<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number: 33-74254
COGENTRIX ENERGY, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1853081
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9405 ARROWPOINT BOULEVARD, CHARLOTTE, NORTH CAROLINA 28273-8110
(Address of principal executive offices) (Zipcode)
(704) 525-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. [X] Yes [ ] No
On August 14, 2000, there were 282,000 shares of common stock, no par value,
issued and outstanding.
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COGENTRIX ENERGY, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Balance Sheets at June 30, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 17
2
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(dollars in thousands)
JUNE 30, DECEMBER 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,553 $ 80,344
Restricted cash 24,908 81,647
Accounts receivable 64,862 59,360
Inventories 22,612 20,137
Other current assets 2,795 2,252
----------- -----------
Total current assets 208,730 243,740
NET INVESTMENT IN LEASES 499,990 500,195
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $281,737 and $262,963 respectively 418,919 437,483
LAND AND IMPROVEMENTS 6,324 5,764
CONSTRUCTION IN PROGRESS 530,088 350,243
DEFERRED FINANCING COSTS, net of accumulated
amortization of $28,334 and $23,950 respectively 61,561 51,315
INVESTMENTS IN UNCONSOLIDATED AFFILIATES 334,716 325,504
PROJECT DEVELOPMENT COSTS 6,087 7,124
NOTES RECEIVABLE 18,502 19,502
OTHER ASSETS 81,344 57,516
----------- -----------
$ 2,166,261 $ 1,998,386
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 90,254 $ 90,114
Accounts payable 47,668 37,588
Accrued compensation 4,357 8,415
Accrued interest payable 20,153 25,708
Accrued dividends payable -- 8,683
Other accrued liabilities 13,586 15,621
----------- -----------
Total current liabilities 176,018 186,129
LONG-TERM DEBT 1,650,029 1,518,773
DEFERRED INCOME TAXES 90,085 72,980
MINORITY INTERESTS 68,822 69,608
OTHER LONG-TERM LIABILITIES 29,509 29,445
----------- -----------
2,014,463 1,876,935
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 300,000 shares
authorized; 282,000 shares issued and
outstanding 130 130
Accumulated other comprehensive loss (1,076) (1,144)
Accumulated earnings 152,744 122,465
----------- -----------
151,798 121,451
----------- -----------
$ 2,166,261 $ 1,998,386
=========== ===========
The accompanying notes to consolidated condensed financial statements
are an integral part of these consolidated balance sheets.
3
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
(dollars in thousands, except share and earnings per common share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Electric $ 78,169 $ 70,958 $ 159,968 $ 145,366
Steam 6,948 6,199 14,488 12,911
Lease 11,192 11,170 22,385 22,331
Service 12,511 11,024 26,601 22,894
Income from unconsolidated investments in power
projects, net of premium amortization 11,341 5,322 26,567 10,732
Other 2,892 4,225 7,827 8,103
--------- --------- --------- ---------
123,053 108,898 257,836 222,337
--------- --------- --------- ---------
OPERATING EXPENSES:
Fuel 27,068 19,417 53,746 37,114
Operations and maintenance 19,140 17,243 36,127 34,219
Cost of services 13,063 12,049 28,199 24,529
General, administrative and development 7,773 8,181 19,804 20,830
Depreciation and amortization 11,082 10,905 21,968 21,776
--------- --------- --------- ---------
78,126 67,795 159,844 138,468
--------- --------- --------- ---------
OPERATING INCOME 44,927 41,103 97,992 83,869
OTHER INCOME (EXPENSE):
Interest expense (23,625) (23,575) (46,922) (47,307)
Investment and other income, net 1,521 862 4,200 2,914
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTERESTS IN INCOME
AND PROVISION FOR INCOME TAXES 22,823 18,390 55,270 39,476
MINORITY INTERESTS IN INCOME (2,881) (2,656) (5,826) (6,482)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 19,942 15,734 49,444 32,994
PROVISION FOR INCOME TAXES (7,521) (6,393) (19,166) (13,259)
--------- --------- --------- ---------
NET INCOME $ 12,421 $ 9,341 $ 30,278 $ 19,735
========= ========= ========= =========
EARNINGS PER COMMON SHARE $ 44.05 $ 33.12 $ 107.37 $ 69.98
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 282,000 282,000 282,000 282,000
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
4
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,278 $ 19,735
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 21,968 21,776
Deferred income taxes 17,060 6,234
Minority interests in income, net of dividends (807) 3,028
Equity in net income of unconsolidated affiliates, net of dividends (7,550) 2,800
Minimum lease payments received 22,590 21,558
Amortization of unearned lease income (22,385) (22,331)
Increase in accounts receivable (5,502) (2,849)
(Increase) decrease in inventories (2,475) 1,321
Increase (decrease) in accounts payable 10,080 (5,028)
Decrease in accrued liabilities (11,648) (4,633)
Increase (decrease) in other 9,571 (855)
--------- --------
Net cash flows provided by operating activities 61,180 40,756
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment additions, net (1,289) (592)
Investments in unconsolidated affiliates (1,662) (39,852)
Construction in progress and project development costs (178,808) --
Expenditures for turbines (29,755) (4,667)
Decrease (increase) in restricted cash 56,739 (2,391)
--------- --------
Net cash flows used in investing activities (154,775) (47,502)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (8,683) (7,398)
Proceeds from issuance of long-term debt 176,790 54,280
Repayments of long-term debt (46,487) (43,223)
Increase in deferred financing costs (15,816) (778)
Decrease in note receivable 1,000 --
--------- --------
Net cash flows provided by financing activities 106,804 2,881
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,209 (3,865)
CASH AND CASH EQUIVALENTS, beginning of period 80,344 48,207
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 93,553 $ 44,342
========= ========
</TABLE>
The accompanying notes to consolidated condensed financial statements
are an integral part of these statements.
5
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COGENTRIX ENERGY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements include
the accounts of Cogentrix Energy, Inc. ("Cogentrix Energy") and its
subsidiary companies (collectively, the "Company"). Wholly-owned and
majority-owned subsidiaries, including 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, are consolidated.
Less-than-majority-owned subsidiaries are accounted for using the equity
method. Investments in unconsolidated affiliates in which the Company has
less than a 20% interest and does not exercise significant influence over
operating and financial policies are accounted for under the cost method.
All material intercompany transactions and balances among Cogentrix Energy,
its subsidiary companies and its consolidated joint ventures have been
eliminated in the accompanying consolidated condensed financial statements.
Information presented as of June 30, 2000 and for the three months and
six months ended June 30, 2000 and 1999 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 June 30, 2000, and the results of
operations for the three months and six months ended June 30, 2000 and 1999
and cash flows for the six months ended June 30, 2000 and 1999. 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 (the "Commission"). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although management believes that the disclosures made are
adequate to make the information presented not misleading. It is suggested
that these unaudited consolidated condensed financial statements be read in
conjunction with the audited consolidated financial statements and the
notes thereto included in the Company's most recent report on Form 10-K for
the year ended December 31, 1999, which the Company filed with the
Commission on March 30, 2000.
2. DOMINICAN REPUBLIC FACILITY
On April 18, 2000, La Compania de Electricidad de San Pedro de Macoris
("Macoris") entered into credit facilities with a group of lending banks
and financial institutions which provide up to $232.5 million which will be
used to construct an approximate 300 megawatt oil-fired, combined-cycle
electric generating facility located in the province of San Pedro de
Macoris, Dominican Republic (the "Facility"). Macoris is owned 65% by a
wholly-owned project subsidiary of the Company, and 35% by Commonwealth
Development Corporation of Great Britain. The Company has committed to
provide an equity contribution to the project subsidiary of approximately
$50.0 million upon the earliest to occur of (a) an event of default under
the project subsidiary's credit facility, (b) completion of construction of
the Facility, or (c) February 2003. This equity contribution is supported
by a letter of credit, which is provided under Cogentrix Energy's corporate
credit facility. The Company expects the Facility, which the Company will
operate, to commence commercial operations in the first quarter of 2002.
Electricity generated by the Facility will be sold under a 20 year power
purchase agreement with Corporacion Dominicana de Electricidad ("CDE").
Macoris has entered into an agreement with the government of the Dominican
Republic which provides for government assistance and assurances related
to, among other things, the obtaining of certain rights, licenses and
permits, seaward access, importation of fuel and equipment, foreign
currency exchange and transfer of funds. The government has also executed
an
6
<PAGE> 7
irrevocable and unconditional guarantee for the full and prompt payment of
all of CDE's payment obligations to Macoris under the power purchase
agreement.
The loans will be provided under the following facilities: a $72.0 million
bank loan, accruing interest per annum at the applicable LIBOR rate plus an
applicable margin ranging from 1.75% to 2.75% during the 12-year loan life,
$83.3 million of fixed rate loans, guaranteed by certain export credit
agencies, accruing interest per annum at fixed rates ranging from 7.71% to
7.78% during the 14-year loan lives, a $12.0 million unguaranteed loan
accruing interest per annum at either a fixed rate or LIBOR rate plus an
applicable margin, as chosen by the Company, during the 8-year life and a
$65.0 million institutional loan accruing interest at the 10-year US
Treasury rate plus 4% during the 17-year loan life.
3. RATHDRUM, IDAHO FACILITY
On March 9, 2000, Rathdrum Power, LLC ("Rathdrum Power") entered into a
credit agreement with a bank, as agent for a group of lending banks, and a
financial institution which provides up to $126.0 million in borrowings and
a $5.0 million debt service reserve letter of credit. Rathdrum Power is
owned 51% by a wholly-owned project subsidiary of the Company and 49% by
Avista Power, Inc. Proceeds from the credit agreement will be used to
construct an approximate 270 megawatt combined-cycle natural gas-fired
generating facility located in Rathdrum, Idaho. The Company has committed
to provide an equity contribution to the project subsidiary of
approximately $16.7 million upon the earliest to occur of (a) an event of
default under the project subsidiary's financing agreement, (b) the
incurrence of construction costs after all project financing has been
expended, or (c) October 1, 2002. This equity contribution commitment is
supported by a letter of credit, which is provided under Cogentrix Energy's
corporate credit facility. An indirect, wholly-owned subsidiary of
Cogentrix Energy has entered into an engineering, procurement and
construction contract (the "EPC Contract") with Rathdrum Power to construct
the Rathdrum facility. Cogentrix Energy is providing a guarantee supporting
the subsidiary's obligations under the EPC Contract. The Company expects
the Rathdrum facility, which the Company will operate, to begin operation
in the third quarter of 2001. Electricity generated by the Rathdrum
facility will be sold under a 25 year power purchase agreement with Avista
Turbine Power, Inc. ("Avista Turbine"). In addition, Avista Turbine will
supply fuel to the Rathdrum facility. Rathdrum Power has been consolidated
in the accompanying consolidated financial statements.
7
<PAGE> 8
The credit agreement provides borrowings up to $49.0 million from the
financial institution and $77.0 million from the banks. The financial
institution loans accrue interest at 8.56% per annum and have a term equal
to the construction period plus 25 years and the bank loans accrue interest
at the applicable LIBOR rate plus an applicable margin ranging from 1.25%
to 2.25% and will have a term equal to the construction period plus periods
up to 18 years.
4. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 established 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 required 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.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" delaying the effectiveness of SFAS No. 133 to fiscal
quarters of all fiscal years beginning after June 15, 2000.
The Company has begun assessing the impact of adopting SFAS No. 133 on
the consolidated financial statements. The Company anticipates completing
its assessment during the fourth quarter of the fiscal year ended December
31, 2000. The Company will adopt SFAS No. 133, as amended by SFAS 138, as
of January 1, 2001. SFAS No. 133 could increase the volatility of the
Company's earnings.
5. CLAIMS AND LITIGATION
One of the Company's indirect, wholly-owned subsidiaries is party to
certain product liability claims related to the sale of coal combustion
by-products for use in various construction projects. Management cannot
currently estimate the range of possible loss, if any, the Company will
ultimately bear as a result of these claims. However, management believes -
based on its knowledge of the facts and legal theories applicable to these
claims and after consultations with various counsel retained to represent
these subsidiaries in their defense of such claims - that the ultimate
resolution of these claims should not have a material adverse effect on the
Company's consolidated financial position or results of operations or
Cogentrix Energy's ability to generate sufficient cash flow to service its
outstanding debt.
In addition to the litigation described above, the Company experiences
other routine litigation in the normal course of its business. Management
is of the opinion that none of this routine litigation will have a material
adverse impact on the Company's consolidated financial position or results
of operations.
6. RECLASSIFICATIONS
Certain amounts included in the accompanying consolidated financial
statements for the periods ended June 30, 1999 and as of December 31, 1999,
have been reclassified from their original presentation to conform with the
presentation as of and for the periods ended June 30, 2000.
8
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
The information called for by this item is hereby incorporated herein
by reference to pages 3 through 8 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In addition to discussing and analyzing our recent historical financial
results and condition, the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" includes statements concerning
certain trends and other forward-looking information affecting or relating to us
which are intended to qualify for the protections afforded "Forward-Looking
Statements" under the Private Securities Litigation Reform Act of 1995, Public
Law 104-67. The forward-looking statements made herein are inherently subject to
risks and uncertainties which could cause our actual results to differ
materially from the forward-looking statements.
GENERAL
Cogentrix Energy, Inc. is an independent power producer that, through
its direct and indirect subsidiaries, acquires, develops, owns and operates
electric generating plants, principally in the United States. We derive most of
our revenue from the sale of electricity, but we also produce and sell steam. We
sell the electricity we generate, primarily under long-term power purchase
agreements, to regulated electric utilities and power marketers. 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.
We currently own - entirely or in part - a total of 25 electric
generating facilities in operation in the United States. Our 25 facilities are
designed to operate at a total production capability of approximately 4,000
megawatts. After taking into account our part interests in the 16 plants that
are not wholly-owned by us, which range from 1.7% to approximately 74.0%, our
net ownership interests in the total production capability of our 25 electric
generating facilities is approximately 1,840 megawatts. We currently operate 12
of our facilities, 10 of which we developed and constructed.
We also have ownership interests in and will operate four facilities
currently under construction in Mississippi, Oklahoma, Idaho and the Dominican
Republic with an aggregate production capability of approximately 2,170
megawatts. Once these facilities begin operation, we will have ownership
interests in a total of 28 domestic and 1 international electric generating
facilities that are designed with an aggregate production capability of
approximately 6,170 megawatts. Our net equity interest in the total production
capability of these 29 facilities will be approximately 3,380 megawatts.
Unless the context requires otherwise, references in this report to
"we," "us," "our," or "Cogentrix" refer to 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's subsidiaries that are engaged in the
development, ownership or operation of electric generating facilities are
sometimes referred to individually as a "project subsidiary" and collectively as
Cogentrix Energy's "project subsidiaries."
9
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RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $123,053 100% $108,898 100% $257,836 100% $222,337 100%
Operating costs 59,271 48 48,709 45 118,072 46 95,862 43
General, administrative
and development 7,773 6 8,181 7 19,804 8 20,830 9
Depreciation and amortization 11,082 9 10,905 10 21,968 9 21,776 10
-------- -------- -------- --------
Operating income $ 44,927 37% $ 41,103 38% $ 97,992 38% $ 83,869 38%
======== ======== ======== ========
</TABLE>
Total operating revenues increased 13.0% to $123.1 million for the
second quarter of 2000 as compared to the second quarter of 1999. This increase
was primarily attributable to a $8.7 million increase in electric and service
revenue related to an increase in megawatt hours sold to the purchasing
utilities at several of our electric generating facilities. The increase in
operating revenues is also attributable to a $6.0 million increase in income
from unconsolidated investments in power projects. This increase is attributable
to an increase in megawatt hours sold to the purchasing utilities at some of the
facilities, and a reduction of major overhaul expenses at four of the
facilities. The increase in income from unconsolidated power projects is also
the result of the acquisition of an additional 19.9% interest in the Indiantown
facility late in the second quarter of 1999, and an additional 20.1% interest in
the third quarter of 1999.
Operating revenues for the six-month period ended June 30, 2000, which
increased 16.0% to $257.8 million as compared to $222.3 for the six-month period
ended June 30, 1999 were largely influenced by the same factors discussed above:
an increase in electric and service revenue at several of our electric
generating facilities, and the increase in income from unconsolidated
investments in power projects. The six-month income from unconsolidated power
projects also increased due to a change in treatment for major overhaul expenses
at four of the facilities on January 1, 1999 requiring major maintenance
overhauls to be expensed as incurred. Previously, the estimated cost of major
maintenance overhauls was reserved in advance.
Our operating costs increased 21.7% to $59.3 million for the second
quarter of 2000 and 23.2% to $118.1 million for the six-month period ended June
30, 2000 as compared to $48.7 million and $95.9 million for the corresponding
periods of 1999. These increases were primarily due to the $7.7 million and
$16.6 million increase in fuel expense for the second quarter of 2000 and
six-month period ended June 30, 2000, respectively. The increase in fuel expense
was a result of an increase in megawatt hours sold to the purchasing utilities
at several of our electric generating plants. Operating costs were also impacted
by the inclusion of startup costs incurred at the Batesville facility during the
second quarter, and six-month period ended June 30, 2000. These costs were not
incurred during 1999. Operating costs also increased as a result of an increase
in expenses at the Richmond facility as a result of the amendment of its project
debt during the second quarter of 2000.
General, administrative and development expense decreased 5.0% to $7.8
million for the second quarter of 2000 as compared to $8.2 million for the
second quarter of 1999. The decrease resulted primarily from the capitalization
of certain corporate development costs related to projects under active
development and construction. The decrease in general, administrative and
development expense was partially offset by an increase in compensation expense
related to an increase in the number of corporate employees and an increase in
incentive compensation expense related to our increased profitability.
General, administrative and development expense decreased 4.9% to $19.8
million for the six-month period ended June 30, 2000 as compared the
corresponding period of 1999. The decrease resulted primarily from the factors
discussed above: the capitalization of certain corporate development costs,
offset by an increase in compensation expenses.
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Interest expense decreased 0.8% to $46.9 million for the six months
ended June 30, 2000 as compared to the corresponding period of 1999. Our average
long-term debt increased to $1.7 billion, as compared to average long-term debt
of $1.2 billion for the six months ended June 30,1999. The increase in average
long-term debt is primarily the result of the inclusion of $326.0 million of
construction financing related to the Batesville facility and additional
construction borrowings incurred during the six months ended June 30, 2000 for
projects in Idaho, Oklahoma and the Dominican Republic. Interest incurred on
these construction borrowings is capitalized during the construction phase. The
decrease in interest expense resulted primarily from the scheduled repayments on
outstanding project financing debt at several of our project subsidiaries.
The decrease in minority interest in income for the first half of 2000
as compared to the corresponding period of 1999 related primarily to the
inclusion of the losses incurred at the Batesville facility, which is currently
under construction.
LIQUIDITY AND CAPITAL RESOURCES
The principal components of operating cash flow for the second quarter
of 2000 were net income of $30.3 million, increases due to adjustments for
depreciation and amortization of $22.0 million, deferred income taxes of $17.1
million and minimum lease payments received, net of amortization of unearned
lease income of $0.3 million, which were partially offset by minority interest
in income, net of dividends of $0.8 million, $7.6 million equity in net income
of unconsolidated affiliates, net of dividends and a net $0.1 million use of
cash reflecting changes in other working capital assets and liabilities. Cash
flow provided by operations of $61.2 million, proceeds from borrowings of $176.8
million, $56.7 million of funds released from escrow, and repayments on notes
receivable of $1.0 million were primarily used to purchase property, plant and
equipment of $1.3 million, invest $1.7 million in unconsolidated affiliates,
make payments on construction in progress and project development costs of
$178.8 million, make deposits on turbines of $29.7 million, pay a common stock
dividend of $8.7 million, repay project finance borrowings of $46.5 million,
and pay deferred financing costs of $15.8 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 certain 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 $1.3 billion as of June
30, 2000) is non-recourse to Cogentrix Energy and our other project
subsidiaries, except in connection with certain transactions where Cogentrix
Energy has agreed to certain limited guarantees and other obligations with
respect to such projects. These limited guarantees and other obligations include
agreements for the benefit of the project lenders to three project subsidiaries
to fund cash deficits that the projects may experience as a result of incurring
certain costs, subject to an aggregate cap of $40.6 million.
In addition, Cogentrix, Inc., which is an 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.
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Any project we develop in the future, and those electric generating
facilities we 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 certain limitations in our
respective financing documents. Such limitations generally require that: (a)
debt service payments be current, (b) debt service coverage ratios be met, (c)
all debt service and other reserve accounts be funded at required levels and (d)
there be no default or event of default under the relevant financing documents.
There are also additional limitations that are adapted to the particular
characteristics of each subsidiary. Management does not believe that such
restrictions or limitations will adversely affect Cogentrix Energy's ability to
meet its debt obligations.
As of June 30, 2000, we had long-term debt (including the current
portion thereof) of approximately $1.7 billion. With the exception of the $355.0
million of senior notes currently outstanding, 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 $54.8
million to $144.9 million in the five-year period ending December 31, 2004. 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 senior notes, 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 our debt service obligations.
On March 3, 2000, our corporate credit facility was amended to increase
available borrowings from $125.0 million to $175.0 million and to modify certain
covenants. The credit facility has been extended through October 2002 and is
unsecured. The corporate credit facility provides direct advances to, or the
issuance of letters of credit for, our benefit in an amount up to $175.0
million. At June 30, 2000, we had utilized approximately $171.2 million of the
credit available under the corporate credit facility primarily for letters of
credit issued in connection with projects under construction in Mississippi,
Idaho, Oklahoma and the Dominican Republic. 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 investments in new projects or acquisitions of existing
electric generating facilities or those under development.
Two of our wholly-owned subsidiaries, Cogentrix Eastern America, Inc.
and Cogentrix Mid-America, Inc. ("Mid-America"), formed to hold interests in
electric generating facilities acquired in 1999 and 1998, maintain credit
agreements with banks to provide for $75.0 million and $25.0 million of
revolving credit, respectively. The credit facilities provide for credit in the
form of direct advances and the Mid-America facility provides issuances of
letters of credit. Including the credit facilities described above, and the
revolving credit facility at one of our project subsidiaries, we maintain
revolving credit, which is non-recourse to Cogentrix Energy, Inc., with
aggregate commitments of $143.0 million. As of June 30, 2000, we had
approximately $41.7 million available under these facilities.
On March 9, 2000, a partnership, in which we own a 51% interest, closed
a credit agreement with a bank and a financial institution which provides for a
$126.0 million construction loan and a $5.0 million debt service reserve letter
of credit. Proceeds from the construction loan are being used to construct an
approximate 270 megawatt combined-cycle natural gas-fired generating facility
located in Rathdrum, Idaho. We have committed to provide an equity contribution
to the project subsidiary of approximately $16.7 million upon the earliest to
occur of (a) an event of default under the project subsidiary's financing
agreement, (b) the incurrence of construction costs after all project financing
has been expended, or (c) October 1, 2002. This equity contribution commitment
is supported by a letter of credit, which is provided under the corporate credit
facility. An indirect, wholly-owned subsidiary of Cogentrix Energy has entered
into an engineering, procurement and construction (EPC) contract with
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the partnership to construct the Rathdrum faciliity. Cogentrix Energy is
providing a guarantee supporting the subsidiary's obligations under the EPC
contract. We expect the Rathdrum facility, which we will operate, to begin
operation in the third quarter of 2001. Electricity generated by the Rathdrum
facility will be sold under a long-term power purchase agreement to Avista
Turbine Power, Inc.
On April 13, 2000 and July 10, 2000, we made equity contributions
totaling $10.0 million to the project subsidiary engaged in the construction of
the electric generating facility in Batesville, Mississippi. We currently own an
approximate 51% interest in the project facility. We made the remaining equity
contribution totalling $44.0 million to the project subsidiary in August 2000
from corporate cash balances.
On April 18, 2000, a partnership, in which we own a 65% interest,
closed credit facilities with a group of lending banks and financial
institutions that will provide up to $232.5 million in construction loans to be
used to construct an approximate 300 megawatt electric generating plant in the
Dominican Republic. This project will utilize fuel oil-fired, combined-cycle
technology. We have committed to provide an equity contribution to the project
subsidiary of approximately $50.0 million upon the earliest to occur of (a) an
event of default under the project subsidiary's financing agreement, (b)
completion of construction of the facility, or (c) February 2003. This equity
commitment is supported by a letter of credit, which is provided under the
corporate credit facility.
On June 28, 2000, Cogentrix of Richmond, Inc., ("Richmond"), a
wholly-owned subsidiary of the Company, amended its loan agreement with the
existing lenders. The amended loan agreement primarily resulted in a 30-month
extension of the final maturity. The amended loan agreement also resulted in an
additional term loan of $25.2 million. The distributions received by Cogentrix
was used by the Company to fund equity commitments to the Batesville project.
We have entered into commitments with a turbine supplier to purchase a
specified number of turbines with specified delivery dates. We have made
approximately $29.7 million in non-refundable deposits related to these
commitments during the first six months of 2000. We expect to make additional
progress payments of $49.7 million in 2000. The aggregate amount of these
deposits will be repaid or funded from proceeds of financings we anticipate
closing during the remainder of 2000.
For the fiscal year ended December 31, 1999, our board of directors
declared a dividend on our outstanding common stock of $8.7 million. The
dividend was paid in March 2000. 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 for the Company's outstanding senior
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 our 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 the power sales agreements for certain of our facilities, energy
payments are indexed, subject to certain 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.
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Changes in interest rates could have a significant impact on our
results of operations because they 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 our 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 we have
implemented 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 the risk by entering into contracts with creditworthy organizations.
Other Financial Ratio Data
Set forth below are other financial data and ratios for the
twelve-month period ended June 30, 2000. (in thousands, except ratio data):
Twelve Months
Ended
June 30, 2000
-------------
Parent EBITDA $113,344
Parent Fixed Charges $33,094
Parent EBITDA / Parent Fixed Charges 3.42
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 to (a) operating income
(determined in accordance with generally accepted accounting principles) or (b)
cash flows from operating activities (determined in accordance with generally
accepted accounting principles).
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Sensitivity
We routinely enter into derivative financial instruments and other
financial instruments to hedge our risk against interest rate fluctuations. As
of June 30, 2000, there have been no significant changes in the portfolio of
instruments as disclosed in our report on Form 10-K for the year ended December
31, 1999 filed with the Commission on March 30, 2000.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
One of our indirect, wholly-owned subsidiaries is party to certain
product liability claims related to the sale of coal combustion by-products for
use in various construction projects. Management cannot currently estimate the
range of possible loss, if any, we will ultimately bear as a result of these
claims. However, our management believes - based on its knowledge of the facts
and legal theories applicable to these claims and after consultations with
various counsel retained to represent these subsidiaries in its defense of such
claims - that the ultimate resolution of these claims should not have a material
adverse effect on our consolidated financial position, results of operations or
on Cogentrix Energy's ability to generate sufficient cash flow to service its
outstanding debt.
In addition to the litigation described above, we experience other
routine litigation in the normal course of its business. Our management is of
the opinion that none of this routine litigation will have a material adverse
effect on our financial position or results of operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
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)(5)
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) (2)
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 (4.2) (3)
4.3 First Supplemental Indenture, dated as of October 20, 1998,
between Cogentrix Energy, Inc. and First Union National Bank,
as Trustee (4.3) (3)
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. (4.4) (3)
4.5 Registration Agreement, dated as of November 25, 1998, between
Cogentrix Energy, Inc. and Salomon Smith Barney, Inc. (4.5)
(3)
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 (4.6) (4)
10.1 Amended and Restated Reimbursement and Loan Agreement, dated
as of June 28, 2000, by and among Cogentrix of Richmond, Inc.
and BNP Paribas.
10.2 Amended and Restated Security Deposit Agreement, dated as of
June 28, 2000, among Cogentrix of Richmond, Inc., BNP Paribas,
as Agent, and First Union National Bank, as Security Agent and
Securities Intermediary.
10.3 Guaranty by Cogentrix Energy, Inc. and La Compania de
Electricidad de San Pedro de Macoris, dated as of April 7,
2000.
10.4 Cogentrix Contingent Equity Guarantee, dated as of April 7,
2000, by and between Cogentrix Energy, Inc. in favor of La
Compania de Electricidad de San Pedro de Macoris and The Bank
of Nova Scotia Trust Company of New York.
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27 Financial Data Schedule, which is submitted electronically to
the U.S. Securities and Exchange Commission for information
only and is not 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 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.
(3) Incorporated by reference to the Registration Statement on
Form S-4 (File No. 33-67171) filed November 12, 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.
(4) Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form S-4 (File No. 33-67171) filed
January 27, 1999. 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 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this
report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COGENTRIX ENERGY, INC.
(Registrant)
August 14, 2000 s/Thomas F. Schwartz
--------------------------------------------
Thomas F. Schwartz
Group Senior Vice President, and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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