CONFORMED COPY
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission File Number 33-83618
SELKIRK COGEN PARTNERS, L.P.
(Exact name of Registrant (Guarantor) as specified in its charter)
Delaware 51-0324332
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
SELKIRK COGEN FUNDING CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 51-0354675
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Bowdoin Square, Boston, Massachusetts 02114
(Address of principal executive offices, including zip code)
(617) 788-3000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
8.65% First Mortgage Bonds Due 2007, Series A
8.98% First Mortgage Bonds Due 2012, Series A
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of November 11, 1998, there were 10 shares of common stock of Selkirk
Cogen Funding Corporation, $1 par value outstanding.
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This document consists of 20 pages of which this page is page 1.
<PAGE>
TABLE OF CONTENTS
----
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997.......................................... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997............. . 4
Condensed Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 1998 and 1997............... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations........................................... 8
Liquidity and Capital Resources................................. 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 18
SIGNATURES............................................................. 19
2
<PAGE>
<TABLE>
SELKIRK COGEN PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
(unaudited)
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash............................................ $ 924 $ 1,337
Restricted funds................................ 31,289 6,509
Accounts receivable............................. 14,306 17,764
Due from affiliates............................. 16 14
Fuel inventory and supplies..................... 5,236 4,936
Other current assets............................ 517 338
--------- ---------
Total current assets...................... 52,288 30,898
Plant and equipment, net........................ 312,185 321,537
Long-term restricted funds...................... 27,091 21,494
Deferred financing charges, net................. 11,072 11,945
--------- ---------
Total Assets $ 402,636 $ 385,874
--------- ---------
--------- ---------
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Current liabilities:
Accounts payable................................ $ 188 $ 1,663
Accrued bond interest payable................... 8,945 382
Accrued expenses................................ 10,258 14,665
Due to affiliates............................... 437 498
Current portion of long-term bonds.............. 3,440 3,298
--------- ----------
Total current liabilities................. 23,268 20,506
Deferred revenues............................... 6,747 ---
Other long-term liabilities..................... 16,019 11,695
Long-term bonds, less current portion........... 383,932 385,955
General partners' capital....................... (262) (311)
Limited partners' capital....................... (27,068) (31,971)
--------- --------
Total partners' capital................... (27,330) (32,282)
--------- --------
Total Liabilities and
Partners' Capital $ 402,636 $ 385,874
--------- ---------
--------- ---------
<FN> See Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
SELKIRK COGEN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
--------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Electric and steam......... $ 43,251 $ 38,238 $ 120,599 $ 116,292
Gas resale................. 170 4,148 5,348 10,869
--------- --------- --------- ---------
Total operating
revenues.............. 43,421 42,386 125,947 127,161
Cost of revenue............. 27,435 29,503 84,313 89,918
--------- --------- --------- ---------
Gross Profit................ 15,986 12,883 41,634 37,243
Other operating expenses:
Administrative services -
affiliates............... 17 874 1,338 2,212
Other general and
administrative expenses.. 250 643 1,346 2,052
Amortization of deferred
financing charges........ 290 292 873 878
--------- --------- --------- ---------
Total other operating
expenses.............. 557 1,809 3,557 5,142
--------- --------- --------- ---------
Operating income............ 15,429 11,074 38,077 32,101
Interest (income) expense:
Interest income........... (565) (523) (1,639) (1,622)
Interest expense.......... 8,564 8,629 25,772 25,925
--------- --------- --------- ---------
Net interest expense.... 7,999 8,106 24,133 24,303
Net income.................. $ 7,430 $ 2,968 $ 13,944 $ 7,798
--------- --------- --------- ---------
--------- --------- --------- ---------
Allocated to:
General partners.......... $ 75 $ 29 $ 140 $ 78
Limited partners.......... 7,355 2,939 13,804 7,720
--------- --------- --------- ---------
Total................... $ 7,430 $ 2,968 $ 13,944 $ 7,798
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
SELKIRK COGEN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
--------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net cash provided by
operating activities....... $ 27,074 $ 16,001 $ 39,120 $ 31,118
Cash flows provided by
(used in) investing
activities:
Plant and equipment
additions............... --- (18) (14) 16
--------- ---------- ---------- --------
Net cash provided by(used in)
investing activities.. --- (18) (14) 16
Cash flows provided by
(used in) financing
activities:
Restricted funds......... (21,851) (14,565) (28,646) (15,253)
Cash distributions....... (5,665) --- (8,992) (14,920)
Payments of principal on
long-term debt.......... --- --- (1,881) (1,061)
Advances from a
customer................ --- --- --- (17)
--------- --------- --------- ---------
Net cash used in
financing activities.. (27,516) (14,565) (39,519) (31,251)
Net increase (decrease)
in cash.................... (442) 1,418 (413) (117)
Cash at beginning
of period.................. 1,366 1,056 1,337 2,591
---------- ---------- ---------- ---------
Cash at end of period....... $ 924 $ 2,474 $ 924 $ 2,474
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Supplemental disclosures of
cash flow information:
Cash paid for interest.... $ --- $ --- $ 17,210 $ 17,320
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
SELKIRK COGEN PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
consolidate Selkirk Cogen Partners, L.P. and its wholly-owned subsidiary,
Selkirk Cogen Funding Corporation, (collectively the "Partnership"). All
significant intercompany accounts and transactions have been eliminated.
The condensed consolidated financial statements for the interim periods
presented are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The information
furnished in the condensed consolidated financial statements reflects all
normal recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of such financial statements. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to rules and regulations
applicable to interim financial statements. Certain reclassifications have
been made to the Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 to conform with the current
period's basis of presentation.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Partnership's December 31, 1997 Annual Report on Form 10-K.
Note 2. New accounting pronouncements
During 1997, the Financial Accounting Standards Board issued two new
accounting standards that the Partnership will adopt in 1998. SFAS No. 130,
"Reporting Comprehensive Income" will require disclosure on comprehensive
income and its components. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" will require disclosure of financial and
descriptive information on reportable operating segments. The adoption of
these standards is not expected to have a material impact on the
Partnership's results of operations or financial position.
6
<PAGE>
SELKIRK COGEN PARTNERS, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs ("start-up costs"). It requires
start-up costs to be expensed as incurred and previously capitalized start-up
costs to be expensed as of the date of adoption. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998. Management has not yet
quantified the impact of adopting SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 establishes
accounting and reporting standards requiring that every derivative instrument
be recorded in the balance sheet as either an asset or liability measured at
its fair value. Changes in the derivatives fair value must be recognized in
the income statement as a gain or loss unless specific hedge accounting
criteria are met. Statement 133 is effective for fiscal years beginning
after June 15, 1999. Statement 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
Management has not yet quantified the impact of adopting Statement 133 on the
Partnership's financial statements and has not yet determined the timing of
or method of its adoption of Statement 133.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
Three and Nine Months Ended September 30, 1998 Compared to the Three and Nine
Months Ended September 30, 1997
Net income for the quarter ended September 30, 1998 was approximately $7.4
million as compared to $3.0 million for the corresponding period in the prior
year. Net income for the nine months ended September 30, 1998 was
approximately $13.9 million as compared to $7.8 million for the corresponding
period in the prior year. The increase in net income for the quarter and
nine months ended September 30, 1998 is primarily due to an increase in
delivered energy to electric customers and decreases in fuel costs and other
operating expenses.
The Partnership entered into a Master Restructuring Agreement (as amended on
March 31, 1998, April 21, 1998, April 30, 1998, May 7, 1998 and June 2, 1998,
the "MRA") dated July 9, 1997 among Niagara Mohawk Power Corporation
("Niagara Mohawk"), the Partnership and certain other non-utility power
generators selling electricity to Niagara Mohawk (the "Settling IPP's"). On
August 31, 1998 the Partnership and Niagara Mohawk consummated the
transactions relating to the Amendment and Restatement of the Niagara Mohawk
Power Purchase Agreement ("Amended and Restated Unit 1 Agreement") pursuant
to the MRA. For a description of certain applicable provisions of the MRA
and related transactions see "Unit 1 Restructuring" below.
Total revenues for the quarter and nine months ended September 30, 1998 were
approximately $43.4 million and $125.9 million as compared to $42.4 million
and $127.2 million for the corresponding periods in the prior year.
Electric Revenues (dollars and kWh's in millions):
- -------------------------------------------------
For the Three Months Ended
September 30, 1998 September 30, 1997
------------------------------- -------------------------------
Dollars kWh's Capacity Dispatch Dollars kWh's Capacity Dispatch
------- ----- -------- -------- ------- ----- -------- --------
Niagara Mohawk 11.7 152.2 86.00% 100.00% 7.4 70.9 40.19% 44.93%
Con Edison 31.5 575.2 98.30% 98.87% 30.8 495.9 79.87% 89.06%
8
<PAGE>
Electric Revenues (dollars and kWh's in millions):
- -------------------------------------------------
For the Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------- -------------------------------
Dollars kWh's Capacity Dispatch Dollars kWh's Capacity Dispatch
------- ------ ------- -------- ------- ----- -------- --------
Niagara Mohawk 27.0 313.4 59.77% 67.98% 23.6 259.4 49.02% 54.21%
Con Edison 93.5 1,599.4 92.12% 95.88% 92.5 1,400.6 79.01% 89.81%
Revenues from Niagara Mohawk increased approximately $4.3 million and $3.4
million for the quarter and nine months ended September 30, 1998 as compared
to the corresponding periods in the prior year. The increase in revenues for
the quarter and nine months ended September 30, 1998 was primarily due to an
increase in delivered energy as evidenced by the increase in capacity factors
from 40.19% to 86.00% and 49.02% to 59.77%, respectively, and improved
contract pricing resulting from the execution of the Amended and Restated
Unit 1 Agreement on August 31, 1998 with terms and conditions retroactive to
July 1, 1998. During the nine months ended September 30, 1998, with the
exception of March and April, Niagara Mohawk dispatched Unit 1 on-line.
Energy delivered during the majority of January and the entire months of
February, July, August and September was sold at full contract rates. Energy
delivered during the first four days of January, and the entire months of May
and June was sold under special dispatch a rrangements which called for the
pricing of delivered energy at variable rates which were less than full
contract rates. Had the Partnership not entered into special dispatch
arrangements, the Unit would have otherwise been dispatched off-line during
the relevant periods. During the nine months ended September 30, 1997, with
the exception of April, May and September, Niagara Mohawk dispatched Unit 1
on-line. Energy delivered during the months of June, July and August was
sold at full contract rates. Energy delivered during January, February and
March was sold under special dispatch arrangements which called for the
pricing of delivered energy at variable rates less than full contract rates.
Revenues for energy pursuant to special dispatch arrangements with Niagara
Mohawk for the quarter and nine months ended September 30, 1998 were
approximately $0 and $1.4 million as compared to $0 and $4.8 million for the
corresponding periods in the prior year.
Revenues from Consolidated Edison Company of New York, Inc. ("Con Edison")
for the quarter and nine months ended September 30, 1998 increased
approximately $0.7 million and $1.0 million as compared to the corresponding
periods in the prior year. The increase in delivered energy for the quarter
and nine months ended September 30, 1998 as evidenced by the increase in
capacity factors from 79.87% to 98.30% and 79.01% to 92.12%, respectively,
was the primary contributor to the increase in revenues from Con Edison.
9
<PAGE>
There were no steam revenues for the quarter ended September 30, 1998. Steam
revenues for the nine months ended September 30, 1998 of $242.0 thousand were
reduced by a reserve for the same amount to reflect the anticipated annual
true-up so that General Electric would be charged a nominal amount which is
the annual equivalent of 160,000lbs/hr. There were no steam revenues for the
quarter ended September 30, 1997. Steam revenues for the nine months ended
September 30, 1997 of $1,053.4 thousand were reduced by a reserve of $881.0
thousand to reflect the anticipated annual true-up. Delivered steam for the
quarter and nine months ended September 30, 1998 was 285.5 million pounds and
969.0 million pounds as compared to 287.3 million pounds and 1,116.0 million
pounds for the corresponding periods in the prior year.
Gas resale revenues for the quarter ended September 30, 1998 were
approximately $0.2 million on sales of 0.1 million MMBtu's as compared to
$4.1 million on sales of 1.5 million MMBtu's for the corresponding period in
the prior year. Gas resale revenues for the nine months ended September 30,
1998 were approximately $5.3 million on 2.3 million MMBtu's as compared to
approximately $10.9 million on sales of 4.3 million MMBtu's for the
corresponding period in the prior year. The $3.9 million and $5.6 million
decrease in gas resale revenues during the quarter and nine months ended
September 30, 1998 was primarily due to lower natural gas resale prices and
higher dispatch of Units 1 and 2, which resulted in lower volumes of natural
gas becoming available for resale at lower prices. The decrease in natural
gas resale prices during the nine months ended September 30, 1998 generally
resulted from more moderate temperatures in the Northeast region as compared
to the colder temperatures, which resulted in higher demand for natural gas,
during the corresponding period in the prior year. The Partnership enters
into gas resale transactions during periods when Units 1 and 2 are not
operating at full capacity.
Costs of revenues for the quarter and nine months ended September 30, 1998
were approximately $27.4 million and $84.3 million on purchases of 7.1
million MMBtu's and 21.1 million MMBtu's as compared to approximately $29.5
million and $89.9 million on purchases of 7.1 million MMBtu's and 21.1
million MMBtu's for the corresponding periods in the prior year. The largest
component of the decrease for the quarter and nine months ended September 30,
1998 was fuel costs, which decreased $1.5 million and $5.2 million from the
corresponding periods in the prior year. The decrease in the cost of fuel
was primarily due to a decrease in contract firm fuel rates from lower index
fuel prices and a decrease in transportation demand costs.
Total other operating expenses for the quarter and nine months ended
September 30, 1998 were approximately $0.6 million and $3.6 million as
compared to approximately $1.8 million and $5.1 million for the corresponding
periods in the prior year. The decrease in other operating expenses for the
quarter and nine months ended September 30, 1998 is primarily due to
decreases in affiliate administrative services and external legal and
consulting services. Net interest expense for the quarter and nine months
ended September 30, 1998 of approximately $8.0 million and $24.1 million are
comparable to the corresponding periods in the prior year.
10
<PAGE>
Liquidity and Capital Resources
Net cash flows provided by operating activities for the quarter and nine
months ended September 30, 1998 were approximately $27.1 million and $39.1
million as compared to approximately $16.0 million and $31.1 million for the
corresponding periods in the prior year. The increase in net cash flows
provided by operating activities for the quarter and nine months ended
September 30, 1998 is primarily due to the increase in net income and the net
activity of approximately $6.9 million resulting from the Unit 1
Restructuring see "Unit 1 Restructuring" below.
Net cash flows used in investing activities for the quarter ended September
30, 1998 were approximately $0 as compared to approximately $18,000 for the
corresponding period in the prior year. Net cash flows used in investing
activities for the nine months ended September 30, 1998 were approximately
$14,000 as compared to net cash flows provided by investing activities of
approximately $16,000 for the corresponding period in the prior year. Net
cash flows used in or provided by investing activities primarily represent
additions or adjustments to plant and equipment, respectively.
Net cash flows used in financing activities for the quarter and nine months
ended September 30, 1998 were approximately $27.5 million and $39.5 million
as compared to approximately $14.6 million and $31.3 million for the
corresponding periods in the prior year. The increase in net cash flows used
in financing activities for the quarter and nine months ended September 30,
1998 is primarily due to more cash becoming available to deposit into
Restricted Funds and distribute to Partners. Pursuant to the Partnership's
Depositary and Disbursement Agreement, administered by Bankers Trust Company,
as depositary agent, the Partnership is required to maintain certain
Restricted Funds. Net cash flows used in financing activities for the nine
months ended September 30, 1998 primarily represents net deposits of monies
into the Principal Fund, Interest Fund, Debt Service Reserve Fund and
Partnership Distribution Fund and distributions of monies to Partners. Net
cash flows used in financing activities for the nine months ended September
30, 1997 primarily represents net deposits of monies into the Interest Fund
and Debt Service Reserve Fund and distributions of monies to Partners.
Interest and principal payments to Bondholders are scheduled for June 26th
and December 26th of each year.
11
<PAGE>
In 1994 and 1995 Con Edison claimed the right to acquire that portion of Unit
2's firm natural gas supply not used in operating Unit 2, when Unit 2 is
dispatched off-line or at less than full capability ("non-plant gas"), or
alternatively to be compensated for 100% of the margins derived from
non-plant gas sales. The Con Edison Power Purchase Agreement contains no
express language granting Con Edison any rights with respect to such excess
natural gas. Nevertheless, Con Edison argued that, since payments under the
contract include fixed fuel charges which are payable whether or not Unit 2
is dispatched on-line, Con Edison is entitled to exercise such rights. The
Partnership vigorously disputes the position adopted by Con Edison, and since
the commencement of Unit 2's operation in 1994 has made and continues to
make, from time to time, non-plant gas sales from Unit 2's gas supply.
Although representatives of Con Edison have expressly reserved all rights
which Con Edison may have to pursue its asserted claim with respect to
non-plant gas sales, the Partnership has received no further formal
communication from Con Edison on this subject since 1995. In the event Con
Edison were to pursue its asserted claim, the Partnership would expect to
pursue all available legal remedies, but there can be no certainty that the
outcome of such remedial action would be favorable to the Partnership or, if
favorable, would provide for the Partnership's full recovery of its damages.
The Partnership's cash flows from the sale of electric output would be
materially and adversely affected if Con Edison were to prevail in its claim
to Unit 2's excess natural gas volumes and the related margins.
On July 21, 1998 the New York Public Service Commission ("NYPSC") approved a
plan submitted by Con Edison for the divestiture of certain of its generating
assets (the "Con Edison Divestiture Plan"). Although the Con Edison
Divestiture Plan does not include any proposal by Con Edison for the sale or
other disposition of its contractual obligations for purchasing power from
non-utility generators, like the Partnership, the NYPSC has ordered Con
Edison to submit a report regarding the feasibility of divesting its
non-utility generator entitlements. At this time, the Partnership has
insufficient information to determine whether, in the course of these
proceedings at the NYPSC, Con Edison may seek to assign its rights and
obligations under the Con Edison Power Purchase Agreement with the
Partnership to a third party or to take some other action for the purpose of
divesting itself of the power purchase obligations under such contract; nor
can the Partnership evaluate the impact which any such assignment or other
action, if proposed, may ultimately have on the Con Edison Power Purchase
Agreement.
Future operating results and cash flows from operations are dependent on,
among other things, the performance of equipment and processes as expected,
level of dispatch, prices for electricity, fuel deliveries and price as
contracted and the receipt of certain capacity and other fixed payments. A
significant change in any of these factors could have a material adverse
effect on the results for the Partnership.
The Partnership believes that based on current conditions and circumstances
it will have sufficient liquidity available provided by cash flows from
operations to fund existing debt obligations and operating costs.
12
<PAGE>
Unit 1 Restructuring
In October 1995, Niagara Mohawk filed its "Power Choice" proposal with the
NYPSC. On October 12, 1995, Niagara Mohawk filed a Report on Form 8-K with
the Securities and Exchange Commission explaining the Power Choice proposal
(the "Power Choice Statement"). In the Power Choice Statement, Niagara
Mohawk described 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 the Partnership, are not regulated
as utilities ("non-utility generators"). Following the filing of the Power
Choice proposal with the NYPSC, the Partnership joined with other non-utility
generators selling power to Niagara Mohawk to commence negotiations
concerning a joint settlement that would result in the termination or
restructuring of their respective power purchase agreements. On July 9, 1997
Niagara Mohawk, the Partnership and the Settling IPP's entered into the MRA.
On February 24, 1998, the NYPSC approved Niaga ra Mohawk'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 the Partnership occurred on June 30, 1998 (the "Other Settling IPP
Closing"). At the Other Settling IPP Closing, the Partnership 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 the Partnership and Niagara Mohawk was
deferred until August 31, 1998.
On August 31, 1998 the Partnership and Niagara Mohawk 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) the Partnership
notified Niagara Mohawk of the Partnership's determination that the
requirements of the Partnership'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 the Partnership and Niagara Mohawk became
effective; and (iii) Niagara Mohawk made as its net share of the agreed
allocation among IPP's for certain adjustments, cash payments of
approximately $10.3 million into the Partnership's Project Revenue Fund
maintained at Bankers Trust Company, as Depositary Agent under the May 1,
1994 Deposit and Disbursement Agreement. In addition, the Partnership
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 the
Partnership and Paramount, and the Amending Agreement to Gas Transportation
Contract, dated as of July 20, 1998, between the Partnership and TransCanada
had become effective. On September 16, 1998, the Partnership 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.
13
<PAGE>
The term of the Amended and Restated Unit 1 Agreement is ten years, effective
July 1, 1998. The $2.2 million payment made by the Partnership to Niagara
Mohawk and the $10.3 million of payments received by the Partnership from
Niagara Mohawk (representing net receipts to the Partnership 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, 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 revenues from
Niagara Mohawk for the quarter and nine months ended September 30, 1998.
Deferred Revenues of approximately $6.7 million appear on the Partnership's
Consolidated Balance Sheet at September 30, 1998.
On August 31, 1998, the Partnership received written notice from Standard &
Poor's Corporation ("S&P") that, after giving effect to the Unit 1
Restructuring, S&P affirmed its "BBB-" rating of the Selkirk Cogen Funding
Corporation's Bonds and removed the rating from CreditWatch. On August 27,
1998, the Partnership received written notice from Moody's Investors Service,
Inc. ("Moody's") that, after giving effect to the Unit 1 Restructuring,
Moody's affirmed its "Baa3" rating of the Selkirk Cogen Funding Corporation's
Bonds, changed the outlook of the Bonds Due 2007 from "negative" to "stable"
and has not changed its previous "negative outlook" with respect to the Bonds
Due 2012.
Year 2000
The Year 2000 issue exists for the Partnership because many software and
embedded systems use only two digits to identify a year in a date field, and
were developed without considering the impact of the upcoming change in the
century. Some of these systems are critical to the Partnership's operations
and business processes and might fail or function incorrectly if not repaired
or replaced with Year 2000 ready products. "Ready" is defined as the system
is remediated so that it will perform its essential functions. "Software" is
defined as both computer programming that has been developed by the
Partnership for its own purposes ("in-house software") and that purchased
from vendors ("vendor software"). "Embedded systems" refers to both
computing hardware and other electronic monitoring, communications, and
control systems that have microprocessors within them.
14
<PAGE>
The Partnership's Year 2000 project focuses on those systems that are
critical to its business. "Critical" is defined as those systems, the
failure of which would directly and adversely affect the Partnership's
ability to generate or deliver products and services or otherwise affect
revenues, safety, or reliability for such a period of time as to lead to
unrecoverable consequences. For these critical systems, the Partnership has
adopted a phased approach to address Year 2000 issues. The primary phases
include: (1) a facility-wide inventory, in which systems critical to the
Partnership's business are identified; (2) assessment, in which critical
systems are evaluated as to their readiness to operate after December 31,
1999; (3) remediation, in which critical systems that are not Year 2000 ready
are made so, either through modifications or replacement; (4) testing, in
which remediation is validated by checking the ability of the critical system
to operate within the Year 2000 time frame; and (5) certification, in which
systems are formally acknowledged to be Year 2000 ready, and acceptable for
production or operation.
The Partnership's Year 2000 project is proceeding generally on schedule. For
in-house and vendor software, the Partnership has completed the inventory
phase and has identified 12 critical systems. Additional software that
requires Year 2000 remediation may be discovered as the Partnership continues
with the assessment, remediation, and testing phases. All of the identified,
critical, in-house and vendor software are in the process of being
remediated, with completion expected in the first quarter of 1999. The
Partnership expects to finish testing remediated in-house and vendor software
by July 1999 and expects to complete the certification phase by July 1999.
The Partnership is testing remediated software and embedded systems both for
ability to handle Year 2000 dates, including appropriate leap year
calculations, and to assure that code repair has not affected the base
functionality of the code. Software and embedded systems are tested
individually and where necessary will be tested in an integrated manner with
other systems, with dates and data advanced and aged to simulate Year 2000
operations. Testing, by its nature, however, cannot comprehensively address
all future combinations of dates and events. Some uncertainty will remain
after testing as to the ability of code to process future dates, as well as
the ability of remediated systems to work in an integrated fashion with other
systems.
The Partnership also depends upon external parties, including customers,
suppliers, business partners, gas and electric system operators, government
agencies, and financial institutions, to reliably deliver their products and
services. To the extent that any of these parties experience Year 2000
problems in their systems, the demand for and the reliability of the
Partnership's services may be adversely affected. The primary phases the
Partnership has undertaken to deal with external parties are: (1) inventory,
in which critical business relationships are identified; (2) action planning,
in which the Partnership develops a series of actions and a time frame for
monitoring expected compliance status; (3) assessment, in which the
likelihood of external party Year 2000 readiness is periodically evaluated;
and (4) contingency planning, in which appropriate plans are made to be ready
to deal with the potential failure of an external party to be Year 2000
ready.
The Partnership has completed its inventory of external contacts and has
identified all of its critical relationships. The Partnership will soon
complete the action-planning phase for each of these entities. Additional
critical relationships may be entered into or discovered as the Partnership
continues. Assessment of Year 2000 readiness of these external parties will
continue through 1999. The Partnership expects to complete contingency plans
for each of these critical business relationships by July 1999.
15
<PAGE>
The Partnership is developing contingency plans for its critical software or
embedded systems that may be at risk for Year 2000 repair or replacement.
For example, if the schedule lags and cannot be re-scheduled to meet certain
milestones, then the Partnership expects to begin an appropriate contingency
planning process. These contingency plans would be implemented as necessary,
if a remediated system does not become available by the date it is needed.
In addition, as described above, the Partnership plans to develop contingency
plans for the potential failure of critical external parties to fully address
their Year 2000 issues.
The Partnership also recognizes that, given the complex interaction of
today's computing and communication systems, it cannot be certain that all of
its efforts to have all critical systems Year 2000 ready will be successful.
Therefore, irrespective of the progress of the Year 2000 project, the
Partnership is preparing contingency plans. The plans will take into account
the possibility of multiple system failures, both internal and external, due
to Year 2000 effects.
These contingency plans will build on existing emergency and business
restoration plans. Although no definitive list of scenarios for this
planning has yet been developed, the events that the Partnership considered
for planning purposes includes increased frequency and duration of
interruptions of the power, computing, financial, and communications
infrastructure. The Partnership expects to complete first drafts of these
contingency plans in the first quarter of 1999. The Partnership anticipates
testing and revision of these plans throughout 1999.
Due to the speculative nature of contingency planning, it is uncertain
whether the Partnership's contingency plans to address failure of external
parties or internal systems will be sufficient to reduce the risk of material
impacts on its operations due to Year 2000 problems.
The Partnership currently is revising and refining its procedures for
tracking and reporting costs associated with its Year 2000 effort. For the
nine months ended September 30, 1998, the Partnership has spent approximately
$45,000 to assess and remediate Year 2000 problems.
16
<PAGE>
The Partnership estimates that its future costs to address Year 2000 issues
will be approximately $395,000. About $305,000 of these remaining Year 2000
costs are expected to be capitalized because they relate to the purchase and
installation of new systems for general business purposes. As the
Partnership continues to assess its systems and as the remediation, testing,
and certification phases of the compliance effort progresses, estimated costs
may change. Further, the Partnership expects to incur costs in the year 2000
and beyond to remediate and replace less critical software and embedded
systems. The Partnership does not believe that the incremental cost of
addressing Year 2000 issues will have a material impact on the its financial
position or results of operation.
The Partnership's current schedule is subject to change, depending on
developments that may arise through further assessment of its systems, and
through the remediation and testing phases of its compliance effort.
Further, the current schedule is partially dependent on the efforts of third
parties, including vendors, suppliers, and customers. Delays by third
parties may cause the Partnership's schedule to change. There also are risks
associated with loss of or inability to locate critical personnel to
remediate and return to service the identified critical systems. The
Partnership may fail to locate all systems critical to its business processes
that require remediation. A combination of businesses and government
entities may fail to be Year 2000 ready, which may lead to a substantial
reduction in a demand for the Partnership's energy services.
Based on the Partnership's current schedule for the completion of Year 2000
tasks, the Partnership believes its plan is adequate to secure Year 2000
readiness of its critical systems. The Partnership expects its remediation
efforts and those of external parties to be largely successful.
Nevertheless, achieving Year 2000 readiness is subject to various risks and
uncertainties, many of which are noted above. The Partnership is not able to
predict all the factors that could cause actual results to differ materially
from its current expectations as to its Year 2000 readiness. If the
Partnership, or third parties with whom the Partnership has significant
business relationships, fail to achieve Year 2000 readiness with respect to
critical systems, there could be a material adverse impact on the
Partnership's financial position, results of operations, and cash flows.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) Exhibits
Exhibit No. Description Page No.
---------- ----------- -------
27 Financial Data Schedule
(For electronic filing purposes only)
(B) Reports on Form 8-K
On September 16, 1998, the Registrant filed a current report on Form 8-K
disclosing the consummation on August 31, 1998 of the transactions relating
to the amendment and restatement of the existing power purchase agreement
between the Partnership and Niagara Mohawk pursuant to the Master
Restructuring Agreement dated as of July 9, 1997, as amended among Niagara
Mohawk, the Partnership and certain other independent power producers.
Omitted from this Part II are items which are not applicable or to which the
answer is negative for the periods covered.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SELKIRK COGEN PARTNERS, L.P.
Date: November 13, 1998 /s/ JMC SELKIRK, INC.
--------------------------
General Partner
Date: November 13, 1998 /s/ JOHN R. COOPER
--------------------------
Name: John R. Cooper
Title: Senior Vice President and
and Chief Financial Officer
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SELKIRK COGEN FUNDING
CORPORATION
Date: November 13, 1998 /s/ JOHN R. COOPER
--------------------------
Name: John R. Cooper
Title: Senior Vice President and
and Chief Financial Officer
20
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