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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 033-69762
CHI ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1138478
-------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 WASHINGTON BOULEVARD, STAMFORD, CONNECTICUT 06901
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (203) 425-8850
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant is not available since there is no public market for the stock.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class A Outstanding as of March 29, 2000
Common stock, $.01 par value 9,085,290
Class B Outstanding as of March 29, 2000
Common stock, $.01 par value 914,710
Page 1 of 85
Exhibit Index begins on page 74
38684.0003
CHI ENERGY, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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Page
Item 1. Business..................................................................................3
Item 2. Properties...............................................................................16
Item 3. Legal Proceedings........................................................................16
Item 4. Submission of Matters to a Vote of Security Holders......................................17
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................18
Item 6. Selected Financial Data..................................................................20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....23
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...............................33
Item 8. Financial Statements.....................................................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....64
PART III
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Item 10. Directors and Executive Officers of the Registrant.......................................64
Item 11. Executive Compensation...................................................................67
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................72
Item 13. Certain Relationships and Related Transactions...........................................73
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................74
2
PART I
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ITEM 1. BUSINESS
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company"), has been engaged in the
energy business since its founding in 1985. Its principal business strategy is
the development, operation and management of renewable energy and related,
environmentally beneficial infrastructure projects. Currently, all of the
Company's revenue is derived from the ownership and operation of hydroelectric
facilities (the Company's "hydroelectric business"). However, the Company is
pursuing the acquisition and development of both hydroelectric and
non-hydroelectric renewable energy facilities that fit its strategic and return
on investment objectives. Non-hydroelectric renewable energy facilities include
those using such technologies as biomass, landfill gas, wind, solar, and
geothermal.
Based on operating megawatts, the Company is the largest independent,
non-utility affiliated hydroelectric power producer in the United States. As of
December 31, 1999, the Company owned, operated or leased 79 projects in the
United States and Canada, with aggregate capacity of approximately 254 megawatts
("MW").
The Company believes that it is well positioned to take advantage of new
business opportunities occasioned both by electric industry restructuring in the
U.S. and other countries, and by increasing public interest in environmental
issues such as global climate change and other potential effects of fossil fuel
consumption. The Company will seek to capitalize on these new opportunities in
energy-related products and services by taking advantage of its existing
technical and financial expertise and using its geographic presence in most U.S.
regions and Eastern Canada to realize economies of scale in development,
acquisition, administration, operation and maintenance of facilities.
CHI is a Delaware corporation. The Company's executive and administrative
offices are located at 680 Washington Boulevard, Stamford, Connecticut 06901 and
its telephone number is (203) 425-8850.
RENEWABLE ENERGY AND ENVIRONMENTAL PROJECTS
Renewable (also known as "green," "sustainable," or "environmentally
preferred") energy is defined broadly to include energy produced by
hydroelectric, biomass, landfill gas, wind, solar, geothermal and various forms
of waste conversion. "Environmental projects" may include waste treatment,
recycling or other facilities that serve such purposes as pollution reduction
and resource conservation. The Company seeks to acquire and develop a
diversified portfolio of projects using a variety of renewable and related
technologies, applying its existing core competencies (including financing,
operations, asset management, environmental permitting and project management)
that have been developed through its hydroelectric business.
The Company believes that electric industry restructuring, which is
rapidly taking place both in the United States and overseas, is converging with
widespread environmental concerns to create a favorable business opportunity for
renewable energy. In the United States, electric supply competition at the
retail level has begun in California and Pennsylvania, and a majority of other
states have taken steps toward deregulating electricity and encouraging
wholesale and retail competition. In approximately 20 of these states,
restructuring legislation or regulations also provide for favorable treatment of
renewable energy through portfolio standards, subsidies, and other requirements
and incentives, and the Company expects this trend to continue as other states
move closer to deregulation. Meanwhile, public support for renewables has
intensified in connection with growing concern over global climate change and
international pressures to limit or reduce greenhouse gases. A strong, active
environmental lobby at the state and federal levels favors action to promote
renewables and is using electric restructuring as a vehicle to institute
incentive programs. Further, there is an emerging market for "emissions
reduction credits" or "greenhouse gas credits" paid by fossil fuel-based
generators to generators of renewable energy, and the future possibility of
government action to create a national market for such credits.
In addition, in states where retail competition has begun or is scheduled
to begin soon, there are active efforts to market green energy to retail
customers who have indicated a willingness to pay a premium to promote
environmentally beneficial technologies. While the commercial success of these
marketing efforts is not yet established, they have served to publicize the
benefits of renewable energy to a wide audience. Meanwhile, large industrial
companies appear to be seeking public approval by publicizing their purchases of
green energy.
3
The Company believes that the combined effect of these developments will
be to increase the value of renewable generation relative to other generating
resources. The Company further believes that its experience and capabilities
developed in the hydroelectric business has positioned it for entry into the
broader renewables field. In addition to its operating portfolio of
hydroelectric facilities, the Company began construction of a 23 MW biomass
facility in 1999 and is actively seeking to acquire or develop other renewable
energy facilities.
HYDROELECTRIC BUSINESS
The Company's operating hydroelectric projects are located in 14 states
and one Canadian province. The U.S. projects are clustered in four regions: the
Northeast, Southeast, Northwest and West, with a concentration in the Northeast,
a region characterized by relatively consistent long-term water flow and power
purchase contract rates which are higher on average than in most other regions
of the country. Additionally, the Company has a 49% ownership interest in an
18.40 megawatt hydroelectric project in Newfoundland, Canada, which it also
operates. The Company currently derives all of its revenues from the ownership
and operation of hydroelectric facilities.
CHI has developed what it believes to be an efficient "hub" system of
project management designed to maximize the efficiency of each facility's
operations. The economies of scale created by this system include reduced costs
related to centralized administration, operations, maintenance, engineering,
insurance, finance and environmental and regulatory compliance. The Company's
hub system and operating expertise have enabled it to successfully integrate
acquisitions into its current portfolio and increase the efficiency and
productivity of its projects. The Company has found that the most efficient way
to operate its projects is to have several projects in a geographic area with
operators who can go to any of the projects as needed. Each of the Company's
regions is broken up into several smaller areas for purposes of assigning
project operators. To address more technical matters the Company bases
maintenance personnel and other technicians at its hubs, with more sophisticated
equipment and a more widely varied inventory of spare parts and supplies than
are kept at an individual project, all available for dispatch to each project.
As of December 31, 1999, the Company had a 100% ownership or long-term
lease interest in 52 projects (150 megawatts), a partial ownership interest in 9
projects (87 megawatts) and operations and maintenance contracts with 18
projects (17 megawatts). The Company sells substantially all of the output from
these projects to public utility companies pursuant to take or pay power
purchase agreements. These contracts vary in their terms, but typically provide
scheduled rates throughout the life of the contracts, which are generally for a
term of 15 to 40 years from inception. See "-- Conventional Hydroelectric
Projects -Power Purchase Agreements".
CHI's initial strategy when it was established in 1985 was to consolidate
the ownership and operation of small, independently-owned hydroelectric plants
in the U.S. During the late 1970's, development of small hydroelectric power
facilities was stimulated by rising oil prices, the enactment by Congress of the
Public Utility Regulatory Policies Act of 1978 ("PURPA") and the adoption of the
regulations thereunder, and certain tax incentives, including the business
energy tax credit and the investment tax credit. PURPA reduced regulatory
procedures for small non-utility power production facilities (known as
"Qualifying Facilities" or "QFs") and required electric utilities to purchase
power from such facilities at a price based on the purchasing utility's full
avoided cost, which is equal to the incremental cost that would have been
incurred if the utility had generated the energy itself or purchased it from
another source. See "-- Energy and Environmental Regulation - Energy
Regulation".
Hydroelectric power is a reliable, cost-effective and non-polluting source
of energy that generally offers the following advantages: (i) it is a proven
technology that has existed essentially unchanged for many years; (ii) it uses
water as a renewable, non-depleting and non-polluting source of energy; (iii) it
has relatively low operating and labor costs, with no fuel costs; (iv)
hydroelectric power facilities typically have economic lives of 50 years or
more; and (v) hydroelectric power facilities can produce other beneficial
impacts such as recreational enhancements, flood control and water supply
management. The disadvantages of hydroelectric power include seasonality,
dependence on satisfactory levels of precipitation and water flow, a factor
which creates difficulty in predicting generating levels for discrete periods,
and, in some cases, environmental impact on both aquatic life and certain
recreational uses near facilities.
Starting in 1985 with an operating portfolio of 6 small projects totaling
5 megawatts of capacity, CHI grew rapidly in terms of numbers of projects and
megawatts owned and operated, as well as in terms of gross revenues, in what was
then a highly regulated noncompetitive electric industry. Beginning in the early
1990s, however, the electric power industry in the United States began to
undergo significant structural changes, evolving from a highly regulated
industry dominated by monopoly utilities to what is becoming a deregulated,
4
competitive industry providing energy customers with an increasing degree of
choice among sources of electric power supply. Reductions in wholesale prices
for electricity, increased efficiency of combustion turbines and other competing
technologies and the deregulation and restructuring of the electric power
industry created a climate of uncertainty with respect to future power prices
and markets for the Company's electric generation. The Company believes,
however, that industry restructuring, including incentive programs to encourage
renewable energy resources and the advent of green power marketers in states
with deregulated electricity markets, may stimulate renewable energy demand and
increase the value of small hydroelectric facilities such as those owned by the
Company.
CHI believes that future growth opportunities in its hydroelectric
business will primarily consist of: (i) potential acquisition of additional
hydroelectric projects; (ii) contract operation, maintenance and management of
hydroelectric projects for others; and (iii) potential project development
opportunities, primarily in Canada and certain overseas markets. The Company
intends to pursue such opportunities on a selective basis, based on the
likelihood of success and expected return on investment.
5
CONVENTIONAL HYDROELECTRIC PROJECTS
The following tables set forth the Company's projects as of December 31,
1999 with 100% ownership, with partial ownership and with O&M contracts:
PROJECTS WITH 100% OWNERSHIP AS OF DECEMBER 31, 1999
(INCLUDING SALE-LEASEBACKS)
POWER PURCHASE DATE OF CHI
AGREEMENT FERC LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT OF
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OPERATIONS(1)
- ------- -------- ----------------------- --------- --------- --------- -------------
Apalache(2)...... Greer, SC Duke Power Co. Dec. 1999 Jul. 2024 0.40 May 1989
Aziscohos (3).... Wilson Mill, ME Central Maine Power Co. Jul. 2008 Mar. 2025 5.31 Jun. 1988
Barber Dam....... Boise, ID Idaho Power Co. Jul. 2022 Nov. 2023 4.14 Dec. 1992
Bear Creek....... Shingletown, CA Pacific Gas & Electric Dec. 2015 Exempt 3.20 Feb. 1990
Beaver Valley.... Beaver Falls, PA Duquesne Power Open Ended(4) Exempt 1.30 Feb. 1995
Boott(3)......... Lowell, MA Commonwealth Elec. Apr. 2023 Apr. 2023 24.82 Dec. 1986
Coneross......... Seneca, SC City of Seneca Jun. 2000 Mar. 2015 0.90 May 1989
Copenhagen....... Copenhagen, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 3.30 Feb. 1995(8)
Crescent......... Russell, MA Groton Electric Light Dept. Oct. 2009(5) Exempt 1.50 Feb. 1995
Dewey's Mill..... Hartland, VT Vermont Electric Power Jan. 2016 Dec. 2032 1.90 Aug. 1993
Producers, Inc.
Dexter........... Dexter, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 4.30 Feb. 1995
Diamond Island... Watertown, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 1.20 Feb. 1995
Dietrich Drop.... Dietrich, ID Idaho Power Co. Jul. 2022 Apr. 2037 4.77 Dec. 1992
Eagle & Phenix(6) Columbus, GA Fieldcrest Cannon Jun. 2006 Feb. 2009 4.26 Jun. 1991
Fowler #7........ Fowler, NY Niag. Mohawk Power Corp. Dec. 2019 Oct. 2002 0.90 Feb. 1995
Fries............ Fries, VA Sempra Energy Trading Corp. Open Ended May 2020 5.21 May 1989
Geo-Bon II....... Lincoln County, ID Idaho Power Co. Mar. 2020 Exempt 1.00 Jun. 1994
Glendale......... Stockbridge, MA Groton Electric Light Dept. Oct. 2009(5) Oct. 2009 0.70 Feb. 1995
Goodyear Lake.... Milford, NY NY State Elec. & Gas Corp. Aug. 2010 Feb. 2019 1.30 Feb. 1995
Great Falls Lower Somersworth, NH Public Serv. Co. of NH Dec. 2011 Apr. 2022 1.29 Jul. 1985
Hailesboro #3.... Fowler, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 0.90 Feb. 1995
Hailesboro #4.... Fowler, NY Niag. Mohawk Power Corp. Dec. 2023 Dec. 2002 1.80 Feb. 1995
Hailesboro #6.... Fowler, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 0.90 Feb. 1995
High Falls....... Franklin County, NY NY State Elec. & Gas Corp. Dec. 2002 Jan. 2026 1.75 Oct. 1993
High Shoals...... High Shoals, NC Duke Power Co. Apr. 2012 Exempt 1.56 Jul. 1993
Kelley's Falls... Manchester, NH Public Serv. Co. of NH Dec. 2005 Mar. 2024 0.45 Dec. 1985
Kings River...... Fresno, CA Pacific Gas & Electric Jan. 2021 Jul. 2037 1.35 Jun. 1994
Kinneytown....... Seymour, CT CT Light & Power Nov. 2016 Exempt 2.36 Nov. 1986
LaChute Lower(3). Ticonderoga, NY Niag. Mohawk Power Corp. Dec. 2015 Exempt 3.60 Dec. 1987
LaChute Upper(3). Ticonderoga, NY Niag. Mohawk Power Corp. Dec. 2015 Exempt 4.90 Dec. 1987
Lawrence......... Lawrence, MA New England Power Co. Dec. 2011(7) Nov. 2028 16.80 Jul. 1986
Long Shoals...... Long Shoals, NC Duke Power Co. Nov. 2000(9) Exempt 0.75 Jul. 1993
Low Line Rapids.. Kimberly, ID Idaho Power Co. Jun. 2022 Exempt 2.80 Dec. 1992
Milstead......... Milstead, GA Municipal Elec. Auth. of GA Apr. 2000 Exempt 1.00 Jul. 1993
Ottauquechee..... N. Hartland, VT Vermont Electric Power Sept. 2017 Exempt 1.89 Jun. 1994
Producers, Inc.
Pelzer Lower..... Williamston, SC Duke Power Co. Sept. 2000(9) Nov. 2017 3.30 Feb. 1990
Pelzer Upper..... Pelzer, SC Duke Power Co. Sept. 2000(9) Nov. 2017 2.00 Feb. 1990
Piedmont......... Piedmont, SC Duke Power Co. Dec. 2000(9) Dec. 2018 1.00 May 1989
Pyrites.......... Canton, NY Niag. Mohawk Power Corp. Dec. 2023 Aug. 2023 8.20 Feb. 1995(10)
Rollinsford...... Rollinsford, NH Public Serv. Co. of NH Sept. 2013 Aug. 2021 1.49 Oct. 1986
Rock Creek II.... Twin Falls, ID Idaho Power Co. Jul. 2019 Aug. 2036 1.90 Dec. 1992
Salmon Falls..... South Berwick, ME Public Serv. Co. of NH Dec. 2006 Dec. 2037 1.20 Jul. 1986
Scotts Flat...... Nevada City, CA Pacific Gas & Electric Dec. 2004 Exempt 0.83 Feb. 1990
6
POWER PURCHASE DATE OF CHI
AGREEMENT FERC LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT OF
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OPERATIONS(1)
- ------- -------- ----------------------- --------- --------- --------- -------------
Theresa.......... Theresa, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 1.30 Feb. 1995
Victory Mills.... Saratoga, NY Niag. Mohawk Power Corp. Dec. 2025 Apr. 2024 1.66 Dec. 1986
Walden........... Walden, NY NY State Elec. & Gas Corp. Nov. 1998(11) May 2022 2.82 Apr. 1986
Ware Shoals...... Ware Shoals, SC Duke Power Co. Dec. 2000(9) Sept. 2001 6.20 May 1989
West Hopkinton... West Hopkinton, NH Public Serv. Co. of NH Nov. 2012 Exempt 1.00 Jul. 1985
Willimantic I.... Willimantic, CT CT Light & Power Dec. 2018 Nov. 2025 0.77 Dec. 1991
Willimantic II... Willimantic, CT CT Light & Power Dec. 2018 Sept. 2025 0.77 Dec. 1991
Woodside I....... Norris, SC Duke Power Co. Dec. 2000(9) Non- 0.40 May 1989
Jurisdictional
Woodside II...... Cateechee, SC Duke Power Co. Dec. 2000(9) Non- 0.44 May 1989
Jurisdictional---------
Number of Projects: 52 Megawatt Subtotal: 149.79
=========
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(1) Whichever is later.
(2) This project ceased operations on December 31, 1999 and decommissioning is
in process.
(3) These projects are subject to sale-leaseback arrangements pursuant to
which the Company is the lessee.
(4) Agreement remains in effect as long as Duquesne Power's tariff with PA
Public Utility Commission remains valid and effective.
(5) The term of the power purchase agreement may be extended by mutual
agreement.
(6) Revenue is derived pursuant to a lease arrangement.
(7) The term of the power purchase agreement may be extended through 2028 at
the option of the utility.
(8) The remaining 50% ownership interest in this project was acquired in
November 1999.
(9) The power purchase agreements for these projects were renewed at
negotiated rates subject to termination upon twelve months notice.
(10) The remaining 50% ownership interest in this project was acquired in May
1999.
(11) The original power purchase agreement for this project expired in November
1998. The project is currently operating pursuant to an interim power
purchase arrangement, pending a new power purchase agreement.
PROJECTS WITH PARTIAL OWNERSHIP AS OF DECEMBER 31, 1999(1)
POWER PURCHASE DATE OF CHI
AGREEMENT FERC LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT OF
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OPERATIONS(1)
- ------- -------- ----------------------- --------- --------- --------- -------------
Denley Dam....... Lyonsdale, NY Niag. Mohawk Power Corp. Dec. 2026 Exempt 1.50 Feb. 1995
Hillsborough..... Hillsborough, NH Public Serv. Co. of NH Jul. 2004 Exempt 1.20 Nov. 1989
Lower Saranac.... Saranac, NY NY State Elec. & Gas Oct. 2029 May 2027 9.30 Jun. 1992
Port Leyden...... Lyonsdale, NY Niag. Mohawk Power Corp. Dec. 2026 Exempt 2.00 Feb. 1995
Rock Island...... Lyonsdale, NY Niag. Mohawk Power Corp. Dec. 2026 Exempt 1.90 Feb. 1995
Sheldon Springs.. Sheldon, VT Vermont Electric Power Aug. 2016 Sept. 2024 24.97 Sept. 1993
Producers, Inc.
Slate Creek...... Lakehead, CA PacifiCorp Dec. 2018(3) Exempt 4.20 May 1990
Star Lake........ Newfoundland, Canada Newfoundland and Oct. 2023 Exempt 18.40 Nov. 1998
Labrador Hydro
Twin Falls....... North Bend, WA Puget Sound Energy, Inc. Dec. 2025 Apr. 2035 24.00 Apr. 1989
---------
Number of Projects: 9 Megawatt Subtotal: 87.47
=========
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(1) Projects with Partial Ownership are defined as those projects in which the
Company has an equity (or equivalent) investment of less than 100%.
(2) Whichever is later.
(3) The term of the power purchase agreement may be extended through 2023 at
the option of the utility.
7
PROJECTS WITH OPERATION AND MAINTENANCE CONTRACTS AS OF DECEMBER 31, 1999(1)
APPROXIMATE CAPACITY DATE OF
-------------------- -------
IN MEGAWATTS O&M CONTRACT
------------ ------------
Barker Mill Lower Auburn, ME 1.50 Jul. 1996
Barker Mill Upper Auburn, ME 0.95 Jul. 1996
Brown's Mill Dover-Foxcroft, ME 0.59 Jul. 1996
Combie North Grass Valley, CA 0.30 Feb. 1990
Combie South Grass Valley, CA 1.50 Feb. 1990
Damariscotta Damariscotta, ME 0.46 Jul. 1996
Eustis Eustis, ME 0.25 Jul. 1996
Gardiner Gardiner, ME 1.00 Jul. 1996
Great Works South Berwick, ME 0.53 Jul. 1996
Lower Wilson Greenville, ME 0.57 Jul. 1996
Mechanic Falls Mechanic Falls, ME 1.30 Jul. 1996
Milo Milo, ME 0.60 Jul. 1996
New Dam Sanford/Alfred, ME 0.78 Jul. 1996
Norway Norway, ME 0.32 Jul. 1996
Old Falls West Kennebunk, ME 0.47 Jul. 1996
Pittsfield Pittsfield, ME 1.05 Jul. 1996
Pumpkin Hill Lowell, ME 0.95 Jul. 1996
Weeks Falls North Bend, WA 4.34 Jun. 1990
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Number of Projects: 18 Megawatt Subtotal: 17.46
=====
(1) These are projects in which the Company's only current significant
interest is through operation and maintenance contracts.
Total Number of Projects: 79
Total Megawatts Owned, Leased or Operated: 254.72
======
Power Purchase Agreements. As of December 31, 1999, substantially all
energy and capacity of the Company's existing wholly-owned projects in the
United States was being sold to 16 public utilities pursuant to take or pay
long-term power purchase agreements with remaining terms ranging from
approximately 4 months to 26 years. The Company's power purchase agreements
generally require the utility to purchase all energy delivered by the relevant
facility. These power purchase agreements generally do not provide for
termination prior to expiration except in the case of either continuing
nonperformance by the Company or certain events of bankruptcy or insolvency of
the project subsidiary.
The Company's power purchase agreements have either fixed or fluctuating
rates or a combination thereof. Fluctuating rate and combination rate contracts
are generally based on avoided costs or a percentage thereof, and typically
incorporate minimum prices which enable the Company to benefit from increases in
energy prices but insulate it against significant decreases. The Company's fixed
rate contracts often contain: (i) blended rates typically based on projected
annual avoided costs averaged over a 15 to 30 year period; or (ii) an escalation
factor that reflects estimated increases in projected annual avoided cost over
the term of the contract. The escalation factor is often indexed to the Gross
Domestic Product ("GDP") deflator. The Company also has contracts that provide
for fixed rates or escalating fixed rates for up to 20 years (from inception),
followed by adjustable rates based on a fixed percentage of actual annual
avoided costs for the remaining term. Certain power purchase contracts provide
for different rates based on peak or off-peak generation of energy. As the
Company's existing contracts mature or change from fixed rates to rates based on
avoided cost, the Company will receive lower prices for its power to the extent
that the currently low market price for electricity continues. Prices for
electricity have remained low as a result of reductions in the cost of power
produced from natural gas due to lower natural gas prices and technological
improvements that have lowered the capital cost and increased the efficiency of
combustion turbines and other competing technologies. Federal regulators and a
number of states, including some in which the Company operates, have opened
access to the transmission grid and are exploring ways to further increase
competition in electricity markets by such means as power pooling arrangements
and customer choice of generation suppliers at the retail level. Although the
character and extent of this deregulation are as yet unclear, the Company
expects that these efforts will increase uncertainty with respect to future
power prices and make it more difficult to obtain additional long-term power
purchase contracts.
8
All of the Company's existing hydroelectric facilities in the United
States are QFs under PURPA, which requires utilities to purchase power from QFs,
and exempts QFs from most utility regulatory requirements. Pursuant to PURPA,
electric utilities are required to purchase power from QFs at prices based on
the utilities' avoided cost. Implementation of the regulations is delegated to
state public utility commissions which may, at their discretion, establish
long-term rates for a specified period higher than short-term avoided costs or
may provide other kinds of incentives to QFs. In recent years, a number of
utilities have begun to challenge certain provisions of PURPA as no longer
appropriate in the current U.S. energy market, but the Company does not expect
such challenges to affect its existing contracts. See "-- Energy and
Environmental Regulation - Electric Industry Restructuring".
The following table sets forth the Company's power sales by customer for
the year ended December 31, 1999:
REVENUES OF COMBINED
PROJECTS IN REVENUES OF
CONSOLIDATED REVENUES OF PROJECTS 100%
RESULTS OF PROJECTS OWNED AND
PARTIALLY PARTIALLY
OPERATIONS % OWNED % OWNED %
---------- - ----- - ----- -
Niagara Mohawk Power Corp. ........... $10,527,068 25.5 $ 2,811,335 11.2 $13,338,403 20.1
Commonwealth Electric Co. ............ 9,398,077 22.7 -- -- 9,398,077 14.1
Vermont Electric Power Producers, Inc. 1,235,291 3.0 6,566,719 26.0 7,802,010 11.7
Puget Sound Energy, Inc. ............. -- -- 7,200,555 28.5 7,200,555 10.8
Newfoundland and Labrador Hydro ...... -- -- 6,211,033 24.6 6,211,033 9.3
New England Power Co. ................ 5,041,606 12.2 -- -- 5,041,606 7.6
N.Y. State Electric & Gas Corp. ...... 1,282,911 3.1 2,167,363 8.6 3,450,274 5.2
Central Maine Power Co. .............. 3,173,163 7.7 -- -- 3,173,163 4.8
Idaho Power Co. ...................... 2,993,730 7.2 -- -- 2,993,730 4.5
Public Service Co. of NH ............. 1,730,516 4.2 273,942 1.1 2,004,458 3.0
PacifiCorp ........................... 1,146,053 2.8 -- -- 1,146,053 1.7
Groton Electric Light Dept ........... 1,043,411 2.5 -- -- 1,043,411 1.6
CT Light and Power ................... 971,346 2.3 -- -- 971,346 1.5
Duke Power Co. ....................... 837,427 2.0 -- -- 837,427 1.3
All other customers .................. 1,961,124 4.8 -- -- 1,961,124 2.8
----------- ----- ----------- ----- ----------- -----
Total ............................ $41,341,723 100.0% $25,230,947 100.0% $65,572,670 100.0%
=========== ===== =========== ===== =========== =====
Substantially all of the Company's existing power purchase agreements
contain scheduled rates for delivered energy through 2000 or later, which
protects the Company from decreases in energy prices and avoided costs from
current levels until such time when the scheduled rate portion of the contract
expires. Thereafter, certain contracts expire and others provide for prices
based upon avoided cost. In general, the scheduled rates exceed the current
avoided cost for delivered energy, which is being influenced by an increasingly
deregulated and competitive energy market. Lower avoided costs of energy could
significantly reduce the rates received by the Company under a particular
contract once the period of scheduled rates terminates and could make it more
difficult in the future for the Company to obtain contracts which can
economically support development of new projects or the continued operation of
certain existing projects.
9
The following table summarizes the actual or expected basis for
determining future rates which are anticipated to be in effect under current and
anticipated future power purchase agreements for the Company's existing
consolidated projects. To develop the information below, the Company first
computed the average annual revenue for each project included in consolidated
power sales revenues using actual revenues for each of the last three calendar
years ended December 31, 1999. This "revenue mix" was then applied to each of
the respective project's power purchase agreement terms on the assumption that
the Company's consolidated project portfolio and average revenue mix remains
unchanged for the ten-year period shown in the table. Power purchase agreements
which expire during the ten-year period shown are assumed to result in revenues
based upon avoided cost or market rates for the period subsequent to contract
expiration. The information shown below is not intended to represent actual
future results, but is believed to be indicative of the portion of existing
revenue that will be subject to avoided cost or market rates during the period
shown. No assurance can be provided as to what the actual avoided cost or market
rate risk will be for the period shown.
% OF CURRENT REVENUES
SUBJECT TO MINIMUM % OF CURRENT REVENUES SUBJECT TO
FIXED OR SCHEDULED RATES DETERMINED PURSUANT TO
CALENDAR YEAR RATES(1) AVOIDED COST OR MARKET RATES
------------- -------- ----------------------------
2000 ...................................................... 89.0 11.0
2001 ...................................................... 68.9 31.1
2002 ...................................................... 68.9 31.1
2003 ...................................................... 66.1 33.9
2004 ...................................................... 66.1 33.9
2005 ...................................................... 65.2 34.8
2006 ...................................................... 63.9 36.1
2007 ...................................................... 63.1 36.9
2008 ...................................................... 63.1 36.9
2009 ...................................................... 63.1 36.9
(1) Includes contracts with GDP or other similar adjustment provisions.
The Company believes that its power purchase agreements are valid,
binding, and enforceable contracts. From time to time, the Company has received
proposals from utility companies with which the Company has power purchase
agreements to restructure the terms of these agreements, including the scheduled
rates. Generally such proposals are to "buy out" the agreement (that is, the
utility offers to pay the Company in return for terminating the agreement) or to
"buy down" the agreement (that is, the utility offers to maintain the agreement
but at lower scheduled rates, and pay the Company an amount representing the
present value of the difference between the currently scheduled rates and the
lower rates). During 1999, the Company reached an agreement with a utility to
"buy down" three of its power purchase agreements. Closing of the actual buy
down is subject to regulatory approval and certain other conditions precedent,
none of which can be assured, and if concluded is expected to close in the
latter half of 2000. The Company has considered and will continue to consider
such proposals in light of its overall investment objectives.
In 1999, local utilities in Vermont which purchase power from Vermont
Electric Power Producers Inc. ("VEPPI"), a customer which accounted for 3.0% of
the Company's consolidated revenues, commenced legal proceedings to alter or
void VEPPI's power purchase agreements, claiming that they result in unfairly
high rates to consumers. The Company, in conjunction with other similarly
affected power producers in Vermont, is vigorously defending the enforceability
of the power purchase agreements and although management believes that it will
prevail in this matter, it also believes that any such modifications would not
have a material adverse effect on the Company's financial position or results of
operations.
In 1992, Niagara Mohawk Power Corporation ("NIMO"), a customer of the
Company which has accounted for approximately 18 to 25% of consolidated power
sales revenues over the past several years, unilaterally imposed a "generation
cap" on three of the fifteen power purchase agreements it has with the Company,
claiming reduced rates for power produced over a cap specified by the utility,
and has withheld approximately $0.9 million of revenues to date. In response,
the Company, in conjunction with others, sought redress in court. In November
1999, the court ruled in favor of the Company. NIMO has informed the Company
that it may appeal the decision, although as of the date hereof, no such appeal
has been filed.
10
Precipitation, Water Flow and Seasonality. For hydroelectric facilities,
the amount of energy generated at any particular facility depends upon the
quantity of water flow at the site of the facility. Dry periods tend to reduce
water flow at particular sites below historical averages, particularly if the
facility has low storage capacity. Excessive water flow may result from
prolonged periods of higher than normal precipitation or sudden melting of snow
packs, possibly causing flooding of facilities and/or a reduction of generation
at such sites until water flows return to normal. In cases of reduced or excess
water flow, energy generation at such sites may be diminished. Pursuant to the
Company's power purchase agreements, any diminished energy generation will have
an adverse effect on revenues from that facility. While the Company does not
have business interruption insurance to cover lost revenues as a result of
drought or dry periods, the Company carries business interruption insurance to
cover, among other things, the loss of revenues above certain deductible levels,
and subject to applicable insurance policy sub-limits and overall limits,
arising from interruption of electricity generation due to damage caused by
flooding and other catastrophic events. There can be no assurance that such
coverage will remain available on acceptable terms.
Production of electricity by the Company is typically greatest in January
through June, when water flow is at its highest at most of the Company's
projects, and lowest in July through September. The Company normally shuts down
selected operations for periods during the relatively dry third quarter in order
to perform routine maintenance. The amount of water flow in any given period
will have a direct effect on the Company's production, revenues and cash flow.
ENERGY AND ENVIRONMENTAL REGULATION
Energy Regulation. The Company is subject to federal and state (or in
Canada, provincial) energy laws and regulations in connection with the
development and operation of its hydroelectric and other renewable energy
projects. Depending on the project, these laws and regulations may govern the
ownership structure of the projects, the rates, terms and conditions under which
the Company may sell electric output from the projects to utilities or other
customers, and the procedures under which these projects are constructed and
operated. In the U.S., federal laws that affect the Company's business include:
(i) the Federal Power Act of 1935 ("FPA"); (ii) the Electric Consumer Protection
Act of 1986; (iii) the Public Utilities Holding Company Act of 1935 ("PUHCA");
(iv) PURPA; and (v) the National Energy Policy Act of 1992.
Under the FPA, substantially all of the Company's existing hydroelectric
projects are subject to varying degrees of regulation by the Federal Energy
Regulatory Commission ("FERC"), either as projects licensed by FERC or
determined by FERC to be exempt from licensing requirements. FERC license
compliance requirements and other regulatory requirements under the FPA can be
complicated and expensive and can subject the Company to future regulatory
requirements, the nature and costs of which are currently unknown.
The exemptions afforded by PURPA to QFs from extensive federal and state
regulation are important to the Company and its competitors. Each of the
operating conventional hydroelectric projects in the U.S. that the Company
currently owns, operates or in which it has an investment meets the requirements
under PURPA for being a QF. As an owner of QFs, the Company is exempt from many
of the provisions of the FPA and PUHCA. However, some larger hydroelectric
facilities (if acquired or developed by the Company) would not qualify as QFs.
In addition, the Company believes that certain energy facilities that it may
acquire or develop in the future may not be QFs.
Electric Industry Restructuring. In recent years, the federal government
and many state governments have begun consideration of proposed legislation or
regulations that would partially or wholly deregulate the electric power
industry and institute competition at the level of retail electricity customers;
and retail competition has or is scheduled to go into effect in several states.
The Company believes that the impacts of such restructuring are likely to be
both positive and negative on the Company. In the area of hydroelectric
generation, it is uncertain to what extent the Company's smaller hydroelectric
facilities would be competitive in a fully deregulated energy market without the
current benefits of PURPA that require electric utilities to purchase the output
from these facilities. At the same time, retail competition and consumer demand
for renewable energy may stimulate demand for small hydroelectric and other
renewable generation. The Company believes that its existing long-term power
purchase contracts with utilities are legally binding for the duration of the
contracts, and that legislation to repeal PURPA, if any, will include
appropriate protection for existing QF contracts under PURPA. See
"--Conventional Hydroelectric Projects -- Power Purchase Agreements".
11
Environmental Regulation. The Company is subject to extensive federal,
state (or in Canada, provincial) and local environmental laws and regulations
applicable to the development and operation of its projects. Environmental laws
and regulations may affect the Company's operations by delaying construction of
a project or closing down an operating project for a period of time. In
addition, environmental laws and regulations may affect the development time,
site selection and permitting of new projects. The development of a power
generation project typically requires numerous licenses, permits, approvals and
certificates from governmental agencies. Procedures followed by certain of these
permitting authorities may be affected by political factors.
The Company monitors applicable environmental laws and regulations and
evaluates its facilities for compliance with applicable standards. Based on
current trends, however, the Company expects that environmental and land use
regulation will become more stringent. Accordingly, the Company plans to
continue to place a strong emphasis on the development and use of its available
technology to minimize potentially harmful effects on the environment that may
result from the operation of its facilities. In addition, the Company has
developed expertise and experience in obtaining necessary licenses, permits and
regulatory approvals.
The Company's hydroelectric facilities are subject to environmental
regulatory requirements pursuant to their FERC licenses or exemptions or, in the
case of facilities not subject to FERC jurisdiction, applicable state
environmental requirements. The Company's prospective renewable energy
facilities are likely to be subject to federal and state laws and regulations
governing a wide range of potential environmental impacts. Environmental
regulatory requirements for such facilities are often complex, and specific
requirements are dependent upon the nature of the individual project and site.
COMPETITION
The renewable energy business includes a large number of companies that
seek to own or develop such facilities. In most cases, such companies are small
and are focused on a single technology, such as wind, solar or geothermal, etc.
The Company believes that there are relatively few companies seeking to build an
operating portfolio of diversified renewable energy facilities in the same
manner as the Company.
In its hydroelectric business, the Company competes both with smaller and
regional independent hydroelectric development companies and with other
independent energy producers, utilities and utility subsidiaries for the rights
to acquire, develop or operate additional conventional hydroelectric projects,
which may cause fewer projects to be available at prices that will permit the
level of return on investment which the Company seeks. Recent years have seen an
increase in competition for available properties from large, well-capitalized
companies, thereby driving down competitive rates of return and making it more
difficult for the Company to successfully acquire additional projects.
PROPERTIES OWNED AND LEASED
The Company leases its administrative offices at 680 Washington Boulevard,
Stamford, Connecticut under a lease calling for annual payments of approximately
$170,000 per year. Additional administrative offices and maintenance facilities
are leased in Houston, Texas; Greenville, South Carolina; Anderson, California;
Twin Falls, Idaho; Andover, Massachusetts; Bellevue, Washington; and Montreal,
Canada, with aggregate annual rental payments of approximately $300,000. The
Company owns administrative offices in Lawrence, Massachusetts and Dexter, New
York and a maintenance facility in Sanford, Maine.
In addition to the foregoing, the Company owns and leases real estate in
California, Connecticut, Georgia, Idaho, Massachusetts, Maine, New Hampshire,
New York, North Carolina, Pennsylvania, South Carolina, Vermont, Virginia and
Washington. Except for certain small non-hydroelectric real estate parcels, this
additional real estate constitutes property used in the hydroelectric generating
projects operated by the Company. In the case of each of the conventional
hydroelectric projects owned or leased by the Company, the project generally
consists of a dam, water rights and interests and rights in real estate
sufficient for the purposes of operating the facility, a powerhouse for the
generation of electricity and other necessary equipment. Except as listed in the
table entitled "Projects with Partial Ownership as of December 31, 1999" under
"Conventional Hydroelectric Projects" above, such property and the federal and
state permits and licenses are owned or leased by one or more subsidiaries of
the Company or various limited partnerships in which such subsidiaries are the
sole general and limited partners. The water rights held by the Company are
subject to various restrictions and limitations with respect to environmental
and other matters. In the opinion of management, none of such restrictions will
have a material adverse effect on the business or operations of the Company.
12
EMPLOYEES
The Company employs approximately 144 full-time and 63 part-time and
temporary employees as of December 31, 1999. The Company's current employees are
not represented by a collective bargaining group, and management considers its
relations with employees to be good.
FINANCIAL RESTRUCTURING OF CHI; CHANGE OF FISCAL YEAR
Prior to November 7, 1997, CHI had a highly leveraged capital structure
and substantial future cash requirements related to corporate debt and
mandatorily redeemable preferred stock, specifically, to then-existing 12%
Senior Discount Notes, due 2003 (the "Senior Discount Notes") and 13 1/2%
Cumulative Redeemable Preferred Stock (the "Series H Preferred"). The high
leverage and future cash requirements of the Company made it difficult to
establish the creditworthiness and credibility necessary to consummate new
business transactions. The Company believed it would be unable to satisfy
certain future corporate dividend and interest payment obligations on a timely
basis as well as meet other Company obligations. In order to capitalize on the
expertise, capabilities and opportunities it believed it had in certain business
segments, the Company concluded that it was necessary to deleverage its capital
structure. To that end, the Company in the fall of 1996 entered into discussions
with substantial holders of its Senior Discount Notes and Series H Preferred, as
well as with holders of its 8% Senior Convertible Voting Preferred Stock (the
"Series F Preferred") and 9.85% Junior Convertible Voting Preferred Stock (the
"Series G Preferred", and together with the Series H Preferred and Series F
Preferred, the "Old Preferred Stock") in an effort to restructure the Company's
significant financial obligations.
In June 1997, CHI reached an agreement in principle with an informal
committee of institutions that owned, or represented beneficial holders that
owned, approximately 89.2% of CHI's then outstanding Senior Discount Notes on
the terms of a restructuring to be accomplished pursuant to a plan of
reorganization for CHI (the "Plan of Reorganization") under chapter 11, Title 11
of the United States Code (the "Bankruptcy Code"). On August 8, 1997, pursuant
to a disclosure statement, dated August 8, 1997 (the "Disclosure Statement"),
CHI commenced a prepetition solicitation of votes by the holders of Senior
Discount Notes and Old Preferred Stock to accept or reject the Plan of
Reorganization. Under the Plan of Reorganization, the holders of Senior Discount
Notes and Old Preferred Stock were the only holders of impaired claims and
impaired equity interests entitled to receive a distribution and, therefore,
pursuant to section 1126 of the Bankruptcy Code, were the only holders entitled
to vote on the Plan of Reorganization. At the conclusion of the 32-day
solicitation period, the Plan of Reorganization had been accepted by holders of
100% of the Senior Discount Notes and by holders of greater than 97% of the Old
Preferred Stock.
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code (the "Chapter 11 Case") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"), and filed the Plan of
Reorganization and the Disclosure Statement. None of CHI's subsidiaries
commenced a case under the Bankruptcy Code. On October 23, 1997, the Bankruptcy
Court entered an order confirming the Plan of Reorganization, which became
effective November 7, 1997 (the "Effective Date").
Through the implementation of the Plan of Reorganization on and after the
Effective Date, CHI's most significant financial obligations were restructured
as follows: $202 million in face amount of outstanding Senior Discount Notes
were converted into, among other things, $15 million in cash and 100% of the
shares of CHI's new common stock, consisting of shares of new class A common
stock (the "New Class A Common Stock") and shares of new class B common stock
(the "New Class B Common Stock", and together with the New Class A Common Stock,
the "New Common Stock"), subject to dilution from the New Warrants and the
Management Options (each as described below); the holders of the Old Preferred
Stock exchanged such stock for warrants to purchase up to 12.5% of the New
Common Stock, consisting of series B warrants (the "New Series B Warrants") and
series C warrants (the "New Series C Warrants", and together with the New Series
B Warrants, the "New Warrants"), subject to dilution from the Management
Options; and CHI's old common stock (the "Old Common Stock") was canceled. CHI's
senior management received options to purchase up to an aggregate of 7.5% of the
New Class A Common Stock, (the "Management Options"), subject to dilution from
the New Warrants. See Part II, Item 5, "Market for the Registrant's Common
Equity and Related Stockholder Matters" for information with respect to the New
Common Stock, New Warrants and Management Options. As a result of the
restructuring, CHI no longer had any significant parent company debt
obligations. Currently, CHI has a secured, revolving $35 million working capital
and letter of credit facility, under which $0.3 million in loans were
outstanding at March 29, 2000.
13
Pursuant to the Plan of Reorganization, CHI adopted, on the Effective
Date, the Amended CHI By-Laws and a Restated CHI Certificate of Incorporation.
Pursuant to CHI's Restated Certificate of Incorporation, as of the Effective
Date, CHI's name was changed from Consolidated Hydro, Inc. to CHI Energy, Inc.
In addition, its fiscal year-end was changed from June 30 to December 31.
CERTAIN RISK FACTORS
Certain statements contained in this Form 10-K that are not related to
historical facts may contain "forward looking" information, as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such statements
are based on the Company's current beliefs as to the outcome and timing of
future events, and actual results may differ materially from those projected or
implied in the forward looking statements. Further, certain forward looking
statements are based upon assumptions of future events which may not prove to be
accurate. The forward looking statements involve risks and uncertainties
including, but not limited to, the uncertainties relating to industry trends;
risks related to hydroelectric, renewable energy and other acquisition and
development projects; risks related to the Company's power purchase agreements;
risks and uncertainties related to weather conditions; and other risk factors
detailed herein and in other of the Company's Securities and Exchange Commission
filings. Certain of these risks are discussed more fully below and should be
carefully considered along with the other matters described herein.
Uncertainty as to Future Opportunities in Renewable Energy. The Company is
pursuing opportunities to develop, acquire, operate and manage renewable energy
facilities using such technologies as hydroelectric, biomass, landfill gas,
wind, solar, and geothermal. Generally, the costs of such renewable energy
facilities are high relative to the current energy market in North America.
Therefore, the economic viability of such facilities may depend, to a greater or
lesser extent, on non-market factors such as green power incentives (including
tax credits, subsidies, or renewable portfolio standards) established by the
federal or state governments, and on the willingness of electric consumers to
pay a premium for renewable energy. While the Company believes that government
incentives in support of renewable energy will continue, that consumer demand
for renewable energy will increase, and that costs for certain renewable
technologies will decline, there can be no assurance that renewable energy will
be regarded favorably by the government or consumers, or that it will be
competitive in the North American electric power market. With respect to its
conventional hydroelectric business, the Company believes that opportunities to
continue to expand are principally through the acquisition of additional
facilities and the securing of operation and maintenance contracts rather than
the development of new hydroelectric facilities in North America. A number of
industry issues, including issues related to the availability, term and pricing
of future power purchase agreements and higher acquisition prices resulting from
increased competition may limit the Company's near-term opportunities to acquire
additional hydroelectric capacity at acceptable rates of return. In addition,
the Company believes that near-term prospects for successful development of new
hydroelectric facilities in North America, in particular the United States, are
limited, due to regulatory restrictions that increase the cost of hydroelectric
development combined with the current energy market, in which low energy prices
often do not make hydroelectric development economically attractive.
Leveraged Project Financing. The Company's existing hydroelectric projects
are, and its future hydroelectric and other renewable energy projects, if any,
would likely be financed using a variety of structures primarily consisting of
limited recourse or non-recourse debt. As of December 31, 1999, the Company had
$75.9 million (exclusive of the Boott project operating lease) of direct project
financing obligations that are limited recourse or non-recourse to CHI. As
limited recourse or, except to the extent set forth below, non-recourse
obligations, each such obligation is structured to be fully serviced out of each
applicable project's cash flow, generally without any claim against CHI's
general corporate funds. In the event of a project default and assuming CHI is
unable or chooses not to cure such default within applicable cure periods (if
any), the lenders or lessor would generally have rights to the facility, related
contracts and all licenses and permits necessary to operate the facility and, in
the event of foreclosure after such a default, the Company might not retain any
interest in such project.
Certain project acquisitions have been financed by General Electric
Capital Corporation ("GECC"), which has required the guarantee of CHI
Acquisitions, Inc. ("CHI Acquisitions"), a subsidiary of CHI which is the parent
of each of the entities formed to acquire such projects. Thus, each such project
is vulnerable in the event of a default by any of the other projects owned
indirectly by CHI Acquisitions. Although all of this guaranteed financing has
been repaid, a performance guarantee relating to one project remains in effect.
Certain other projects acquired by CHI Acquisitions II, Inc. ("CHI Acquisitions
II"), a subsidiary of CHI, were financed by CHI Acquisitions II with two loans
from GECC. One such loan has been secured by the projects acquired and the other
loan by the cash flows of certain other projects of which CHI Acquisitions II is
the parent. See Note 10 of the Notes to Consolidated Financial Statements for
additional information.
14
Dependence on Precipitation and Effects of Variations in Water Flow and
Seasonality. The amount of hydroelectric energy generated at any particular
conventional hydroelectric facility depends upon the quantity of water flow at
the site of the facility. In cases of reduced or excessively high water flow,
energy generation at such site may be diminished, particularly if the facility
has low storage capacity. Pursuant to the Company's power purchase agreements,
any diminished energy generation will have an adverse effect on revenues from
that facility. While the Company does not have business interruption insurance
to cover lost revenues as a result of drought or dry periods, the Company
carries business interruption insurance to cover, among other things, the loss
of revenues above certain deductible levels, and subject to applicable insurance
policy sub-limits, and overall limits arising from interruption of electricity
generation due to damage caused by flooding and other catastrophic events. There
can be no assurance that such coverage will remain available on acceptable
terms.
Production of electricity by the Company is typically greatest in January
through June, when water flow is at its highest at most of the Company's
projects, and lowest in July through September. The amount of water flow in any
given period will have a direct effect on the Company's production, revenues and
cash flow.
Changes in Applicable Rates; Energy Price Declines. From calendar years
2000 through 2009, rates paid to the Company pursuant to power purchase
agreements representing approximately 36.9% of the Company's average power sales
revenues (calculated on a rolling three year basis) will be affected by changes
from scheduled rates to rates based either on the applicable utilities' then
current avoided cost or on prices determined in a competitive market. Use of
avoided cost is driven by either the specific terms of certain power purchase
agreements or the expiration of the remaining agreements during the period
presented and the assumed utility purchase of project generation, in accordance
with the requirements of PURPA and the regulations adopted thereunder. A
utility's avoided cost rate is equal to the incremental cost that would have
been incurred if the utility had generated the energy itself or purchased it
from another source. Consequently, the Company's revenue at such time will be
adversely affected if the then current utility avoided cost rate is lower than
the scheduled rate previously in effect.
The majority of the generating capacity of the Company's operating
projects is contracted through 2020. However, if energy prices remain at current
levels or decline, the rates negotiated by the Company for new contracts,
contract rates based upon utility avoided costs or extensions of existing
contracts could be adversely affected.
Dependence on NIMO, Commonwealth Electric Company ("CEC"), New England
Power Company ("NEPCO"), Central Maine Power Company ("CMP") and Idaho Power
Company ("IPCO"); Creditworthiness of the Company's Customers. A substantial
portion of the Company's power is sold to five customers pursuant to various
long-term power purchase agreements. Sales to NIMO, CEC, NEPCO, CMP and IPCO
represented approximately 25.5%, 22.7%, 12.2%, 7.7% and 7.2%, respectively, of
the consolidated revenues of the Company for the year ended December 31, 1999.
The Company is not aware of any specific circumstances that might materially
affect its revenues pursuant to the sale of power to these customers. However,
given the uncertainties associated with electric industry restructuring, there
can be no assurance that one or more of these customers will not attempt to
modify their contracts with the Company or that their future credit worthiness
will not be adversely affected.
Energy and Environmental Regulation. All of the Company's existing
operating hydroelectric projects, while exempt from public utility regulation,
are subject to varying degrees of regulation by FERC and state agencies.
Substantially all of the Company's generating capacity has either been licensed
or granted an exemption from licensing as required under the FPA. There is no
guarantee that a FERC license can be obtained or renewed. Although the Company
has not encountered significant difficulties in transferring, amending or
obtaining licenses, there can be no assurance that it will not encounter
significant difficulties in this regard in the future, nor can there be any
assurance that existing regulations will not be revised or that new regulations
will not be adopted or become applicable to the Company that could have an
adverse effect on its operations.
The Company's activities require numerous permits, approvals and
certificates from appropriate federal, state and local government agencies as
well as compliance with certain environmental protection legislation and the
FPA. While the Company believes it has obtained the requisite approvals for its
existing operations and that its business is operated in accordance with
applicable law, it remains subject to a varied and complex body of regulations
that both public officials and private individuals may seek to enforce. Such
laws and regulations may affect operations by delaying construction or forcing a
15
temporary or permanent closure of a project and may affect site selection or
permitting of new projects. Based on current trends, the Company expects that
environmental and land use regulation will become more stringent. There can be
no assurance that existing regulations will not be revised or that new
regulations that could have an adverse effect on its operations will not be
adopted or become applicable to the Company nor can there be any assurance that
the Company will be able to obtain all necessary licenses, permits, approvals
and certificates for proposed projects or that completed facilities will comply
with all applicable statutes or regulations.
Significant Holders. Two holders hold approximately 74% of the outstanding
voting shares of the New Common Stock. For a list of such holders, see Part III,
Item 12, "Security Ownership of Certain Beneficial Owners and Management." If
holders of significant numbers of shares of the New Common Stock were to act
together, such holders would be in a position to control the outcome of most
actions requiring stockholder approval. This concentration of ownership could
also facilitate or hinder a negotiated change of control of CHI and,
consequently, have an impact upon the value of the New Common Stock. In that
regard, all holders of New Common Stock are subject to a new stockholders'
agreement (the "New Stockholders' Agreement"), which agreement includes, among
other things, certain "drag along" and "tag along" rights.
ITEM 2. PROPERTIES
The information concerning properties required by Item 2 is set forth in
Part I, Item 1, of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
As described above, CHI completed a financial restructuring, effective
November 7, 1997, including confirmation of its Plan of Reorganization filed in
a chapter 11 reorganization case (no. 97-1924(SLR)) in the United States
Bankruptcy Court for the District of Delaware.
On September 2, 1997, a then-shareholder of CHI filed a civil action
against CHI, certain of its current and former officers and directors and Morgan
Stanley Dean Witter & Co. in Connecticut Superior Court, Judicial District of
Stamford, entitled Charles J. Lindsay v. Consolidated Hydro, Inc., et al.,
alleging, among other things, that the officers and directors of CHI breached
their fiduciary duty to the holders of CHI's Old Common Stock by proposing a
Plan of Reorganization that eliminated CHI's Old Common Stock. On December 18,
1997, the Company and each of the other defendants filed a motion to strike the
complaint and dismiss the action on the grounds that, among other things, the
allegations raised in the complaint were barred as a matter of law. On March 16,
1998, prior to the scheduled hearing on the Company's and the other defendants'
motion to strike the complaint, and dismiss the action, the plaintiff agreed to
withdraw the complaint without prejudice to his right to amend and to replead
the complaint. Subsequently, the plaintiff filed a substitute complaint in which
CHI is not named as a defendant, although CHI continues to provide
indemnification for the remaining defendants in the case. In addition, the
Company maintains directors and officers liability insurance and for that
reason, among others, management believes that they Company's liability with
respect to the claim, if any, will not have a material adverse effect on the
Company's financial position or results of operations.
On August 20, 1997, a former employee of the Company filed a civil action
against the Company in Connecticut Superior Court, District of New Haven
entitled Carol H. Cunningham v. Consolidated Hydro, Inc. alleging that the
Company breached its employment agreement with her. On or about October 13,
1997, the former employee filed a proof of claim in the Bankruptcy Court for
approximately $7.3 million plus unliquidated amounts based primarily on the
allegations in the civil action (the "Claim"). On November 25, 1997, the Company
filed an objection to the Claim on the grounds that, among other things, the
former employee failed to satisfy her obligations under her employment contract
with the Company. The trial was argued during January 2000, but a verdict has
not yet been reached. The Company has vigorously defended the Claim and
management believes that the Company's liability with respect to the Claim, if
any, will not have a material adverse effect on the Company's financial position
or results of operations.
The Company is involved in various legal proceedings which are routine
litigation matters incidental to the conduct of its business. CHI's management
currently believes that none of this litigation, if determined adversely to the
Company, would have a material adverse effect on the financial condition or
results of operations of the Company.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
year ended December 31, 1999 through the solicitation of proxies or otherwise.
17
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 29, 2000, to the best of the Company's knowledge, the number
of holders of record of the New Class A Common Stock of CHI was 22, and the
number of holders of record of the New Class B Common Stock was one. There is no
established public trading market for the New Common Stock of the Company. No
dividends were declared on either class of CHI's New Common Stock during the
years ended December 31, 1999 and 1998 or during the period from November 8,
1997 to December 31, 1997. CHI presently intends to retain earnings to fund
working capital and for general corporate purposes. In addition, pursuant to its
working capital agreement, CHI is prohibited from paying dividends and therefore
does not anticipate paying cash dividends on shares of the New Common Stock in
the foreseeable future.
Pursuant to the Plan of Reorganization, on the Effective Date, 20,000,000
shares of New Common Stock were authorized as follows: 9,085,290 shares of New
Class A Common Stock and 914,710 shares of New Class B Common Stock which were
issued on the Effective Date and 10,000,000 additional shares of New Common
Stock which may be issued as either New Class A Common Stock or New Class B
Common Stock, as applicable. Of the 10,000,000 shares of New Common Stock which
were authorized on the Effective Date but not issued, 1,337,127 shares are
reserved for issuance if, as and when the holders of the New Warrants exercise
such warrants and 810,811 shares of New Class A Common Stock are reserved for
issuance, if as and when, the holders of the Management Options exercise such
options. In addition, 10,000,000 shares of preferred stock were authorized, none
of which were issued.
The following is a description of the two classes of New Common Stock, the
two classes of New Warrants and the Management Options issued on the Effective
Date, as well as a summary of the principal provisions of the registration
rights agreement (the "Registration Rights Agreement") and the New Stockholders'
Agreement which became effective on the Effective Date:
New Class A Common Stock. Pursuant to the Plan of Reorganization, on the
Effective Date, 9,085,290 shares of New Class A Common Stock were issued and
distributed to substantially all of the holders of Senior Discount Notes and
810,811 shares of New Class A Common Stock were reserved to satisfy the
obligation of CHI under the Management Options. For a discussion of the
Management Options, see Part I, Item 1, "--Financial Restructuring of CHI;
Change of Fiscal Year" and Part III, Item 11, "Executive Compensation". Each
share of New Class A Common Stock entitles its holder to one vote. Holders of
New Class A Common Stock will have the right to participate proportionately in
dividends, if any, distributed by the Company.
New Class B Common Stock. Pursuant to the Plan of Reorganization, on the
Effective Date, 914,710 shares of New Class B Common Stock were issued and
distributed to a holder of Senior Discount Notes. Each share of New Class B
Common Stock entitles its holder to one-hundredth (1/100) of one vote. The
holder of New Class B Common Stock will have the right to participate
proportionately in dividends, if any, distributed by the Company. The New Class
B Common Stock was issued to a holder of Senior Discount Notes, at such holder's
request, to provide to such holder reduced voting rights in CHI. Pursuant to the
Restated Certificate of Incorporation of CHI, upon any transfer of shares of New
Class B Common Stock, the shares of New Class B Common Stock will automatically
convert into an equal number of shares of New Class A Common Stock.
New Series B Warrants. The New Series B Warrants, which were issued to the
holders of the Old Preferred Stock on the Effective Date and expire on the sixth
anniversary thereof, entitle such holders to subscribe for the purchase of up to
an aggregate of 7.5% of the New Common Stock, subject to dilution due to the
issuance by the Company of shares of New Common Stock pursuant to the exercise
of the New Series C Warrants and the Management Options by the holders thereof.
The New Series B Warrants are exercisable for up to 1% of the New Common Stock
of CHI if, as and when the total capital (debt and equity) invested in
industrial infrastructure projects that either (i) close within 3 years from the
Effective Date or (ii) are subject to a legally binding and enforceable
agreement between CHI or any of its subsidiaries and a party sponsoring a
development or acquisition of such industrial infrastructure projects within
such 3 year-period and thereafter close within the term of the New Series B
Warrants, equals or exceeds $60 million. The additional New Series B Warrants
exercisable for the remaining 6.5% of the New Common Stock vest incrementally
if, as and when the total capital invested in industrial infrastructure projects
increases from $60 million to $450 million within the parameters set forth
above. The exercise price per share of the New Common Stock subject to the New
Series B Warrants is $10. The New Series B Warrants contain customary
antidilution provisions and protections against certain extraordinary
distributions. As of March 29, 2000, the Company has not completed any
industrial infrastructure transactions and is not currently in negotiations to
develop or acquire any industrial infrastructure projects.
18
New Series C Warrants. The New Series C Warrants, which were issued to the
holders of the Old Preferred Stock on the Effective Date and expire on the
eighth anniversary thereof, entitle such holders to subscribe for the purchase
of up to an aggregate of 5.0% of the New Common Stock, subject to dilution due
to the issuance by CHI of shares of New Common Stock pursuant to the exercise of
the New Series B Warrants or the Management Options by the holders thereof. The
exercise price per share of the New Common Stock subject to the New Series C
Warrants was determined by reference to the accreted value of the Senior
Discount Notes as of September 15, 1997 (the date CHI commenced its Chapter 11
Case), which was approximately $183 million. The exercise price per share of the
New Common Stock subject to the New Series C Warrants is $18.36. The New Series
C Warrants contain customary antidilution provisions and protections against
certain extraordinary distributions.
Management Options. The Management Options, which have been issued to
certain members of CHI's management pursuant to a 1997 stock option plan and
management option agreements (the "1997 Stock Option Plan and Management Option
Agreements") and expire on the seventh anniversary of the Effective Date, are
exercisable for the purchase of up to an aggregate of 7.5% of the New Class A
Common Stock, subject to dilution due to the issuance by CHI of shares of New
Common Stock pursuant to the exercise of the New Series B Warrants or the New
Series C Warrants by the holders thereof. The Management Options contain
customary antidilution provisions and protections against certain extraordinary
distributions.
Registration Rights Agreement. Each person or entity who received a
distribution of New Common Stock, New Warrants or New Common Stock issued upon
the exercise of the New Warrants or the Management Options pursuant to the Plan
of Reorganization is entitled to become a party to the Registration Rights
Agreement. Under the Registration Rights Agreement, holders of the New Common
Stock and New Warrants (including shares of New Common Stock issued upon the
exercise thereof) are entitled to certain demand and incidental (or "piggyback")
registration rights, and holders of the Management Options are entitled to
certain incidental (or "piggyback") registration rights with respect to shares
of New Class A Common Stock issued upon the exercise thereof. The Registration
Rights Agreement contains customary suspension, "hold back", indemnification
/contribution and priority provisions.
New Stockholders' Agreement. Under the terms of the Plan of
Reorganization, each holder (including each original recipient and transferee of
an original recipient or other transferee) of the New Common Stock and of the
New Common Stock issued upon exercise of the New Warrants or the Management
Options (collectively, the "New Securities") is bound by the New Stockholders'
Agreement. The New Stockholders' Agreement contains certain provisions relating
to the size and composition of the Board of Directors of CHI. In addition, the
New Stockholders' Agreement provides that each holder of New Common Stock is
entitled to participate on a pro-rata basis in any sale of 50% or more of the
outstanding New Common Stock and that each holder of New Securities (including,
in certain circumstances, holders of New Warrants and Management Options) may be
required to sell its New Securities in any sale of 66-2/3% or more of the New
Common Stock.
19
ITEM 6. SELECTED FINANCIAL DATA
As discussed in Part I, Item 1, the Company emerged from its chapter 11
proceedings on the Effective Date. In accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting By
Entities In Reorganization Under The Bankruptcy Code", the Company applied fresh
start reporting as of the Effective Date which resulted in significant changes
to the valuation of certain Company assets and liabilities, and to its
stockholders' equity. In connection with the adoption of fresh start reporting,
a new entity was deemed created for financial reporting purposes. The periods
prior to and including the Effective Date have been designated "Predecessor
Company" and the period subsequent to the Effective Date has been designated
"Reorganized Company".
The following Statement of Operations and Balance Sheet Data has been
derived from financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. The data set forth below should be read in conjunction
with the Consolidated Financial Statements for the years ended December 31, 1999
and 1998, the November 8, 1997 - December 31, 1997 period, the July 1, 1997 -
November 7, 1997 period and the fiscal years ended June 30, 1997, 1996 and 1995
and the related Notes thereto, and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations":
Reorganized Company Predecessor Company
-------------------------------- ---------------------------------------------
Year Year
Ended Ended Nov. 8 - July 1 - Fiscal Year Ended June 30,
Dec. 31, Dec. 31, Dec. 31, Nov. 7, ---------------------------------
1999 1998 1997 1997 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands,
STATEMENT OF OPERATIONS Except Per Share Amounts) (Dollars in Thousands)
Operating Revenues: --------------------------------- ---------------------------------------------
Power generation revenue ..................... $ 41,342 $ 43,868 $ 6,598 $ 8,661 $ 50,665 $ 49,761 $ 39,387
Management fees
and operation & maintenance revenue ........ 5,777 7,059 1,437 2,713 5,395 4,986 4,326
Equity income in partnership
interests and other partnership income ..... 1,628 3,572 203 212 1,320 737 245
--------- --------- --------- --------- --------- --------- ---------
Total revenue .................................. 48,747 54,499 8,238 11,586 57,380 55,484 43,958
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses
Operating .................................... 15,470 18,337 2,566 6,588 18,015 17,957 15,895
General and administrative ................... 6,522 9,754 1,199 2,217 8,575 6,578 6,899
Charge for employee and director equity
participation programs (1) ................. -- -- -- -- 100 259 339
Reorganization costs(2) ...................... -- -- -- 3,978 -- -- --
Fair value adjustments(2) .................... -- -- -- 4,855 -- -- --
Depreciation and amortization ................ 7,435 7,334 1,105 3,009 8,661 9,846 9,625
Lease expense ................................ 5,837 5,896 900 2,001 5,764 6,072 5,753
(Adjustment to)/charge for impairment of
long-lived assets ......................... -- -- -- (75) 83 87,202 1,272
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses ....................... 35,264 41,321 5,770 22,573 41,198 127,914 39,783
--------- --------- --------- --------- --------- --------- ---------
Income/(loss) from operations .................. 13,483 13,178 2,468 (10,987) 16,182 (72,430) 4,175
Interest income ................................ 1,472 1,488 242 739 1,661 1,032 1,416
Other income ................................... 348 459 6 57 434 368 185
Gain on adjustment to project development debt . -- -- -- 8,568 -- -- --
Interest expense ............................... (6,745) (8,048) (1,260) (7,741) (29,591) (26,876) (21,778)
Minority interests in loss of consolidated
subsidiaries ................................ -- -- -- -- -- 2,063 3
--------- --------- --------- --------- --------- --------- ---------
Income/(loss) before income taxes and
extraordinary items ......................... 8,558 7,077 1,456 (9,364) (11,314) (95,843) (15,999)
(Provision)/benefit for income taxes ........... (3,557) (3,104) (751) 114 272 7,512 (277)
--------- --------- --------- --------- --------- --------- ---------
Income/(loss) before extraordinary items ..... 5,001 3,973 705 (9,250) (11,042) (88,331) (16,276)
Extraordinary items (3)
Gain on extinguishment of debt (net of
income tax of $0 and $3,414 as of November
7, 1997 and June 30, 1997, respectively) .... -- -- -- 87,218 5,658 -- --
--------- --------- --------- --------- --------- --------- ---------
Net income/(loss) .............................. $ 5,001 $ 3,973 $ 705 $ 77,968 $ (5,384) $ (88,331) $ (16,276)
========= ========= ========= ========= ========= ========= =========
Net income per common share,
basic and diluted (4) ....................... $ .50 $ .40 $ .07 -- -- -- --
Cash dividends per common share ................ -- -- -- -- -- -- --
20
Reorganized Company Predecessor Company
-------------------------------- ---------------------------------------------
Nov. 8 - July 1 - Fiscal Year Ended June 30,
Year Ended Dec. 31 Dec. 31, Nov. 7, ---------------------------------
1999 1998 1997 1997 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands, (Dollars in Thousands)
--------------------------------- ---------------------------------------------
OPERATING DATA:
Megawatts operated 254.72 272.42 335.50 335.50 342.61 343.66 379.08
Capital expenditures
Cost of acquisitions and partnership interests $ 8,924 $ -- $ -- $ -- $ -- $ -- $35,503
Cost of development expenditures 12,985 -- -- -- 2,045 1,968 6,086(5)
All other capital expenditures associated with
operating
projects, including changes in other long-term
assets,
net 2,837 2,691 375 2,430 9,226 3,460 2,288
Interest, net (6) 5,273 6,560 1,018 7,002 27,930 25,844 20,362
Cash interest, net (7) 4,705 5,969 1,190 2,876 6,962 7,725 4,702
Ratios and Other Data:
EBDIAT (8) 21,266 20,971 3,604 (3,096) 25,613 25,376 15,696
EBDIAT/Interest, net (9) 4.03 3.20 3.54 10,098 2,317 468 4,666
EBDIAT/Cash interest, net (9) 4.52 3.51 3.80 5,233 3.68 3.28 3.34
Ratio of earnings to fixed charges (11) 2.08 1.76 2.18 -- -- -- --
Deficiency of earnings to fixed charges(10)(11) -- -- -- 9,387 11,350 97,417 18,850
Ratio of earnings to fixed charges
and Preferred Stock Dividends (12) 2.08 1.76 2.18 -- -- -- --
Deficiency of earnings to fixed charges
and Preferred Stock Dividends (10)(12) -- -- -- 15,447 37,241 121,149 40,958
Reorganized Company Predecessor Company
-------------------------------- ---------------------------------
Dec. 31, June 30,
-------------------------------- ---------------------------------
1999 1998 1997 1997 1996 1995
--------- --------- --------- --------- --------- ---------
(Dollars in Thousands, (Dollars in Thousands)
---------------------- ----------------------
BALANCE SHEET DATA:
Cash and cash equivalents 15,954 21,778 11,998 32,502 23,834 16,682
Current assets 26,493 28,535 21,361 41,003 33,041 25,454
Total assets 238,932 219,871 221,961 243,628 244,657 330,617
Current liabilities 22,400 16,143 13,345 13,924 16,061 13,602
Long-term debt 70,001 74,486 82,616 262,615 260,158 248,887
Mandatorily redeemable preferred stock -- -- -- 114,372 98,604 84,690
Stockholders' equity/(deficit) 94,779 89,778 85,805 (189,679) (168,627) (66,641)
- ---------------
(1) This non-cash charge accounts for the equity entitlements granted to
certain key employees and certain directors pursuant to both the
arrangements surrounding the conversion of the old class B common stock to
old class A common stock and the vested entitlements under employment
equity programs which have been canceled.
(2) These amounts were the result of the implementation of fresh start
reporting. See Note 2 of the Notes to Consolidated Financial Statements.
(3) For the period from July 1, 1997 to November 7, 1997, as a result of the
Plan of Reorganization, a gain on extinguishment of debt of $87,218 was
recorded. The fiscal year ended June 30, 1997 amount results from the
purchase of a non-recourse project term loan, $14,500 at June 30, 1996,
for $5,000, including certain required reserves and closing costs of
approximately $500. The gain recorded is net of certain transaction costs
of approximately $187 and income tax of $3,414.
(4) Share and per share data for the Predecessor Company are not meaningful on
or prior to November 7, 1997 due to the significant change in the capital
structure in connection with the Plan of Reorganization.
(5) These amounts were substantially funded with proceeds from outside lenders
on a non-recourse basis or sales of CHI equity securities.
(6) Interest, net is defined as interest expense less interest income.
(7) Cash interest, net is defined as cash interest expense less cash interest
income.
(8) EBDIAT is defined as income/(loss) from operations plus depreciation,
amortization, other non-cash charges to income and other income. EBDIAT
and EBDIAT ratios are not measures of performance or financial condition
under generally accepted accounting principles, but are presented to
provide additional information related to fixed charge service capability.
EBDIAT should not be considered in isolation or as a substitute for other
measures of financial performance or liquidity under generally accepted
accounting principles.
21
(9) Computations resulting in a ratio of less than one are disclosed as a
deficiency and represent the dollar amount of EBDIAT required to attain a
ratio of one-to-one.
(10) Computations resulting in a ratio of less than one are disclosed as a
deficiency and represent the dollar amount of earnings required to attain
a ratio of one-to-one.
(11) For the purpose of calculating the ratio of earnings to fixed charges,
earnings are determined by adding fixed charges (excluding capitalized
interest) to income/(loss) before provision for income taxes and
extraordinary items. Fixed charges consist of interest expense,
amortization of debt issuance costs and the imputed interest on the
Company's Boott facility lease, which is accounted for as an operating
lease. The resulting deficiencies primarily reflect non-cash charges. An
analysis of such non-cash charges and the resulting ratio or deficiency
adjusted for such charges follows:
Reorganized Company Predecessor Company
-------------------------------- ---------------------------------------------
Nov. 8 - July 1 - Fiscal Year Ended June 30,
Year Ended Dec. 31 Dec. 31, Nov. 7, ---------------------------------
1999 1998 1997 1997 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands, (Dollars in Thousands)
--------------------------------- ---------------------------------------------
Non-cash interest $ 568 $ 591 $ 70 $ 4,865 $ 19,709 $ 18,629 $ 16,610
Depreciation and amortization 7,435 7,334 1,105 3,009 8,661 9,846 9,625
Other non-cash (gains)/charges, net -- -- -- (75) (5,475) 87,461 1,611
-------- -------- -------- -------- -------- -------- --------
Total non-cash charges $ 8,003 $ 7,925 $ 1, 175 $ 7,799 $ 22,895 $115,936 $ 27,846
======== ======== ======== ======== ======== ======== ========
Resulting ratio of earnings
to fixed charges 3.10 2.61 3.11 1.38 1.36 1.61 1.34
(12) For the purpose of calculating the ratio of earnings to fixed charges and
preferred stock dividends, earnings are determined by adding fixed charges
(excluding capitalized interest) and preferred stock dividends to
income/(loss) before provision for income taxes and extraordinary items.
Preferred stock dividends consist of the cumulative undeclared dividends
on Series F and Series G Preferred Stock and dividends and accretion on
the Series H Preferred Stock. The resulting deficiencies primarily reflect
non-cash charges. The analysis of such non-cash charges is the same as
that set forth in the preceding footnote and the resulting ratio or
deficiency adjusted for such charges follows:
Reorganized Company Predecessor Company
-------------------------------- ---------------------------------------------
Nov. 8 - July 1 - Fiscal Year Ended June 30,
Year Ended Dec. 31 Dec. 31, Nov. 7, ---------------------------------
1999 1998 1997 1997 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
----------------------
Resulting ratio of earnings
to fixed charges and
preferred stock dividends 3.10 2.61 3.11 -- -- -- --
Resulting deficiency of earnings
to fixed charges and
preferred stock dividends -- -- -- $ 2,793 $14,346 $ 5,213 $13,112
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company"), has been engaged in the
energy business since its founding in 1985 and is currently principally engaged
in the development, acquisition, operation and management of renewable energy
and related, environmentally beneficial infrastructure assets. Non-hydroelectric
renewable energy facilities include those using such technologies as biomass,
landfill gas, wind, solar and geothermal. Currently, all of the Company's
revenue is derived from the ownership and operation of hydroelectric facilities
(the Company's "hydroelectric business"). The Company's operating hydroelectric
projects are located in 14 states and one Canadian province.
As of November 7, 1997, (the "Effective Date"), CHI adopted fresh start
reporting in accordance with American Institute of Certified Public Accountants
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under The Bankruptcy Code ("SOP 90-7") which resulted in the creation of a new
reporting entity. The accompanying financial information for the years ended
December 31, 1999 and 1998 and the period from November 8, 1997 to December 31,
1997 reflects the financial condition and results of operations of the new
reporting entity (the "Reorganized Company") while prior period financial
information relates to the former reporting entity (the "Predecessor Company").
The Company's existing U.S. hydroelectric projects are clustered in four
regions: the Northeast, Southeast, Northwest and West, with a concentration in
the Northeast. CHI has developed what it believes to be an efficient "hub"
system of project management designed to maximize the efficiency of each
facility's operations. The economies of scale created by this system include
reduced costs related to centralized administration, operations, maintenance,
engineering, insurance, finance and environmental and regulatory compliance. The
hub system and the Company's operating expertise have enabled the Company to
successfully integrate acquisitions into its current portfolio and increase the
efficiency and productivity of its projects.
Since its inception, the Company has expanded primarily by acquiring
existing hydroelectric facilities in the United States. As of December 31, 1999,
the Company had a 100% ownership or long-term lease interest in 52 projects (150
megawatts), a partial ownership interest in 9 projects (87 megawatts), and
operations and maintenance ("O&M") contracts with 18 projects (17 megawatts).
CHI sells substantially all of the electric energy and capacity from its
projects to public utility companies pursuant to take or pay power purchase
agreements. These contracts vary in their terms but typically provide scheduled
rates throughout the life of the contracts, which are generally for a term of 15
to 40 years from inception.
The Company seeks opportunities to acquire and develop a diversified
portfolio of projects using a variety of renewable technologies to take
advantage of what it perceives to be a favorable market climate for renewable
and environmentally beneficial energy and related infrastructure assets, as
described in Part I, Item 1, "--Renewable Energy and Environmental Projects."
For purposes of the discussion of results of operations for the six months
ended December 31, 1997, the results of the Predecessor Company and Reorganized
Company have been combined.
Power Generation Revenue
The Company's revenues are derived principally from selling electrical
energy and capacity to utilities under long-term power purchase agreements which
require the contracting utilities to purchase energy generated by the Company.
The Company's present power purchase agreements have remaining terms of up to 26
years. After the expiration of such power purchase agreements, rates generally
change to the purchasing utility's avoided cost for delivered energy or market
rates, which are likely to be lower than expiring power purchase agreement
rates. See Part I, Item 1, "--Conventional Hydroelectric Projects" for a
discussion of the percentage of current revenues subject to minimum fixed or
scheduled rates and the percentage of current revenues subject to rates
determined pursuant to avoided cost or market rates. Fluctuations in revenues
and related cash flows are generally attributable to changes in projects in
operation, coupled with variations in water flows and the effect of escalating
and declining contract rates in the Company's power purchase agreements.
23
Management Fees and Operations & Maintenance Revenues
O&M contracts, from which management fees and operations and maintenance
revenues are derived, generally enable the Company to maximize the use of its
available resources and to generate additional income.
Equity Income in Partnership Interests and Other Partnership Income
In accordance with generally accepted accounting principles, certain of
the Company's partnership interests are accounted for under the equity and the
cost methods of accounting. Fluctuations in equity income and other partnership
income are generally attributable to variations in results of operations and
timing of cash distributions of certain partnerships.
Operating Expenses
Operating expenses consist primarily of project-related costs such as
labor, repairs and maintenance, supplies, insurance and real estate taxes.
Operating expenses include direct expenses related to the production of power
generation revenue as well as direct costs associated with O&M contracts which
are rebillable to applicable third party owners directly or not rebillable since
they are covered through an established management fee.
Lease Expense
Lease expense includes operating leases associated with some of the
hydroelectric projects as well as leases for the corporate and regional
administrative offices. Certain leases provide for payments that are based upon
power sales revenue or cash flow for specific projects. Hence, varying project
revenues will impact overall lease expense, year-to-year.
24
CERTAIN KEY OPERATING RESULTS AND TRENDS
The information in the tables below provides an overview of certain key
operating results and trends which, when read in conjunction with the narrative
discussion that follows, is intended to provide an enhanced understanding of the
Company's results of operations. These tables include information regarding the
Company's ownership of projects by region as well as information on regional
precipitation. As presented, the Company's project portfolio is concentrated in
the Northeastern United States, a region characterized by relatively consistent
long-term water flow and power purchase contract rates which are higher than in
most other regions of the country.
This information should be read in conjunction with the December 31, 1999
Consolidated Financial Statements and the related Notes thereto, included
herein.
Power Producing Facilities
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
---- ---- ----
MEGAWATTS #PROJECTS MEGAWATTS #PROJECTS MEGAWATTS #PROJECTS
--------- --------- --------- --------- --------- ---------
Northeast:
100% Ownership (1) 102.38(8) 31(8) 90.88 29 90.88 29
Partial Ownership (2) 59.27(8) 7(8) 70.77(4) 9(4) 52.37 8
O&M Contracts (3) 11.32 15 12.02(5) 16(5) 92.16 19
--------- --------- --------- --------- --------- ---------
Total 172.97 53 173.67 54 235.41 56
========= ========= ========= ========= ========= =========
Southeast:
100% Ownership (1) 27.42 13 27.42 13 27.42 13
Partial Ownership (2) -- -- -- -- -- --
O&M Contracts (3) -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total 27.42 13 27.42 13 27.42 13
========= ========= ========= ========= ========= =========
West:
100% Ownership (1) 5.38 3 5.38 3 5.38 3
Partial Ownership (2) 4.20 1 4.20 1 4.20 1
O&M Contracts (3) 1.80(9) 2(9) 18.80 3 19.08 4
--------- --------- --------- --------- --------- ---------
Total 11.38 6 28.38 7 28.66 8
========= ========= ========= ========= ========= =========
Northwest:
100% Ownership (1) 14.61 5 14.61(6) 5(6) 14.71 6
Partial Ownership (2) 24.00 1 24.00(7) 1(7) 24.96 2
O&M Contracts (3) 4.34 1 4.34 1 4.34 1
--------- --------- --------- --------- --------- ---------
Total 42.95 7 42.95 7 44.01 9
========= ========= ========= ========= ========= =========
Total:
100% Ownership (1) 149.79 52 138.29 50 138.39 51
Partial Ownership (2) 87.47 9 98.97 11 81.53 11
O&M Contracts (3) 17.46 18 35.16 20 115.58 24
--------- --------- --------- --------- --------- ---------
Total 254.72 79 272.42 81 335.50 86
========= ========= ========= ========= ========= =========
- ------------
(1) Defined as projects in which the Company has 100% of the economic
interest.
(2) Defined as projects in which the Company's economic interest is less than
100%.
(3) Defined as projects in which the Company is an operator pursuant to O&M
contracts with the project's owner or owners. The Company does not have
any ownership interest in such projects.
(4) Reflects the addition of one project (18.40 megawatts) on November 11,
1998.
(5) Reflects the termination of three O&M contracts (80.14 megawatts) on
October 31, 1998.
(6) Reflects the sale of one project (0.10 megawatts) on December 31, 1998.
(7) Reflects the dissolution of one project (0.96 megawatts) on June 18, 1998.
(8) Reflects the purchase of the remaining ownership interest of two projects
(8.20 and 3.30 megawatts, respectively) on May 25, 1999 and November 30,
1999, respectively.
(9) Reflects the termination of one O&M contract (17.00 megawatts) on January
31, 1999.
25
Selected Operating Information(1)
TWELVE MONTHS TWELVE MONTHS SIX MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997(2) JUNE 30, 1997
---------------- ----------------- ---------------- ---------------
Power generation revenues (thousands) $41,342 $43,868 $15,259 $50,665
Kilowatt hours produced (thousands) 539,706 585,112 209,453 663,920
Average rate per kilowatt hour 7.7(cent) 7.5(cent) 7.3(cent) 7.6(cent)
- ---------
(1) Limited to projects included in consolidated revenues.
(2) Comprised of results of the Predecessor Company from July 1, 1997 through
November 7, 1997 and the Reorganized Company from November 8, 1997 through
December 31, 1997.
As the above tables indicate, the Company's portfolio of operating
projects may fluctuate from year to year in terms of total operating megawatts.
The Company expects to develop, acquire, sell, or discontinue operations of
certain projects, as it has in the past, if it perceives such actions to be
beneficial. In the case of O&M contracts, such contracts are subject to
termination for a variety of reasons. The total number of operating megawatts in
the Company's portfolio is not necessarily indicative of overall financial
results.
Precipitation, Water Flow and Seasonality
The amount of hydroelectric energy generated at any particular facility
depends upon the quantity of water flow at the site of the facility. Dry periods
tend to reduce water flow at particular sites below historical averages,
especially if the facility has low storage capacity. Excessive water flow may
result from prolonged periods of higher than normal precipitation, or sudden
melting of snow packs, possibly causing flooding of facilities and/or a
reduction of generation until water flows return to normal.
Water flow is generally consistent with precipitation. However, snow and
other forms of frozen precipitation will not necessarily increase water flow in
the same period of such precipitation if temperatures remain at or below
freezing. "Average", as it relates to water flow, refers to the actual long-term
average of historical water flows at the Company's facilities for any given
year. Typically, these averages are based upon hydrologic studies done by
qualified engineers for periods of 20 to 50 years or more, depending on the flow
data available with respect to a particular site. Over an extended period (e.g.,
10 to 15 years) water flows would be expected to be average, whereas for shorter
periods (e.g., three months to three years) variation from average is likely.
Each of the regions in which the Company operates has distinctive precipitation
and water flow characteristics, including the degree of deviation from average.
Geographic diversity helps to minimize short-term variations.
Water Flow by Region (1)
TWELVE MONTHS TWELVE MONTHS SIX MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997(2) JUNE 30, 1997
----------------- ------------------ -------------------- -------------------
Northeast Average Average Below Average Above Average
Southeast Below Average Below Average Below Average Average
West Below Average Above Average Below Average Below Average
Northwest Above Average Above Average Above Average Above Average
- ---------
(1) These determinations were made based upon water flow in areas where the
Company's projects are located and may not be applicable to the entire
region.
(2) Determination based on water flows of the Predecessor Company from July 1,
1997 through November 7, 1997 and the Reorganized Company from November 8,
1997 through December 31, 1997.
Production of energy by the Company is typically greatest in January
through June when water flow is at its highest at most of the Company's
projects, and lowest in July through September. The amount of water flow in any
given period will have a direct effect on the Company's production, revenues and
cash flow.
26
The following tables, which present revenues from power sales and kilowatt
hour production by quarter, respectively, highlight the seasonality of the
Company's revenue stream. These tables should be reviewed in conjunction with
the water flow information included above.
Power Generation Revenues (in thousands)(1)
TWELVE MONTHS TWELVE MONTHS SIX MONTHS
ENDED ENDED ENDED TWELVE MONTHS ENDED
DEC. 31, 1999(2) DEC. 31, 1998 DEC. 31, 1997(4) JUNE 30, 1997(2)(3)
-------------------- ------------------ ------------------ ---------------------
$ % $ % $ % $ %
Jan. 1 - Mar. 31 14,016 33.9 14,712 33.6 -- -- 15,078 29.8
Apr. 1 - Jun. 30 10,220 24.7 14,185 32.3 -- -- 13,461 26.5
Jul. 1 - Sep. 30 6,382 15.4 8,259 18.8 6,422 N/A 8,855 17.5
Oct. 1 - Dec. 31 10,724 26.0 6,712 15.3 8,837 N/A 13,271 26.2
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 41,342 100.0 43,868 100.0 15,259 100.0 50,665 100.0
========== ========== ========== ========== ========== ========== ========== ==========
- -----------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $907 and $604 representing
claims for lost generation recoverable from an insurance company for the
twelve months ended December 31, 1999 and June 30, 1997, respectively.
(3) Comprised of the period from July 1 - December 31, 1996 and January 1 -
June 30, 1997.
(4) Comprised of results of the Predecessor Company from July 1, 1997 through
November 7, 1997 and the Reorganized Company from November 8, 1997 through
December 31, 1997.
Kilowatt Hours ("kWh") Produced (in thousands)(1)
TWELVE MONTHS TWELVE MONTHS SIX MONTHS
ENDED ENDED ENDED TWELVE MONTHS ENDED
DEC. 31, 1999(2) DEC. 31, 1998 DEC. 31, 1997(4) JUNE 30, 1997(2)(3)
------------------ ------------------- -------------------- ---------------------
kWh % kWh % kWh % kWh %
--- - --- - --- - --- -
Jan. 1 - Mar. 31 175,172 32.4 192,355 32.9 -- -- 193,576 29.2
Apr. 1 - Jun. 30 145,505 27.0 191,969 32.8 -- -- 178,824 26.9
Jul. 1 - Sep. 30 84,707 15.7 108,649 18.6 95,852 N/A 125,197 18.9
Oct. 1 - Dec. 31 134,322 24.9 92,139 15.7 113,601 N/A 166,323 25.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 539,706 100.0 585,112 100.0 209,453 100.0 663,920 100.0
========== ========== ========== ========== ========== ========== ========== ==========
- -------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 15,483 and 9,412 kWh of the business
interruption revenue recoverable as a result of insurance claims for the
twelve months ended December 31, 1999 and June 30, 1997, respectively.
(3) Comprised of the period from July 1 - December 31, 1996 and January 1 -
June 30, 1997.
(4) Comprised of kilowatt hours produced from July 1, 1997 through November 7,
1997 for the Predecessor Company and from November 8, 1997 through
December 31, 1997 for the Reorganized Company.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Operating Revenues
Power Generation Revenue. The Company's power generation revenue decreased
by $2.6 million (5.9%) from $43.9 million to $41.3 million for the year ended
December 31, 1998 and the year ended December 31, 1999, respectively.
The Northeast region experienced a minimal increase of $0.1 million
primarily as a result of the acquisition of two partnerships during 1999,
partially offset by decreased water flows during 1999.
The Southeast region experienced decreased revenues of $2.0 million
primarily as a result of the expiration and renegotiation, at reduced rates, of
some of the power purchase agreements and decreased water flows during 1999.
27
The West and Northwest regions (combined) experienced decreased revenues
of $0.7 million primarily as a result of average water flows in the West during
the year ended December 31, 1999 as compared to above average water flows during
the year ended December 31, 1998.
The average rate earned by the Company increased by 0.2(cent) (2.7%) from
7.5(cent) to 7.7(cent) in the year ended December 31, 1998 versus the year ended
December 31, 1999, respectively, primarily as a result of variations in the
production mix and contract rates among various projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
operations & maintenance revenues decreased by $1.3 million (18.3%) from $7.1
million to $5.8 million for the year ended December 31, 1998 and the year ended
December 31, 1999, respectively, primarily due to decreased levels of rebillable
work performed during the year ended December 31, 1999 versus the year ended
December 31, 1998.
Equity Income in Partnership Interests and Other Partnership Income.
Equity income in partnership interests and other partnership income decreased by
$2.0 million (55.6%) from $3.6 million to $1.6 million for the year ended
December 31, 1998 and the year ended December 31, 1999, respectively, primarily
due to (i) a decreased distribution of $1.4 million from a minority owned
partnership which owns a hydroelectric project in the Northeast; (ii) a decrease
of $0.9 million resulting from a one-time cash distribution received during 1998
in connection with the dissolution of a partnership in the West; and (iii) the
purchase and subsequent consolidation of two partnerships during 1999, which
were previously accounted for under the equity method, partially offset by (iv)
increased equity income from a partnership which owns a hydroelectric project in
Canada.
Costs and Expenses
Operating Expenses. Operating expenses decreased by $2.8 million (15.3%)
from $18.3 million to $15.5 million for the year ended December 31, 1998 and the
year ended December 31, 1999, respectively primarily due to (i) decreased levels
of rebillable labor and contract costs due to decreased levels of rebillable
work for the year ended December 31, 1999 and (ii) decreased maintenance and
supplies expense during the year ended December 31, 1999 due to less maintenance
required.
General and Administrative. General and administrative expenses decreased
by $3.3 million (33.7%) from $9.8 million to $6.5 million for the year December
31, 1998 and the year ended December 31, 1999, respectively. The decrease is
primarily due to a $2.4 million decrease in development expenditures and a $0.8
million decrease in salaries and benefits.
Interest Expense
Interest expense decreased by $1.3 million (16.3%) from $8.0 million to
$6.7 million for the year ended December 31, 1998 and the year ended December
31, 1999, respectively. The decrease was primarily due to lower principal
balances on outstanding debt and the modification of terms of a note payable,
which resulted in an effective rate of 0% on such note during the year ended
December 31, 1999.
Income Taxes
The Company's effective income tax rate was 41.6% on net income for the
year ended December 31, 1999. The effective rate was higher than the federal
statutory rate primarily due to deferred tax assets for which the Company did
not recognize a current tax benefit and current state tax liability.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
Operating Revenues
Power Generation Revenue. The Company's power generation revenue decreased
by $6.8 million (13.4%) from $50.7 million to $43.9 million for the fiscal year
ended June 30, 1997 and the year ended December 31, 1998, respectively.
Excluding the effects of the sale of 15 projects on December 23, 1996, power
generation revenue decreased by $4.9 million (10.0%), from $48.8 million to
$43.9 million for the fiscal year ended June 30, 1997 and the year ended
December 31, 1998, respectively.
28
The Northeast region experienced decreased revenues of $3.4 million
primarily as a result of above average water flows throughout the region during
the fiscal year ended June 30, 1997 as compared to average water flows during
the year ended December 31, 1998, coupled with lost generation at four of its
New York sites for six months as a result of a severe ice storm which crippled
the Northeastern United States and Southern Quebec during January 1998.
The Southeast region experienced decreased revenues of $1.4 million
primarily as a result of average water flows throughout the region during the
fiscal year ended June 30, 1997 as compared to below average water flows during
the year ended December 31, 1998 and the expiration and renegotiation, at
reduced rates, of some of the power purchase agreements.
The West and Northwest regions (combined) experienced a minimal decrease
of $0.1 million.
The average rate earned by the Company decreased by 0.1(cent) (1.3%) from
7.6(cent) to 7.5(cent) in the fiscal year ended June 30, 1997 versus the year
ended December 31, 1998, respectively, primarily as a result of variations in
the production mix and contract rates among various projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
operations & maintenance revenues increased by $1.7 million (31.5%) from $5.4
million to $7.1 million for the fiscal year ended June 30, 1997 and the year
ended December 31, 1998, respectively. Excluding the addition of 15 O&M
contracts on December 23, 1996, management fees and operations & maintenance
revenues increased by $0.5 million (10.2%) from $4.9 million to $5.4 million for
the fiscal year ended June 30, 1997 and the year ended December 31, 1998,
respectively, primarily due to increased levels of rebillable work performed
during the year ended December 31, 1998 versus the fiscal year ended June 30,
1997.
Equity Income in Partnership Interests and Other Partnership Income.
Equity income in partnership interests and other partnership income increased by
$2.3 million (176.9%) from $1.3 million to $3.6 million for the fiscal year
ended June 30, 1997 and the year ended December 31, 1998, respectively,
primarily due to an increased distribution of $1.0 million received from a
minority owned partnership which owns a hydroelectric project located in the
Northeast, a $0.9 million one-time cash distribution received in connection with
the dissolution of a partnership in the West, in which the Company had general
and limited partnership interests, and a $0.3 million increase due to a change
from the cost method to the equity method of accounting for a certain
investment.
Costs and Expenses
General and Administrative. General and administrative expenses increased
by $1.2 million (14.0%) from $8.6 million to $9.8 million for the fiscal year
ended June 30, 1997 and the year ended December 31, 1998, respectively. The
increase is primarily due to (i) a $1.7 million increase in development
expenditures; (ii) a $1.2 million increase in salaries and benefits, including a
$0.7 million severance accrual; (iii) a $0.7 million increase in net worth and
franchise taxes due to the Company's improved financial position; offset by (iv)
a $2.4 million decrease resulting from the accrual of reorganization expenses
during the fiscal year ended June 30, 1997.
Depreciation and Amortization. Depreciation and amortization decreased by
$1.4 million (16.1%) from $8.7 million to $7.3 million for the fiscal year ended
June 30, 1997 and the year ended December 31, 1998, respectively, due to the
revaluation of the Company's assets in conjunction with the adoption of fresh
start reporting.
Interest Expense
Interest expense decreased by $21.6 million (73.0%) from $29.6 million to
$8.0 million for the fiscal year ended June 30, 1997 and the year ended December
31, 1998, respectively. The decrease was primarily due to the cessation of
accruing interest on CHI's 12% Senior Discount Notes due 2003, Series B (the
"Senior Discount Notes") as of September 15, 1997, the date CHI commenced its
case under chapter 11 of Bankruptcy Code. See Note 1 of the Notes to
Consolidated Financial Statements.
29
Income Taxes
The Company's effective income tax rate was 43.9% on net income for the
year ended December 31, 1998. The effective rate was higher than the federal
statutory rate primarily due to deferred tax assets for which the Company did
not recognize a current tax benefit and current state tax liability. The
Company's effective income tax rate was 2.4% on loss before extraordinary items
for the fiscal year ended June 30, 1997. The effective rate on loss before
extraordinary items was higher than the federal statutory rate primarily due to
deferred tax assets for which the Company did not recognize a current tax
benefit. In addition, for the fiscal year ended June 30, 1997, the effective
income tax rate of 37.6% on the extraordinary gain was higher than the federal
statutory rate primarily due to current state tax liability.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
Operating Revenues
Power Generation Revenue. The Company's power generation revenue decreased
by $6.8 million (30.8%) from $22.1 million to $15.3 million for the six months
ended December 31, 1996 and 1997, respectively. Excluding the effects of the
sale of 15 projects on December 23, 1996, power generation revenue decreased by
$4.9 million (24.3%) from $20.2 million to $15.3 million for the six months
ended December 31, 1996 and 1997, respectively.
The Northeast region experienced decreased revenues of $4.0 million due to
below average water flows for the six months ended December 31, 1997 as compared
to above average water flows for the six months ended December 31, 1996.
The Southeast region experienced decreased revenues of $0.4 million due to
below average water flows for the six months ended December 31, 1997, as
compared to average water flows for the six months ended December 31, 1996.
The West and the Northwest regions (combined) experienced decreased
revenues of $0.5 million due to the decommissioning of three projects totaling
7.01 megawatts.
The average rate earned by the Company decreased by 0.3(cent) (3.9%) from
7.6(cent) to 7.3(cent) per kilowatt hour for the six months ended December 31,
1996 and 1997, respectively. Excluding the 1996 results of the 15 projects sold
on December 23, 1996, revenue per kilowatt hour decreased by 0.6(cent) (7.6%)
from 7.9(cent) to 7.3(cent) for the six months ended December 31, 1996 and 1997,
respectively, primarily as a result of variations in the production mix and
contract rates among the various projects. In addition, due to the
decommissioning of three projects, approximately 3.5 million kilowatt hours of
production were sold at a rate of 0.8(cent) per kilowatt hour during the six
months ended December 31, 1997, while the average rate for these projects during
the six months ended December 31, 1996 was 7.7(cent) per kilowatt hour.
Management Fees and Operations & Maintenance Revenues. Management fees and
O&M contract revenue increased by $1.4 million (51.9%), from $2.7 million to
$4.1 million for the six months ended December 31, 1996 and 1997, respectively.
Excluding the addition of 15 O&M contracts, management fees and O&M contract
revenue increased $0.8 million (29.6%) from $2.7 million to $3.5 million for the
six months ended December 31, 1996 and 1997, respectively. The increase was
primarily due to an increase in O&M rebillable contract costs and a generation
incentive bonus.
Costs and Expenses
Operating Expenses. Operating expenses increased by $0.3 million (3.4%)
from $8.9 million to $9.2 million for the six months ended December 31, 1996 and
1997, respectively. Excluding the 1996 results of the 15 projects sold and the
1997 addition of the 15 O&M contracts, operating expenses increased $0.6 million
(7.4%) from $8.1 million to $8.7 million for the six months ended December 31,
1996 and 1997, respectively. This increase was primarily due to (i) an increase
in O&M rebillable contract costs; and (ii) an increase in non-recurring
maintenance and supplies, partially offset by (i) a decrease in travel expense;
and (ii) a decrease in the provision for uncollectable accounts receivable.
Reorganization Costs. Reorganization costs amounted to $4.0 million for
the six months ended December 31, 1997. These costs represent (i) $1.5 million
of fees and expenses for the Company's financial, legal, and other professional
advisors associated with the Company's financial restructuring and the legal
counsel representing the holders of the Company's then-existing Senior Discount
Notes and (ii) a $2.5 million non-cash write-off of loan acquisition costs
related to the Senior Discount Notes.
30
Fair Value Adjustments. As a result of the application of fresh start
reporting, in accordance with SOP 90-7, fair value adjustments of $4.9 million
were recorded on the Effective Date.
Gain on Adjustment to Project Development Debt
During the period from July 1, 1997 to December 31, 1997, the Company
wrote off certain of its project development debt resulting in a gain of $8.6
million. This debt was contingent upon the successful development (including the
financing thereof) of pumped storage projects, which management believed would
not be successfully developed by the Company and the exercise of options on land
and a mine which was to be used as an underground reservoir for the projects.
Interest Expense
Interest expense decreased by $5.7 million (38.8%) from $14.7 million to
$9.0 million for the six months ended December 31, 1996 and 1997, respectively.
Excluding the 1996 results of the 15 projects sold, interest expense decreased
by $5.6 million (38.4%) from $14.6 million to $9.0 million for the six months
ended December 31, 1996 and 1997, respectively. The decrease is primarily due to
the cessation of accruing interest on the Senior Discount Notes as of September
15, 1997. See Note 1 of the Notes to Consolidated Financial Statements.
Extraordinary Gain
As a result of the reorganization, a gain on extinguishment of debt of
$87.2 million was recorded on the Effective Date.
LIQUIDITY AND CAPITAL RESOURCES
As more fully described in the Consolidated Financial Statements and
related Notes thereto, the cash flow of the Company was comprised of the
following:
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------------------------------ --------------------------------
(IN THOUSANDS) (IN THOUSANDS)
-------------- --------------
TWELVE MONTHS TWELVE MONTHS NOV. 8 - JULY 1 - TWELVE MONTHS
ENDED ENDED DEC. 31, NOV. 7, ENDED
DEC. 31, 1999 DEC. 31, 1998 1997 1997 JUNE 30, 1997
------------- -------------- ----------- ---------- --------------
Net cash provided by/(used in)
Operating activities............... $ 14,958 $ 18,176 $ 2,327 $ (1,457) $ 14,172
Investing activities............... (24,746) (1,737) (876) (425) 731
Financing activities............... 3,964 (6,659) (10,718) (9,355) (6,235)
------------- -------------- ----------- ---------- --------------
Net (decrease)/increase in cash and
cash equivalents...................... $ (5, 824) $ 9,780 $ (9,267) $ (11,237) $ 8,668
============= ============== =========== ========== ==============
The Company's primary source of liquidity is internally generated cash
from operations. Management believes that cash provided by operations will be
sufficient to satisfy all of the Company's working capital, capital expenditure
and debt service requirements during 2000. Available external sources of
liquidity include a $35.0 million secured revolving working capital and letter
of credit facility (see "--Summary of Indebtedness"). This facility provides
additional liquidity to support the Company's existing operations as well as its
future growth. As of March 29, 2000, $0.3 million in revolving loans and $8.3
million of letters of credit are outstanding under the facility and therefore
$24.6 million was available for working capital purposes or additional letter of
credit issuances. In addition, should growth opportunities warrant significant
additional cash requirements, the Company may pursue other external sources of
funds through debt and/or equity offerings.
31
For the year ended December 31, 1999, the cash provided by operating
activities of $15.0 million was principally the result of the $16.0 million of
net income adjusted for non-cash items offset by a decrease of $1.0 million due
to a change in operating assets and liabilities. Significant non-cash items
include $7.4 million of depreciation and amortization, a $3.2 million provision
relating to deferred tax liabilities and $0.5 million of non-cash interest and
other charges. The cash used in investing activities of $24.7 million was
primarily attributable to $13.0 million of development expenditures, $8.9
million used to purchase partnership interests and $3.1 million of capital
expenditures, offset by a $0.3 million decrease in investments and other
long-term assets. The cash provided by financing activities of $4.0 million was
due to $5.6 million in borrowings and a $3.7 million contribution from minority
interests, offset by repayment of $5.4 million of project debt.
Cash provided by operating activities decreased by $3.2 million for the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
The decrease resulted from a difference in cash generated from operating assets
and liabilities of $6.0 million, offset by an increase in net income adjusted
for non-cash items of $2.6 million and cash used for reorganization items of
$0.2 million. The difference in net income adjusted for non-cash items is mainly
attributed to an increase in net income of $1.0 million and non-recurring income
from the sale of partnership assets of $0.9 million in 1998.
SUMMARY OF INDEBTEDNESS (IN THOUSANDS)
PRINCIPAL AMOUNT OUTSTANDING AS OF
DEC. 31, DEC. 31,
1999 1998
----------- ------------
Company debt, excluding non-recourse
debt of subsidiaries $ 5,550 $ --
Non-recourse debt of subsidiaries 75,906 80,813
Current portion of long-term debt (11,455) (6,327)
----------- ------------
Total long-term debt obligations $ 70,001 $ 74,486
=========== ============
In November 1999, the Company obtained a $35 million secured revolving
working capital and letter of credit facility with an initial expiration date of
December 31, 2001 (the "Facility"). The Company may use proceeds available under
the Facility to support its development, acquisition and operating activities.
Upon expiration of the Facility, any outstanding revolving loans will, at the
Company's option, be converted into a five year term loan. The interest rate on
the revolving loans is prime + 1.5%. As of March 29, 2000, $0.3 million in
revolving loans are outstanding under the Facility and $8.3 million of letters
of credit have been issued and are outstanding.
On March 20, 1997, the Company, at a meeting with certain holders of the
Senior Discount Notes (the "Bondholders"), announced an outline for its current
business strategy and made a proposal to restructure its outstanding debt and
equity. Subsequently, the Bondholders formed a committee to discuss a possible
restructuring with the Company (the "Unofficial Bondholders' Committee"). On
June 4, 1997, CHI reached an agreement in principle with the Unofficial
Bondholders' Committee on the terms of the plan of reorganization ("Plan of
Reorganization"). On August 8, 1997, pursuant to a disclosure statement dated
August 8, 1997, CHI commenced the solicitation of votes from holders of Senior
Discount Notes and holders of the 13 1/2% Cumulative Redeemable Preferred Stock,
8% Senior Convertible Voting Preferred Stock and 9 1/2% Junior Convertible
Voting Preferred Stock (collectively the "Old Preferred Stock") for the
acceptance or rejection of the Plan of Reorganization. This solicitation was
conducted prior to the filing by CHI of a case under chapter 11 of the
Bankruptcy Code so as to significantly shorten the pendency of the case and to
simplify its administration. The solicitation was successfully completed on
September 9, 1997, and CHI commenced the chapter 11 case on September 15, 1997
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). None of CHI's subsidiaries commenced a case under the
Bankruptcy Code. The Bankruptcy Court confirmed the Plan of Reorganization on
October 23, 1997 and the Company emerged from bankruptcy effective November 7,
1997.
32
Under the Plan of Reorganization, CHI's Senior Discount Notes were
converted into, among other things, $15.0 million in cash and 100% of the shares
of CHI's new common stock issued on the Effective Date (the "New Common Stock"),
subject to dilution from the New Warrants and the Management Options (each as
described as follows); the holders of Old Preferred Stock exchanged such stock
for warrants to purchase up to 12.5% of the New Common Stock (the "New
Warrants"), subject to dilution from the Management Options; and CHI's old
common stock was canceled. CHI's senior management received options to purchase
up to an aggregate of 7.5% of the New Class A Common Stock (the "Management
Options"), subject to dilution from the New Warrants. In addition, certain
members of CHI's senior management team entered into new employment agreements
in connection with the restructuring.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
33
REPORT OF INDEPENDENT ACCOUNTANTS
(POST-EMERGENCE)
To the Board of Directors
and Stockholders of CHI Energy, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of CHI Energy,
Inc., (formerly Consolidated Hydro, Inc. (CHI) and its subsidiaries
(collectively, the "Company") at December 31, 1999 and 1998 and the results of
their operations and their cash flows for the years ended December 31, 1999 and
1998 and the eight weeks ended December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 1 and 2 to the consolidated financial statements, on
October 23, 1997, the United States Bankruptcy Court for the District of
Delaware confirmed CHI Energy, Inc.'s plan of reorganization (the "Plan").
Confirmation of the Plan resulted in the discharge of certain claims against CHI
that arose before September 15, 1997 and substantially alters the rights and
interests of certain debt and equity securities holders as provided for in the
Plan. The Plan became effective on November 7, 1997 and the parent company
emerged from bankruptcy. In connection with its emergence from bankruptcy, CHI
adopted fresh-start reporting as of November 8, 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 20, 2000
34
REPORT OF INDEPENDENT ACCOUNTANTS
(PRE-EMERGENCE)
To the Board of Directors
and Stockholders of CHI Energy, Inc.
In our opinion, the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the results of operations, stockholders' equity (deficit) and cash
flows of CHI Energy, Inc. (formerly Consolidated Hydro, Inc.) and its
subsidiaries (collectively, the "Company") for the eighteen weeks ended November
7, 1997 and for the year ended June 30, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 1 and 2 to the consolidated financial statements, on
September 15, 1997, CHI Energy, Inc., the parent company, filed a petition with
the United States Bankruptcy Court for the District of Delaware under the
provisions of Chapter 11 of the Bankruptcy Code. None of the Company's
subsidiaries were party to the case under the Bankruptcy Code. The Company's
plan of reorganization became effective on November 7, 1997 and the parent
company emerged from bankruptcy. In connection with its emergence from
bankruptcy, the Company adopted fresh-start reporting as of November 8, 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 27, 1998
35
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
REORGANIZED COMPANY PREDECESSOR COMPANY
--------------------------------------- -----------------------
FISCAL YEAR
YEAR ENDED NOV. 8 TO JULY 1 TO ENDED
DEC. 31 DEC. 31 DEC. 31 NOV. 7 JUNE 30
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 7 1 9 9 7
------- ------- ------- ------- -------
Operating revenues:
Power generation revenue $ 41,342 $ 43,868 $ 6,598 $ 8,661 $ 50,665
Management fees and operations & maintenance revenues 5,777 7,059 1,437 2,713 5,395
Equity income in partnership interests and other partnership income 1,628 3,572 203 212 1,320
---------- ---------- ---------- ---------- ----------
48,747 54,499 8,238 11,586 57,380
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Operating 15,470 18,337 2,566 6,588 18,015
General and administrative 6,522 9,754 1,199 2,217 8,575
Charge for employee and director equity participation programs - - - - 100
Reorganization costs - - - 3,978 -
Fair value adjustments - - - 4,855 -
Depreciation and amortization 7,435 7,334 1,105 3,009 8,661
Lease expense to a related party - - - 1,274 3,549
Lease expense to unrelated parties 5,837 5,896 900 727 2,215
(Adjustment to)/charge for impairment of long-lived assets - - - (75) 83
---------- ---------- ---------- ---------- ----------
35,264 41,321 5,770 22,573 41,198
---------- ---------- ---------- ---------- ----------
Income/(loss) from operations 13,483 13,178 2,468 (10,987) 16,182
INTEREST INCOME 1,472 1,488 242 739 1,661
OTHER INCOME 348 459 6 57 434
GAIN ON ADJUSTMENT TO PROJECT DEVELOPMENT DEBT - - - 8,568 -
INTEREST EXPENSE ON INDEBTEDNESS TO RELATED PARTIES - - - (2,752) (10,519)
INTEREST EXPENSE ON INDEBTEDNESS TO UNRELATED PARTIES (6,745) (8,048) (1,260) (4,989) (19,072)
---------- ---------- ---------- ---------- ----------
Income/(loss) before (provision)/benefit for income taxes and
extraordinary item 8,558 7,077 1,456 (9,364) (11,314)
(PROVISION)/BENEFIT FOR INCOME TAXES (3,557) (3,104) (751) 114 272
---------- ---------- ---------- ---------- ----------
Income/(loss) before extraordinary item 5,001 3,973 705 (9,250) (11,042)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NET OF INCOME TAX OF
ZERO AND $3,414 AS OF NOVEMBER 7 AND JUNE 30, 1997, RESPECTIVELY) - - 87,218 5,658
---------- ---------- ---------- ---------- ----------
NET INCOME/(LOSS) $ 5,001 $ 3,973 $ 705 $ 77,968 $ (5,384)
========== ========== ========== ========== ==========
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK:
Net income/(loss) $ 5,001 $ 3,973 $ 705 $ 77,968 $ (5,384)
Dividends declared on preferred stock - - - (3,370) (14,911)
Accretion of preferred stock - - - (179) (857)
Undeclared dividends on cumulative preferred stock - - - (2,511) (10,123)
---------- ---------- ---------- ---------- ----------
$ 5,001 $ 3,973 $ 705 $ 71,908 $(31,275)
========== ========== ========== ========== ==========
BASIC AND DILUTED NET INCOME PER COMMON SHARE (A) $ 0.50 $ 0.40 $ 0.07
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (A) 10,000,000 10,000,000 10,000,000
========== ========== ==========
(a) Share and per share data are not meaningful on or prior to November 7, 1997
due to the significant change in the capital structure in connection with the
Plan of Reorganization.
36
CHI ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share amounts)
DEC. 31, DEC. 31,
1 9 9 9 1 9 9 8
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents unrestricted $ 9,674 $ 16,106
Cash and cash equivalents restricted 6,280 5,672
Accounts receivable, net of allowance for doubtful accounts of $608 and $443, respectively 7,472 4,728
Prepaid expenses and other current assets 3,067 2,029
--------- ---------
Total current assets 26,493 28,535
PROPERTY, PLANT AND EQUIPMENT, NET 109,184 92,331
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS, NET 8,655 11,805
INTANGIBLE ASSETS, NET 58,959 45,535
INVESTMENTS AND OTHER ASSETS 35,641 41,665
--------- ---------
$ 238,932 $ 219,871
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 10,945 $ 9,816
Current portion of long-term debt and obligations under capital leases 11,455 6,327
--------- ---------
Total current liabilities 22,400 16,143
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 70,001 74,486
DEFERRED CREDIT, STATE INCOME TAXES AND OTHER LONG-TERM LIABILITIES 48,057 39,464
COMMITMENTS AND CONTINGENCIES
--------- ---------
Total liabilities 140,458 130,093
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 3,695 -
--------- ---------
STOCKHOLDERS' EQUITY
COMMON STOCK, $.01 PAR VALUE, 20,000,000 SHARES AUTHORIZED
Class A common stock, 9,085,290 shares issued and outstanding at December 31, 1999 and 1998 91 91
Class B common stock, 914,710 shares issued and outstanding at December 31, 1999 and 1998 9 9
ADDITIONAL PAID-IN CAPITAL, INCLUDING $2,064 RELATED TO WARRANTS AT DECEMBER 31, 1999 AND 1998 85,000 85,000
RETAINED EARNINGS 9,679 4,678
--------- ---------
Total stockholders' equity 94,779 89,778
--------- ---------
$ 238,932 $ 219,871
========= =========
37
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands except share amounts)
PREFERRED STOCK COMMON STOCK
--------------- ------------ RETAINED
NUMBER NUMBER ADDITIONAL EARNINGS
OF SHARES REPORTED OF SHARES PAR PAID-IN (ACCUMULATED
OUTSTANDING AMOUNT OUTSTANDING VALUE CAPITAL DEFICIT)
----------- ------ ----------- ----- ------- --------
PREDECESSOR COMPANY
BALANCE JUNE 30, 1996 110,000 $98,712 1,285,762 $ 2 $13,497 $ (259,427)
Annual dividend of $108.88 per share, mandatorily redeemable
Series H Preferred (14,911)
Accretion of Series H Preferred (857)
Recognition of employee compensation
expense related to the issuance of common stock
Issuance of preferred stock 2,558
Net loss (5,384)
----------- ------ ----------- ----- ------- --------
BALANCE JUNE 30, 1997 112,558 98,712 1,285,762 2 13,497 (280,579)
Dividend of $24.63 per share, mandatorily redeemable
Series H Preferred - July 1, 1997 to September 14, 1997 (3,370)
Accretion of Series H Preferred (179)
Net income 77,968
Fair value adjustments (112,558) (98,712) 8,714,238 98 71,503 206,160
----------- ------ ----------- ----- ------- --------
REORGANIZED COMPANY
BALANCE NOVEMBER 7, 1997 - - 10,000,000 100 85,000 -
Net income 705
----------- ------ ----------- ----- ------- --------
BALANCE DECEMBER 31, 1997 - - 10,000,000 100 85,000 705
Net income 3,973
----------- ------ ----------- ----- ------- --------
BALANCE DECEMBER 31, 1998 - - 10,000,000 100 85,000 4,678
Net income 5,001
----------- ------ ----------- ----- ------- --------
BALANCE DECEMBER 31, 1999 - - 10,000,000 $ 100 $85,000 $ 9,679
=========== ====== =========== ===== ======= ========
Table continued...
TOTAL
STOCKHOLDERS'
DEFERRED TREASURY EQUITY
COMPENSATION STOCK (DEFICIT)
------------ ----- ---------
PREDECESSOR COMPANY $ (350) $ (21,061) $ (168,627)
BALANCE JUNE 30, 1996
Annual dividend of $108.88 per share, mandatorily redeemable
Series H Preferred (14,911)
Accretion of Series H Preferred (857)
Recognition of employee compensation
expense related to the issuance of common stock 100 100
Issuance of preferred stock
Net loss (5,384)
------------ --------- ---------
BALANCE JUNE 30, 1997 (250) (21,061) (189,679)
Dividend of $24.63 per share, mandatorily redeemable
Series H Preferred - July 1, 1997 to September 14, 1997 (3,370)
Accretion of Series H Preferred (179)
Net income 77,968
Fair value adjustments 250 21,061 200,360
------------ --------- ---------
REORGANIZED COMPANY
BALANCE NOVEMBER 7, 1997 - - 85,100
Net income 705
------------ --------- ---------
BALANCE DECEMBER 31, 1997 - - 85,805
Net income 3,973
------------ --------- ---------
BALANCE DECEMBER 31, 1998 - - 89,778
Net income 5,001
------------ --------- ---------
BALANCE DECEMBER 31, 1999 - - $ 94,779
============ ========= =========
38
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
Reorganized Company Predecessor Company
------------------------------ --------------------
Fiscal Year
Year Ended Year Ended Nov. 8 to July 1 to Ended
Dec. 31 Dec. 31 Dec. 31 Nov. 7 June 30
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 7 1 9 9 7
------- ------- ------- ------- -------
Cash flows from operating activities:
Net income/(loss) $ 5,001 $ 3,973 $ 705 $ 77,968 $ (5,384)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities before reorganization items:
Non-cash interest and other charges 473 668 32 4,629 21,279
Reorganization costs -- -- -- 3,978 --
Fair value adjustments -- -- -- 4,855 --
Provision/(benefit) relating to deferred tax liabilities 3,173 2,600 571 (213) (1,032)
Extraordinary gain on extinguishment of debt -- -- -- (87,218) (5,658)
Gain on adjustment to project development debt -- -- -- (8,568) --
Non-cash (adjustment to)/charge for impairment of long-lived assets -- -- -- (75) 83
Gain on disposal of assets -- (24) -- (17) --
Depreciation and amortization 7,435 7,334 1,105 3,009 8,661
(Undistributed)/distributed earnings of affiliates (126) (269) 90 788 (696)
Income from sale of partnership assets -- (930) -- -- --
(Increase)/decrease in accounts receivable (2,127) 3,229 (1,643) 546 240
Decrease/(increase) in prepaid expenses and other current assets 163 (623) 415 (123) (375)
Decrease/(increase) in accounts payable and accrued expenses 966 2,419 1,598 (267) (2,946)
-------- -------- -------- -------- --------
Net cash provided by/(used in) operating activities before
reorganization items 14,958 18,377 2,873 (708) 14,172
-------- -------- -------- -------- --------
Operating cash flows used for reorganization items:
Professional fees -- (201) (546) (749) --
-------- -------- -------- -------- --------
Net cash used for reorganization items -- (201) (546) (749) --
-------- -------- -------- -------- --------
Net cash provided by/(used in) operating activities 14,958 18,176 2,327 (1,457) 14,172
-------- -------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets -- 24 -- 2,006 12,002
Proceeds from sale of partnership assets -- 930 -- -- --
Cost of development expenditures (12,985) -- -- -- (2,045)
Capital expenditures (3,094) (3,103) (230) (1,109) (4,358)
Decrease/(increase) in investments and other long-term assets 257 412 (646) (1,322) (4,868)
Purchase of partnership interests, net of cash acquired (8,924) -- -- -- --
-------- -------- -------- -------- --------
Net cash (used in)/provided by investing activities (24,746) (1,737) (876) (425) 731
-------- -------- -------- -------- --------
Cash flows from financing activities:
Payment of refinancing costs -- -- -- -- (310)
Borrowings from unrelated parties 5,550 -- 4 9 149
Payments to a related party on borrowings -- -- -- (2,271) (2,304)
Payments to unrelated parties on borrowings (5,441) (6,673) (296) (2,245) (3,999)
Contribution from minority interest 3,695 -- -- -- --
Increase/(decrease) in other long-term liabilities 160 14 (426) 152 229
Payment to holders of Senior Discount Notes -- -- (10,000) (5,000) --
-------- -------- -------- -------- --------
Net cash provided by/(used in) financing activities 3,964 (6,659) (10,718) (9,355) (6,235)
-------- -------- -------- -------- --------
Net (decrease)/increase in cash and cash equivalents (5,824) 9,780 (9,267) (11,237) 8,668
Cash and cash equivalents, at beginning of the period 21,778 11,998 21,265 32,502 23,834
-------- -------- -------- -------- --------
Cash and cash equivalents, at end of the period $ 15,954 $ 21,778 $ 11,998 $ 21,265 $ 32,502
======== ======== ======== ======== ========
39
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(continued)
Reorganized Company Predecessor Company
------------------------------------- -------------------
Fiscal Year
Year Ended Year Ended Nov. 8 to July 1 to Ended
Dec. 31 Dec. 31 Dec. 31 Nov. 7 June 30,
1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 7 1 9 9 7
------- ------- ------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid to a related party $ -- $ -- $-- $ 819 $4,275
======= ======= ===== ======= ======
Interest paid to unrelated parties $ 6,121 $ 7,484 $ 290 $ 2,100 $5,047
======= ======= ===== ======= ======
Income taxes, net $ 503 $ 483 $ 112 $ 379 $ 288
======= ======= ===== ======= ======
Schedules of noncash investing and financing activities:
The Company acquired the common stock or hydroelectric assets
of certain entities amounting to the following:
Fair value of assets acquired $ -- $ -- $-- $ -- $ 28 -
Cash paid -- -- -- -- --
------- ------- ----- ------- ------
Liabilities assumed $ -- $ -- $-- $ -- $ 28
======= ======= ===== ======= ======
During the year ended December 31, 1999, the Company purchased additional
partnership interests in three partnerships for $9,629 resulting in 100%
ownership of these projects. In conjuction with the acquisitions, liabilities
were assumed as follows:
Partnership
Interests
---------
Fair value of assets acquired $ 19,111
Prior ownership interests (9,076)
Cash paid (9,872)
--------
Liabilities assumed $ 163
========
As a result of the settlement of certain pre-reorganization contingencies and
the realization of net operating loss credits, during the year ended December
31, 1999, reorganization value in excess of amounts allocable to identifiable
assets and deferred credit, state income taxes and other long-term liabilities
decreased by $2,358.
As a result of the settlement of certain pre-reorganization contingencies and
the realization of net operating loss credits, during the year ended December
31, 1998, reorganization value in excess of amounts allocable to identifiable
assets decreased by $4,479. In addition, accounts payable and accrued expenses
decreased by $392, deferred credit, state income taxes and other long-term
liabilities decreased by $3,050 and long-term debt and obligations under capital
leases decreased by $1,037.
Series H mandatorily redeemable preferred stock increased $179 for the period
from July 1 to November 7, 1997, and $857 for the fiscal year ended June 30,
1997 as a result of the accretion of the difference between the fair market
value at issuance and the redemption value.
Series H mandatorily redeemable preferred stock increased $3,370 and $14,911 for
the period from July 1 to November 7, 1997 and the fiscal year ended June 30,
1997, respectively, as a result of declared dividends which increased the
liquidation preference.
Long-term debt and obligations under capital leases increased by $10,189 and
$18,682 for the period from July 1 to November 7, 1997, and the fiscal year
ended June 30, 1997, respectively, as a result of non-cash interest accrued on
the Senior Discount Notes.
In accordance with the Plan of Reorganization, the Company exchanged New Common
Stock for Senior Discount Notes and New Warrants for Old Preferred Stock. See
Note 1.
40
NOTE 1 - ORGANIZATION
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company") has been engaged in the
energy business since its founding in 1985. Its principal business strategy is
the development, acquisition, operation and management of renewable energy and
other energy-related assets. Renewable energy generally includes hydroelectric,
biomass, landfill gas, wind, solar and geothermal generating facilities.
Currently, all of the Company's revenue is derived from the ownership and
operation of hydroelectric facilities. As of December 31, 1999, 1998 and 1997
and June 30, 1997, the Company had ownership interests in, leased and/or
operated projects with a total operating capacity of 254, 272, 336 and 343
megawatts ("MW"), respectively.
On June 4, 1997, CHI, the holders of a majority of the Company's 13 1/2%
Cumulative Redeemable Preferred Stock (the "Series H Preferred"), 8% Senior
Convertible Voting Preferred Stock (the "Series F Preferred") and 9 1/2% Junior
Convertible Voting Preferred Stock (the "Series G Preferred", and together with
the Series H Preferred and the Series F Preferred, the "Old Preferred Stock") as
well as an informal committee of institutions that owned, or represented
beneficial holders that owned, approximately 89.2% of CHI's outstanding 12%
Senior Discount Notes due 2003 (the "Senior Discount Notes") reached an
agreement in principle on the terms of a restructuring to be accomplished
pursuant to a plan of reorganization (the "Plan of Reorganization") under
chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On August 8, 1997, pursuant to a
disclosure statement (the "Disclosure Statement"), CHI commenced a prepetition
solicitation of votes by the holders of Senior Discount Notes and Old Preferred
Stock to accept or reject the Plan of Reorganization. Under the Plan of
Reorganization, the holders of Senior Discount Notes and Old Preferred Stock
were the only holders of impaired claims and impaired equity interests entitled
to receive a distribution, and therefore, pursuant to section 1126 of the
Bankruptcy Code, were the only holders entitled to vote on the Plan of
Reorganization. At the conclusion of the 32-day solicitation period, the Plan of
Reorganization had been accepted by holders of 100% of the Senior Discount Notes
and by holders of greater than 97% of the Old Preferred Stock.
On September 15, 1997, CHI commenced its case under chapter 11 of the
Bankruptcy Code and filed the Plan of Reorganization and the Disclosure
Statement. The Bankruptcy Court entered an order confirming the Plan of
Reorganization on October 23, 1997 and the Plan of Reorganization became
effective on November 7, 1997 (the "Effective Date").
Through the implementation of the Plan of Reorganization on and after the
Effective Date, CHI's most significant financial obligations were restructured
as follows: $202 million in face amount of outstanding Senior Discount Notes
were converted into, among other things, $15 million in cash and 100% of the
shares of CHI's new common stock, consisting of shares of new class A common
stock (the "New Class A Common Stock") and shares of new class B common stock
(the "New Class B Common Stock", and together with the New Class A Common Stock,
the "New Common Stock") subject to dilution from the New Warrants and the
Management Options (each as described below); the holders of the Old Preferred
Stock exchanged such stock for warrants to purchase up to 12.5% of the New
Common Stock, consisting of series B warrants (the "New Series B Warrants") and
series C warrants (the "New Series C Warrants", and together with the New Series
B Warrants, the "New Warrants") subject to dilution from the Management Options;
and CHI's old common stock (the "Old Common Stock") was canceled. CHI's senior
management received options to purchase up to an aggregate of 7.5% of the New
Class A Common Stock (the "Management Options"), subject to dilution from the
New Warrants. As a result of the restructuring, CHI no longer had any
significant parent company debt obligations.
41
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 2 - FRESH START REPORTING
As of the Effective Date, the Company adopted fresh start reporting in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). The accompanying consolidated financial
statements reflect the use of fresh start reporting as required by SOP 90-7, in
which assets and certain liabilities were adjusted to their fair values and
resulted in the creation of a new reporting entity (the "Company", or the
"Reorganized Company") with no retained earnings or accumulated deficit as of
November 7, 1997. Accordingly, the consolidated financial statements for the
periods prior to and including November 7, 1997 (the "Predecessor Company") are
not comparable to the consolidated financial statements presented subsequent to
November 7, 1997. A black line has been drawn on the accompanying consolidated
financial statements to distinguish between the Reorganized Company and
Predecessor Company balances.
The Company adopted fresh start reporting since holders of existing voting
shares before filing and confirmation of the Plan of Reorganization received
less than 50% of the voting shares of the emerging entity and its reorganization
value was less than its post-petition liabilities and allowed claims. As a
result of the restructuring and the application of fresh start reporting as
required by SOP 90-7, a gain on extinguishment of debt of approximately $87.2
million, reorganization costs of approximately $4.0 million and fair value
adjustments of approximately $4.9 million were recorded in the Predecessor
Company Statement of Operations for the period ended November 7, 1997.
The total reorganization value assigned to the Company's net assets was
determined, by independent valuation, by calculating projected cash flows before
debt service requirements, for a fifteen year period, plus an estimated terminal
value. The discount rates used to value the Company ranged from 10% to 24%
depending on the risks associated with discrete cash flow components of the
Company. The above calculations resulted in an estimated reorganization value
attributable to equity of approximately $85.1 million of which the
reorganization value in excess of amounts allocable to identifiable assets was
approximately $17.5 million. The reorganization value in excess of amounts
allocable to identifiable assets will be amortized over fifteen years.
The effect of the Plan of Reorganization and the implementation of fresh
start reporting on the Company's consolidated balance sheet as of November 7,
1997 was as follows:
Pre Fresh-Start Reorganization Fair Value Fresh Start
Balance Sheet Adjustments (1) Adjustments (2) Balance Sheet
---------------- -------------- --------------- -----------------
Current assets $ 34,342 $ (5,000) $ 29,342
Property, plant and equipment, net 125,037 $ (30,971) 94,066
Reorganization value in excess of
amounts allocable to identifiable assets -- 17,453 17,453
Intangible assets, net 44,320 3,790 48,110
Other assets 27,763 13,590 41,353
---------------- -------------- --------------- -----------------
Total $ 231,462 $ (5,000) $ 3,862 $ 230,324
=============== ============== =============== =================
42
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 2 - FRESH START REPORTING (CONTINUED)
Pre Fresh-Start Reorganization Fair Value Fresh Start
Balance Sheet Adjustments (1) Adjustments (2) Balance Sheet
------------- --------------- --------------- -------------
Current liabilities $ 12,392 $ 10,000 $ 301 $ 22,693
Long-term debt 82,505 (71) 82,434
Deferred income taxes 31,111 (1,053) 2,360 32,418
Liabilities subject to compromise 183,603 (183,603) --
Mandatorily redeemable preferred
stock subject to compromise 117,921 (117,921) --
Other long-term liabilities 1,552 6,127 7,679
Preferred stock 98,713 (98,713) --
Common stock 2 98 100
Additional paid-in capital 13,497 71,503 85,000
Accumulated deficit (288,523) 293,378 (4,855) --
Deferred compensation (250) 250 --
Treasury stock (21,061) 21,061 --
-------------- -------------- -------------- ----------------
Total $ 231,462 $ (5,000) $ 3,862 $ 230,324
============== ============== ============== ================
- ----------
(1) To record transactions associated with the Plan of Reorganization as
described in Note 1 and eliminate the accumulated deficit.
(2) To record adjustments to assets and liabilities to reflect their estimated
fair value, including the establishment of reorganization value in excess
of amounts allocable to identifiable assets.
CHANGE IN FISCAL YEAR-END
Effective November 7, 1997, the Company changed its fiscal year-end from
June 30 to December 31. The unaudited results of operations for the six months
ended December 31, 1996 are as follows:
Revenues $ 25,214
========
Income from operations $ 6,346
========
Loss before benefit for
income taxes and extraordinary item $ (7,642)
Benefit for income taxes 1,520
--------
Loss before extraordinary item (6,122)
Extraordinary gain on
extinguishment of debt
(net of tax of $3,414) 5,622
--------
Net loss $ (500)
========
Share and per share data are not meaningful on or prior to November 7,
1997, due to the significant change in the capital structure in connection with
the Plan of Reorganization.
43
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CHI Energy,
Inc., its subsidiaries, the majority of which are wholly owned, and partnership
interests. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform with current year presentation.
USE OF MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE
Emerging Issues Task Force ("EITF") Issue 91-6, "Revenue Recognition of
Long-Term Power Sales Contracts" addressed and reached consensus on certain
revenue recognition questions raised by the terms and pricing arrangements of
long-term power sales contracts between non-utility power generators and
rate-regulated utilities. EITF Issue 96-17, "Revenue Recognition Under Long-Term
Power Sales Contracts That Contain Both Fixed and Variable Pricing Terms" ("EITF
96-17") addressed and reached consensus on additional revenue recognition
questions raised by such contracts. EITF 96-17 requires the recognition of
income at the lower of actual amounts billed or the average rate to be billed
over the life of the contract for contracts which have both fixed and variable
pricing terms. The Company is in compliance with the accounting treatments
discussed and the consensus reached.
Management fees and operations and maintenance revenues are earned in
conjunction with operation and maintenance services provided to third parties
under contractual agreements. Costs associated with rendering these services are
included in operating expenses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with maturities
when purchased of three months or less to be cash equivalents. A portion of cash
is restricted by specific project-related agreements, which generally mandate
that cash must first be utilized solely for funding operations and/or the
payment of debt associated with the project. As a result, restricted cash is
generally not available for general corporate purposes.
PROPERTY, PLANT AND EQUIPMENT
Plant and equipment are depreciated on a straight-line basis over the
remaining estimated useful lives of the respective assets (originally 50 years
for dam and appurtenant structures and 30 years for mechanical and electrical
equipment). Depreciation expense was $4,236, $4,127, $603, $2,026 and $5,654 for
the years ended December 31, 1999 and 1998, the period from November 8, 1997 to
December 31, 1997, the period from July 1, 1997 to November 7, 1997 and the
fiscal year ended June 30, 1997, respectively.
Property, plant and equipment additions are recorded at cost (Note 7).
Renewals and betterments that increase the useful lives of the assets are
capitalized. Repair and maintenance expenditures that increase the efficiency of
the assets are expensed as incurred.
INTEREST CAPITALIZATION
The Company capitalizes interest costs associated with the development and
construction of its facilities in accordance with Statement of Financial
Accounting Standards No. 34 "Capitalization of Interest Cost". Interest
capitalized in the period from July 1, 1997 to November 7, 1997 and the fiscal
year ended June 30, 1997 is disclosed in Note 10.
44
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets principally include costs incurred in connection with
power purchase agreements and Federal Energy Regulatory Commission ("FERC")
licenses, all of which are capitalized and amortized on a straight-line basis
over the periods to be benefited by such costs, ranging from 2 to 40 years (Note
8). Legal, compliance and other related expenditures incurred in connection with
the maintenance of power purchase agreements and FERC licenses are capitalized
and amortized over the remaining term of the applicable contract or license.
Amortization expense was $2,817 $2,601, $412, $983 and $3,007 in the years ended
December 31, 1999 and 1998, the period from November 8, 1997 to December 31,
1997, the period from July 1, 1997 to November 7, 1997 and the fiscal year ended
June 30, 1997, respectively. Management periodically reviews intangible assets
for potential impairments.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Value") resulted from the application of fresh start reporting
as described in Note 2, which required the excess of the fair value of the
Company over the fair value allocated to its identifiable assets to be recorded.
This excess is classified as Reorganization Value and is being amortized on a
straight-line basis over a fifteen-year period. Reorganization Value was reduced
by $2,358 and $4,479 during the years ended December 31, 1999 and 1998,
respectively, as a result of the reversal of tax valuation allowances related to
net operating loss carryforwards and the settlement of certain
pre-reorganization contingencies. Amortization was $792, $1,017 and $152 in the
years ended December 31, 1999 and 1998 and the period from November 8, 1997 to
December 31, 1997, respectively.
INVESTMENTS
In accordance with generally accepted accounting principles, the Company's
investments in partnership interests are accounted for under either the equity
method or the cost method of accounting. Investments accounted for under the
equity method of $9,394 and $16,932 at December 31, 1999 and 1998 respectively,
are included as part of long-term investments.
ADVERSE CONTRACTS
As a result of fresh start reporting as described in Note 2, certain
projects with unfavorable power purchase contracts were determined to be
generating net cash outflows. This resulted in the recording of an adverse
contract liability. The Company amortizes adverse contracts over the life of the
project's FERC license. Amortized benefit of $410, $411 and $62 was recorded in
the years ended December 31, 1999 and 1998 and the period from November 8, 1997
to December 31, 1997, respectively.
BUSINESS DEVELOPMENT COSTS
The Company expenses all business development related costs as incurred
until a viable purchase and sale agreement, or other material project
development document, is signed in respect of a prospective transaction. From
that date forward, all third party, project specific, business development
related costs are capitalized. Business development costs related to the St.
Felicien Congeneration Limited Partnership (Note 11) were capitalized during the
year ended December 31, 1999.
INCOME TAXES
The Company provides for deferred income taxes based on differences in
reporting certain income and expense items for federal income tax and financial
reporting purposes. The Company accounts for income taxes under the liability
method required by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109").
45
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing the net income
for the period by the weighted average number of common shares outstanding in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share" ("SFAS 128"). In the years ended December 31, 1999 and 1998 and the
period from November 8, 1997 to December 31, 1997, the exercise of stock options
and warrants were excluded from diluted net income per common share under the
treasury stock method as inclusion of such was antidilutive.
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS
Cash equivalents consist principally of investments in short term interest
bearing instruments and because of the short-term maturity of these items, the
carrying amount approximates fair value.
LONG-TERM INVESTMENTS
The carrying value of investments held in escrow accounts approximates
fair value based on their near-term maturity. Such investments are classified as
long-term on the Balance Sheet due to restrictions imposed under certain
contractual agreements. Investments in affiliates of the Company which are
accounted for on the cost basis have no quoted market prices. Accordingly, at
December 31, 1999 and 1998, a reasonable estimate of fair value could not be
made without incurring excessive costs.
46
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
Market rate obligations approximate their fair value because of interest
rates which fluctuate with market rates.
The fair value of fixed rate obligations is based on discounted future
cash flows using rates currently available to the Company for non-recourse
project-finance loans with similar terms and average maturities. Loans related
to the Company's pumped storage development assets have a fair value based on
the prospects of the project development and fair value of such assets.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and cash equivalents 15,954 15,954 21,778 21,778
Long-term investments:
Escrow deposits 9,443 9,443 9,127 9,127
Investments in affiliates 13,917 --(1) 14,561 --(1)
Long-term debt:
Market rate obligations 35,558 35,558 31,132 31,132
Fixed rate obligations 19,189 15,193 21,389 20,638
Pumped storage obligations 8,358 -- 7,939 --
(1) An estimate of fair value could not be made because it is not practicable.
47
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 5 - ACQUISITIONS
On May 25, 1999, the Company acquired an additional 50% ownership interest
in Pyrites Associates, a partnership which owns an 8.2 MW hydroelectric
facility, for $4.1 million and an additional 50% ownership interest in Hydro
Power Associates, a partnership which owns 25% of three hydroelectric facilities
aggregating 5.4 MW, for $3.2 million. On November 30, 1999, the Company acquired
an additional 50% ownership interest in Copenhagen Associates, a partnership
which owns a 3.3 MW hydroelectric facility, for $2.5 million. The Company now
has a 100% ownership interest in all three partnerships. The transactions were
funded with unrestricted cash. The Company has applied purchase accounting for
the acquisitions on a step-by-step basis. Accordingly, the results of operations
have been included in the Company's consolidated financial statements since the
dates of acquisition.
In addition, the Company has restated its prior period financial
statements to reflect a change from the cost to equity method of accounting for
the investment in Hydro Power Associates, in accordance with the provisions of
Accounting Principles Board Opinion No. 18 "Equity Method of Accounting for
Investments in Common Stock". As a result of this restatement, equity income in
partnership interests and other partnership income has been increased by $123
and $287 in the years ended December 31, 1999 and 1998, respectively, and
investments and other assets has been increased by $287, deferred credit, state
income taxes and other long-term liabilities has been increased by $115 and
retained earnings has been increased by $172 at December 31, 1998.
The following unaudited pro forma consolidated results of operations for
the years ended December 31, 1999 and 1998 assume the acquisitions occurred as
of the beginning of the periods presented:
Year ended December 31,
1999 1998
---- ----
Operating revenues $ 49,407 $ 56,073
Net income $ 5,174 $ 4,496
Basic and diluted net income per common share $ .52 $ .45
Weighted average number of common shares 10,000,000 10,000,000
The pro forma results are not necessarily indicative of the results that
would have been obtained if the acquisitions had been completed as of the
beginning of each of the fiscal periods presented, nor are they necessarily
indicative of future consolidated results.
48
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 6 - POWER GENERATION CONTRACTS
The Company operates facilities which qualify as small power production
facilities under the Public Utility Regulatory Policies Act ("PURPA"). PURPA
requires that each electric utility company, operating at the location of a
small power production facility, as defined, purchase the electricity generated
by such facility at a specified or negotiated price.
The Company sells substantially all of its electrical output to public
utility companies pursuant to long-term power purchase agreements, of which the
remaining terms range between 4 months and 26 years. Consolidated power
generation revenues, by major customer, for the years ended December 31, 1999
and 1998, the period from November 8, 1997 to December 31, 1997, the period from
July 1, 1997 to November 7, 1997 and the fiscal year ended June 30, 1997 were as
follows:
Reorganized Company Predecessor Company
---------------------------------------------------------- -----------------------------------
Fiscal
Year Ended Year Ended Nov. 8 - July 1 - Year Ended
Dec. 31 Dec. 31 Dec. 31, Nov. 7, June 30,
1999 1998 1997 1997 1997
--------------- ----------------- ---------------- -------------- ----------------
Niagara Mohawk Power Corp. $ 10,527 $ 8,797 $ 1,554 $ 1,181 $ 10,285
Commonwealth Electric Co. 9,398 9,649 1,451 1,563 10,685
New England Power Co. 5,042 5,460 841 963 6,184
Central Maine Power Co. 3,173 3,883 732 1,334 4,615
Idaho Power Co. 2,994 2,885 123 1,657 3,258
All other customers 10,208 13,194 1,897 1,963 15,638
---------- ---------- ---------- --------- ---------
$ 41,342 $ 43,868 $ 6,598 $ 8,661 $ 50,665
========== ========== ========== ========= ==========
During the year ended December 31, 1999, the amount shown for Niagara
Mohawk Power Corp. includes approximately $754 of business interruption revenue
representing lost generation recoverable from an insurance company as a result
of an insurance claim. During the fiscal year ended June 30, 1997, the amount
shown for Commonwealth Electric Co. includes approximately $212 of business
interruption revenue.
Increased competition in the electricity industry might cause certain
utilities to become higher credit risks. Although the ratings of the debt
securities of many of the utilities which purchase power from the Company are
currently investment grade, there can be no assurance of the long-term
creditworthiness of any of the Company's customers. Should any customer fail, it
would be difficult for the Company to replace an existing long-term contract
with a new contract with another customer on similar economic terms in the
current environment.
49
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 7 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment includes assets acquired or refinanced under
capitalized lease obligations of $18,351 and $20,353 at December 31, 1999 and
1998, respectively (Note 10).
Property, plant and equipment are comprised of the following at December
31, 1999 and 1998:
Range of
December 31, 1999 December 31, 1998 Asset Lives
------------------------- ------------------------ ----------------
Land $ 4,476 $ 3,738
Dam and appurtenant structures 57,260 49,414 50 years
Mechanical and electrical equipment 39,533 38,721 30 years
Buildings and other 2,747 2,346 3-12 years
Construction in progress 14,121 2,841
---------------- ----------------
118,137 97,060
Less - accumulated depreciation (8,953) (4,729)
---------------- ----------------
$ 109,184 $ 92,331
================ ================
NOTE 8 - INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31, 1999 and
1998:
Range of
December 31, 1999 December 31, 1998 Asset Lives
------------------------ ----------------------- ------------------
Power purchase contracts $ 52,399 $ 39,264 3 - 32 years
FERC licenses 6,926 6,926 4 - 40 years
Goodwill 2,788 -- 24 years
Other intangibles 2,674 2,364 2 - 40 years
-------------- --------------
64,787 48,554
Less - accumulated
amortization (5,828) (3,019)
-------------- --------------
$ 58,959 $ 45,535
============== ==============
Power purchase contracts and goodwill include those purchased in
conjunction with the acquisition of an additional 50% ownership interest in
Pyrites Associates and Copenhagen Associates (Note 5). The majority of the
Company's projects have been issued FERC licenses (extending through years
ranging from 2001 to 2037) or have qualified for exemption from FERC licensing.
50
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following at
December 31, 1999 and 1998:
December 31, December 31,
1999 1998
------------ ------------
Accounts payable $ 3,109 $ 1,082
Accrued lease expense 1,972 2,083
Accrued taxes 1,405 1,375
Accrued compensation 1,582 1,720
Accrued interest 840 954
Accrued severance 393 715
Other accrued expenses 1,644 1,887
------------ ------------
$ 10,945 $ 9,816
============ ============
51
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 10 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and capitalized lease obligations are comprised of the
following at December 31, 1999 and 1998:
December 31, December 31,
1999 1998
------------ ------------
Parent Company Debt:
Debt guaranteed or issued by the Parent Company directly - Revolving credit
loan with a bank, interest payable monthly at the
prime rate, as defined, plus a margin of 1.5% (10.0% at December
31, 1999). $ 5,550 --
------------ ------------
5,550 --
------------ ------------
Non-Recourse Debt of Subsidiaries secured by project assets unless otherwise
noted:
Capitalized lease obligations maturing at various dates
through 2008. 18,351 $ 20,353
Term loan agreement with an investor due in quarterly payments through
2003, interest payable at the Commercial Paper ("CP") Rate, as defined,
plus a margin of 4.0%, (9.51% and 8.88%, at December 31, 1999 and 1998,
respectively).
26,265 26,958
Term loan agreement with an investor due in quarterly payments through
2013, interest at 11.59%. 2,767 2,902
Term loan agreement with a bank, principal due in quarterly payments
through 2008. Interest payable quarterly at a fixed annual rate of
10.17% through October 29, 2003 and thereafter through maturity, at the
U.S. Treasury Note Rate, as defined, plus a margin of 3.9%.
1,913 2,772
Note payable to an insurance company, due in monthly payments through
2007, interest at 12.7%. 5,601 6,490
Notes payable to an insurance company, due December 31, 2008. Interest
on $2,060 of principal payable monthly at 6.5%.
6,023 6,157
Termloan agreement with a bank, due in quarterly payments through 2006,
interest at the London Interbank Offered Rate ("LIBOR"), as defined,
plus a margin of 2.0% (8.03% and 7.06% at December 31, 1999 and 1998,
respectively).
766 1,006
52
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 10 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
December 31, December 31,
1999 1998
------------ ------------
Termloan agreement with a bank, due in quarterly payments through 2006,
interest at LIBOR, as defined, plus a margin of 2.0% (8.03% and 7.06%,
at December 31, 1999 and 1998, respectively).
1,672 1,718
Unsecured notes payable to investors, interest payable annually at the prime
rate, as defined (8.5% and 7.75% at December 31, 1999 and 1998,
respectively) for certain notes and 15% for other notes.
3,360 3,067
Security deed held by the previous owners of a hydroelectric facility, due
Jan 18, 2006. Interest payable monthly at 6%.
900 1,000
Notes payable to an insurance company, due in quarterly payments
through 2005, interest at 8.5%. 557 622
Term loan agreement with a bank, due in quarterly payments through
2006, interest at LIBOR, as defined, plus a margin of 2.0% (8.03% and
7.06%, at December 31, 1999 and 1998, respectively).
1,017 1,130
Termloan agreement with a bank, due in quarterly payments through 2006,
interest at LIBOR, as defined, plus a margin of 2.0% (8.03% and 7.06% at
December 31, 1999 and 1998, respectively).
288 320
Unsecured notes payable to private investors, due December 31, 1999 and
2003, including accrued interest. Interest accrues annually at 12%. A
minimum of 3.6% of such interest is due in cash each December 31 and if
not paid, accrues interest at a penalty rate equal to the stated rate
plus 3.0%.
1,157 1,031
Other long-term liabilities with various rates and maturities. 5,269 5,287
------------ ------------
75,906 80,813
------------ ------------
Total debt and obligations under capital leases 81,456 80,813
Less: current portion (11,455) (6,327)
------------ ------------
Total long-term debt and obligations under capital leases $70,001 $74,486
============ ============
53
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 10 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
Total interest charges associated with the above obligations were as
follows:
Reorganized Company Predecessor Company
--------------------------------------------------- --------------------------------
Year Year Fiscal Year
Ended Ended Nov. 8 - July 1 - Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Nov. 7, 1997 June 30, 1997
------------- ------------- ------------- ------------ -------------
Total Interest $ 6,745 $ 8,048 $ 1,260 $ 7,809 $ 29,780
Capitalized Interest -- -- -- $ 68 $ 189
The aggregate long-term debt payments due each year ending December 31,
including capitalized lease obligations, net of amounts representing interest
totaling $7,876, are as follows:
2000 11,455
2001 5,605
2002 5,950
2003 28,764
2004 3,938
Thereafter 25,744
----------
$ 81,456
==========
In November 1999, the Company obtained a $35,000 secured revolving working
capital and letter of credit facility with an initial expiration date of
December 31, 2001 (the "Facility"). The Company may use proceeds available under
the Facility to support its development, acquisition and operating activities.
Upon expiration of the Facility, any outstanding revolving loans will, at the
Company's option, be converted into a five year term loan. The interest rate on
the revolving loans is prime + 1.5%. As of March 29, 2000, $250 in revolving
loans are outstanding under the Facility and $8,286 of letters of credit have
been issued and are outstanding. Fees on each outstanding letter of credit are
2.0% per annum on the available amount of such letter of credit, plus confirming
bank fees, if applicable, payable annually in arrears.
As of December 31, 1999, capitalized lease obligations consist primarily
of two lease financing transactions. The leases have initial terms that extend
through 2003 and 2008, with renewal options in minimum one and five year
increments. These leases require that lease payment reserves, with provisions
for escalations in the event certain power sales rates are not attained, be
maintained for the respective terms of the leases. Certain of these reserves
must be in cash with the balance in either cash or letters of credit from an
acceptable issuer.
To the extent that it is anticipated that the minimum cash components will
not be used to fund operation expenses or lease payments in the next fiscal
year, these minimum cash components have been included in Investments and other
assets in the accompanying Balance Sheet. Minimum rental commitments under these
leases for the five years following December 31, 1999 and thereafter are
included in the table above.
54
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 10 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
In conjunction with the acquisition of Hydro Development Group, Inc., a
New York Corporation, ("HDG"), the Company entered into a Credit and
Reimbursement Agreement dated February 15, 1995, with General Electric Capital
Corporation ("GECC"). The agreement provides for two term loans, the GECC A Term
Loan ("GECC A Loan") and the GECC B Term Loan ("GECC B Loan"), a revolving
credit facility, and a letter of credit in support of HDG project obligations.
The GECC A Loan, with an outstanding principal balance at December 31, 1999 of
$26,265, is secured by the stock and assets of the HDG projects. The GECC B
Loan, with an outstanding principal balance at December 31, 1999 of $2,767, is
secured by certain other projects owned by the Company. Each of these loans is
non-recourse to CHI. The agreement also provides for a $3,000 revolving credit
facility through 2013, to be drawn as necessary to pay principal and interest
due on the term loans in the case of insufficient funds resulting from unusually
low water flow. The $3,000 revolving credit facility shall bear interest at a
rate equal to the CP Rate, as defined, plus a margin of 5%. GECC has also
provided a letter of credit totaling $100 in support of certain HDG projects.
The $1,913 term loan agreement with a bank, which matures in the year
2008, accrues interest at a fixed rate of 10.17% per annum through October 29,
2003. Thereafter, through October 30, 2008, interest accrues on a quarterly
basis, at a rate equal to the three year U.S. Treasury Note Rate plus a margin
of 3.9%. Principal and interest payments are to be made quarterly in arrears and
mandatory prepayments, if required, are to be made annually. Costs associated
with obtaining this loan have been capitalized and are included in Intangible
assets, net on the Company's Balance Sheet as of December 31, 1999.
The $5,601 note payable to an insurance company was assumed in connection
with an acquisition by the Company. Pursuant to the terms of the note,
substantially all of the acquired hydroelectric assets (approximately $21,048 at
December 31, 1999) have been pledged as security.
On December 31, 1998, the Company modified the terms of its 11.25%, $6,157
note payable to an insurance company which was assumed in connection with
another acquisition by the Company. The insurance company agreed to accept 6.5%
interest only monthly payments on a new $2,060 Senior Note with principal due
December 31, 2008 and contingent payments on an 11.5%, $2,940 Subordinated Note.
Beginning on December 31, 2002, the Subordinated Note may be converted into
85-100% of the common equity of the related projects, subject to the Company's
option to redeem the Subordinated Note upon notice of conversion. The
modification of the terms of this note qualified for accounting treatment under
Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and
Creditors for Troubled Debt Restructurings" ("SFAS 15"). In accordance with SFAS
15, no gain was recognized upon modification and the carrying value of the note
was not adjusted. In addition, the modifications have resulted in an effective
interest rate of 0%; therefore, no interest expense will be recognized. Pursuant
to the terms of the notes, substantially all of the acquired hydroelectric
assets (approximately $1,000 at December 31, 1999) have been pledged as
security.
The $766 term loan agreement with a bank (the "Loan Agreement") was
entered into in connection with the acquisition of certain hydroelectric
facilities. The Loan Agreement is secured by the stock of the Company's
subsidiary which acquired the hydroelectric facilities and the subsidiary's
interest in certain limited partnerships as well as certain notes payable, by
these limited partnerships, to the Company.
The $1,672 term loan agreement with a bank was originally assumed by the
Company as an interim loan in conjunction with the acquisition of a
hydroelectric facility.
The $3,360 unsecured notes payable to investors relate to the financing
for one of the Company's pumped storage development projects. Interest is
payable annually on December 31, at the prime rate of interest, as defined, for
certain notes and 15% for other notes. Unpaid interest balances are added to the
outstanding principal at each December 31, and accrue interest at the applicable
interest rate.
The $900 security deed is secured by substantially all of the related
hydroelectric facility's assets (approximately $841 at December 31, 1999).
55
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 10 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
The $557 note payable to an insurance company was assumed in connection
with an acquisition by the Company. Pursuant to the terms of the note,
substantially all of the acquired hydroelectric assets (approximately $368 at
December 31, 1999) have been pledged as security. As of February 16, 2000, the
note was in default due to non-payment of principal and interest due in February
2000. The insurance company has waived the default until the next payment due
date in May, 2000.
The $1,017 term loan agreement with a bank was originally assumed by the
Company as an interim loan in conjunction with the acquisition of a
hydroelectric facility. Pursuant to the terms of the agreement, substantially
all of the acquired hydroelectric assets (approximately $4,291 at December 31,
1999) have been pledged as security.
The $288 term loan agreement with a bank was entered into in connection
with the acquisition of a hydroelectric facility. Pursuant to the terms of the
note, substantially all of the acquired hydroelectric assets (approximately $510
at December 31, 1999) have been pledged as security.
The $1,157 unsecured notes payable to private investors relate to the
financing for Consolidated Pumped Storage, Inc. ("CPS") for which warrants were
also issued to the holder for the purchase of 10% of CPS common stock. Interest
accrues annually at 12%. A minimum of 3.6% of such interest is due in cash each
December 31 and if not paid, is added to the outstanding principal balance which
earns interest at a penalty rate equal to the stated rate plus 3.0%.
During the period from July 1, 1997 to November 7, 1997, the Company wrote
off certain of its project development debt resulting in a gain of $8,568. This
debt was contingent upon the successful development (including the financing
thereof) of pumped storage projects which management believes will not be
successfully developed by the Company and the exercise of options on land and a
mine which was to be used as an underground reservoir for the projects.
NOTE 11 - MINORITY INTEREST
CHI S.F., L.P. and Hydrodev, Inc. ("Hydrodev"), wholly owned subsidiaries
of the Company, and Societe en commandite Centrale Thermique SF formed the St.
Felicien Cogeneration Limited Partnership (the "Partnership") to develop, own
and operate a biomass fueled power plant located in Quebec, Canada, which is
expected to commence commercial operations in April 2001. In November 1999, the
partnership agreement was amended to admit Soquip Energie Inc. ("Soquip") as a
limited partner and to replace Hydrodev as general partner with Gestion
Cogeneration Inc., which is 60% owned by Hydrodev and 40% owned by Soquip. As a
result of the amendment, the Company's general and limited partnership interests
total 59.9%. The Partnership's assets and liabilities are included in the
Company's consolidated Balance Sheet at December 31, 1999 and Soquip's limited
partnership interest has been recorded as Minority interest in consolidated
subsidiaries.
NOTE 12 - MANDATORILY REDEEMABLE PREFERRED STOCK
Until the Effective Date, the Series H Preferred, issued for $70,299, was
recorded net of issuance costs of $3,083 and the value attributed to the
detached warrants of $5,916, and adjusted to reflect non-cash dividends
declared. The recorded value of the Series H Preferred was adjusted by $179 and
$857, representing accretion of the issuance costs and attached warrant value,
in the period from July 1 to November 7, 1997 and the fiscal year ended June 30,
1997.
Through the implementation of the Plan of Reorganization as of the
Effective Date, the Series H Preferred and the other components of the Old
Preferred Stock were exchanged for the New Warrants (Note 1).
56
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 13 - CAPITAL STOCK
CHANGE IN CAPITAL STRUCTURE
Through the implementation of the Plan of Reorganization as of the
Effective Date, CHI issued shares of New Class A Common Stock and New Class B
Common Stock and all shares of CHI's Old Common Stock were canceled.
NEW COMMON STOCK
Pursuant to the Plan of Reorganization, on the Effective Date, 20 million
shares of New Common Stock were authorized as follows: 9,085,290 shares of New
Class A Common Stock, 914,710 shares of New Class B Common Stock and 10,000,000
additional shares of New Common Stock which may be issued as either New Class A
Common Stock or New Class B Common Stock, as applicable. Of the 10,000,000
shares of New Common Stock which were authorized on the Effective Date but not
issued, 1,337,127 shares are reserved for issuance if, as and when the holders
of the New Warrants exercise such warrants and 810,811 shares of New Class A
Common Stock are reserved for issuance if, as and when the holders of the
Management Options exercise such options.
Pursuant to the Plan of Reorganization, on the Effective Date, 9,085,290
shares of New Class A Common Stock were issued and distributed to substantially
all of the holders of the Senior Discount Notes and 810,811 shares of New Class
A Common Stock were reserved to satisfy the obligation of CHI under the
Management Options (Note 14). Each share of New Class A Common Stock entitles
its holder to one vote. The holders of New Class A Common Stock have the right
to participate proportionately in dividends, if any, distributed by the Company.
Pursuant to the Plan of Reorganization, on the Effective Date, 914,710
shares of New Class B Common Stock were issued and distributed to a holder of
the Senior Discount Notes. Each share of New Class B Common Stock entitles its
holder to a one hundredth (1/100) of one vote. The holder of New Class B Common
Stock has the right to participate proportionately in dividends, if any,
distributed by the Company. The New Class B Common Stock was issued to a holder
of the Senior Discount Notes, at such holder's request, to provide to such
holder reduced voting rights in CHI. Pursuant to the Restated Certificate of
Incorporation of CHI, upon any transfer of shares of New Class B Common Stock,
the shares of New Class B Common Stock automatically convert into an equal
number of shares of New Class A Common Stock.
NEW SERIES B WARRANTS
The New Series B Warrants, which were issued to the holders of the Old
Preferred Stock on the Effective Date and expire on the sixth anniversary of the
Effective Date, entitle such holders to subscribe for the purchase of up to an
aggregate of 7.5% of the New Common Stock, subject to dilution due to the
issuance by the Company of shares of New Common Stock pursuant to the exercise
of the New Series C Warrants and the Management Options by the holders thereof.
The New Series B Warrants are exercisable for up to 1% of the New Common Stock
of CHI if, as and when the total capital (debt and equity) invested in
industrial infrastructure projects that either (i) close within 3 years from the
Effective Date or (ii) are subject to a legally binding and enforceable
agreement between CHI or any of its subsidiaries and a party sponsoring a
development or acquisition of such industrial infrastructure project within such
3 year period and thereafter close within the term of the warrants, equals or
exceeds $60 million. The additional New Series B Warrants exercisable for the
remaining 6.5% of the New Common Stock vest incrementally if, as and when the
total capital invested in industrial infrastructure projects increases from $60
million to $450 million within the parameters set forth above. The exercise
price per share of the New Common Stock subject to the New Series B Warrants is
$10. The New Series B Warrants have customary antidilution provisions, and
protections against extraordinary distributions. As of December 31, 1999, the
Company has not completed any industrial infrastructure transactions and is not
currently in negotiations to develop or acquire any industrial infrastructure
projects.
57
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 13 - CAPITAL STOCK (CONTINUED)
NEW SERIES C WARRANTS
The New Series C Warrants, which were issued to the holders of the Old
Preferred Stock on the Effective Date and expire on the eighth anniversary
thereof, entitle such holders to subscribe for the purchase of up to an
aggregate of 5.0% of the New Common Stock, subject to dilution due to the
issuance by the Company of shares of New Common Stock pursuant to the exercise
of the New Series B Warrants and the Management Options by the holders thereof.
The exercise price per share of the New Common Stock subject to the New Series C
Warrants was determined by reference to the accreted value of the Senior
Discount Notes as of September 15, 1997 (the date CHI commenced its Chapter 11
case) which was approximately $183 million. The exercise price per share of the
New Common Stock subject to the New Series C Warrants is $18.36. The New Series
C Warrants contain customary antidilution provisions, and protections against
certain extraordinary distributions.
REGISTRATION RIGHTS AGREEMENT
Each person or entity who received a distribution of New Common Stock, New
Warrants or New Common Stock issued upon the exercise of the New Warrants or the
Management Options pursuant to the Plan of Reorganization is entitled to become
a party to a registration rights agreement as of the Effective Date (the
"Registration Rights Agreement"). Under the Registration Rights Agreement,
holders of the New Common Stock and New Warrants (including shares of New Common
Stock issued upon the exercise thereof) are entitled to certain demand and
incidental (or "piggyback") registration rights, and holders of the Management
Options are entitled to certain incidental (or "piggyback") registration rights
with respect to shares of New Class A Common Stock issued upon the exercise
thereof. The Registration Rights Agreement contains customary suspension, "hold
back", indemnification/contribution and priority provisions.
NEW STOCKHOLDERS' AGREEMENT
Under the terms of the Plan of Reorganization, each holder (including each
original recipient and transferee of an original recipient or other transferee)
of the New Common Stock and of the New Common Stock issued upon exercise of the
New Warrants or the Management Options (collectively, the "New Securities") is
bound by a new stockholders' agreement as of the Effective Date (the "New
Stockholders' Agreement"). The New Stockholders' Agreement contains certain
provisions relating to the size and composition of the Board of Directors of
CHI. In addition, the New Stockholders' Agreement provides that each holder of
New Common Stock is entitled to participate on a pro-rata basis in any sale of
50% or more of the outstanding New Common Stock and that each holder of New
Securities (including, in certain circumstances, holders of New Warrants and
Management Options) may be required to sell its New Securities in any sale of 66
2/3% or more of the New Common Stock.
NEW PREFERRED STOCK
Under the terms of the Plan of Reorganization, 10,000,000 shares of
preferred stock with a par value of $0.01 per share (the "New Preferred Stock")
were authorized by CHI. There were no shares of New Preferred Stock issued and
outstanding on December 31, 1999.
58
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 13 - CAPITAL STOCK (CONTINUED)
SERIES F AND SERIES G PREFERRED STOCK
Through the implementation of the Plan of Reorganization as of the
Effective Date, the shares of Series F Preferred and Series G Preferred were
exchanged for the New Warrants, subject to dilution from Management Options
(Note 1).
Dividends on the Series F Preferred and Series G Preferred were cumulative
(amounting to $53,540 and $51,029 at November 7, 1997 and June 30, 1997,
respectively) and were payable annually in arrears upon declaration by the
Company's Board of Directors. The cumulative undeclared dividends in arrears per
share as of June 30, 1997 were $413.33 for the original 55,000 shares of Series
F Preferred and $107.11 for the 1,279 shares of Series F Preferred issued
subsequently, and $508.92 for the original 55,000 shares of Series G Preferred
and $131.88 for the 1,279 shares of Series G Preferred issued subsequently.
SERIES H PREFERRED STOCK
Through the implementation of the Plan of Reorganization as of the
Effective Date, Series H Preferred was exchanged for the New Warrants, subject
to dilution from Management Options (Note 1).
The initial liquidation preference of the Series H Preferred was $513.32
per share at issuance on June 22, 1993 and $875.67 per share on June 30, 1997.
The liquidation preference was increased as a form of payment for declared
dividends required quarterly in arrears, computed based on the then current
liquidation preference, until increasing the liquidation preference to $1,000
per share on June 30, 1998, after such time the dividends were to become payable
in cash from legally available funds, when, and if declared by the Board of
Directors.
NOTE 14 - MANAGEMENT OPTIONS, DIRECTOR COMPENSATION AND 401(K) PLAN
MANAGEMENT OPTIONS
As of the Effective Date, the Company granted 810,811 Management Options
to acquire New Class A Common Stock at an exercise price of $10 per share
pursuant to the Management Option Plan to certain CHI employees. The Management
Options entitle such holders to purchase up to an aggregate of 7.5% of the New
Class A Common Stock, subject to dilution due to the issuance by CHI, of shares
of New Common Stock pursuant to the exercise of the New Series B Warrants and
the New Series C Warrants by the holders thereof. With the exception of 20,000
fully vested and exercisable options granted to Charles F. Goff, Jr. on the
Effective Date, the Management Options issued on the Effective Date will vest,
or have vested and become exercisable as follows:
Effective Date 33 1/3% of the Management Options
December 31, 1998 22 2/9% of the Management Options
December 31, 1999 22 2/9% of the Management Options
December 31, 2000 22 2/9% of the Management Options
The Management Options will also become vested and exercisable upon a
change in control of CHI. The Management Options will terminate on the seventh
(7th) anniversary of the Effective Date unless terminated at an earlier date
following termination of an optionee's employment. Management Options issued
subsequent to the Effective Date may have different exercise prices or vesting
provisions, in accordance with the Management Option Plan. No employee of CHI
will be eligible under the Management Option Plan to be granted Management
Options to purchase more than 350,000 shares of New Class A Common Stock.
59
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 14 - MANAGEMENT OPTIONS, DIRECTOR COMPENSATION AND 401(K) PLAN (CONTINUED)
A summary of the activity in the Company's stock options for the period
from the Effective Date to December 31, 1999 is presented below:
Number of Shares Exercise Price
---------------- --------------
Options granted on the Effective Date 810,811 $ 10.00
Options exercised -- --
Options canceled -- --
-------- ---------
Outstanding at December 31, 1997 810,811 $ 10.00
Options exercised -- --
Options canceled (11,811) 10.00
Options issued 8,478 10.00
-------- ---------
Outstanding at December 31, 1998 807,478 $ 10.00
Options exercised -- --
Options canceled (225,125) 10.00
Options issued 228,458 10.00
-------- ---------
Outstanding at December 31, 1999 810,811 $ 10.00
======== =========
Exercisable at December 31, 1999 628,506 $ 10.00
======== =========
Weighted average remaining
Contractual life (years) 4.43
========
The Company applies the principles of Accounting Principles Board Opinion
No. 25 in accounting for employee stock option plans. Compensation cost as
determined on the basis of SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") would have been recorded based on the estimated fair
value of stock options granted. The total fair value of these options was
$2,618, $2,201 and $2,201 at December 31, 1999, 1998 and 1997, respectively,
based upon the Black-Scholes option pricing model. The following assumptions
were used in the Black-Scholes option pricing model (i) risk-free interest rate
of approximately 5.7%, 4.9% and 6.2% for 1999, 1998 and 1997 respectively, (ii)
expected life of five, six and seven years for 1999, 1998 and 1997,
respectively, (iii) 30% volatility, and (iv) no expected dividends. Had
compensation cost been determined based on the estimated fair value at the grant
date consistent with the method of SFAS 123, the Company's net income and net
income per share would have decreased by approximately $836, $700 and $105 and
$.08, $.07 and $.01, respectively, for the years ended December 31, 1999 and
1998 and the period from November 8, 1997 to December 31, 1997.
DIRECTOR COMPENSATION
Non-employee Directors of the Company, are entitled to receive an annual
retainer of $40 for services as a director, plus $2 for attendance at each
meeting of the Board of Directors as well as each committee meeting attended.
401(k) PLAN
The Company provides a defined contribution 401(k) plan which covers
substantially all of its domestic employees subject to certain prequalification
requirements. Costs of the plan were charged to operations as compensation
expense.
60
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 15 - TAXES
The (provision)/benefit for income taxes consists of the following:
Reorganized Company Predecessor Company
-------------------------------------------------- ------------------------------
Year Year Fiscal Year
Ended Ended Nov. 8 - July 1 - Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Nov. 7, 1997 June 30, 1997
------------- ------------- ------------- ------------ -------------
Federal income taxes $ (184) $ (200) $ (100) $ -- $ (408)
State income taxes (200) (304) (80) (99) (352)
Deferred tax (provision)/benefits (3,173) (2,485) (571) 213 (2,382)
------------- ------------- ------------- ------------ -------------
$ (3,557) $ (2,989) $ (751) $ 114 $ (3,142)
============= ============= ============= ============= =============
The (provision)/benefit for income taxes differs from an amount computed
by applying the statutory income tax rate to pre-tax income, as follows:
Reorganized Company Predecessor Company
----------------------------------------------------- ----------------------------------
Year Year Fiscal Year
Ended Ended Nov. 8- July 1- Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Nov. 7, 1997 June 30, 1997
------------- ------------- ------------- ------------ -------------
Tax (provision)/benefit at US
statutory rate $ (2,995) $ (2,377) $ (518) $ (27,265) $ 731
State income tax expense (119) (304) (80) (99) (352)
Losses without current tax benefit -- -- -- (383) (3,113)
Alternative minimum tax (184) (200) (100) -- (408)
Goodwill amortization (277) -- -- -- --
Reorganization value in excess of
amounts allocable to
identifiable assets -- -- (53) -- --
Restructuring charges -- -- -- (1,392) --
Debt extinguishment -- -- -- 30,552 --
Corporate recapitalization -- -- -- 1,700 --
Project debt adjustment -- -- -- (2,999) --
Other 18 (108) -- -- --
------------- ------------- ------------- ------------ -------------
$ (3,557) $ (2,989) $ (751) $ 114 $ (3,142)
============= ============= ============= ============= =============
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
December 31, 1999 December 31, 1998
----------------- -----------------
Deferred tax assets:
Net operating loss $14,138 $ 17,345
Tax credits 4,068 4,635
Lease payment obligations 6,687 7,504
Deferred revenue 2,052 --
Pumped storage development costs 6,750 6,750
Valuation reserve (30,169) (32,765)
----------- -----------
Total deferred tax assets, net 3,526 3,469
----------- -----------
61
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 15 - TAXES (CONTINUED)
Deferred tax liabilities: December 31, 1999 December 31, 1998
----------------- -----------------
Depreciation and Amortization $39,552 $35,893
----------- ------------
Total deferred tax liabilities 39,552 35,893
----------- ------------
Net deferred tax liability $36,026 $32,424
=========== ============
The valuation allowance decreased by $2,596 primarily due to a decrease in
the gross deferred tax assets relating to the utilization of NOL carryforwards
and expiring tax credits.
At December 31, 1999 and 1998, the Company had U.S. federal tax NOLs of
$40,396 and $48,684, respectively, expiring through 2012. Of the amounts at
December 31, 1999, the Company has available acquired federal income tax net
operating loss ("Acquisition NOL") carryforwards in the amount of $4,522
representing unused losses accumulated by certain entities prior to their
acquisition by the Company. These NOLs, which expire in varying amounts
beginning in 2001, are restricted in terms of utilization.
At December 31, 1999, the Company has $2,825 of investment, energy and
Alternative Minimum Tax ("AMT") credits available to reduce future income taxes
for federal income tax reporting purposes which begin to expire during the year
2000. Additionally, the Company has available investment, energy and AMT credits
in the amount of $1,243, representing unused credits accumulated by certain
entities prior to their acquisition by the Company. These credits, which are
restricted in terms of utilization, will begin to expire in 2001.
The Company's NOL carryforwards for federal income tax purposes were
reduced by $15,712 due to the discharge of indebtedness under the Plan of
Reorganization as described in Note 1.
Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of the
NOL and tax credit carryforwards which can be utilized in future years.
62
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or as otherwise noted)
NOTE 16 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company has several non-cancelable operating leases expiring through
2080. The majority of these leases require annual lease payments based upon a
percentage of gross or net revenues, as defined in the respective lease
agreements, and provide for minimum annual payments to the lessor.
Minimum rental commitments under non-cancelable operating leases for the
five years following December 31, 1999 are approximately $4,800 per year and
approximately $18,700 thereafter.
LEGAL PROCEEDINGS
On August 20, 1997, a former employee of the Company filed a civil action
against the Company in Connecticut Superior Court, District of New Haven
entitled Carol H. Cunningham v. Consolidated Hydro, Inc. alleging that the
Company breached its employment agreement with her. On or about October 13,
1997, the former employee filed a proof of claim in the Bankruptcy Court for
approximately $7.3 million plus unliquidated amounts based primarily on the
allegations in the civil action (the "Claim"). On November 25, 1997, the Company
filed an objection to the Claim on the grounds that, among other things, the
former employee failed to satisfy her obligations under her employment contract
with the Company. The trial was argued during the first quarter of 2000, but a
verdict has not yet been reached. The Company has vigorously defended the Claim
and management believes that the Company's liability with respect to the Claim,
if any, will not have a material adverse effect on the Company's financial
position or results of operations.
PUMPED STORAGE DEVELOPMENT
Management believes that its pumped storage projects will not be
successfully developed by the Company. However, the Company maintains certain
debt obligations related to project commitments entered into during pumped
storage development.
NOTE 17 - RELATED PARTY TRANSACTIONS
GECC is a former minority stockholder of and is currently a significant
lender and provider of partnership equity to the Company and/or its projects,
through project financing, including the HDG transaction. Transactions indicated
on the face of the financial statements as related party transactions include
those with GECC. As of the Effective Date, GECC is no longer a related party.
Michael B. Peisner and Stephen E. Champagne, assistant secretaries of the
Company and certain of its subsidiaries, are partners in the law firm of Curtis
Thaxter Stevens Broder & Micoleau ("Curtis Thaxter") which provides certain
legal services to the Company. Subsequent to the Effective Date, the Company has
no other related party transactions.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the executive officers ("Executive Officers") and the directors
("Directors") of CHI, their ages as of March 29, 2000, and positions with CHI
are as follows:
NAME AGE POSITION
- ---- --- --------
Charles F. Goff, Jr. 59 Chairman, Interim Chief Executive Officer
and Director
Edward M. Stern 41 President, Chief Operating Officer, Secretary
and Director
Michael I. Storch 48 Executive Vice President
Pascal J. Brun 50 Senior Vice President
Daniel S. Pease 45 Senior Vice President
James F. Groelinger 55 Senior Vice President
J. Christopher Hocker 49 Vice President
James W. Fulmer 40 Vice President
Victor A. Engel 39 Vice President
James J. Duplessie 40 Director
Michael J. Petrick 38 Director
- ---------------
64
The Executive Officers and Directors of the Company are:
Charles F. Goff, Jr., Chairman, Interim Chief Executive Officer and
Director -- Mr. Goff has served as a Director of the Company since 1997 and was
elected Chairman and Interim Chief Executive Officer effective March 9, 1999. He
previously served as Chairman and Chief Executive Officer of Destec Energy,
Inc., a major worldwide independent power developer, producer and marketer that
owned power generation and gasification facilities which produce, sell and
market electricity, steam and synthetic fuel gas. Prior to its sale in 1997,
Destec had interests in 24 operating projects with a total rated equivalent
capacity of approximately 5,136 megawatts and over three million pounds per hour
of steam. In addition, Mr. Goff has served as a member of Boards of Directors of
APD Partnership (a joint venture between The Dow Chemical Company and Apache
Corporation), Magma Power Company, Dow Pipeline Company and Boride Products,
Inc. Prior to forming Destec, Mr. Goff served 25 years with Dow in various
energy and business management executive positions. Mr. Goff graduated from the
University of Texas, where he earned a Bachelor's degree in business
administration.
Edward M. Stern, President, Chief Operating Officer, Secretary and
Director-- Mr. Stern was elected President and COO of the Company in September
1996 and a Director in November 1997. He previously served as Executive Vice
President, Secretary and General Counsel of CHI with primary responsibility for
the company's legal, human resources, communications, financial, acquisitions,
risk management and environmental and regulatory compliance functions. Prior to
joining CHI in April 1991, Mr. Stern was a Vice President with BayBanks, Inc., a
Boston-based $10 billion financial services organization, where for six years he
specialized in energy project finance, foreclosures, debt restructurings and
asset management. He received BA, JD and MBA degrees from Boston University. Mr.
Stern is a member of the Massachusetts Bar and the Federal Energy Bar.
Michael I. Storch, Executive Vice President -- Mr. Storch began his
employment with CHI in June 1987. He was elected to his current position in 1988
and is currently responsible for strategic planning relative to the future
development and growth of the Company. Previously, he was responsible for
operations of hydroelectric facilities owned by CHI and its affiliates, and for
financial matters related to the Company, including its existing operations,
acquisitions, and development. Before joining CHI he served as Vice President --
Corporate Development for G.O. Holdings Management, Inc., a management company
controlled by Anglo-French financier Sir James Goldsmith. For the preceding ten
years, he was employed by the accounting firm of Price Waterhouse in various
capacities, last serving as Senior Audit Manager. Mr. Storch holds a Bachelor of
Business Administration degree from Baruch College. He is a member of the
American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants.
Pascal J. Brun, Senior Vice President of CHI; President, CHI Canada Inc.
- -- Mr. Brun joined CHI in June 1988. He was elected to his current position in
1991 and is currently responsible for acquisition, development and operation of
hydroelectric facilities in Canada. Previously, he served as CHI's Vice
President for Corporate Development, responsible for acquisition of operating
projects in the United States and Canada. Prior to joining CHI, he was a Vice
President for the SNC Group, Ltd., a large Canadian engineering and construction
company, and a Project Manager for T. Pringer & Sons, Engineers. He holds
Bachelors and Masters degrees in Applied Sciences from Laval University and an
MBA degree from the University of Montreal.
Daniel S. Pease, Senior Vice President -- Mr. Pease joined CHI as a
Construction Manager in 1986, and was made Vice President of Construction in
1988 before advancing to his current position in 1992. In his previous capacity,
he was responsible for planning and managing construction related to
Company-owned facilities, and for advising on engineering and construction
aspects of development and acquisition opportunities. Currently, he is
responsible for management of all of the Company's operating hydroelectric
facilities, as well as for engineering and construction activities of the
Company. Prior to joining CHI, he was a construction supervisor for Walsh
Construction Company of Connecticut, serving on several major hydroelectric and
nuclear construction projects. He holds a BS degree from the University of
Connecticut.
65
James F. Groelinger, Senior Vice President -- Mr. Groelinger joined CHI in
1997 after five years as an independent consultant and business unit head
specializing in the development and financial structuring aspects of energy
projects in the U.S. and internationally. Mr. Groelinger was elected to his
current position in 1999 and currently serves as head of the Company's business
development team. His more than 30 years of experience include positions as a
director of Putnam, Hayes & Bartlett, Inc., an international strategy management
consulting firm, and chief financial officer of U.S. Synthetic Fuels
Corporation. Mr. Groelinger holds a Finance MBA from Temple University and a
Bachelors degree in Chemical Engineering from City College of New York.
J. Christopher Hocker, Vice President -- Mr. Hocker joined CHI in November
1990 as Director of Communications and was elected to his current position in
1991. Currently, he coordinates CHI's business development efforts and also is
responsible for internal and external communications relating to the Company and
its major projects in development and for public affairs related to the
Company's involvement in national industry associations. Prior to joining CHI,
he was an independent consultant specializing in communications related to the
energy and environmental industries. His previous experience also includes
serving as Marketing Manager for Morrison-Knudsen Engineers, Inc., specifically
related to hydroelectric, environmental and transportation projects. He has also
been elected President of the National Hydropower Association for a one year
term, commencing in April 2000. Mr. Hocker received a BA degree from Stanford
University in 1973.
James W. Fulmer, Vice President -- Mr. Fulmer joined CHI in January 1993
as Director of Southeast Operations, was made Vice President of Consolidated
Hydro Southeast, Inc. in 1994 and was elected to his current position in 1999.
He is currently responsible for the operations and financial management of CHI's
hydroelectric facilities in the southeast and west, as well as a number of
hydroelectric facilities in the northeast region. Prior to joining CHI, he
worked as a consultant and business development professional for the engineering
and design firm of Piedmont Olsen Hensley, and served as project manager of
Aquenergy Systems, Inc. where he oversaw the construction and operation of six
hydroelectric projects. Mr. Fulmer received his Bachelors degree in mechanical
engineering from Clemson University. He is a registered Professional Engineer
and is active in the National Hydropower Association and the National Society of
Professional Engineers.
Victor A. Engel, Vice President -- Mr. Engel joined CHI in March 1993 as a
Construction Manager and was promoted to Director of Engineering and
Construction in 1995 before being elected to his current position in 1999. He is
currently responsible for the planning and management of engineering and
construction activities, permitting, compliance and regulatory functions,
operations interface, and coordination of technical aspects of development and
acquisition activities. Prior to joining CHI, he served as a project manager and
departmental head of Rivers Engineering Corporation, an engineering firm
specializing in the hydroelectric and water resources industries. Mr. Engel
received a Bachelor's degree from the University of Massachusetts and is a
registered Professional Engineer. He also holds officer and board seats on
various state and regional industry associations, and is active in a number of
professional societies.
James J. Duplessie, Director -- Mr. Duplessie has served as a director of
the Company since 1997. Mr. Duplessie is currently an Executive Director of
United Bank of Switzerland ("UBS"). He joined UBS in June 1998 following its
merger with Swiss Bank Corporation, where he was an Executive Director since
1995. Previously, Mr. Duplessie was an Executive Director of O'Connor &
Associates. He received a B.A. in Economics from Washington and Lee University
in 1981, an MBA from Tulane University in 1984 and a JD from Wake Forest
University in 1987.
Michael J. Petrick, Director -- Mr. Petrick has served as a director of
the Company since 1997. Mr. Petrick is currently a Managing Director in the
fixed income division of Morgan Stanley Dean Witter & Co. ("Morgan Stanley"),
and has been with Morgan Stanley since 1989. Prior to joining Morgan Stanley,
Mr. Petrick was a Vice President and Portfolio Manager for First Interstate
Bancorp in Los Angeles. In addition, Mr. Petrick currently serves on the boards
of Marvel Enterprises, Premium Standard Farms and Earth Watch Incorporated. Mr.
Petrick received a BA in Economics and Chemistry from Grinnell College in 1984
and an MBA degree from the University of Chicago in 1987.
There are no family relationships among the Directors and Executive
Officers.
The Board of Directors has established an Executive Compensation Committee
comprised of Messrs. Goff, Petrick and Duplessie and an Audit Committee
comprised of Messrs. Goff, Petrick and Duplessie. During his tenure as Interim
Chief Executive Officer, Mr. Goff will not serve on either of these committees.
66
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
compensation of the following Executive Officers for services rendered during
the twelve months ended December 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
------------
Annual Other Annual All Other
Name and Compensation ($) Compensation Stock Option Compensation
Principal Position Year Salary Bonus ($) Grants (#) ($)(7)
- ------------------ ----- -------------------- ---- ---------- ---
Charles F. Goff, Jr.(1....................... 1999 150,000 -- 86,169(5) 80,000 --
Chairman, Interim Chief Executive Officer 1998 -- -- 44,000(6) -- --
and Director 1997 -- -- 8,000(6) 20,000 --
James T. Stewart(2) ........................ 1999 65,000 -- -- -- 699,667(8)
Former Chairman and Chief Executive Officer 1998 325,000 162,500 -- -- 8,592
1997 311,538(4) 325,000 -- 250,000 6,572
Edward M. Stern(3) ........................ 1999 250,000 175,000 -- -- 7,134
President, Chief Operating Officer, 1998 250,000 125,000 -- -- 6,853
Secretary and Director 1997 247,991(4) 149,700 -- 115,000 5,085
Michael I. Storch ........................ 1999 250,000 12,500 -- 3,000 7,350
Executive Vice President 1998 250,000 83,333 -- -- 7,182
1997 259,512(4) 39,990 -- 55,000 4,800
Pascal J. Brun ........................ 1999 133,000 75,000 -- 13,000 7,842
Senior Vice President 1998 129,000 19,000 -- -- 6,351
1997 130,809(4) 52,000 -- 45,000 5,720
Daniel S. Pease ........................ 1999 133,500 28,000 -- 13,000 6,982
Senior Vice President 1998 130,000 28,000 -- -- 6,810
1997 130,327(4) 27,500 -- 45,000 5,457
- --------------------------
(1) Mr. Goff has served as a Director of the Company since November 1997 and
was elected Chairman and Interim Chief Executive Officer effective March
9, 1999.
(2) Mr. Stewart resigned from his position as Chairman and Chief Executive
Officer effective March 9, 1999.
(3) Mr. Stern was elected President and Chief Operating Officer of the Company
in September 1996 and a Director of the Company in November 1997.
(4) The salaries listed for 1997 include an extra bi-weekly pay period, or
twenty-seven pay periods for the year, whereas the other years listed
include twenty-six pay periods.
(5) Comprised of amount reimbursed during 1999 for the payment of taxes.
(6) Amounts represent compensation for serving as a Director of the Company.
(7) Unless otherwise noted, comprised of contributions made by the Company to
the 401(k) plan and life insurance premiums paid by the Company on behalf
of each Executive Officer.
(8) Comprised of termination amounts (paid and to be paid), contributions made
by the Company to the 401(k) plan and life insurance premiums paid on
behalf of Mr. Stewart of $690,625, $6,400 and $2,642, respectively, in
1999.
67
The following table contains information about stock options granted in
1999 to the named Executive Officers pursuant to the Company's Management Option
Plan.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(1)
- ------------------------------------------------------------------------------------------- ------------------------------
Number of
Securities % of Total Exercise
Underlying Options Granted or Base
Options to Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh)(2) Date 5% ($) 10% ($)
---- ----------- ----------- --------- ---- ------ -------
Charles F. Goff, Jr. ...... 80,000(3) 35.02% $10.00 11/7/04 $168,000 $421,600
James T. Stewart ...... -- -- -- -- -- --
Edward M. Stern ..... -- -- -- -- -- --
Michael I. Storch ..... 3,000(4) 1.31% $10.00 $ 6,300 $ 15,810
11/7/04(5)
Pascal J. Brun ..... 13,000(4) 5.69% $10.00 $ 27,300 $ 68,510
11/7/04(5)
Daniel S. Pease ..... 13,000(4) 5.69% $10.00 $ 27,300 $ 68,510
11/7/04(5)
- --------------------------
(1) The potential realizable value shown for the Executive Officers is net of
the option exercise price. The dollar gains under these columns result
from calculations, as prescribed by the Securities and Exchange
Commission, assuming 5% and 10% growth rates in stock price and are not
intended to forecast future price appreciation of CHI Energy, Inc. common
stock.
(2) The exercise price (the price that the optionee, or the person or persons
having the right to exercise the option, must pay to purchase each share
of common stock that is subject to option) is greater than the fair market
value of the stock on the date of grant of the option.
(3) Mr. Goff received 60,000 options on March 9, 1999 and 20,000 on June 1,
1999. All options were fully vested and exercisable on the date of grant
of such options. Each of the option grants was made at the same exercise
price of $10.00 per share and has the same expiration date of November 7,
2004.
(4) Options were granted on December 31, 1999 pursuant to the Management
Option Plan. For a more detailed description of the plan, see "--1997
Stock Option Plan and Management Option Agreements".
(5) One-quarter of options granted are exercisable on the date of grant. An
additional 25% of the options will vest and become exercisable on each of
12/31/00, 12/31/01 and 12/31/02. All options will terminate on November 7,
2004, unless terminated at an earlier date following termination of an
optionee's employment.
68
The following table sets forth information with respect to the following
Executive Officers concerning the exercise of options during the year ended
December 31, 1999 of the Company and unexercised options held as of December 31,
1999.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------
AND YEAR-END OPTION VALUES(1)
-----------------------------
Number of Securities Value of Unexercised
Underlying Unexercised Options at In-the-Money Options
December 31, 1999 (#) at December 31, 1999 ($)(2)
--------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Charles F. Goff, Jr. 100,000 -- -- --
James T. Stewart 138,875 -- -- --
Edward M. Stern 89,436 25,564 -- --
Michael I. Storch 43,524 14,476 -- --
Pascal J. Brun 38,247 19,753 -- --
Daniel S. Pease 38,247 19,753 -- --
- --------------------------
(1) No options were exercised by any of the above Executive Officers during
the year ended December 31, 1999.
(2) Calculated using the difference between the fair market value of the
securities underlying the options and the exercise price of the options.
Based on information available to the Company, the fair market value of
the options did not exceed the exercise price of the options at December
31, 1999.
69
Employment Contracts. On the Effective Date, CHI entered into an
employment agreement with Edward M. Stern, the Company's President and Chief
Operating Officer. On July 1, 1999, CHI entered into a new employment agreement
(the "New Agreement") with Mr. Stern. The New Agreement with Mr. Stern provides
for an initial 42 month term, subject to automatic extension for successive 12
month periods (unless CHI notifies Mr. Stern of its intent not to renew the
employment agreement prior to January 1 in any year, commencing with January 1,
2002).
Pursuant to the New Agreement, if Mr. Stern's employment is terminated by
CHI or Mr. Stern resigns during the term of the employment agreement (other than
in certain specified circumstances), Mr. Stern will receive, among other
benefits, monthly severance payments for a period equal to the shorter of (i) 24
months from the date of termination or (ii) nine months following the date on
which the term of the employment agreement expires.
Mr. Stern received a base salary of $250,000 for 1999. In addition to his
base salary, Mr. Stern is eligible to (i) receive an annual bonus, (ii)
participate in benefits plans, (iii) receive Management Options, and (iv)
receive disability and death benefits. For a discussion of the Management
Options, see "1997 Stock Option Plan and Management Option Agreement" below.
On March 9, 1999, CHI entered into an agreement with Charles F. Goff, Jr.
The agreement provided for Mr. Goff to serve in the position of Chairman and
Interim Chief Executive Officer for a minimum three-month term, which Mr. Goff
has agreed to extend for an indefinite period. Mr. Goff's compensation for 1999
consisted of an initial payment of approximately $86,000, monthly payments of
$15,000 and certain stock option grants.
Director Compensation. Non-employee directors of the Company are entitled
to receive an annual retainer of $40,000 for services as a director, plus $2,000
for attendance at each meeting of the Board of Directors as well as each
committee meeting attended.
Senior Management Benefits Policy. In 1992, CHI's Board of Directors
adopted a Senior Management Benefits Policy covering certain of the Company's
executive officers listed herein in Part III, Item 10, "Directors and Officers
of the Registrant" (the "Participants") which offers severance, supplemental
life insurance and supplemental disability insurance benefits subject to
entering into a non-competition agreement. In 1996, the Company expanded the
eligibility under the policy to include officers of certain of its subsidiaries.
Each Participant is entitled to, under certain circumstances, between 12 and 26
weeks of severance pay. In addition, each Participant shall be provided with
$150,000 of supplemental term life insurance, or such other amount or type of
insurance as determined by the Board of Directors, and supplemental disability
benefits of up to one year subject to a maximum aggregate benefit of $200,000.
To the extent that benefits under the Senior Management Benefits Policy
duplicate benefits which a Participant is entitled to receive under any other
arrangement with the Company, such benefits will not be additive.
70
1997 Stock Option Plan and Management Option Agreements. Pursuant to the
Plan of Reorganization, as of the Effective Date, Management Options to acquire
New Class A Common Stock at an exercise price of $10 per share of New Class A
Common Stock were granted pursuant to the Management Option Plan to certain CHI
employees (including each of the executive officers mentioned above). The
Management Options entitle such holders to purchase up to an aggregate of 7.5%
of the New Class A Common Stock, subject to dilution due to the issuance by CHI
of shares of New Common Stock pursuant to the exercise of the New Warrants. With
the exception of 20,000 fully vested and exercisable options granted on the
Effective Date to Charles F. Goff, Jr., the Management Options issued on the
Effective Date will vest, or have vested and become exercisable as follows:
Effective Date - 33 1/3% of the Management Options
December 31, 1998 - 22 2/9% of the Management Options
December 31, 1999 - 22 2/9% of the Management Options
December 31, 2000 - 22 2/9% of the Management Options
The Management Options will also become vested and exercisable upon a
change in control of CHI. The Management Options granted as of the Effective
Date will terminate on the seventh anniversary of the Effective Date unless
terminated at an earlier date following termination of an optionee's employment.
In accordance with the Management Option Plan, Management Options issued
subsequent to the Effective Date may have different exercise prices or vesting
provisions. No employee of CHI will be eligible under the 1997 Stock Option Plan
and Management Option Agreements to be granted Management Options to purchase
more than 350,000 shares of New Class A Common Stock.
71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's New Class A Common Stock and New Class B
Common Stock as of March 29, 2000 by (i) each stockholder, who, to the best of
the Company's knowledge, owns beneficially more than 5% of either the
outstanding shares of New Class A Common Stock or New Class B Common Stock, (ii)
each of the Company's Directors , (iii) each of the Executive Officers whose
names appear in the "Summary Compensation Table" and (iv) all Directors and
Executive Officers as a group. Except as otherwise indicated, each named person
has voting and investment power over the listed shares, and such voting and
investment power is exercised solely by the named person or shared with a
spouse.
New Class A New Class B Voting
Common Stock Common Stock Power
-------------------------- ----------------------------- -----------
Directors, Executive Officers
and 5% Stockholders Number %(1) Number %(1) %
------------------- ------ ---- ------ ---- -
Morgan Stanley Dean Witter & Co.
1585 Broadway
New York, N.Y. 10036 3,610,630 39.74% -- -- 39.70%
United Bank of Switzerland
299 Park Avenue
New York, N.Y. 10171 3,137,206 34.53% -- -- 34.50%
Gem Capital Management
70 East 55th Street
New York, N.Y. 10022 475,000 5.23% -- -- 5.22%
Merrill Lynch Asset Management
800 Scudders Mill Road
Plainsboro, N,J. 08536 454,883 5.01% 914,710 100% 5.10%
Charles F. Goff, Jr.(2)(3) 100,000 1.10% -- -- 1.10%
Edward M. Stern(2)(4) 89,436 0.98% -- -- 0.98%
Michael I. Storch(2) 43,524 0.48% -- -- 0.48%
Pascal J. Brun(2) 38,247 0.42% -- -- 0.42%
Daniel S. Pease(2) 38,247 0.42% -- -- 0.42%
All Directors and Executive Officers
as a group(2) 393,375 4.33% -- -- 4.33%
72
- ---------------
(1) Ownership percentages are calculated in accordance with SEC Rule 13d -
3(d)(1) and, therefore, exclude the dilutive effects of outstanding
warrants and stock options. Consequently, these percentages do not
represent ownership on a fully diluted basis as disclosed in Part I, Item
1, "Business".
(2) All shares are represented by vested, exercisable stock options.
(3) Mr. Goff was elected Chairman and Interim Chief Executive Officer
effective March 9, 1999.
(4) The options granted to Mr. Stern are owned by a trust for the benefit of
Mr. Stern's family (for which Mr. Stern does not act as trustee) and as
such, Mr. Stern disclaims beneficial ownership of these options.
73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GECC is a former minority stockholder of and is currently a significant
lender and provider of partnership equity to the Company and/or its projects
through project financing. As of the Effective Date, GECC is no longer a related
party.
Michael B. Peisner and Stephen E. Champagne, assistant secretaries of the
Company and certain of its subsidiaries, are partners in the law firm of Curtis
Thaxter Stevens Broder & Micoleau ("Curtis Thaxter") which provides certain
legal services to the Company. Subsequent to the Effective Date, the Company has
no other related party transactions.
74
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PAGE
----
(a) 1. Financial Statements 34
Report of Independent Accountants
Consolidated Statements of Operations for the years ended December 31, 1999
and 1998 ,the period from November 8, 1997 to
December 31, 1997, the period from July 1,
1997 to November 7, 1997, and the
fiscal year ended June 30, 1997 36
Consolidated Balance Sheet at December 31, 1999 and 1998 37
Consolidated Statement of Stockholders' Equity for the for the years
ended December 31, 1999 and 1998, the period from November 8, 1997
to December 31, 1997, the period from July 1, 1997 to
November 7, 1997, and the fiscal year ended June 30, 1997 38
Consolidated Statement of Cash Flows for the years ended
December 31, 1999 and 1998, the period from
November 8, 1997 to December 31, 1997, the
period from July 1, 1997 to November 7, 1997,
and the
fiscal year ended June 30, 1997 39
Notes to Consolidated Financial Statements 41
(a) 2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
Individual financial statements of the Registrant have been omitted
because consolidated financial statements of the Registrant and all its
subsidiaries are furnished.
(a) 3. Exhibits
Exhibit No. Description
----------- -----------
++++++2.1 Disclosure Statement dated August 8, 1997
++++++2.2 Plan of Reorganization under Chapter 11 of the
Bankruptcy Code of Consolidated Hydro, Inc.
+++++++3.1 Restated Certificate of Incorporation of
Consolidated Hydro, Inc.
+++++++3.2 By-Laws of CHI Energy, Inc.
+3.5 Certificate of Incorporation and Bylaws of Summit
Energy Storage Inc.
+++++++10.1 Stockholders Agreement
+++++++10.2 Registration Rights Agreement
+++++++10.3 Employment Agreements
+++++++10.4 CHI Energy, Inc. 1997 Stock Option Plan and Form
Management Option Agreement
++++++10.5 Form of Series B Warrant
++++++10.6 Form of Series C Warrant
+10.7 Power Purchase Agreement between Boott Hydropower,
Inc. and Commonwealth Electric Company, dated
January 10, 1983 and amendment dated March 6, 1985
75
+10.8 Participation Agreement dated as of December 1,
1985 among Boott Hydropower, Inc., General
Electric Credit Corporation, Corporation
Investments, Inc. and United States Trust Company
of New York, as Owner Trustee and amendment
thereto dated as of February 26, 1988
+10.9 Lease Agreement dated as of December 1, 1985
between United States Trust Company of New York,
as Owner Trustee, and Boott Hydropower, Inc. and
amendments thereto dated as of December 12, 1986
and February 26, 1988
+10.10 Power Purchase Agreement between Lawrence
Hydroelectric Associates, Essex Company and New
England Power Company (Lawrence Project), dated
January 1, 1985
+10.11 Mortgage and Security Agreement from Lawrence
Hydroelectric Associates to New England Power
Company, dated January 1, 1985
+10.12 Indenture of Mortgage, dated as of September 8,
1981, between Lawrence Hydroelectric Associates
and State Street Bank and Trust Company, Trustee,
and Supplemental Indentures dated as of January 1,
1985, October 1, 1987 and July 1, 1988
+10.13 Agreement between International Paper Company and
Niagara Mohawk Power Corporation (LaChute Lower
Project), dated March 7, 1986
+10.14 Agreement between International Paper Company and
Niagara Mohawk Power Corporation (LaChute Upper
Project), dated March 7, 1986
+10.15 Participation Agreement dated as of December 31,
1987 among LaChute Hydro Company, Inc., Philip
Morris Credit Corporation, the Financial
Institutions listed on Schedule II thereto, The
Connecticut Bank and Trust Company, National
Association, as Indenture Trustee, and The
Connecticut National Bank, as Owner Trustee
+10.16 Lease Agreement dated as of December 31, 1987
between LaChute Hydro Company, Inc. and The
Connecticut National Bank, as Owner Trustee
+10.17 Indenture and Amended and Restated Building Loan
Mortgage and Security Agreement dated as of
December 31, 1987 between The Connecticut National
Bank, as Owner Trustee and The Connecticut Bank
and Trust Company, National Association, as
Indenture Trustee
+10.18 Tax Indemnification Agreement dated as of December
31, 1987 between LaChute Hydro Company, Inc. and
Philip Morris Credit Corporation
+10.19 Tax Indemnification Agreement dated as of December
31, 1987 between LaChute Hydro Company, Inc. and
General Electric Capital Corporation
+10.20 Power Purchase Agreement between Androscoggin
Reservoir Company and Central Maine Power Company
(Aziscohos Project), dated October 23, 1984
+10.21 Participation Agreement dated as of September 1,
1988 among Aziscohos Hydro Company, Inc., NYNEX
Credit Company, The CIT Group/Equipment Financing,
Inc., The Connecticut National Bank, as Indenture
Trustee, and Meridian Trust Company, as Owner
Trustee
76
+10.22 Lease Agreement dated as of September 1, 1988
between Meridian Trust Company, as Owner Trustee,
and Aziscohos Hydro Company, Inc.
+10.23 Indenture, Mortgage and Security Agreement dated
as of September 1, 1988 between Meridian Trust
Company, as Owner Trustee and The Connecticut
National Bank, as Indenture Trustee
+10.24 Indenture of Lease dated as of January 15, 1986
between Aziscohos Hydro Company, Inc. and
Androscoggin Reservoir Company, and amendments
thereto dated March 13, 1986 and as of September
1, 1988
+10.25 Collateral Assignment of Lease dated September 1,
1988 between Aziscohos Hydro Company, Inc. and
Central Maine Power Company
+10.26 Tax Indemnification Agreement dated as of
September 6, 1988 between Aziscohos Hydro Company,
Inc., Consolidated Hydro, Inc. and NYNEX Credit
Company
+10.27 Purchase Power Agreement dated December 29, 1987,
between Duke Power Company and Riegel Power
Corporation as assigned to Aquenergy Systems, Inc.
by Assignment dated July 27, 1988
+10.28 Note Purchase Agreement between UNUM Life
Insurance Company of America and Aquenergy
Systems, Inc. dated as of November 1, 1988
+10.29A Mortgage and Security Agreement dated as of
November 1, 1988 from Aquenergy Systems, Inc. to
The Connecticut Bank and Trust Company, National
Association, as Trustee (Ware Shoals Project)
+10.30 Loan Agreement dated June 18, 1991, between
Fieldcrest Cannon, Inc. as lender and Eagle &
Phenix Hydro Company, Inc. as borrower setting
forth terms and conditions for the loan evidenced
by the Promissory Note described in item A above
+10.31 Security Deed dated June 18, 1991 from Eagle &
Phenix Hydro Company, Inc. to Fieldcrest Cannon,
Inc. as security for the Promissory Note described
item A above
+10.32 Security Agreement dated June 18, 1991, between
Eagle & Phenix Hydro Company, Inc. as grantor and
Fieldcrest Cannon Inc. as secured party as
security for the Promissory Note described in item
A above
+10.33 Lease agreement dated January 18, 1991, between
Eagle & Phenix Hydro Company, Inc. as lessor and
Fieldcrest Cannon, Inc. as lessee
+10.34 Agreement for the sale of electricity to Virginia
Electric & Power Company dated July 29, 1988,
between Virginia Electric & Power Company and
Aquenergy Systems, Inc.
+10.35 Deed of Trust and Security Agreement dated as of
November 1, 1988 from Aquenergy Systems, Inc. to
The Connecticut Bank and Trust Company, National
Association, as Trustee (Fries Project)
+10.36A Purchase Power Agreement between Duke Power
Company and Pelzer Hydro Company, Inc. dated
February 15, 1991 (Upper Pelzer)
77
+10.36B Purchase Power Agreement between Duke Power
Company and Pelzer Hydro Company, Inc. dated
February 15, 1991 (Lower Pelzer)
+10.37 Second Amended and Restated Certificate and
Agreement of Limited Partnership of Catalyst Slate
Creek Hydroelectric Partnership, dated as of July
18, 1989 and Amendment No. 1. dated as of May 9,
1990 thereto
+10.38 Restated and Amended Power Purchase Agreement
between Catalyst Slate Creek Hydroelectric
Partnership and PacifiCorp, dba Pacific Power &
Light Company and Utah Power & Light Company,
dated May 8, 1990
+10.39 Lease Agreement dated September 9, 1986, between
Wallowa Hydro Associates, Ltd. as lessee and Roy &
Wilfred Daggett as lessors as amended on April 13,
1988, as assigned to Joseph Hydro Company, Inc. by
Assignment and Assumption of Leases dated July 31,
1991
+10.40 Lease Agreement dated September 9, 1986, between
Wallowa Hydro Associates, Ltd. as lessee and Rex
W. and Zela G. Ziegler as lessors as amended on
April 13, 1988, as assigned to Joseph Hydro
Company, Inc. by Assignment and Assumption of
Leases dated July 31, 1991
+10.41 Lease Agreement dated August 8, 1986 between
Wallow Hydro Associates, Ltd. as lessee and Dale
L. Potter as lessor, as assigned to Joseph Hydro
Company, Inc. by Assignment and Assumption of
Leases dated July 31, 1991
+10.42 Amended and Restated Power Purchase Agreement
dated July 31, 1991, between Joseph Hydro Company,
Inc. and PacifiCorp Electric Operations
+10.43 Agreement between Wallowa Valley Improvement
District No. 1 and Cook Electric, Inc. dated
January 6, 1981, as amended on February 2, 1982,
December 13, 1982, December 27, 1982, September
13, 1983, and July 31, 1991, as assigned to Joseph
Hydro Company, Inc. by Assignment and Consent
Agreement dated July 31, 1991
+10.44 Agreement between Joseph Hydro Associates, Ltd.
and the Little Sheep Creek Property Owners
Association as assigned to Joseph Hydro Company
Inc. by Assignment and Assumption of Contracts
dated July 31, 1991
+10.45 American Arbitration Association Order No. 75 110
0110 85 dated September 16, 1983, as assigned to
Joseph Hydro Company, Inc. by Assignment and
Assumption of Contracts dated July 31, 1991
+10.46 Contract between the Connecticut Light and Power
Company and Kinneytown Hydro Company, Inc.
(Kinneytown Project) dated December 2, 1986
+10.47 Open-End Electricity Purchase Agreement Mortgage
and Security Agreement between Kinneytown Hydro
Company, Inc. and the Connecticut Light and Power
Company dated April 29, 1988
+10.48 Amended and Restated Agreement of Limited
Partnership, dated as of December 22, 1989, of
Twin Falls Hydro Associates, L.P.
78
+10.49 Tax Indemnification Agreement, dated as of
December 22, 1989, between The Connecticut
National Bank, as LP Trustee, and CHI
Acquisitions, Inc. (Exhibit G to item 10.48)
+10.50 Agreement between New York State Electric & Gas
Corporation and Walden Power Corporation dated as
of August 2, 1982
+10.51 Lease between Barbara Gurman Lewis and Walden
Power Corporation dated as of August 24, 1982
+10.52 Lease between the Village of Walden and Walden
Power Corporation dated as of August 5, 1982
+10.53 Stock Subscription Agreement dated as of March 30,
1988 among Consolidated Hydro, Inc., Summit Energy
Storage Inc., Acres International Corporation,
Commonwealth Securities and Investments, Inc. and
seven individuals
+10.54 Memorandum of Understanding between Kvaerner Brug
A/S, Boving & Co., Limited, EB Kraftgenerering
a.s. (Powergeneration), and Consolidated Hydro,
Inc., dated April 12, 1988
+10.55 Agreement between Kvaerner Brug A/S, Boving & Co.,
Limited, EB Kraftgenerering a.s. (Power
generation), Summit Energy Storage Inc., dated
April 12, 1988
+10.56 Agreement between Kvaerner Brug A/S, Boving & Co.,
Limited, EB Kraftgenerering a.s. (Power
generation), Consolidated Hydro Inc., Summit
Energy Storage Inc., dated April 12, 1988
+10.57 Agreement for Energy Services for Summit Energy
Storage Project between Summit Energy Storage Inc.
and Acres International Corporation dated March
30, 1988
+10.58 Letter Agreement dated March 30, 1988 between
Summit Energy Storage Inc. and Acres International
Corporation
+10.59 Mitigation Agreement between Summit Energy Storage
Inc. and the City of Norton, Ohio dated May 14,
1990
+10.60 Memorandum of Understanding concerning commitment
to lease between Summit Energy Storage Inc. and
Ohio Edison Company, dated October 8, 1991
+10.61 Agreement concerning specified facility
transmission and dispatching service between
Summit Energy Storage Inc. and Ohio Edison
Company, dated October 8, 1991
+10.62A Technical Services Agreement dated June 5, 1992
between Summit Energy Storage Inc. and Morrison
Knudsen Corporation
79
+10.62B Promissory notes dated March 19, 1990 (a) in the
principal amount of $658,500 from Summit Energy
Storage Inc. to EB Kraftgenerering a.s. and (b) in
the principal amount of $341,500 from Summit
Energy Storage Inc. to Kvaerner Hydro Power A/S
+10.63 Promissory note dated May 30, 1991 in the
principal amount of $110,000 from Summit Energy
Storage Inc. EB Kraftgenerering a.s.
(Powergeneration)
+10.64 Promissory note dated November 26, 1991 in the
principal amount $500,000 from Summit Energy
Storage Inc. to Witoco Venture Corporation
+10.65 Promissory note dated October 31, 1991 in the
principal amount of $277,778 from Summit Energy
Storage Inc. to Andrea Rich, in her capacity as
Trustee of the Howard Rich Trust for the benefit
of Daniel Rich
+10.66 Promissory note dated October 31, 1991 in the
principal amount of $222,222 from Summit Energy
Storage Inc. to Andrea Rich, in her capacity as
Trustee of the Howard Rich Trust for the benefit
of Joseph Rich
+10.67A Letter agreements between Summit Energy Storage
Inc. and Curtis Thaxter Stevens Broder & Micoleau
dated June 15, 1988, August 29, 1990 and June 21,
1991
+10.67B Kidder, Peabody & Co., Incorporated Fee Letter,
dated September 5, 1989
+10.68 Letter Agreement dated September 26, 1989 between
Consolidated Pumped Storage, Inc. and JDJ Energy
Company, Inc.
+10.69 Conveyance, Pledge, Security and Shareholders
Agreement dated as of September 15, 1990 among
Consolidated Pumped Storage Arkansas, Inc.,
Consolidated Pumped Storage, Inc. and JDJ Energy
Company, Inc.
+10.70 Loan Agreement and Supply Commitment dated as of
September 28, 1990 among Consolidated Pumped
Storage Arkansas, Inc., Consolidated Pumped
Storage, Inc. and Voith Hydro, Inc.
+10.71 Loan Agreement and Supply Commitment dated as of
December 18, 1991 among Consolidated Pumped
Storage Arkansas, Inc., Consolidated Pumped
Storage, Inc. and Siemens Power Ventures, Inc.
+10.72A Warrant to purchase up to 10 shares of common
stock of Consolidated Pumped Storage, Inc. issued
to Andrea Rich
+10.72B Securities Purchase Agreement between Consolidated
Hydro, Inc., and BCC Brown Finance (Curacao) N.V.,
dated June 29, 1992
+10.73 Employment Agreement between Consolidated Hydro,
Inc. and Olof S. Nelson dated March 25, 1992
10.74 Employment Agreement between Consolidated Hydro,
Inc. and Michael I. Storch dated March 25, 1992
80
+10.75 Employment Agreement between Consolidated Hydro,
Inc. and Carol H. Cunningham dated March 25, 1992
+10.76A Side letter with Carol H. Cunningham dated March
25, 1992
+10.76B Incentive Compensation and Transition Employment
Agreement for the Eagle and Phenix projects, dated
December 18, 1992
+10.77 Stockholders, Optionholders and Warrantholders
Agreement among Consolidated Hydro, Inc. and its
stockholders, optionholders and warrantholders
dated March 25, 1992
+10.78 Purchase Agreement dated March 25, 1992 among
Consolidated Hydro, Inc., Madison Group, L.P., and
The Morgan Stanley Leveraged Equity Fund II, L.P.
+10.79 Amended and Restated Acquisition Facility
Agreement between Consolidated Hydro, Inc. and
General Electric Capital Corporation dated March
25, 1992
+10.80 Note Pledge and Security Agreement between General
Electric Capital Corporation and CHI Acquisitions,
Inc., dated June 22, 1993
+10.81 Amendment and Agreement among General Electric
Capital Corporation, and its subsidiaries, dated
June 22, 1993
+10.82 Reimbursement Agreement between CHI Acquisitions,
Inc., Consolidated Hydro Southeast, Inc., Joseph
Hydro Company, Inc., and General Electric Capital
Corporation, dated June 22, 1993
+10.83 Kidder, Peabody & Co. Letter Agreement, dated July
19, 1991
+10.84 Participation Agreement dated September 9, 1993
among CHI Acquisitions, Inc., Sheldon Springs
Power Company, Sheldon Vermont Hydro Company,
Inc., GECC and Aircraft Services Corporation
+10.85 Agreement of Limited Partnership of Sheldon
Springs Hydro Associates, L.P. dated September 9,
1993
+10.86 Loan Agreement dated September 10, 1993 among
Missisquoi Associates, Sheldon Springs Hydro
Associates, L.P. and GECC
+10.87 Long-Term, Firm Levelized and Non-Levelized
Purchase Agreement, executed on July 23, 1986,
between Vermont Power Exchange, Inc. and
Missisquoi Associates
+10.88 Revolving Credit Agreement among Consolidated
Hydro, Inc., as the Borrower, the Banks Listed in
Schedule I and Den norske Bank AS, as Agent, dated
as of October 14, 1993
+10.89 Warrant Agreement dated as of November 1, 1993,
between Consolidated Hydro, Inc. and SES Partners
II, L.P.
+10.90 Stock Option Plan
81
+10.91 Form of Stock Option Agreement
+10.92 Form of Indemnifications Agreement
+10.93 Form of Amended and Restated Indenture for the
Notes between Consolidated Hydro, Inc. and Shawmut
Bank Connecticut, National Association, as trustee
+10.94 Form of Exchange Debenture Indenture (including
form of debenture)
+10.95 Registration Rights Agreement, dated June 15,
1993, between Consolidated Hydro, Inc. and Morgan
Stanley
++10.96 Credit and Reimbursement Agreement dated as of
February 15, 1995 among CHI Acquisitions II, Inc.,
Hydro Development Group Inc., Beaver Valley Power
Company, Littleville Power Company, Inc.,
Consolidated Hydro Southeast, Inc., Pelzer Hydro
Company, Inc., Joseph Hydro Company, Inc., Slate
Creek Hydro Company, Inc., CHI Acquisitions, Inc.,
the Lenders from time to time party thereto, and
General Electric Capital Corporation, as Agent for
the Lenders.
+++10.97 Deed of Trust, Assignment of rents and Fixture
Filing dated as of May 10, 1990 between Slate
Creek Hydro Associates, L.P. (f/k/a Catalyst Slate
Creek Hydroelectric Partnership), in favor of
First American Title Insurance Company, trustee,
f/b/o General Electric Capital Corp. ("GECC"),
recorded in Book 2595, Page 805, as assigned by
GECC to CHI Acquisitions, Inc. by Assignment of
Beneficial Interest Under Deed of Trust, dated
February 15, 1995, recorded in Book 3260, Page
629, as amended by Modification of Deed of Trust,
dated February 15, 1995, recorded in Book 3260,
Page 635, as further assigned by CHI Acquisitions,
Inc. to Slate Creek Hydro Company, Inc., by
Assignment of Deed of Trust dated February 15,
1995, recorded in book 3260, Page 647, and as
further assigned by CHI Acquisitions, Inc. to GECC
by Assignment of Beneficial Interest Under Deed of
Trust dated February 15, 1995 and recorded in Book
3260, Page 651.
+++10.98 Mortgage from Pelzer Hydro Company, Inc. to
General Electric Capital Corporation, dated as of
February 15, 1995.
+++10.99 Power Purchase Agreement by and between Niagara
Mohawk Power Corporation and Pyrites Associates,
dated as of April 22, 1985, as amended by First
Amendment dated as of March 22, 1993.
+++10.100 Lease Agreement between Pyrites Associates
(lessee) and St. Lawrence County Industrial
Development Agency, dated June 1, 1985 and
recorded in Book 992, Page 742, as amended by
First Amendment dated June 3, 1993 and recorded in
book 1072, Page 921.
+++10.101 Pyrites Project Agreement dated November 18, 1982
between Hydro Development Group Inc. and Hydra-Co
Enterprises, Inc.
+++10.102 Cataldo Hydro Power Associates Partnership
Agreement dated October 12, 1983.
82
+++10.103 Agreement of Limited Partnership of Black River
Hydro Associates, dated as of November 23, 1983,
as amended by First Amendment dated as of October
14, 1984 and undated, unexecuted Second Amendment.
+++10.104 Amended and Restated Power Purchase Agreement -
Port Leyden Plant by and between Black River Hydro
Associates and Niagara Mohawk Power Corporation,
dated as of October 15, 1984, as amended by
amendments dated October 15, 1984 and June 18,
1993, respectively.
+++10.105 Lease by and between Lewis County Industrial
Development Agency (Lessor) and Black River Hydro
Associates (Lessee), dated 02/01/85 and recorded
in Liber 454 of Deeds, Page 191, as amended by
amendments dated 04/01/86, 05/26/88 and 07/07/93,
respectively, the latter being recorded in Liber
565 of Deeds, Page 51.
+++10.106 Indenture of Trust, Mortgage and Assignment given
by Lewis County Industrial Development Agency to
Chase Manhattan Bank, N.A., dated 02/01/85, as
supplemented by instruments dated 04/01/86,
10/31/91 and 07/07/93, the latter being recorded
in Liber 393 of Mortgages, Page 165.
+++10.107 Power Purchase Agreement by and between Hydro
Development Group Inc. and Niagara Mohawk Power
Corporation, dated December 16, 1993 (Dexter,
Copenhagen and other Projects).
+++10.108 Mortgage Restatement Agreement between Hydro
Development Group Inc. and General Electric
Capital Corporation dated February 15, 1995 and
recorded in the Jefferson County Clerk's Office in
Liber 1362, Page 033.
+++10.109 Project Agreement by and between Hydro Development
Group, Inc. and Hydra-Co Enterprises, Inc., dated
November 18, 1982.
+++10.110 Agreement by and between Hydro Development Group,
Inc., and Hydra-Co Enterprises, Inc. dated as of
May 23, 1994.
+++10.111 Employment Agreement between Consolidated Hydro,
Inc. and Edward M. Stern dated November 1, 1994.
+++10.112 Termination Agreement between Consolidated Hydro,
Inc. and Olof S. Nelson dated June 27, 1996.
+++10.113 Employment Agreement between Consolidated Hydro,
Inc. and James T. Stewart dated July 1, 1996.
+++++++10.114 Employment Agreement dated as of October 31, 1997,
by and between Consolidated Hydro, Inc. and
Michael I. Storch.
+++++++10.115 Employment Agreement dated as of October 31, 1997
by and between Consolidated Hydro, Inc. and Edward
M. Stern.
+++++++10.116 Employment Agreement dated as of October 31, 1997,
by and between Consolidated Hydro, Inc. and Mary
V. Gilbert.
83
++++++++10.117 Amendment dated as of July 1, 1996 to the
Revolving Credit Agreement between Consolidated
Hydro, Inc. and Den norske Bank ASA
++++++++10.118 First Amended and Restated Credit Agreement dated
as of October 15, 1996 between Lyon Credit
Corporation and BP Hydro Finance Partnership.
++++10.119 Agreement of Merger, dated as of July 1, 1996, by
and among Consolidated Consolidated Hydro Maine,
Inc., CHI Universal, Inc., Ridgewood Maine Hydro
Corporation and Ridgewood Maine Hydro Partners,
L.P.
++++10.120 Letter of Agreement, dated November 15, 1996,
amending Agreement of Merger, dated as of July 1,
1996, by and among Consolidated Hydro Maine, Inc.,
CHI Universal, Inc., Consolidated Hydro, Inc.,
Ridgewood Maine Hydro Corporation and Ridgewood
Maine Hydro Partners, L.P.
++++10.121 Letter Agreement, dated December 3, 1996, amending
Agreement of Merger, dated as of July 1, 1996, by
and among Consolidated Hydro Maine, Inc., CHI
Universal, Inc., Consolidated Hydro, Inc.,
Ridgewood Maine Hydro Corporation and Ridgewood
Maine Hydro Partners, L.P.
+++++10.122 Amended Engagement Letter, dated as of May 30,
1997, between Consolidated Hydro, Inc. and
Houlihan Lokey Howard and Zukin, Inc.
++++++10.123 Bill of Sale dated June 13, 1997, between TKO
Power, Inc. and Ralphs Ranches, Inc.
++++++10.124 Termination Agreement dated September 9, 1997,
between Joseph Hydro Company, Inc. and PacifiCorp.
++++++10.125 Purchased Power Agreement between Duke Power and
Mill Shoals Hydro Company, Inc., dated August
12,1997.
+++++++++10.126 Loan and Security Agreement dated as of March 31,
1998 between CHI Energy, Inc. and Lyon Credit
Corporation
++++++++++10.127 Amended and Restated Trust Indenture dated as of
December 31, 1998 between Aquenergy Systems, Inc
and UNUM Life Insurance Company of America, as
Trustee.
++++++++++10.128 Agreement dated as of March 9, 1999 between
Charles F. Goff, Jr. and CHI Energy, Inc.
10.129 Second Amendment to Pyrites Project Agreement
dated May 25, 1999 between Hydra-Co Enterprises,
Inc. and Hydro Development Group Inc.
10.130 Amendment to Cataldo Partnership Agreement dated
May 25, 1999 between Hydra-Co Enterprises, Inc.
and Hydro Development Group Inc.
10.131 Copenhagen Project Agreement dated May 25, 1999
between Hydra-Co Enterprises, Inc. and Hydro
Development Group Inc.
10.132 First Amendment to Promissory Note dated June 1,
1999 between Eagle & Phenix Hydro Company, Inc.
and Fieldcrest Cannon, Inc.
84
10.133 First Amendment to Security Deed dated June 1,
1999 between Eagle & Phenix Hydro Company, Inc.
and Fieldcrest Cannon, Inc. as security for the
Promissory Note dated June 1, 1999
10.134 First Amendment to Lease Agreement dated June 1,
1999 between Eagle & Phenix Hydro Company, Inc.
and Fieldcrest Cannon, Inc. as lessee
10.135 Amended and Restated Loan and Security Agreement
among CHI Energy, Inc., as Borrower, each of the
financial institutions parties hereto, as Lenders,
and Hudson United Bank, as Agent dated as of
November 3, 1999
12.1 Statements regarding computation of ratios
21.1 List of Subsidiaries of Registrant
27.1 Financial Data Schedule
+ Incorporated by reference to the respective
exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-69762).
++ Incorporated by reference to the Company's Current
Report on Form 8- K dated May 2, 1995.
+++ Incorporated by reference to the Company's Report
on Form 10-K for the fiscal year ended June 30,
1996.
++++ Incorporated by reference to the Company's Report
on Form 8-K dated December 23, 1996, as amended by
Form 8-K/A dated March 7, 1997.
+++++ Incorporated by reference to the Company's Current
Report on Form 8- K dated June 4, 1997.
++++++ Incorporated by reference to the Company's Report
on Form 10-K for the fiscal year ended June 30,
1997.
+++++++ Incorporated by reference to the Company's Report
on Form 10-K for the transition period from July
1, 1997 to December 31, 1997.
++++++++ Incorporated by reference to the Company's Report
on Form 10-Q for the quarterly period ended
December 31, 1996.
+++++++++ Incorporated by reference to the Company's Report
on Form 10-Q for the quarterly period ended March
31, 1998.
++++++++++ Incorporated by reference to the Company's Report
on Form 10-K for the year ended December 31, 1998.
(b) Reports on Form 8-K:
NONE.
85
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHI ENERGY, INC.
(Registrant)
Date: March 30, 2000 By: /s/ Charles F. Goff, Jr.
-------------------------------
Chairman, Interim Chief
Executive Officer and Director
Signature Title Date
--------- ----- ----
by:
/s/Charles F. Goff, Jr.
- ------------------------------------
Charles F. Goff, Jr. Chairman, Interim Chief Executive Officer March 30, 2000
and Director
by:
/s/ Edward M. Stern
- ------------------------------------
Edward M. Stern President, Chief Operating Officer, March 30, 2000
Secretary, and Director
by:
/s/Thomas G. Beaumonte
- ------------------------------------
Thomas G. Beaumonte Controller March 30, 2000
(principal accounting officer)
by:
/s/ Michael J. Petrick
- ------------------------------------
Michael J. Petrick Director March 30, 2000
by:
/s/ James J. Duplessie
- ------------------------------------
James J. Duplessie Director March 30, 2000
86