ITEM 1. BUSINESS
GENERAL
Trigen Energy Corporation was incorporated under the laws of Delaware on November 21, 1986. In this Annual Report, the pronouns "Trigen", "we" and "our" refer to Trigen Energy Corporation together with its wholly owned subsidiaries and the Trigen-Cinergy joint venture subsidiaries ( See "Revenue Growth/Acquisitions" below). We seek to produce and deliver the maximum economic value of energy and minimum pollution from each unit of fuel burned. Our approach is to use fuel to produce electricity or mechanical power, and in the same process also produce thermal energy (heating and/or cooling). In some locations our facilities are connected to pipeline networks which distribute our thermal energy to multiple buildings (district energy), in others our facilities are located adjacent to industrial plants and dedicated to the needs of those plants (onsite energy).
On January 19, 2000, Elyo, an energy subsidiary of the Suez Lyonnaise des Eaux Group, T Acquisition Corp., an indirect wholly owned subsidiary of Elyo, and the Company entered into a merger agreement, pursuant to which Elyo, through T Acquisition Corp., would acquire all of the outstanding shares of Trigen Common Stock it did not already own. On February 28, 2000, T Acquisition Corp. commenced a tender offer to purchase any and all of the issued and outstanding shares of Common Stock of Trigen at a price of $23.50 per share, net to the seller in cash, without interest thereon. The tender offer is being made pursuant to the terms of the merger agreement. On March 27, 2000, Elyo announced the completion of the tender offer. As of that date, Elyo had beneficial ownership of approximately 96% of Trigen's stock.
On January 19, 2000, Richard E. Kessel, formerly executive vice president, chief operating officer and a director of Trigen, was elected president and chief executive officer. Mr. Kessel joined Trigen in 1993, when the Company acquired United Thermal Corporation of which he was CEO. He also serves as Chairman of the Board's executive committee. Mr. Kessel succeeds Thomas R. Casten who resigned the position of President and Chief Executive Officer to pursue other interests.
We operate fourteen district energy systems serving urban customers and seventeen single customer industrial/commercial energy projects. Our major customers include industrial plants, electric utilities, commercial and office buildings, government buildings, colleges and universities, hospitals, residential complexes, hotels, sports arenas and convention centers. Our two largest customers are Long Island Power Authority and Coors' Brewing Company (See Note 2 to Consolidated Financial Statements Summary of Accounting Policies, Revenue Recognition). A significant portion of our revenues and operating profit from sales of thermal energy for non-industrial users is subject to seasonal fluctuations (See Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations).
Our choice of fuels, technology, blend of heat, cooling, and power produced, and distribution media are determined by local prices for fuel, prices for conventionally generated energy products and the convertibility of existing plant and equipment to more efficient cogeneration or trigeneration. Cogeneration is the combined production of electricity and useful thermal energy (heating OR cooling) by the sequential use of energy from one unit of fuel. Trigeneration is the combined production of electricity and useful thermal energy (heating AND cooling) from one unit of fuel. We develop, own, and operate facilities that produce and deliver thermal energy to commercial, governmental, and industrial customers in the form of steam, hot water, and/or chilled water. Our plants use various technologies - gas turbines, diesel engines, boilers and chillers - and various fuels, including natural gas, coal, oil, wood waste, municipal solid waste, and industrial by-products or scrap.
To complement our basic business and to enhance our ability to add energy value, we have a separate technical product division that develops and produces products that conserve energy or extract more value from steam or help users
manage energy more efficiently. At present, this division offers steam pipeline insulation products, which may be installed without removing pipe from the ground and a low temperature thermal stratification fluid designed to lower the freezing point of water thus increasing the efficiency of conventional chiller plants. This division also produces back-pressure steam turbine generator sets and power units. Our back-pressure turbines take the place of steam pressure reducing valves and extract mechanical energy from the steam pressure reduction process. We also provide total energy management services to building owners and operators by providing operational services and management expertise with respect to energy production, procurement and usage.
Our cogeneration or trigeneration plants emit up to 95% less nitrous oxides than the conventional electric generation they replace, and because of greater energy efficiency, emit less than half as much carbon dioxide (an ingredient in global warming) as would be produced by conventional production of the same energy. When we burn bio-mass fuels in our plants we eliminate the need to dispose of this waste in a landfill and we produce no more carbon dioxide than if these wastes were allowed to decay in a landfill.
REVENUE GROWTH/ACQUISITIONS
Our revenues have increased from approximately $1 million in 1987 (our first full year of operation) to $280.4 million in 1999 through acquisitions and internal growth. This Annual Report includes Consolidated Statements of Operations, which report our revenues and operating income for the last three fiscal years. Total assets at the end of 1999, 1998 and 1997 were $727.5 million, $618.2 million and $526.0 million respectively.
We report the amount and percentage of our total revenue from thermal energy sales and electric energy sales for the last three years in Item 7 of this Annual Report ("Management's Discussion and Analysis of Financial Condition and Results of Operations"). Our revenue from sales outside the United States for the last three years was not material. We have not held a material amount of assets outside the United States over the last three years.
In 1995, we formed a limited partnership with a subsidiary of Tucson Electric Power Company which purchased the energy systems of Coors' Brewing Company and Coors Energy Company in Golden, Colorado. In September of 1998, we purchased an additional 48% interest in that limited partnership from the subsidiary of Tucson Electric and in June 1999 purchased the remaining 1%. We now own 100% of those energy systems.
In January 1998, we acquired Power Sources, Inc., which has been renamed Trigen-BioPower, Inc. Trigen-BioPower operates seven biomass-to-energy plants, producing steam for seven industrial customers from roughly 600,000 tons per year of renewable biomass fuels, including wood residues, rice hulls, cotton waste and paper mill sludge. As of December 1999, Trigen-BioPower has one additional biomass plant under construction in St. Mary's, GA.
We have an active joint venture with Cinergy Corp. to build, own and operate cogeneration and trigeneration facilities in the United States, Canada, the United Kingdom and Ireland. We own 51% of most of the Trigen-Cinergy joint venture investments and 49% of others.
NEW ON SITE INDUSTRIAL/COMMERCIAL PROJECTS
During 1999, we focused greater efforts on industrial customers. Since the start of 1999, the Trigen-Cinergy joint venture began operating a district cooling system Orlando, FL and took over large heating and cooling facilities in Boca Raton, FL and College Park, MD. Trigen-Cinergy took over operations of cogeneration facilities in Baltimore, MD and Ashtabula, OH. Trigen-Cinergy has other projects currently under construction in Baltimore MD, St. Paul, MN, Silver Grove, KY, and Rochester, NY. Trigen took over operations at a plant in Decatur, AL and has a plant under construction in Denver, CO. We intend to continue these efforts in the future and will selectively pursue electricity and sales to the grid where that electricity is a by-product of efficient heat and cooling production.
Internationally, we are prepared to pursue selected opportunities in Canada, Mexico and Central America or other countries where our customers have facilities that favor a power project with high efficiency, reliability and waste heat recovery. Trigen has one new plant under construction in Tampico, Mexico.
BUSINESS STRATEGY
We are a thermal sciences company. We seek ways to reduce fossil fuel usage with cost effective efficiency. Our mission is to provide heating, cooling and electricity with half the fossil fuel and half the pollution of conventional generation. We use our expertise in thermodynamic engineering and proprietary trigeneration processes to convert fuel to various forms of thermal energy and electricity and achieve over 90% overall energy efficiency compared to the 33% average efficiency of the U.S. electric utility industry in 1997.
We believe industrial and institutional energy users will increasingly turn to specialist energy companies, and will contract out all of their energy and other utility needs in a process called outsourcing. We offer industrial customers outsourcing options ranging from operating their systems to investing our capital to provide new on site energy services and facilities. We specialize in adding electric power generation sized to provide for the basic thermal requirements of the
customer with normally wasted exhaust heat. We believe that our expertise in developing and running cogeneration projects and projects which use biomass fuels will be very attractive to these industrial customers.
We see opportunities to expand our existing urban and industrial systems to serve additional customers and the expanded needs of existing customers. We will evaluate the acquisition of existing urban district energy or industrial systems and the development of new systems to provide district energy or independent power wherever our expertise provides a competitive advantage.
Our strengths for the future include:
- STABLE CUSTOMER BASE. Our long term contracts (i.e. contracts with remaining terms in excess of 3 years) provide consolidated revenues of over $275 million per year for the five-year period 2000 through 2005 and approximately $5.5 billion cumulatively for the period 2000 through 2030 (before inflation, renewals and changes in consumption from 1999 levels).
- TECHNICAL INNOVATION AND PLANT OPTIMIZATION. We have special expertise in the design and operation of energy systems which we use to optimize the efficiency of energy assets. Among other things, we have installed computerized, automated control systems, which place real-time production cost information in the hands of the plant operator, as well as back-pressure turbines, and thermal storage tanks that allow us to produce energy during off peak usage periods for use during peak periods.
- SERVICE RATE STRUCTURES ALIGN OUR INTERESTS WITH OUR CUSTOMERS. Our thermal service rate structures seek recovery of all fixed costs and a profit from fixed charges per month, which are adjusted with inflation, and then add a usage charge that is very close to our variable fuel and water cost. This lets us help customers to use less energy without reducing our gross margins and aligns our interests with customers. This feature has led to reductions of customer energy use per unit of product, or per square foot of building of as much as 20% in three years. Our price structures typically enable us to pass through to our customers fuel and most other commodity prices associated with providing energy services. For that reason, changes in such prices (which constitute approximately 49% of our costs) have little impact on our operating income.
- PROTECTING THE ENVIRONMENT. By extracting and delivering the maximum value of energy from fuel and by employing pollution control technology, we emit substantially less pollution than would result from conventional generation of the same heat, electricity, and cooling. The principal reasons for lower emissions are the fuel efficiency of cogeneration and trigeneration, the use of biomass, employment of refrigerants other than CFC's and wherever possible, thermal, chemical, and catalytic destruction of exhaust contaminants. Our modern cogeneration plants produce as little as 5% of the nitrogen oxide emissions associated with conventional generation.
- ENTREPRENEURIAL MISSION DRIVEN MANAGEMENT. Our senior management has extensive experience in developing and operating plants and processes that increase the value extracted from each unit of energy. These activities include the development and operation of district energy systems and cogeneration technologies.
OVERVIEW OF OUR PRODUCTS AND SERVICES
The plants we operated at the end of 1999 have the total capacity to produce 6,104 Megawatts of end use energy, of which approximately 86% is steam or hot water, 7% is electricity and 7% is chilled water. These products are distributed to customers through 156.4 miles (251.6 kilometers) of pipeline. Separate pipelines are used for steam, hot water and chilled water.
When we produce electricity with diesel or gas turbines, we recover the exhaust heat to produce additional electricity, steam or hot water and/or chilled water. Because demand for steam and hot water has daily and yearly cycles, we cannot always use all the waste heat generated by our plants to produce steam and hot water for immediate use. Trigeneration plants enable us to recover and use waste heat to produce chilled water when heat demands are low. We also store chilled water produced off-peak for sale during the peak usage hours.
By generating two or three energy products from a single fuel source, cogeneration and trigeneration increase the value of useful energy output. Average US electric-only generation converts 33% of fuel energy to high value electricity, but exhausts 67% of the fuel energy as waste heat. Conventional heat-only production converts 60% to 85% of the fuel energy to a much lower value energy form -- typically steam, hot water, or hot air -- and fails to extract the high value electric energy. Our approach is to combine the generation of heat and power to maximize the value of energy produced from each unit of fuel and minimize the resultant pollution.
We balance the costs of producing and delivering these various energy products, including the cost of capital, labor, line losses, and fuel with the market value of the products to each user. The resulting plants seek to generate profits after debt service by extracting more delivered value than conventional single product generation.
Reliability of service is a key. Most of our facilities have sufficient heating capacity to generate peak loads with their largest production unit out of service, and have the ability to use two or more different fuels.
STEAM AND HOT WATER. We produce steam and/or hot water at substantially all of our systems. Our customers use our steam and/or hot water for space heating and hot water, for various industrial process uses, for cooling (by powering on-site steam-driven chillers or absorption chillers), and for humidification and sterilization.
Currently, the States of Missouri and Pennsylvania regulate our district steam energy business. Pennsylvania requires us to seek State regulatory approval of our prices for steam service. Missouri requires us to seek State regulatory approval of our prices for steam service from our Kansas City facilities. Our other businesses are not subject to State utility price regulation. In 1999, Maryland and New Jersey removed the requirement to seek State regulatory approval of pricing for steam.
ELECTRICITY. We produce electricity at seventeen of our plants. The electricity produced is sold to the local utility company or used by our customers or us. Our electric generating plants, which sell their power to the local utility, are located in Kansas City, MO, London, Ontario (Canada), Nassau County, NY, Philadelphia, PA and Trenton, NJ. The plants in Nassau County, NY, Philadelphia, PA, Trenton, NJ and Kansas City, MO are qualified for an exemption from regulation under the Public Utility Regulatory Policies Act of 1978.
CHILLED WATER. At fifteen of our facilities, we produce chilled water, which we provide to customers to cool commercial building space and for process chilling.
OTHER ENERGY SERVICES. We provide other utility services to our customers such as compressed air and water treatment. We also provide operating supervision, management and maintenance of facilities as well as advice and assistance regarding initial design, construction and start-up, with respect to energy use as well as energy audits.
FUEL AND RAW MATERIALS
We are a significant purchaser of gas, coal, oil and biomass fuels, as well as chillers, boilers, generators and other equipment used for heating, cooling and electric generation. Most of our gas, coal, oil and biomass fuel requirements, as well as most of our other supplies, are purchased from local suppliers. We believe that we have adequate sources of fuel, supplies and equipment.
COMPETITION
PROVISION OF DISTRICT HEATING, ELECTRICITY AND COOLING
The sale of electricity at wholesale over the interstate electric power grid is highly competitive. Where permitted by State law, the sale of electric power to individual end-users is also highly competitive. Some States continue to ban retail sales of electric power by non-utility companies as a means to protect the local electric utility monopoly. Other States permit non-utility generators to sell their electric power to only one user on the same site as their power plant. The provision of heating and cooling services through a multiple-user distribution system is highly competitive with on-site generation of the heat and cooling. There are currently very few competing operators of multiple-user district energy systems. Our principal thermal energy competition is from potential customers who own and operate their own boiler and chilled water plants. These customers are often provided financial incentives to install and retain their own plants by the suppliers of raw energy (such as local oil, natural gas and electricity companies) and by equipment suppliers that sell products and services to users who self-generate thermal energy. In several locations, local utilities are competing directly with us through unregulated subsidiaries offering steam and/or cooling.
We believe that competition in the district energy business turns on the customers' evaluation of expected cost savings and reliability of service. We compete to attract and retain customers, and also compete for contracts and other awards to develop new facilities and systems. A significant additional factor is the high capital cost involved in constructing a district energy system. While this factor provides a competitive advantage once we are operating a completed system, high initial capital costs typically require us to have a significant number of customers, preferably under long-term contracts, prior to undertaking construction of a new cooling or heating system. We will pursue opportunities to expand our district energy systems and services wherever our expertise provides a competitive advantage.
TECHNOLOGY
Our research and development efforts have focused on improving the value of the energy products we extract and deliver. Our principal focus has been on finding ways to more efficiently convert fuel to energy and on improved generating, monitoring, automation and storage technologies. These efforts have resulted in the trigeneration machine, innovations in chilled water storage and control systems, innovative applications of standard modular equipment, and various incremental operational improvements. Expenditures for customer-sponsored or Company-sponsored research and development are not separately reflected in our financial statements, and the Company believes that if such expenditures were so allocated, the amounts would not be material. We have been granted patents for the trigeneration
machine, our freeze suppression chemical for stratified cold water storage and a fuel blending system for emissions control. None of these patents are believed to be material.
YEAR 2000 COMPUTER ISSUES
We discuss our Year 2000 computer processing compliance status in Item 7 of this Annual Report ("Management's Discussion and Analysis of Financial Condition and Results of Operations").
ENVIRONMENTAL
Our operations are subject to extensive federal, state, provincial and local environmental laws and regulations that govern, among other matters, emissions into the air, the discharge of effluents, the use of water, fuel tank management and the storage, handling and disposal of toxic waste material. We believe that our facilities are in substantial compliance with applicable environmental laws and regulations and seek to maintain such compliance through appropriate management policies and procedures.
We invest substantial funds to modify facilities to comply with applicable environmental laws and plan additional capital expenditures for these purposes in the future. We spent approximately $ 2.9 million and $ 3.9 million in 1999 and 1998, respectively, to comply with these requirements and estimate that the expenditures for environmental compliance in 2000 through 2002 will be approximately $ 11.2 million in the aggregate. These expenditures may include improvements at certain facilities for air emission control and monitoring equipment, wastewater discharge control equipment, asbestos control and other applicable environmental requirements. Additional amounts to be spent for environmental compliance in future years will depend on new laws and regulations and other changes in environmental concerns and legal requirements.
Our United States facilities are subject to regulation by the U. S. Environmental Protection Agency under the Clean Air Act, among other laws. In May of 2003, regulations under the Clean Air Act are scheduled to create an allocation and trading program with respect to the release of nitrogen oxides into the atmosphere from facilities located in 12 States in the northeast United States. We produce nitrogen oxides at substantially all of our facilities. Our facilities in Philadelphia, PA and Nassau County, NY are currently expected to be required to comply with a nitrogen oxides emissions budget. Based on the current emissions budget allocated by the EPA to our facilities in Philadelphia, PA and Nassau County, NY, we do not believe that our compliance with these requirements will have a material impact on our results of operations. If the EPA revises our current budget, that may have a material impact on our results of operations. Our other facilities may become subject to nitrogen oxide emissions reductions requirements in the future. We are not able to predict what the impact of any new requirements would be at this time.
EMPLOYEES
As of December 31, 1999, we had approximately 846 employees of which 110 were covered by union agreements.
ITEM 2.
ITEM 2. PROPERTIES
We operate 51 energy plants at 36 different locations. We own all or a portion of the interests in most of our facilities, lease some facilities and manage others. Note 13 of the Notes to Consolidated Financial Statements of the Company (included later in this Annual Report) describes how our assets are pledged as security under our financing agreements.
We operate district energy systems in Boston, MA, Baltimore, MD, Charlottetown, Prince Edward Island (Canada), Kansas City, MO, London, Ontario (Canada), Oklahoma City, OK, Orlando, FL, Philadelphia, PA, St. Louis, MO, Trenton, NJ and Tulsa, OK. In Philadelphia, PA, we have a one half interest in the Grays Ferry Cogeneration Facility. We operate energy systems on the site of our industrial and commercial customers in Nassau County, NY, Chicago, IL, Golden, CO, Eden NC, Forest City, NC, Greenville, MS, Lenoir, NC, Loudon, TN, Marion, NC, Tuscola, IL, Boca Raton, FL, Baltimore, MD, Decatur, AL, Champaign, IL, Ashtabula, OH, College Park, MD, Rochester, NY and Syracuse, NY. Certain of these facilities are subject to minority interests due to investments by our Trigen-Cinergy joint venture, among other factors.
The Company leases approximately 22,000 square feet in White Plains, New York, which houses our executive offices, financial, engineering, marketing, legal and data processing staffs. The term of the lease extends through March 31, 2005 and the annual rent due thereunder is approximately $.5 million. We believe that these facilities are adequate to meet our needs for the foreseeable future, and that suitable replacement space is readily available.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
OKLAHOMA LITIGATION
In September 1996, our subsidiary, Trigen-Oklahoma City Energy Corporation ("Trigen-Oklahoma City"), commenced an antitrust action in Federal District Court in Oklahoma City seeking injunctions and actual, treble and punitive damages from a local utility, Oklahoma Gas and Electric Company ("OG&E"), based on alleged anti-competitive actions against Trigen-Oklahoma City Energy Corporation by OG&E. Trigen-Oklahoma City's antitrust action went to trial in 1998 and on December 21, 1998, the jury returned a verdict in favor of Trigen. On January 19, 1999, the Court entered a judgment in favor of Trigen in the amount of $27.8 million. On January 25, 2000 the court decided post-trial motions to vacate or modify the judgment reducing the judgment to $20.6 million. OG&E has filed an appeal to the Tenth Circuit Court of Appeals and has posted a bond in order to stay enforcement of the judgment pending appeal. Trigen has filed a cross-appeal. Trigen's separate motion for attorney's fees (seeking approximately $3 million) is pending but OG&E has requested that the court postpone a hearing on that motion until the appeals are decided by the Circuit Court. We have not recognized any gain with respect to this matter because we cannot predict the final outcome.
KINETIC ENERGY LITIGATION
On May 2, 1997, a judgment was entered against us in the amount of $4.3 million following a jury trial in a law suit by Kinetic Energy Development Corporation against Trigen in the Circuit Court of Jackson County, Missouri, in connection with our acquisition of the Kansas City steam system. Kinetic claimed for compensation alleged to be owed to it by Trigen in connection with that acquisition. On August 6, 1997, the Court set aside the jury verdict and granted judgment for Trigen. Kinetic Energy Development Corporation appealed that order and on December 8, 1998, the Missouri Court of Appeals set aside the lower court decision and ordered a new trial. On December 22, 1998, we filed a motion for rehearing with the Missouri Court of Appeals and/or a review by the Missouri Supreme Court. The Court of Appeals granted our motion for rehearing. On September 7, 1999, the Court of Appeals held that Kinetic had proven only nominal damages at trial and returned the case to Circuit Court for retrial. The retrial will allow Kinetic to attempt to establish that it is entitled to some award for the reasonable value of its services, if any, in connection with the Trigen acquisition of the Kansas City steam system. The case presently awaits rescheduling for trial. We believe we have good defenses to these claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
GRAYS FERRY LITIGATION
On April 23, 1999, the Pennsylvania Court of Common Pleas of Philadelphia County approved a settlement agreement which ended the lawsuit brought by Grays Ferry Cogeneration Partnership (the "Partnership"), Trigen-Schuylkill Cogeneration, Inc. and CogenAmerica Schuylkill Inc. against PECO Energy Company and Adwin (Schuylkill) Cogeneration, Inc. The Partnership is the owner of the Grays Ferry Cogeneration Facility located in Philadelphia, Pennsylvania. The Partnership, Trigen-Schuylkill and CogenAmerica commenced this lawsuit in reaction to the alleged
termination by PECO on March 3, 1998, of the electric power purchase agreements between the Partnership and PECO (the "Power Purchase Agreements").
Prior to the settlement, we owned a one-third interest in the Partnership through our wholly owned subsidiary, Trigen-Schuylkill. CogenAmerica and Adwin owned the other two-thirds interests in the Partnership. Adwin is an indirect wholly owned subsidiary of PECO. Under the settlement agreement, PECO's subsidiary, Adwin, surrendered its rights to its one-third partnership interest in the Partnership to the two remaining partners, Trigen-Schuylkill and CogenAmerica. As a result, we own one half of the Partnership and CogenAmerica owns the other half.
In the year 2001, the energy price under the Power Purchase Agreements will be based upon a percentage of a market based index, which we expect to produce substantially lower revenues from sales to PECO than the more favorable rates of the early contract years. Under the settlement agreement the Partnership gained the right to sell to third parties electric energy and capacity from the facility in excess of the 150 megawatts which PECO is required to purchase under the Power Purchase Agreements, subject to a right of first refusal for PECO. We expect that the ability to sell to third parties electric energy and capacity above the 150 megawatts under contract to PECO, will result in an opportunity to improve the financial performance of the Partnership. The Partnership will now have the ability to institute capital modifications to the combustion turbine to increase electric capacity during the summer months when the price of electric capacity and energy are historically the highest.
Separately, The Chase Manhattan Bank, as agent for several commercial banks (collectively "Chase"), and Westinghouse Power Generation, which collectively financed the construction of the Gray's Ferry Cogeneration Facility, agreed to dismiss their lawsuits against PECO. Chase and Westinghouse also agreed that they will not charge the Partnership for any default interest up to April 16, 1999, although they have reserved the right to do so with respect to periods after April 16, 1999.
The Partnership is in default under its separate credit agreements with Westinghouse and Chase for the following reasons. The Partnership did not convert on time its short-term construction loan from Chase to a longer term loan. The Partnership could not complete that conversion because of a dispute with the construction contractor, which has now been resolved. The Partnership also did not make principal payments to Westinghouse because the Chase loan agreement prohibits such payments to subordinate parties while the Partnership is in default. Westinghouse is a subordinate party.
The Partnership owes a total principal amount of approximately $79.4 million to Chase. Chase has not accelerated the debt owing under the Credit Agreement. Chase has required to date, and may require in the future, the Partnership to apply available cash held by Partnership (net of operating expenses) toward repayment of the principal amount of the loans outstanding to Chase. The Partnership owes a total principal amount of approximately $15 million to Westinghouse. On March 1, 2000, Westinghouse demanded full payment of the amount owing to Westinghouse under its credit agreement. Only the Partnership assets and the Partners' ownership interests in the Partnership secure the Partnership's debt under the Chase and Westinghouse loans. The Partnership has accrued $3.0 million in default interest since April 16, 1999.
To resolve these matters we have negotiated an amendment to the credit agreement with Chase and we are negotiating with Westinghouse and other subordinate parties.
NASSAU LITIGATION
On May 29, 1998, the County of Nassau, New York commenced an action against Trigen Energy Corporation and Trigen-Nassau Energy Corporation in New York State Supreme Court. Trigen-Nassau provides energy services to Nassau County under various agreements. Nassau County alleges that Trigen-Nassau breached those agreements by, among other means, charging the County for certain real estate taxes that the County contends are Trigen-Nassau's responsibility. On October 8, 1998, the Court dismissed the claims against Trigen Energy Corporation. On November 9, 1998, Trigen-Nassau filed counterclaims against Nassau County, seeking $1.6 million in damages. Trigen-Nassau alleges that Nassau County breached the parties' agreements by, among other things, failing to operate and maintain certain facilities and equipment. On January 21, 1999, the County requested that the Court dismiss Trigen-Nassau's counterclaims. On April 5, 1999, the Court dismissed some but not all of Trigen-Nassau's counterclaims. The Court declined to dismiss Trigen-Nassau's counterclaims that seek approximately $1.5 million in damages. The County is seeking approximately $10 million in damages. We believe we have good defenses to the County's claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
ESI LITIGATION
In 1996, ESI, Inc. commenced an action against, among others, Coastal Power Company, Latin American Energy Development, Inc. and La Casa Castro S.A. de N.V. in the United States District Court for the Southern District of New York. On September 17, 1998, ESI, Inc. amended its complaint naming Trigen as an additional defendant. This action arises out of the development by Trigen, Latin American Energy, La Casa Castro and others, of an independent power project in El Salvador between 1993 and 1994. Trigen transferred its interest in the project to Tenneco Gas International in May 1994. In July 1994, Tenneco transferred its interest in the project to Coastal Power Company, which currently owns and operates the project. ESI claimed that it was entitled to a 2.5% interest in the project and that Coastal had wrongfully withheld or denied ESI's interest. ESI further claimed that Trigen had failed to disclose ESI's interest to Tenneco and so was responsible, in whole or in part, for ESI's failure to receive a 2.5% interest in the project from Coastal.
On October 8, 1998, Latin American Energy asserted cross-claims against Trigen, Coastal and Tenneco claiming that it too had been denied its carried interest in the Project. On October 28, 1998, La Casa Castro asserted cross-claims against Trigen and on November 6, 1998, Coastal asserted cross-claims against Trigen for indemnification, each alleged that Trigen failed to disclose ESI's claimed interest to Tenneco and that Trigen was responsible for any damages that each may be required to pay to ESI and Latin American.
On December 15, 1998, Trigen filed an amended answer denying liability for these claims and cross-claimed against Latin American Energy, Tenneco, Coastal and La Casa Castro, asserting that these parties were responsible for any damages owed to ESI and Latin American. On December 23, 1998, ESI and Latin American dismissed without prejudice their claims against Trigen.
Coastal and La Casa Castro are continuing to assert their claims against Trigen for any damages they may be required to pay to ESI or Latin American. At this time, the case is in the early stages of discovery and as such we are not able to estimate the amount of damages that ESI and Latin American are seeking. We believe we have good defenses to Coastal's claims and La Casa Castro's claims. Accordingly, we have not recognized any loss of expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
SHAREHOLDER CLASS ACTIONS AGAINST TRIGEN
COMPLAINTS OF FOTHERGILL, CORTEZ, AND BERKOWITZ.
On September 23, 1999, three complaints were filed in the Court of Chancery of the State of Delaware against: Trigen Energy Corporation, Suez Lyonnaise Des Eaux SA, Patrick Buffet, George F. Keane, Thomas R. Casten, Philippe Brongniart, Olivier Degos, Patrick Desnos, Richard E. Kessel, Charles E. Bayless, Michel Bleitrach, Dominique Mangin D'Ouince and Michel Cassou. The individual defendants were sued in their capacity as Trigen directors and/or former Trigen directors. The complaints were filed, respectively, by Michael Fothergill, Rosa Cortez and Sarah Berkowitz. Each complaint was filed purportedly as a class action on behalf of the Company's shareholders. The complaints raised substantially identical allegations: that Trigen received a proposal from Suez to take Trigen private for $22.00 per share in cash. The plaintiffs alleged that this price does not represent the true value of Trigen and is unfair to the minority shareholders. Plaintiffs further alleged that because Suez owns approximately 52% of Trigen's outstanding shares, Suez has the power to effectuate the transaction without regard to the minority shareholders. Plaintiffs sought class certification, declaratory and injunctive relief (or money damages if the transaction is consummated), and an accounting. By agreement of the parties, an order has been entered consolidating all three actions under the Fothergill caption.
On February 22, 2000, counsel for ELYO and the plaintiffs reached an agreement to settle this lawsuit, subject to court approval. The settlement does not require any payment to the plaintiffs from the Company or its directors. Accordingly, we have not recognized any loss or expense (other than defense costs and certain costs of providing Notice of Settlement to Class members) with respect to this matter, although we cannot predict the final outcome. The parties are in the process of submitting this settlement to the Court of Chancery of the State of Delaware for approval.
COMPLAINT OF RICE.
On March 16, 2000, Adam Rice filed a complaint in the Supreme Court of the State of New York, County of Westchester against Trigen Energy Corporation, Suez Lyonnaise Des Eaux S.A., Elyo, S.A., T Acquisition Corporation, Christine Morin-Postel, Richard E. Kessel, George Keane, Patrick Buffet, Olivier Degos, Philippe Brongniart, Michel Bleitrach, Dominique Mangin D'Ouince and Charles Bayless. The complaint was filed purportedly as a class action on behalf of the Company's shareholders. The individual defendants were sued in their capacity as Trigen directors. The plaintiff alleged that the defendants have breached their fiduciary duties to plaintiff and our public shareholders by not renegotiating and/or reformulating the terms of the tender offer by which T Acquisition Corporation has offered to purchase all of our outstanding shares at a price of $23.50 per share. Plaintiff seeks class certification and money damages as well as other unspecified relief. We believe we have good defenses to these claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect tot his matter, although we cannot predict the final outcome.
OTHER LITIGATION
We are subject from time to time to various other claims that arise in the normal course of business, and we believe that the outcome of these matters (either individually or in the aggregate) will not have a material adverse effect on our business results of operation or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is traded on the New York Stock Exchange under the symbol TGN. As of March 27, 2000 there were approximately 431 shareholders of record.
The following table sets forth the high and low sales prices at close for our Common Stock for the periods indicated:
During 1999 and 1998, we declared quarterly dividends in an aggregate annual amount equal to $0.14 per share of Common Stock. See Note 2 of the Notes to the Condensed Financial Statements of Trigen Energy Corporation (Parent Company) for a statement on amounts available for payment of dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report:
- -------- (a) The extraordinary losses in 1998 and 1996 result from the early extinguishment of debt. See Note 5 of the Notes to Consolidated Financial Statements.
(b) Reflects an after-tax charge of $4.9 million related to the adoption of SOP 98-5 "Reporting on the Costs of Start-Up Activities" which was recorded as a cumulative effect of a change in accounting principle. See Note 4 of the Notes to Consolidated Financial Statements.
(c) Earnings used in computing the ratio of earnings to fixed charges consist of earnings before extraordinary item plus income taxes, fixed charges (excluding capitalized interest) and income distributions of non-consolidated partnerships on a cash basis. Fixed charges consist of interest expense, capitalized interest and a portion of rental expense representative of the interest factor.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report.
The following table shows revenues and units of megawatt hours sold for the three years ended December 31, 1999:
The following table shows the components of the Statement of Operations as a percent of total revenues for the three years ended December 31, 1999:
Our preferred rate structure for thermal energy includes fixed and variable components. These rate structures are intended to cause revenues to match our costs of providing capacity, including projected debt service and return on equity, thermal losses in the distribution network, taxes, labor and scheduled maintenance and repair. The capacity component, which is independent of usage in the period, generally includes cost escalation provisions. These rate structures also contain a charge, which varies with usage during the period, and which is intended to cover directly variable costs, so as to pass through to customers our cost of fuel.
A significant portion of our revenues and operating profit are subject to seasonal fluctuation due to peak heating demand in the winter and peak cooling demand in the summer. This seasonal fluctuation is accentuated in those acquired steam systems where our preferred rate structures are not employed. Our strategy of converting old contracts to our preferred rate structures, adding cooling, electricity, energy services and industrial process loads has reduced the concentration of revenues in cold months during 1999 and is expected to continue in the future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
OVERVIEW
For the year ended December 31, 1999, earnings before a cumulative effect of a change in accounting principle amounted to $16.1 million, or $1.33 per diluted earnings per share. This compared to $6.6 million, or $.55 per diluted earnings per share before extraordinary item reported in 1998. For the year ended December 31, 1999, net earnings amounted to $11.2 million, or $.92 per diluted earnings per share after the effect of the adoption of a change in accounting principle. Revenues of $280.4 million for 1999 increased $38.0 million, or 15.7% over 1998. Operating income was $39.6 million and the operating margin was 14.1% in 1999 compared with operating income of $31.8 million and an operating
margin of 13.1% in 1998. Included in net earnings for 1999 was a non-recurring after-tax gain of $8.5 million, or $.70 per diluted share, related to the PECO lawsuit settlement. (See Note 23 of Notes to Consolidated Financial Statements, Legal Proceedings)
REVENUES
Revenues of $280.4 million in 1999 increased $38.0 million from revenues of $242.4 million in 1998. Thermal energy revenue increased $30.1 million to $212.5 million. Units of thermal energy sold increased 19% over 1998 reflecting a somewhat colder winter and the full year contribution of our joint venture in Tuscola, Illinois.
Electric energy revenues increased $2.5 million to $45.2 million in 1999. The predominant reason for this increase is due to our Nassau facility, which operated for the full year in 1999, but was taken off line in 1998 for 22 days for a scheduled five year major overhaul. In addition, our new cogeneration plant in St. Louis began operations and contributed to electricity revenues in 1999.
Equity in earnings (losses) of non-consolidated subsidiaries increased $2.9 million in 1999. This is due essentially to the improvement in earnings of the Grays Ferry Cogeneration Partnership and the increase in our ownership share to 50% from 33 1/3% as a result of the PECO settlement. The increase in the Partnership income reflects the reversal of 1998 default interest of $1.8 million (our share is $.9 million) which was waived through April 16, 1999 after such settlement (See Note 23 of the Notes to Consolidated Financial Statements, Legal Proceedings).
Fees earned and other revenues increased by $2.5 million in 1999 as a result of our new joint venture projects in Baltimore, MD and Ashtabula, OH.
OPERATING EXPENSES
Fuel and consumables in 1999 increased $15.8 million to $117.3 million, an increase of 15.6%. This increase reflects the increased level of energy sales. Our rates typically enable us to pass changes in fuel and most commodity costs to the customer. As a result, such changes have little impact on operating income.
Production and operating costs are those costs incurred to operate the plants, other than fuel and consumables in 1999, and include labor and supervisory personnel, repair and maintenance costs, and plant operating costs. In 1999, production and operating costs totaled $55.0 million, a 13.9% increase over 1998. This increase is primarily due to the inclusion of production and operating costs associated with 1999 new industrial accounts.
Depreciation and amortization expense was $27.8 million in 1999, compared with $24.4 million in 1998. In 1999, we recognized an asset impairment loss of $3.0 million. This loss represents the difference between the carrying value of the long-lived assets of a division of our Canadian subsidiary and the fair value of those assets based on estimated discounted future cash flows. The loss is included in depreciation expense.
General and administrative expenses of $40.8 million in 1999 increased $4.4 million compared to 1998. Expenses in 1998 included special cost adjustments of $2.0 million for insurance and employee related costs. Increased costs in 1999 are primarily due to legal expenses incurred in pursuing the Oklahoma City antitrust lawsuit against OG&E, overhead related to new industrial accounts and to increased expenses required to pursue energy outsourcing opportunities.
OTHER INCOME/(EXPENSE)
Interest expense increased $2.3 million to $26.0 million in 1999 primarily due to higher debt levels required to finance new business.
Other income, net was $17.4 million in 1999, an increase of $11.8 million over 1998. This is primarily due to recognizing the gain from our share of the Adwin interest in the Grays Ferry Cogeneration Partnership which was surrendered to us on April 23, 1999 as part of the PECO settlement (See Note 23 of Notes to Consolidated Financial Statements - Legal Proceedings). We recorded a pre-tax gain of $14.5 million which represents the market value of the share of Adwin's interest in the Partnership that was surrendered to us. Other income, net for 1998 included the net results from gains of $2.1 million from the sale of nitrogen oxide emission allowances and $1.7 million from an insurance settlement.
INCOME TAXES
Our effective tax rate is determined primarily by the federal statutory rate of 35% and state and local income taxes. The effective tax rate was 41.4% in 1999 and 41.1% in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
OVERVIEW
For the year ended December 31, 1998, net earnings were $6.3 million compared with $5.0 million in 1997, and diluted earnings per common share were $.52 in 1998 compared with $.41 per common share 1997. Included in net earnings for 1998 was an extraordinary loss of $.3 million, or $.03 per common share, as a result of the early extinguishment of debt. Revenues of $242.4 million in 1998 increased $1.7 million over revenues of $240.7 million in 1997. Operating income was $31.8 million in 1998 and the operating margin was 13.1% in 1998 compared with operating income of $28.7 million and an operating margin of 11.9% in 1997. Offsetting the continuing mild weather and unfavorable results from our Canadian operations were positive contributions from the Trigen-BioPower acquisition and the Grays Ferry Cogeneration Partnership. Both were major contributors to the higher levels of revenues and profits in 1998.
REVENUES
Revenues of $242.4 million in 1998 increased $1.7 million from $240.7 million in 1997. Thermal energy revenue increased $2.9 million to $182.4 million. Units of thermal energy sold increased 19% over 1997 primarily reflecting the contribution of Trigen-BioPower, which was acquired in January 1998. Partially offsetting this increase were lower thermal energy sales in Philadelphia, Boston and Baltimore due to the effect of milder weather patterns.
Electric energy revenues decreased $6.3 million to $42.7 million in 1998. The Nassau plant was taken off-line by the local utility, as permitted under their contract, for a longer period of time in 1998 than in 1997. In addition, in 1998, this facility was taken off-line for twenty-two days for a scheduled five year major overhaul. The Grays Ferry Cogeneration Partnership, of which we were a 33% partner, commenced operations in January 1998 and produced $60.3 million in electrical revenues for the year. Grays Ferry replaced our electric generation in Philadelphia and thus lowered reported revenues from electricity compared to the prior year by approximately $3.2 million. Our 33% share of the Grays Ferry Cogeneration Partnership's electric revenues are $20.1 million and the resulting profits are reflected in equity earnings of non-consolidated subsidiaries.
Equity earnings/(losses) of non-consolidated subsidiaries in 1998 exceeded 1997 by $5.9 million, primarily reflecting our share of earnings from the Grays Ferry Cogeneration Partnership.
Fees earned and other revenues declined slightly in 1998, reflecting the absence of revenues associated with the sale of a natural gas pipeline in 1997. This was essentially offset by the inclusion of fees from the Grays Ferry Cogeneration Partnership in 1998.
OPERATING EXPENSES
Fuel and consumables were $101.5 million in 1998, a $12.7 million decrease from 1997, in spite of a significant increase of 19% in thermal energy units sold. This decrease reflects the lower level of energy sales due to warm weather at systems primarily located in the Northeast and lower fuel prices at our fossil fuel plants. Our rate structure typically enables us to pass changes in fuel and most commodity costs to the customer. As a result, such changes have little impact on operating income. Fuel and consumables' costs decreased from 47.4% of revenues in 1997 to 41.9% in 1998 largely due to the addition of seven biomass fueled plants with relatively low fuel prices.
Production and operating costs are those costs incurred to operate the plants, other than fuel and consumables, and include labor and supervisory personnel, repair and maintenance costs, and plant operating costs. In 1998, production and operating costs totaled $48.3 million, a 2.5% increase over 1997. This increase is primarily due to the inclusion of production and operating costs associated with Trigen-BioPower, which was acquired in January 1998.
Depreciation and amortization expense was $24.4 million in 1998, compared with $18.2 million in 1997. The increase is primarily attributable to the addition of Trigen-BioPower depreciation expense in 1998.
General and administrative expenses increased $4.0 million to $36.4 million in 1998, a 12.3% increase over 1997. Contributing to the increase was the inclusion of 1998 Trigen-BioPower general and administrative expenses and a $2.0 million increase in insurance and employee-related costs, and the costs of pursuing the Oklahoma City antitrust lawsuit against OG&E. All of the 1998 costs of the lawsuit were expensed in 1998, and a gain, if any, will not be recognized until a final judgment is affirmed on appeal or a final settlement is consummated.
OTHER INCOME/(EXPENSE)
Interest expense increased $4.8 million to $23.7 million in 1998 primarily due to financing the Trigen-BioPower acquisition and the purchase of an additional 48% interest in the Trigen-Nations Energy Company Limited Partnership.
Other income, net was $5.6 million in 1998, an increase of $3.1 million over 1997. The increase primarily results from gains during 1998 of $2.1 million from the sale of nitrogen oxide emission allowances and $1.7 million from an insurance settlement.
INCOME TAXES
Our effective tax rate is determined primarily by the federal statutory rate of 35% and state and local income taxes. The effective tax rate was 41.1% in 1998 and 41.0% in 1997.
LIQUIDITY AND FINANCIAL POSITION
We ended 1999 with total debt of $441.2 million compared with $375.1 million at year-end 1998. Stockholders' equity increased to $160.0 million in 1999 from $147.9 million in 1998. Our working capital deficit was $14.6 million at year end 1999 compared with a working capital deficit of $9.5 million at year-end 1998. At December 31, 1999 and 1998, cash and cash equivalents were $20.0 million and $14.7 million, respectively, of which $13.6 million and $13.3 million, respectively, was restricted as to use. See Note 7 of the Notes to Consolidated Financial Statements for information on the restrictions.
Our principal sources of funds are proceeds from new borrowings and cash from operations. In 1999, $38.6 million was generated from operating activities compared with $36.4 million in 1998 and $23.3 million in 1997. During 1999 we invested $93.6 million in capital expenditures, $5.8 million for the acquisition of energy facilities, and paid dividends of $1.7 million to shareholders. These expenditures were financed by cash generated from operating activities and by $65.1 million of net new borrowings.
On April 4, 1997, we entered into a $160.0 million revolving credit agreement with several banks. This facility was used to repay indebtedness outstanding under a $62.5 million credit facility entered into in 1995. The $160.0 million facility is for an initial period of three years and may be extended by a total of two one-year periods. Borrowings under the facility bear interest, at our option, at an annual rate equal to the base rate or the LIBOR rate plus 3/4%. The base rate is the higher of the prime lending rate or the Federal Reserve reported Federal funds rate plus 1/2%. On June 10, 1997, we amended the $160.0 million credit agreement by reducing the facility to $125.0 million and entered into a $35.0 million revolving credit facility with the same group of banks. The new facility is for an initial 364-day period and may be extended annually at the option of the banks. The terms and conditions of both facilities are the same. On September 23, 1998, the $125.0 million three year facility was increased by $35.75 million and the initial period was increased by one year. The base rate is the higher of the prime lending rate or the Federal Reserve reported Federal funds rate. The average effective rate on the facility was 6.0% in 1999 and the rate at December 31, 1999 was 7.2%. On December 30, 1998, we borrowed from an affiliate, Cofreth American Corporation, $50.0 million for acquisitions and project development. The $50.0 million was initially used to partially pay down the corporate facility. The $50.0 million is subordinate and junior in right of payment to all other debt. The subordinated debt may be redeemed in whole or in part at the option of Cofreth American Corporation with the net proceeds of an equity sale by the Company. The debt matures on December 31, 2010 and the interest rate is 7.38%.
At December 31, 1999, we had $2.8 million of borrowings available under our credit facilities for working capital and general corporate purposes. Our loan agreements contain various restrictions and conditions with which we are in compliance (See Note 23 for default information related to Grays Ferry Cogeneration Partnership). Certain loan
agreements restrict payments by subsidiaries to the Company, unless the payments are for specified purposes or the subsidiary meets certain covenants. Management believes that cash generated from operations, borrowings available under our credit facilities, the ability to obtain financing from our affiliates, and access to capital markets provide adequate resources to meet ongoing operating needs and future capital expenditures related to the existing business and development of new projects. See Note 13 of the Notes to Consolidated Financial Statements for information on long-term debt.
During 1999, stockholders' equity increased $12.1 million to $160.0 million. This increase reflects $11.2 million of net earnings, $1.5 million from the issuance of common stock, $.5 million of amortization of unearned compensation related to restricted shares and a $.8 million cumulative translation adjustment, partially offset by $1.7 million of dividend payments to shareholders and the purchase of 14,000 shares of common stock for the treasury at a cost of $.2 million.
CAPITAL EXPENDITURES
Capital expenditures were $93.6 million in 1999 compared with $42.9 million in 1998 and $39.4 million in 1997, as we continue to invest in capital improvements to increase efficiency, reduce costs, pursue new opportunities, expand production and improve facilities. Capital expenditures during 1999 included construction of facilities in St. Louis, MO, Baltimore, MD, Ashtabula, OH, College Park, MD, Decatur, AL, Tampico, Mexico and St. Mary's, GA.
ENVIRONMENTAL EXPENDITURES
Our facilities are subject to governmental requirements with respect to the discharge of materials and otherwise relating to protection of the environment. We spent approximately $2.9 million and $3.9 million in 1999 and 1998, respectively, to comply with these requirements and estimate that our expenditures for environmental compliance in 2000 through 2002 will be approximately $11.2 million in the aggregate. These expenditures include improvements at certain facilities for air emission control equipment as required by the United States Clean Air Act (the "Clean Air Act"), wastewater discharge control equipment, asbestos control and replacement of CFC refrigerants.
ACQUISITIONS
On January 22, 1998, we acquired all of the capital stock of Power Sources, Inc. (renamed Trigen-BioPower, Inc.), a biomass-to-energy power plant developer and operator, for a cash price of $44.1 million. On September 23, 1998, we purchased an additional 48% interest in Trigen-Nations Energy Company Limited Partnership from Nations Energy Corporation for $21.3 million. On June 22, 1999, we purchased the final 1% of the limited partnership for $.3 million. The acquisitions were funded from our existing credit facilities. See Note 6 of the Notes to Consolidated Financial Statements for information on the acquisition.
IMPACT OF NEW ACCOUNTING STANDARDS
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 requires costs of start-up activities and organizational costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. We adopted SOP 98-5 effective January 1, 1999. The effect of the adoption was an after-tax charge of $4.9 million which was reported as a cumulative effect of a change in an accounting principle.
Based on preliminary analyses, we do not expect that the future adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") will have a material effect on the Company's results of operations or financial condition. We will adopt SFAS No. 133 effective January 1, 2001.
YEAR 2000 DATE CONVERSION
We experienced no material problems with our information systems or with our customers or suppliers with which we deal, as a result of the date change to the year 2000. We spent approximately $1.0 million for the years 1997 through 1999 to make the required modifications to our systems. There was no material effect on our results of operations as a result of the Year 2000 issue. No significant information technology projects or capital spending were deferred as a result of our Year 2000 program.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in the trading of market risk sensitive instruments in the normal course of business. Our short and long-term debt is subject to fixed and variable interest rates including rates primarily based on LIBOR. An analysis of debt is found in Notes 12 and 13 of the Notes to Consolidated Financial Statements, Short-Term Debt and Long-Term Debt, included in this Annual Report. Based upon the debt balances at December 31, 1999, a change in the LIBOR rate of .25% would have a corresponding change in interest expense of approximately $.8 million per year when three-month LIBOR is under 6.0% ranging to approximately $.7 million per year when three-month LIBOR is over 7.5%. Three-month LIBOR at December 31, 1999 was 6.00125%.
We use financial instruments to limit the financial risk of increases in interest rates on our floating rate debt. The differential to be paid or received under financial instruments is accrued and recognized in interest expense as interest rates change. As of December 31, 1999, we had outstanding interest rate swap, cap and collar agreements related to $39.4 million of debt outstanding, with an average fixed interest rate of 6.2% and an average remaining life of 5 years. The fair value of the swap, cap and collar was a receivable of $1.5 million at December 31, 1999. We do not expect these financial instruments to have a material effect on our earnings or cash flows or on the fair value of these instruments.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules that are filed as part of this Annual Report begin on page hereof.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Our principal accountant for the fiscal years ending December 31, 1994, December 31, 1995, December 31, 1996 and December 31, 1997 was KPMG Peat Marwick LLP ("KPMG"). In 1998, we made a decision to change our principal accountant for our fiscal year ending December 31, 1998, for the reason set forth below. In 1998, the Audit Committee and the Board of Directors of the Company approved this determination.
KPMG is also in the business of providing consulting services to clients with respect to issues related to the energy business. In 1997, a dispute arose between the Company and the consulting services division of KPMG with respect to the conduct of consulting services provided to a third party. That dispute was not resolved to our satisfaction. The change in principal accountant was not due to any matter regarding KPMG's accounting services. KPMG's report on our financial statements for 1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. Neither were there, during the 1996 and 1997 fiscal years or the period since December 31, 1997, any disagreement with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject matter of the disagreement in connection with its report.
In 1998, the Board of Directors selected Arthur Andersen LLP as our new principal accountant. This selection was presented to our shareholders and ratified at our annual meeting of shareholders, which took place on May 19, 1999.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
CLASS A: serving until the annual election of directors in 2001 or until a successor is elected and qualified:
PATRICK BUFFET, 46, was elected a Director of Trigen on September 9, 1998. Since 1998, he has been Executive Vice President of Suez Lyonnaise des Eaux ("Suez Lyonnaise"). From 1994 to 1998 he was Director of Industrial Holdings and Strategy of Societe Generale de Belgique, a subsidiary of Suez Lyonnaise.
RICHARD E. KESSEL, 50, has been President and Chief Executive Officer of Trigen since January 19, 2000 and has served as a Director of Trigen since 1994. He is also a member of the Executive Committee. He was Executive Vice President and Chief Operating Officer of Trigen from 1993 to January 19, 2000.
CLASS B: serving until the annual election of directors in 2002 or until a successor is elected and qualified:
CHRISTINE MORIN-POSTEL, 53, has served as a Director and non-executive Chairman of the Board since January, 2000. She has been Chief Executive Officer and Chairman of the Management Committee of Societe Generale de Belgique since 1998. From 1996 to 1998, she was Chairman and Chief Executive Officer of Compagnie Hypothecaire and Credisuez. She was a General Partner of Financiere Indosuez from 1993 to 1995. She served as a Director of Trigen from December, 1986 to June, 1993.
GEORGE F. KEANE, 70, has served as a Director since 1994 and was non-executive Chairman of the Board from 1994 to January 19, 2000. He is the Chairman of the Audit Committee and a member of the Nominating Committee. From 1993 through 1996, he served as President Emeritus and Senior Investment Adviser to The Common Fund, a company that he helped organize and that manages the investment of over $17 billion in endowment funds and operating cash for more than 1,300 member colleges, universities and independent schools. Since 1996, Mr. Keane has been self-employed. He serves on the boards of Universal Stainless & Alloy Products, Global Pharmaceutical, United Water Resources, The Bramwell Funds, Nicholas-Applegate Investment Trust and Northern Trust of Connecticut.
PHILIPPE BRONGNIART, 61, has been a Director of Trigen since 1997. Since 1997 he has been Directeur General of Suez Lyonnaise. From 1993 to 1997 he was General Manager of Societe Lyonnaise des Eaux ("Lyonnaise"). He has been Chairman and Chief Executive Officer of Sita since 1988.
OLIVIER DEGOS, 38, since 1995, has been Chief Financial Officer of ELYO, a subsidiary of Suez Lyonnaise engaged in energy management. From 1994 to 1995, was Deputy Chief Financial Officer of Sita, a waste services company and subsidiary of Suez Lyonnaise.
CLASS C: serving until the annual election of directors in 2000 or until a successor is elected and qualified:
CHARLES E. BAYLESS, 56, has served as a Director of Trigen since 1994. He is a member of the Compensation Committee, the Nominating Committee and the Audit Committee. Since 1998 he has been President and Chief Executive Officer of Illinova Power Company. He was Chairman of Tucson Electric Power Company ("Tucson Electric"), an electric utility corporation, from 1992 to 1998. From 1990 to 1998 he was President and Chief Executive Officer of Tucson Electric. He became Chairman, President and Chief Executive Officer of UniSource Energy on January 1, 1998. UniSource Energy is Tucson Electric's holding company.
MICHEL BLEITRACH, 54, has been a Director of Trigen since 1995. He is Chairman of the Compensation Committee. Mr. Bleitrach has been the Chairman of Elyo since 1995 and has been the Chief Executive Officer of Elyo since 1993.
DOMINIQUE MANGIN D'OUINCE, 50, has been a Director of Trigen since 1995. He is a member of the Executive Committee. Mr. Mangin d'Ouince has been an Executive Vice President and Managing Director of Elyo since 1995 and was a Managing Director in charge of Business Development of Lyonnaise from 1990 to 1997.
EXECUTIVE OFFICERS
The executive officers of the Company include Richard E. Kessel, who is also on the Board of Directors, and the following:
BENOIT ANSART, 39, has been Vice President - Energy Marketing and Development since September, 1999. He was Director of Engineering for Trigen from 1993 to 1999.
DANIEL FIORE, 54, has been Vice President - Project Services for Trigen since June, 1999. From 1995 to 1999 he was Vice President - Fossil Services worldwide for Burns & Roe, a consulting, engineering and enterprises construction company.
MARK C. HALL, 32, has been Vice President, External Affairs since August, 1999. From 1998 to 1999, he was Director of Government Affairs for Trigen. From 1997 to 1998, he was Manager of Environmental Health and Safety and Manager, Legislative and Regulatory Affairs for Trigen. From 1995 to 1997, he was an environmental engineer for Trigen.
JAMES F. LOWRY, 61, has been Vice President of Mergers and Acquisitions since 1997. He was Vice President, Development of Trigen from 1995 to 1997. From 1993 to 1995 he was a principal in International Ventures Group, which provided consulting services to developing businesses in countries of the former USSR.
JEAN M. MALAHIEUDE, 61, has been Executive Vice President, Engineering since 1997, and also heads the Company's Project Development Division. He was Vice President, Engineering of Trigen from 1987 to 1997. Since 1987 he has been Executive Vice President of Cofreth-American Corporation ("CAC").
EUGENE E. MURPHY, 65, has been Vice President and General Counsel of Trigen since 1986. He has been Secretary of Trigen since 1988. From 1986 to 1994 he was a Director of Trigen.
DANIEL J. SAMELA, 52, has been Controller of Trigen since 1995. From 1991 to 1995 he was Chief Financial Officer of the Dealer Division of Savin Corporation, a distributor of office machinery and equipment.
STEVEN G. SMITH, 58, has been Vice President since 1998. Since 1997 he has headed the Operations Division of the Company. Since 1990 he has been President of Trigen-Philadelphia Energy Corporation, a subsidiary of the Company.
MARTIN S. STONE, 64, has been Vice President and Chief Financial Officer of Trigen since 1998. From 1971 through 1997, he held various positions at Helmsley Enterprises, Inc., including Treasurer, the last being Vice President and Corporate Secretary.
STEPHEN K. SWINSON, 42, has been Vice President since 1998. Since 1997 he has headed the Technology Division of the Company. From 1996 to 1997 he was President of the Western Region of the Company. From 1995 to 1997 he was President of Trigen-Colorado Energy Corporation, a subsidiary of the Company, and from 1993 to 1997 he was President of Trigen-Kansas City Energy Corporation, a subsidiary of the Company.
STEPHEN T. WARD, 57, has been Treasurer of Trigen since 1995. From 1988 to 1995 he was Treasurer of TI Group Inc. TI Group plc is a London-based manufacturer of automotive and aerospace products. TI Group Inc. is their U.S. holding company.
MICHAEL WEISER, 57, has been Vice President, Development of Trigen since 1992. From 1986 to 1994 he was a Director of Trigen. From 1986 to 1992 he was Treasurer of Trigen.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and persons who own more than 10% of the Company's common stock to file certain reports with respect to each such person's beneficial ownership of the Company's common stock. In addition, Item 405 of Regulation S-K requires the Company to identify each reporting person that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years. The 0initial statement of beneficial ownership on Form 3 for the month of August, 1999 for Mr. Mark C. Hall, for the month of September, 1999 for Mr. Benoit Ansart and for the month of June, 1999 for Mr. Daniel Fiore were not filed on a timely basis. Both were newly elected officers at that time. Form 4 for the month of December 1998 for Mr. Thomas R. Casten was not filed on a timely basis.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table presents before-tax information on compensation earned, paid, awarded or accrued as of the end of fiscal years 1999, 1998 and 1997 for services by the Named Executive Officers, including options granted.
SUMMARY COMPENSATION TABLE
- ----------------------- (1) Amounts shown in this column are bonuses earned in the year shown, rather than bonuses paid in the year shown, except that, the following amounts included in the Bonus column were paid in 1998 for prior years' work: Mr. Kessel - $21,000 for 1997, Mr. Smith - $40,250 for 1996, and Mr. Murphy - $7,500 for 1997.
(2) For each of the individuals listed, in 1999 the portion of Other Annual Compensation which is auto allowance for each respective individual is as follows: Mr. Casten - $23,296, Mr. Kessel - $20,800, Mr. Murphy - $18,278, Mr. Smith - $14,100, and Mr. Stone - $13,200. For Mr. Smith the portion of his Other Annual Compensation which is a relocation reimbursement is $40,096. For each of the individuals listed, in 1998 the portion of Other Annual Compensation which is auto allowance for each respective individual is as follows: Mr. Casten - $23,296, Mr. Kessel - $20,800, Mr. Murphy - $18,278, Mr. Smith - $14,100 and Mr. Stone - $5,737. In 1997, the portion of Other Annual Compensation which is auto allowance for each respective individual is as follows: Mr. Casten - $24,192, Mr. Kessel - $21,600, Mr. Murphy - $18,981, and Mr. Smith - $14,100.
(3) The number and value of the aggregate restricted stockholdings for the Named Executive Officers as of December 31, 1999, including reinvested dividends, are as follows: Mr. Casten - 38,120 shares, $662,335; Mr. Kessel - 27,447 shares, $476,892; Mr. Murphy - 13,215 shares, $229,611; Mr. Smith - 18,298 shares, $317,928; Mr. Stone - 9,831 shares, $170,814.
(4) Options granted in 1998 merely replaced options granted in 1997.
(5) Amount shown is the total of the Company's matching contribution to the 401(k) Plan, profit sharing contribution, and term life insurance premiums.
(6) Mr. Stone began his employment with the Company in July, 1998.
FISCAL YEAR-END OPTIONS/SAR VALUES
No named Executive Officer exercised options in 1999.
Compensation of Directors
Directors who are regularly employed officers of the Company receive no fees for serving as directors of the Company. Each non-officer director receives $20,000 (the Chairman receives $30,000) per year plus $1,000 per day of meetings of the Board or Committee of the Board attended, and each may elect to receive such compensation in shares of common stock. Upon his election to the Board in 1999, Olivier Degos received options to purchase 10,000 shares of common stock exercisable at $15.938 per share (the price per share on the date of the grant). Upon his election to the Board in 1998, Patrick Buffet received options to purchase 10,000 shares of common stock exercisable at $10.625 per share (the price per share on the date of the grant).Upon his election to the Board in 1997, Philippe Brongniart received options to purchase 10,000 shares of common stock exercisable at $25.00 per share (the price per share on the date of the grant). Upon their election to the Board in 1995, Messrs. Bleitrach and Mangin d'Ouince each received options to purchase 10,000 shares of common stock exercisable at $22.13 per share (the price per share on the date of the grant). During 1994, each individual who was then a Director received options to purchase 10,000 shares of common stock (20,000 for the Chairman) exercisable at $15.75 per share (the price per share on the date of the grant). In July 1996 the Chairman received additional options to purchase 10,000 shares of Common Stock exercisable at $18.75 per share. Each Director is reimbursed for the out-of-pocket costs of attending meetings. Ms. Christine Morin-Postel did not receive options upon her election to the Board when elected Chairman in January, 2000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment Agreements") with Thomas R. Casten, Richard E. Kessel and Eugene E. Murphy, ("Named Executive Officers"). Each of the Employment Agreements was initially for a period of three years commencing as of August 12, 1994 and is renewable for additional annual extensions unless terminated by either party. The base salaries under the Employment Agreements are subject to review by the Compensation Committee. The Employment Agreements also provide for the payment of incentive compensation. An Employment Agreement for a particular Executive Officer contains other specified benefits only if those benefits have been approved by a member of the Board of Directors who has been authorized to review and approve such provisions. Mr. Casten's employment terminated on January 19, 2000.
On January 19, 2000 Mr. Casten entered into an agreement with Elyo pursuant to which Mr. Casten shall sell his shares of Stock in Trigen to Elyo, and Elyo shall purchase such shares on the thirty-first (31st) calendar day following the filing of Schedule TO by Elyo and certain of its affiliates in connection with the offer by T Acquisition Corp., a Delaware corporation and an indirect, wholly owned subsidiary of Elyo, to purchase any and all of the outstanding shares of Trigen.
Also on January 19, 2000, Mr. Casten entered into a Separation Agreement and Release (the "Separation Agreement") with Trigen whereby Mr. Casten resigned as a director and officer of Trigen effective January 19, 2000. Pursuant to the Separation Agreement, Mr. Casten resigned from his positions as President, Chief Executive Officer and a director of Trigen and is eligible for salary and benefits continuation until the earlier of (a) January 19, 2002, or (b) the date on which he breaches any of his obligations under the Separation Agreement. Mr. Casten's obligations include non-disparagement, non-competition, cooperation, non-solicitation and confidentiality covenants. If Mr. Casten breaches any of these covenants, his right to payments under the terms of the Separation Agreement will be extinguished. Restricted
stock and unvested options held by Mr. Casten will continue to vest in accordance with their terms as if Mr. Casten remained employed by the Company and to the extent not vested on January 19, 2002 will become fully vested on that date to the extent not previously canceled by reason of a breach of the Separation Agreement. Alternatively, immediately prior to the effective time of the merger, if the merger occurs, (i) Mr. Casten's options will be canceled and he will receive for each share subject thereto the excess of the merger consideration over the exercise price, and (ii) Mr. Casten's shares of restricted stock will be canceled and he will receive an amount per share equal to the merger consideration in respect of one-fourth of such shares and will be eligible to receive on January 19, 2002 an amount per share equal to the merger consideration in respect of three-fourths of such shares. Mr. Casten is entitled to remain a general partner of the Trenton District Energy Company ("TDEC"), but may not interfere with or participate in the day-to-day operations of TDEC. Trigen has agreed that if TDEC refinances, Trigen will, subject to certain exceptions, use its good faith efforts so that Mr. Casten does not recognize income as a result of such refinancing as long as such efforts do not adversely impact TDEC, Trigen or its affiliates.
REPORT OF THE COMPENSATION COMMITTEE
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
All decisions on compensation of the Company's executive officers, including decisions about awards under certain of the Company's stock-based compensation plans, are made by the members of the Compensation Committee, each of whom is a non-employee director. This report addresses the Company's compensation policies for 1999 as they affected Messrs. Casten, Kessel, Murphy, Smith and Stone, the chief executive officer and the four highest paid executive officers of the Company for 1999 (collectively, the "Named Executive Officers").
COMPENSATION POLICIES
The Compensation Committee's executive compensation policies are designed to (a) provide competitive compensation opportunities when financial and operational performance attains pre-set ambitious levels, (b) reward executives consistent with the Company's performance, (c) recognize individual performance and responsibility, (d) underscore the importance of shareholder value creation, and (e) assist the Company in attracting, retaining and inspiring qualified executives. The overall focus of the compensation policy is to balance the near-term goals and needs of management and other employees with the long-term perspective to drive performance and results to provide a consistent commitment to the growth of the Company and enhance the creation of shareholder value.
The principal elements of compensation employed by the Committee to meet these objectives are base salaries, annual cash incentives, business development incentives, and long term stock-based incentives. By design, the variable or "at-risk" components of compensation are proportionately greater for more senior executives, in recognition of their greater potential impact on the Company's results.
All compensation decisions are determined following a detailed review of many factors that the Committee believes are relevant, including external competitive data, the Company's achievements over the past year, the individual's contributions to the Company's success, any significant changes in role or responsibility, and the reasonableness of compensation in relation to that of other employees.
The competitiveness of the Company's total compensation program (incorporating base salaries, annual cash bonuses, and long term stock-based incentives) is assessed regularly with the assistance of an independent expert compensation consultant. Comparisons are made with executives in similarly sized firms with comparable responsibilities. Data for these comparisons is drawn from two primary sources: (1) a national compensation survey of similar publicly traded companies, and (2) the proxy statements of identified competitors, including all companies within a selected group of peer industry organizations (the "Compensation Peer Groups").
One of the guiding principles is to pay at a level that allows the Company to compensate key executives competitively compared with similarly placed executives within the Compensation Peer Groups. This comparison is performed while considering the Company's performance in relation to the performance results of those companies. In general, the Committee intends to pay base salary levels at the median or average levels of competitive compensation for executives with comparable responsibilities in the Company's Compensation Peer Groups. In addition to base salary, the Company's total compensation program includes an annual cash incentive plan, a business development growth incentive and a long-term stock-based incentive program. The targeted total compensation levels for the Named Executive Officers
are intended to be consistent with competitive levels (as measured by the total compensation levels of similar positions at the Compensation Peer Groups) when the Company attains its targeted corporate performance objectives. Actual payouts, if any, depend upon actual Company performance. Thus, the total compensation levels and individual compensation components received in any particular year could be demonstrably lesser or greater than the Compensation Peer Groups' average.
The Company compensation philosophy for senior management emphasizes pay at risk, highlights a long-term performance results perspective, provides executive commitment via stock ownership, and bolsters the creation of shareholder value.
BASE SALARY. Base salaries for all Named Executive Officers, including the Chief Executive Officer, are reviewed by the Committee on an annual basis. In determining appropriate base salaries, the Committee considers external competitiveness, the roles and responsibilities of the individual, the reasonableness of compensation in relation to that of other employees, and the contributions of the individual.
ANNUAL CASH INCENTIVES. The Company believes that its incentive compensation plan should reward executives and other employees for their contributions to the success and profitability of the business, as well as the achievement of their personal goals and objectives which support the overall growth of the Company. Incentives paid under the Incentive Compensation Plan reflect the Committee's assessment of the degree to which the Company and business units met predetermined earnings per share and profitability objectives, and the executives and other participants achieved their individual goals and objectives that were agreed to between the Company and the executive. All Named Executive Officers, including the Chief Executive Officer, are eligible to participate in this program.
LONG TERM STOCK-BASED INCENTIVES. The Company also believes that it is essential to link management and shareholder interests. To meet this objective, the Company implemented the 1994 Stock Incentive Plan ("Stock Plan"), which allows the Committee to grant stock options, restricted stock, performance shares, and stock appreciation rights to help attract, retain, and inspire executives and other employees by providing them with an opportunity to share in the Company's success. In determining actual awards, the Committee considers the externally competitive market, the contributions of the individual to the success of the Company, and the need to retain the individual over time. All Named Executive Officers, including the Chief Executive Officer, are eligible to participate in this program. The Company implemented a long-term program in 1997 under the Stock Plan in which senior management, including all Named Executive Officers, were granted a combination of incentive stock options and restricted shares. A key component of this program is for management to meet share ownership goals in order to participate fully in this program.
By encouraging employees to obtain a stake in the Company's on-going success, the Company believes this will focus employees' attention on managing the Company as a shareholder with an equity position. The Company intends to continue granting stock options on a periodic basis to its employees, executives, and directors.
The Committee has reviewed Internal Revenue Code Section 162(m) and has determined that, at present, its limitations are not applicable to the Company. Annually, the Committee will continue to consider the implications of this statute.
The Committee's policy regarding the compensation of other executive officers of the firm is consistent with the approach outlined here.
1999 COMPENSATION
As in prior years, the Company engaged the services of an outside, independent compensation consulting firm to conduct and verify to the Committee its findings concerning the compensation levels and practices of the Compensation Peer Groups and its recommendations for compensation actions for the Named Executive Officers. As outlined under "Compensation Policies", the Committee is thoroughly committed to the Company's variable pay concept. Under this philosophy, the Company is driven to leverage its compensation dollars and reward high performance levels when the Company's shareholder value added levels warrant.
Base salaries paid in 1999 to the Named Executive Officers, including the CEO, reflect the Committee's review of external competitiveness, the roles, responsibilities and contributions of the individuals and the reasonableness of compensation in relation to that of other employees.
Incentive Compensation Plan incentives to be paid to all Named Executive Officers for 1999 were determined in conjunction with the Committee's assessment of the Company's performance with respect to predetermined earnings per share and profitability objectives. Overall, the Company's performance as measured by earnings per share was significantly above the target levels established in 1999 for the Incentive Compensation Plan. Accordingly, the CEO and the other Named Executive Officers received an incentive proportionately greater than their individual target levels for 1999. In addition to the Corporate earnings per share target, the business units in 1999 also were measured by an operating income performance criteria. Most business units did achieve their goals although two business units were below their threshold, and the remaining business units were slightly below their assigned threshold levels. Overall, the incentive levels are greater than the approved target levels for those Named Executive Officers who did receive an incentive.
The Company launched a long-term stock-based compensation program in 1997. The program's primary objective is to focus management on increasing shareholder value. The program has three components: a) stock ownership goals, b) a restricted share award, and c) an incentive stock option grant. The restricted shares, which have a life cycle of eight years, will remain restricted until the Company announces accumulated basic earnings per share over four consecutive fiscal quarters of $2.08. This earnings target represents a doubling of the Company's 1996 earnings per share figure. In addition to the earnings target, the shares are also restricted from vesting unless the participant achieves his/her prescribed stock ownership levels. Each participant, including the Named Executive Officers, have been provided with a stock ownership target. The stock ownership targets are stated as a percentage of the participant's restricted share award and the percentages are progressive based on the increase in role and responsibility.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION IN COMPENSATION DECISIONS
COMPENSATION COMMITTEE Michel Bleitrach Charles E. Bayless Olivier Degos
There are no Compensation Committee interlocks. Mr. Bleitrach, a Director of Trigen, is the Chairman and Chief Executive Officer of Elyo. Mr. Bayless, a Director of Trigen, is Chairman of Illinova Power. Mr. Degos is the Chief Financial Officer of Elyo.
STOCK PERFORMANCE INFORMATION
The following graph assumes the investment on August 12, 1994 of $100 in each of the four investment alternatives. For the Standard & Poor's Mid-Cap 400 Index and the Peer Group, the initial investment was assumed to be allocated among the respective companies based on their market capitalizations at the start of the period. The graphs assume dividends were reinvested when received. The Peer Group is composed of companies in the independent power producer sector, and includes the Company (which represented 4.0% of the market capitalization of the Peer Group at the start of the period). The other companies in the "Peer Group" are AES Corporation, Calpine Corp., Cogeneration Corp. of America, Destec Energy, Inc., Kenetech Corp., Magma Power Company (acquired by CalEnergy Company, Inc. in March 1995), MidAmerican Energy Holdings (formerly CalEnergy Company Inc.) and Sithe Energies USA, Inc., during the periods that each company has been publicly traded.
[INSERT GRAPHIC]
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the Company's common stock as of January 27, 2000, of each person known by the Company to own beneficially more than 5% of the common stock outstanding as of such date. Except as otherwise indicated, all shares are owned directly. Unless otherwise noted, each of the stockholders has sole voting and investment power with respect to the shares shown.
- -----------------------
(1) Suez Lyonnaise owns 100% of Societe Generale de Belgique which owns 100% of Elyo, which directly owns 80.5% of the outstanding voting stock of CAC, and may be deemed to own beneficially 90.7% of the outstanding voting stock of CAC due to its ownership of stock in certain other entities which are themselves owners of outstanding voting stock of CAC. CPCU is a direct subsidiary of Elyo. All shares directly held by CAC or CPCU are indirectly held by Elyo, Societe Generale de Belgique and Suez Lyonnaise.
(2) Includes 43,950 shares held by his wife and children, 322,832 shares held by the Casten Family Limited Partnership, and 85,171 shares owned by an S-corporation in which he shares beneficial ownership with two other officers of the Company.
(3) Based upon information filed by Dimensional Fund Advisors Inc. with the Securities and Exchange Commission in a report on Schedule 13G dated February 4, 2000. Dimensional Fund Advisors Inc. is a registered investment advisor to managed portfolios. As such, it may be deemed to be the beneficial owner of the shares of stock set forth above.
(4) Based upon information filed by Investment Counselors of Maryland, Inc. with the Securities and Exchange Commission in a report on Schedule 13G dated February 10, 2000. Investment Counselors of Maryland, Inc. is a registered investment advisor to managed portfolios. As such, it may be deemed to be the beneficial owner of the shares of stock set forth above.
The following table sets forth information furnished by the following persons and, where possible, confirmed from records of the Company, as to the number of shares of the Company's common stock beneficially owned by the directors, the Named Executive Officers of the Company and all directors and executive officers as a group as of January 27, 2000.
- --------------
(1) Includes shares subject to acquisition through currently exercisable stock options. See column 4 for amounts. (2) See Note 2 to the preceding table. (3) Includes 15,000 shares held by the Keane Family Trust of which George Keane is the trustee, and 275 shares held by his wife. (4) Less than 1% of the outstanding shares. (5) Includes shares acquired through the 1994 Director Stock Plan. (6) Includes 85,171 shares owned by an S-Corporation in which he is a director.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See information presented under Compensation Committee Interlocks and Inside Participation in Compensation Decisions under Item 11 above.
TRENTON PARTNERSHIP
Trigen-Trenton Company, L.P., a limited partnership ("Trigen-Trenton"), which was formed in 1982, four (4) years before the formation of the Company, owns and operates the community energy system in Trenton, New Jersey. Trenton Energy Corporation, a wholly owned subsidiary of Trigen ("TEC"), is the managing general partner of Trigen-Trenton and owns a 72.25% partnership interest in Trigen-Trenton. Mr. Casten, who was the chief executive officer and a director of Trigen until January 19, 2000, Mr. Weiser, who is an officer of Trigen, and Jeanne N. Murphy, whose husband is an officer of Trigen, are general partners in Trigen-Trenton owning approximately 1.04%, 0.46%, and 0.12%, respectively, of the partnership interests. CDC is also a general partner of Trigen-Trenton and owns 2.08% of the partnership interests. Messrs. Casten, Weiser and Murphy own approximately 59.5%, 23% and 17.5%, respectively, of the shares of common stock of CDC. The remaining general and limited partnership interests in Trigen-Trenton are owned by persons not affiliated with the Company. The Company itself owns directly a 7.48% limited partnership interest in Trigen-Trenton.
RELATIONSHIPS WITH THE ELYO GROUP
LICENSE AGREEMENT. Elyo and the Company have entered into an Intercompany Services and License Agreement (the "License Agreement"). Under the License Agreement, Elyo will continue to provide to the Company on a non-exclusive basis technical assistance and technical knowledge. The Company will have the right to use such technical knowledge to construct, operate and maintain community energy systems within North America as well as the right to use patents and licenses of Elyo and its subsidiaries in connection with the generation and distribution of electricity, chilled water and waste incineration. Elyo has also agreed that it may make available to the Company, upon request, new support letters or other similar credit support, at mutually agreed rates. Pursuant to the License Agreement the Company will have the first right to develop any corporate opportunities relating to the application of the licensed technologies in North America that are presented to Elyo or its subsidiaries. Elyo also agreed that neither it nor its subsidiaries will engage in activities that may cause the Company to become or be regulated as a public-utility holding company or a subsidiary of a public-utility holding company under federal, state or local laws or regulations. The initial term is for three years with automatic two year renewals, unless terminated sooner as a result of a default or bankruptcy or related event or a change of control with respect to Trigen. The Company reimbursed Elyo Group and/or paid third party providers on behalf of Elyo $465,515 for salary, bonus, and expenses paid to Jean Malahieude, an Executive Officer of Trigen, and an additional $235,237 for benefits of Mr. Malahieude and other professionals in 1999.
SUBORDINATED DEBT. On December 30, 1998 CAC loaned the Company $50 million at 7.38% in subordinated debt pursuant to an agreement which requires repayment on December 31, 2010. Since January 1, 2000 CAC has loaned the Company an additional $36.0 million in intercompany loans at an interest rate equal to the London Interbank Offered Rate plus 2.25%.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The Financial Statements and Financial Statement Schedules listed under "Index to Financial Statements and Financial Statement Schedules" on page hereof are filed as part of this Annual Report.
(a) (3) The Exhibits listed under "Index of Exhibits" on pages E-1 to E-3 hereof are filed as part of this Annual Report.
(b) The following reports on Form 8-K were made during the fourth quarter of the year ended December 31, 1999:
None.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of TRIGEN ENERGY CORPORATION:
We have audited the accompanying consolidated balance sheets of Trigen Energy Corporation and subsidiaries as of December 31, 1999 and 1998 , and the related consolidated statements of operations, cash flows and stockholders' equity for the years then ended. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trigen Energy Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the accompanying index are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These schedules, as of December 31, 1999 and 1998 and for the years then ended, have been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly state, in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Stamford, Connecticut February 9, 2000
INDEPENDENT AUDITORS' REPORT
The Board of Directors TRIGEN ENERGY CORPORATION:
We have audited the accompanying consolidated statement of operations of Trigen Energy Corporation and subsidiaries and the related consolidated statements of stockholders' equity and cash flows for the year ended December 31, 1997. In connection with our audit of the consolidated financial statements, we also have audited the information in the financial statement schedules as listed in the accompanying index for the year ended December 31, 1997. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Trigen Energy Corporation and subsidiaries for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, for the year ended December 31, 1997, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG LLP
February 3, 1998 Stamford, Connecticut
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to consolidated financial statements.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes to consolidated financial statements.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to consolidated financial statements.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Trigen Energy Corporation (the "Parent Company", and together with its subsidiaries, "We") develop, own and operate commercial and industrial energy systems in the United States, Canada and Mexico. We use our expertise in thermal engineering and proprietary cogeneration processes to convert fuel to various forms of thermal energy and electricity. We combine heat and power generation, producing electricity as a by-product, for use in our facilities and for sale to customers.
Suez Lyonnaise Des Eaux, a French corporation, through its energy services affiliate Elyo, a French corporation, owns 52.8% of our common stock. We have entered into a licensing agreement with Elyo to provide us with technical assistance to construct, operate and maintain community energy systems within North America, as well as the right to use patents and licenses of Elyo in connection with the generation and distribution of electricity, chilled water and waste incineration.
Subsequent to year end, we have entered into an agreement with Elyo in which Elyo will purchase all of the outstanding shares that it does not already own (See Note 22 of Notes to Consolidated Financial Statements).
We have established joint ventures with electric utilities to develop and operate combined heat and power plants. Our equity share in the operating results of these joint ventures is reported in equity in earnings/(losses) of non-consolidated partnerships in the Consolidated Statements of Operations.
A significant portion of our revenues and operating profit are subject to seasonal fluctuation due to peak heating demand in the winter and peak cooling demand in the summer.
2. SUMMARY OF ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, SFAS No. 137 was issued, which deferred the effective date of SFAS No. 133. We will adopt SFAS No. 133 effective January 1, 2001. Based on preliminary analyses, we do not expect that the future adoption of SFAS No. 133 will have a material effect on results of operations and financial condition.
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 requires costs of start-up activities and organizational costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. We adopted SOP 98-5 effective January 1, 1999. The effect of the adoption was an after-tax charge of $4.9 million net of a tax benefit of $3.5 million, to expense deferred organizational and start-up costs as a cumulative effect of a change in an accounting principle.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Parent Company and all wholly-and majority-owned subsidiaries. Intercompany accounts and transactions are eliminated.
Certain reclassifications have been made to the prior years' financial statements to conform to the 1999 presentation.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue for energy sold includes both fixed charges and amounts based on energy delivered. Contract rates are either directly negotiated with the customer or approved by the applicable regulatory authority. Sales not billed by month-end are accrued based upon estimated usage. Fees earned are recognized as services are performed.
There is one customer whose revenues were more than 10% of total revenues in 1999. Revenues for the one customer were 11%, 12% and 13% of total revenues in 1999, 1998 and 1997, respectively. Another customer accounted for 11% and 13% of total revenues in 1998 and 1997, respectively. The one customer accounted for 6.9% of the total trade receivable balance at December 31, 1999.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits and temporary investments in high-grade instruments with original maturities at date of purchase of three months or less.
FUEL EXPENSE AND DEFERRED FUEL
Certain of our subsidiaries, either as a result of regulation or contractual agreements with their customers, are allowed to recover all or substantially all of their fuel costs, which is our largest expense. Certain of these subsidiaries estimate the future cost of fuel in current contract rates. Differences between the estimated fuel costs and actual fuel costs are deferred and subsequently charged to or rebated to the customer through future rate adjustments.
INVENTORIES
Inventories are comprised principally of fuel, operating supplies and spare parts. Fuel inventories are stated at cost determined on a first-in, first-out basis and materials and supplies and spare parts are stated at average cost. The portion of spare parts inventories not expected to be used within one year is classified as non-current.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is computed by the straight-line method over the estimated useful lives commencing when assets, or major components thereof, are placed in service. Renewals or betterments are capitalized, while maintenance and repair costs are expensed.
DEFERRED COSTS AND OTHER ASSETS
Included in deferred costs and other assets are capitalized costs associated with debt financing, deferred contract costs, development projects and other non-current assets. Financing costs are capitalized and amortized over the debt term using methods that approximate the interest method. Deferred contract costs are costs incurred to complete certain energy contracts. These costs are deferred and amortized over the contract period. Costs incurred in developing energy generation facilities after the execution of a letter of intent are accumulated by project and included in the acquisition cost or as construction in process for that project.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
Included in intangible assets are costs in excess of the net assets of acquired companies, non-compete agreements with former majority owners of acquired companies, a fuel management contract and organization costs. The costs in excess of the net assets of acquired companies is being amortized over periods not exceeding 32 years. The non-compete and fuel management agreements are being amortized over the terms of the agreements, 15 and 19 years, respectively. We continuously assess the recoverability of these intangible assets by evaluating whether the amortization of the intangible assets over the remaining lives can be recovered through expected future results. Expected future results are based on projected undiscounted operating results before the effects of intangible amortization. The amount of impairment, if any, is measured based on projected discounted future results, using a discount rate reflecting our average cost of funds.
FOREIGN CURRENCY TRANSLATION
Income and expenses of Canadian subsidiaries are translated to U. S. dollars at rates in effect during the year, and assets and liabilities at year-end rates. Translation adjustments are included in stockholders' equity in the Consolidated Balance Sheet. Foreign currency transaction gains and losses are included in net earnings.
FINANCIAL INSTRUMENTS
We use financial instruments to limit the financial risk of increases in interest rates on its floating rate debt. The differential to be paid or received under financial instruments is accrued and recognized in interest expense as interest rates change.
INCOME TAXES
We use the asset and liability method of accounting for income taxes following the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
ENVIRONMENTAL EXPENDITURES
Expenditures that relate to an existing condition, which do not contribute to current or future revenue generation and expenditures incurred for environmental compliance with respect to pollution prevention and ongoing monitoring programs, are expensed as incurred. Expenditures that increase the value of the property are capitalized.
EARNINGS PER COMMON SHARE
Following is a reconciliation of basic earnings per common share to diluted earnings per common share for the three years ended December 31, 1999 (in thousands, except per share data).
Certain stock options are not considered in the above computations due to the fact that they would be anti-dilutive.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUPPLEMENTARY INCOME INFORMATION
Included in other income, net for the year ended December 31, 1999, is a pre-tax gain of $14.5 million related to the Grays Ferry Cogeneration Partnership litigation settlement agreement. The gain represents the market value of the share of the Partnership that we received as part of this settlement. (See Note 23 of Notes to Consolidated Financial Statements, Legal Proceedings). In addition, included in other income, net for the year ended December 31, 1999, is a pre-tax gain of $1.8 million associated with the sale of marketable securities. Included in other income, net for the year ended December 31, 1998, were pre-tax gains of $2.1 million from the sale of nitrogen oxide emission allowances and $1.7 million from an insurance settlement.
4. CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE
Effective January 1, 1999, we adopted the American Institute of Certified Public Accountants Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that costs associated with start-up activities and organizational costs be expensed as incurred. The effect of the adoption was an after-tax charge of $4.9 million, net of a tax benefit of $3.5 million, to expense deferred organizational and start-up costs as a cumulative effect of a change in an accounting principle.
5. EXTRAORDINARY ITEM
We incurred extraordinary charges of $.3 million during 1998, net of a tax benefit of $.2 million, in connection with the early retirement of debt.
6. ACQUISITIONS
On January 22, 1998, we acquired all of the capital stock of Power Sources, Inc. (renamed Trigen-BioPower, Inc.), a biomass-to-energy power plant developer and operator, for a total cash investment of $44.1 million, funded from our existing credit facility. Results for Trigen-BioPower have been consolidated with our results since the date of acquisition.
The acquisition was accounted for under the purchase method of accounting. The purchase price has been allocated to the assets acquired and liabilities assumed based on fair market value at the date of acquisition. The excess of the purchase price over the net assets was $10.4 million and is being amortized over a period of 30 years. The fair value of the assets acquired and liabilities assumed is as follows (in thousands):
The following unaudited pro forma summary presents the consolidated results of operations for the year ended December 31, 1998 as if the acquisition had occurred at the beginning of the year presented (in thousands, except per share data):
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma results included certain adjustments for depreciation expense as a result of a step up in the basis of property, plant and equipment and an increase in the remaining useful lives, amortization expense as a result of goodwill and other intangible assets and interest expense on borrowings to finance the acquisition. The pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisition been made at the beginning of the year presented, or of results which may occur in the future.
On September 23, 1998, we purchased an additional 48% interest in the Trigen-Nations Energy Company Limited Partnership from Nations Energy Corporation for $21.3 million. This limited partnership owns the energy production assets in service to Coors Brewing Company in Golden, Colorado. On June 22, 1999, we purchased an additional 1% of the limited partnership for $.3 million. The combined excess of purchase price over the net assets purchased was $9.6 million and is being amortized over a period not exceeding 32 years. These purchases increased our investment in Trigen-Nations Energy Company from 51% to 100%.
7. RESTRICTED FUNDS
Under the terms of our debt agreements, a portion of the cash of the operating subsidiaries is restricted in use, first to paying the operating costs of the respective subsidiary, then its debt service obligations, in the priority stipulated in the respective debt agreements. Restricted funds at December 31, 1999 and 1998 were (in thousands):
Under the terms of the debt agreements, payments from subsidiaries to affiliated companies, including the Parent Company, are permitted, provided no default exists or would be created by the payment and either (a) the payment is to reimburse the Parent Company for management costs as permitted by the respective debt agreement or (b) the subsidiary meets financial tests, which may include debt coverage, working capital or equity tests, as specified in the respective agreement.
8. INVENTORIES
Inventories at December 31, 1999 and 1998 were (in thousands):
At December 31, 1999, we had purchase commitments for fuel at prices discounted from the spot market and at fixed prices. The aggregate commitment under these contracts is estimated to be $14.2 million based on current spot prices. These contracts expire at varying dates from March 2000 through December 2000. We have fuel cost pass-through clauses in our rates with customers for all of these commitments.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 was (in thousands):
Substantially all of our assets are pledged as collateral under our debt agreements (See Note 13 of Notes to Consolidated Financial Statements). In 1999, we recognized an asset impairment loss of $3.0 million ($1.8 million net of tax) in accordance with SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This loss is the difference between the carrying value of the long-lived assets of a division of our Canadian subsidiary and the fair value of those assets based on discounted estimated future cash flows. The loss is included in depreciation expense.
10. INTANGIBLE ASSETS
Intangible assets at December 31, 1999 and 1998 were (in thousands):
Amortization expense for the years ended December 31, 1999, 1998 and 1997 was $2.7 million, $2.9 million, and $1.7 million, respectively.
11. DEFERRED COSTS AND OTHER ASSETS
Deferred costs and other assets at December 31, 1999 and 1998 were (in thousands):
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense for the years ended December 31, 1999, 1998 and 1997 was $2.2 million, $1.6 million and $1.8 million, respectively.
12. SHORT-TERM DEBT
United Thermal Corporation, a wholly-owned subsidiary of the Parent Company, together with its affiliated companies ("UTC"), have a $15 million revolving credit facility available (the "UTC Revolver") through June 30, 2000, and, upon approval of the lender, for additional one year periods thereafter. The UTC Revolver is secured pro rata with the UTC Term Loan (See Note 13 of the Notes to Consolidated Financial Statements). UTC is required to have 60 consecutive days each year with no outstanding borrowings under the UTC Revolver. UTC has several interest rate options under the UTC Revolver including LIBOR. The balance outstanding under this facility at December 31, 1999 and 1998 was $15 million, and the average rate on this borrowing was 6.4% in 1999 and 6.5% in 1998. The effective rate at December 31, 1999 was 7.3%.
13. LONG-TERM DEBT
Long-term debt outstanding at December 31, 1999 and 1998 was (in thousands):
(a) On April 4, 1997, we entered into a $160.0 million revolving credit agreement with several banks. This facility was used to repay indebtedness outstanding under a $62.5 million credit facility entered into in 1995. The $160.0 million facility is for an initial period of three years and may be extended by a total of two one-year periods. Borrowings under the facility bear interest, at our option, at an annual rate equal to the base rate or the LIBOR rate plus3/4%. The base rate is the higher of the prime lending rate or the Federal Reserve reported Federal funds rate plus1/2%. On June 10, 1997, we amended the $160.0 million credit agreement by reducing the facility to $125.0 million and entered into a $35.0 million revolving credit facility with the same group of banks. The new facility is for an initial 364-day period and may be extended annually at the option of the banks. The terms and conditions of both facilities are the same. On September 23, 1998, the $125.0 million three year facility was increased by $35.75 million and the initial period was increased by one year. The base rate is the higher of the prime lending rate or the Federal Reserve reported Federal funds rate. The average effective rate on the facility was 6.0% in 1999 and the rate at December 31, 1999 was 7.2%.
(b) The UTC term loan and the UTC Revolver (Note 12) (together the "UTC Debt") are secured by all the assets and revenues of UTC. The Parent Company has guaranteed the UTC Debt in an amount which is limited, except for liabilities of UTC arising from environmental matters, to the lesser of $31.7 million and one-third of the UTC Debt commitments.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest on the UTC term loan is at variable rates based on LIBOR. The average effective rate was 7.3% in 1999, 7.8% in 1998 and 7.3% in 1997. The rate at December 31, 1999 was 8.1%. UTC has purchased interest rate protection agreements (See Note 14 of Notes to Consolidated Financial Statements). Principal repayments commenced in June 1994, with final maturity in September 2004.
(c) Interest on the Nassau term loan is at variable rates based on LIBOR. The average effective rate was 6.4% in 1999, 6.8% in 1998 and 6.7% in 1997. At December 31, 1999, the effective rate was 7.2%. Principal repayments commenced in June 1992, with final maturity in December 2003.
The Nassau bonds were issued by the Town of Hempstead Industrial Development Authority. In February 1998, the Nassau bonds were refinanced as variable rate demand tax-exempt industrial development bonds. A bank has issued a letter of credit in favor of the bondholders in the event of default. Interest is variable, and the average effective rate was 3.2% in 1999.
The Nassau term loan and the Nassau bonds are without recourse to the Parent Company. All the assets and revenues of Trigen-Nassau Energy Corporation ("Trigen-Nassau"), a wholly owned subsidiary of the Parent Company are pledged to secure the term loan and bonds. Upon certain events, Trigen-Nassau will be required to enter into interest rate protection agreements the effect of which is to fix the rate on 50% of the aggregate outstanding principal amounts of the term loan and bonds for a minimum of five years.
(d) The Trenton bonds were issued by the New Jersey Economic Development Authority, and are payable solely from revenues and other funds pledged by Trigen-Trenton Energy Company, L.P., a majority-owned subsidiary of the Parent Company. The bonds require annual sinking fund payments that began December 1993 with final maturity in December 2010. The interest rates were fixed to maturity at 6.1%-6.2% on $34.6 million of the bonds (the tax-exempt portion).
(e) Interest on the Oklahoma term loan is at variable rates based on LIBOR. The average effective rate was 6.6% in 1999, 7.0% in 1998 and 7.1% in 1997. The rate at December 31, 1999, was 7.0%. Principal repayments commenced in December 1994, with final maturity in September 2007.
The Oklahoma bonds were issued by the Oklahoma City Industrial and Cultural Facilities Trust. Interest is 6.75% per year. Principal payments are due from 2008 through 2017. A bank has issued a letter of credit in favor of the bondholders in the event of default.
The Oklahoma term loan and the Oklahoma bonds are without recourse to the Parent Company. All the assets of Trigen-Oklahoma Energy Corporation ("Trigen-Oklahoma"), a wholly owned subsidiary of the Parent Company, are pledged to secure the term loan and bonds. Upon certain events, Trigen-Oklahoma will be required to enter into interest rate protection agreements the effect of which is to fix the rate on 75% of the aggregate outstanding principal amounts of the term loan and bonds for an average life of seven years.
(f) Interest on the term loan for Trigen Energy Canada Inc., a wholly owned subsidiary of the Parent Company, ("Trigen-Canada") was at variable rates during 1999 based on Canadian bankers' acceptances. The average effective rate was 6.3% in 1999, 5.39% in 1998 and 4.6% in 1997. At December 31, 1997, Trigen-Canada entered into an interest rate swap agreement fixing the rate on the outstanding principal amount (See Note 14 of Notes to Consolidated Financial Statements). The rate at December 31, 1999 was 5.3%. The term loan is secured by the assets of Trigen-Canada, with limited recourse to the Parent Company in the event of any shortfall in debt service payments by Trigen-Canada.
(g) Trigen-BioPower ("BioPower") secured revolving credit facility is without recourse to the Parent Company. All the assets of BioPower, a wholly owned subsidiary of the Parent Company are pledged to secure the loan. The facility requires BioPower to meet certain financial tests and contains restrictions. The average effective rate was 7.63% for 1999 and 7.03% for 1998. The effective rate at December 31, 1999 was 8.13% and 7.03% in 1998.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) Trigen-BioPower bonds were issued by the Development Authority of St. Mary's (Georgia) as variable rate demand tax-exempt pollution control revenue bonds. A bank has issued a letter of credit in favor of the bondholders in the event of default. Interest is variable, and the average effective rate was 3.68%. The Parent Company has guaranteed this debt.
(i) On December 30, 1998, we borrowed from an affiliate, Cofreth American Corporation, $50.0 million for acquisitions and project development. The $50.0 million was initially used to partially pay down the Corporate facility. The $50.0 million is subordinate and junior in right of payment to all other debt. The subordinated debt may be redeemed in whole or in part at the option of Cofreth American Corporation with the net proceeds of an equity sale by the Company. The debt matures on December 31, 2010 and the interest rate is 7.38%.
Our debt agreements limit or restrict cash payments, the payment of dividends, capital expenditures, incurrence of new debt and transactions with affiliates. At December 31, 1999, we were in compliance with all covenants contained in our debt agreements (See Note 23 of Notes to Consolidated Financial Statements for default information related to Grays Ferry Cogeneration Partnership).
Maturities of long-term debt for the next five years are as follows (in thousands):
Based upon the debt balances at December 31, 1999, a change in the LIBOR rate of .25% would have a corresponding change in interest expense of approximately $.8 million per year when three-month LIBOR is under 6.0% ranging to approximately $.7 million per year when three-month LIBOR is over 7.5%.
Three-month LIBOR at December 31, 1999 was 6.00125%.
Cash paid for interest was $23.8 million, $21.0 million and $17.3 million in 1999, 1998 and 1997, respectively.
14. FINANCIAL INSTRUMENTS
The estimated fair value of long term debt approximates carrying value at December 31, 1999. The fair value of receivables, payables and short-term debt approximates carrying value at December 31, 1999 due to the short-term maturity of these instruments.
As of December 31, 1999, we had outstanding interest rate swap, cap and collar agreements related to $39.4 million of debt outstanding, with an average fixed interest rate of 6.2% and an average remaining life of 5 years. The fair value of the swap, cap and collar agreements was a receivable of $1.5 million.
In addition to the letters of credit issued with respect to the Nassau, BioPower and Oklahoma bonds (See Note 13 of Notes to Consolidated Financial Statements), we had outstanding a contingent liability for letters of credit of $7.9 million at December 31, 1999.
15. LEASES
We have entered into various leasing arrangements for office space, land and equipment. These arrangements are accounted for as operating leases.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental payments under operating leases with remaining non-cancelable terms in excess of one year at December 31, 1999 are (in thousands):
Excluded from the above future minimum rental payments are two operating leases, one for a term of 25 years and the other for 99 years. The 25-year lease is for land, facilities and equipment and the 99-year lease is for land. The current annual rental payments for these leases are $1.0 million and the total remaining commitments at December 31, 1999 are estimated to be $27.5 million.
Rental expense was $4.4 million in 1999, $4.2 million in 1998 and $3.7 million in 1997.
16. STOCK OPTIONS
Our stock incentive plan provides for the granting of stock options, stock appreciation rights, performance shares, restricted stock and other stock awards to officers and key employees and stock options to non-employee directors. In 1997, shareholders approved an increase in the number of shares of common stock that may be issued under the stock incentive plan to 2,000,000 shares.
Stock options outstanding under the stock incentive plan were granted at a price equal to 100% of the market price on the date of grant. Stock options granted to non-employee directors are exercisable six months from the date of grant, and are exercisable until the earlier of the tenth anniversary of the date of grant, or the first anniversary of leaving the Board of Directors. Stock options granted to employees vest at the rate of 20% per year, starting on the first anniversary of the grant date and are exercisable over a period of ten years from the date of grant, with the exception of grants of stock options in 1995 for 18,800 shares, which vested immediately.
During 1998, we reviewed the stock option program and approved an option exchange program covering 291,100 outstanding stock options which were granted under the 1997 stock-based compensation program with stock exercise prices greater than $14.00 per share. This exchange program provided that all eligible management had the right to exchange existing options with strike prices greater than $14.00 for new options with a strike price of $14.00.
Information relating to stock options granted during 1999, 1998 and 1997 is summarized as follows:
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes information about stock options outstanding at December 31, 1999.
- --------- (a) Average contractual life remaining in years.
We apply APB 25 in accounting for our stock option plan. Accordingly, compensation expense would be recorded on the date of grant only if the current market price of our common stock exceeded the exercise price. Had compensation expense for the stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with SFAS No. 123, net earnings would have decreased by $.6 million ($.05 per common share) and $.6 million ($.05 per common share) in 1999 and 1998, respectively.
The fair value of each option was estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions: risk free interest rates of 5.7 % and 5.3% for 1999 and 1998, respectively; annual dividend yields of 1.22% for 1999 and 1998; expected option life of 8.1 years for 1999 and 8 years for 1998; and volatility of 41% and 37% for 1999 and 1998, respectively. The weighted average fair value of an option granted during 1999 and 1998 was $8.15 and $6.33 per share, respectively.
Pursuant to the terms of the Merger Agreement (See Note 22 of Notes to Consolidated Financial Statements) all options to acquire Trigen's stock will be cancelled. Each holder of an option will receive an amount in cash equal to the excess, if any, of the merger consideration over the per share exercise price of such option without interest.
In connection with the employee stock purchase plan, we allocated 200,000 shares of common stock for purchases pursuant to such plan. On September 9, 1999, we amended the 1994 Stock Purchase Plan to increase the number of shares of stock available thereunder from 200,000 to 400,000. The amendment is subject to approval by our stockholders. Stock purchased in 1999, 1998 and 1997 pursuant to the employee stock purchase plan was 63,367, 46,050 and 32,028 shares, respectively. The acquisition price of the stock is 85% of the lower of the closing market price on the first and last day of the six-month purchase period.
RESTRICTED STOCK
We launched a long-term restricted stock-based compensation program in 1997. The program's primary objective is to focus management on increasing shareholder value. The program has two components: (a) stock ownership goals; and (b) a restricted share award. The restricted shares, which have a life cycle of eight years, will remain restricted until we announce accumulated basic Earnings per Share over four consecutive fiscal quarters of $2.08. This earnings target represents a doubling of our 1996 Earnings per Share figure. In addition to the earnings target, the shares are also restricted from vesting unless the participant achieves his/her prescribed stock ownership levels. Each participant has been provided with a stock ownership target. The stock ownership targets are stated as a percentage of the participant's restricted share award and the percentages are progressive based on the increase in role and responsibility.
During 1999, we granted 32,400 restricted shares to certain employees. Deferred compensation based on the market price of the stock on the date of the grants totaling $.7 million was recorded in 1999. 5,525 restricted shares were canceled in 1999 due to employees leaving the Company, resulting in a reduction in unearned compensation of $.1 million. We are amortizing unearned compensation into earnings over the vesting period of eight years.
Pursuant to the terms of the Merger Agreement (See Note 22 of Notes to Consolidated Financial Statements), these shares of restricted stock will be cancelled and each holder will, promptly after the effective time of the merger, receive, for each share of restricted stock, an amount of cash equal to one-fourth of the merger consideration.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RETIREMENT PLANS
We sponsor a 401(k) Plan which allows participants to make contributions pursuant to Section 401(k) of the Internal Revenue Code. We match employee contributions in varying percentages according to a schedule up to an annual maximum employer contribution of approximately $1,290 per employee. Employees vest immediately in both employee and employer contributions. Employer contributions to the 401(k) Plan were $1.1 million (including the cost of 47,646 shares of our common stock), $1.0 million (including the cost of 21,576 shares of our common stock), and $1.1 million (including the cost of 23,902 shares of our common stock) in 1999, 1998 and 1997, respectively. Effective January 1, 1995, the 401(k) Plan was open to all of our employees excluding certain employees covered by other retirement plans.
Benefits payable under a defined benefit plan were frozen as of December 31, 1994 pending vesting and distribution to participants. Benefits under the plan are based primarily on salary during the term of employment and length of service. Pension expense was $42,000, $39,000 and $316,000 in 1999, 1998 and 1997, respectively. Our net obligation under the plan at December 31, 1998 was not significant.
18. INCOME TAXES
The provision for income taxes was (in thousands):
The tax effects of temporary differences that give rise to deferred tax liabilities and assets at December 31, 1999 and 1998 are (in thousands):
Net current deferred income tax assets of $5.5 million and $3.4 million at December 31, 1999 and 1998, respectively, are included in prepaid expenses and other current assets, net in the Consolidated Balance Sheet.
At December 31, 1999, a loss carryforward of $2.9 million was available to offset Canadian taxable income expiring $.7 million in 2003, $.9 million in 2004, $.8 million in 2005 and $.6 million in 2006. At December 31, 1999, an alternative minimum tax credit carryforward of $5.8 million was available to offset future U.S. regular income taxes, if any, over an indefinite period. Valuation allowances were primarily for tax loss carryforwards in state and local jurisdictions that may expire before being used. We believe that it is more likely than not that we will generate taxable income sufficient to realize the loss carryforwards prior to their expiration. This belief is based upon projected taxable income and available tax planning strategies.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of tax at the U.S. statutory rate to the effective income tax rate follows:
We made income tax payments of $5.9 million, $2.2 million and $2.2 million in 1999, 1998 and 1997, respectively. Taxes on receipts or capital, imposed by some jurisdictions in lieu of taxes on income are included in general and administrative expenses. These taxes were $1.3 million, $.7 million and $.8 million in 1999, 1998 and 1997, respectively.
19. EQUITY INVESTMENT IN GRAYS FERRY COGENERATION PARTNERSHIP
As of December 31, 1999, we had an investment of $39.3 million in the Grays Ferry Cogeneration Partnership (the "Partnership"), representing a one-half interest in the Partnership through our wholly owned subsidiary Trigen-Schuylkill Cogeneration, which is accounted for under the equity method. Cogen America Schuylkill Inc. owns the other one-half interest in the Partnership. We derive a significant portion of our income from the Partnership. Included in our revenues for the year ended December 31, 1999 was our pre-tax share of the Partnership earnings of $8.1 million and fees earned from the Partnership of $3.1 million. The summarized financial information presented below as of December 31, 1999 represents an aggregation of 100% of the Partnership (in thousands).
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------
(a) As of January 1, 1998, we changed our accounting policy for interim reporting for certain operating costs from an average costing method to an actual costing method. We believe that use of an actual costing methodology better reflects the results of our operations and conforms internal and external reporting of such results. This change effects interim quarterly reporting only and has no effect on an annual basis for the years ended December 31, 1999, 1998 and 1997 or on any prior years. The amounts presented above for 1998 and 1997 have been restated to reflect this change in accounting policy.
(b) Reflects an after-tax charge of $4.9 million related to the adoption of SOP 98-5 "Reporting on the costs of Start-Up Activities" which was recorded as a cumulative effect of a change in accounting principle. See Note 4 of Notes to Consolidated Financial Statements.
(c) Represents extraordinary losses of $.3 million, net of a $.2 million tax benefit, incurred in 1998, in connection with the early retirement of debt.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. CONTINGENCIES
We are subject from time to time to legal proceedings and other claims that arise in the normal course of business, and we believe, except as set forth in Note 23 of Notes to Consolidated Financial Statements, that the outcome of these matters will not have a material adverse effect on our results of operations or financial condition.
22. SUBSEQUENT EVENT
On January 19, 2000, Trigen and Elyo, an energy subsidiary of the Suez Lyonnaise des Eaux Group, jointly announced that they have entered into a definitive merger agreement for Elyo to purchase all of the outstanding shares of Trigen it does not already own for $23.50 a share in cash. Elyo's subsidiaries currently own approximately 53% of Trigen common stock. On March 27, 2000, Elyo announced the completion of the tender offer. As of that date, Elyo had beneficial ownership of aproximately 96% of Trigen's common stock.
23. LEGAL PROCEEDINGS
OKLAHOMA LITIGATION
In September 1996, our subsidiary, Trigen-Oklahoma City Energy Corporation ("Trigen-Oklahoma City"), commenced an antitrust action in Federal District Court in Oklahoma City seeking injunctions and actual, treble and punitive damages from a local utility, Oklahoma Gas and Electric Company ("OG&E"), based on alleged anti-competitive actions against Trigen-Oklahoma City Energy Corporation by OG&E. Trigen-Oklahoma City's antitrust action went to trial in 1998 and on December 21, 1998, the jury returned a verdict in favor of Trigen. On January 19, 1999, the Court entered a judgment in favor of Trigen in the amount of $27.8 million. On January 25, 2000 the court decided post-trial motions to vacate or modify the judgment reducing the judgment to $20.6 million. OG&E has filed an appeal to the Tenth Circuit Court of Appeals and has posted a bond in order to stay enforcement of the judgment pending appeal. Trigen has filed a cross-appeal. Trigen's separate motion for attorney's fees (seeking approximately $3 million) is pending but OG&E has requested that the court postpone a hearing on that motion until the appeals are decided by the Circuit Court. We have not recognized any gain with respect to this matter because we cannot predict the final outcome.
KINETIC ENERGY LITIGATION
On May 2, 1997, a judgment was entered against us in the amount of $4.3 million following a jury trial in a law suit by Kinetic Energy Development Corporation against Trigen in the Circuit Court of Jackson County, Missouri, in connection with our acquisition of the Kansas City steam system. Kinetic claimed for compensation alleged to be owed to it by Trigen in connection with that acquisition. On August 6, 1997, the Court set aside the jury verdict and granted judgment for Trigen. Kinetic Energy Development Corporation appealed that order and on December 8, 1998, the Missouri Court of Appeals set aside the lower court decision and ordered a new trial. On December 22, 1998, we filed a motion for rehearing with the Missouri Court of Appeals and/or a review by the Missouri Supreme Court. The Court of Appeals granted our motion for rehearing. On September 7, 1999, the Court of Appeals held that Kinetic had proven only nominal damages at trial and returned the case to Circuit Court for retrial. The retrial will allow Kinetic to attempt to establish that it is entitled to some award for the reasonable value of its services, if any, in connection with the Trigen acquisition of the Kansas City steam system. The case presently awaits rescheduling for trial. We believe we have good defenses to these claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GRAYS FERRY LITIGATION
On April 23, 1999, the Pennsylvania Court of Common Pleas of Philadelphia County approved a settlement agreement which ended the lawsuit brought by Grays Ferry Cogeneration Partnership (the "Partnership"), Trigen-Schuylkill Cogeneration, Inc. and CogenAmerica Schuylkill Inc. against PECO Energy Company and Adwin (Schuylkill) Cogeneration, Inc. The Partnership is the owner of the Grays Ferry Cogeneration Facility located in Philadelphia, Pennsylvania. The Partnership, Trigen-Schuylkill and CogenAmerica commenced this lawsuit in reaction to the alleged termination by PECO on March 3, 1998, of the electric power purchase agreements between the Partnership and PECO (the "Power Purchase Agreements").
Prior to the settlement, we owned a one-third interest in the Partnership through our wholly owned subsidiary, Trigen-Schuylkill. CogenAmerica and Adwin owned the other two-thirds interests in the Partnership. Adwin is an indirect wholly owned subsidiary of PECO. Under the settlement agreement PECO's subsidiary, Adwin, surrendered its rights to its one-third partnership interest in the Partnership to the two remaining partners, Trigen-Schuylkill and CogenAmerica. As a result, we own one half of the Partnership and CogenAmerica owns the other half. During 1999, we recognized an after tax gain of $8.5 million ($.70 per diluted share) which represents the market value of our share of Adwin's interest.
In the year 2001, the energy price under the Power Purchase Agreements will be based upon a percentage of a market based index, which we expect to produce substantially lower revenues from sales to PECO than the more favorable rates of the early contract years. Under the Settlement the Partnership gained the right to sell to third parties electric energy and capacity from the facility in excess of the 150 megawatts which PECO is required to purchase under the Power Purchase Agreements, subject to a right of first refusal for PECO. We expect that the ability to sell to third parties electric energy and capacity above the 150 megawatts under contract to PECO, will result in an opportunity to improve the financial performance of the Partnership. The Partnership will now have the ability to institute capital modifications to the combustion turbine to increase electric capacity during the summer months when the price of electric capacity and energy are historically the highest.
Separately, The Chase Manhattan Bank, as agent for several commercial banks (collectively "Chase"), and Westinghouse Power Generation, which collectively financed the construction of the Gray's Ferry Cogeneration Facility, agreed to dismiss their lawsuits against PECO. Chase and Westinghouse also agreed that they will not charge the Partnership for any default interest up to April 16, 1999, although they have reserved the right to do so with respect to the period after April 16, 1999.
The Partnership is in default under its separate credit agreements with Westinghouse and Chase for the following reasons. The Partnership did not convert on time its short-term construction loan from Chase to a longer term loan. The Partnership could not complete that conversion because of a dispute with the construction contractor, which has now been resolved. The Partnership also did not make principal payments to Westinghouse because the Chase loan agreement prohibits such payments to subordinate parties while the Partnership is in default. Westinghouse is a subordinate party.
The Partnership owes a total principal amount of approximately $79.4 million to Chase. Chase has not accelerated the debt owing under the Credit Agreement. Chase has required to date, and may require in the future, the Partnership to apply available cash held by Partnership (net of operating expenses) toward repayment of the principal amount of the loans outstanding to Chase. The Partnership owes a total principal amount of approximately $15 million to Westinghouse. On March 1, 2000, Westinghouse demanded full payment of the amount owing to Westinghouse under its credit agreement. Only the Partnership assets and the Partners' ownership interests in the Partnership secure the Partnership's debt under the Chase and Westinghouse loans.
To resolve these matters we have negotiated an amendment to the credit agreement with Chase and we are negotiating with Westinghouse and other subordinate parties. The Partnership has accrued $3.0 million in default interest since April 16, 1999.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NASSAU LITIGATION
On May 29, 1998, the County of Nassau, New York commenced an action against Trigen Energy Corporation and Trigen-Nassau Energy Corporation in New York State Supreme Court. Trigen-Nassau provides energy services to Nassau County under various agreements. Nassau County alleges that Trigen-Nassau breached those agreements by, among other means, charging the County for certain real estate taxes that the County contends are Trigen-Nassau's responsibility. On October 8, 1998, the Court dismissed the claims against Trigen Energy Corporation. On November 9, 1998, Trigen-Nassau filed counterclaims against Nassau County, seeking $1.6 million in damages. Trigen-Nassau alleges that Nassau County breached the parties' agreements by, among other things, failing to operate and maintain certain facilities and equipment. On January 21, 1999, the County requested that the Court dismiss Trigen-Nassau's counterclaims. On April 5, 1999, the Court dismissed some but not all of Trigen-Nassau's counterclaims. The Court declined to dismiss Trigen-Nassau's counterclaims that seek approximately $1.5 million in damages. The County is seeking approximately $10 million in damages. We believe we have good defenses to the County's claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
ESI LITIGATION
In 1996 ESI, Inc. commenced an action against, among others, Coastal Power Company, Latin American Energy Development, Inc. and La Casa Castro S.A. de N.V. in the United States District Court for the Southern District of New York. On September 17, 1998, ESI, Inc. amended its complaint naming Trigen as an additional defendant. This action arises out of the development by Trigen, Latin American Energy, La Casa Castro and others, of an independent power project in El Salvador between 1993 and 1994. Trigen transferred its interest in the project to Tenneco Gas International in May 1994. In July 1994, Tenneco transferred its interest in the project to Coastal Power Company, which currently owns and operates the project. ESI claimed that ESI was entitled to a 2.5% interest in the project and that Coastal had wrongfully withheld or denied ESI's interest. ESI further claimed that Trigen had failed to disclose ESI's interest to Tenneco and so was responsible, in whole or in part, for ESI's failure to receive a 2.5% interest in the project from Coastal.
On October 8, 1998, Latin American Energy asserted cross-claims against Trigen, Coastal and Tenneco claiming that it too had been denied its carried interest in the Project. On October 28, 1998, La Casa Castro asserted cross-claims against Trigen and on November 6, 1998, Coastal asserted cross-claims against Trigen for indemnification, each alleged that Trigen failed to disclose ESI's claimed interest to Tenneco and that Trigen was responsible for any damages that each may be required to pay to ESI and Latin American.
On December 15, 1998, Trigen filed an amended answer denying liability for these claims and cross-claimed against Latin American Energy, Tenneco, Coastal and La Casa Castro, asserting that these parties were responsible for any damages owed to ESI and Latin American. On December 23, 1998, ESI and Latin American dismissed without prejudice their claims against Trigen.
Coastal and La Casa Castro are continuing to assert their claims against Trigen for any damages they may be required to pay to ESI or Latin American. At this time, the case is in the early stages of discovery and as such we are not able to estimate the amount of damages that ESI and Latin American are seeking. We believe we have good defenses to Coastal's claims and La Casa Castro's claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SHAREHOLDER CLASS ACTIONS AGAINST TRIGEN
COMPLAINTS OF FOTHERGILL, CORTEZ, AND BERKOWITZ.
On September 23, 1999, three complaints were filed in the Court of Chancery of the State of Delaware against: Trigen Energy Corporation, Suez Lyonnaise Des Eaux SA, Patrick Buffet, George F. Keane, Thomas R. Casten, Philippe Brongniart, Olivier Degos, Patrick Desnos, Richard E. Kessel, Charles E. Bayless, Michel Bleitrach, Dominique Mangin D'Ouince and Michel Cassou. The individual defendants were sued in their capacity as Trigen directors and/or former Trigen directors. The complaints were filed, respectively, by Michael Fothergill, Rosa Cortez and Sarah Berkowitz. Each complaint was filed purportedly as a class action on behalf of the Company's shareholders. The complaints raised substantially identical allegations: that Trigen received a proposal from Suez to take Trigen private for $22.00 per share in cash. The plaintiffs alleged that this price does not represent the true value of Trigen and is unfair to the minority shareholders. Plaintiffs further alleged that because Suez owns approximately 52% of Trigen's outstanding shares, Suez has the power to effectuate the transaction without regard to the minority shareholders. Plaintiffs sought class certification, declaratory and injunctive relief (or money damages if the transaction is consummated), and an accounting. By agreement of the parties, an order has been entered consolidating all three actions under the Fothergill caption.
On February 22, 2000, counsel for ELYO and the plaintiffs reached an agreement to settle this lawsuit, subject to court approval. The settlement does not require any payment to the plaintiffs from the Company or its directors. Accordingly, we have not recognized any loss or expense (other than defense costs and certain costs of providing Notice of settlement to the Class members) with respect to this matter, although we cannot predict the final outcome. The parties are in the process of submitting this settlement to the Court of Chancery of the State of Delaware for approval.
COMPLAINT OF RICE.
On March 16, 2000, Adam Rice filed a complaint in the Supreme Court of the State of New York, County of Westchester against Trigen Energy Corporation, Suez Lyonnaise Des Eaux S.A., Elyo, S.A., T Acquisition Corporation, Christine Morin-Postel, Richard E. Kessel, George Keane, Patrick Buffet, Olivier Degos, Philippe Brongniart, Michel Bleitrach, Dominique Mangin D'Ouince and Charles Bayless. The complaint was filed purportedly as a class action on behalf of the Company's shareholders. The individual defendants were sued in their capacity as Trigen directors. The plaintiff alleged that the defendants have breached their fiduciary duties to plaintiff and our public shareholders by not renegotiating and/or reformulating the terms of the tender offer by which T Acquisition Corporation has offered to purchase all of our outstanding shares at a price of $23.50 per share. Plaintiff seeks class certification and money damages as well as other unspecified relief. We believe we have good defenses to these claims. Accordingly, we have not recognized any loss or expense (other than defense costs) with respect to this matter, although we cannot predict the final outcome.
OTHER LITIGATION
We are subject from time to time to various other claims that arise in the normal course of business, and we believe that the outcome of these matters (either individually or in the aggregate) will not have a material adverse effect on our business results of operation or financial condition.
See accompanying notes to condensed financial statements.
S-1
SCHEDULE I--(CONTINUED)
TRIGEN ENERGY CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
See accompanying notes to condensed financial statements.
S-2
SCHEDULE I--(CONTINUED)
TRIGEN ENERGY CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
See accompanying notes to condensed financial statements.
S-3
SCHEDULE I--(CONTINUED)
TRIGEN ENERGY CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(1) TRIGEN ENERGY CORPORATION (PARENT COMPANY) FINANCIAL STATEMENTS
The accompanying condensed financial information has been prepared in accordance with Regulation S-X of the Securities Act of 1933 and does not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles since the user of these statements is assumed to read them in conjunction with Trigen Energy Corporation's consolidated financial statements and the notes thereto for the year ended December 31, 1999 included elsewhere in this document.
(2) TRANSACTIONS WITH SUBSIDIARIES
The Parent Company derives cash from management fees and costs recovered from its subsidiaries, distributions by its subsidiaries and, at times, repayment to the Parent Company from proceeds of long-term financing obtained by the subsidiaries for funds previously advanced to subsidiaries for construction in advance of obtaining permanent financing. Certain subsidiaries have restrictive debt agreements which generally permit distributions to the Parent Company only when certain ratios and other financial covenants are satisfied. Cash available to the Parent Company without restrictions as to use, including amounts distributable by subsidiaries was $6.5 million at December 31, 1999, and $1.4 million at December 31, 1998.
(3) DEBT
On April 4, 1997, the Parent Company entered into a $160.0 million revolving credit agreement with several banks. This facility was used to repay indebtedness outstanding under a $62.5 million credit facility entered into in 1995. The $160.0 million facility is for an initial period of three years and may be extended by a total of two one-year periods. Borrowings under the facility bear interest, at the Parent Company's option, at an annual rate equal to the base rate or the LIBOR rate plus 3/4%. The base rate is the higher of the prime lending rate or the Federal Reserve reported Federal funds rate plus 1/2%. On June 10, 1997, the Parent Company amended the $160.0 million credit agreement by reducing the facility to $125.0 million and entered into a new $35.0 million revolving credit facility with the same group of banks. The new facility is for an initial 364-day period and may be extended annually at the option of the banks. The terms and conditions of both facilities are the same. On September 23, 1998, the $125.0 million three year facility was increased by $35.75 million and the initial period was increased by one year. The base rate is the higher of the prime lending rate or the Federal Reserve reported Federal funds rate. The average effective rate on the facility was 6.0% in 1999 and the rate at December 31, 1999 was 7.2%.
The Parent Company has issued certain guarantees relating to the debt of UTC. The Parent Company has guaranteed the UTC debt in an amount which is limited, except for liabilities of UTC arising from environmental matters, to the lesser of $31.7 million and one-third of the UTC debt commitments.
On December 30, 1998, the Company borrowed from an affiliate, Cofreth American Corporation, $50.0 million for acquisitions and project development. The $50.0 million was initially used to partially pay down the Corporate facility. The $50.0 million is subordinate and junior in right of payment to all other debt. The subordinated debt may be redeemed in whole or in part at the option of Cofreth American Corporation with the net proceeds of an equity sale by the Company. The debt matures on December 31, 2010 and the interest rate is 7.38%.
(4) INCOME TAXES
The Parent Company and its domestic subsidiaries file a consolidated U.S. Federal income tax return. The Parent Company's state income taxes are filed on a separate return basis. A valuation allowance for state tax loss carryforwards has been provided because there are carryforwards which may expire before being used.
S-4
SCHEDULE II
TRIGEN ENERGY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
S-5
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 on March 30, 2000.
TRIGEN ENERGY CORPORATION
By: /s/ Richard E. Kessel Richard E. Kessel President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2000.
TRIGEN ENERGY CORPORATION
INDEX OF EXHIBITS
* Filed herewith.
** Incorporated by reference to the corresponding exhibit to the indicated prior filing.