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
electric output will continue until December 31, 2011. Pittsfield is required to
provide irrevocable letters of credit to Cambridge Electric Light Company and
Commonwealth Electric Company to secure its performance under these power sales
agreements. At December 31, 1997 and 1996, the letters of credit outstanding
were approximately $5,737,000 and $5,109,000 for Cambridge Electric Light
Company, respectively, and $4,554,000 and $4,209,000 for Commonwealth Electric
Company, respectively. The letters of credit reach a maximum of $11,100,000 for
calendar year 1998 and expire on December 31, 2002 and December 31, 2001,
respectively.
Steam sales agreements
Pittsfield has a steam sales agreement with General Electric ("GE") through
2008, subject to two five-year extensions. GE has committed to purchase a
minimum of 700 million pounds (mmlbs.) of steam per year, up to a maximum of 840
mmlbs. per year.
The basic contract price (subject to escalation or renegotiation) of
$1,000,000 annually for up to 840 mmlbs. of steam per year will be reduced if
steam sales are less than 840 mmlbs. per year, with the total reduction not to
exceed $400,000 annually. Total operating revenue from GE was approximately
$712,000, $780,000 and $600,000 for steam delivered during the years ended
December 31, 1997, 1996 and 1995, respectively.
Fuel supply agreements
Pittsfield has two new long-term gas purchase and sale agreements with
Talisman Energy, Inc. ("Talisman") and Home Oil Company Limited ("Home"). The
Talisman agreement, which expires on September 1, 2010, calls for a daily fuel
supply of 22,420 Mcf/day. The Home agreement expires on October 31, 2011, and
calls for a daily fuel supply of 11,759 Mcf/day.
In addition, Pittsfield provides irrevocable letters of credit to Talisman
and Home to secure performance under the agreements. At December 31, 1997 and
1996, the total outstanding amount under the letters of credit was $3,300,000.
Fuel transportation agreements
Pittsfield's Canadian fuel suppliers have contracted for the transportation
of fuel from the wellhead in Empress, Alberta on the Nova Pipeline ("Nova") to
the TCPL interconnect. Pittsfield has entered into a firm transportation
agreement for the delivery of fuel from the Nova/TCPL interconnect to the
U.S./Canadian border. In addition, Pittsfield entered into a long-term
transportation agreement for firm transportation of fuel from the U.S./Canadian
border to the Feedline.
In June 1995, Pittsfield entered into a short-term firm service
transportation agreement with TCPL to transport fuel of 21,500 Mcf/day from the
Nova/TCPL pipeline interconnect at Empress, Alberta to the U.S./Canadian border
at Niagara Falls. This agreement expired on March 31, 1996. In December 1995,
the National Energy Board ("NEB") approved Pittsfield's application for
long-term transportation service on TCPL. Pittsfield has negotiated to replace
the short-term firm service transportation agreement with a firm long-term
transportation agreement. The term of the long-term firm transportation
agreement commenced on April 1, 1996 and expires on October 31, 2010. Under the
terms of this agreement, Pittsfield is required to provide an irrevocable letter
of credit to secure performance. At December 31, 1997 and 1996, the total letter
of credit outstanding was approximately $1,600,000.
In October 1995, Pittsfield entered into a temporary capacity assignment
agreement with NEPCO for firm transportation on TCPL. Pittsfield took assignment
of 10,000 Mcf/day of TCPL capacity effective November 1, 1995. The capacity
assignment allows Pittsfield to transport fuel on TCPL from Empress, Alberta to
Waddington, New York. In September 1997, the temporary capacity assignment
agreement was
F-167
<PAGE> 298
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
made permanent effective from November 1, 1997 through October 31, 2006. Under
the terms of the permanent assignment agreement, Pittsfield is required to
provide an irrevocable letter of credit to secure performance. At December 31,
1997, the total letter of credit outstanding was approximately $413,000.
In October 1997, Pittsfield entered into two temporary capacity assignment
agreements with Renaissance Energy, Ltd. ("Renaissance") for firm transportation
on TCPL. These agreements exchange delivery points from Waddington, New York to
Niagara Falls, New York to allow Pittsfield to deliver Canadian gas supplies to
the interconnect at Niagara Falls to match the downstream firm transportation.
Effective November 1, 1997, Pittsfield assigned to Renaissance 10,000 Mcf/day of
capacity for fuel transportation on TCPL from Empress, Alberta to Waddington,
New York. In return, Pittsfield took assignment from Renaissance for 10,000
Mcf/day of capacity for fuel transportation on TCPL from Empress, Alberta to
Niagara Falls, New York. The temporary capacity assignment agreements are
effective from November 1, 1997 to November 1, 1998. Renaissance and Pittsfield
are in the process of executing permanent assignment agreements to be effective
November 1, 1998.
NEPCO contingency
Pursuant to the rate formula established in the NEPCO power sales
agreement, Pittsfield bills NEPCO for reimbursement of transportation charges
(including finance charges) related to the Feedline. The NEPCO contingency
exists because NEPCO has not acknowledged in writing its obligation to reimburse
the Company for such charges using the rate formula or terms set forth in the
NEPCO power sales agreement. As of December 31, 1997, NEPCO continued to
reimburse the Company for amounts billed for transportation charges related to
the Feedline.
Transmission agreements
Pittsfield has an interconnection agreement whereby Northeast Utilities
("NU") provides the transmission of electricity to NEPCO through 2010. In
December 1994, the agreement was amended and Pittsfield provided NU with a
$343,388 application deposit, which is refundable upon expiration of certain
agreements (December 31, 2011) and is reflected as a long-term transmission
deposit, included as power sales and other deposits in the accompanying
consolidated balance sheets as of December 31, 1997 and 1996.
Pittsfield has agreements with Montaup Electric Company and Boston Edison
Company for the transmission of electricity to third-party purchasers
terminating on December 31, 2011.
Operation and maintenance agreement
Pittsfield and GE entered into a six-year, fee-based agreement whereby GE
provides ongoing operating and maintenance services. GE is also entitled to an
annual bonus based on the performance of the Pittsfield plant. The agreement
with GE expired on September 30, 1996.
Pittsfield paid GE $375,000 in November 1996 for the bonus earned during
the nine months ended September 30, 1996. Pittsfield entered into a new
agreement on October 1, 1996 with U.S Operating Services Company ("USOSC"), an
affiliated entity, which extends through October 31, 2002 and automatically
extends for an additional five years unless terminated by either party. The
USOSC agreement provides for ongoing operating and maintenance services similar
to those in the GE agreement. Pittsfield paid USOSC $125,000 in February 1997,
which was accrued for at December 31, 1996, for the bonus earned during the
three months ended December 31, 1996. As of December 31, 1997, Pittsfield has
$500,000 in accrued bonuses due to USOSC included in the accompanying
consolidated balance sheet and in operating expenses in the accompanying
consolidated statement of operations for the year then ended.
F-168
<PAGE> 299
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Site lease
Pittsfield has a lease with GE for certain property on which its plant is
located. The lease term expires the later of April 2028 or the economic useful
life of the plant. The lease may be terminated in the event that the steam sales
agreement with GE is terminated for default. The lease provides for rent of $1
for the entire lease term.
Office lease
In 1989, the Company entered into a ten year operating lease for office
space, commencing June 1989, with payments beginning September 1990. The Company
provided for the obligation on a straight-line basis over the term of the lease
and accrued a deferred lease liability for rent incurred from the commencement
date through October 31, 1996.
This lease was terminated on October 31, 1996 by the Company and assumed by
USGen. The Company's deferred lease liability has been relieved to zero. Total
rent expense was approximately $1,272,000 and $938,000 for the years ended
December 31, 1996 and 1995, respectively, and is included in general and
administrative expense in the accompanying consolidated statement of operations.
10. CONTINGENCIES
AVOCA
During 1997, JMC Avoca was named in several civil suits on behalf of
contractors and other vendors seeking damages related to Avoca, an unsuccessful
development project. This project, located in Steuben County, New York, was a
development project owned by JMC Avoca and two other general partners. In July
1997, Avoca and its partners, including JMC Avoca, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. JMC and the other non-debtor affiliates
of JMC named in any such lawsuits are responding to the above claims and
undertaking their respective legal defenses. Given the uncertainty associated
with this litigation, management cannot predict the outcome or estimate JMC's
exposure at this time.
11. CONCENTRATION OF CREDIT RISK
The Company provides management and consulting services to, and invests in,
projects and entities engaged in the generation of electricity and
transportation of natural gas. The majority of the Company's service revenues
are from affiliated entities; therefore, the Company does not perform credit
evaluations of these entities' financial condition and does not require
collateral. Credit losses historically have been small, which is consistent with
management's expectations.
12. SALE OF MANAGEMENT SALES AGREEMENTS
On January 1, 1998, the Company sold its management sales agreements with
Alberta Northeast Gas and Boundary Gas, Inc., and use of the name Northeast Gas
Marketing for approximately $2,000,000. Management does not believe the outcome
of this will have a material impact on the financial position, results of
operations, or cash flows of the Company.
13. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED)
On March 1, 1998, JMC distributed the stock of ten subsidiary companies to
Beale. The distribution was intended to complete the purchase and sale
transaction entered into in September 1997 between PG&E Generating Company
("PGen"), a wholly owned indirect subsidiary of PG&E Enterprises and Bechtel
Generating Company ("BGen"), a wholly owned indirect subsidiary of Bechtel
Enterprises. Subsequent to this distribution, the stock of the companies was
further distributed or sold.
F-169
<PAGE> 300
J. MAKOWSKI COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1998, PGen's indirect ownership interest in Beale was transferred to
U.S. Generating Company, LLC ("USGenLLC") and subsequently contributed by
USGenLLC to its subsidiary, USGen Power Group, LLC ("Power").
On June 24, 1998, Power and BGen each contributed cash totaling
approximately $1 million in exchange for the stock of Mason Generating Company.
The cash contribution and the related allocation of stock was consistent with
their ownership ratio of Beale. Immediately following the formation of Mason, it
purchased six wholly-owned subsidiaries of JMC for approximately $1 million. The
sale resulted in a loss of approximately $3 million to JMC. JMC the distributed
the cash proceeds from this sale to Beale, who in turn distributed the cash pro
rata to Power and BGen.
On October 15, 1998, Beale was merged with and into JMC. JMC was then
renamed Beale Generating Company ("New Beale"), indicating a reverse merger. The
surviving company, New Beale, consists of all the assets and liabilities
previously held by both Beale and JMC and is owned 89.1% by Power and 10.9% by
BGen.
The transactions described above, except for the transfer of ownership
interest in Beale in May 1998, were performed to prepare BGen's 10.9% interest
in Beale for sale. Such sale is expected to occur in October 1998 by a
subsidiary of Cogentrix Energy, Inc, a North Carolina corporation.
In June 1998, JMC sold its interest in the OSP projects which resulted in a
nominal gain.
On August 31, 1998 Selkirk and NIMO consummated the transactions relating
to the amendment and restatement of the existing power purchase agreement
between Selkirk and NIMO pursuant to the Master Restructuring Agreement dated as
of July 9, 1997, as amended, among NIMO, Selkirk and certain other independent
power producers (the "MRA"). As contemplated by the MRA, on that date (i)
Selkirk notified NIMO of Selkirk's determination that the requirements of
Selkirk's Trust Indenture, dated as of May 1, 1994 (the "Indenture"), with
respect to the restructuring of certain project contracts relating to the
operation of Unit 1 of the Selkirk facility had been satisfied: (ii) the Amended
ad Restated Power Purchased Agreement, dated as of July 1, 1998 between Selkirk
and NIMO became effective; and (iii) NIMO made certain payments into Selkirk's
Project Revenue Fund maintained at Bankers Trust Company, as Depository Agent
under the May 1, 1994 Deposit and Disbursement Agreement. In addition, Selkirk
has delivered notices to Paramount Resources Limited ("Paramount") and
TransCanada Pipelines Limited ("TransCanada") that the Second Amended and
Restated Gas Purchase Contract, dated as of May 6, 1998 between Selkirk and
Paramount, and the Amending Agreement to Gas Transportation Contract, dated as
of July 20, 1998, between Selkirk and TransCanada have become effective.
In June 1998, the $10,000,000 dividend declared in 1997 was paid.
F-170
<PAGE> 301
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Selkirk Cogen and MASSPOWER:
We have audited the accompanying combined balance sheets of Selkirk Cogen
Partners L.P. (a Delaware limited partnership) and MASSPOWER (a Massachusetts
general partnership) as of December 31, 1997 and 1996, and the related
statements of income, changes in partner's capital and cash flows for the years
ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Partnerships' management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Selkirk Cogen Partners L.P.
and MASSPOWER as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 12, 1998
F-171
<PAGE> 302
SELKIRK COGEN/MASSPOWER
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -------------------
1998 1997 1996
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,255 $ 8,164 $ 9,022
Restricted funds.......................................... 46,140 19,994 18,374
Accounts receivable....................................... 33,134 34,675 36,253
Inventories............................................... 9,585 9,205 8,635
Due from affiliates....................................... 16 14 40
Other current assets...................................... 517 530 664
-------- -------- --------
Total current assets.............................. 91,647 72,582 72,988
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $96,919 (unaudited), $81,893 AND
$61,627................................................... 488,293 503,304 523,776
DEFERRED CHARGES AND OTHER ASSETS:
Deferred financing cost, net of accumulated amortization
of $8,980 (unaudited), $8,057 and $6,248............... 14,490 15,873 17,682
Other assets.............................................. 7,470 6,944 5,157
Prepaid rent.............................................. 9,413 8,195 6,010
Long-term restricted funds................................ 27,091 21,494 20,446
-------- -------- --------
Total assets...................................... $638,404 $628,392 $646,059
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 9,740 $ 8,811 $ 6,630
Short-term debt........................................... 5,600 8,400 13,000
Accounts payable and accrued expenses..................... 20,521 24,678 25,122
Due to affiliated companies............................... 437 1,212 1,519
Accrued interest.......................................... 9,277 2,536 1,217
Customer advances......................................... -- -- 17
-------- -------- --------
Total current liabilities......................... 45,575 45,637 47,505
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
DEFERRED REVENUES........................................... 6,748 -- --
LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 564,318 574,171 584,516
OTHER LIABILITIES........................................... 23,715 18,665 16,522
PARTNERS' CAPITAL........................................... (1,952) (10,081) (2,484)
-------- -------- --------
Total liabilities and partners' capital........... $638,404 $628,392 $646,059
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-172
<PAGE> 303
SELKIRK COGEN/MASSPOWER
COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------------
1998 1997 1997 1996 1995
------------ ------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Electric and steam.................... $209,029 $205,886 $279,344 $261,810 $244,659
Gas resale............................ 6,522 11,864 14,909 26,313 18,974
-------- -------- -------- -------- --------
Total operating revenues...... 215,551 217,750 294,253 288,123 263,633
-------- -------- -------- -------- --------
COST OF REVENUES:
Fuel costs............................ 107,121 116,436 156,847 147,414 143,537
Operating and maintenance expenses.... 19,779 22,499 29,994 30,240 27,405
Ground lease.......................... 2,112 2,112 2,816 4,090 5,000
Depreciation.......................... 15,535 15,697 20,931 20,795 20,604
-------- -------- -------- -------- --------
Total cost of revenues........ 144,547 156,744 210,588 202,539 196,546
-------- -------- -------- -------- --------
GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 6,181 7,602 10,336 10,578 11,206
-------- -------- -------- -------- --------
Operating income.............. 64,823 53,404 73,329 75,006 55,881
INTEREST EXPENSE, NET................... 38,390 38,806 51,386 51,598 52,082
-------- -------- -------- -------- --------
Net income.................... $ 26,433 $ 14,598 $ 21,943 $ 23,408 $ 3,799
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-173
<PAGE> 304
SELKIRK COGEN/MASSPOWER
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- -------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994.................................. $14,221 $ 24,539 $38,760
Distributions............................................. (5,599) (20,321) (25,920)
Conversion and assignment of JMCSI Investors L.P.
interest............................................... 4,411 (4,411) --
Net income................................................ 2,119 1,680 3,799
------- -------- -------
BALANCE, DECEMBER 31, 1995.................................. 15,152 1,487 16,639
Distributions............................................. (7,379) (35,152) (42,531)
Net income................................................ 8,380 15,028 23,408
------- -------- -------
BALANCE, DECEMBER 31, 1996.................................. 16,153 (18,637) (2,484)
Distributions............................................. (4,861) (24,679) (29,540)
Net income................................................ 10,598 11,345 21,943
------- -------- -------
BALANCE, DECEMBER 31, 1997.................................. 21,890 (31,971) (10,081)
Distributions............................................. (9,410) (8,894) (18,304)
Net income................................................ 12,640 13,793 26,433
------- -------- -------
BALANCE, SEPTEMBER 30, 1998 (UNAUDITED)..................... $25,120 $(27,072) $(1,952)
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-174
<PAGE> 305
SELKIRK COGEN/MASSPOWER
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND 1997 (UNAUDITED)
AND THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 26,433 $ 14,598 $ 21,943 $ 23,408 $ 3,799
Adjustments to reconcile net income to net
cash provided by operating activities --
Depreciation............................. 15,535 15,217 20,931 20,795 20,604
Amortization of deferred financing
activities............................. 873 1,357 1,170 1,173 1,130
Other.................................... 2,441 (25) (472) (1,053) (268)
Decrease (increase) in accounts
receivable............................. 1,541 1,076 1,728 1,309 (6,022)
Decrease (increase) in inventory......... (380) (451) (570) (2,242) 233
Increase in other current assets......... (1,207) (1,024) (2,019) (5,314) (2)
(Decrease) increase in accounts payable
and accrued expenses................... 917 7,385 1,006 4,232 (3,331)
Increase in other liabilities............ 5,050 2,945 2,140 3,903 5,158
-------- -------- -------- -------- --------
Net cash provided by operating
activities........................ 51,203 41,078 45,857 46,211 21,301
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of proceeds...... (14) 31 28 (2,973) (4,497)
Other long-term assets -- escrow
deposits................................. (924) (15,294) (2,802) (424) 15,619
-------- -------- -------- -------- --------
Net cash (used in) provided by
investing activities.............. (938) (15,263) (2,774) (3,397) 11,122
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt................ (8,924) (5,191) (8,164) (6,330) (3,998)
(Repayment) proceeds from short-term debt,
net...................................... (2,800) (5,900) (4,600) 4,900 2,100
Capital distributions...................... (18,304) (17,860) (29,540) (42,531) (25,920)
Advances................................... -- (17) (17) (136) (5,282)
Financing costs............................ -- -- -- -- (217)
-------- -------- -------- -------- --------
Net cash used in financing
activities........................ (30,028) (28,968) (42,321) (44,097) (33,317)
-------- -------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 20,237 (3,153) 762 (1,283) (894)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 28,158 27,396 27,396 28,679 29,573
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR....... $ 48,395 $ 24,243 $ 28,158 $ 27,396 $ 28,679
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest..... $ 51,820 $ 52,877 $ 56,555
======== ======== ========
Purchase of inventory -- noncash........... $ -- $ 182 $ 3,800
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-175
<PAGE> 306
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BUSINESS
ORGANIZATION
Selkirk Cogen Partners, L.P. (Selkirk) was organized on December 15, 1989
as a Delaware limited partnership. Prior to the Partnership Agreement, the
partners had a cost-sharing arrangement for costs incurred from the project's
inception in October 1987.
Selkirk was formed for the purpose of constructing, owning and operating a
natural gas-fired combined-cycle cogeneration facility located on General
Electric Company's (GE) property in Bethlehem, New York (the Facility). The
Facility consists of one unit (Unit 1) with an electric generating capacity of
approximately 79.9 megawatts (MW) and a second unit (Unit 2) with an electric
generating capacity of approximately 265 MW. Unit 1 and Unit 2 have been
designed to operate independently for electrical generation, while thermally
integrated for steam generation, thereby optimizing efficiencies in the combined
performance of the Facility. Selkirk received construction financing for Unit 1
in June 1990 and commercial operations commenced on April 17, 1992. Unit 2
obtained construction financing in October 1992 and commercial operations
commenced September 1, 1994. Both units are fueled by Canadian natural gas
purchased under firm 15-year natural gas supply contracts (extendible to 20
years upon satisfaction of certain conditions). Unit 1 is selling at least 79.9
MW of electric capacity and associated energy to Niagara Mohawk Power
Corporation (NIMO) under a 20-year contract, and Unit 2 is selling 265 MW of
electric capacity and associated energy to Consolidated Edison Company of New
York (ConEd) under a 20-year contract. Also, Selkirk makes excess gas layoff
sales during periods when Units 1 and 2 are not operating at full capacity (see
Note 4). Historical natural gas resale prices have resulted in significant gas
resale margins for Selkirk.
Unit 1 of Selkirk is currently certified as a qualifying facility (QF)
under the Public Utility Regulatory Policy Act of 1978, as amended (PURPA).
Accordingly, the prices charged for the sale of electricity and steam are not
regulated. When Unit 2 commenced operations, Selkirk was no longer qualified by
the State of New York but continues to be certified by the Federal Energy
Regulation Commission (FERC) as a QF. However, this is not expected to have a
material impact on Selkirk's financial position or operations. Certain fuel
transportation agreements entered into by Selkirk are subject to regulation on
the federal and provincial levels in Canada. Selkirk has obtained all material
Canadian governmental permits and authorizations required for operation.
MASSPOWER is a Massachusetts General Partnership formed under the terms of
a Joint Venture Agreement dated August 8, 1989 and as amended and restated on
August 14, 1991. The partnership consists of five general partners and is
managed by a committee comprised of one representative from each general
partner. MASSPOWER has no employees, and the administration and operation of the
project are arranged under various contractual agreements (see Note 4).
MASSPOWER was formed to construct, own and operate a gas-fired combined
cycle cogeneration facility located on the property of Solutia Company (Solutia)
in Springfield, Massachusetts. The Facility's average net capacity is
approximately 240 MW. The Facility is fueled by Canadian natural gas and
revaporized liquefied natural gas (LNG), which are both purchased under firm
long-term contracts (see Note 5). The Facility's electrical generation is sold
to five utility companies under long-term power purchase agreements (see Note
5). The steam generation is sold to Solutia under a 20-year stream purchase
agreement (see Note 5). MASSPOWER also enters into short-term (less than six
months) contracts for sale of a portion of its electrical generation capability.
MASSPOWER is currently certified by the Federal Energy Regulatory
Commission as a QF under the PURPA. Accordingly, the prices charged for the sale
of electricity and steam are not regulated. However, MASSPOWER and certain
agreements entered into by MASSPOWER are subject to regulation by various
F-176
<PAGE> 307
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
federal, state and Canadian authorities. The criteria for QF certification
include requirements that a minimum of 5% of the Facility's output be useful
thermal energy, that the Facility achieve at least a specified ratio of energy
output to energy input, and that the ownership of the Facility by electric
utilities be no greater than 50%.
Construction and term financing was obtained on August 15, 1991, and
commercial operations commenced on September 1, 1993.
PARTNERS' CAPITAL
The general and limited partners of Selkirk, along with their respective
equity interests, are as follows:
<TABLE>
<CAPTION>
INTEREST
--------------------
GENERAL PARTNERS AFFILIATE OF PREFERRED ORIGINAL
- ---------------- ------------ --------- --------
<S> <C> <C> <C>
JMC Selkirk, Inc. J. Makowski Company, Inc. .09% 1.00%
(JMC)
Cogen Technologies Selkirk GP, Inc. Cogen Technologies, Inc. 1.00% --%
</TABLE>
<TABLE>
<CAPTION>
INTEREST
--------------------
LIMITED PARTNERS AFFILIATE OF PREFERRED ORIGINAL
- ---------------- ------------ --------- --------
<S> <C> <C> <C>
JMC Selkirk, Inc. J. Makowski Company, Inc. 1.95% 21.40%
Pentagen Investors, L.P. J. Makowski Company, Inc. 5.25% 57.60%
EI Selkirk, Inc. GPU International, Inc. 13.55% 20.00%
Cogen Technologies Selkirk L.P., Inc. Cogen Technologies, Inc. 78.16% --%
</TABLE>
Under the terms of the Selkirk amended partnership agreement, cash
available is distributed 99% to the partners in accordance with their respective
equity interest (preferred equity) and 1% is allocated based on the original
ownership structure between JMC affiliates and GPU International, Inc. (GPUI).
Any additional funds available after the preferred distribution are distributed
99% to the initial equity holders and 1% to the preferred equity holders.
Subsequent to the eighteenth anniversary of Unit 1's commercial operations or
the date on which all the preferred partners achieve a specified return,
distributions will be made in accordance with the residual interest: JMC
affiliates at 64.8%, GPUI at 17.7% and Cogen Technologies, Inc. at 17.5%.
The five general partners of MASSPOWER, along with their respective equity
interests, are as follows:
<TABLE>
<CAPTION>
EQUITY
PARTNER AFFILIATE OF INTEREST
- ------- ------------ --------
<S> <C> <C>
MASSPOWER, Inc. PG&E Enterprises 30.0%
Springfield Generating Company, L.P. PG&E Enterprises 17.5%
MP Cogen, Inc. General Electric Company 17.5%
Bay State Energy Development, Inc. Energy Investors Funds 17.5%
EPEC Independent Power I Company El Paso Energy 17.5%
</TABLE>
The net profits or losses and cash distributions of MASSPOWER are allocated
to the partners based on their respective equity interests.
F-177
<PAGE> 308
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The detail of partners capital, as reflected in the accompanying combined
balance sheets as of December 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Selkirk --
General Partners.......................................... $ (311) $ (173)
Limited Partners.......................................... (31,971) (18,637)
MASSPOWER --
General Partners.......................................... 22,201 16,326
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying combined financial statements of Selkirk Cogen Partners,
L.P. and MASSPOWER (collectively the Partnerships) are presented on a combined
basis due to the common management of the operating facilities of the
Partnerships. As such, all interpartnership transactions have been eliminated in
combination.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The combined financial statements as of September 30, 1998 and for the
periods ended September 30, 1998 and 1997 are unaudited and are presented
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, the accompanying combined financial statements
reflect all adjustments (which are of normal recurring nature) necessary to
present fairly the financial position and results of operations and cash flows
for the interim periods, but are not necessarily indicative of the results of
operations for a full fiscal year.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, cash equivalents include
short-term investments with maturities of three months or less.
RESTRICTED FUNDS AND LONG-TERM RESTRICTED FUNDS
The Partnerships are required to maintain cash reserve accounts for
maintenance costs and debt service requirements as part of their credit
agreement with a bank. Certain of the restricted funds are associated with
transactions or events that are applicable to periods beyond the current
accounting period and are, therefore, classified as long-term. All other funds
are classified as current assets.
INVENTORIES
Inventories are stated at the lower of cost or market. Costs for materials,
supplies and oil inventories are determined using the average unit cost method.
F-178
<PAGE> 309
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Cogeneration facility....................................... 30 years
Computer systems............................................ 7 years
Office equipment............................................ 5 years
Furniture, fixtures and other equipment..................... 10 years
</TABLE>
DEFERRED FINANCING COSTS
Deferred financing costs represent the costs incurred to obtain project
financing and are amortized using the effective interest rate method over the
estimated life of the loans.
OTHER ASSETS
Included in other assets is a $525 and $491 long-term deposit with
Northeast Utilities Service Company (NUSCO) for long-term firm transmission
service as of December 31, 1997 and 1996, respectively, and $6,059 and $4,666 in
an escrow account to fulfill a potential repayment obligation under the power
purchase agreement with Boston Edison Company (BECo) as of December 31, 1997 and
1996, respectively.
REAL ESTATE TAXES
Real estate tax payments made under the Partnerships' payment in lieu of
taxes (PILOT) agreements are recognized on a straight-line basis over the term
of the agreement.
INCOME TAXES
Income taxes have not been recorded in the accompanying combined financial
statements because such taxes, if any, are the responsibility of the partners of
Selkirk and MASSPOWER.
PLANNED MAJOR OVERHAULS
Periodic major overhauls of the gas and steam turbines will be necessary to
maintain the Facilities' operating capacity. A maintenance and repairs reserve
is recorded by Selkirk based on scheduled major maintenance plans for 20 years.
MASSPOWER will be conducting its next major overhaul of a gas turbine engine
during 1998 at an estimated cost of $1,500. MASSPOWER follows the direct
expensing method for these major overhaul costs. Deterioration in existing parts
and required work scope could cause the estimates to change in the near term.
CURRENCY AND INTEREST RATE SWAPS
In connection with its asset and liability management policies, the
Partnerships have entered into foreign currency and interest rate swap
agreements. Gains and losses on currency exchange contracts are deferred as
hedges of firmly committed transactions and recognized in income in the same
period that the hedged transactions are realized. In the unlikely event that the
underlying transaction terminates, the deferred gains and losses on the
associated swap agreement will be recorded in the income statement.
REVENUE RECOGNITION
Revenues for the sale of electricity and steam are recorded based on
monthly output delivered as specified under contractual terms. Revenues for the
sale of excess gas are recorded in the month sold.
F-179
<PAGE> 310
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT FINANCING
SELKIRK
On May 9, 1994, the Selkirk Funding Corporation, a wholly owned subsidiary
of Selkirk Cogen, issued an aggregate of $392,000 in bonds, of which a portion
was used to refinance the outstanding indebtedness of the Partnerships. The
bonds consist of $165,000, which matures on December 26, 2007 at an interest
rate of 8.65% with principal and interest payable semiannually on June 26 and
December 26 of each year with principal payments commencing June 26, 1996, and
$227,000, which matures on June 26, 2012 at an interest rate of 8.98% with
principal and interest payable semiannually on June 26 and December 26 of each
year with principal payments commencing December 26, 2007.
The scheduled principal payments on the bonds are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- --------
<S> <C>
1998........................................................ $ 3,298
1999........................................................ 4,822
2000........................................................ 7,307
2001........................................................ 11,062
2002........................................................ 13,529
Thereafter.................................................. 349,235
</TABLE>
The loans are secured by liens on, and security interests in, substantially
all of the assets of Selkirk Cogen. These loans are nonrecourse to the
individual partners. The trust indenture restricts the ability of Selkirk to
make distributions to the partners under certain circumstances.
In connection with the bonds, the Partnerships are required to maintain
certain restricted funds to finance future debt, interest and maintenance
payments. These funds have been included in restricted funds and long-term
restricted funds in the accompanying combined balance sheets.
In 1994, Selkirk entered into a combined working capital and bank
reimbursement agreement (Credit Agreement). The Credit Agreement has a maximum
available amount of $23,471 to be used by Selkirk for required letters of credit
related to various project contracts and working capital purposes. The maximum
amount available under the Credit Agreement for working capital purposes is
$5,000. No amounts have been drawn under the Credit Agreement.
MASSPOWER
The MASSPOWER loan payable represents borrowings under a $240,000
construction and term credit facility from a syndicate of banks (the Banks)
dated August 15, 1991. The credit facility consists of $210,000 of original
principal term loan, $15,000 available for letters of credit and $15,000
available for working capital loans.
TERM LOANS
The term loans bear interest at the option of MASSPOWER at either 1%
through September 14, 1997 and 1 3/8% thereafter, plus the greater of the prime
rate or the Federal Funds rate plus 3/8%; or 1 1/2% through September 14, 1997
and 1 7/8% thereafter over the certificate of deposit rate; or 1 3/8% through
September 14, 1997 and 1 3/4% thereafter over the LIBOR rate. The credit
facility is secured by substantially all of the assets of the Facility. A
commitment fee is payable on the letter of credit facility semiannually based on
the daily average unused letter-of-credit commitment amount at a rate of 1/4%
per annum, and an issuance fee is payable semiannually on the average daily
stated amount of all outstanding letters of credit at a rate of 1 1/4% per
annum.
F-180
<PAGE> 311
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The term credit facility lenders have no recourse to any general partner
and do not benefit from a debt guarantee by any general partner.
The credit agreement contains certain covenants, including restrictions on
the distribution of cash or property to the partners, the incurrence of
additional indebtedness, the creation of liens, the sale of assets, the creation
of contingent obligations and the amendment of certain project contracts.
At December 31, 1997 and 1996, term loans totaled $193,729 and $199,727,
respectively. The effective interest rate on the loans without giving effect to
the differences between amounts received and paid under MASSPOWER's interest
rate swap agreements was 7.29%, 7.06% and 7.61% for the years ended December 31,
1997, 1996 and 1995, respectively. In addition, approximately $15,000,000 in
letters of credit were issued as security deposits under certain power sales
agreements and certain other project contracts as of December 31, 1997, 1996 and
1995 (see Note 4). The letters of credit expire at various times through the
year 2014.
The scheduled principal payments on the term loans are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 5,513
1999........................................................ 7,350
2000........................................................ 11,025
2001........................................................ 13,125
2002........................................................ 15,750
Thereafter.................................................. 140,966
</TABLE>
SHORT-TERM DEBT
As part of the credit facility, MASSPOWER has a $15,000 line of credit
available for working capital loans. Working capital loans bear interest at the
rate of 5/8% plus the greater of the prime rate or the federal funds rate plus
3/8%. A commitment fee is payable semiannually on the daily average unused
commitment amount at a rate of 3/8% per annum.
At December 31, 1997 and 1996, $8,400 and $13,000, respectively, were
outstanding under the working capital line of credit. The effective interest
rates on these borrowings were 9.135%, 9.0% and 9.42% for the years ended
December 31, 1997, 1996 and 1995, respectively.
INTERCREDITOR AND COLLATERAL AGENCY AGREEMENTS
In August 1991, MASSPOWER entered into several intercreditor and security
arrangements with the Chase Manhattan Bank, N.A. (on behalf of itself as agent
for the Banks), State Street Bank and Trust Company (as the collateral agent),
Western Massachusetts Electric Company (WMECO), Commonwealth Electric Company
(ComElec) (WMECO and ComElec, together, the Secured Power Purchasers) and
Solutia. The credit facility is secured by a first priority lien and security
interest granted by MASSPOWER in favor of the collateral agent. The
intercreditor agreements have created a procedure for restructuring or selling
the Facility in the event the Facility is unable to perform in accordance with
its contracts and/or the credit facility.
The First Intercreditor and Collateral Agency Agreement includes a First
Mortgage, a Second Mortgage, an Equipment Security Agreement, and a Power Sales
Security Agreement. These agreements subject the leased property, equipment and
fixtures on the property, the Power Sales Agreements with the Secured Power
Purchasers and related accounts receivable, to liens in favor of the collateral
agent to benefit the Banks, and subordinately, to benefit the Secured Power
Purchasers. Solutia subordinately benefits under the Equipment Security
Agreement.
F-181
<PAGE> 312
SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The remaining project contracts and all other assets of MASSPOWER, except
equipment, are subject to the lien and security interest granted under the
Second Intercreditor and Collateral Agency Agreement in favor of the collateral
agent to benefit the Banks and WMECO.
4. INTEREST AND CURRENCY SWAP AGREEMENTS
On June 20, 1990 and October 29, 1992, Selkirk entered into currency
exchange agreements to hedge against future exchange rate fluctuations, which
could result in additional costs incurred under fuel transportation agreements,
which are denominated in Canadian dollars. The June 1990 agreement relates to
Unit 1 under which Selkirk exchanges approximately $368 U.S. dollars for $458
Canadian dollars on a monthly basis commencing on December 25, 1992 and
terminating December 25, 2002. The October 1992 agreement relates to Unit 2
under which Selkirk exchanges approximately $1,044 U.S. dollars for $1,300
Canadian dollars on a monthly basis commencing on May 25, 1995 and terminating
on December 25, 2004.
On August 22, 1991, MASSPOWER entered into an interest rate exchange
agreement, as amended on December 1, 1993, effective from January 18, 1994 to
January 15, 2004 at a fixed rate of 8.925% for monthly predetermined notional
amounts as scheduled at the time of execution of this agreement. For the years
ended December 31, 1997, 1996 and 1995, the weighted average floating rate at
which MASSPOWER received interest payments was 5.72%, 5.65% and 6.05%,
respectively. The notional amount of debt for which interest rate exchange has
been entered into under this agreement is $105,000,000 at December 31, 1997,
1996 and 1995.
On January 27, 1994, MASSPOWER entered into an additional interest rate
exchange agreement with a bank. The agreement will be effective from January 16,
1996 to January 15, 2002 for predetermined interest rates and notional amounts
as scheduled at the time of execution of the agreement. For the years ended
December 31, 1997 and 1996, the weighted average floating rate at which
MASSPOWER received interest payments was 5.72% and 5.65% respectively. The
notional amount of debt for which interest rate exchange agreements have been
entered into under this agreement at December 31, 1997 and 1996 is $50,000 and
$55,000, respectively.
On August 22, 1991, MASSPOWER entered into a currency exchange agreement
with a bank to mitigate the currency exchange rate risks associated with
MASSPOWER's Canadian fuel transportation costs (see Note 4), which are
denominated in Canadian dollars. The currency exchange agreement commenced on
February 20, 1994 and terminates on February 20, 2004. MASSPOWER will exchange
U.S. dollars for Canadian dollars at an exchange rate of 1.20 Canadian dollars
for each U.S. dollar on amounts scheduled at the time of the execution of the
agreement.
On October 6, 1994, MASSPOWER entered into two other currency exchange
agreements with different banks to further mitigate its currency exchange risks
associated with its Canadian fuel transportation costs. Both agreements
commenced on October 20, 1994 and terminate on February 20, 2004. MASSPOWER will
exchange U.S. dollars for Canadian dollars at various exchange rates on $CDN 400
per month as scheduled at the time of the execution of the agreement. Gross
deferred unrealized gains from hedging firm purchase commitments were $787, $717
and $579, as of December 31, 1997, 1996 and 1995, respectively, and are expected
to be realized by the end of the agreements.
The monthly notional amount of transportation costs for which currency
exchange agreements have been entered into is $CDN 1,301 at December 31, 1997
and 1996 and $CDN 1,450 at December 31, 1995.
In the event of default by any of the bank counterparties to the interest
rate and currency exchange agreements, the Partnerships could be exposed to
interest rate and currency exchange rate risks. The Partnerships do not
anticipate nonperformance by any of the counterparties.
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The Partnerships have only the above-mentioned limited involvement with
derivative financial instruments and does not use them for trading purposes.
They are used to manage well-defined interest rate and commodity price risks
(see Note 7 for fair value of financial instruments).
5. COMMITMENTS AND AGREEMENTS
Selkirk and MASSPOWER have entered into respective site lease, property
tax, fuel supply and transportation, power sales, steam sales, electric
interconnection and transmission, operations and maintenance, water supply and
project administrative agency agreements. In connection with the construction
and operation of these facilities, Selkirk and MASSPOWER are obligated under the
following agreements:
SITE LEASE
Selkirk has entered into an agreement with General Electric to lease the
property on which that facility is located. The amended lease term expires on
the twentieth anniversary of the commercial operations date of Unit 2 and is
renewable for the greater of five years or until termination of any power sales
contract, to a maximum of 20 years. The lease may be terminated by Selkirk under
certain circumstances with the appropriate written notice during the initial
term. Annual rent payments under this agreement are $1,000.
MASSPOWER has entered into an operating lease agreement, as amended in July
1991, to lease the property on which the Facility is located from Solutia. The
original lease agreement was amended in 1996. The amendment gives MASSPOWER the
right to extend the lease an additional 15 years. The amended lease term expires
in 2028. At the end of the term, the lease may be renewed, or if not renewed,
Solutia has the right to purchase the Facility at a fair market value or require
that the site be restored to its original condition at the partnership's
expense. The lease provides for annual rent of $5,000.
In addition, Solutia has agreed to supply MASSPOWER with wastewater
equalization and cooling water supply for 20 years or cancellation of the site
lease agreement under a separate services agreement.
Lease expense for MASSPOWER has been recorded ratably over the term of the
amended lease with the difference between the lease expense and lease payments
recorded as prepaid rent.
FUEL SUPPLY AND TRANSPORTATION PURCHASE AGREEMENTS
Selkirk has entered into a firm natural gas supply agreement, as amended,
with Paramount Resources Ltd., a Canadian corporation, for Unit 1. The agreement
has an initial term of 15 years, which began in November 1992, with an option to
extend for an additional five years upon satisfaction of certain conditions.
Selkirk has entered into firm natural gas supply agreements with various
suppliers for Unit 2. The agreements have an initial term of 15 years, which
began November 1, 1994, and an option to extend for an additional five-year term
upon satisfaction of certain conditions.
Each Unit 2 gas supply contract requires that Selkirk purchase a minimum of
75% of the maximum annual contract volumes each year. If the partnership fails
to take this minimum quantity, then the shortfall amount between the minimum
required volumes and the actual nominations must be made up in the following
year(s). The partnership is allowed up to two years under these contracts,
during which time the partnership may make up any shortfall. If the partnership
does not make up the shortfall within these periods, then the suppliers have a
right to reduce the maximum daily contract quantity by the shortfall. The
partnership purchased approximately $38,279 and $35,191 in gas from these
suppliers for the years ended December 31, 1997 and 1996, respectively.
Selkirk has entered three 20-year agreements for firm fuel transportation
service to supply Unit 1 commencing November 1, 1992. In accordance with one of
these agreements, Selkirk posted a letter of credit in the amount of
approximately $586 in October 1992.
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Selkirk has entered into three agreements for firm fuel transportation
service for Unit 2. The agreements commenced in November 1994 and have terms of
20 years. Upon the execution of the transportation agreement with one
transporter, the various fuel suppliers posted letters of credit totaling
approximately $10,007,000 Canadian dollars for the benefit of the transporter on
behalf of Selkirk, which was subsequently reduced to approximately $9,814
Canadian dollars in February 1997. Selkirk will reimburse all costs related to
obtaining and maintaining the letters of credit. Selkirk also posted two letters
of credit related to the remaining two firm fuel transportation agreements for
approximately $796 and $2,090.
MASSPOWER and Granite State Gas Transmission, Inc. (Granite State), a
subsidiary of Bay State Gas Company (Bay State), designated Orchard Gas
Corporation (Orchard Gas), an affiliate of J. Makowski Company, Inc. (JMC), as
their agent to purchase Canadian natural gas and to enter into gas
transportation contracts on their behalf for one half of the Facility's annual
fuel supply.
Orchard Gas entered into an 18.5-year Gas Purchase Contract with ProGas
Limited (ProGas), a Canadian corporation. Orchard Gas also entered into a
20-year Firm Gas Transportation Agreement with Iroquois Gas Transmission System,
L.P., and a 20-year Firm Gas Transportation Contract with Tennessee Gas Pipeline
Company. Local transportation is provided by Bay State through a 20-year
transportation agreement with MASSPOWER.
MASSPOWER entered into a gas supply contract for the purchase of
revaporized LNG from Distrigas of Massachusetts Corporation for a term of 20
years from the date of commercial operations for the remaining one-half of the
Facility's gas supply.
Additionally, MASSPOWER entered into two gas supply contracts with Bay
State to supply MASSPOWER with natural gas in the event of nonperformance by
MASSPOWER's primary gas supplier. Under the first contract, Bay State will
provide a 305-day sales service contract. Under the second contract, Bay State
will provide an interruptible sales service contract to facilitate the purchase
of incremental gas supplies. MASSPOWER also entered into a Gas Peaking Service
Agreement with Bay State for any 20 days during the period from November through
March.
MASSPOWER and Granite State entered into a release gas agreement whereby
MASSPOWER agreed to release and Granite State agreed to accept the difference
between the daily amount of gas required for use in the facility and 75% of the
daily contracted ProGas supply.
ENERGY SALES AGREEMENT -- STEAM
In February 1990, Selkirk entered into a steam sales agreement for Unit 1,
as amended, with GE for an initial term of 20 years, effective from the date of
commercial operations. On October 21, 1992, Selkirk and GE entered into a new
steam sales agreement, as amended, with a term of 20 years from the commercial
operations date of Unit 2 and may be extended under certain circumstances. The
Unit 1 steam sales agreement terminated upon the commercial operations of Unit
2.
Until Unit 2 achieved commercial operations, GE had agreed to forego
(subject to later repayment plus interest) the discount on a certain quantity of
steam supplied by Selkirk during a quarter to the extent necessary for Selkirk
to maintain a quarterly debt service coverage ratio of 1.2 to 1, and the
advances, with interest, are repayable to the extent Selkirk's quarterly debt
service coverage ratio exceeds 1.3 to 1. Under this agreement, Selkirk had
invoiced and received from GE approximately $5,022. In April 1995, the
partnership paid off the outstanding principal amount and approximately 75% of
the associated accrued interest. The partnership paid the remaining accrued
interest in January 1996 and February 1997.
GE is obligated under the steam sales agreement to purchase the minimum
quantities of steam necessary for the Facility to maintain its QF status. In the
event that GE were to fail to purchase and take this minimum
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COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
quantity, the partnership could acquire title to the Facility site, terminating
the lease agreement, at no cost to the partnership.
The agreement provides GE the right of first refusal to purchase the
Facility, subject to certain pricing considerations. Additionally, GE has the
right to purchase the boiler facility that produces the steam at a mutually
agreed-upon price if and when the steam sales agreement is terminated. The steam
sales agreement may be terminated by Selkirk with one year's written notice if
either the NIMO or ConEd power sales agreement is terminated. It may also be
terminated by GE with two years' written notice if GE's plant no longer has a
requirement for steam.
In July 1990, MASSPOWER entered into an Energy Purchase Agreement (EPA)
with Solutia. Under the terms of the EPA, MASSPOWER is obligated to sell Solutia
steam for the period of 20 years from the date of commercial operations.
ENERGY/POWER SALES AGREEMENTS -- ELECTRICITY
In December 1987, Selkirk entered into a power sales agreement, as amended,
with NIMO for the sale of electricity for an initial term of 20 years commencing
on the date of commercial operations, April 17, 1992. The agreement may be
terminated upon two years' written notice to NIMO and payment of a termination
fee or upon the loss of Selkirk's status as a QF.
In April 1994, the power sales agreement with NIMO was amended and pursuant
to this amended agreement Selkirk paid NIMO $1,250,000 as a consent fee from the
proceeds of the bond offering. In addition, Selkirk posted a letter of credit
for approximately $15,000 under the Credit Agreement.
On October 6, 1996, NIMO filed its "PowerChoice" proposal with the New York
State Public Service Commission (NYPSC). On October 12, 1995, NIMO filed a
Report on Form 8-K with the Securities and Exchange Commission (the Commission)
explaining the PowerChoice proposal (the PowerChoice Statement). In the
PowerChoice Statement, NIMO describes a number of related proposals to
restructure the utility's business, including the reorganization of its assets
and the renegotiation of its contracts with generators which, like Selkirk, are
not regulated as utilities (nonutility generators). On July 10, 1997, NIMO filed
a Report on Form 8-K with the Commission stating that NIMO had entered into a
Master Restructuring Agreement (MRA) pursuant to which it and the 29 independent
power producers that had signed the MRA proposed to terminate, restate or amend
their respective power sales agreements. On October 17, 1997, NIMO filed a
Report on Form 8-K with the Commission stating that on October 11, 1997, NIMO
filed its Power Choice settlement with the NYPSC which incorporates the terms of
the MRA. On February 24, 1998, the NYPSC approved NIMO's Power Choice settlement
proposal, which includes the implementation of the MRA.
The consideration for the independent power sellers' agreement varies by
party and may consist of cash, short term notes, shares of NIMO's common stock
or certain swap contracts. Among the contracts proposed to be restructured is
the NIMO power sales agreement for the electric output of Unit 1. Pursuant to
the MRA and subject to implementation as described below, the parties proposed
to restructure the NIMO power sales agreement to provide for the sale of
electricity by Selkirk pursuant to a predetermined schedule of output at a price
based on certain indices for a period of 10 years in lieu of the delivery and
price provisions of the NIMO power sales agreement as currently in effect.
Selkirk anticipates that if and when a restructured power sales agreement goes
into effect, NIMO will relinquish its right to direct dispatch of Unit 1, the
electrical output of Unit 1 will be sold to NIMO and other purchasers based on
market conditions then in effect, and Selkirk will receive certain fixed
payments from NIMO under the restructured power sales agreement and other
payments under the MRA.
The details of the physical delivery and pricing arrangements are subject
to final agreement with NIMO, and possible modifications to other Selkirk
contracts for Unit 1 continue to be the subject of extensive
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COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
negotiations. Implementation of the MRA is subject to a number of significant
conditions, including, without limitation, NIMO and Selkirk negotiating the
restructured Unit 1 power sales agreement, the receipt of all regulatory
approvals, the receipt of all consents by third parties necessary for the
transaction contemplated by the MRA (including satisfying certain standards
under Selkirk's trust indenture relating to the absence of material adverse
changes or receiving any required approval of bondholders or other creditors),
Selkirk's entering into new third-party arrangements that will enable Selkirk to
restructure its project on a reasonably satisfactory economic basis, and the
receipt by NIMO and Selkirk of all necessary approvals from their respective
boards of directors, shareholders and partners. Should NIMO and Selkirk satisfy
all of the conditions to effectuating the transactions contemplated by the MRA
with respect to Selkirk, NIMO may nevertheless terminate the MRA if NIMO
determines that as a result of the failure to satisfy the conditions of the MRA
by other independent power producers the benefits anticipated to be received by
NIMO pursuant to the MRA have been materially and adversely affected. Further,
final implementation of the MRA is conditioned upon NIMO's successful completion
of financing required to fund certain of its payment obligations under
agreements to implement the MRA.
Selkirk, as a party to the MRA, is committed to negotiate with NIMO and
other parties to reach agreement on contractual arrangements required to
restructure the NIMO power sales agreement pursuant to the MRA; however, Selkirk
expresses no opinion with respect to the likelihood that all of the conditions
to implementation of the MRA will be met. Further, Selkirk expresses no opinion
with respect to the viability of NIMO's proposed alternatives should the
implementation of the MRA not be completed, such as NIMO's proposal in the
context of the Power Choice Statement to take possession of independent power
projects through the power of eminent domain and to thereafter sell such
projects or NIMO's position that it has not ruled out the ultimate possibility
of a filing for restructuring under Chapter 11 of the U.S. Bankruptcy Code as
set forth in the Power Choice Statement. Nevertheless, in the absence of
agreement on a definitive restructured power sales agreement, Selkirk continues
to believe that the NIMO power sales agreement is a valid and binding contract
with NIMO. Given the uncertainties with respect to such implementation, Selkirk
is unable to determine what effect, if any, the restructured power sales
agreement or the Power Choice proposal will have on Selkirk, its business or net
operating revenues. For the year ended December 31, 1997, electric sales to NIMO
accounted for approximately 19.3% of total project revenues.
Previously, in connection with NIMO's March 10, 1997 announcement of the
agreement in principle, Standard & Poor's placed the bonds on creditwatch "with
negative implications," based in part on its analysis of the current reports on
Form 8-K filed in March 1997 by NIMO and Selkirk, respectively, and its belief
that the restructuring has the potential to erode cash flow coverage derived
from long-term contracts supporting the bonds. To date, Standard & Poor's has
not changed its outlook on the bonds. Additionally, as of the date of this
report, Moody's Investors Service has not changed its rating or its previous
"negative outlook" on the bonds as a result of the developments.
Selkirk has also entered into a power sales agreement with ConEd for the
sale of electricity for an initial term of 20 years commencing on September 1,
1994, the date of Unit 2 commercial operations. The contract is extendible under
certain circumstances.
The power sales agreements with NIMO and ConEd each provide the purchasing
utility with the contractual right to schedule the related Unit for dispatch on
a daily basis at full capability, partial capability or off-line. Each
purchasing utility's scheduling decisions are required to be based in part on
economic criteria which, pursuant to the governing rules of the New York Power
Pool, take into account the variable cost of the electricity to be delivered.
Certain payments under these agreements are unaffected by levels of dispatch.
However, certain payments may be rebated or reduced to NIMO and ConEd if Selkirk
does not maintain a minimum availability level.
ConEd, by a letter dated September 19, 1994, claimed the right to acquire
that portion of Unit 2's natural gas supply not used in operating Unit 2 (the
excess gas), when Unit 2 is dispatched off-line or at less than full
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COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
capability. The ConEd power sales agreement contains no express language
granting ConEd any rights to such excess gas and the partnership has stated to
ConEd that claims to excess gas are without merit. To date, ConEd has paid all
amounts invoiced by the partnership in accordance with the ConEd power purchase
agreement.
If ConEd were to prevail in its claim to Unit 2's excess natural gas
volumes, Selkirk would lose its ability to engage in layoff sales of such
volumes at favorable prices relative to their costs, and thus Selkirk's cash
flows from gas resale activities would also be materially and adversely
affected. Selkirk is unable to determine the outcome of this uncertainty.
In August 1992, NIMO filed a petition requesting the NYPSC to authorize
NIMO to curtail purchases from, and avoid payment obligations to, nonutility
generators, including QFs such as the Facility, during certain periods. NIMO
claimed that such curtailment would be consistent with PURPA, and the
regulations promulgated thereunder, which contemplate utilities' curtailing
purchases from QFs under certain circumstances. In October 1992, the NYPSC
initiated a proceeding to investigate whether conditions existed justifying the
exercise of the PURPA curtailment rights and, if so, to determine the procedures
for implementing PURPA curtailment rights. ConEd also filed a petition in this
proceeding seeking to implement PURPA curtailment rights during certain periods.
An administrative law judge appointed by the NYPSC held hearings during the
spring of 1993; however, his opinion was never released. On August 30, 1996, the
NYPSC reopened the curtailment proceedings and directed an administrative law
judge to prepare a recommended decision under an abbreviated deadline. On March
18, 1998, the NYPSC announced that an order instituting a curtailment policy
would be forthcoming; however, a written order has not yet been issued. Selkirk
expects that any agreement that it enters into with NIMO to implement the MRA
will waive NIMO's right, if any, to curtail purchases from Selkirk.
In any event, Selkirk has taken the position in this proceeding that it
should not be subject to curtailment as a result of this proceeding, even if the
NYPSC grants NIMO and ConEd some measure of generic curtailment rights.
Selkirk's position is based in part on the fact that neither NIMO nor ConEd
bargained for an express curtailment right in its power sales agreement and
Selkirk agreed to permit NIMO and ConEd to direct the dispatch of the relevant
Unit. Nevertheless, both NIMO and ConEd have refused to expressly waive their
claimed curtailment rights against dispatchable facilities and have not agreed
to exempt the Facility from curtailment, notwithstanding the absence of
contractual language in the power sales agreements granting the utilities this
right. If NIMO and ConEd were to receive NYPSC authorization to curtail power
purchases from QFs, including dispatchable facilities, they may seek to
implement curtailment with respect to Selkirk by avoiding not only energy
payments but also capacity payments during periods in which the Facility is
curtailed. Such a reduction in energy payments and capacity payments could
materially and adversely affect Selkirk's net operating revenues.
MASSPOWER has entered into long-term "take-and-pay" capacity and energy
sales contracts with Massachusetts Municipal Wholesale Electric Company for 20
years, ComElec (Commonwealth I) for 15 years, ComElec (Commonwealth II) for 20
years, WMECO for 15 years and BECo for 20 years. These contracts account for 98%
and 95% of the Facility's net stated capacity for the Summer and Winter period,
respectively. The pricing methods for these contracts vary, but in general, are
based on variable costs with inflation and other escalators, plus fixed amounts
with annual escalation adjustments. In addition, MASSPOWER has entered into a
20-year energy-only contract with Consolidated Edison Company of New York, Inc.
MASSPOWER has also entered into short-term sales agreements with various other
parties.
ELECTRIC TRANSMISSION AND INTERCONNECTION AGREEMENTS
Selkirk constructed an interconnection facility to transfer power from Unit
1 to NIMO and transferred title of the facility to NIMO. Selkirk has agreed to
reimburse NIMO $150 annually for the operation and
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COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
maintenance of the facility. The term of the agreement is for 20 years from the
commercial operations date of Unit 1 and may be extended if the power sales
agreement with NIMO is extended.
In December 1990, Selkirk entered into a 20-year firm interruptible
transmission agreement with NIMO, as amended, to transmit power from Unit 2 to
ConEd, beginning with commercial operations. In connection with this agreement,
Selkirk constructed an interconnection facility and transferred title to NIMO in
1995. Under the terms of this agreement, Selkirk will reimburse NIMO $450
annually for the maintenance of the facility.
There are three transmission service agreements associated with
transmitting power from the MASSPOWER facility. MASSPOWER entered into a firm
service agreement with NUSCO to allow transmission of energy through the NUSCO
system to all power purchasers and a non-firm transmission agreement to provide
additional transmission capabilities. MASSPOWER also entered into an agreement
with Montaup Electric Company (Montaup) to allow for transmission of energy from
Montaup's interconnection with NUSCO to BECo, Commonwealth I and Commonwealth
II.
In March of 1997, MASSPOWER signed a Memorandum of Understanding and
Settlement Agreement (Agreement) with Northeast Utilities Service Company (NU)
and with Montaup. The Agreements are intended to provide for certain rights and
obligations of the parties with respect to the Transmission Service Agreements
with NU and Montaup under and in light of the Restated New England Power Pool
Agreement (NEPOOL Agreement), filed with the Federal Energy Regulatory
Commission on December 31, 1996, which filing includes a NEPOOL Open Access
Transmission Tariff. These Agreements provide for firm transmission rates to be
set as $14 per kilowatt-year and $8 per kilowatt-year for NU and Montaup,
respectively. These Agreements are awaiting FERC approval, which is anticipated
to occur in early 1998.
MASSPOWER agreed to construct certain interconnection facilities to enable
the Facility to interconnect with the NUSCO system. The costs of these
facilities are included in property, plant and equipment in the accompanying
combined financial statements. Under the terms of the interconnection agreement
with WMECO, ownership of these facilities was transferred, without
consideration, to WMECO after energization of the Facility. During 1997, 1996
and 1995, MASSPOWER reimbursed WMECO $133, $122 and $133, respectively, for the
operation and maintenance costs of these facilities under a service agreement.
PROPERTY TAXES
In October 1992, Selkirk entered into a PILOT agreement with the Town of
Bethlehem Industrial Development Agency, a corporate governmental agency, which
exempts Selkirk from all property taxes, except for special assessments. The
agreement commenced on January 1, 1993 and terminates on December 31, 2012.
MASSPOWER has entered into an agreement with the City of Springfield,
Massachusetts, providing for payments in lieu of property taxes. Payments are
due twice per year in equal installments. The combined PILOT payments of Selkirk
and MASSPOWER scheduled for fiscal years are as follows:
<TABLE>
<S> <C>
1998........................................................ $3,766
1999........................................................ 3,960
2000........................................................ 4,173
2001........................................................ 4,387
2002........................................................ 4,601
Thereafter.................................................. 55,832
</TABLE>
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COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER AGREEMENTS
Selkirk has an operations and maintenance services agreement with GE
whereby GE will provide certain operation and maintenance services during the
operations of Unit 1 and the construction of Unit 2 and for seven years after
the Unit 2 commercial operations date on a cost plus fixed fee basis. In
addition, Selkirk has entered into a 20-year take or pay water supply agreement
with the Town of Bethlehem under which Selkirk is committed to make minimum
annual purchases of approximately $1,000, subject to adjustment for changes in
market rates beginning in the tenth year.
6. RELATED PARTIES
An affiliate of JMC Selkirk, Inc. has been appointed project administrative
agent to manage the day-to-day affairs of Selkirk. This affiliate is compensated
at agreed-upon billing rates, which are adjusted quadrennially in accordance
with an administrative services agreement. For the years ended December 31, 1997
and 1996, approximately $2,852 and $2,715, respectively, were incurred for
services rendered and are reflected in general and administrative expenses in
the accompanying combined statements of operations.
During the years ended December 31, 1997 and 1996, Selkirk purchased
approximately $346 and $16, respectively, and sold approximately $26 and $238,
respectively, in fuel at its fair market value in transactions with affiliates
of JMC Selkirk, Inc. Purchases are included in fuel costs and sales are included
in gas resales in the accompanying combined statements of operations.
During the year ended December 31, 1996, Selkirk entered into an Enabling
Agreement with US Gen Power Services, L.P. (USGEN PS), an affiliate of JMC
Selkirk Inc., to enter into certain transactions for the purchase and sale of
energy and other services. During the years ended December 31, 1997 and 1996,
Selkirk entered into energy and capacity sales transactions with USGEN PS
totaling approximately $100 and $45, respectively.
Selkirk has two agreements with Iroquois Gas Transmission System (IGTS) to
provide firm transportation of natural gas from Canada. An affiliate of JMC
Selkirk, Inc. has a partnership interest in IGTS.
MASSPOWER entered into an agreement with GE whereby GE provided certain
operations and maintenance services for the one-year period prior to commercial
operations (mobilization/start-up) and will continue to provide services for the
seven-year period commencing on the date of commercial operations. For the years
ended December 31, 1997, 1996 and 1995, respectively, MASSPOWER paid GE
approximately $4,448, $4,519 and $4,222 for services rendered under this
contract. In addition, certain plant equipment was purchased from GE through the
construction contractor.
An affiliate of JMC was appointed the project administrator to manage the
day-to-day affairs of MASSPOWER. This affiliate is compensated at agreed-upon
billing rates, which are adjusted annually. JMC's affiliate was paid
approximately $1,729, $1,647 and $1,708 for the years ended 1997, 1996 and 1995,
respectively. Orchard Gas, an affiliate of JMC, was reimbursed by MASSPOWER for
fuel purchases it made acting in its capacity as agent for MASSPOWER. Orchard
Gas was compensated $47, $52 and $62 for services performed during the years
ended December 31, 1997, 1996 and 1995, respectively.
7. DISCLOSURE OF FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Partnerships in
estimating their fair value disclosures for financial instruments as of December
31, 1997 and 1996:
Cash -- The carrying amount reported in the accompanying combined balance
sheets for cash approximates its fair value of $8,164 and $9,022 at December 31,
1997 and 1996, respectively.
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COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Restricted funds -- The carrying amount reported in the accompanying
combined balance sheets for restricted funds approximates its fair value of
$41,488 and $38,820 at December 31, 1997 and 1996, respectively.
Due from affiliates -- Management believes that the fair market value of
these advances approximates market value.
Due to affiliates -- The carrying amount reported in the accompanying
combined balance sheets for amounts due to affiliates approximates its fair
value due to the short-term maturities of these amounts.
Long-term bonds -- The fair value of the long-term bonds is based on the
current market rates for the bonds. The fair value of the long-term bonds
(including the current portion) at December 31, 1997 and 1996 is approximately
$598,010 and $591,451, respectively. The recorded value of these bonds is
$574,171 and $584,516 at December 31, 1997 and 1996, respectively.
Currency swap agreements -- The fair value of the currency exchange
arrangements represents the termination value (liability) of approximately
$(18,554) and $(8,433) at December 31, 1997 and 1996, respectively, estimated
using current exchange rates.
Interest rate swap agreements -- The fair value of the interest rate swap
arrangements represents the termination value (liability) of approximately
$14,680 at December 31, 1997 and 1996, respectively.
The carrying amounts of other short-term liabilities (short-term debt,
accrued interest and accounts payable and accrued expenses) reported in the
accompanying combined balance sheet approximate market due to their short-term
nature.
8. SELKIRK -- UNIT 1 RESTRUCTURING (UNAUDITED)
As described in Note 5 herein, on February 24, 1998, the NYPSC approved
NIMO's Power Choice settlement proposal, including the implementation of the
MRA. The closing of the transactions provided under the MRA for the settling
IPP's other than Selkirk occurred on June 30, 1998 (the "Other Settling IPP
Closing"). At the Other Settling IPP Closing, Selkirk made $2.2 million in
payments related to the agreed allocation among the settling IPP's of certain
costs and benefits. Pursuant to the terms of the MRA, the closing of the MRA
transactions between Selkirk and NIMO was deferred until August 31, 1998. On
August 31, 1998 Selkirk and NIMO consummated the transactions relating to the
Amended and Restated Unit 1 Agreement pursuant to the MRA. As contemplated by
the MRA, on that date (i) Selkirk notified NIMO of Selkirk's determination that
the requirements of Selkirk's Trust Indenture, dated as of May 1, 1994 (the
"Indenture"), with respect to the restructuring of certain project contracts
relating to the operation of Unit 1 of the Selkirk facility had been satisfied;
(ii) the Amended and Restated Power Purchase Agreement, dated as of July 1,
1998, between Selkirk and NIMO became effective; and (iii) NIMO made as its net
share of the agreed allocation among IPP's for certain adjustments, cash
payments of approximately $10.3 million into Selkirk's Project Revenue Fund
maintained at Bankers Trust Company, as Depositary Agent under the May 1, 1994
Deposit and Disbursement Agreement. In addition, Selkirk delivered notices to
Paramount Resources Limited ("Paramount") and TransCanada Pipelines Limited
("TransCanada") that the Second Amended and Restated Gas Purchase Contract,
dated as of May 6, 1998, between Selkirk and Paramount, and the Amending
Agreement to Gas Transportation Contract, dated as of July 20, 1998, between
Selkirk and TransCanada had become effective. On September 16, 1998, Selkirk
filed a current report on Form 8-K disclosing the consummation on August 31,
1998 of the transactions relating to the Amended and Restated Unit 1 Agreement
and including the related Project documents as exhibits. The term of the Amended
and Restated Unit 1 Agreement is ten years, effective July 1, 1998. The $2.2
million payment made by Selkirk to NIMO and the $10.3 million of payments
received by Selkirk from NIMO (representing net receipts to Selkirk of
approximately $8.1 million) were a condition to the Amended and Restated Unit 1
Agreement and are being deferred to be amortized over the life of the Amended
and Restated Unit 1 Agreement. In addition,
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SELKIRK COGEN/MASSPOWER
COMBINED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
approximately $1.2 million in restructuring costs have been capitalized and will
be amortized over the life of the Amended and Restated Unit 1 Agreement.
Deferred revenues of approximately $173,000 are included in the Partnership's
combined revenues for the nine months ended September 30, 1998. Deferred
Revenues of approximately $6.7 million appear on the Partnership's Combined
Balance Sheet at September 30, 1998.
F-191
<PAGE> 322
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY COGENTRIX ENERGY OR THE INITIAL PURCHASERS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF COGENTRIX ENERGY SINCE THE DATE AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
$255,000,000
COGENTRIX
ENERGY, INC.
EXCHANGE OFFER
FOR OUTSTANDING 8.75%
SENIOR NOTES DUE 2008
(COGENTRIX LOGO)
---------------------
PROSPECTUS
Dated , 1999
---------------------
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Cogentrix Energy, Inc.
Cogentrix Energy is a North Carolina corporation Section 55-2-02 of the
North Carolina Business Corporation Act (the "Business Corporation Act") enables
a corporation in its articles of incorporation to eliminate or limit, with
certain exceptions, the personal liability of a director for monetary damages
for breach of duty as a director. No such provision is effective to eliminate or
limit a director's liability for (i) acts or omissions that the director at the
time of the breach knew or believed to be clearly in conflict with the best
interests of the corporation, (ii) improper distributions described in Section
55-8-33 of the Business Corporation Act, (iii) any transaction from which the
director derived an improper personal benefit or (iv) acts or omissions
occurring prior to the date the exculpatory provision became effective.
Cogentrix Energy's articles of incorporation limit the personal liability of its
directors to the fullest extent permitted by the Business Corporation Act.
Sections 55-8-50 through 55-8-58 of the Business Corporation Act permit a
corporation to indemnify its directors and officers under either or both a
statutory or nonstatutory scheme of indemnification. Under the statutory scheme,
a corporation may, with certain exceptions, indemnify a director or officer of
the corporation who was, is, or is threatened to be made, a party to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative, or investigative, because of the fact that such
person was a director or officer of the corporation, or is or was serving at the
request of such corporation as a director, officer, agent or employee of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses, including
attorneys' fees, incurred in connection with a proceeding; provided that no such
indemnification may be granted unless such director or officer (1) conducted
himself or herself in good faith, (2) reasonably believed that (A) any action
taken in his or her official capacity with the corporation was in the best
interests of the corporation and (B) in all other cases, his or her conduct was
at least not opposed to the corporation's best interests, and (3) in the case of
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. In accordance with Section 55-8-55 of the Business Corporation
Act, the determination of whether a director has met the requisite standard of
conduct for the type of indemnification set forth above is made by the board of
directors, a committee of directors, special legal counsel or the shareholders.
A corporation may not indemnify a director under the statutory scheme in
connection with a proceeding by or in the right of the corporation in which the
director was adjudged liable to the corporation or in connection with a
proceeding in which a director was adjudged liable on the basis of having
received an improper personal benefit.
In addition to, and notwithstanding the conditions of and limitations on
indemnification described above under the statutory scheme, Section 55-8-57 of
the Business Corporation Act permits a corporation in its articles of
incorporation or bylaws or by contract or resolution to indemnify or agree to
indemnify any of its directors or officers against liability and expenses,
including attorneys' fees, in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interests of the corporation.
Pursuant to this nonstatutory scheme, Cogentrix Energy's bylaws provide for
indemnification to the fullest extent permitted by law of (1) any person who at
any time serves or has served as an officer, serving in a capacity of vice
president or any more senior officer, or a director of Cogentrix Energy, (2) any
person who serves or has served in such capacity at the request of Cogentrix
Energy for another corporation, partnership, joint venture, trust or other
enterprise, or as a trustee or administrator under an employee benefit plan or
(3) any other persons as the directors of Cogentrix Energy may determine;
provided such persons have not engaged in activities known or believed by the
person who undertook them to be clearly in conflict with Cogentrix Energy's best
interests when they occurred.
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Sections 55-8-52 and 55-8-56 of the Business Corporation Act require a
corporation, unless its articles of incorporation provide otherwise, to
indemnify against reasonable expenses incurred by a director or officer who has
been wholly successful, on the merits or otherwise, in the defense of any
proceeding to which such director or officer was, or was threatened to be made,
a party. Unless prohibited by the articles of incorporation, a director or
officer also may make application and obtain court-ordered indemnification if
the court determines that such director or officer is fairly and reasonably
entitled to such indemnification in view of all the relevant circumstances as
provided in Sections 55-8-54 and 55-8-56 of the Business Corporation Act.
In addition, Section 55-8-57 of the Business Corporation Act authorizes a
corporation to purchase and maintain insurance on behalf of an individual who is
or was a director or officer of the corporation against certain liabilities
incurred by such persons, whether or not the corporation is otherwise authorized
by the Business Corporation Act to indemnify such party.
Cogentrix Energy maintains a directors and officers insurance policy which,
subject to certain exceptions, insures the officers and directors of Cogentrix
Energy from any claim arising out of an alleged wrongful act by such persons in
their respective capacities as officers and directors of Cogentrix Energy.
Cogentrix Delaware Holdings, Inc.
Cogentrix Delaware Holdings is a Delaware corporation. Section 145 of the
General Corporation Law of the State of Delaware (the "Delaware Law") permits a
corporation to indemnify its directors and officers against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlements actually and
reasonably incurred by them in connection with any action, suit or proceeding,
whether criminal or civil, brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to a matter
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made if such person shall have been
adjudged liable to the corporation, unless and only to the extent that the court
in which the action or suit was brought shall determine upon application that
the defendant officers or directors are reasonably entitled to indemnity for
such expenses despite such adjudication of liability.
In addition, Section 102 of the Delaware Law provides that a corporation
may include in its certificate of incorporation a provision eliminating or
limiting the personal liability of directors for monetary damages for breach of
fiduciary duty, provided that such provision shall not eliminate or limit the
liability of a director: (1) for any breach of the director's duty of loyalty to
the corporation or its stockholders; (2) for acts or omissions not in good faith
that involve intentional misconduct or a knowing violation of the law; (3)
conduct in violation of Section 174 of the Delaware Law (which section relates
to unlawful distributions); or (4) for any transaction from which the director
derived an improper personal benefit.
Cogentrix Delaware Holdings' certificate of incorporation provides that
each person who was or is made a party or is threatened to be made a party to or
is involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director or
officer of Cogentrix Delaware Holdings or, while serving as a director or
officer of Cogentrix Delaware Holdings, is or was serving at the request of
Cogentrix Delaware Holdings as a director or officer, among others, of another
corporation or of a partnership, joint venture, trust or other enterprise,
including, service with respect to employee benefit plans, whether the basis of
the proceeding is alleged action in an official capacity as a director or
officer of Cogentrix Delaware Holdings or in any other capacity while serving as
a director or officer of Cogentrix Delaware Holdings, shall be indemnified and
held harmless by Cogentrix Delaware Holdings to the fullest extent authorized by
Delaware Law. Additionally, the officers and directors of Cogentrix Delaware
Holdings are to be indemnified against all expense, liability and loss
(including, without limitation, attorneys' fees) reasonably incurred or suffered
by the person and the indemnification shall continue as to a person who has
ceased to be a director or officer of
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<PAGE> 325
Cogentrix Delaware Holdings and shall inure to the benefit of his or her heirs,
executors and administrators. Under its certificate of incorporation, Cogentrix
Delaware Holdings is to indemnify any person seeking indemnification in
connection with a proceeding initiated by the person only if the proceeding was
authorized by the board of directors of Cogentrix Delaware Holdings. The right
to indemnification conferred in Cogentrix Delaware Holdings' certificate of
incorporation is a contract right and includes the right to be paid by Cogentrix
Delaware Holdings the expense incurred in defending any such proceeding in
advance of its final disposition.
Cogentrix Delaware Holdings' bylaws also provide that it shall indemnify to
the fullest extent authorized by Delaware Law and the certificate of
incorporation any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he, his testator or intestate is or was a director or officer,
among others, of Cogentrix Delaware Holdings or any of its predecessors or
serves or served any other enterprise as a director or officer, among others, at
the request of Cogentrix Delaware Holdings or any of its predecessors.
Cogentrix Delaware Holdings' certificate of incorporation allows Cogentrix
Delaware Holdings to maintain insurance, at its expense, to protect any director
and officer, among others, against any expense, liability or loss whether or not
Cogentrix Delaware Holdings would have the power to indemnify the person against
the expense, liability or loss under Delaware Law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
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<C> <S>
2.1 Purchase Agreement, dated as of March 6, 1998, between
Cogentrix Energy, Inc. and Bechtel Generating Company, Inc.
(10.2).(*)(17)
2.1(a) Amendment No. 1, dated October 14, 1998, to Purchase
Agreement, dated March 6, 1998, between Cogentrix Energy,
Inc. and Bechtel Generating Company, Inc. (2.1(a)). (23)
2.2 Securities Purchase Agreement, dated March 6, 1998, by and
among LS Power Corporation, Granite Power Partners, L.P.,
Cogentrix Mid-America, Inc., Cogentrix Cottage Grove, LLC,
Cogentrix Whitewater, LLC and Cogentrix Energy, Inc.
(2).(16)
3.1 Articles of Incorporation of Cogentrix Energy, Inc.
(3.1).(1)
3.2 Amended and Restated Bylaws of Cogentrix Energy, Inc., as
amended (3.2).(15)
3.3 Certificate of Incorporation of Cogentrix Delaware Holdings,
Inc.
3.4 Bylaws of Cogentrix Delaware Holdings, Inc.
4.1 Indenture, dated as of March 15, 1994, between Cogentrix
Energy, Inc. and First Union National Bank of North
Carolina, as Trustee, including form of 8.10% 2004 Senior
Note (4.1).(3)
4.2 Indenture, dated as of October 20, 1998, between Cogentrix
Energy, Inc. and First Union National Bank, as Trustee,
including form of 8.75% Senior Note.(+)
4.3 First Supplemental Indenture, dated as of October 20, 1998,
between Cogentrix Energy, Inc. and First Union National
Bank, as Trustee.(+)
4.4 Registration Agreement, dated as of October 20, 1998, by and
among Cogentrix Energy, Inc., Salomon Smith Barney Inc.,
Goldman, Sachs & Co. and CIBC Oppenheimer Corp.(+)
4.5 Registration Agreement, dated as of November 25, 1998,
between Cogentrix Energy, Inc. and Salomon Smith Barney,
Inc.(+)
4.6 Amendment No. 1 to the First Supplemental Indenture, dated
as of November 25, 1998, between Cogentrix Energy, Inc. and
First Union National Bank, as Trustee.(+)
</TABLE>
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<PAGE> 326
<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
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<C> <S>
5.1 Opinion of Moore & Van Allen, PLLC.(+)
10.1 Electric Power Purchase Agreement, dated as of June 13,
1984, among Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation), Cogentrix, Inc. (then known
as Cogentrix of North Carolina, Inc.) and Carolina Power &
Light Company, as amended (assigned to and assumed by
Cogentrix Eastern Carolina Corporation) (Elizabethtown
Facility) (10.1).(1)
10.1(a) Second Amendment to Electric Power Purchase Agreement, dated
as of August 5, 1996, between Cogentrix Eastern Carolina
Corporation and Carolina Power & Light Company
(Elizabethtown Facility) (10.1(a)).(*)(11)
10.2 Electric Power Purchase Agreement, dated as of June 13,
1984, among Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation), Cogentrix, Inc. (then known
as Cogentrix of North Carolina, Inc.) and Carolina Power &
Light Company, as amended (assigned to and assumed by
Cogentrix Eastern Carolina Corporation) (Lumberton Facility)
(10.2).(1)
10.2(a) Second Amendment to Electric Power Purchase Agreement, dated
as of August 5, 1996, between Cogentrix Eastern Carolina
Corporation and Carolina Power & Light Company (Lumberton
Facility) (10.2(a)).(*)(11)
10.3 Electric Power Purchase Agreement, dated as of June 13,
1984, among Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation), Cogentrix, Inc. (then known
as Cogentrix of North Carolina, Inc.) and Carolina Power &
Light Company, as amended (assigned to and assumed by
Cogentrix Eastern Carolina Corporation) (Kenansville
Facility) (10.3).(1)
10.3(a) Second Amendment to Electric Power Purchase Agreement, dated
as of August 5, 1996, between Cogentrix Eastern Carolina
Corporation and Carolina Power & Light Company (Kenansville
Facility) (10.3(a)).(*)(11)
10.4 Electric Power Purchase Agreement, dated as of December 17,
1985, among Cogentrix of North Carolina, Inc. (successor by
merger to Cogentrix Carolina Leasing Corporation),
Cogentrix, Inc. (then known as Cogentrix of North Carolina,
Inc.) and Carolina Power & Light Company, as amended
(Roxboro Facility) (10.4).(1)
10.4(a) Third Amendment to Electric Power Purchase Agreement, dated
as of August 5, 1996, between Cogentrix of North Carolina,
Inc. and Carolina Power & Light Company (Roxboro Facility)
(10.4(a)).(*)(11)
10.5 Electric Power Purchase Agreement, dated as of December 17,
1985, among Cogentrix of North Carolina, Inc. (successor by
merger to Cogentrix Carolina Leasing Corporation),
Cogentrix, Inc. (then known as Cogentrix of North Carolina,
Inc.) and Carolina Power & Light Company, as amended
(Southport Facility) (10.5).(1)
10.5(a) Third Amendment to Electric Power Purchase Agreement, dated
as of August 5, 1996, between Cogentrix of North Carolina,
Inc. and Carolina Power & Light Company (Southport Facility)
(10.5(a)).(*)(11)
10.6 Power Purchase and Operating Agreement, dated as of December
31, 1985, between Cogentrix of Virginia, Inc. and Virginia
Electric and Power Company, as amended (assigned to and
assumed by James River Cogeneration Company) (Hopewell
Facility) (10.6).(1)
10.6(a) Amendment No. 4 to Power Purchase and Operating Agreement,
dated as of January 1, 1996, by and between James River
Cogeneration Company and Virginia Electric and Power Company
(Hopewell Facility) (10.1).(10)
</TABLE>
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<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
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<C> <S>
10.6(b) Fifth Amendment and Restatement of the Power Purchase and
Operating Agreement, dated January 28, 1998, between James
River Cogeneration Company and Virginia Electric and Power
Company (Hopewell Facility) (10.6(b)).(15)
10.7 Power Purchase and Operating Agreement, dated as of July 21,
1986, between Cogentrix of Virginia, Inc. and Virginia
Electric and Power Company, as amended (assigned to and
assumed by Cogentrix Virginia Leasing Corporation)
(Portsmouth Facility) (10.7).(1)
10.7(a) Third Amendment and Restatement of the Power Purchase and
Operating Agreement, dated December 5, 1997, between
Cogentrix Virginia Leasing Corporation and Virginia Electric
and Power Company (Portsmouth Facility) (10.7(a)).(15)
10.8 Power Purchase and Operating Agreement, dated as of January
24, 1989, between Cogentrix of Rocky Mount, Inc. and
Virginia Electric and Power Company, doing business in North
Carolina as North Carolina Power, as amended (Rocky Mount
Facility) (10.8).(1)
10.9 Agreement, dated as of June 23, 1986, for the Sale of Energy
from the Ringgold Cogeneration/Greenhouse Plant, between
Xiox Corporation and Pennsylvania Electric Company, as
amended (assigned to and assumed by Cogentrix of
Pennsylvania, Inc.) (Ringgold Facility) (10.9).(1)
10.10 Power Purchase and Operating Agreement, dated as of January
24, 1989, between Cogentrix of Richmond, Inc. (formerly
named Cogentrix of Petersburg, Inc.) and Virginia Electric
and Power Company, as amended. (Richmond Facility, Unit I)
(10.10).(1)
10.11 Power Purchase and Operating Agreement, dated as of January
24, 1989, between WV Hydro, Inc. and Virginia Electric and
Power Company, as amended (assigned to and assumed by
Cogentrix of Richmond, Inc.) (Richmond Facility, Unit II)
(10.11).(1)
10.12 Power Purchase Agreement, dated as of August 4, 1992,
between Consumers Power Company and Muskegon Generation,
Inc., as amended (assigned to and assumed by Michigan
Cogeneration Partners) (Michigan Facility) (10.12).(1)
10.12(a) Memorandum of Agreement, dated as of July 18, 1994, among
Consumers Power Company and Michigan Cogeneration Partners
Limited Partnership (10.12(a)).(3)
10.13 Power Purchase and Operating Agreement, dated as of July 13,
1990, between SEI Birchwood, Inc. (assigned to and assumed
by Birchwood Power Partners, L.P.) and Virginia Electric and
Power Company, as amended (Birchwood Facility) (10.6).(12)
10.14 Steam Purchase Agreement, dated as of August 23, 1984,
between Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation) and West Point Stevens Inc.
(then known as West-Point Pepperell, Inc.), as amended
(assigned to and assumed by Cogentrix Eastern Carolina
Corporation (Elizabethtown Facility) (10.13).(*)(2)
10.15 Steam Purchase Agreement, dated as of August 23, 1984,
between Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation) and West Point Stevens Inc.
(then known as West-Point Pepperell, Inc.), as amended
(assigned to and assumed by Cogentrix Eastern Carolina
Corporation) (Lumberton Facility) (10.14).(*)(2)
10.16 Steam Purchase Agreement, dated as of November 30, 1984,
between Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation) and Guilford Mills, Inc., as
amended (assigned to and assumed by Cogentrix Eastern
Carolina Corporation) (Kenansville Facility) (10.15).(*)(2)
10.17 Steam Purchase Agreement, dated as of December 31, 1985,
among Cogentrix of North Carolina, Inc. (successor by merger
to Cogentrix Carolina Leasing Corporation) and Collins &
Aikman Corporation, as amended (Roxboro Facility)
(10.16).(*)(2)
</TABLE>
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<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
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<C> <S>
10.18 Steam Purchase Agreement, dated as of December 31, 1985,
among Cogentrix of North Carolina, Inc. (successor by merger
to Cogentrix Carolina Leasing Corporation),
Roxboro/Southport General Partnership and
Archer-Daniels-Midland Company (as assignee of Pfizer Inc.),
as amended (Southport Facility) (10.17).(*)(2)
10.19 Steam Purchase Agreement, dated as of January 31, 1986,
between Cogentrix of Virginia, Inc. and Allied-Signal Inc.
(then known as Allied Corporation), as amended (assigned to
and assumed by James River Cogeneration Company) (Hopewell
Facility) (10.18).(*)(2)
10.20 Steam Purchase Agreement, dated as of December 31, 1985,
between Cogentrix Virginia Leasing Corporation and
Hoechst-Celanese Corporation (successor to Virginia
Chemicals Inc.) (Portsmouth Facility) (10.19).(*)(2)
10.21 Steam Purchase Agreement, dated as of November 15, 1988,
between Cogentrix of Rocky Mount, Inc. and Abbott
Laboratories, as amended (Rocky Mount Facility)
(10.20).(*)(2)
10.22 Lease Agreement dated as of September 21, 1993 between
Cogentrix of Pennsylvania, Inc. and Keystone Village Farms,
Inc., as amended (Ringgold Facility) (10.21).(*)(2)
10.23 Steam Purchase Agreement, dated as of May 18, 1990, between
Cogentrix of Richmond, Inc. and E.I. du Pont de Nemours and
Company, as amended (Richmond Facility) (10.22).(*)(2)
10.24 Coal Sales Agreement, dated as of November 15, 1991, among
Blue Crystal Sales Company, Bell County Coal Corporation and
Cogentrix Eastern Carolina Corporation (Elizabethtown,
Lumberton and Kenansville Facilities) (10.23).(*)(2)
10.24(a) First Amendment to Coal Sales Agreement, dated as of April
17, 1995, between James River Coal Sales, Inc. (formerly
named Blue Crystal Coal Sales Company), Bell County Coal
Corporation and Cogentrix Eastern Carolina Corporation
(Elizabethtown, Lumberton and Kenansville Facilities)
(10.1).(7)
10.25 Coal Sales Agreement, dated as of March 11, 1986, between
Martiki Coal Corporation and Cogentrix of North Carolina,
Inc. (successor by merger to Cogentrix Carolina Leasing
Corporation) (Roxboro Facility) (10.24).(*)(2)
10.26 Coal Sales Agreement, dated as of June 30, 1997, by and
between Pontiki Coal Corporation and Cogentrix of North
Carolina, Inc. (Roxboro Facility) (10.26).(*)(14)
10.27 Coal Sales Agreement, dated as of May 19, 1986, among
Coastal Coal International Inc., Johnson Processing,
Incorporated and Cogentrix of North Carolina, Inc.
(successor by merger to Cogentrix Carolina Leasing
Corporation) (Southport Facility) (10.25).(*)(2)
10.28 Coal Sales Agreement, dated as of June 30, 1997, by and
between MC Mining, Inc. and Cogentrix of North Carolina,
Inc. (Southport Facility) (10.28).(*)(14)
10.29 Coal Sales Agreement, dated as of December 1, 1986, between
Pontiki Coal Corporation and Cogentrix of Virginia, Inc.
(assigned to and assumed by James River Cogeneration
Company) (Hopewell Facility) (10.26).(*)(2)
10.30 Coal Sales Agreement, dated as of December 15, 1986, among
AgipCoal Sales USA, Inc. (formerly named Enoxy Coal Sales,
Inc.), AgipCoal USA, Inc. (formerly named Enoxy Coal, Inc.)
and Cogentrix Virginia Leasing Corporation (Portsmouth
Facility) (10.27).(*)(2)
10.30(a) First Amendment to Coal Sales Agreement, dated September 29,
1995, by and between Arch Coal Sales Company, Inc., and
Cogentrix Virginia Leasing Corporation (Portsmouth Facility)
(10.1).(9)
10.31 Coal Sales Agreement, dated as of October 1, 1989, among
AgipCoal Sales USA, Inc., Laurel Creek Co., Inc. and
Cogentrix of Rocky Mount, Inc., as amended (Rocky Mount
Facility) (10.28).(*)(2)
</TABLE>
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<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
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<C> <S>
10.32 Gas Supply Contract, dated as of June 15, 1989, among
Cogentrix of Pennsylvania, Inc., Cogentrix, Inc. and J. C.
Enterprises, as amended (Ringgold Facility) (10.29).(1)
10.33 Gas Sale and Purchase Agreement, dated as of September 8,
1989, between Eastern Marketing Corporation and Cogentrix of
Pennsylvania, Inc. (Ringgold Facility) (10.30).(1)
10.34 Coal Sales Agreement, dated as of February 15, 1990, among
Electric Fuels Corporation, Kentucky May Coal Company, Inc.
and Cogentrix of Richmond, Inc., as amended (Richmond
Facility, Unit I) (10.31).(*)(2)
10.35 Coal Sales Agreement, dated as of January 1, 1990, between
Coastal Coal Sales, Inc., and Cogentrix of Richmond, Inc.,
as amended (Richmond Facility, Unit II) (10.32).(*)(2)
10.36 Coal Supply Agreement, dated as of July 22, 1993, by and
among Birchwood Power Partners, L.P., AgipCoal Holding USA,
Inc. and AgipCoal Sales USA, Inc. (assigned to and assumed
by Neweagle Coal Sales Corp. and Neweagle Industries, Inc.),
Laurel Creek Co., Inc. and Rockspring Development, Inc.
(Birchwood Facility) (10.7).(*)(12)
10.36(a) First Amendment to Coal Supply Agreement, dated as of May
18, 1994, by and among Birchwood Power Partners, L.P.,
Laurel Creek Co., Inc., Rockspring Development, Inc.,
Neweagle Coal Sales Corp. and Neweagle Industries, Inc.
(Birchwood Facility) (10.7(a)).(12)
10.37 Railroad Transportation Contract, dated December 5, 1984,
between Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation) and CSX Transportation, Inc.
(then known as The Chesapeake and Ohio Railway Company and
Seaboard System Railroad, Inc.), as amended (assigned to and
assumed by Cogentrix Carolina Leasing Corporation)
(Elizabethtown Facility) (10.33).(*)(2)
10.37(a) Fifth Amendment to Railroad Transportation Contract, dated
January 21, 1994, between Cogentrix Eastern Carolina
Corporation and CSX Transportation, Inc. (Elizabethtown
Facility) (10.33(a)).(*)(2)
10.37(b) Sixth Amendment to Railroad Transportation Contract, dated
August 23, 1995, between Cogentrix Eastern Carolina
Corporation and CSX Transportation, Inc. (Elizabethtown
Facility) (10.33(b)).(*)(8)
10.38 Railroad Transportation Contract, dated December 5, 1984,
between Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation) and CSX Transportation, Inc.
(then known as The Chesapeake and Ohio Railway Company and
Seaboard System Railway, Inc.), as amended (assigned to and
assumed by Cogentrix Eastern Carolina Corporation)
(Lumberton Facility) (10.34).(*)(2)
10.38(a) Fifth Amendment to Railroad Transportation Contract, dated
January 21, 1994, between Cogentrix Eastern Carolina
Corporation and CSX Transportation, Inc. (Lumberton
Facility) (10.34(a)).(*)(2)
10.38(b) Sixth Amendment to Railroad Transportation Contract, dated
August 23, 1995, between Cogentrix Eastern Carolina
Corporation and CSX Transportation, Inc. (Lumberton
Facility) (10.34(b)).(*)(8)
10.39 Railroad Transportation Contract, dated December 5, 1984,
between Cogentrix of North Carolina, Inc. (then known as
Cogentrix Leasing Corporation) and CSX Transportation, Inc.
(then known as The Chesapeake and Ohio Railway Company and
Seaboard System Railway, Inc.), as amended (assigned to and
assumed by Cogentrix Eastern Carolina Corporation)
(Kenansville Facility) (10.35).(*)(2)
10.39(a) Fifth Amendment to Railroad Transportation Contract, dated
January 21, 1994, between Cogentrix Eastern Carolina
Corporation and CSX Transportation, Inc. (Kenansville
Facility) (10.35(a)).(*)(2)
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10.39(b) Sixth Amendment to Railroad Transportation Contract, dated
August 23, 1995, between Cogentrix Eastern Carolina
Corporation and CSX Transportation, Inc. (Kenansville
Facility) (10.35(b)).(*)(8)
10.40 Railroad Transportation Contract, dated as of July 15, 1986,
between Cogentrix of North Carolina, Inc. (successor by
merger to Cogentrix Carolina Leasing Corporation), and
Norfolk Southern Railway Company (Roxboro Facility)
(10.36).(*)(2)
10.41 Railroad Transportation Contract, dated as of June 23, 1997,
by and between Cogentrix of North Carolina, Inc. and Norfolk
Southern Railway Company (Roxboro Facility) (10.41).(*)(14)
10.42 Railroad Transportation Contract, dated as of July 15, 1986,
between Cogentrix of North Carolina, Inc. (successor by
merger to Cogentrix Carolina Leasing Corporation) and CSX
Transportation, Inc. (then known as The Chesapeake and Ohio
Railway Company and Seaboard System Railroad, Inc.), as
amended (Southport Facility) (10.37).(*)(2)
10.42(a) Sixth Amendment to Railroad Transportation Contract,
effective as of January 1, 1996, between Cogentrix of North
Carolina, Inc. and CSX Transportation, Inc. (Southport
Facility) (10.37(a)).(*)(11)
10.43 Railroad Transportation Contract, dated as of June 30, 1997,
by and among Cogentrix of North Carolina, Inc. and CSX
Transportation, Inc. (Southport Facility) (10.43).(*)(14)
10.43(a) Amendment No. 1 to Contract CSXT-C-67123, effective on June
3, 1998, between Cogentrix of North Carolina, Inc. and CSX
Transportation, Inc. (Southport Facility).(**)(+)
10.44 Railroad Transportation Contract, dated as of December 15,
1986, between Cogentrix of Virginia, Inc., and Norfolk
Southern Railway Company, as amended (assigned to and
assumed by James River Cogeneration Company) (Hopewell
Facility) (10.38).(*)(2)
10.45 Railroad Transportation Contract, dated as of December 22,
1986, between Cogentrix Virginia Leasing Corporation, and
Norfolk Southern Railway Company, as amended (Portsmouth
Facility) (10.39).(*)(2)
10.46 Barge Transportation Contract, dated as of December 23,
1986, between Cogentrix Virginia Leasing Corporation and
McAllister Brothers, Inc., as amended (Portsmouth Facility)
(10.40).(1)
10.47 Railroad Transportation Contract, dated as of September 26,
1989, between Cogentrix of Rocky Mount, Inc. and CSX
Transportation, Inc., as amended (Rocky Mount Facility)
(10.41).(*)(2)
10.47(a) Fourth Amendment, dated as of August 23, 1995, to the
Railroad Transportation Contract, dated as of September 26,
1989, between Cogentrix of Rocky Mount, Inc. and CSX
Transportation, Inc. (Rocky Mount Facility) (10.41(a)).(8)
10.47(b) Fifth Amendment, dated as of January 1, 1996, to the
Railroad Transportation Contract, dated as of September 26,
1989, between Cogentrix of Rocky Mount, Inc. and CSX
Transportation, Inc. (Rocky Mount Facility) (10.41(b)).(11)
10.47(c) Amendment No. 6 to Contract CSXT-C-03951, dated as of
January 1, 1997, between Cogentrix of Rocky Mount, Inc. and
CSX Transportation, Inc. (Rocky Mount Facility) (10.9).(12)
10.47(d) Amendment No. 7 to Contract CSXT-C-03951, dated as of July
1, 1997, between Cogentrix of Rocky Mount, Inc. and CSX
Transportation, Inc. (Rocky Mount Facility) (10.47(d)).(14)
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10.48 Railroad Transportation Contract, dated as of March 1, 1990,
between Cogentrix of Richmond, Inc. and CSX Transportation,
Inc., as amended (Richmond Facility, Unit I) (10.42).(*)(2)
10.48(a) Third Amendment to Railroad Transportation Contract, filed
with the ICC on December 13, 1994, between Cogentrix of
Richmond, Inc. and CSX Transportation, Inc. (Richmond
Facility, Unit I) (10.4).(6)
10.49 Railroad Transportation Contract, dated as of March 1, 1990,
between Cogentrix of Richmond, Inc. and CSX Transportation,
Inc., as amended (Richmond Facility, Unit II) (10.43).(*)(2)
10.49(a) Fourth Amendment to Railroad Transportation Contract, filed
with the ICC on December 13, 1994, between Cogentrix of
Richmond, Inc. and CSX Transportation, Inc. (Richmond
Facility, Unit II) (10.5).(6)
10.49(b) Fifth Amendment to Railroad Transportation Contract,
effective as of November 16, 1995, between Cogentrix of
Richmond, Inc. and CSX Transportation, Inc. (Richmond
Facility, Unit II) (10.43(b)).(*)(11)
10.49(c) Amendment No. 6 to Contract CSXT-C-04033, effective on June
9, 1998, between Cogentrix of Richmond, Inc. and CSX
Transportation, Inc. (Richmond Facility).(**)(+)
10.50 Coal Transportation Agreement, dated as of July 22, 1993,
between Birchwood Power Partners, L.P. and ER&L-Birchwood,
Inc. (Birchwood Facility) (10.8).(*)(12)
10.50(a) First Amendment to Coal Transportation Agreement, dated as
of April 28, 1994, between Birchwood Power Partners, L.P.
and ER&L Birchwood, Inc. (Birchwood Facility)
(10.8(a)).(*)(12)
10.51 Amended and Restated Senior Term Loan Agreement, dated as of
September 24, 1996, among Cogentrix Eastern Carolina
Corporation, the Lenders party thereto, Credit Lyonnais New
York Branch, as Issuing Bank and Agent (Elizabethtown,
Lumberton and Kenansville Facilities) (10.44).(11)
10.51(a) First Amendment to the Amended and Restated Senior Term Loan
Agreement, dated as of December 1, 1997, among Cogentrix
Eastern Carolina Corporation, the Lenders party thereto,
Credit Lyonnais New York Branch, as Issuing Bank and Agent
(Elizabethtown, Lumberton and Kenansville Facilities)
(10.51(a)).(15)
10.52 Amended and Restated Senior Term Loan Agreement and
Guarantee, dated as of September 24, 1996, among United
States Trust Company of New York, as Roxboro Owner Trustee,
United States Trust Company of New York, as Southport Owner
Trustee, United States Trust Company of New York in its
individual capacity only to the extent expressly provided
therein, Cogentrix of North Carolina, Inc.,
Roxboro/Southport General Partnership, Credit Lyonnais New
York Branch, as Lender, Administrative Agent and Issuing
Bank, and the other lenders party thereto (Roxboro and
Southport Facilities) (10.45).(11)
10.52(a) First Amendment to the Amended and Restated Loan Agreement
and Guarantee, dated as of December 1, 1997, among United
States Trust Company of New York, as Roxboro Owner Trustee,
United States Trust Company of New York, as Southport Owner
Trustee, United States Trust Company of New York in its
individual capacity only to the extent expressly provided
therein, Cogentrix of North Carolina, Inc.,
Roxboro/Southport General Partnership, Credit Lyonnais New
York Branch, as Lender, Administrative Agent and Issuing
Bank, and the other lenders party thereto (Roxboro and
Southport Facilities) (10.52(a)).(15)
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10.53 Third Amended and Restated Application for Letter of Credit
and Reimbursement Agreement, dated as of February 11, 1998,
among James River Cogeneration Company, the Banks named
therein, and Credit Lyonnais, as Issuing Bank and Agent
(Hopewell Facility) (10.53).(15)
10.54 Third Amended and Restated Loan Agreement, dated as of
December 22, 1997, among Cogentrix Virginia Leasing
Corporation, the lenders party thereto and Credit Lyonnais,
as the Agent, Issuing Bank and a Lender (Portsmouth
Facility) (10.54).(15)
10.55 Amended and Restated Construction and Term Loan Agreement,
dated as of December 1, 1993, among Cogentrix of Rocky
Mount, Inc., the Tranche B Lenders party thereto, and The
Prudential Insurance Company of America, as Credit Facility
Agent (Rocky Mount Facility) (10.52).(1)
10.55(a) First Amendment, dated as of March 31, 1996, to the Amended
and Restated Construction and Term Loan Agreement, dated as
of December 1, 1993, among Cogentrix of Rocky Mount, Inc.,
the Tranche B Lenders party thereto, and The Prudential
Insurance Company of America, as Credit Facility Agent
(Rocky Mount Facility) (10.4).(10)
10.55(b) Second Amendment, dated as of May 31, 1996, to the Amended
and Restated Construction and Term Loan Agreement, dated as
of December 1, 1993, among Cogentrix of Rocky Mount, Inc.,
the Tranche B Lenders party thereto, and The Prudential
Insurance Company of America, as Credit Facility Agent
(Rocky Mount Facility)(10.48(b)). (11)
10.55(c) Third Amendment, dated as of December 1, 1997, to the
Amended and Restated Construction and Term Loan Agreement,
dated as of December 1, 1993, among Cogentrix of Rocky
Mount, Inc, the Tranche B Lenders party thereto, and The
Prudential Insurance Company of America, as Credit Facility
Agent (Rocky Mount Facility) (10.55(c)).(15)
10.56 Construction and Term Loan Agreement, dated as of June 15,
1989, among Cogentrix of Pennsylvania, Inc., the lenders
party thereto and Banque Paribas, New York Branch, as Agent,
as amended (Ringgold Facility) (10.53).(1)
10.56(a) Third Amendment, dated as of December 1, 1997, to the
Construction and Term Loan Agreement, dated as of June 15,
1989, among Cogentrix of Pennsylvania, Inc., the Lenders
party thereto and Banque Paribas, New York Branch, as Agent
(Ringgold Facility) (10.56(a)).(15)
10.57 Amended and Restated Subordinated Note dated April 22, 1994
of Cogentrix of Pennsylvania, Inc. payable to Cogentrix
Delaware Holdings, Inc. (10.57).(15)
10.58 Reimbursement and Loan Agreement, dated as of December 1,
1990, among Cogentrix of Richmond, Inc., Banque Paribas, New
York Branch as Issuing Bank, the lenders party thereto and
Banque Paribas, New York Branch, as Agent, as amended
(Richmond Facility) (10.55).(1)
10.58(a) Fourth Amendment, dated as of February 15, 1995, to the
Reimbursement and Loan Agreement, dated as of December 1,
1990, among Cogentrix of Richmond, Inc., Banque Paribas, New
York Branch, as Issuing Bank, the lenders party thereto and
Banque Paribas, New York Branch, as Agent (Richmond
Facility) (10.55(a)).(8)
10.58(b) Fifth Amendment, dated as of June 1, 1995, to the
Reimbursement and Loan Agreement, dated as of December 1,
1990, among Cogentrix of Richmond, Inc., Banque Paribas, New
York Branch, as Issuing Bank, the lenders party thereto and
Banque Paribas, New York Branch, as Agent (Richmond
Facility) (10.55(b)).(8)
10.58(c) Sixth Amendment, dated as of March 31, 1996, to the
Reimbursement and Loan Agreement, dated as of December 1,
1990, among Cogentrix of Richmond, Inc., Banque Paribas, New
York Branch, as Issuing Bank, the lenders party thereto and
Banque Paribas, New York Branch, as Agent (Richmond
Facility) (10.5).(10)
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10.58(d) Seventh Amendment, dated as of December 1, 1997, to the
Reimbursement and Loan Agreement, dated as of December 1,
1990, among Cogentrix of Richmond, Inc., Banque Paribas, New
York Branch, as Issuing Bank, the lenders party thereto and
Banque Paribas, New York Branch, as Agent (Richmond
Facility) (10.58(d)).(15)
10.59 Indenture of Trust, dated as of December 1, 1990, between
the Industrial Development Authority of the City of
Richmond, Virginia and Sovran Bank, N.A., as Trustee,
including First and Second Supplemental Indentures of Trust
(Richmond Facility) (10.56).(1)
10.60 Sale Agreement, dated as of December 1, 1990, between the
Industrial Development Authority of the City of Richmond,
Virginia and Cogentrix of Richmond, Inc., including First
and Second Supplemental Sale Agreements (Richmond Facility)
(10.57).(1)
10.61 Amended and Restated Loan and Reimbursement Agreement, dated
as of July 1, 1998, among Birchwood Power Partners, L.P.,
the Banks party thereto, John Hancock Mutual Life Insurance
Company, Allstate Insurance Company, New York Life Insurance
Company and other Institutions party thereto, Banque
Paribas, New York Branch, Barclays Bank PLC, Credit Suisse
First Boston, Union Bank of California, as Co-Agents for the
Banks, and Credit Suisse, as Issuing Bank and as
Administrative Agent for the Banks (Birchwood Facility)
(10.1).(22)
10.62 Amended and Restated Security Deposit and Intercreditor
Agreement, dated as of July 1, 1998, among Birchwood Power
Partners, L.P., the Secured Parties named therein, and
Credit Suisse First Boston, as Security Agent (Birchwood
Facility) (10.2).(22)
10.63 First Amendment to Composite Amendment and Consent to
Project Loan Agreement and Security Deposit Agreement, among
Birchwood Power Partners, L.P. and the persons party to the
Loan and Reimbursement Agreement, dated as of May 18, 1994,
as amended, and the Security Deposit and Intercreditor
Agreement, dated as of May 18, 1994, as amended (Birchwood
Facility) (10.3).(12)
10.64 Greenhouse Restructure Amendment, dated as of March 27,
1997, to the Loan and Reimbursement Agreement, the Security
Deposit and Intercreditor Agreement, the Loan and
Contribution Agreement and the Steam Sales Agreement, among
the parties obligated under such agreements (Birchwood
Facility) (10.64).(14)
10.65 Amended and Restated Security Deposit Agreement, dated as of
September 24, 1996, among Cogentrix Eastern Carolina
Corporation, Credit Lyonnais New York Branch, as Senior Debt
Agent and Issuing Bank and The Chase Manhattan Bank, as
Security Agent (Elizabethtown, Lumberton and Kenansville
Facilities) (10.54).(11)
10.66 Amended and Restated Security Deposit Agreement, dated as of
September 24, 1996, among United States Trust Company of New
York, as Roxboro Owner Trustee, United States Trust Company
of New York, as Southport Owner Trustee, Cogentrix of North
Carolina, Inc., Roxboro/Southport General Partnership,
Credit Lyonnais New York Branch, as Administrative Agent and
Issuing Bank, and The Chase Manhattan Bank, as Security
Agent (Roxboro and Southport Facilities) (10.55).(11)
10.67 Third Amended and Restated Security Deposit Agreement, dated
as of February 11, 1998, among James River Cogeneration
Company, Cogentrix of Virginia, Inc., Credit Lyonnais, as
Grantee and Issuing Bank, and First Union National Bank, as
Security Agent (Hopewell Facility) (10.67).(15)
10.68 Third Amended and Restated Security Deposit Agreement, dated
as of December 22, 1997, among Cogentrix Virginia Leasing
Corporation, Credit Lyonnais, as Agent and Issuing Bank, and
First Union National Bank, as Security Agent (Portsmouth
Facility) (10.68).(15)
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10.69 Amended and Restated Security Deposit Agreement, dated as of
December 1, 1993, among Cogentrix of Rocky Mount, Inc., The
Prudential Insurance Company of America, as Credit Facility
Agent and First Union National Bank of North Carolina, as
Security Agent (Rocky Mount Facility) (10.65).(1)
10.70 Security Deposit Agreement, dated as of June 15, 1989, among
Cogentrix of Pennsylvania, Inc., Banque Paribas, New York
Branch, as Bank Agent and First Union National Bank of North
Carolina, as Security Agent (Ringgold Facility) (10.66).(1)
10.71 Security Deposit Agreement, dated as of December 1, 1990,
among Cogentrix of Richmond, Inc., Banque Paribas, New York
Branch, as Agent and First Union National Bank of North
Carolina, as Security Agent (Richmond Facility) (10.67).(1)
10.71(a) First Amendment to Security Deposit Agreement, dated
December 15, 1993, among Cogentrix of Richmond, Inc., Banque
Paribas, New York Branch, as Agent and First Union National
Bank of North Carolina, as Security Agent (Richmond
Facility) (10.67(a)).(2)
10.72 Stock Pledge and Security Agreement, dated as of September
24, 1996, made by Cogentrix, Inc. in favor of Credit
Lyonnais New York Branch, as Agent (Elizabethtown, Lumberton
and Kenansville Facilities) (10.61).(11)
10.73 Stock Pledge and Security Agreement, dated as of September
24, 1996, made by Cogentrix of North Carolina Holdings, Inc.
in favor of Credit Lyonnais New York Branch, as
Administrative Agent (Roxboro and Southport Facilities)
(10.62).(11)
10.74 Stock Pledge and Security Agreement, dated as of September
24, 1996, made by Roxboro/Southport I, Inc. in favor of
Credit Lyonnais New York Branch, as Administrative Agent
(Roxboro and Southport Facilities) (10.63).(11)
10.75 General Partner Assignment and Security Agreement, dated as
of September 24, 1996, made by Roxboro/Southport II, Inc. in
favor of Credit Lyonnais New York Branch, as Administrative
Agent (Roxboro and Southport Facilities) (10.64).(11)
10.76 General Partner Assignment and Security Agreement, dated as
of September 24, 1996, made by Roxboro/Southport I, Inc. in
favor of Credit Lyonnais New York Branch, as Administrative
Agent (Roxboro and Southport Facilities) (10.65).(11)
10.77 Stock Pledge Agreement, dated as of December 1, 1986,
between Cogentrix, Inc., as Pledgor, and Banque Paribas, New
York Branch, as Agent, as amended (Hopewell Facility)
(10.78).(1)
10.77(a) Amendment No. 2 to Pledge and Security Agreement, dated as
of July 1, 1996, made by Cogentrix, Inc., as Pledgor to
Banque Paribas, New York Branch, as Grantee (Hopewell
Facility) (10.66(a)).(11)
10.77(b) Amendment No. 3 to Pledge and Security Agreement, dated as
of February 11, 1998, by and between Cogentrix, Inc., as
Pledgor, and Credit Lyonnais, as Grantee (Hopewell Facility)
(10.77(b)).(15)
10.78 Assignment and Security Agreement, dated as of October 1,
1987, between Cogentrix of Virginia, Inc. and Banque
Paribas, New York Branch, as Grantee, as amended (Hopewell
Facility (10.79).(1)
10.78(a) Amendment No. 2 to Assignment and Security Agreement, dated
as of July 1, 1996, between Cogentrix of Virginia, Inc. and
Banque Paribas, New York Branch, as Grantee (Hopewell
Facility) (10.67(a)).(11)
10.78(b) Amendment No. 3 to Assignment and Security Agreement, dated
as of February 11, 1998, between Cogentrix of Virginia, Inc.
and Credit Lyonnais, as Grantee (Hopewell Facility)
(10.78(b)).(15)
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10.79 Third Amended and Restated Pledge Agreement, dated as of
December 22, 1997, made by Cogentrix, Inc., as Pledgor, and
Credit Lyonnais, as Agent (Portsmouth Facility) (10.79).(15)
10.80 Pledge Agreement, dated as of June 15, 1989, between
Cogentrix, Inc., as Pledgor and Banque Paribas, New York
Branch, as Agent (Ringgold Facility) (10.81).(1)
10.81 Amended and Restated Stock Pledge Agreement, dated as of
November 19, 1996, by and between Cogentrix/Birchwood Two,
L.P., as Pledgor, and Birchwood Power Partners, L.P., as
Lender (Birchwood Facility) (10.4).(12)
10.82 Ground Lease, dated as of August 23, 1984, between Cogentrix
of North Carolina, Inc. (then known as Cogentrix Leasing
Corporation) and West Point Stevens Inc. (then known as West
Point-Pepperell, Inc.), as amended (assigned to and assumed
by Cogentrix Eastern Carolina Corporation) (Elizabethtown
Facility) (10.82).(1)
10.83 Ground Lease, dated as of August 23, 1984, between Cogentrix
of North Carolina, Inc. (then known as Cogentrix Leasing
Corporation) and West Point Stevens Inc. (then known as West
Point-Pepperell, Inc.), as amended (assigned to and assumed
by Cogentrix Eastern Carolina Corporation) (Lumberton
Facility) (10.83).(1)
10.84 Ground Lease, dated as of November 30, 1984, between
Cogentrix of North Carolina, Inc. (then known as Cogentrix
Leasing Corporation) and Guilford Mills, Inc., as amended
(assigned to and assumed by Cogentrix Eastern Carolina
Corporation) (Kenansville Facility) (10.84).(1)
10.85 Lease (SBD 9284; RE-81558) from Seaboard System Railroad,
Inc. to Cumberland Elkhorn Coal and Coke, Inc., dated
December 17, 1985, assigned by Cumberland Elkhorn Coal &
Coke, Inc. to Oxbow Carbon and Minerals Inc. and further
assigned by Oxbow Carbon & Minerals, Inc. to Cogentrix
Eastern Carolina Corporation, as amended (Kenansville
Facility) (10.85).(1)
10.86 Lease (SBD 8074; RE-81558) from Seaboard System Railroad,
Inc. to Cumberland Elkhorn Coal & Coke, Inc., dated October
4, 1985, assigned by Cumberland Elkhorn Coal & Coke, Inc. to
Oxbow Carbon and Minerals Inc. and further assigned by Oxbow
Carbon & Minerals, Inc. to Cogentrix Eastern Carolina
Corporation, as amended (Kenansville Facility) (10.86).(1)
10.87 Agreement (SBD 8801; RE-81558) dated October 2, 1985, as
amended, between CSX Transportation, Inc. (as successor to
the rights and obligations of Seaboard System Railroad,
Inc.), and Cogentrix Eastern Carolina Corporation (as
successor to the rights of Oxbow Carbon & Minerals, Inc.,
which succeeded to the rights and obligations of Cumberland
Elkhorn Coal & Coke, Inc. by assignment), as amended
(Kenansville Facility) (10.87).(1)
10.88 Agreement (SBD 10257; RE-83767) dated June 18, 1986, as
amended, between CSX Transportation, Inc. (as successor to
the rights and obligations of Seaboard System Railroad,
Inc.), and Cogentrix Eastern Carolina Corporation (as
successor to the rights of Oxbow Carbon & Minerals, Inc.,
which succeeded to the rights and obligations of Cumberland
Elkhorn Coal & Coke, Inc. by assignment), as amended
(Elizabethtown and Lumberton Facilities) (10.88).(1)
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10.89 Lease Agreement, dated as of November 10, 1987, between
United States Trust Company of New York, as Roxboro Owner
Trustee, as Lessor, and Cogentrix of North Carolina, Inc.
(successor by merger to Cogentrix Carolina Leasing
Corporation), as Lessee, as amended (Roxboro Facility)
(10.89).(1)
10.89(a) Fourth Amendment to Lease Agreement, dated as of September
24, 1996, between United States Trust Company, as Roxboro
Owner Trustee and Cogentrix of North Carolina, Inc. (Roxboro
Facility) (10.77(a)).(11)
10.90 Lease Agreement, dated as of November 10, 1987, between
United States Trust Company of New York, as Southport Owner
Trustee, as Lessor, and Cogentrix of North Carolina, Inc.
(successor by merger to Cogentrix Carolina Leasing
Corporation), as Lessee, as amended (Southport Facility)
(10.90).(1)
10.90(a) Fourth Amendment to Lease Agreement, dated as of September
24, 1996, between United States Trust Company, as Southport
Owner Trustee and Cogentrix of North Carolina, Inc.
(Southport Facility) (10.78(a)).(11)
10.91 Ground Lease, dated as of December 31, 1985, between United
States Trust Company, as Roxboro Owner Trustee, as Lessee,
and Cogentrix of North Carolina, Inc. (successor by merger
to Cogentrix Carolina Leasing Corporation), as Lessor
(Roxboro Facility) (10.91).(1)
10.92 Amended and Restated Ground Lease, dated as of December 31,
1985, between Carolina Power & Light Company, as Lessor, and
Cogentrix of North Carolina, Inc. (successor by merger to
Cogentrix Carolina Leasing Corporation), as Lessee, as
amended (Southport Facility) (10.92).(1)
10.93 Ground Lease, dated January 31, 1986, between Allied-Signal,
Inc., as Lessor, and Cogentrix of Virginia, Inc., as Lessee,
as amended (assigned to and assumed by James River
Cogeneration Company) (Hopewell Facility) (10.93).(1)
10.94 Ground Lease and Easement, dated as of December 15, 1986,
between Virginia Chemicals, Inc., as Lessor and Cogentrix
Virginia Leasing Corporation, as Lessee (Portsmouth
Facility) (10.94).(1)
10.95 Ground Lease, dated as of December 13, 1990, between
Cogentrix of Richmond, Inc., as Lessee, and E.I. du Pont de
Nemours and Company, as Lessor (Richmond Facility)
(10.95).(1)
10.96 Amended and Restated Land Lease Agreement, dated as of
February 18, 1988, among Arrowpoint Associates Limited
Partnership, as Landlord, and Cogentrix, Inc., CI
Properties, Inc. and Equipment Leasing Partners, as Tenant,
as amended (assigned to and assumed by Equipment Leasing
Partners, with Cogentrix, Inc., as guarantor) (Corporate
Headquarters) (10.96).(1)
10.97 Amended and Restated Lease Agreement, dated as of April 30,
1993, among Equipment Leasing Partners, as Landlord,
Cogentrix, Inc., as Tenant, and CI Properties, Inc., as
amended (Corporate Headquarters) (10.97).(1)
10.98 Letter Agreement, dated May 25, 1989, among Cogentrix, Inc.,
Cogentrix of Richmond, Inc. (formerly named Cogentrix of
Petersburg, Inc.), and WV Hydro, Inc., as amended (Richmond
Facility) (10.98).(1)
10.99 Consulting Agreement, dated as of September 27, 1991,
between Robert W. Lewis and Cogentrix, Inc., as amended
(assigned to and assumed by Cogentrix Energy, Inc.)
(10.99).(1)
</TABLE>
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<PAGE> 337
<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<C> <S>
10.100 Consulting Agreement, dated as of September 30, 1993,
between Cogentrix, Inc. and W.E. Garrett (assigned to and
assumed by Cogentrix Energy, Inc.) (10.100).(1)
10.101 Consulting Agreement, dated as of September 30, 1993,
between Cogentrix, Inc. and C&L Account Ten Inc. (assigned
to and assumed by Cogentrix Energy, Inc.) (10.101).(1)
10.102 Form of Profit-Sharing Plan (I) (10.102).(1)
10.103 Form of Profit-Sharing Plan (II) (10.103).(1)
10.104 Executive Incentive Bonus Plan (10.104).(2)
10.105 Facility Cash Flow Incentive Compensation Agreement with
Robert W. Lewis (10.105).(1)
10.106 General Partnership Agreement dated as of September 30, 1987
between Cogentrix of Virginia, Inc. and Capistrano
Cogeneration Company (10.110).(1)
10.107 Adoption of Stock Transfer Agreement dated as of December
30, 1993 among Cogentrix Energy, Inc., Cogentrix Inc., David
J. Lewis, Robert W. Lewis and James E. Lewis (10.111).(1)
10.108 Employment Agreement, dated as of June 24, 1994, between
David J. Lewis and Cogentrix Energy, Inc. (10.115).(3)
10.109 Employment Agreement, dated as of May 1, 1997, between Mark
F. Miller and Cogentrix Energy, Inc. (10.109).(14)
10.110 Employment Agreement, dated as of January 1, 1994, between
Dennis W. Alexander and Cogentrix Energy, Inc. (10.110).(15)
10.111 Power Purchase Agreement, dated as of September 30, 1994,
between Mangalore Power Company and Karnataka Electricity
Board (Phase One Facility) (10.1).(4)
10.112 Power Purchase Agreement, dated as of September 30, 1994,
between Mangalore Power Company and Karnataka Electricity
Board (Phase Two Facility) (10.2).(4)
10.113 Transaction Agreement by and among SEI Birchwood, Inc.,
Birchwood Development Corp., Birchwood Power Partners, L.P.,
Cogentrix/Birchwood Two, L.P. and Cogentrix Energy, Inc.,
dated as of November 23, 1994 (Birchwood Facility) (2.1).(5)
10.114 Engineering, Procurement and Construction Agreement, dated
as of December 8, 1994, between Cogentrix Energy, Inc. and
Public Utility District No. 1 of Clark County, Washington,
together with Letter Agreement, dated January 18, 1995
(Clark Facility) (10.1).(6)
10.115 Development and Engineering Agreement, dated as of December
8, 1994, between Cogentrix of Vancouver, Inc. and Public
Utility District No. 1 of Clark County, Washington (Clark
Facility) (10.2).(6)
10.116 Operation and Maintenance Agreement, dated as of December 8,
1994, between Cogentrix of Vancouver, Inc. and Public
Utility District No. 1 of Clark County, Washington (Clark
Facility) (10.3).(6)
10.117 Amended and Restated Facility Operations and Maintenance
Agreement, dated as of May 18, 1994, between Southern
Electric International, Inc. and Birchwood Power Partners,
L.P. (Birchwood Facility) (10.5).(*)(12)
10.118 Operating Agreement, dated as of November 14, 1997, between
Greenhost, Inc., as Owner, and Village Farms of Virginia,
Inc., as Operator (Birchwood Facility) (10.1).(*)(17)
10.119 Amended and Restated Limited Partnership Agreement of
Birchwood Power Partners, L.P., dated December 15, 1994
(Birchwood Facility) (10.6).(6)
10.120 Equity Contribution Agreement, dated as of December 15,
1994, among Cogentrix Energy, Inc., Cogentrix Delaware
Holdings, Inc., Birchwood Power Partners, L.P., and Credit
Suisse (Birchwood Facility) (10.9).(6)
</TABLE>
II-15
<PAGE> 338
<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<C> <S>
10.121 Limited Partner Pledge Agreement, dated as of December 15,
1994, made by Cogentrix/Birchwood Two, L.P. in favor of
Credit Suisse (Birchwood Facility) (10.10).(6)
10.122 General Partner Pledge Agreement, dated as of December 15,
1994, made by Cogentrix/Birchwood Two, L.P. in favor of
Credit Suisse (Birchwood Facility) (10.11).(6)
10.123 Agreement of Limited Partnership of Rathdrum Generation
Partners Limited Partnership, dated as of November 3, 1994,
by and among BTU Energy I, Inc. and Cogentrix of Rathdrum I,
Inc., as General Partners, and BTU Energy II, Inc. and
Cogentrix of Rathdrum II, Inc., as Limited Partners
(10.131).(8)
10.124 Supplemental Retirement Savings Plan (10.132).(8)
10.125 Trust Under Supplemental Retirement Savings Plan, dated
April 17, 1995, by and between Cogentrix Energy, Inc. and
Wachovia Bank of North Carolina, N.A. of Winston Salem,
North Carolina, as Trustee (10.133).(8)
10.126 Consulting and Noncompetition Employment Agreement, dated as
of August 11, 1995, between Cogentrix Energy, Inc. and
George T. Lewis, Jr. (10.135).(8)
10.127 Joint Development Agreement, dated as of July 14, 1995,
between Cogentrix Mauritius Company and Malconna Company
Limited (10.136).(*)(8)
10.128 Support Agreement, dated as of July 14, 1995, from Cogentrix
Energy, Inc. to Malconna Company Limited (10.137).(8)
10.129 Amended and Restated Credit Agreement, dated as of October
29, 1998, among Cogentrix Energy, Inc., the Lenders (as
defined therein), Australia and New Zealand Banking Group
Limited, CIBC Oppenheimer Corporation, and The Bank of Nova
Scotia, as the lead arrangers, and Australia and New Zealand
Banking Group Limited, as the Agent (as defined therein) and
as the Issuing Bank (as defined therein).(+)
10.130 Amended and Restated Guarantee, dated as of October 29,
1998, made by Cogentrix Delaware Holdings, Inc. in favor of
the Borrower Creditors (as defined therein).(+)
10.131 Agreement of Limited Partnership of Village Farms of Texas,
L.P., dated as of February 6, 1996, by and among Cogentrix
of Fort Davis I, Inc. and Village Farms of Delaware, L.L.C.,
as General Partners, and Cogentrix of Fort Davis II, Inc.
and Village Farms, L.L.C., as Limited Partners
(10.6).(*)(10)
10.132 Guaranty, dated as of February 14, 1996, made by Cogentrix
Energy, Inc. in favor of Farm Credit Bank of Texas and Texas
Production Credit Association, as Lenders, and CoBank, ACB,
as Administrative Agent, to guarantee certain obligations of
Village Farms of Texas, L.P. (10.7).(10)
10.133 Agreement of Limited Partnership, dated as of March 10,
1997, of Pocono Village Farms, L.P. by and among Cogentrix
of Pocono, Inc., Cogentrix Greenhouse Investments, Inc.,
Village Farms of Delaware, L.L.C. and Village Farms, L.L.C.
(10.1).(13)
10.134 Agreement of Limited Partnership, dated as of June 4, 1997,
of Village Farms of Marfa, L.P. by and among Cogentrix of
Marfa, Inc., Cogentrix Greenhouse Investments, Inc., Village
Farms of Delaware, L.L.C. and Village Farms, L.L.C.
(10.134).(*)(14)
10.135 Agreement of Limited Partnership, dated as of September 4,
1997, of Village Farms of Buffalo, L.P. by and among
Cogentrix of Buffalo, Inc., Cogentrix Greenhouse
Investments, Inc., Village Farms of Delaware, L.L.C. and
Village Farms, L.L.C. (10.135).(*)(14)
10.135(a) Amendment to Agreement of Limited Partnership, dated as of
April 17, 1998, by and among Cogentrix of Buffalo, Inc.,
Cogentrix Greenhouse Investments, Inc., Village Farms of
Delaware, L.L.C., and Village Farms, L.L.C. (10.3).(17)
10.136 Amended and Restated Limited Partnership Agreement, dated as
of June 30, 1995, among LSP-Cottage Grove, Inc., Granite
Power Partners, L.P., and TPC Cottage Grove, Inc.(18)
</TABLE>
II-16
<PAGE> 339
<TABLE>
<CAPTION>
DESIGNATION OF
EXHIBIT DESCRIPTION OF EXHIBIT
- -------------- ----------------------
<C> <S>
10.136(a) Amendment #1 to the Cottage Grove Partnership Agreement.(19)
10.136(b) Consent, Waiver and Amendment No. 2, dated March 20, 1998,
to the Amended and Restated Limited Partnership Agreement of
LSP-Cottage Grove, L.P.(21)
10.137 Amended and Restated Partnership Agreement, dated as of June
30, 1995, among LSP-Whitewater I, Inc., Granite Power
Partners, L.P. and TPC Whitewater, Inc.(18)
10.137(a) Consent, Waiver and Amendment No. 1, dated March 20, 1998,
to the Amended and Restated Limited Partnership Agreement of
LSP-Whitewater Limited Partnership.(21)
10.138 Power Purchase Agreement, dated as of May 9, 1994, between
Northern States Power Company and LSP-Cottage Grove,
L.P.(18)
10.139 Power Purchase Agreement, dated as of December 21, 1993,
between Wisconsin Electric Power Company and LSP-Whitewater
Limited Partnership.(18)
10.139(a) Amendment to Power Purchase Agreement, dated as of February
10, 1994, between Wisconsin Electric Power Company and
LSP-Whitewater Limited Partnership.(18)
10.139(b) Second Amendment to Power Purchase Agreement, dated as of
October 5, 1994, between Wisconsin Electric Power Company
and LSP-Whitewater Limited Partnership.(18)
10.139(c) Third Amendment to Power Purchase Agreement, dated as of May
5, 1995, between Wisconsin Electric Power Company and
LSP-Whitewater Limited Partnership.(18)
10.139(d) Fourth Amendment to Power Purchase Agreement, dated March
18, 1997, between Wisconsin Electric Power Company and
LSP-Whitewater Limited Partnership.(20)
10.139(e) Fifth Amendment to Power Purchase Agreement, dated February
26, 1998, between Wisconsin Electric Power Company and
LSP-Whitewater Limited Partnership.(21)
10.140 Equity Contribution Agreement, dated as of August 28, 1998,
among LSP Batesville Holding, LLC, LSP Energy Limited
Partnership, and IBJ Schroder Bank and Trust Company
(Batesville Facility).(+)
12.1 Statement Regarding: Computation of Ratio of Earnings to
Fixed Charges.(+)
21.1 Direct and Indirect Subsidiaries of Cogentrix Energy,
Inc.(+)
23.1 Consent of Moore & Van Allen, PLLC (contained in the opinion
filed as Exhibit 5.1).(+)
23.2 Independent Auditors' Consent of Arthur Andersen LLP.
23.3 Consent of Independent Accountants of PricewaterhouseCoopers
LLP.
23.4 Independent Certified Public Accountants' Consent of KPMG
LLP.
23.5 Consent of Independent Auditors of Ernst & Young LLP.
23.6 Independent Auditors' Consent of Deloitte & Touche LLP.
23.7 Consent of Independent Accountants of PricewaterhouseCoopers
LLP.
24.1 Power of Attorney of Directors and Officers of Cogentrix
Energy, Inc.(+)
24.2 Power of Attorney of Directors and Officers of Cogentrix
Delaware Holdings, Inc. (contained on the signature page of
this Registration Statement).
25.1 Form T-1 Statement of Eligibility of First Union National
Bank, as Trustee.(+)
99.1 Form of Letter of Transmittal.(+)
99.2 Form of Notice of Guaranteed Delivery.(+)
</TABLE>
- ---------------
(*) Certain portions of these exhibits have been omitted pursuant to previously
approved requests for confidential treatment.
II-17
<PAGE> 340
(**) Certain portions of these exhibits have been omitted pursuant to a request
for confidential treatment filed with the Securities and Exchange
Commission pursuant to Rule 406 under the Securities Act of 1933, as
amended.
(+) Previously filed.
(1) Incorporated by reference to Registration Statement on Form S-1 (File No.
33-74254) filed January 19, 1994. The number designating the exhibit on the
exhibit index to such previously-filed report is enclosed in parentheses at
the end of the description of the exhibit above.
(2) Incorporated by reference to Amendment No. 2 to Registration Statement on
Form S-1 (File No. 33-74254) filed March 7, 1994. The number designating
the exhibit on the exhibit index to such previously-filed report is
enclosed in parentheses at the end of the description of the exhibit above.
(3) Incorporated by reference to the Form 10-K (File No. 33-74254) filed
September 28, 1994. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(4) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed
November 14, 1994. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(5) Incorporated by reference to the Form 8-K (File No. 33-74254) filed
December 29, 1994. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(6) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed
February 14, 1995. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(7) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed May
16, 1995. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(8) Incorporated by reference to the Form 10-K (File No. 33-74254) filed
September 28, 1995. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(9) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed
November 14, 1995. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(10) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed May 3,
1996. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(11) Incorporated by reference to the Form 10-K (File No. 33-74254) filed
October 10, 1996. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(12) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed
February 14, 1997. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(13) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed May
15, 1997. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
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<PAGE> 341
(14) Incorporated by reference to the Form 10-K (File No. 33-74254) filed
September 29, 1997. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(15) Incorporated by reference to the Form 10-K (File No. 33-74254) filed March
30, 1998. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(16) Incorporated by reference to the Form 8-K (File No. 33-74254) filed April
6, 1998. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(17) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed May
15, 1998. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(18) Incorporated herein by reference from the Registration Statement on Form
S-4, File No. 33-95928 filed with the Securities and Exchange Commission by
LS Power Funding Corporation, LSP-Cottage Grove, L.P. and LSP-Whitewater
Limited Partnership on August 16, 1995, as amended, or from the Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 filed with
the Securities and Exchange Commission by LS Power Funding Corporation,
LSP-Cottage Grove, L.P. and LSP-Whitewater Limited Partnership.
(19) Incorporated herein by reference from the Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1996, File No. 33-95928 filed with the
Securities and Exchange Commission by LS Power Funding Corporation,
LSP-Cottage Grove, L.P. and LSP-Whitewater Limited Partnership.
(20) Incorporated herein by reference from the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1997, File No. 33-95928 filed with the
Securities and Exchange Commission by LS Power Funding Corporation,
LSP-Cottage Grove, L.P. and LSP-Whitewater Limited Partnership.
(21) Incorporated herein by reference from the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 filed with the Securities and
Exchange Commission by LS Power Funding Corporation, LSP-Cottage Grove,
L.P. and LSP-Whitewater Limited Partnership.
(22) Incorporated by reference to the Form 10-Q (File No. 33-74254) filed August
14, 1998. The number designating the exhibit on the exhibit index to such
previously-filed report is enclosed in parentheses at the end of the
description of the exhibit above.
(23) Incorporated by reference to the Form 8-K (File No. 33-74254) filed
November 4, 1998. The number designating the exhibit on the exhibit index
to such previously-filed report is enclosed in parentheses at the end of
the description of the exhibit above.
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are included in Part II of the
Registration Statement:
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
ITEM 22. UNDERTAKINGS
(1) Each undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
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<PAGE> 342
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(3) The undersigned registrants hereby undertake as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuers undertake that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(4) The registrants undertake that every prospectus: (i) that is filed
pursuant to paragraph (3) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement, relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
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<PAGE> 343
(6) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(7) The undersigned registrants hereby undertake to file an application for
the purpose of determining eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Securities and Exchange Commission under Section
305(b)(2) of the Securities Act.
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<PAGE> 344
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment no. 3 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Charlotte,
North Carolina, on March 15, 1999.
COGENTRIX ENERGY, INC.
By: /s/ THOMAS F. SCHWARTZ
------------------------------------
Thomas F. Schwartz
Senior Vice President - Finance
and Treasurer
Pursuant to the requirements of the Securities Act, this amendment no. 3 to
the registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEORGE T. LEWIS, JR.* Chairman of the Board of Directors March 15, 1999
- -----------------------------------------------------
George T. Lewis, Jr.
/s/ DAVID J. LEWIS* Vice Chairman, Chief Executive March 15, 1999
- ----------------------------------------------------- Officer and Director (Principal
David J. Lewis Executive Officer)
/s/ MARK F. MILLER* President, Chief Operating Officer March 15, 1999
- ----------------------------------------------------- and Director
Mark F. Miller
/s/ JAMES E. LEWIS* Executive Vice President and March 15, 1999
- ----------------------------------------------------- Director
James E. Lewis
/s/ DENNIS W. ALEXANDER Group Senior Vice President, March 15, 1999
- ----------------------------------------------------- General Counsel, Secretary and
Dennis W. Alexander Director
/s/ JAMES R. PAGANO Group Senior Vice President -- March 15, 1999
- ----------------------------------------------------- Development, Mergers and
James R. Pagano Acquisitions
/s/ BETTY G. LEWIS* Director March 15, 1999
- -----------------------------------------------------
Betty G. Lewis
/s/ ROBERT W. LEWIS* Director March 15, 1999
- -----------------------------------------------------
Robert W. Lewis
/s/ W.E. GARRETT* Director March 15, 1999
- -----------------------------------------------------
W.E. Garrett
/s/ JOHN A. TILLINGHAST* Director March 15, 1999
- -----------------------------------------------------
John A. Tillinghast
/s/ THOMAS F. SCHWARTZ Senior Vice President -- Finance March 15, 1999
- ----------------------------------------------------- and Treasurer (Principal
Thomas F. Schwartz Financial and Accounting
Officer)
*By: /s/ THOMAS F. SCHWARTZ
------------------------------------------------
Thomas F. Schwartz
Attorney-in-fact
</TABLE>
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<PAGE> 345
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment no. 3 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Charlotte,
North Carolina, on March 15, 1999.
COGENTRIX ENERGY, INC.
By: /s/ THOMAS F. SCHWARTZ
------------------------------------
Thomas F. Schwartz
Senior Vice President - Finance
and Treasurer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Thomas
F. Schwartz his attorney-in-fact, with the power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration statement,
and to file the same, with all exhibits thereto in all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might, or could, do in
person, hereby ratifying and confirming that such attorney-in-fact and agent, or
his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this amendment no. 3 to
the registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES R. PAGANO President and Director (Principal March 15, 1999
- ----------------------------------------------------- Executive Officer)
James R. Pagano
/s/ DAVID P. FONTELLO Director March 15, 1999
- -----------------------------------------------------
David P. Fontello
/s/ THOMAS F. SCHWARTZ Senior Vice President -- Finance March 15, 1999
- ----------------------------------------------------- Treasurer and Director
Thomas F. Schwartz (Principal Financial and
Accounting Officer)
</TABLE>
II-21
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF INCORPORATION
OF
COGENTRIX DELAWARE HOLDINGS, INC.
I, the undersigned, for the purposes of incorporating and organizing a
corporation under the General Corporation Law of the State of Delaware, do
hereby certify as follows:
I.
The name of the Corporation is: COGENTRIX DELAWARE HOLDINGS, INC.
II.
The address of the Corporation's registered office in the State of
Delaware is ll05 North Market Street, Suite 1300, in the City of Wilmington,
County of New Castle, Delaware 19899. The name of the Corporation's registered
agent at such address is Delaware Corporate Management, Inc.
III.
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
IV.
The total number of shares of stock which the Corporation shall have
authority to issue is One Thousand (1,000) shares of common stock, and the par
value of each of such shares is One Dollar ($1.00), amounting in the aggregate
to One Thousand Dollars ($1,000.00).
V.
The Board of Directors is expressly authorized and empowered to adopt,
amend and repeal the By-Laws of the Corporation, subject to the power of the
stockholders of the Corporation to alter or repeal any By-Laws made by the Board
of Directors.
VI.
The business of the Corporation shall be managed by a Board of
Directors, and the number of directors comprising the Board shall be fixed by
the By-Laws and such number may from time to time be
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<PAGE> 2
increased or decreased in such manner as is provided in the By-Laws of the
Corporation.
VII.
The capital stock after the amount of subscription price of par value
has been paid in shall not be subject to assessment to pay the debts of the
Corporation.
VIII.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the Delaware General Corporation Law,
or (d) for any transaction from which the director derived an improper personal
benefit.
IX.
(a) Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter, a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or, while serving as a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including, without limitation, service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director or officer of the
Corporation or in any other capacity while serving as a director or officer of
the Corporation, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including, without limitation, attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director or
officer of the Corporation and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
paragraph (b) hereof, the Corporation shall
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<PAGE> 3
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to indemnification conferred in this Article IX shall be a contract
right and shall include, without limitation, the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that, if the Delaware General
Corporation Law so requires, the payment of such expenses incurred by a director
or officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is rendered by such person while a director or
officer, including, without limitation, service to an employee benefit plan) in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article IX or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Article IX is not paid in full by the Corporation within thirty days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim, and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including, without limitation, its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the Corporation (including, without limitation, its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard or conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
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<PAGE> 4
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article IX shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, By-Law, agreement, vote of
stockholders or disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
X.
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, or by the Certificate of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
XI.
The name and the mailing address of the incorporator are:
Stephen D. Hope
MOORE & VAN ALLEN
NationsBank Corporate Center
100 North Tryon Street, Floor 47
Charlotte, NC 28202-4003
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of
Delaware, do make this certificate, hereby declaring and certifying that this is
my act and deed and the facts herein stated are true, and accordingly have
hereunto set my hand this 1st day of December, 1993.
/s/ Stephen D. Hope
---------------------------------
Stephen D. Hope, Incorporator
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<PAGE> 1
EXHIBIT 3.4
INDEX OF
BY-LAWS
OF
COGENTRIX DELAWARE HOLDINGS, INC.
(STATE OF DELAWARE)
ARTICLE I
OFFICES
Section 1. Registered Office
Section 2. Other Offices
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Location
Section 2. Annual Meetings
Section 3. Substitute Annual Meeting
Section 4. Notice
Section 5. Record Date
Section 6. Stock Ledger
Section 7. Special Meetings
Section 8. Notice of Special Meeting
Section 9. Business at Special Meeting
Section 10. Quorum and Adjournments
Section 11. Organization
Section 12. Vote
Section 13. Proxies
Section 14. Action Without Meeting
ARTICLE III
DIRECTORS
Section 1. Number
Section 2. Vacancies
Section 3. Powers
Section 4. Chairman of the Board
<PAGE> 2
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. Location
Section 6. First Meeting
Section 7. Regular Meetings
Section 8. Special Meetings
Section 9. Quorum
Section 10. Organization
Section 11. Action Without Meeting
Section 12. Meeting by Conference Telephone
COMMITTEES OF DIRECTORS
Section 13. Committees
Section 14. Committee Rules
Section 15. Minutes
COMPENSATION OF DIRECTORS
Section 16. Compensation
REMOVAL OF DIRECTORS
Section 17. Removal
ARTICLE IV
NOTICES
Section 1. Writing
Section 2. Waiver
ARTICLE V
OFFICERS
Section 1. Officers
Section 2. Election
Section 3. Other Officers
Section 4. Salaries
Section 5. Term
THE PRESIDENT
Section 6. Duties and Powers
ii
<PAGE> 3
THE VICE PRESIDENTS
Section 7. Duties and Powers
THE SECRETARY AND ASSISTANT SECRETARIES
Section 8. Duties and Powers
Section 9. Assistant Secretaries
THE TREASURER AND ASSISTANT TREASURERS
Section 10. Duties and Powers
Section 11. Disbursement
Section 12. Bond
Section 13. Assistant Treasurer
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Certificates
Section 2. Facsimile Signatures
Section 3. Lost Certificates
Section 4. Transfers of Stock
Section 5. Closing of Transfer Books
Section 6. Registered Stockholders
Section 7. Indemnification
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends
Section 2. Reserves
Section 3. Annual Statement
Section 4. Checks
Section 5. Fiscal Year
Section 6. Seal
Section 7. Indemnification
Section 8. Form of Records
ARTICLE VIII
AMENDMENTS
Section 1. Amendments
iii
<PAGE> 4
BY-LAWS
OF
COGENTRIX DELAWARE HOLDINGS, INC.
(STATE OF DELAWARE)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office in
Delaware shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The corporation may also have
offices at such other places both within and without the State of Delaware as
the board of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Location. All meetings of the stockholders shall be
held on such date and at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meeting. Annual meetings of stockholders,
commencing with the year 1994, shall be held on the third Wednesday in the month
of September at the hour of eleven o'clock A.M. (or at such other time as shall
be stated in the notice of meeting or in a duly executed waiver of notice
thereof) at which they shall elect by plurality vote a board of directors, and
transact such other business as may properly be brought before the meeting.
Section 3. Substitute Annual Meeting. If the annual meeting
for election of directors is not held on the date designated therefor, the
directors shall cause the meeting to be held as soon thereafter as convenient.
If there should be a failure to hold the annual meeting for a period of thirty
days after the date designated therefor, or if no date has been designated, for
a period of thirteen months after the organization of the corporation or after
its last annual meeting, the meeting may be ordered as provided for in Section
211 of the General Corporation Law of Delaware.
Section 4. Notice. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote thereat at least ten days but not more than sixty
days before the date of the meeting.
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Section 5. Record Date. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. If no record date is fixed: (1) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and (2) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the board of directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
Section 6. Stock Ledger. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at said meeting, arranged in alphabetical order, showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held and which place shall be specified in the notice
of the meeting, or, if not specified, at the place where said meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list of stockholders or
the books of the corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 7. Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the certificate of incorporation, may be called by the chief
executive officer and shall be called by the chief executive officer or the
secretary at the request in writing of a majority of the board of directors, or
at the request in writing of stockholders owning a majority in amount of the
entire capital stock of the corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed meeting.
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<PAGE> 6
Section 8. Notice of Special Meeting. Written notice of a
special meeting of stockholders, stating the date, time, place and purpose
thereof, shall be given to each stockholder entitled to vote thereat, at least
ten days but not more than fifty days before the date fixed for the meeting. If
mailed, such notice shall be deemed to be given when deposited in the mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
Section 9. Business at Special Meeting. Business transacted at
any special meeting of stockholders shall be limited to the purposes stated in
the notice.
Section 10. Quorum and Adjournments. The holders of a majority
of the stock issued and outstanding and entitled to vote thereat, present in
person or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided by
statute or by the certificate of incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power by majority vote to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of any corporation to vote stock, including without limitation its own
stock, held by it in a fiduciary capacity. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 11. Organization. Meetings of stockholders shall be
presided over by the chairman of the board, if any, or in his absence by the
chief executive officer, or in the absence of the foregoing persons by a
chairman designated by the board of directors, or in the absence of such
designation by a chairman chosen at the meeting. The secretary or, in his
absence, an assistant secretary, shall act as secretary of the meeting, but in
the absence of the foregoing persons the chairman of the meeting may appoint any
person to act as secretary of the meeting.
Section 12. Vote. Each stockholder entitled to vote at any
meeting of stockholders shall be entitled to one vote for each share of stock
held by him which has voting power upon the matter in questions. Voting at
meetings of stockholders need not be by written ballot and need not be conducted
by inspectors unless the
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holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or by proxy at such meeting shall so
determine. At all meetings of stockholders for the election of directors a
plurality of the votes cast shall be sufficient to elect. All other elections
and questions shall, unless otherwise provided by law or by the certificate of
incorporation or these by-laws, be decided by the vote of the holders of
majority of the outstanding shares of stock entitled to vote thereon present in
person or by proxy at the meeting, provided that (except as otherwise required
by law or by the certificate of incorporation) the board of directors may
require a larger vote upon any election or question.
Section 13. Proxies. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for him
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or another duly executed proxy bearing a later date
with the secretary of the corporation.
Section 14. Action Without Meeting. Unless otherwise
restricted by the certificate of incorporation, any action required or permitted
to be taken at any annual or special meeting of the stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporation action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. Number. The number of directors which shall
constitute the whole board shall be three. The directors shall be elected at the
annual meeting of the stockholders, except as provided in Section 2 of this
Article, and each director elected shall hold office until his successor is
elected and qualified or until his earlier resignation or removal. Directors
need not be stockholders.
Section 2. Vacancies. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, by the sole remaining director,
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or by the stockholders at any meeting, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and shall qualify, unless sooner displaced. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute.
Section 3. Powers. The business of the corporation shall be
managed by its board of directors which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute or by
the certificate of incorporation or by these by-laws directed or required to be
exercised or done by the stockholders.
Section 4. Chairman of the Board. There may be a chairman of
the board elected by the directors from their number at any meeting of the board
of directors. The chairman shall preside at all meetings of the board of
directors and perform such other duties as may be directed by the board.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. Location. The board of directors of the corporation
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 6. First Meeting. The first meeting of each newly
elected board of directors shall be held at the same place as the annual meeting
of the stockholders of the Corporation and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present.
Section 7. Regular Meetings. Regular meetings of the board of
directors may be held without notice at such time and at such place as shall
from time to time be determined by the board. If so determined, notices of
regular meetings need not be given.
Section 8. Special Meetings. Special meetings of the board may
be called by the chief executive officer on not less than two, or, in the case
of notice given by mail, not less than three days' notice to each director;
special meetings shall be called by the chief executive officer or the secretary
on like notice on the written request of two directors, unless the board
consists of only one director in which case special meetings shall be called by
the chief executive officer or the secretary on like notice on the written
request of the sole director.
Section 9. Quorum. At all meetings of the board a majority of
the directors shall constitute a quorum for the transaction of business and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of directors, the
directors present thereat may adjourn the meeting
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<PAGE> 9
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Section 10. Organization. Meetings of the board of directors
shall be presided over by the chairman of the board, if any, or in his absence
by the chief executive officer, or in their absence by a chairman chosen at the
meeting. The secretary or, in his absence, an assistant secretary, shall act as
secretary of the meeting, but in their absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 11. Action Without Meeting. Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action
required or permitted to be taken at any meeting of the board of directors or of
any committee thereof may be taken without a meeting, if a written consent
thereto is signed by all members of the board or of such committee, as the case
may be, and such written consent is filed with the minutes of proceeding of the
board or committee.
Section 12. Meeting by Conference Telephone. Unless otherwise
restricted by the certificate of incorporation, members of the board of
directors or any committee designated by the board may participate in the
meeting of the board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation in a meeting shall constitute
presence in person at such meeting.
COMMITTEES OF DIRECTORS
Section 13. Committees. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in place of any such absent or disqualified member. To the extent
provided in the resolution, any such committee shall have and may exercise the
powers of the board of directors in the management of the business and affairs
of the corporation and may authorize the seal of the corporation to be affixed
to all papers which may require it; but no such committee shall have power or
authority in reference to amending the certificate of incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the board of directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
any of the preferences or rights of the shares), adopting an agreement of merger
or consolidation, recommending to the stockholders the sale, lease or exchange
of all
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or substantially all of the corporation's property and assets, recommending to
the stockholders a dissolution of the corporation or a revocation of
dissolution, or amending these by-laws; and, unless the resolution expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the board of directors.
Section 14. Committee Rules. Unless the board of directors
otherwise provides, each committee designated by the board may make, alter and
repeal rules for the conduct of its business. In the absence of such rules, each
committee shall conduct its business in the same manner as the board of
directors conducts its business pursuant to Article III of these by-laws.
Section 15. Minutes. Each committee shall keep regular minutes
of its meetings and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 16. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a fixed sum for attendance at each meeting of the board of directors
or a stated salary as director. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 17. Removal. Any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
shares entitled to vote at an election of directors.
ARTICLE IV
NOTICES
Section 1. Writing. Notices to directors and stockholders
shall be in writing and delivered personally or mailed to the directors or
stockholders at their addresses appearing on the books of the corporation.
Notice to directors may also be given by telegram, telex or facsimile.
Section 2. Waiver. Whenever any notice is required to be given
under provisions of the statutes or of the certificate of incorporation or of
these by-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
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<PAGE> 11
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the corporation shall be
chosen by the board of directors and shall be a president, a secretary and a
treasurer. The board of directors may also choose a vice president or vice
presidents, and one or more assistant secretaries and assistant treasurers.
Two or more offices may be held by the same person.
Section 2. Election. The board of directors at its first
meeting after each annual meeting of stockholders shall choose a president, a
secretary and a treasurer, and may choose one or more vice presidents, assistant
secretaries or assistant treasurers, none of whom need be a member of the board.
Section 3. Other Officers. The board of directors may appoint
such other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the board.
Section 4. Salaries. The salaries of all officers and agents
of the corporation shall be fixed by the board of directors.
Section 5. Term. Each officer of the corporation shall hold
office until his successor is chosen and qualified or until his earlier
resignation or removal. Any officer elected or appointed by the board of
directors may be removed, with or without cause, at any time by the affirmative
vote of a majority of the board of directors, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
corporation. Any vacancy occurring in any office of the corporation shall be
filled by the board of directors.
PRESIDENT
Section 6. Duties and Powers. The president of the corporation
shall be the chief executive officer of the corporation. He shall, when present
and in the absence of the chairman of the board, if any, preside at all meetings
of the stockholders and at all meetings of the board of directors. He may sign
all authorized contracts in the name of the corporation, shall have general
charge and supervision of the business of the corporation, subject to the
control of the board of directors, and shall be the medium of communication of
the board of directors and any board committee of reports, proposals and
recommendations for
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their respective consideration or action. He may sign, with the treasurer or an
assistant treasurer or the secretary or an assistant secretary, certificates of
shares of the capital stock of the corporation, and he shall do and perform such
other duties as may be assigned to him, from time to time, by the board of
directors. All officers shall report to the chief executive officer or according
to his direction in respect of any matters within his jurisdiction.
THE VICE PRESIDENTS
Section 7. Duties and Powers. The vice president, or if there
shall be more than one, the vice presidents in the order determined by the board
of directors, shall, in the absence or disability of the president, perform the
duties and exercise the powers of the president and shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe. If a vice president is designated as the chief operating officer
of the corporation, then he shall be deemed to be the most senior vice president
of the corporation.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 8. Duties and Powers. The secretary shall attend all
meetings of the board of directors and all meetings of the stockholders and
record all the proceedings of the meetings of the stockholders and of the board
of directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. The secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
board of directors, and shall perform such other duties as may be prescribed by
the board of directors or president, under whose supervision he shall be. The
secretary shall keep in safe custody the seal of the corporation and, when
authorized by the board of directors, affix the same to any instrument requiring
it and, when so affixed, it shall be attested by his signature or by the
signature of an assistant secretary.
Section 9. Assistant Secretaries. The assistant secretary, or
if there be more than one, the assistant secretaries in the order determined by
the board of directors, shall, in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 10. Duties and Powers. The treasurer shall have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the corporation in such depositories as may be designated by the board
of
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directors. The treasure shall be the chief financial officer of the corporation.
Section 11. Disbursement. The treasurer shall disburse the
funds of the corporation as may be ordered by the board of directors, taking
proper vouchers for such disbursements, and shall render to the president and
the board of directors, at its regular meetings, or when the board of directors
so requires, an account of all his transactions as treasurer and of the
financial condition of the corporation.
Section 12. Bond. If required by the board of directors, he
shall give the corporation a bond (which shall be renewed as and when required)
in such sum and with such surety or sureties as shall be satisfactory to the
board of directors for the faithful performance of the duties of his office and
for the restoration to the corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control belonging
to the corporation.
Section 13. Assistant Treasurer. The assistant treasurer, or
if there shall be more than one, the assistant treasurers in the order
determined by the board of directors, shall, in the absence or disability of the
treasurer, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Certificates. Every holder of stock in the
corporation shall be entitled to have a certificate, signed by, or in the name
of the corporation by, the president or a vice president and the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation, certifying the number of shares owned by him in the corporation. If
the corporation shall be authorized to issue more than one class of stock, or
more than one series of any class, the designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the corporation shall issue to represent such class of
stock; provided, however, that except as otherwise provided in Section 202 of
the General Corporation Law of Delaware, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, a statement
that the corporation will furnish without charge to each stockholder who so
requests, the designations, preferences and relative participating, optional or
other special rights of each
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<PAGE> 14
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
Section 2. Facsimile Signatures. Where a certificate is signed
(1) by a transfer agent or an assistant transfer agent or (2) by a transfer
clerk acting on behalf of the corporation and a registrar, the signature of any
such president, vice president, treasurer, assistant treasurer, secretary or
assistant secretary may be facsimile. In case any officer or officers who have
signed, or whose facsimile signature or signatures have been used on, any such
certificate or certificates, shall cease to be such officer or officers of the
corporation, whether because of death, resignation, removal or otherwise, before
such certificate or certificates have been delivered by the corporation, such
certificate or certificates may nevertheless be adopted by the corporation and
be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer or officers of the corporation.
Section 3. Lost Certificates. The board of directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of the fact
by the person claiming the certificate of stock to be lost or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed
or the issuance of such new certificate.
Section 4. Transfers of Stock. Upon surrender to the
corporation or the transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 5. Closing of Transfer Books. The board of directors
may close the stock transfer books of the corporation for a period of not more
than sixty nor less than ten days preceding the date of any meeting of
stockholders or the date for payment of any dividend or the date for the
allotment of rights or the date when any change or conversion or exchange of
capital stock shall go into effect or for a period of not more than sixty nor
less than ten days in connection with obtaining the consent of stockholders for
any purpose. In lieu of closing the stock transfer books as aforesaid, the board
of directors may fix in advance a record date, pursuant to Article II of these
by-laws.
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Section 6. Registered Stockholders. The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Section 2. Reserves. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the directors from time to time, in their absolute discretion,
think proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 3. Annual Statement. The board of directors shall
present at each annual meeting, and at any special meeting of the stockholders
when called for by vote of the stockholders, a full and clear statement of the
business and condition of the corporation.
Section 4. Checks. All checks or demands for money and notes
of the corporation shall be signed by such officer or officers or such other
person or persons as the board of directors may from time to time designate.
Section 5. Fiscal Year. The fiscal year of the corporation
shall be fixed by resolution of the board of directors.
Section 6. Seal. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
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Section 7. Indemnification. The corporation shall indemnify to
the fullest extent authorized by law and the certificate of incorporation any
person made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he,
his testator or intestate is or was a director, officer or employee of the
corporation or any predecessor of the corporation or serves or served any other
enterprise as a director, officer or employee at the request of the corporation
or any predecessor of the corporation.
Section 8. Form of Records. Any records maintained by the
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs, or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
ARTICLE VIII
AMENDMENTS
Section 1. Amendments. These by-laws may be altered or
repealed at any regular meeting of the stockholders or of the board of directors
or at any special meeting of the stockholders or of the board of directors if
notice of such alteration or repeal be contained in the notice of such special
meeting. If the power to adopt, amend or repeal bylaws is conferred upon the
board of directors by the certificate of incorporation, it shall not divest or
limit the power of the stockholders to adopt, amend or repeal by-laws.
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Exhibit No. 23.2
INDEPENDENT AUDITORS' CONSENT
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
March 12, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Cogentrix Energy, Inc., our report dated
June 8, 1998 relating to the combined financial statements of Birch Power
Corporation, Cedar Power Corporation, Hickory Power Corporation, Palm Power
Corporation, and Panther Creek Leasing, Inc. which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
San Francisco, California
March 12, 1999
<PAGE> 1
Exhibit No. 23.4
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' CONSENT
-------------------------------------------------
Board of Directors
Cogentrix Energy, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Billings, Montana
March 12, 1999
<PAGE> 1
Exhibit No. 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 16, 1998, included in Amendment No. 3 to the
Registration Statement (Form S-4, No. 333-67171) and related Prospectus of
Cogentrix Energy, Inc., dated March 15, 1999, with respect to the financial
statements of Gilberton Power Company (not separately presented herein).
/s/ ERNST & YOUNG LLP
Harrisburg, Pennsylvania
March 12, 1999
<PAGE> 1
Exhibit No. 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Cogentrix Energy, Inc.
on Form S-4 of our report on Morgantown Energy Associates dated February 25,
1998, appearing in the Prospectus, which is part of this Registration Statement
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Richmond, Virginia
March 12, 1999
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Cogentrix Energy, Inc., our report dated
February 28, 1997 relating to the consolidated financial statements of Compania
Boliviana de Energia Electrica S.A. -- Bolivian Power Company Limited and its
subsidiaries, which appears in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
La Paz, Bolivia
March 12, 1999
