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 [FEE REQUIRED]
For the fiscal year ended JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission File Number: Not Yet Issued
Reg. No. 33-69762
CONSOLIDATED HYDRO, 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
(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 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 September 15, 1997
- - - ----------------------------- ------------------------------------
Common stock, $.001 par value 1,285,762
Class B Outstanding as of September 15, 1997
- - - ----------------------------- ------------------------------------
Common stock, $.001 par value NONE
Page 1 of 97
Exhibit Index begins on page 85
CONSOLIDATED HYDRO, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business............................................................3
Item 2. Properties..........................................................21
Item 3. Legal Proceedings...................................................21
Item 4. Submission of Matters to a Vote of Security Holders.................21
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................................22
Item 6. Selected Financial Data.............................................24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................27
Item 8. Financial Statements................................................41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................71
PART III
Item 10. Directors and Executive Officers of the Registrant..................71
Item 11. Executive Compensation..............................................76
Item 12. Security Ownership of Certain Beneficial Owners and Management......80
Item 13. Certain Relationships and Related Transactions......................82
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K....85
PART I
ITEM 1. BUSINESS
Consolidated Hydro, Inc. ("CHI", and together with its consolidated
subsidiaries, the "Company") has, since its establishment in 1985, been
principally engaged in the development, operation and management of
hydroelectric power plants. Based on operating megawatts, the Company is the
largest independent hydroelectric power producer in the United States.
As of June 30, 1997, the Company owned, operated or leased 90 projects in
the United States and Canada, with aggregate capacity of approximately 343
megawatts. In addition, the Company and a joint venture partner have begun
construction on a 15-megawatt hydro project in Newfoundland, Canada that is
expected to commence commercial operation in the fall of 1998.
Currently, all of the Company's revenue is derived from the ownership and
operation of hydroelectric facilities. The Company believes that its existing
hydroelectric business will continue to provide a relatively stable revenue
stream, but that major future hydro opportunities will be limited for a variety
of reasons explained below. Therefore, the Company believes that a significant
proportion of future revenue and earnings increases will depend on the success
of its industrial infrastructure business activities. See "-- Hydroelectric
Business" and "-- Industrial Infrastructure Business".
Commencing in November 1995, the Company began to diversify its business
activities to include the development, ownership, and operation of industrial
infrastructure facilities. In addition, the Company in 1996 completed a
management reorganization and initiated a financial restructuring that it
expects to complete by the end of calendar year 1997. The intent of its
diversification, reorganization, and restructuring programs has been to
significantly reduce or eliminate corporate debt, reduce overhead and operating
costs, and position itself to take advantage of new business opportunities
occasioned by electric industry restructuring in the U.S. and by other trends
within its target customer group which includes industrial companies and
electric utilities. 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 to realize economies of scale in administration, operation,
maintenance and insurance of facilities.
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code. None of CHI's subsidiaries has commenced a case under the
Bankruptcy Code. See "--Financial Restructuring of CHI" and Item 3, "Legal
Proceedings".
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.
FINANCIAL RESTRUCTURING OF CHI
CHI's highly leveraged capital structure and substantial future cash
requirements have made it difficult for the Company to establish the
creditworthiness and credibility necessary to consummate industrial
infrastructure and other new business transactions. Specifically, commencing on
September 30, 1998, cash dividends become payable on the Company's existing 13
1/2% Cumulative Redeemable Exchangeable Preferred Stock (the "Series H Preferred
Stock") and on January 15, 1999, cash interest becomes payable on the Company's
existing 12% Senior Discount Notes due 2003, Series B (the "Senior Discount
Notes"). The Company believes it will be unable to satisfy such dividend and
interest payment obligations on a timely basis as well as meet the Company's
other obligations, including accrued and unpaid dividends since issuance under
the Company's 8.0% Senior Convertible Voting Preferred Stock (the "Series F
Preferred Stock"), and its capital expenditure and working capital requirements
at such time. In addition, the Company anticipates that it will be unable to
satisfy the principal payments on its Senior Discount Notes at their maturity in
2003 and to redeem the Series H Preferred Stock at its 2003 redemption date. In
order to capitalize on the expertise and capabilities it believes it has in the
industrial and hydro power areas, 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 Preferred Stock (as such term is defined below) in an effort to restructure
the Company's significant financial obligations. On March 20, 1997, the Company,
at a meeting with certain holders of CHI's Senior Discount Notes, announced an
outline for its current business strategy and made a proposal to restructure its
outstanding debt and equity.
3
On June 4, 1997, CHI, the holders of a majority of the Series F Preferred
Stock, CHI's Junior Convertible Voting Preferred Stock (the "Series G Preferred
Stock") and the Series H Preferred Stock (the Series F Preferred Stock, the
Series G Preferred Stock and the Series H Preferred Stock being collectively
referred to herein as the "Preferred Stock") and an informal committee of
institutions that own, or represent beneficial holders that own, approximately
89.2% of CHI's outstanding Senior Discount Notes (the "Unofficial Bondholders'
Committee") reached an agreement in principle on the terms of a restructuring to
be accomplished pursuant to a plan of reorganization for CHI (the "Plan of
Reorganization") under chapter 11 of the Bankruptcy Code. On August 8, 1997,
CHI, pursuant to a disclosure statement, dated August 8, 1997 (the "Disclosure
Statement"), commenced a prepetition solicitation of votes by the holders of
Senior Discount Notes and Preferred Stock to accept or reject the Plan of
Reorganization. Under the Plan of Reorganization, the holders of Senior Discount
Notes and 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 Series F Preferred
Stock, greater than 97% of the Series G Preferred Stock and greater than 98% of
the Series H Preferred Stock, that voted on the Plan of Reorganization.
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 has
commenced a case under the Bankruptcy Code. Pursuant to an order of the
Bankruptcy Court signed on September 15, 1997, a hearing before the Bankruptcy
Court to consider confirmation of the Plan of Reorganization is scheduled to be
held on October 23, 1997. CHI anticipates (but can give no assurance) that, if
the Bankruptcy Court enters an order confirming the Plan of Reorganization on or
about October 23, 1997, the Plan of Reorganization will become effective before
December 31, 1997 (the date of such effectiveness being the "Effective Date").
Through the implementation of the Plan of Reorganization on and after the
Effective Date, it is anticipated that CHI's most significant financial
obligations will be restructured as follows: $202 million in face amount of
outstanding Senior Discount Notes will be 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"), to be issued on the
Effective Date, subject to dilution from the New Warrants and the Management
Options (each as described below); the holders of the Preferred Stock will
exchange such stock for warrants to purchase up to 12.5% of the New Common
Stock, consisting of class B warrants (the "New Class B Warrants") and class C
warrants (the "New Class C Warrants, " and together with the New Class B
Warrants, the "New Warrants"), subject to dilution from the Management Options;
and CHI's old common stock will be cancelled. CHI's senior management will
receive options to purchase up to an aggregate of 7.5% of the 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, it is
anticipated that other than a working capital facility to be entered into as of
the Effective Date, CHI will not have any significant debt obligations after the
Effective Date.
If the Bankruptcy Court confirms the Plan of Reorganization, CHI shall be
deemed to have adopted, on the Effective Date, the Amended CHI By-Laws and a
Restated CHI Certificate of Incorporation, each of which has been filed in the
Bankruptcy Court as an exhibit to the Plan of Reorganization. Pursuant to CHI's
Restated Certificate of Incorporation, as of the Effective Date, CHI's name will
be changed from Consolidated Hydro, Inc. to CHI Energy, Inc. and the fiscal
year-end will be changed from June 30 to December 31.
4
HYDROELECTRIC BUSINESS
Until the establishment of its CHI Power, Inc. subsidiary in November 1995
to pursue industrial energy and related opportunities, the Company had been
engaged exclusively in the development, acquisition, and operation of
hydroelectric facilities and currently derives all of its revenues from this
source. The Company's operating hydroelectric projects are located in 15 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 operates three projects with an
aggregate capacity of 80 megawatts in Ontario, Canada pursuant to an operations
and maintenance ("O&M") contract and has begun construction of a 15-megawatt
hydroelectric project in Newfoundland.
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 people 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.
To date, the Company has expanded primarily by acquiring existing
conventional hydroelectric facilities in the United States. On June 30, 1997,
the Company had a 100% ownership or long-term lease interest in 55 projects (145
megawatts) including 4 projects held for sale or decommissioning, a partial
ownership interest in 11 projects (82 megawatts) and O&M contracts with 24
projects (116 megawatts). CHI sells substantially all of the output from these
projects, excluding the Canadian projects, to public utility companies pursuant
to take and 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 "-- Power
Purchase Agreements". In 1996, the Company significantly reduced the carrying
value of certain of its assets. See Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General".
The Company also has been a developer of pumped storage hydroelectric power
plants in the United States. By cycling water between upper and lower
reservoirs, a pumped storage hydroelectric facility is able to convert low value
off-peak energy into high value peak power. However, as a result of continued
restructuring of the U.S. electric power industry and other events which have
created a climate of uncertainty regarding the future structure of the U.S.
electric power industry, the Company in 1996 wrote down virtually all of its
previous investments in pumped storage development. The Company will limit its
pumped storage development activities to the minimum necessary to maintain the
viability of the pumped storage projects currently in development while
completing an assessment designed to determine which of these projects, if any,
have future value.
Factors Affecting the Hydroelectric Business. 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,
5
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.
By the time CHI was organized in July 1985, the hydroelectric power
industry had already entered a transition period. Fragmented ownership,
inefficient operating practices, inappropriate capitalization, and the loss of
certain tax incentives for small hydro project development led many early
developers to leave the industry. 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 in terms of
gross revenues. At that time, the Company anticipated that the electric utility
industry would remain heavily regulated and noncompetitive, that purchased power
rates for output from QF projects such as the Company's would not decline, and
that hydropower, as a renewable resource, would generally be viewed favorably by
regulators. Similarly, the Company anticipated successful development of its
pumped storage projects (which were not QFs) based on a utility industry
structure and climate that would motivate utilities to offer long-term contracts
for the output from these projects.
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 will become a
deregulated, competitive industry providing energy customers with an increasing
degree of choice among sources of electric power supply. Reductions in 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 made it more difficult to obtain long-term power purchase contracts, thereby
severely limiting the Company's near-term opportunities to acquire or develop
additional hydroelectric capacity at acceptable rates of return. At the same
time, competition for the acquisition of available hydroelectric assets has
intensified, with the Company's competitors including a broad range of other
independent power producers and many well-capitalized domestic and foreign
industry participants such as utilities, equipment manufacturers and affiliates
of industrial companies, many of whom are aggressively pursuing power
development programs and have relatively low return-on-capital objectives.
CHI believes that future growth opportunities in its hydroelectric business
are limited and will primarily consist of: (i) potential acquisition of
additional hydroelectric projects of significant size, possibly as the result of
utility asset divestitures; (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.
6
CONVENTIONAL HYDROELECTRIC PROJECTS
The following tables set forth the Company's projects as of June 30, 1997
with 100% ownership, with partial ownership and with O&M contracts:
PROJECTS WITH 100% OWNERSHIP AS OF JUNE 30, 1997
(INCLUDING SALE-LEASEBACKS)
POWER
PURCHASE FERC DATE OF CHI
AGREEMENT LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT OF
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OPERATIONS(1)
- - - ------- -------- ----------------------- ------------ ----- --------- -------------
Apalache......... Greer, SC Duke Power Co. Dec. 1997(2) 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 Dusquesne Power Open Ended(4) Exempt 1.30 Feb. 1995
Black Canyon..... Gooding, ID Idaho Power Co. May 2019 Exempt 0.10 May 1993
Boott(3)......... Lowell, MA Commonwealth Elec. Apr. 2023 Apr. 2023 24.82 Dec. 1986
Canal Creek(10).. Joseph, OR Pacific Power & Light Dec. 2020(5) Exempt 1.13 Aug. 1991
Coneross......... Seneca, SC City of Seneca Mar. 1998 Mar. 2015 0.90 May 1989
Crescent......... Russell, MA Town of Groton Oct. 2009(9) May 2024 1.50 Feb. 1995
Dewey's Mill..... Hartland, VT Vermont Power Exchange Jul. 2015 Dec. 2032 1.90 Aug. 1993
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
Ferguson Ridge(10)....Joseph, OR Pacific Power & Light Dec. 2020(5) Exempt 1.44 Aug. 1991
Fowler #7........ Fowler, NY Niag. Mohawk Power Corp. Dec. 1998(8) Oct. 2002 .90 Feb. 1995
Fries............ Fries, VA Virginia Elec. Power Jan. 1999 May 2020 5.21 May 1989
Co. & Apalachian
Power Co.
Geo-Bon II....... Lincoln County, ID Idaho Power Co. Mar. 2020 Exempt 1.00 Jun. 1994
Glendale......... Stockbridge, MA Town of Groton Oct. 2009(9) Oct. 2009 .70 Feb. 1995
Goodyear Lake.... Milford, NY NY State Elec. & Gas Aug. 2010 Feb. 2019 1.30 Feb. 1995
Corp.
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 .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 .90 Feb. 1995
High Falls....... Franklin County, NY NY State Elec. & Gas Dec. 2002 Jan. 2026 1.75 Oct. 1993
Corp.
High Shoals...... High Shoals, NC Duke Power 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 Nov. 1999 Exempt 0.75 Jul. 1993
Low Line Rapids.. Kimberly, ID Idaho Power Co. Jun. 2022 Exempt 2.80 Dec. 1992
7
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)
- - - ------- -------- ----------------------- ------------ ----- --------- -------------
Milstead........ Milstead, GA Municipal Elec. Auth. Apr. 2000 Exempt 1.00 Jul. 1993
of GA
Ottauquechee.... N. Hartland, VT Vermont Power Exchange Sept. 2017 Exempt 1.89 Jun. 1994
Pelzer Lower.... Williamston, SC Duke Power Co. Sept. 1998(2) Nov. 2017 3.30 Feb. 1990
Pelzer Upper.... Pelzer, SC Duke Power Co. Sept. 1998(2) Nov. 2017 2.00 Feb. 1990
Piedmont........ Piedmont, SC Duke Power Co. Dec. 1997(2) Dec. 2018 1.00 May 1989
Prather Ranch(10) MacDoel, CA Pacific Power & Light Dec. 2012 Exempt 0.10 Feb. 1990
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 Licensing in 1.20 Jul. 1986
Progress
Scotts Flat..... Nevada City, CA Pacific Gas & Electric Dec. 2004 Exempt 0.83 Feb. 1990
Theresa......... Theresa, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 1.30 Feb. 1995
Upper Little
Sheep Joseph, OR Pacific Power & Light Dec. 2020(5) Exempt 4.44 Aug. 1991
Creek(10).......
Victory Mills... Saratoga, NY Niag. Mohawk Power Corp. Dec. 2025 Apr. 2024 1.66 Dec. 1986
Walden.......... Walden, NY NY State Elec. & Gas Nov. 1998 May 2022 2.82 Apr. 1986
Corp.
Ware Shoals..... Ware Shoals, SC Duke Power Co. Dec. 1997(2) 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. 1997(2) Non-Jurisdictional 0.40 May 1989
Woodside II.... Cateechee, SC Duke Power Co. Dec. 1997(2) Non-Jurisdictional 0.44 May 1989
Number of Projects: 55 Megawatt Subtotal: 145.50
======
- - - -------------------------
(1) Whichever is later.
(2) The terms of the power purchase agreements relating to these projects may
be extended for an additional five years at negotiated rates at the
option of the Company.
(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) Includes utility's option to extend for an additional three years.
(6) Revenue is derived pursuant to a lease arrangement.
(7) The term of the Lawrence power purchase agreement may be extended through
2028 at the option of the purchasing utility.
(8) The term of the power purchase agreement for this project may be extended
for an additional 20 years at the option of the utility.
(9) May be extended by mutual agreement
(10) These projects are classified as Assets to be disposed of at June 30,
1997. See Notes 2 and 20 of the Notes to Consolidated Financial
Statements for additional information.
8
PROJECTS WITH PARTIAL OWNERSHIP AS OF JUNE 30, 1997(1)
POWER PURCHASE APPROXIMATE DATE OF CHI
AGREEMENT FERC LICENSE PROJECT ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OF OPERATIONS(2)
- - - ------- -------- ----------------------- ---- ----- --- ----- --------- ----------------
Copenhagen........ Copenhagen, NY Niag. Mohawk Power Dec. 2023 Exempt 3.30 Feb. 1995
Corp.
Denley Dam........ Lyonsdale, NY Niag. Mohawk Power Dec. 2026 Exempt 1.50 Feb. 1995
Corp.
Hillsborough...... Hillsborough, NH Public Serv. Co. of NH Jul. 2004 Exempt 1.20 Nov. 1989
Lacomb............ Lacomb, OR Pacific Power & Light Dec. 2022 Exempt 0.96 Feb. 1990
Lower Saranac..... Saranac, NY NY State Elec. & Gas Oct. 2029 May 2027 9.30 Jun. 1992
Port Leyden....... Lyonsdale, NY Niag. Mohawk Power Dec. 2026 Exempt 2.00 Feb. 1995
Corp.
Pyrites........... Canton, NY Niag. Mohawk Power Dec. 2023 Aug. 2023 8.20 Feb. 1995
Corp.
Rock Island....... Lyonsdale, NY Niag. Mohawk Power Dec. 2026 Exempt 1.90 Feb. 1995
Corp.
Sheldon Springs... Sheldon, VT Vermont Power Exchange Aug. 2016 Sept. 2024 24.97 Sept. 1993
Slate Creek....... Lakehead, CA Pacific Power & Light Dec. 2018(3) Exempt 4.20 May 1990
Twin Falls........ North Bend, WA Puget Power & Light Co. Dec. 2025 Apr. 2035 24.00 Apr. 1989
Number of Projects: 11 Megawatt Subtotal: 81.53
============
- - - -------------------------
(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 power purchase agreement for this project may be extended through
2023 at the option of the utility.
PROJECTS WITH OPERATION AND MAINTENANCE CONTRACTS AS OF JUNE 30, 1997(1)
APPROXIMATE PROJECT
PROJECT LOCATION CAPACITY IN MEGAWATTS DATE OF 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
Champlain Spinners. Whitehall, NY 0.70 Aug. 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
Iroquois Falls..... Ontario, Canada 21.49 Apr. 1994
Island Falls....... Ontario, Canada 38.40 Apr. 1994
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
Schaads............ San Andreas, CA 0.28 Feb. 1990
Terminus........... Tulare County, CA 17.00 Apr. 1995
Twin Falls......... Ontario, Canada 20.25 Apr. 1994
Weeks Falls........ North Bend, WA 4.34 Jun. 1990
Number of Projects: 24 Megawatt Subtotal: 115.58
=========
(1) These are projects where the Company's only current significant interest is
through operation and maintenance contracts.
Total Number of Projects: 90
Total Megawatts Owned, Leased or Operated: 342.61
=========
9
Sale of Hydroelectric Facilities. On December 23, 1996, the Company sold 15
of its 100% owned hydroelectric facilities in Maine, aggregating 11.32
megawatts. In connection with this sale, the Company executed a contract to
operate and maintain the facilities for an initial period of up to 15 years. See
Note 4 of the Notes to Consolidated Financial Statements.
Power Purchase Agreements. As of June 30, 1997, substantially all energy
and capacity of the Company's existing majority-owned projects in the United
States was being sold to 18 public utilities pursuant to take and pay long-term
power purchase agreements with remaining terms ranging from approximately 6
months to 28 years. The Company's power purchase agreements generally require
the utility company 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, 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 remain low as
a result of reductions in the cost of power produced from natural gas due to
lower natural gas prices and technological improvements which 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 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.
All of the Company's existing hydro 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' current 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. See "-- Energy and Environmental
Regulation".
10
The following table sets forth the Company's power sales by customer, the
majority of which are utilities, for the year ended June 30, 1997:
COMBINED
REVENUES OF
REVENUES OF PROJECTS
PROJECTS IN REVENUES OF 100% OWNED
CONSOLIDATED PROJECTS ONLY AND
RESULTS OF PARTIALLY PARTIALLY
OPERATIONS % OWNED % OWNED %
---------- - ----- - ----- -
Niagara Mohawk Power Corp...................... $10,285,472 20.3 $5,326,023 21.5 $15,611,495 20.7
Commonwealth Electric Co....................... 10,685,185 (1) 21.1 -- -- 10,685,185 14.2
Vermont Electric Power Producers, Inc.......... 1,660,296 3.3 7,691,327 31.1 9,351,623 12.4
Puget Power.................................... -- -- 7,462,800 30.2 7,462,800 9.9
New England Power Co........................... 6,183,617 12.2 -- -- 6,183,617 8.2
N.Y. State Electric & Gas Corp................. 1,591,550 3.1 3,460,248 14.0 5,051,798 6.7
Central Maine Power Co......................... 4,615,333(2) 9.1 -- -- 4,615,333 6.1
Duke Power Co.................................. 3,427,923(1) 6.8 -- -- 3,427,923 4.6
Idaho Power Co................................. 3,257,541 6.4 -- -- 3,257,541 4.3
Public Service Co. of NH....................... 1,979,942 3.9 346,356 1.4 2,326,298 3.1
PacifiCorp..................................... 1,817,503 3.6 374,327 1.5 2,191,830 2.9
All other customers............................ 5,161,035(2) 10.2 72,240 0.3 5,233,275 6.9
Total $50,665,397 100.0% $24,733,321 100.0% $75,398,718 100.0%
(1) Includes business interruption revenue representing lost generation
recoverable from an insurance company as a result of an insurance claim.
See Note 17 of the Notes to the Consolidated Financial Statements for
additional information.
(2) Includes revenue of $1,605,158 and $273,872 from Central Maine Power Co.
and Bangor Hydroelectric Co., respectively, generated by certain projects
sold during the year. See Note 4 of the Notes to Consolidated Financial
Statements for additional information.
Substantially all of the Company's existing power purchase agreements
contain scheduled rates for delivered energy through 1998 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. 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.
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 arrangements 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 three years in the period ended
June 30, 1997. 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 costs 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 risk during the period shown. No assurance can be provided as to
what the actual avoided cost risk will be for the period shown.
11
% OF CURRENT % OF CURRENT REVENUES
REVENUES SUBJECT TO SUBJECT TO RATES
MINIMUM FIXED OR DETERMINED PURSUANT TO
CALENDAR YEAR-END SCHEDULED RATES(1) AVOIDED COST
----------------- ------------------ ------------
1998............................................................ 93.4 6.6
1999............................................................ 86.8 13.2
2000............................................................ 85.5 14.5
2001............................................................ 66.6 33.4
2002............................................................ 66.6 33.4
2003............................................................ 64.2 35.8
2004............................................................ 64.2 35.8
2005............................................................ 63.2 36.8
2006............................................................ 62.9 37.1
2007............................................................ 61.0 39.0
(1) Includes contracts with GDP or other similar adjustment provisions.
In recent years, several public utility companies have approached
independent power producers (each an "IPP"), including the Company, to
renegotiate specified rates in their power purchase agreements alleging that
these agreements force the utilities to purchase power from IPPs at rates higher
than current avoided cost, resulting in higher rates to consumers. Niagara
Mohawk Power Corporation ("NIMO"), a customer of the Company which accounted for
approximately 18.4% and 20.3% of consolidated power sales revenues in fiscal
1996 and fiscal 1997, respectively, has in the recent past issued statements and
taken action, including legal action, indicating its desire to be relieved of
its obligations under contracts with IPPs that NIMO considers uneconomic. In
March 1997, NIMO announced that it reached preliminary agreements to restructure
power purchase agreements with 19 IPPs. However, neither the Company nor any of
its subsidiaries participated in these negotiations, and the impact of the
announced settlements on the Company, if any, is unknown. NIMO has also
unilaterally imposed a "generation cap" on three of the fifteen power purchase
agreements it has with the Company, alleging reduced rates for power produced
over a cap specified by the utility and withholding approximately $0.6 million
of revenues to date. In response, the Company, in conjunction with other IPPs,
has sought redress in court and expects the case to be decided during fiscal
year 1998.
Although the Company believes that its power purchase agreements are valid,
binding and enforceable contracts, and economic when analyzed over the life of
such contracts, and that the arguments raised by the utilities fail to
acknowledge that IPP power is still often less expensive than alternative
sources and less expensive than rates that might prevail had the utilities built
their own additional capacity, there can be no assurance additional customers of
the Company will not attempt to modify their contracts with the Company and, if
such attempts succeed, that any such modifications will not have a material
adverse effect on the Company's future revenues. Additionally, 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 might be difficult for the
Company to replace an existing long-term contract with such a customer with a
new contract with another customer on similar economic terms in the current
environment. See Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
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 maintains 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.
12
Production of electricity by the Company is typically greatest in its third
and fourth fiscal quarters (January through June), when water flow is at its
highest at most of the Company's projects, and lowest in the first fiscal
quarter (July through September). The Company normally shuts down selected
operations for periods during the relatively dry first fiscal 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.
INDUSTRIAL INFRASTRUCTURE BUSINESS
In November 1995, the Company established a subsidiary, CHI Power, Inc.,
for the purpose of developing, acquiring, operating and managing industrial
energy facilities and related industrial assets in such sectors as pulp and
paper, petroleum refining, chemicals, textiles, and other energy-intensive
industries (the Company's "industrial infrastructure business"). James T.
Stewart, former president of CRSS Inc., an independent power development
company, was employed to head the subsidiary. Other individuals with experience
in industrial energy project development, finance, management, and operations
have also joined the Company in senior positions. The Company believes that
diversification into the industrial market, if successful, would permit the
Company to move away from relying exclusively on hydropower ownership and
operation where the business climate is driven largely by legislation and
regulation and the structural industry trends described above and where
acquisition and development opportunities are believed to be limited.
Effective July 1, 1996, Mr. Stewart was elected Chairman and Chief
Executive Officer of the Company and began an organizational restructuring
which, among other things, integrated the Company's traditional pursuit of
additional hydropower business with development of its new industrial
infrastructure business. The Company believes that it possesses expertise in
certain areas, obtained through the hydropower business, that is readily
transferable and applicable to the industrial infrastructure business, including
project operation, management, administration, and financial structuring. This
expertise can be combined with that of recently hired Company personnel with
direct industrial project experience. In addition, the Company has offices in
several U.S. states as well as Canada, affording a geographic base from which to
pursue the new business.
The Company seeks to acquire or develop the energy and infrastructure
assets of energy and capital-intensive entities in industries such as pulp and
paper, textiles, chemicals and petroleum refining companies. Such assets may
include assets used to produce electricity, steam, or chilled water, or
facilities used for chemical recovery, storage, and water and wastewater
treatment. These assets are typically "non-core" assets that are necessary but
ancillary to the customer's primary, or "core", manufacturing activities. By
"outsourcing" its non-core infrastructure assets to the Company, the customer
may derive a financial benefit and may also benefit from the opportunity to
focus its resources on its core business, while the Company may benefit from the
long-term revenue stream resulting from such an arrangement.
CHI's industrial infrastructure business is strongly related to energy
production but is not traditional cogeneration or independent power plant
development. In the traditional cogeneration model, a developer finances and
builds a power plant at an industrial facility, typically producing electricity
that is sold at wholesale to the local electric utility and steam that is sold
at retail to the industrial company. In contrast, CHI's industrial
infrastructure business can involve a wide range of capital-intensive "utility"
infrastructure assets, such as steam generators, air compressors, storage
facilities, water management systems, and chemical recovery boilers. The
transaction may, but need not necessarily, include electricity generation. The
customer may seek to receive cash for, or "monetize," such assets if already
existing, or to construct such assets, either new or as an upgrade or expansion
of existing facilities. CHI will acquire or develop the assets, operate and
manage them, and sell back the resulting product (steam, chilled water,
compressed air, electricity, etc.) to the customers under a long-term contract,
generally at retail, although individual project circumstances may include the
sale of electricity to utilities.
The Company believes that the potential market for its industrial
infrastructure business in North America is very large, represented by
approximately $40 billion in annual energy-related expenditures and $50 billion
in annual capital expenditures on the part of companies in energy-intensive
manufacturing sectors such as pulp and paper, petroleum refining, chemicals, and
textiles. While the Company believes it possesses the expertise to successfully
complete transactions in this market, no such transactions have been completed
as of September 15, 1997 and there can be no assurance that any such
transactions will be completed in the future.
13
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 industrial 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 ("ECPA"); (iii) the Public Utilities Holding Company Act of 1935
("PUHCA"); (iv) PURPA; and (v) the National Energy Policy Act of 1992
("NEPAct"). A brief discussion of the impact of these laws on the Company
follows.
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. Except for the
projects which have been declared to be exempt wholesale generators ("EWG"),
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 industrial energy
facilities that it may acquire or develop in the future may not be QFs. The
Company does not intend for its industrial energy facilities to be principally
engaged in the sale of electric power to electric utilities at wholesale rates.
However, to the extent they may sell such power, they may be subject to
regulation by FERC or by the public service commissions in the states in which
they operate or sell power.
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.
In April 1996, FERC issued Order No. 888 which, among other things, requires
electric utilities to file open access tariffs that offer others the same
transmission services that the electric utilities provide themselves, encourages
the establishment of Independent System Operators ("ISOs") as a means of fair
administration of an open-access transmission system, and provides for utility
recovery of investments that utilities do not expect to recover from their
ratepayers under deregulation ("Stranded Costs"). In late 1995, the California
Public Utility Commission issued an electric utility restructuring plan that
implements retail customer choice in phases beginning in 1998 and requires
divestiture of certain utility generating assets. Many other states (including
New York among those in which the Company has significant interests) have
considered, or are believed likely to consider, plans for electric utility
restructuring that may include asset divestiture, ISOs, retail customer choice,
and Stranded Cost recovery, although the details of such plans may vary
considerably from state to state and may be in conflict with another state's
plans or with FERC's Order No. 888. In 1996 and 1997, several bills were
introduced in Congress that attempt to deal with electric industry restructuring
on a nationwide basis, some of which set a deadline for enactment of full retail
customer choice and the repeal of PURPA and PUHCA in states that provide for
full retail electric competition. The Company believes that such restructuring,
including significant elements of retail competition, is likely within the next
few years with a variety of potential impacts both positive and negative on the
Company. In the area of acquiring and developing industrial energy facilities,
removing restrictions on retail sales of energy to industrial customers is
likely to enhance the Company's prospects for completing transactions with such
customers. 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. While
the Company believes that its existing long-term power purchase contracts with
utilities are legally binding for the duration of the contracts, there can be no
assurance that the provisions of these contracts will not be affected by future
legislation or regulation dealing with electric industry restructuring. (see "--
Power Purchase Agreements").
14
Environmental Regulation. The Company is subject to extensive federal,
state (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, although the Company has never experienced such an event, the
closing down of 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 industrial energy
facilities are likely to be subject to federal and state laws and regulations
governing atmospheric emissions and, in some cases, governing the discharge of
effluents into water bodies. Environmental regulatory requirements for such
facilities are often complex, and specific requirements are dependent upon the
nature of the individual project and site.
COMPETITION
In its hydroelectric business, the Company competes with a number of
smaller and regional independent hydroelectric development companies and, on
occasion, 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.
In its industrial energy business, the Company competes with a large number
of well-capitalized companies, including many U.S. and foreign electric
utilities and their affiliates, which are also attempting to serve the energy
needs of industrial companies. However, the Company believes that there are
relatively few companies seeking to serve the industrial energy market in the
same manner as the Company, principally through requirements-based contracts and
by offering multiple products and services.
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;
Boise and Twin Falls, Idaho; Andover, Massachusetts; North Bend, Washington; and
Montreal, Canada, with aggregate annual rental payments of approximately
$200,000. 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, Idaho, Massachusetts, Maine, New Hampshire, New York,
Ohio, Oregon, Pennsylvania, Washington, Virginia, South Carolina, North
Carolina, Vermont, and Georgia. 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 June 30,
1997" 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
15
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.
EMPLOYEES
The Company employs approximately 141 full-time and 92 part-time and
temporary employees as of September 15, 1997. The Company's current employees
are not represented by a collective bargaining group, and management considers
its relations with employees to be good.
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 the Company's
existing debt, industry trends and financing needs and opportunities; risks
related to hydroelectric, industrial energy, pumped storage and other
acquisition and development projects; risks related to the Company's power
purchase contracts; risks and uncertainties related to weather conditions;
uncertainties related to the Company's Chapter 11 Case; 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.
High Leverage; Deficiency of Earnings to Fixed Charges and Preferred Stock
Dividends; Maturing Obligations. The Company is currently highly leveraged,
primarily as a result of a management buyout in 1988 (the "Management Buyout")
(see Part III, Item 13, "Certain Relationships and Related Transactions -- GECC
Relationship"), the refinancing of debt and capital in 1993 and the limited
recourse and non-recourse debt financing of the acquisitions of its conventional
hydroelectric power plants. As of June 30, 1997, the Company's total liabilities
were $433.3 million, including $114.4 million of mandatorily redeemable
preferred stock, its total assets were $243.6 million and its stockholders'
deficit was $189.7 million. For each of the years ended June 30, 1997, 1996,
1995, 1994, and 1993, the earnings (before fixed charges, provisions for income
taxes, extraordinary items and cumulative effect of accounting change) and net
of non-cash charges to cover fixed charges ratios were 1.36, 1.61, 1.34, 1.32,
and 1.08, respectively. For the years ended June 30, 1997, 1996, 1995, 1994, and
1993, the deficiency of earnings (before fixed charges, preferred stock
dividends, provision for income taxes, extraordinary items and cumulative effect
of accounting change) net of non-cash charges to cover fixed charges and
preferred stock dividends were $14.3 million, $5.2 million, $13.1 million, $13.1
million, and $16.9 million, respectively. See calculations in Item 6, "Selected
Financial Data", Footnotes 10 and 11.
Restrictions Imposed by the Company's Existing Indebtedness. The Indenture
relating to CHI's existing Senior Discount Notes (the "Indenture") and the
certificate of designation relating to CHI's existing Series H Preferred Stock
(the "Certificate of Designation") as well as CHI's existing working capital
facility (the "DnB Facility") with Den norske Bank ("DnB") (see Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Summary of Indebtedness") contain certain restrictive covenants.
But for the commencement of CHI's Chapter 11 Case, such restrictions would
affect, and in many respects would significantly limit or prohibit, among other
things, the ability of the Company to incur recourse indebtedness, make
prepayments of certain indebtedness, pay dividends, make investments, engage in
transactions with stockholders and affiliates, issue capital stock of restricted
subsidiaries, create liens, sell assets and engage in mergers and
consolidations. The covenants are subject to various exceptions which are
generally designed to allow the Company to continue to operate its business
without undue restraint and, therefore, are only limited prohibitions with
respect to certain activities. There can be no assurance that if the financial
restructuring of CHI were unsuccessful, the Company would be able to comply with
covenants and other restrictions contained in the Indenture, its other
indebtedness and the Certificate of Designation.
Leveraged Project Financing. The Company's existing hydroelectric projects
are and its future hydroelectric and industrial projects, if any, would likely
be financed using a variety of structures primarily consisting of limited
recourse or non-recourse debt. As of June 30, 1997, the Company had $100.3
million (exclusive of the Boott project operating lease) of direct project
financing obligations that are limited recourse or non-recourse to CHI. As
16
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 tax
indemnity and performance guarantee relating to one project will remain (see
Note 11 of the Notes to Consolidated Financial Statements for additional
information with respect to the tax indemnity). 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 (see Note 6 of the
Notes to Consolidated Financial Statements for additional information). 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. In
addition, there can be no assurance that, in respect of any financing of
projects in the future, GECC will not require CHI Acquisitions, CHI Acquisitions
II or another subsidiary of CHI to guarantee or otherwise secure the
indebtedness in respect of such future projects, rendering projects owned by
such guaranteeing subsidiary vulnerable in the event of a default in respect of
any one of such projects.
Net Losses; No Assurance of Future Profitability. The Company incurred the
following net losses for each of the last five fiscal years: $5.4 million for
the fiscal year ended June 30, 1997; $88.3 million for the fiscal year ended
June 30, 1996 (including $87.2 million of a non-cash charge for the impairment
of long-lived assets); $16.3 million for the fiscal year ended June 30, 1995
(including a $1.3 million of a non-cash charge for the impairment of long-lived
assets); $33.6 million for the fiscal year ended June 30, 1994 (including $19.2
million for a non-cash charge related to a cumulative effect of an accounting
change); and $10.8 million for fiscal year ended June 30, 1993. These results
were due primarily to the effects of the debt and other costs associated with
the extensive acquisition program carried on since the Company's inception, the
1988 Management Buyout and, with respect to the fiscal year ended June 30, 1993,
the recapitalization and the refinancing and accounting requirements associated
with their respective components, and with respect to fiscal year ended June 30,
1996, the charge for the impairment of long-lived assets. There can be no
assurance of the future profitability of the Company.
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. In the three years prior to 1996, the Company experienced low
water flow relative to long-term indications at many of its facilities. The
effect on revenues of the lower than average flows was most adverse in the
Northeast, a region in which a majority of the Company's projects are located
and where the Company's rates received for power sales are highest on average.
The Northeast region experienced below average water flows during 1995, 1994 and
1993, while experiencing above average flows in 1997 and 1996. 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. There can be no assurance that such coverage will remain available on
acceptable terms.
Production of electricity by the Company is typically greatest in its third
and fourth fiscal quarters (January through June), when water flow is at its
highest level at most of the Company's projects, and lowest in the first fiscal
quarter (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 1998 through 2007,
rates paid to the Company pursuant to power purchase agreements representing
approximately 39.0% of the Company's average power sales revenues for the fiscal
year ended June 30, 1997, will be affected by changes from scheduled rates to
17
rates based on the applicable utilities' then current avoided cost. 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 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 Commonwealth Electric Company ("CEC"), Central Maine Power
Company ("CMP"), NIMO, New England Power Company ("NEPCO") and Duke Power
Company ("Duke"); 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 CEC, CMP, NIMO, NEPCO and Duke
represented approximately 21%, 9%, 20%, 12% and 7%, respectively, of the
consolidated revenues of the Company for the fiscal year ended June 30, 1997. In
the recent past, NIMO has issued statements indicating its desire to be
relieved of its obligations under contracts with independent power producers
that NIMO considers uneconomic. While offering to renegotiate such contracts,
NIMO has in the past proposed that, should negotiations fail and NIMO be unable
to gain alternative economic relief, NIMO would seek to take possession of
associated projects through the power of eminent domain and has indicated that
it would consider the possibility of restructuring under chapter 11 of the
Bankruptcy Code should its proposal prove unachievable. The Company understands
that the ratings of the debt securities of NIMO were lowered to below investment
grade following NIMO's filing of a proposal with the New York State Public
Service Commission on October 6, 1995. In March 1997, NIMO announced an
agreement-in-principle with owners of forty-four of its power sales contracts
with IPPs in exchange for a combination of cash and NIMO stock. NIMO has not
offered to buy out any of the Company's power sales contracts in conjunction
with the group buy-out offer and the Company does not know what effect, if any,
the proposed buy-out will have on the Company's contracts with NIMO. There can
be no assurance of the long-term creditworthiness of any of the Company's
customers.
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
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.
18
Uncertainty as to Future Opportunities in Hydroelectric Business. The
Company believes that opportunities to continue to expand its conventional
hydroelectric generation business through the acquisition of additional
facilities and the securing of O&M contracts are likely to be limited. There can
also be no assurance that the Company will be able to take advantage of such
opportunities on terms acceptable to it, nor can there be any assurance that the
Company will be able to obtain financing with respect to such opportunities. In
addition, 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 in certain segments are
limiting and are expected to continue to limit the Company's near-term
opportunities to acquire additional hydroelectric capacity at acceptable rates
of return. See Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
In addition, the Company believes that near-term prospects for successful
development of new hydroelectric facilities in North America are severely
limited due to regulatory restrictions that increase the cost of hydroelectric
development combined with the current energy market, in which low energy prices
do not make hydroelectric development economically attractive. The development
of new hydroelectric projects includes certain risks not associated with the
purchase of operating facilities, including licensing, environmental,
engineering, equipment, power sales, construction and distribution risks, as
well as implementation risks such as cost overruns, delays and performance
risks. There is no assurance that the Company will be able to raise development
capital and obtain satisfactory project development agreements, construction
contracts, power purchase agreements, licenses and permits or financing
commitments with respect to the projects currently under development or any
projects that the Company might wish to develop in the future. Further, there
can be no assurance that equity or non-recourse or limited recourse development
capital, similar to that which the Company has used generally to finance
development projects, is currently available or will be available on a similar
basis in the future. If the Company terminates a project, it would generally not
be able to recover its investment in such a project and would expense all
capitalized development costs incurred in connection therewith.
Uncertainty as to Future Opportunities in Industrial Infrastructure
Business. Recognizing the barriers to continued growth in its hydroelectric
business, in November 1995, the Company established a subsidiary, CHI Power,
Inc., for the purpose of developing, acquiring, operating and managing
industrial energy facilities and related industrial assets in such sectors as
pulp and paper, petroleum refining, chemicals, textiles, and other
energy-intensive industries. The Company has integrated its hydroelectric and
industrial businesses and has begun to seek opportunities for providing
energy-related products and services to industrial and utility customers in an
effort to respond to changing market conditions. Such opportunities, if
available, will permit the Company to move away from relying exclusively on
hydropower ownership and operation where the business climate is driven largely
by legislation and regulation and certain adverse trends and where the Company
currently believes that acquisition and development opportunities are limited.
Currently, all of the Company's revenue is derived from the ownership and
operation of hydroelectric facilities. The Company believes that opportunities
exist for industrial energy transactions and that it possesses the required
technical and development expertise to complete such transactions successfully.
As of September 15, 1997, the Company had not completed any such transaction,
and there can be no assurance that any such transaction will occur.
Significant Holders. As of September 15, 1997, Morgan Stanley Leveraged
Equity Fund, II, L.P. ("MSLEF II') owned 80.0% of the Company's Series F and
Series G Preferred Stock which currently has 25 votes per share and which would,
if converted, currently represent 48.8% of CHI's common stock on a fully diluted
basis. Madison Group, L.P. ("Madison") owns 17.8% of the Company's Series F and
Series G Preferred Stock which would, if converted, currently represent 10.8% of
CHI's common stock on a fully diluted basis. See Part III, Item 12, "Security
Ownership of Certain Beneficial Owners and Management". The general partner of
MSLEF II and Morgan Stanley & Co. Incorporated ("Morgan Stanley") are both
wholly owned subsidiaries of Morgan Stanley Group Inc. ("MS Group"), and two of
the directors of the Company are officers of Morgan Stanley.
As a result of such ownership and certain rights of MSLEF II and Madison
(together, the "Investors"), pursuant to CHI's Restated Certificate of
Incorporation and the Amended and Restated Stockholders, Option holders and
Warrant holders Agreement, dated as of March 25, 1992, among CHI and certain
stockholders, optionholders and warrantholders of CHI, MSLEF II would be in a
position, acting either separately or together with Madison, under certain
circumstances to control the affairs of CHI. In addition, the Investors have
granted each other certain first refusal rights in the event one of them
approves a sale of CHI to an independent third party.
It is anticipated that, as of the Effective Date, certain holders of the
19
Senior Discount Notes will receive distributions of the New Common Stock
representing in excess of five percent (5%) of the outstanding 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 as a group,
such holders could be in a position to control the outcome of actions requiring
stockholder approval. This concentration of ownership could also facilitate or
hinder a negotiated change of control of reorganized CHI and, consequently, have
an impact upon the value of the New Common Stock. In that regard, all holders of
New Common Stock will be subject to a new stockholders' agreement (the "New
Stockholders' Agreement"), which agreement includes, among other things, certain
"drag along" and "tag along" rights.
Risk of Non-Confirmation of the Plan of Reorganization. Although CHI
believes that the Plan of Reorganization will satisfy all requirements necessary
for confirmation by the Bankruptcy Court, there can be no assurance that the
Bankruptcy Court will reach the same conclusion. Moreover, there can be no
assurance that modifications of the Plan of Reorganization will not be required
for confirmation or that such modifications would not necessitate the
resolicitation of votes.
Risk of Non-Occurrence of the Effective Date. Although CHI believes that
the Effective Date may occur soon after the date that the Bankruptcy Court
confirms the Plan of Reorganization (the "Confirmation Date"), there can be no
assurances as to such timing. Moreover, if the conditions precedent to the
Effective Date have not occurred or been waived within sixty days after the
Confirmation Date, the Bankruptcy Court, upon notification from CHI, may vacate
the order confirming the Plan of Reorganization, in which event, the Plan of
Reorganization would be deemed null and void, and CHI may propose to solicit
votes on an alternative plan of reorganization that may not be as favorable to
parties in interest as the Plan of Reorganization.
Effect of CHI's Chapter 11 Case on Its Subsidiaries. CHI does not
anticipate the commencement of the Chapter 11 Case for any of its operating
subsidiaries or affiliated entities which own the hydroelectric projects set
forth in Schedule I to the Disclosure Statement dated August 8, 1997, attached
hereto as Exhibit 2.1. CHI does not believe that the Chapter 11 Case will
adversely affect the businesses of such entities. Nevertheless, if the Chapter
11 Case is protracted, the possibility of adverse effects on such entities may
increase. Although CHI does not believe that creditors or customers of
substantially all, if not all, of its subsidiaries and affiliated entities which
own the hydroelectric projects have the legal right to take actions with respect
to such entities due to the commencement of the Chapter 11 Case by CHI, certain
of such creditors or customers may attempt to take certain actions nonetheless.
In the event such creditors or customers seek to do so, the subsidiaries and
related entities will not have the benefit of the automatic stay provisions of
the Bankruptcy Code. Although there can be no assurance, CHI believes that such
actions would not have a material adverse effect on the business or financial
condition of CHI.
20
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
CHI is currently a debtor in possession in a chapter 11 reorganization case
(no. 97-1924(SLR)) pending in the United States Bankruptcy Court for the
District of Delaware and has obtained certain routine relief from the Bankruptcy
Court attendant thereto. Since the commencement of the Chapter 11 Case on
September 15, 1997, the Bankruptcy Court has had jurisdiction over CHI and its
assets, wherever located. The Judge presiding over the Chapter 11 Case is the
Hon. Sue L. Robinson, United States District Court Judge. Although the
management of CHI believes that the Plan of Reorganization will satisfy all
requirements necessary for confirmation by the Bankruptcy Court, there can be no
assurance that the Bankruptcy Court will reach the same conclusion.
On September 2, 1997, a shareholder of CHI filed a civil action against
CHI, certain of its current and former officers and directors and Morgan Stanley
& Co., Incorporated in Connecticut Superior Court, Judicial District of
Stamford, entitled Charles J. Lindsay v. Consolidated Hydro, Inc., et al.,
alleging, among other things, that the such officers and directors of CHI
breached their fiduciary duty to the holders of CHI's class A common stock by
proposing a Plan of Reorganization which eliminates CHI's old common stock. If
successful, the lawsuit could potentially result in modification or termination
of the Plan of Reorganization. However, CHI's management believes that this
lawsuit is without merit.
In addition, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the year ended
June 30, 1997. On August 8, 1997, the Company distributed a Disclosure Statement
to holders of Senior Discount Notes and Preferred Stock for the purpose of
obtaining acceptance of the Plan of Reorganization prior to the filing of a case
under chapter 11 of the Bankruptcy Code. As of September 9, 1997, the
overwhelming majority of the holders of Senior Discount Notes and Preferred
Stock voted to accept the Plan of Reorganization.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of September 15, 1997, the number of holders of record of the class A
common stock of CHI was 56, and no shares of class B common stock were
outstanding. There is no public market for CHI's common stock. No dividends were
declared on either class of CHI's common stock in fiscal 1997 or 1996.
Pursuant to the Plan of Reorganization, it is expected that on the
Effective Date 20,000,000 shares of New Common Stock will be authorized as
follows: 9,085,517 shares of New Class A Common Stock and 914,483 shares of New
Class B Common Stock to be 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 are being authorized on the Effective State but
not issued, 1,337,127 shares will be 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 will be reserved for issuance, if as and when, the holders
of Management Options exercise such options.
The following is a description of the two classes of New Common Stock, the
two classes of New Warrants and the Management Options to be 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 to become effective on the Effective Date (each such
document is being filed as an exhibit to this Form 10-K):
New Class A Common Stock. Pursuant to the Plan of Reorganization, on the
Effective Date, it is expected that 9,085,517 shares of New Class A Common Stock
will be issued and distributed to substantially all of the holders of Senior
Discount Notes and 810,811 shares of New Class A Common Stock will be reserved
to satisfy the obligation of reorganized CHI under the Management Options. For a
discussion of the Management Options, see "--Management Options." Each share of
New Class A Common Stock will entitle 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 reorganized CHI.
New Class B Common Stock. Pursuant to the Plan of Reorganization it is
expected that, on the Effective Date, 914,483 shares of New Class B Common Stock
will be issued and distributed to a holder of Senior Discount Notes. Each share
of New Class B Common Stock will entitle its holder to one-hundredth (1/100) of
one vote. Holders of New Class B Common Stock will have the right to participate
proportionately in dividends, if any, distributed by reorganized CHI. The New
Class B Common Stock is being issued to a holder of Senior Discount Notes, at
such holder's request, to provide to such holder reduced voting rights in
reorganized 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 will be issued to
the holders of 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 reorganized CHI of shares of New Common Stock
pursuant to the exercise of the New Series C Warrants or the Management Options
by the holders thereof. The New Series B Warrants are exercisable for up to 1%
of the New Common Stock of reorganized CHI if, as and when the total capital
(debt and equity) invested in industrial infrastructure projects (as described
in Part I, Item 1, "Business -- Industrial Infrastructure Business") that either
(i) close within 3 years from the Effective Date or (ii) are subject to a
legally binding and enforceable agreement between reorganized 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 $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 time periods set forth above. The exercise price per share of the New
Common Stock subject to the New Series B Warrants will be $10 (subject to
adjustment as provided in the next sentence). The New Series B Warrants will
have customary antidilution provisions and protections against certain
extraordinary distributions.
22
New Series C Warrants. The New Series C Warrants, which will be issued to
the holders of 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 reorganized 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 will be 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 is approximately $183 million. The exercise price per
share of the New Common Stock, subject to the New Series C Warrants will be
approximately $18.36 (subject to adjustment as provided in the next sentence).
The New Series C Warrants will contain customary antidilution provisions and
protections against certain extraordinary distributions.
Management Options. The Management Options, which will be issued to certain
members of reorganized CHI's management on the Effective Date 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
thereof, will be 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
reorganized 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 will contain customary antidilution provisions and
protections against certain extraordinary distributions. For a more detailed
discussion of the Management Options, see Part III, Item 11, "Executive
Compensation as of the Effective Date -- 1997 Stock Option Plan and Management
Option Agreements."
Registration Rights Agreement. Each person or entity receiving 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 will be entitled to become a party to the Registration Rights
Agreement. Under the Registration Rights Agreement, which has been filed in the
Bankruptcy Court as an exhibit to the Plan of Reorganization, holders of the New
Common Stock and New Warrants (including shares of New Common Stock issued upon
the exercise thereof) will be entitled to certain demand and incidental (or
"piggyback") registration rights, and holders of the Management Options will be
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 will contain 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, which has been filed in the Bankruptcy Court as an exhibit to the
Plan of Reorganization. The New Stockholders' Agreement contains certain
provisions relating to the size and composition of the Board of Directors of
restructured CHI. See Part III, Item 12, "Directors and Executive Officers of
the Registrant -- Directors and Executive Officers as of the Effective Date." 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.
23
ITEM 6. SELECTED FINANCIAL DATA
The following Income Statement and Balance Sheet Data has been derived from
financial statements audited by Price Waterhouse LLP, independent accountants.
The data set forth below should be read in conjunction with the Consolidated
Financial Statements for the fiscal years ended June 30, 1997, 1996, 1995, 1994,
and 1993, and the related Notes thereto, and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations":
Year Ended June 30,
-------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Amounts)
INCOME STATEMENT DATA:
Revenue
Power generation revenue $50,665 $ 49,761 $39,387 $36,184 $32,776
Management fees and operation & maintenance revenue 5,395 4,986 4,326 5,677 2,501
Equity income in partnership interests and other 1,320 737 245 335 ---
----------- --------- --------- -------- --------
partnership income
Total revenue 57,380 55,484 43,958 42,196 35,277
----------- --------- --------- -------- --------
Costs and expenses
Operating 18,015 17,957 15,895 16,466 11,762
General and administrative 8,422 6,447 6,799 7,285 5,204
Charge for employee and director equity
participation programs (1) 100 259 339 670 1,075
Depreciation and amortization 8,661 9,846 9,625 8,679 7,601
Lease expense 5,764 6,072 5,753 5,386 5,230
Charge for impairment of long-lived assets 87,202 1,272 -- --
----------- --------- --------- -------- --------
83
Total costs and expenses 41,045 127,783 39,683 38,486 30,872
----------- --------- --------- -------- --------
Income/(loss) from operations 16,335 (72,299) 4,275 3,710 4,405
Interest income 1,661 1,032 1,416 1,052 987
Other income 434 368 185 107 186
Interest expense (29,591) (26,876) (21,778) (18,980) (13,868)
Minority interests in loss/(income) of consolidated
subsidiaries -- 2,063 (15) 100
----------- --------- --------- -------- --------
3
Loss before income taxes, extraordinary
items and cumulative effect of accounting change (11,161) (95,712) (15,899) (14,126) (8,190)
Benefit/(provision) for income taxes 119 7,381 (377) (264) (319)
----------- --------- --------- -------- --------
Loss before extraordinary items and cumulative
effect of accounting change (11,042) (88,331) (16,276) (14,390) (8,509)
Extraordinary items (2)
Gain/(loss) on early extinguishment of debt
(net of income tax of $3,414) 5,658 -- -- -- (2,269)
----------- --------- --------- -------- --------
Loss before cumulative effect of accounting change (5,384) (88,331) (16,276) (14,390) (10,778)
Cumulative effect of accounting change (3) -- -- -- (19,204) --
----------- ----------- --------- -------- ---------
Net loss $ (5,384) $ (88,331) $ (16,276) $(33,594) $(10,778)
=========== ========== ========= ========= =========
Net loss applicable to common stock $ (31,275) $ (112,063) $(38,384) $(54,281) $(29,007)
=========== ========== ========= ========= =========
Net loss per common share -- before extraordinary
items and cumulative effect of accounting change $ (28.72) $ (87.45) $(30.21) $(27.70) $(21.12)
Net loss per common share -- primary and fully
diluted(4) $ (24.32) $ (87.45) $(30.21) $(42.87) $(22.91)
Cash dividends per common share -- -- -- -- --
24
Year Ended June 30,
-------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands, Except Per Share Amounts)
OPERATING DATA:
Megawatts operated 342.61 343.66 379.08 329.08 220.98
Capital expenditures
Cost of acquisitions and partnership interests $-- $ -- $35,503 $15,230 $ 16
Cost of development expenditures 2,045 1,968 6,086(5) 8,319(5) 10,580 (5)
All other capital expenditures associated with operating
projects, including changes in other long-term
assets net 9,226 3,460 2,288 (332) 4,244
Interest, net (6) 27,930 25,844 20,362 17,928 12,881
Cash interest, net (7) 6,962 7,725 4,702 4,009 11,514
Net debt (8) 237,579 242,786 237,196 190,678 159,865
Ratios and Other Data:
EBDIAT (9) 25,613 25,376 15,696 13,166 13,267
EBDIAT/Interest, net (10)
2,317 468 4,666 4,762 1.03
EBDIAT/Cash interest, net 3.68 3.28 3.34 3.28 1.15
Net debt /EBDIAT 9.28 9.57 15.11 14.48 12.05
Net debt and mandatorily redeemable preferred
stock/EBDIAT 13.74 13.45 20.51 19.98 16.68
Deficiency of earnings to fixed charges (11) 11,350 97,417 18,850 16,429 8,743
Deficiency of earnings to fixed charges and preferred
stock dividends (12) 37,241 121,149 40,958 37,117 26,972
BALANCE SHEET DATA:
Cash and cash equivalents 32,502 23,834 16,682 14,155 42,617
Current assets 41,003 33,041 25,454 24,649 49,467
Current liabilities 13,924 16,061 13,602 9,990 22,465
Total assets 243,628 244,657 330,617 286,827 286,521
Long-term debt 262,615 260,158 248,887 201,620 189,186
Mandatorily redeemable preferred stock 114,372 84,690 72,401 61,428 98,604
Stockholders' (deficit)/equity (189,679) (168,627) (66,641) (38,414) 5,472
- - - ---------------
(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 class B common stock to
class A common stock and the vested entitlements under the Performance
Unit Plan pursuant to the Stock Option Plan. See Notes to Consolidated
Financial Statements for the fiscal years ended June 30, 1997, 1996 and
1995 (the "Consolidated Financial Statements").
(2) The fiscal 1993 amount consists of premiums paid and the write-off of
certain debt issuance costs associated with the early extinguishment of
debt, which included the repurchase of $13,195,000 principal amount of
13% Debentures and the repayment of approximately $20,435,000 principal
amounts of GECC project indebtedness. The fiscal 1997 amount results from
the purchase of a non-recourse project term loan, $14,500,000 at June 30,
1996, for $5,000,000, including certain required reserves and closing
costs of approximately $500,000. The gain recorded is net of certain
transaction costs of approximately $187,000 and income tax of $3,414,000.
(3) Represents the adoption of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. See Note 2 of the Notes to the
Consolidated Financial Statements.
(4) See Note 2 of the Notes to Consolidated Financial Statements for
information on losses per common share.
(5) These amounts are substantially funded with proceeds from (i) outside
lenders on a non-recourse basis or (ii) sales of CHI equity securities,
primarily through the Recapitalization.
(6) Interest, net is defined as interest expense less interest income.
(7) Cash interest, net is defined as cash interest less interest income.
(8) Net debt is defined as total debt less cash and cash equivalents (which
include restricted cash that, at the end of each period presented, has
ranged from $4.3 million to $13.2 million and was $8.3 million at June
30, 1997).
(9) 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.
(10) 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.
(11) For the purpose of calculating the deficiency of earnings to fixed
charges, earnings are determined by adding fixed charges (excluding
capitalized interest) to loss before provision for income taxes,
extraordinary items and cumulative effect of accounting change. 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. These deficiencies
25
primarily reflect non-cash charges. An analysis of such non-cash
charges and the resulting ratio or reduced deficiency adjusted for such
charges follows.
(12) For the purpose of calculating the deficiency of earnings to fixed
charges and preferred stock dividends, earnings are determined by adding
fixed charges (excluding capitalized interest) and preferred stock
dividends to loss before provision for income taxes, extraordinary items
and cumulative effect of accounting change. Preferred stock dividends
consist of the cumulative undeclared dividends on Series F and G
Preferred Stock and dividends and accretion on the Series H Preferred
Stock. These 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 reduced deficiency adjusted
for such charges follows:
Year Ended June 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-cash interest $ 19,709 $ 18,629 $ 16,610 $ 14,629 $ 1,401
Depreciation and amortization 8,661 9,846 9,625 8,679 7,601
Other non-cash (gains)/charges, net (5,475) 87,461 1,611 670 1,075
----------- ----------- ---------- ---------- ----------
$ 22,895 $ 115,936 $ 27,846 $ 23,978 $10,077
======= ======= ====== ====== ======
Resulting ratio of earnings
to fixed charges 1.36 1.61 1.34 1.32 1.08
Year Ended June 30,
1997 1996 1995 1994 1993
-------- ---- ---- ---- ----
(Dollars in Thousands)
Resulting ratio of earnings
to fixed charges and
preferred stock dividends -- -- -- -- --
Deficiency of earnings
to fixed charges and
preferred stock dividends $14,346 $5,213 $13,112 $13,139 $16,895
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Consolidated Hydro, Inc. ("CHI", together with its consolidated
subsidiaries the "Company") is principally engaged in the development, operation
and management of hydroelectric power plants. The Company's operating
hydroelectric projects are located in 15 states and one Canadian province. In
November 1995, the Company established a subsidiary, CHI Power, Inc., for the
purpose of developing, acquiring, operating and managing industrial energy
facilities and related industrial assets.
The Company's existing U.S. 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.
The Company has expanded primarily by acquiring existing hydroelectric
facilities in the United States. On June 30, 1997, the Company had a 100%
ownership or long-term lease interest in 55 projects (145 megawatts), a partial
ownership interest in 11 projects (82 megawatts), and operations and maintenance
("O&M") contracts with 24 projects (116 megawatts).
On December 23, 1996, the Company sold 15 of its 100% owned hydroelectric
facilities ("CHI Maine"), located in the Northeast region. In connection with
the disposition, the Company executed a contract to operate and maintain the
facilities for an initial period of up to 15 years. See Note 4 to the
Consolidated Financial Statements included herewith.
CHI sells substantially all of the electric energy and capacity from its
U.S. projects to public utility companies pursuant to take and 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.
In fiscal 1996, the Company wrote down the carrying values of its pumped
storage development assets, certain investments in partnerships which own
hydroelectric facilities and certain of its conventional hydroelectric assets to
$0.1 million, $0.8 million and $26.0 million, respectively. The Company has
determined that it is highly unlikely that it will successfully develop its
pumped storage projects. See "Fiscal Year Ended June 30, 1996 Compared to Fiscal
Year Ended June 30, 1995 - SFAS 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
In addition, during fiscal 1997, the Company wrote off certain development
costs and wrote down the carrying value of certain conventional hydroelectric
assets to $1.9 million as these assets are considered assets to be disposed of.
Also in fiscal 1996, the Company began to seek opportunities to provide
energy-related products and services to industrial and utility customers in an
effort to respond to changing market conditions. Such opportunities, if
available, would permit the Company to move away from relying exclusively on
hydropower ownership and operation in a business climate driven largely by
legislation and regulation and the structural industry trends described above,
in which the Company currently believes that acquisition and development
opportunities are increasingly limited, particularly with regard to
hydroelectric facilities. Currently, all of the Company's revenue is derived
from the ownership and operation of hydroelectric facilities. See "--Liquidity
and Capital Resources".
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 30
years. 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.
27
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.
28
CERTAIN KEY OPERATING RESULTS AND TRENDS
The information provided in the tables below is included to provide 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 Consolidated
Financial Statements and the related Notes thereto, included herein.
Power Producing Facilities
AS OF JUNE 30,
1997 1996 1995
---- ---- ----
MWS #PROJECTS MWS #PROJECTS MWS #PROJECTS
--- --------- --- --------- --- ---------
Northeast:
100% Ownership (1) 90.88(4) 29(4) 102.20 44 104.72 45
Partial Ownership (2) 52.37 8 52.37 8 52.37 8
O&M Contracts (3) 92.16(4) 19(4) 80.14 3 80.14 3
--------- ---- --------- ---- ---------- ----
Total 235.41 56 234.71 55 237.23 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) 5.48 4 1.35 1 1.35 1
Partial Ownership (2) 4.20 1 8.33 4 8.33 4
O&M Contracts (3) 19.08 4 19.08 4 51.98 6
--------- ---- --------- ---- ---------- ----
Total 28.76 9 28.76 9 61.66 11
====== === ====== === ====== ===
Northwest:
100% Ownership (1) 21.72 9 21.72 9 21.72 9
Partial Ownership (2) 24.96 2 24.96 2 24.96 2
O&M Contracts (3) 4.34 1 6.09 2 6.09 2
--------- ---- --------- ---- ---------- ----
Total 51.02 12 52.77 13 52.77 13
====== === ====== === ====== ===
Total:
100% Ownership (1) 145.50(4) 55(4) 152.69 67 155.21 68
Partial Ownership (2) 81.53 11 85.66 14 85.66 14
O&M Contracts (3) 115.58(4) 24(4) 105.31 9 138.21 11
----------- ---- ----------- ---- ---------- ----
Total 342.61 90 343.66 90 379.08 93
====== === ====== === ====== ===
- - - ------------
(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 sale of 15 projects (11.32 megawatts) on December 23, 1996,
and the addition of those same projects as O&M contracts.
29
Selected Operating Information
TWELVE MONTHS ENDED JUNE 30,
1997 1996 1995
-------------- --------------- ------------
Power generation revenues
(thousands) (1) $ 50,665 $ 49,761 $ 39,387
Kilowatt hours produced
(thousands) (1) 663,920 647,664 532,063
Average rate per kilowatt hour (1) 7.6(cent) 7.7(cent)(2)(3) 7.4(cent)(2)(3)
- - - ---------
(1) Limited to projects included in consolidated revenues.
(2) Excluding the fiscal 1996 and 1995 results of the CHI Maine projects, the
average rates per kilowatt hour were 7.6(cent) and 7.2(cent)for the
fiscal years ending June 30, 1996 and 1995, respectively.
(3) Excluding the fiscal 1996 and 1995 results of the HDG projects, the
average rates per kilowatt hour were 7.9(cent)and 7.5(cent)for the fiscal
years ending June 30, 1996 and 1995, respectively.
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.
During 1995, the Company had experienced low water flow relative to
long-term indications at many of its facilities. The effect on revenues of the
lower than average flows was most adverse in the Northeast, the region in which
the majority of the Company's projects are located and where the Company's rates
received for power sales are highest, on average.
Water Flow by Region (1)
TWELVE MONTHS ENDED JUNE 30,
1997 1996 1995
-------------- -------------- ----------------
Northeast Above Average Above Average Below Average
Southeast Average Average Above Average
West Below Average Above Average Above Average
Northwest Above Average Above Average Below 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.
30
Production of energy by the Company is typically greatest in its third and
fourth fiscal quarters (January through June), when water flow is at its highest
at most of the Company's projects, and lowest in the first fiscal quarter (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.
The following tables, which show revenues from power sales and kilowatt
hour production by fiscal 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 (1)
FISCAL 1997(2) FISCAL 1996 (2) FISCAL 1995 (2)
-------------------- ------------------- -----------------
$ % $ % $ %
First Fiscal Quarter $8,855 17.5 $5,363 10.8 $ 7,471 19.0
Second Fiscal Quarter 13,271 26.2 12,355 24.8 7,503 19.0
Third Fiscal Quarter 15,078 29.8 15,744(3) 31.6 13,437(5) 34.1
Fourth Fiscal Quarter 13,461 26.5 16,299(3) 32.8 10,976(5) 27.9
----------- ------- ---------- -------- ---------- -------
Total $50,665 100.0 $49,761(4) 100.0 $39,387(3) 100.0
====== ===== ========== ===== ======= ========
- - - -----------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $88, $840 and $604 representing
claims for lost generation recoverable from an insurance company for the
fiscal years ended June 30, 1995, 1996 and 1997, respectively.
(3) Includes $4,252, $1,763 and $1,744 of power generation revenues from the
CHI Maine projects, which were sold on December 23, 1996, for the fiscal
year ended June 30, 1995 and for the three months ended March 31, 1996
and June 30, 1996, respectively.
(4) Includes $5,131 resulting from the acquisition of HDG, for the fiscal
year ended June 30, 1996.
(5) Includes $789 and $1,164 resulting from the acquisition of HDG in the
third and fourth fiscal quarters, respectively.
Kilowatt Hours Produced (1)
FISCAL 1997(2) FISCAL 1996(2) FISCAL 1995(2)
----------------- ------------------- ------------------------
kWh % kWh % kWh %
First Fiscal Quarter 125,197 18.9 80,596 12.4 105,456 19.8
Second Fiscal Quarter 166,323 25.0 160,088 24.7 103,428 19.4
Third Fiscal Quarter 193,576 29.2 195,540(3) 30.2 171,280(5) 32.2
Fourth Fiscal Quarter 178,824 26.9 211,440(3) 32.7 151,899(5) 28.6
---------- ----- ----------- ----- ---------- -----
Total 663,920 100.0 647,664(4) 100.0 532,063(3) 100.0
======= ===== ========== ==== ========== =====
- - - -------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 600, 15,335 and 9,412 kWh of the
business interruption revenue recoverable as a result of insurance claims
for the fiscal years ended June 30, 1995, 1996 and 1997, respectively.
(3) Includes 44,645, 19,310, and 19,106 kWh from the CHI Maine projects,
which were sold on December 23, 1996, for the fiscal year ended June 30,
1995 and for the three months ended March 31, 1996 and June 30, 1996,
respectively.
(4) Includes 80,883 kWh resulting from the acquisition of HDG, for the fiscal
year ended June 30, 1996.
(5) Includes 12,302 and 18,254 kWh resulting from the acquisition of HDG, in
the third and fourth fiscal quarters, respectively.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
by $0.9 million (1.8%), from $49.8 million to $50.7 million for the fiscal years
ended June 30, 1996 and 1997, respectively. Excluding the effects of the sale of
CHI Maine on December 23, 1996, power generation revenue increased by $4.4
million (9.5%), from $46.3 million to $50.7 million for the fiscal years ended
June 30, 1996 and 1997, respectively.
The Northeast region experienced increased revenues of $3.9 million due to
well above average water flows and precipitation for the fiscal year ended June
30, 1997 as compared to slightly above average water flows and precipitation for
the fiscal year ended June 30, 1996.
31
The Southeast region experienced a minimal increase of $0.1 million.
The West and Northwest regions (combined) experienced increased revenues of
$0.4 million primarily as a result of well above average water flows and
precipitation in the Northwest region, as compared to slightly above average
water flows and precipitation in the Northwest region for the fiscal year ended
June 30, 1996, coupled with the addition of three newly-consolidated projects in
the West region on January 1, 1997.
The average rate earned by the Company decreased by 0.1(cent) (1.3%) from
7.7(cent) to 7.6(cent) per kilowatt hour in The 1996 fiscal period versus the
1997 fiscal period, respectively, primarily as a result of variations in the
production mix and contract rates among the various projects. Excluding the
fiscal 1996 results of CHI Maine, revenue per kilowatt hour remained constant at
7.6(cent) in the 1996 fiscal period versus the 1997 fiscal period, respectively.
Management Fee and Operations & Maintenance Revenues. Management fees and
O&M contract revenue increased by $0.4 million (8.0%) from $5.0 million to $5.4
million for the fiscal years ended June 30, 1996 and 1997, respectively.
Excluding the addition of the CHI Maine O&M contract, management fees and O&M
contract revenue remained relatively constant, decreasing by $0.1 million (2.0%)
from $5.0 million to $4.9 million for the fiscal years ended June 30, 1996 and
1997, respectively.
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income increased $0.6
million (85.7%) from $0.7 million to $1.3 million for the fiscal years ended
June 30, 1996 and 1997, respectively. The increase is primarily due to increased
revenues earned by partnership interests in the Northeast region as a result of
above average water flows and precipitation for the fiscal year ended June 30,
1997 as compared to the fiscal year ended June 30, 1996.
Costs and Expenses
Operating Expenses. Operating expenses increased by $0.1 million (0.6%)
from $17.9 million to $18.0 million for the fiscal years ended June 30, 1996 and
1997, respectively. Excluding the effects of the sale of the CHI Maine projects
and the fiscal 1997 addition of the CHI Maine O&M contract, operating expenses
increased by $0.4 million (2.3%), from $17.2 million to $17.6 million for the
fiscal years ended June 30, 1996 and 1997, respectively. The increase was
primarily due to (i) an increase in revenue related expenses resulting from
increased power generation; (ii) an increase in insurance premiums; (iii) an
increase in the provision for uncollectable accounts receivable and (iv) smaller
increases in other operating costs, partially offset by: (i) a decrease in
salaries and benefits resulting from a decrease in operating employees in the
West region, coupled with an increase in the allocation of company-wide
operating labor charged to capitalized projects; (ii) a decrease in expenses
related to insurance deductibles during the current fiscal year and (iii) a
decrease in non-recurring environmental and regulatory expenses.
General and Administrative Expenses. General and administrative expenses
increased $2.0 million (31.3%) from $6.4 million to $8.4 million for the fiscal
years ended June 30, 1996 and 1997, respectively. The increase was primarily due
to: (i) costs associated with the formulation of financial restructuring options
for the Company; (ii) the effect of expensing, rather than capitalizing, certain
pumped storage business development costs for the six months ended December 31,
1996 and (iii) an increase in other business development costs, partially offset
by (i) a decrease in administrative salaries and benefits resulting from a
reduction in severance accruals made for a former officer of the Company and
(ii) a decrease in industry related membership dues.
Depreciation and Amortization. Depreciation and amortization decreased $1.1
million (11.2%) from $9.8 million to $8.7 million, for the fiscal years ended
June 30, 1996 and 1997, respectively. The decrease was primarily due to a
write-down of impaired assets in fiscal 1996 as a result of the implementation
of SFAS 121 and the cessation of depreciation expense taken on assets to be
disposed of for the fiscal year ended June 30, 1997 as compared to the fiscal
year ended June 30, 1997.
Interest Expense
Interest expense increased by $2.7 million (10.0%), from $26.9 million to
$29.6 million for the fiscal years ended June 30, 1996 and 1997, respectively.
Excluding the fiscal 1996 results of the CHI Maine projects, interest expenses
increased by $2.8 million (10.4%) from $26.8 million to $29.6 million for the
fiscal years ended June 30, 1996 and 1997, respectively. The increase is
primarily due to the increasing principal balance of the Company's 12% Senior
Discount Notes due 2003, Series B (the "Senior Discount Notes") which resulted
in a corresponding increase in interest expense and the effect of expensing
interest on loans related to pumped storage development for the six months ended
December 31, 1996, which had previously been capitalized during the six months
ended December 31, 1995.
32
Issuance of Series F and G Preferred Stock
Effective February 28, 1996, the Company issued 1,279 shares each of its 8%
senior convertible voting preferred stock ("Series F Preferred") and its 9.85%
junior convertible voting preferred stock ("Series G Preferred") to Ms. Carol H.
Cunningham in exchange for shares of Summit Energy Storage Inc. common stock (or
vested options therefor) owned by Ms. Cunningham pursuant to a 1992 agreement.
The financial statement impact of this exchange is not material.
SFAS 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
The Company implemented SFAS 121 during the fiscal year ended June 30, 1996
and, as a result, the Company recorded an impairment charge of $87.2 million as
a component of the Company's loss from operations. Included in the impairment
charge was an amount related to certain assets to be disposed of. During fiscal
1997, the carrying value of certain of those assets has been adjusted upward by
$0.7 million to reflect the actual sale price of the assets. In addition, the
Company wrote down the carrying values of certain development costs and certain
of its conventional hydroelectric assets held for disposal resulting in a
combined impairment charge of $0.8 million. Each of the above described
adjustments has been included in Charge for impairment of long-lived assets on
the Statement of Operations for the fiscal year ended June 30, 1997.
Minority Interests in Loss of Consolidated Subsidiaries
The Company recognized a benefit of approximately $2.1 million for the
fiscal year ended June 30, 1996 resulting from the recognition of minority
shareholders' interest in the loss of certain consolidated subsidiaries related
to the write-down of pumped storage business development assets in accordance
with SFAS 121 which reduced the value of minority interests recorded by the
Company to zero.
Benefit for Income Taxes
The Company recognized deferred benefits for income taxes (excluding
current provisions) of $8.0 million and $1.0 million for the fiscal years ended
June 30, 1996 and 1997, respectively. For the fiscal 1996 period, the deferred
tax benefit related to the write-down of certain long-lived assets in accordance
with SFAS 121. For the fiscal 1997 period, the deferred benefit for income tax
relates to certain factors, principally due to an increase in the amount of net
operating loss ("NOL") expected to be utilized during the NOL carryforward
period.
Extraordinary Gain on Early Extinguishment of Debt
On October 30, 1996, the Company arranged to have a financial institution
purchase a $13,759 non-recourse project term loan (the "Old Loan") relating to
four of its existing hydroelectric projects for $5,000, including certain
required reserves and closing costs of $500 (the "New Loan"). An additional
$2,000 credit facility is also available under the New Loan for up to one year
to finance certain project enhancements. A subsidiary of CHI was assigned an
interest in the balance of the Old Loan on a basis fully subordinated to the New
Loan. As a result, the Company has recorded a $5,658 Extraordinary gain on early
extinguishment of debt, net of certain transaction costs of approximately $187
and income tax of $3,414, on its Statement of Operations for the fiscal year
ended June 30, 1997.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Operating Revenues
Power Generation Revenue. Power generation revenue increased by $10.4
million (26.4%) from $39.4 million to $49.8 million for fiscal 1995 and 1996,
respectively. Excluding the results of HDG, acquired on February 16, 1995, power
generation revenue increased $7.2 million (19.3%) from $37.4 million to $44.6
million.
The Northeast region experienced increased revenues of $6.6 million due to
above average water flows and precipitation in the current fiscal year as
compared to below average water flows and precipitation in the prior fiscal
year.
The Southeast region experienced decreased revenues of $0.1 million due
primarily to flood damage and continued repairs at certain of its facilities.
33
The West and Northwest regions (combined) experienced increased revenues of
$0.7 million in the current fiscal year as compared to the prior fiscal year
primarily as a result of above average water flow and precipitation in the
Northwest region, an area which contributes significantly to total revenues of
the combined regions..
The Company as a whole experienced increased revenue per kilowatt hour of
0.3(cent) (4.1%) from 7.4(cent) to 7.7(cent) in The 1996 fiscal period versus
the 1995 fiscal period, respectively. Excluding the results of HDG, revenue per
kilowatt hour increased by 0.4(cent) (5.3%) from 7.5(cent) to 7.9(cent),
primarily as a result of variations in the production mix and contrACt rates
among the various projects.
Management Fees and Operation & Maintenance Revenues. Management fees and
O&M contract revenue increased by $0.7 million (16.3%) from $4.3 million to $5.0
million for fiscal 1995 and 1996, respectively. Excluding the results of HDG,
management fees and O&M contract revenue increased by $0.3 million (7.1%) from
$4.2 million to $4.5 million. The increase was primarily due to revenue
generated from an increase in project management base fees coupled with an
increase in rebillable capital expenditures at a Northeast O&M facility.
Equity Income in Partnership Interests and Other Partnership Interests.
Equity income in partnership interests and other partnership income increased by
$0.5 million (250.0%) from $0.2 million to $0.7 million for the fiscal years
ended June 30, 1995 and 1996, respectively. Excluding the results of HDG, equity
income in partnership interests and other partnership income remained relatively
constant at $0.1 million for the fiscal years ended 1995 and 1996.
Costs and Expenses
Operating Expenses. Operating expenses increased by $2.0 million (12.6%)
from $15.9 million to $17.9 million for fiscal 1995 and 1996, respectively.
Excluding the results of HDG, operating expenses increased $0.9 million (6.0%)
from $14.9 million to $15.8 million. The increase was primarily due to time
spent by certain management personnel (who previously charged their time to
general and administrative and other activities) on operating activities
partially offset by (i) an overall decrease in insurance premiums due to a
change in carriers effective on July 1, 1995 and (ii) a reduction in
expenditures related to regulatory requirements in the Northeast region.
General and Administrative Expenses. General and Administrative expenses
decreased by $0.4 million (5.9%) from $6.8 million to $6.4 million for fiscal
1995 and 1996, respectively. Excluding the results of HDG, general and
administrative expenses decreased $0.6 million (8.8%) from $6.8 million to $6.2
million. The decrease was primarily due to (i) a decrease in third party
acquisition costs related to a cessation or decline in acquisitions prospects
which were actively pursued during the prior year, partially offset by
acquisition related activity of the Company's newly formed subsidiary (CHI
Power, Inc.), coupled with the expensing of pumped storage development costs
which were previously capitalized; (ii) a decrease in travel, meetings, and
seminars as part of an overall cost reduction effort made by the Company; and
(iii) a reduction in time spent by certain management personnel on general and
administrative activities offset by an increase in administrative salaries and
benefits due to costs associated with CHI Power, Inc., coupled with a severance
accrual for the Company's former President.
34
Depreciation and Amortization. Depreciation and amortization increased by
$0.2 million (2.1%) from $9.6 million to $9.8 million for fiscal 1995 and 1996,
respectively. Excluding the results of HDG, depreciation and amortization
decreased $0.6 million (6.7%) from $9.0 million to $8.4 million. The decrease
was primarily due to a write-down of impaired assets in fiscal 1996 as a result
of the implementation of SFAS 121 (see "-- SFAS 121 -- Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Note 5 of the Notes to Consolidated Financial Statements).
Interest Expense
Interest expense increased by $5.1 million (23.4%) from $21.8 million to
$26.9 million for fiscal 1995 and 1996, respectively. Excluding the results of
HDG, interest expense increased $2.9 million (14.2%) from $20.4 million to $23.3
million. The increase was primarily due to the increasing principal balance of
the Senior Discount Notes which resulted in a corresponding increase in interest
expense and the effect of expensing interest (for the second half of fiscal
1996) that had been capitalized during the prior fiscal year.
SFAS 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
The Company implemented Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("SFAS 121") in the second quarter of fiscal 1996. This
statement establishes accounting standards for determining impairment of
long-lived assets and long-lived assets to be disposed of. The Company
periodically assesses the realizability of its long-lived assets and evaluates
such assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets (or group of assets) may not be
recoverable. For assets in use or under development, impairment is determined to
exist if the estimated future cash flow associated with the asset, undiscounted
and without interest charges, is less than the carrying amount of the asset.
When the estimated future cash flow indicates that the carrying amount of the
asset will not be recovered, the asset is written down to its fair value.
In light of the Company's planned sale of certain of its conventional
hydroelectric projects, recent industry trends (including the continued decline
in electricity prices and other factors stemming from the deregulation of the
electric power industry), the timing of the expiration of the fixed rate period
of some of its long-term power sales contracts and other indications of a
decline in the fair value of certain of its conventional hydroelectric projects,
the Company determined that certain of these projects (including properties
which are not included among those to be sold) were impaired pursuant to the
criteria established under SFAS 121. The Company also determined that due to the
factors noted above, as well as its current financial position, it is highly
unlikely that the Company will successfully develop its pumped storage projects.
As a result of the factors noted above, in fiscal 1996 the Company recorded
an impairment charge of $87.2 million as a component of its loss from
operations. In addition, a deferred tax benefit and a benefit for minority
interests in loss of consolidated subsidiaries of $7.9 million and $2.1 million,
respectively, were recorded as of that date. Of the total charges, $38.5 million
was attributable to pumped storage development assets, resulting in an aggregate
remaining carrying value of such assets of $0.1 million, $44.9 million was
attributable to certain conventional hydroelectric assets, resulting in an
aggregate remaining carrying value for such written down assets of $26.0
million, and $3.8 million was attributable to an other than temporary decline in
the value of certain investments in partnerships which own hydroelectric
facilities, resulting in an aggregate remaining carrying value of such assets of
$0.8 million. In accordance with SFAS 121, the carrying value of these written
down assets now reflects management's best estimate as to their fair value,
although there can be no assurance that future events or changes in
circumstances will not require that such assets, or other of the Company's
assets, be written down in the future.
In conjunction with the adoption of SFAS 121, during the third quarter the
Company re-evaluated the useful lives of certain property, plant and equipment
and intangible assets. This resulted in a reduction of the estimated useful
lives of these fixed and intangible assets. This change had the effect of
increasing the loss from operations and the loss net of tax benefit by
approximately $0.5 million for the year ended June 30, 1996.
Minority Interests in Loss of Consolidated Subsidiaries
The Company recognized a benefit of approximately $2.1 million for the year
ended June 30, 1996 resulting from the minority shareholders' interest in the
loss of certain consolidated subsidiaries related to the write-down of pumped
storage development assets in accordance with SFAS 121 (discussed above).
35
Benefit for Income Taxes
The Company recognized a deferred tax benefit of approximately $8.0 million
for the year ended June 30, 1996. The benefit relates to the write-down of
certain long-lived assets in accordance with SFAS 121 (discussed above). The
effective tax rate of the deferred benefit recognized from the write-down
differs from the federal statutory rate due to the reduction of deferred tax
liabilities offset by the increase in the valuation allowance attributable to
tax assets related to net operating loss carryforwards. The valuation allowance
increased due to the reduction of taxable temporary differences for book
depreciation and amortization previously projected to be recognized during the
net operating loss carryforward period.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Operating Revenues
Power Generation Revenue. Power generation revenue increased $3.2 million
(8.8%) from $36.2 million to $39.4 million for fiscal 1994 and 1995,
respectively. Excluding the 1995 results of HDG, acquired on February 16, 1995,
power generation revenue increased $1.2 million (3.3%) from $36.2 million to
$37.4 million.
The Northeast region experienced decreased revenues of $0.8 million
primarily attributable to unusually low water flow in the fourth quarter of
1995. The Southeast region had a $1.5 million increase in revenues, primarily
attributable to the effects of above average water flow in 1995 versus below
average in 1994. The West and Northwest regions combined, experienced increased
revenues of $0.5 million, primarily resulting from the full year effect of the
acquisition of two projects aggregating 2.4 megawatts in June 1994, coupled with
above average water flows for the West region in 1995 versus below average in
1994.
The Company as a whole experienced decreased revenue per kilowatt hour of
0.4(cent) (5.1%) from 7.8(cent) to 7.4(cent) in The 1995 fiscal period versus
the 1994 fiscal period, respectively. Excluding the results of HDG, revenue per
kilowatt hour decreased 0.3(cent) (3.8%) from 7.8(cent) to 7.5(cent), primarily
as a result of variations in the production mix and contraCT rates among the
various projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
O&M contract revenue decreased by $1.4 million (24.6%) from $5.7 million to $4.3
million for fiscal 1994 and 1995, respectively. Excluding the 1995 results of
HDG, management fees and O&M revenues decreased $1.5 million (26.3%) from $5.7
million to $4.2 million, primarily due to higher than normal revenues earned in
1994, relating to significant special work performed at a Northeast O&M
facility, offset slightly by the full-year addition of a Northeast O&M, which
realized base fees plus an additional incentive fee.
Costs and Expenses
Operating Expenses. Operating expenses decreased by $0.6 million (3.6%)
from $16.5 million to $15.9 million for fiscal 1994 and 1995, respectively.
Excluding the 1995 results of HDG, operating expenses decreased $1.6 million
(9.7%) from $16.5 million to $14.9 million, primarily due to a reduction in the
rebillable expenses incurred relating to the significant special work performed
in 1994 at a Northeast O&M facility, as discussed above, offset by: (i) a
significant increase in insurance premiums; (ii) an increase in necessary
repairs needed to maintain operations at several Southeast projects; and (iii)
the recognition of self-insurance deductibles associated with insurance claims.
General and Administrative Expenses. General and Administrative expenses
decreased by $0.5 million (6.8%) from $7.3 million to $6.8 million for fiscal
1994 and 1995, respectively. There was no material impact on general and
administrative expenses resulting from the acquisition of HDG. The decrease was
primarily related to the write-off of acquisition costs in 1994 as a result of a
change in Company policy regarding the treatment of such costs.
Depreciation and Amortization. Depreciation and amortization increased by
$0.9 million (10.3%) from $8.7 million to $9.6 million for fiscal 1994 and 1995,
respectively. Excluding the 1995 results of HDG, depreciation and amortization
increased $0.3 million (3.4%) from $8.7 million to $9.0 million, primarily due
to the full-year effect of the acquisition of three projects in the fourth
quarter of fiscal 1994, coupled with the completion of capital projects related
to the Company's existing facilities.
Charge for Impairment of Long-Lived Assets. The Company wrote off
approximately $1.3 million of its investment in two pumped storage projects
during fiscal 1995 as compared to no write-offs in fiscal 1994.
36
Interest Expense
Interest expense increased by $2.8 million (14.7%) from $19.0 million to
$21.8 million for fiscal 1994 and 1995, respectively. Excluding the 1995 results
of HDG, interest expense increased $1.4 million (7.4%) from $19.0 million to
$20.4 million, primarily due to the increasing principal balance of the Senior
Discount Notes which resulted in a corresponding increase in interest expense.
Cumulative Effect of Accounting Change
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109") on a
prospective basis. The adoption of SFAS 109 resulted in the recognition of a
deferred credit of $27.6 million, an increase to fixed and intangible assets of
$7.0 million and $1.4 million, respectively, and a charge in 1994 reflecting the
cumulative effect of a change in accounting principle of $19.2 million or $15.17
per share.
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:
FISCAL YEAR ENDED
----------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
-------------- ---------------- ---------------
Net cash provided by/(used in):
Operating activities.............. $ 14,172 $ 16,750 $ 14,328
Investing activities.............. 731 (5,720) (43,629)
Financing activities.............. (6,235) (3,878) 31,828
-------------- ---------------- --------------
Net increase in cash and cash equivalents $ 8,668 $ 7,152 $ 2,527
============= ================= ===============
For the year ended June 30, 1997, the cash flow provided by operating
activities was principally the result of the $5.4 million net loss for such
period, adjusted for $21.2 million of non-cash interest and other charges, $8.7
million of depreciation and amortization and a $0.3 million increase to the
provision for uncollectible accounts receivable, offset by a $5.7 million gain
on early extinguishment of debt, a $1.0 million deferred tax benefit, a $2.9
million decrease in accounts payable and accrued expenses, $0.7 million of
undistributed earnings of affiliates and a $0.4 million increase in prepaid
expenses and other current assets. The cash flow provided by investing
activities was primarily attributable to $12.1 million of net cash proceeds
received from the sale of the CHI Maine assets, offset by $4.4 million of
investments in upgrading existing conventional projects, a $4.9 million increase
in investments and other long term assets and $2.0 million investment in
conventional development during fiscal 1997. The cash flow used in financing
activities was primarily due to the repayment of $6.3 million of project debt
(See - "Summary of Indebtedness") and , offset by a $0.2 million increase in
other long-term liabilities.
Cash provided by operating activities decreased by $2.6 million for the
year ended June 30, 1997 as compared to the year ended June 30, 1996. The
decrease resulted from a $0.5 million increase in income before depreciation and
amortization, non-cash interest and other charges, charge for employee and
director equity participation programs, non-cash charge for impairment of
long-lived assets, benefit relating to deferred tax liabilities, extraordinary
gain on early extinguishment of debt, minority interests in loss of consolidated
subsidiaries, provision for uncollectible accounts receivable and undistributed
earnings of affiliates, offset by a $3.1 million decrease resulting from
variations in other operating items (receivables, prepaid expenses, accounts
payable and accrued expenses).
For the year ended June 30, 1996, the cash flow provided by operating
activities was principally the result of the $88.3 million net loss for such
period, adjusted for an $87.2 million non-cash charge for impairment of
long-lived assets, and benefits of $8.0 million and $2.1 million for deferred
tax and minority interests in loss of consolidated subsidiaries, respectively,
resulting from such impairment charge, $0.3 million in undistributed earnings of
affiliates and a $1.6 million increase in accounts receivable, offset by $9.8
million of depreciation and amortization, $18.2 million for non-cash interest
and other charges and a $1.4 million increase in accounts payable and accrued
expenses. The cash flow used in investing activities was primarily attributable
to $2.2 million of capital expenditures, a $2.4 million investment in
conventional and pumped storage development and a $1.2 million increase in
37
investments and other long-term assets during fiscal 1996. Of the pumped storage
and conventional development expenditures, approximately $1.6 million was
attributable to capitalized interest costs and $1.0 million was attributable to
the funding of committed development capital for the Summit and other pumped
storage projects. The cash flow used in financing activities was due primarily
to repayment of $4.3 million of project debt (see "--Summary of Indebtedness"),
offset by a $0.3 million increase in other long-term liabilities.
Cash provided by operating activities increased by $2.4 million for the
year ended June 30, 1996 as compared to the year ended June 30, 1995. The
increase resulted from a $6.4 million increase in income before depreciation and
amortization, non-cash interest and other charges, charge for employee and
director equity programs, non-cash charge for impairment of long-lived assets,
benefit relating to deferred tax liabilities, extraordinary gain on early
extinguishment of debt, minority interests in loss of consolidated subsidiaries,
provision for uncollectible accounts receivable and undistributed earnings of
affiliates, offset by a $4.0 million decrease resulting from variations in other
operating items (receivables, prepaid expenses, accounts payable and accrued
expenses).
For the year ended June 30, 1995, the cash flow provided by operating
activities was principally the result of the $16.3 million net loss for such
year offset by $15.7 million from a charge for non-cash interest, $9.6 million
of depreciation and amortization, a $1.3 million non-cash charge for impairment
of long-lived assets, $2.4 million of a decrease in accounts receivable and $1.4
million of an increase in amounts payable and accrued expenses. The cash flow
used in investing activities was primarily attributable to $35.5 million
utilized for the acquisitions of the HDG projects and the $6.1 million
investment in pumped storage and conventional development and $2.9 million of
capital expenditures during fiscal 1995. Of the pumped storage and conventional
development expenditures, approximately $1.7 million was attributable to
capitalized interest costs, $0.6 million was financed through non-recourse debt
and approximately $2.9 million was attributable to the funding of committed
development capital for the Summit project. The cash flow provided by financing
activities was largely due to the $35.9 million of additional debt incurred in
connection with the HDG acquisition offset by repayment of $4.9 million of
project debt.
38
SUMMARY OF INDEBTEDNESS
PRINCIPAL AMOUNT OUTSTANDING AS OF
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
--------------------- -------------------- --------------------
Company debt, excluding non-recourse
debt of subsidiaries $ 169,813 $ 151,131 $ 134,506
Non-recourse debt of subsidiaries 100,268 115,489 119,372
Current portion of long-term debt (7,466) (6,462) (4,991)
------------ ------------ ------------
Total long-term debt obligations $ 262,615 $ 260,158 $ 248,887
============= ============ =============
In October 1993, one of the Company's former senior lenders, Den norske
Bank AS ("DnB"), provided the Company with a $20.0 million unsecured working
capital facility (the "DnB Facility"), which originally had an expiration date
of June 30, 1997. The DnB Facility is pari passu with the Senior Discount Notes.
Under certain limited circumstances, pursuant to the terms of the credit
agreement, DnB had the right, upon notice to the Company, to limit any further
borrowings under the DnB Facility and require the Company to repay any and all
outstanding indebtedness thereunder within one year from the date DnB provides
such notice to the Company.
On December 3, 1996, the Company amended the DnB Facility (the
"Amendment"), which Amendment, among other things, waived previous defaults by
the Company, changed the final expiration date of the DnB Facility to June 30,
1998, reduced (in steps) the total commitment under the DnB Facility from
approximately $5.9 million at June 30, 1996 to zero at June 30, 1998, limited
the use of the DnB Facility solely to letters of credit and modified certain
financial covenants. Since the execution of the Amendment, the Company has
reduced the outstanding letters of credit under the DnB Facility to
approximately $3.1 million in accordance with the terms of the Amendment. The
Company does not currently expect that it will require a revolving credit
facility for additional working capital during fiscal 1997.
The electric power industry in the United States is undergoing significant
structural changes, evolving from a highly regulated industry dominated by
monopoly utilities to a deregulated, competitive industry providing energy
customers with an increasing degree of choice among sources of electric power
supply. The Company will seek to become a provider of reliable, low-cost energy
and related products and services to industrial and utility customers, by taking
advantage of its existing technical and financial expertise and using its
geographic presence to realize economies of scale in administration, operation,
maintenance and insurance of facilities.
Nevertheless, the performance of the Company in the future will be affected
by a number of factors, in addition to the structural changes to the electric
power industry described above. First, the Company competes for hydroelectric
and industrial energy projects with a broad range of electric power producers
including other independent power producers of various sizes and many
well-capitalized domestic and foreign industry participants such as utilities,
equipment manufacturers and affiliates of industrial companies, many of whom are
aggressively pursuing power development programs and have relatively low
return-on-capital objectives. Opportunities to acquire or develop power
generation assets on favorable economic terms in such an environment are
increasingly limited, particularly with regard to hydroelectric facilities.
Second, the Company is highly leveraged and its debt service obligations, the
cash portion of which commence in January 1999, along with its preferred stock
obligations, the cash portion of which commence in September 1998, make it
difficult to source capital on favorable terms that would allow the Company to
successfully pursue significant acquisition and development opportunities. Such
leverage and debt service obligations also make it difficult to establish the
creditworthiness necessary to develop projects and in several recent instances
have adversely affected the Company's ability to obtain contracts to develop
products and services for its industrial and utility customers.
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 in which to further increase competition in electricity markets, most
notably by instituting customer choice of power 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 long-term power
purchase contracts.
Commencing on September 30, 1998, however, cash dividends become payable on
the Company's 13 1/2% Cumulative Redeemable Exchangeable Preferred Stock (the
"Series H Preferred Stock") and on January 15, 1999, cash interest becomes
payable on the Company's Senior Discount Notes. CHI
39
believes it will be unable to satisfy such dividend and interest payment
obligations on a timely basis as well as meet CHI's other obligations, including
accrued and unpaid dividends since issuance under the Series F Preferred Stock,
and its capital expenditure and working capital requirements at such time. In
addition, CHI anticipates that it will be unable to satisfy the principal
payments on its Senior Discount Notes at their maturity in 2003 and to redeem
the Series H Preferred Stock at its 2003 redemption date.
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 principal with the Unofficial
Bondholders' Committee on the terms of a proposed restructuring to be
accomplished pursuant to a plan of reorganization for CHI under chapter 11 of
the Bankruptcy Code (the "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 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 has commenced a case under the
Bankruptcy Code.
Under the proposed Plan of Reorganization, CHI's Senior Discount Notes,
will be converted into, among other things, $15 million in cash and 100% of the
shares of CHI's new common stock to be issued on the Effective Date (the "New
Common Stock"), subject to dilution from the New Warrants and the Management
Options (each as described below); the holders of Preferred Stock will exchange
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 will be cancelled. CHI's senior management will receive 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 are expected to enter into new
employment agreements in connection with the restructuring.
It is a condition of the proposed Plan of Reorganization that CHI have
credit available under a working capital facility, to provide reorganized CHI
with (i) access to letters of credit for projects, (ii) working capital to meet
its ordinary and peak requirements and (iii) additional borrowings to support
future projects. However, satisfaction of this requirement may be waived by the
Bankruptcy Court subject to prior waiver by CHI and the Unofficial Bondholders'
Committee.
Certain statements contained herein 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 the Company's existing debt, industry
trends and financing needs and opportunities; risks related to hydroelectric,
industrial energy, pumped storage and other acquisition and development
projects; risks related to the Company's power purchase contracts; 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.
See Part I, Item 1 "--Certain Risk Factors".
40
ITEM 8. FINANCIAL STATEMENTS
- - - ------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Consolidated Hydro, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Consolidated
Hydro, Inc. and its subsidiaries at June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1997, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 20, Consolidated Hydro, Inc., the parent company,
filed a plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code on
September 15, 1997. None of the Company's subsidiaries has commenced a case
under the Bankruptcy Code. The outcome of the bankruptcy proceedings is not
presently determinable. Accordingly, the accompanying financial statements do
not include any adjustments or provide for the consequences of the bankruptcy
proceedings.
/s/ Price Waterhouse LLP
New York, New York
September 26, 1997
41
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 and 1995
(Amounts in thousands except share and per share amounts)
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
OPERATING REVENUES:
Power generation revenue $ 50,665 $ 49,761 $ 39,387
Management fees and operations & maintenance revenues 5,395 4,986 4,326
Equity income in partnership interests and other partnership income 1,320 737 245
----------- ----------- ----------
57,380 55,484 43,958
----------- ----------- ----------
COSTS AND EXPENSES:
Operating 18,015 17,957 15,895
General and administrative 8,422 6,447 6,799
Charge for employee and director equity participation programs 100 259 339
Depreciation and amortization 8,661 9,846 9,625
Lease expense to a related party 3,549 3,532 3,495
Lease expense to unrelated parties 2,215 2,540 2,258
Charge for/adjustment to impairment of long-lived assets 83 87,202 1,272
----------- ----------- ----------
41,045 127,783 39,683
----------- ----------- ----------
Income/(loss) from operations 16,335 (72,299) 4,275
INTEREST INCOME 1,661 1,032 1,416
OTHER INCOME 434 368 185
INTEREST EXPENSE ON INDEBTEDNESS TO RELATED PARTIES (10,519) (9,927) (7,001)
INTEREST EXPENSE ON INDEBTEDNESS TO UNRELATED PARTIES (19,072) (16,949) (14,777)
MINORITY INTERESTS IN LOSS OF CONSOLIDATED SUBSIDIARIES --- 2,063 3
----------- ----------- ----------
Loss before benefit/(provision) for income taxes and extraordinary item (11,161) (95,712) (15,899)
BENEFIT/(PROVISION) FOR INCOME TAXES 119 7,381 (377)
----------- ----------- ----------
Loss before extraordinary item (11,042) (88,331) (16,276)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NET OF INCOME TAX OF $3,414) 5,658 --- ---
----------- ----------- ----------
NET LOSS $ (5,384) $ (88,331) $ (16,276)
=========== =========== ==========
NET LOSS APPLICABLE TO COMMON STOCK:
Net loss $ (5,384) $ (88,331) $ (16,276)
Dividends declared on preferred stock (14,911) (13,057) (11,433)
Accretion of preferred stock (857) (857) (857)
Undeclared dividends on cumulative preferred stock (10,123) (9,818) (9,818)
----------- ----------- ----------
$ (31,275) $ (112,063) $ (38,384)
=========== =========== ==========
NET LOSS PER COMMON SHARE:
Loss before extraordinary item $ (28.72) $ (87.45) $ (30.21)
Extraordinary item 4.40 --- ---
----------- ----------- ----------
$ (24.32) $ (87.45) $ (30.21)
=========== =========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,285,762 1,281,516 1,270,614
=========== =========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
42
CONSOLIDATED HYDRO, INC.
CONSOLIDATED BALANCE SHEET
As of June 30, 1997 and 1996
(Amounts in thousands except share and per share amounts)
1 9 9 7 1 9 9 6
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents unrestricted $ 24,247 $ 10,598
Cash and cash equivalents restricted 8,255 13,236
Accounts receivable, net 6,803 7,854
Prepaid expenses and other current assets 1,698 1,353
------------ ----------
Total current assets 41,003 33,041
PROPERTY, PLANT AND EQUIPMENT, NET 125,954 126,133
FACILITIES UNDER DEVELOPMENT 100 1,217
INTANGIBLE ASSETS, NET 47,785 50,746
ASSETS TO BE DISPOSED OF 1,914 15,066
INVESTMENTS AND OTHER ASSETS 26,872 18,454
------------ ----------
$ 243,628 $ 244,657
============ ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,458 $ 9,599
Current portion of long-term debt payable to a related party 3,234 2,305
Current portion of long-term debt and obligations under capital leases payable
to unrelated parties 4,232 4,157
------------ ----------
Total current liabilities 13,924 16,061
LONG-TERM DEBT PAYABLE TO RELATED PARTIES 90,918 87,406
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES PAYABLE TO UNRELATED PARTIES 171,697 172,752
DEFERRED CREDIT, STATE INCOME TAXES AND OTHER LONG-TERM LIABILITIES 42,396 38,461
COMMITMENTS --- ---
MANDATORILY REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE, AT REDEMPTION
VALUE OF $1,000 PER SHARE, JUNIOR IN LIQUIDATION PREFERENCE TO SERIES F
PREFERRED STOCK:
Series H, 136,950 shares authorized, issued and outstanding ($119,923 and $105,012 liquidation
preference in 1997 and 1996, respectively) 114,372 98,604
------------ ----------
Total liabilities and mandatorily redeemable preferred stock 433,307 413,284
------------ ----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value, at redemption value of $1,000 per share:
Series F, 56,279 and 55,000 shares authorized issued and outstanding in 1997 and 1996,
respectively ($56,279 and $55,000 liquidation preference in 1997 and 1996, respectively) 49,356 49,356
Series G, 56,279 and 55,000 shares authorized issued and outstanding in 1997 and 1996,
respectively($56,279 and $55,000 liquidation preference in 1997 and 1996, respectively) 49,356 49,356
Class A common stock, $.001 par value, 9,000,000 shares authorized, 3,831,683
and 4,576,925 unissued
shares reserved, 1,834,235 and 1,834,235 shares issued and 1,285,762 and 1,285,762 shares
outstanding for the years ended 1997 and 1996, respectively 2 2
Class B common stock, $.001 par value, 1,000,000 shares authorized, 246,510
unissued shares reserved,
no shares issued and outstanding --- ---
Additional paid-in capital, including $5,966 related to warrants 13,497 13,497
Accumulated deficit (280,579) (259,427)
------------ ----------
(168,368) (147,216)
Less: Deferred compensation (250) (350)
Treasury stock (common: 548,473 shares), at cost (21,061) (21,061)
------------ ----------
Total stockholders' deficit (189,679) (168,627)
------------ ----------
$ 243,628 $ 244,657
------------ ----------
The accompanying notes are an integral part of the consolidated
financial statements.
43
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 and 1995
(Amounts in thousands except share and per share amounts)
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,384) $ (88,331) $ (16,276)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Non-cash interest and other charges 21,179 18,181 15,660
Charge for employee and director equity participation programs 100 259 339
Non-cash charge for/adjustment to impairment of long-lived assets 83 87,202 1,272
Benefit relating to deferred tax liabilities (1,032) (7,951) ---
Extraordinary gain on early extinguishment of debt (5,658) --- ---
Depreciation and amortization 8,661 9,846 9,625
Minority interests in loss of consolidated subsidiaries --- (2,063) (3)
Increase in the provision for uncollectible accounts receivable 287 176 ---
Undistributed earnings of affiliates (696) (317) ---
(Increase)/decrease in accounts receivable (47) (1,575) 2,366
Increase in prepaid expenses (375) (40) (5)
(Decrease)/increase in accounts payable and accrued expenses (2,946) 1,363 1,350
---------- ----------- ---------
Net cash provided by operating activities 14,172 16,750 14,328
---------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of acquisitions --- --- (35,503)
Proceeds from disposition of assets 12,063 --- ---
Cost associated with disposition of assets (61) --- ---
Cost of development expenditures (2,045) (2,381) (6,086)
Decrease in long-term notes receivable --- 179 567
Increase in long-term notes receivable --- (58) (319)
Capital expenditures (4,358) (2,230) (2,905)
(Increase)/decrease in investments and other long-term assets (4,868) (1,230) 617
---------- ----------- ---------
Net cash provided by/(used in) investing activities 731 (5,720) (43,629)
---------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of refinancing costs (310) --- ---
Long-term borrowings from related parties --- --- 35,900
Long-term borrowings from unrelated parties 149 120 1,168
Payments to a related party on long-term borrowings (2,304) (269) (488)
Payments to unrelated parties on long-term borrowings (3,999) (4,018) (4,402)
Increase/(decrease) in other long-term liabilities 229 289 (350)
---------- ----------- ---------
Net cash (used in)/provided by financing activities (6,235) (3,878) 31,828
---------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,668 7,152 2,527
CASH AND CASH EQUIVALENTS, AT BEGINNING OF THE YEAR 23,834 16,682 14,155
---------- ----------- ---------
CASH AND CASH EQUIVALENTS, AT END OF THE YEAR $ 32,502 $ 23,834 $ 16,682
========== =========== =========
(continued)
44
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 and 1995
(Amounts in thousands except share and per share amounts)
(continued)
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest paid to a related party $ 4,275 $ 2,720 $ 1,406
========== ========== =========
Interest paid to unrelated parties $ 5,047 $ 6,865 $ 6,309
========== ========== =========
Income taxes, net $ 288 $ 622 $ 349
========== ========== =========
SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
INVESTING:
The Company acquired the common stock or hydroelectric assets of certain entities
amounting to the following:
Fair value of assets acquired $ 28 $ --- $ 49,165
Cash paid --- --- 35,503
---------- ---------- ---------
Liabilities assumed $ 28 $ --- $ 13,662
========== ========== =========
FINANCING:
Series H mandatorily redeemable preferred stock increased $857 for the years
ended 1997, 1996 and 1995, 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 $14,911, $13,057 and
$11,433 for the years ended June 30, 1997, 1996 and 1995, respectively as a
result of declared dividends which increased the liquidation preference of the
series H preferred stock.
Long-term debt and obligations under capital leases increased by $20,066,
$17,913 and $15,515 for the years ended June 30, 1997, 1996 and 1995,
respectively, as a result of non-cash interest.
The Company issued 1,279 shares of series F preferred stock and 1,279 shares of
series G preferred stock in exchange for shares of stock in a majority owned
subsidiary of the Company.
In connection with the disposition of certain assets by the Company, long-term
debt was reduced by approximately $1.2 million.
The accompanying notes are an integral part of the consolidated
financial statements.
45
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)
FOR THE YEARS ENDED ENDED JUNE 30, 1995, 1996 and 1997
(Amounts in thousands except shares and per share amounts)
PREFERRED STOCK COMMON STOCK
--------------- ------------
TOTAL
NUMBER NUMBER ADDITIONAL STOCKHOLDERS'
OF SHARES REPORTED OF SHARES PAR PAID-IN ACCUMULATED DEFERRED TREASURY EQUITY/
OUTSTANDING AMOUNT OUTSTANDING VALUE CAPITAL DEFICIT COMPENSATION STOCK DEFICIT)
----------- --------- ----------- ----- --------- ----------- ------------ -------- ------------
BALANCE JUNE 30, 1994 110,000 $ 98,712 1,266,298 $ 2 $ 12,877 $ (128,616) $ (328) $ (21,061) $ (38,414)
Annual dividend of $83.48 per
share, mandatorily redeemable
Series H Preferred (11,433) (11,433)
Accretion of Series H
Preferred (857) (857)
Issuance of common stock and
related deferred compensation 12,400 620 (620) ---
Recognition of board of directors
and employee compensation
expense related to the
issuance of common stock 110 110
Compensation expense related to
conversion of Performance Unit
Plan to Stock Option Plan in 1993 229 229
Net loss (16,276) (16,276)
------- ------ --------- --- ------ --------- ---- ---------- ---------
BALANCE JUNE 30, 1995 110,000 98,712 1,278,698 2 13,497 (157,182) (609) (21,061) (66,641)
Annual dividend of $95.34
per share, mandatorily
redeemable Series H Preferred (13,057) (13,057)
Accretion of Series H Preferred (857) (857)
Issuance of Class A common
stock, $.001 par value 7,064
Recognition of board of
directors and employee
compensation expense related to
the issuance of common stock 160 160
Compensation expense related
to conversion of Performance
Unit Plan to Stock Option
Plan in 1993 99 99
Net loss (88,331) (88,331)
------- ------ --------- --- ------ --------- ------ -------- ----------
BALANCE JUNE 30, 1996 110,000 98,712 1,285,762 2 13,497 (259,427) (350) (21,061) (168,627)
Annual dividend of $108.88
per share, mandatorily
redeemable Series H Preferred (14,911) (14,911)
Accretion of Series H Preferred (857) (857)
Recognition of employee
compensation expense related
to the issuance of
common stock 100 100
Issuance of preferred stock 2,558
Net loss (5,384) (5,384)
------- -------- --------- --- -------- ----------- ------- ---------- -----------
BALANCE JUNE 30, 1997 112,558 $ 98,712 1,285,762 $ 2 $ 13,497 $ (280,579) $ (250) $ (21,061) $(189,679)
======= ======== ========= === ======== =========== ======= ========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
46
CONSOLIDATED HYDRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 1 - ORGANIZATION
Consolidated Hydro, Inc., ("CHI", and together with its consolidated
subsidiaries, the "Company") has, since its establishment in 1985, been engaged
principally in the development, operation and management ("O&M") of
hydroelectric power plants. As of June 30, 1997, 1996 and 1995, it had ownership
interests in, leased and/or operated projects with a total operating capacity of
343, 344 and 379 megawatts ("MW"), respectively. Commencing in November 1995,
the Company began to diversify its business activities to include the
development, ownership and operation of industrial infrastructure facilities.
Currently, all of the Company's revenue is derived from the ownership and
operation of hydroelectric facilities.
In 1992, the Company entered into an agreement (the "Purchase Agreement")
with The Morgan Stanley Leveraged Equity Fund II, L.P. and Madison Group, L.P.
(collectively, the "Investor Group") that provided for, among other things, the
sale to the Investor Group of $110.0 million of newly issued convertible
preferred stock and certain warrants (the "Recapitalization") (Note 13). Among
other terms and conditions of the Purchase Agreement and in conjunction with the
Recapitalization, approximately $34.3 million of the Company's outstanding
indebtedness and related accrued interest, including approximately $2.9 million
of project debt, was retired and approximately 36% of the Company's outstanding
common stock and all issued warrants were redeemed.
In 1993, the Company completed the sale of 12% Senior Discount Notes due
2003, Series B (the "Senior Discount Notes") and preferred stock with attached
warrants for an aggregate sale price of $182.4 million and retired approximately
$138.7 million of existing debt and preferred stock with an additional $9.5
million of debt called pursuant to a minimum 30-day redemption notification in
June 1993 and repaid in July 1993 (the "Refinancing").
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") and filed the plan of reorganization (the
"Plan of Reorganization") and the disclosure statement dated August 8, 1997 (the
"Disclosure Statement"). Pursuant to an order of the Bankruptcy Court signed on
September 15, 1997, a hearing before the Bankruptcy Court to consider
confirmation of the Plan of Reorganization is scheduled to be held on October
23, 1997. CHI anticipates (but can give no assurance) that, if the Bankruptcy
Court enters an order confirming the Plan of Reorganization on or about October
23, 1997, the Plan of Reorganization will become effective before December 31,
1997 (the date of such effectiveness being the "Effective Date").
Through the implementation of the Plan of Reorganization on and after the
Effective Date, it is anticipated that CHI's most significant financial
obligations will be restructured as follows: $202 million in face amount of
outstanding Senior Discount Notes will be 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"), to be issued on the
Effective Date, subject to dilution from the New Warrants and the Management
Options (each as described below); the holders of the Company's preferred stock
will exchange 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 will be cancelled. CHI's senior management will receive
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, it is anticipated that, other than a working
capital facility to be entered into as of the Effective Date, CHI will not have
any significant debt obligations after the Effective Date.
47
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Consolidated
Hydro, 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 amounts have been reclassified in
1996 and 1995 to be in conformity with 1997 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
Power generation revenue is recognized based on power delivered at rates
stipulated in the respective power contracts. 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. 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.
EQUITY INCOME FROM PARTNERSHIPS AND OTHER PARTNERSHIP INCOME
In accordance with generally accepted accounting principles, certain of the
Company's partnership interests are accounted for under the equity method and
the cost method of accounting.
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
Property, plant and equipment is recorded at cost (Note 8). 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.
Plant and equipment are depreciated on the straight-line method over the
estimated useful lives of the respective assets (generally 50 years for dam and
appurtenant structures and 30 years for mechanical and electrical equipment).
Depreciation expense was $5,654, $6,042 and $5,872 in 1997, 1996 and 1995,
respectively.
ASSETS TO BE DISPOSED OF
The Company has reached agreements to sell or decommission four
hydroelectric facilities located in California and Oregon and classifies these
assets as Assets to be disposed of at June 30, 1997. These assets are stated at
the lower of their carrying amount or fair value less estimated costs to sell.
See Note 20 for further discussion.
48
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FACILITIES UNDER DEVELOPMENT
Costs associated with facilities under development, including acquisition
costs of property, plant and equipment, intangible assets and investments are
transferred to construction in progress or investments as appropriate, upon the
commencement of construction. Facilities under development are those that have
not yet commenced the construction phase primarily because all the requisite
permits and contracts have not yet been obtained and generally represent a
higher level of risk than those projects under construction.
INTEREST CAPITALIZATION
The Company capitalizes interest costs associated with the development and
construction of its facilities. Interest capitalized in 1997, 1996 and 1995 is
disclosed in Note 11.
INTANGIBLE ASSETS
Intangible assets principally include costs incurred in connection with
power purchase agreements, Federal Energy Regulatory Commission ("FERC")
licenses and goodwill, all of which are capitalized and amortized on a
straight-line basis over the periods to be benefited by such costs, ranging from
3 to 40 years (Note 9). Amortization expense was $3,007, $3,804, and $3,753 in
1997, 1996 and 1995, respectively. 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. Management periodically reviews
intangibles, including goodwill, for potential impairments.
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 documents are signed in respect of a prospective transaction. From
thereon, all third party, project specific, business development related costs
are capitalized.
TREASURY STOCK
The Company accounts for treasury stock under the cost method.
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 energy and investment tax credits
using the flow-through method as a reduction of the provision for federal income
taxes in the year in which such credits are utilized. 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").
NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the net loss for the
year, adjusted for accretion of preferred stock and preferred dividends, by the
weighted average number of common shares outstanding. Common stock equivalents
are not included in the computation of net loss per common share as they would
be antidilutive to the computation.
49
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128") which
adjusts the reporting of earnings per share ("EPS") for financial statements for
periods ending after December 15, 1997. Under SFAS 128, the reporting of primary
EPS will be replaced by "basic" EPS, which is calculated by dividing the income
available to common stockholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock equivalents.
Fully diluted EPS will be replaced by "diluted" EPS, which will be similar to
fully diluted EPS as previously computed. Due to the Company's generation of
losses, there is no difference anticipated between primary EPS as reported by
the Company and "basic" EPS as computed under SFAS 128.
NOTE 3 - 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 and cash equivalents consist principally of investments in short term
interest bearing instruments and because of the short maturity of these items,
the carrying amount approximates fair value.
LONG-TERM INVESTMENTS
The carrying value approximates fair value for certain investments based on
their near - term maturity. These investments in escrow are classified as
long-term in the Balance Sheet due to restrictions imposed under certain
contractual agreements. For other investments, for which there are no quoted
market prices, a reasonable estimate of fair value could not be made without
incurring excessive costs. These investments are mainly in affiliates of the
Company and are accounted for on the cost basis. The investment amounts in the
chart below are exclusive of investments accounted for under the equity method
of $8,177 and $7,512 in 1997 and 1996, respectively.
LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
Market rate obligations consist of long-term debt obligations that
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 for the development of and fair value of such assets.
The fair value of the Senior Discount Notes and the Company's 13%
Cumulative Redeemabale Exchangeable Preferred Stock ( the "Series H Preferred")
could not be reasonably estimated at June 30, 1996 because there was no public
market for these securities. At June 30, 1997, the fair values of the Senior
Discount Notes and Series H Preferred are based on the midpoint of a range of
values prepared by a third party in connection with the reorganization (Note 1
and Note 20).
50
NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
1997 1996
----------- ----- ----------- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents 32,502 32,502 23,834 23,834
Long-term investments for which it is:
practicable to estimate fair value 8,184 8,184 2,973 2,973
not practicable 10,501 -- 7,949 --
Long-term debt:
market rate obligations 33,208 33,208 34,890 34,890
fixed rate obligations 26,518 27,631 23,989 24,725
pumped storage obligations 15,905 100 14,420 100
refinanced obligations -- -- 14,500 4,500
Senior discount notes 169,813 81,400 151,131 --
Series H preferred stock 114,372 882 98,604 --
NOTE 4 - SALE OF CONSOLIDATED HYDRO MAINE, INC.
On December 23, 1996, the Company through its wholly owned subsidiary, CHI
Universal, Inc., a Delaware corporation ("CHI Universal"), sold Consolidated
Hydro Maine, Inc., a Delaware corporation ("CHI Maine"), to Ridgewood Maine
Hydro Partners, L.P., a Delaware limited partnership (the "Partnership"). CHI
Maine owned and operated 15 hydroelectric projects located in the State of Maine
with an aggregate capacity of 11.32 megawatts (the "Projects"). The sale was
made pursuant to an Agreement of Merger dated as of July 1, 1996 (the "Merger
Agreement"), by and among CHI Maine, CHI Universal, Ridgewood Maine Hydro
Corporation and the Partnership. These assets were reported at their carrying
value of $11.3 million in Assets to be disposed of on the Balance Sheet as of
June 30, 1996.
On the Closing Date (as defined in the Merger Agreement), all of the issued
and outstanding capital stock of CHI Maine was sold to the Partnership for cash.
After final adjustments, the total sale price aggregated approximately $12.9
million and the Partnership assumed a long-term lease obligation of
approximately $1.2 million related to one of the Projects. In fiscal 1997, the
carrying value was adjusted upward by $0.7 million as a result of adjustments to
the final sales price of the assets (Note 5).
The following unaudited pro forma financial information for the fiscal year
ended June 30, 1997 and 1996 has been prepared assuming the disposition of CHI
Maine occurred at the beginning of the periods presented.
(Unaudited)
Twelve Months Ended June 30,
1997 1996
---- - ----
(Pro forma) (Pro forma)
Operating Revenues $ 56,350 $ 51,967
======= =======
Net loss $ (5,742) $(71,486)
======= =======
Net loss per common share $ (24.60) $ (74.30)
======= =======
Weighted average number of common shares 1,285,762 1,281,516
======== ========
51
NOTE 5 - ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF" ("SFAS 121")
The Company implemented SFAS 121 in the second quarter of fiscal 1996. This
statement establishes accounting standards for determining impairment of
long-lived assets and long-lived assets to be disposed of. The Company
periodically assesses the realizability of its long-lived assets and evaluates
such assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets (or group of assets) may not be
recoverable. For assets in use or under development, impairment is determined to
exist if the estimated future cash flow associated with the asset, undiscounted
and without interest charges, is less than the carrying amount of the asset.
When the estimated future cash flow indicates that the carrying amount of the
asset will not be recovered, the asset is written down to its fair value.
In fiscal 1996, in light of the Company's planned sale of certain of its
conventional hydroelectric projects, recent industry trends (including the
continued decline in electricity prices and other factors stemming from the
deregulation of the electric power industry), the timing of the expiration of
the fixed rate period of some of its long-term power sales contracts and other
indications of a decline in the fair value of certain of its conventional
hydroelectric projects, the Company determined pursuant to SFAS 121 that certain
of these projects (including properties which are not included among those to be
sold) were impaired pursuant to the criteria established under SFAS 121. The
Company also determined that due to the factors noted above, as well as its
current financial position, it is highly unlikely that the Company will
successfully develop its pumped storage projects.
In fiscal 1996, the Company recorded an impairment charge of $87.2 million
as a component of its loss from operations. In addition, a deferred tax benefit
and a benefit for minority interests in loss of consolidated subsidiaries of
$8.0 million and $2.1 million, respectively, were recorded as of that date. Of
the total charges, $38.5 million was attributable to pumped storage development
assets, resulting in an aggregate remaining carrying value of such assets of
$0.1 million, $44.9 million was attributable to certain conventional
hydroelectric assets, resulting in an aggregate remaining carrying value for
such written down assets of $26.0 million, and $3.8 million was attributable to
an other than temporary decline in the value of certain investments in
partnerships which own hydroelectric facilities, resulting in an aggregate
remaining carrying value of such assets of $0.8 million.
In fiscal 1997, the Company recorded an impairment charge of $0.1 million
as a component of income from operations. The total charges include an upward
adjustment of $0.7 million to the carrying value of the CHI Maine assets as a
result of adjustments to the final sales price of the assets, a $0.4 million
charge attributable to certain conventional hydroelectric assets held for
decommissioning resulting in a carrying value of such assets of $1.9 million,
and a $0.4 million charge attributable to the write-off of certain development
costs, resulting in a carrying value of zero. The new carrying value of these
written down assets now reflects management's best estimate as to their fair
value although there can be no assurance that future events or changes in
circumstances will not require that such assets, or other of the Company's
assets, be written down in the future.
In conjunction with the adoption of SFAS 121, during the third quarter of
fiscal 1996, the Company re-evaluated the useful lives of certain property,
plant and equipment and intangible assets. This resulted in a reduction of the
estimated useful lives of these fixed and intangible assets. This change had the
effect of increasing the loss from operations and the net loss, net of tax
benefit, by approximately $1.0 million and $0.5 million for the years ended June
30, 1997 and 1996, respectively.
52
NOTE 6 - ACQUISITIONS
The Company accounts for acquisitions in accordance with the purchase
accounting method. The results of operations for these acquired hydroelectric
projects are included in the accompanying Consolidated Statement of Operations
commencing with the acquisition date.
On February 16, 1995, the Company, through a wholly owned subsidiary, CHI
Acquisitions II, Inc., a Delaware corporation formerly known as HDG
Acquisitions, Inc. ("CHI Acquisitions II"), purchased 100% of the issued and
outstanding capital stock of Hydro Development Group, Inc., a New York
corporation ("HDG"). The stock of HDG was purchased pursuant to a Stock Purchase
Agreement, dated as of December 19, 1994 (the "HDG Purchase Agreement") among
CHI Acquisitions II, HDG and the holders of 100% of the issued and outstanding
capital stock of HDG (the "Sellers") for a total cost of $49.2 million,
comprised of a net cash payment of approximately $35.5 million including CHI's
closing costs, plus certain assumed debt and other liabilities of approximately
$2.7 million and $11.0 million, respectively. HDG's assets include certain
general partnership interests in operating hydroelectric projects. The
acquisition is disclosed in the fiscal 1995 Consolidated Statement of Cash
Flows.
HDG owns either directly, through subsidiaries or through general
partnerships, interests in a total of 16 operating hydroelectric projects with
an aggregate capacity of approximately 33 MWs (the "HDG Projects"). The HDG
Projects are located in the states of New York, Massachusetts and Pennsylvania.
All 16 HDG Projects have power purchase agreements in place that extend for
terms ranging from approximately 5 to 30 years. CHI continues to operate the HDG
Projects according to the terms of their licenses, contracts and permits.
CHI Acquisitions II financed this acquisition through existing cash and two
term loans aggregating $35.9 million provided by Global Projects and Structured
Finance Corporation ("GPSF"), a unit of General Electric Capital Corporation
("GECC"). These two loans are comprised of the "A Loan" in aggregate principal
amount of $29.0 million which is a variable rate loan for a term of 8 years, and
the "B Loan" in the aggregate principal amount of $6.9 million which is a fixed
rate loan for a term of 18 years (Note 11).
53
NOTE 6 - ACQUISITIONS (CONTINUED)
In February 1990, the Company acquired all of the common stock of TKO
Power, Inc., a California Corporation ("TKO"). TKO was the General Partner and
Limited Partner in certain operating hydroelectric projects located in
California, aggregating approximately 4 MW of capacity. As of January 1, 1997
these partnerships were dissolved and all of the assets were transferred to a
100% owned subsidiary of the Company. Assets of $28 were transferred and
liabilities of $28 were assumed in connection with this transaction. The
transfer was accounted for in accordance with the purchase accounting method.
Pro forma financial information has not been included, as the acquisition is
immaterial to the consolidated financial results of the Company.
In 1988, the Company entered into a $240.0 million acquisition facility
agreement (the "Acquisition Facility") with GECC to provide funds for future
acquisitions. All rights related to the Acquisition Facility terminated on March
25, 1997.
NOTE 7 - 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 ("PPAs"), of
which the remaining terms range between 6 months and 28 years. Consolidated
power generation revenues, by major customer, for the years ended June 30, 1997,
1996 and 1995 were as follows:
1997 1996 1995
------------- ------------- ----------
Commonwealth Electric Co. $ 10,685 $ 9,528 $ 8,509
Niagara Mohawk Power Corporation 10,285 9,139 4,865
New England Power Co. 6,184 5,133 4,942
Central Maine Power Co. 4,615 8,341 6,312
Duke Power Co. 3,428 3,581 3,701
All other customers 15,468 14,039 11,058
-------------- -------------- --------------
$ 50,665 $ 49,761 $ 39,387
============== ============== ==============
During 1997, 1996 and 1995, the amount shown for Commonwealth Electric Co.
includes approximately $212, $72 and $290, respectively, of business
interruption revenue representing lost generation recoverable from an insurance
company as a result of an insurance claim. During 1997 and 1996, the amount
shown for Duke Power Co. also includes approximately $419 and $767,
respectively, of business interruption revenue from an insurance company as a
result of an insurance claim (Note 17).
On October 6, 1995, Niagara Mohawk Power Corporation ("NIMO"), a customer
of the Company which accounted for approximately 20.3% and 18.4% of consolidated
power sales revenues in fiscal 1997 and fiscal 1996, respectively, submitted a
proposal to the New York State Public Service Commission. NIMO proposed that it
be relieved of its obligations under contracts with independent power producers
("IPPs") that NIMO considers uneconomic. In March 1997, NIMO announced that it
reached preliminary agreements to restructure power purchase agreements with 19
IPPs. However, neither the Company nor any of its subsidiaries participated in
these negotiations, and the impact of the remaining agreements on the Company,
if any, is unknown.
54
NOTE 7 - POWER GENERATION CONTRACTS (CONTINUED)
The Company has certain PPAs with Duke Power Company and the City of
Seneca, related to projects located in the Southeast region, that expire in
fiscal 1998, commencing in December 1997. Upon expiration of the PPA, the
existing customers are required under PURPA to continue to purchase the
electrical output of each project. However, the output will be sold to the
related customers at avoided cost rates that are substantially lower than the
rates currently in effect under the PPA. The effects of these reduced rates are
not considered to be material to the consolidated results of the Company.
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
might be difficult for the Company to replace the existing long-term contract
with a new contract on similar economic terms in the current environment.
NOTE 8 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment includes assets acquired or refinanced under
capitalized lease obligations of $24,455 and $27,525 at June 30, 1997 and 1996,
respectively (Note 11).
Property, plant and equipment comprise the following at June 30, 1997 and
1996:
1997 1996
-------------- --------------
Land $ 3,738 $ 3,610
Dam and appurtenant structures 71,101 68,953
Mechanical and electrical equipment 70,738 69,785
Buildings and other 4,777 4,381
Construction in progress 1,851 534
-------------- --------------
152,205 147,263
Less - accumulated depreciation (26,251) (21,130)
-------------- --------------
$ 125,954 $ 126,133
============== ==============
55
NOTE 9 - INTANGIBLE ASSETS
Intangible assets comprise the following at June 30, 1997 and 1996:
Range of
1997 1996 Asset Lives
------- ----- ------- ----- -----------
Power purchase contracts $ 23,958 $ 24,243 3 - 32 years
FERC licenses 16,234 16,066 4 - 40 years
Goodwill 17,740 17,740 40 years
Other intangibles 7,881 7,933 3 - 40 years
------------- -------------
65,813 65,982
Less - accumulated amortization (18,028) (15,236)
------------- -------------
$ 47,785 $ 50,746
============= =============
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. Additionally, certain of the Company's projects
aggregating 0.8 MW are not subject to licensing or exemption. An exemption
exists for the duration of the life of the facility.
NOTE 10 - ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company reviews its accounts receivable for future collectability. As
of June 30, 1997 and 1996, allowance for doubtful accounts on certain
receivables was approximately $382 and $176, respectively. Accounts receivable
comprise the following at June 30, 1997 and 1996:
1997 1996
------------- ---------
Accounts receivable trade $ 3,956 $ 6,512
Accounts receivable O&M contracts, net 780 739
Accounts receivable insurance claims 1,335 198
Accounts receivable other, net 732 405
------------ ------------
$ 6,803 $ 7,854
======= =======
Accounts payable and accrued expenses, inclusive of related party payments
due to GECC, comprise the following at June 30, 1997 and 1996:
1997 1996
------------ -----------
Accrued interest $ 1,226 $ 2,320
Accounts payable 218 1,006
Accrued lease expense payable to a related party 1,595 1,746
Accrued compensation 945 1,027
Accrued severance (Note 19) 198 1,141
Other accrued expenses 2,276 2,359
------------ ------------
$ 6,458 $ 9,599
============ ============
56
NOTE 11 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and capitalized lease obligations comprise the following at
June 30, 1997 and 1996:
1997 1996
---------- ----------
Parent Company Debt:
Debt guaranteed or issued by the Parent Company directly - 12% Senior
Discount Notes due 2003, non-cash interest computed on
the basis of semi-annual compounding through July 15, 1998, after
which interest, computed on the face value, becomes
payable semi-annually in cash. $169,813 $151,131
------------ ------------
169,813 151,131
------------ ------------
Non-Recourse Debt of Subsidiaries secured by project assets unless otherwise
noted:
Capitalized lease obligations maturing at various dates through 2008. 24,455 27,525
Term loan agreement with an investor due in quarterly payments through 2003,
interest payable at the CP Rate, as defined, plus a margin of 4.0%,
(9.62% and 9.42% at June 30, 1997 and 1996, respectively).
27,584 28,522
Term loan agreement with an investor due in quarterly payments through
2013, interest payable at a fixed rate of 11.59%. 5,254 6,621
Term loan agreement with a bank, principal due in semi-annual payments
through 2007, interest due quarterly on current loan balance at the
London Interbank Offered Rate ("LIBOR"), as defined, plus a margin of
1.25% (interest at 6.69% at June 30, 1996). Interest due quarterly on
overdue principal payments of $1,624 at June 30, 1996 at the prime rate,
as defined, plus a margin of 2.0% (interest at
10.25% at June 30, 1996). -- 14,500
Term loan agreement with a bank, principal due in quarterly payments
through 2008, beginning on September 30, 1997. Interest due
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 390 basis points. 5,000 --
Note payable to an insurance company, due in monthly payments through
2007, interest at 12.7%. 6,858 7,619
Note payable to an insurance company, due in quarterly payments
through 2003, interest at 11.25%. 6,538 6,795
Term loan agreement with a bank, due in quarterly payments through 2006,
interest at LIBOR, as defined, plus a margin of 2.0%
(interest at 7.78% and 7.47%, at June 30, 1997 and 1996, 2,211 2,700
respectively).
57
NOTE 11 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
1997 1996
---------- ----------
Unsecured notes payable to investors , interest payable annually at
various rates. 5,902 4,972
Term loan agreement with a bank, due in quarterly payments through 2006,
interest at LIBOR, as defined, plus a margin of 2.0% (interest at 7.78%
and 7.47% at June 30, 1997 and 1996,
respectively). 1,766 1,801
Unsecured notes payable to investors , interest payable annually at the
prime rate, as defined (8.50% and 8.25% at June 30, 1997 and 1996,
respectively) for certain notes and 15% for other notes.
4,299 3,968
Security deed held by the previous owners of a hydroelectric facility,
due June 18, 1999. Interest payable monthly at a fixed rate of
11.5%. 1,000 1,000
Notes payable to an insurance company, due in quarterly payments
through 2005, interest rate at 8.5%. 787 850
Term loan agreement with a bank, due in quarterly payments through 2006,
interest at LIBOR, as defined, plus a margin of 2.0% (interest at 7.78%
and 7.47% at June 30, 1997 and 1996,
respectively). 1,283 1,470
Term loan agreement with a bank, due in quarterly payments through 2006,
interest at LIBOR, as defined, plus a margin of 2.0% (7.78%
and 7.47% at June 30, 1997 and 1996, respectively). 364 396
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%. 820 730
Other long-term liabilities with various rates and maturities. 6,147 6,020
------------ ------------
100,268 115,489
------------ ------------
Total debt and obligations under capital leases 270,081 266,620
Less current portion (7,466) (6,462)
------------ ------------
Total long-term debt and obligations under capital leases $262,615 $260,158
======= =======
58
NOTE 11 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
Total interest charges associated with the above obligations were $29,780,
$28,581 and $24,729, of which $189, $1,705 and $2,951, was capitalized in
conjunction with the development and construction of hydroelectric facilities in
1997, 1996 and 1995, respectively. The aggregate long-term debt payments due
each fiscal year ending June 30, including capitalized lease obligations, net of
amounts representing interest totaling $11,238, are as follows:
1998 $ 7,466
1999 6,154
2000 5,478
2001 5,894
2002 6,215
Thereafter 238,874
-------------
$270,081
========
The Senior Discount Notes were issued as part of the Refinancing, at a
substantial discount from their principal amount and provide for cash payment of
interest commencing January 15, 1999. The issue price represents a yield to
maturity of 12% computed on a basis of semi-annual compounding until reaching
face value in 1998, after which interest becomes payable semi-annually at the
stated 12% rate. The Senior Discount Notes are due July 15, 2003 but may be
redeemed at any time on or after July 15, 1998 at the Company's option, in whole
or in part, at 100% of their principal amount plus accrued interest. The Senior
Discount Notes contain restrictive covenants providing for limitations on
indebtedness and restrictions on payments of dividends or distributions of
capital stock, among other restrictions. See Note 1 and Note 20 for effects
resulting from the implementation of the Plan of Reorganization on and after the
Effective Date.
In October 1993, one of the Company's former senior lenders, Den norske
Bank AS ("DnB"), provided the Company with a $20.0 million unsecured working
capital facility (the "DnB Facility"), which originally had an expiration date
of June 30, 1997. On December 3, 1996, the Company amended the DnB Facility (the
"Amendment") which Amendment, among other things, waived previous defaults by
the Company, changed the final expiration date of the DnB Facility to June 30,
1998, reduced (in steps) the total commitment under the DnB Facility from $5.9
million at June 30, 1996 to zero at June 30, 1998, limited the use of the DnB
Facility solely to letters of credit and modified certain financial covenants.
The DnB Facility contains certain affirmative and restrictive covenants
which are generally consistent with the terms of the Senior Discount Notes and
the preferred stock. As of June 30, 1997, the Company was in compliance with its
covenants, as amended, under the DnB Facility. The Company's September 15, 1997
chapter 11 filing with the Bankruptcy Court resulted in an event of default
under the DnB Facility. Subsequently, DnB notified the Company that it will take
no action to enforce it's remedies for such default.
The outstanding letters of credit under the DnB Facility totaled $3,091 and
$5,941 as of June 30, 1997 and 1996, respectively. Fees on each outstanding
letter of credit are computed as follows: (i) 2.0% per annum on the available
amount of such letter of credit, payable quarterly in arrears; (ii) standard
charges in connection with the issuing, administering, amending, processing or
paying any letter of credit; and (iii) costs of confirmation, requested by any
beneficiary, in the amount not to exceed 1/2 of 1.0% per annum based upon the
available amount of the letter of credit.
As of June 30, 1997, capitalized lease obligations consist primarily of two
lease financing transactions on three of the Company's projects. As a result of
the initial transactions, $22,274 in dam and appurtenant structures and $12,239
of mechanical and electrical equipment, in the aggregate, were capitalized. 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.
59
NOTE 11 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
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 Consolidated Balance Sheet. Further, in connection
with one of the leases, the Company has provided a tax indemnity of an amount
not to exceed $2,750 to the extent certain specified tax benefits, as defined,
are not available to one of the owner participants, as defined. Minimum rental
commitments under these leases for the five years following June 30, 1997 are
included in the table above.
In conjunction with the acquisition of HDG, the Company entered into a
Credit and Reimbursement Agreement dated February 15, 1995, with GECC (Note 6).
The agreement provides for two term loans, the A Loan and B Loan, a revolving
credit facility, and two letters of credit in support of HDG project
obligations. The A Loan, with an outstanding principal balance at June 30, 1997
of $27,584, is secured by the stock and assets of the HDG projects. The B Loan,
with an outstanding principal balance at June 30, 1997 of $5,254, is secured by
certain other projects owned by the Company (Note 20). Each of these loans is
non-recourse to the Company. 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 two letters of credit totaling $350 in support of certain HDG
projects.
As of June 30, 1996, non-recourse project loans, aggregating $14,500,
remained in default. The $14,500 term loan agreement with a bank was assumed in
conjunction with the acquisition of certain hydroelectric assets. On October 30,
1996, the Company arranged to have a financial institution purchase this
non-recourse project term loan, $13,759 at the date of purchase, (the "Old
Loan") for $5,000, including certain required reserves and closing costs of $500
(the "New Loan"). An additional $2,000 credit facility is also available under
the New Loan for up to one year to finance certain project enhancements. A
subsidiary of the Company was assigned an interest in the balance of the Old
Loan on a basis fully subordinated to the New Loan. As a result, the Company
recorded a $5,658 Extraordinary gain on early extinguishment of debt, net of
certain transaction costs of approximately $187 and income tax of $3,414, on its
Statement of Operations for the fiscal year ended June 30, 1997.
The New Loan, 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 390 basis points. 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 the New Loan
have been capitalized and are included in Intangible assets, net on the
Company's Balance Sheet as of June 30, 1997.
The $6,858 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 $18,900
and $19,300 at June 30, 1997 and 1996, respectively) have been pledged as
security.
The $6,538 note payable to an insurance company was assumed in connection
with another acquisition by the Company. Pursuant to the terms of the note,
substantially all of the acquired hydroelectric assets (approximately $11,786
and $9,526 at June 30, 1997 and 1996, respectively) have been pledged as
security.
The $2,211 term loan agreement (the "Loan Agreement") with a bank was
entered 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.
60
NOTE 11 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
The $5,902 notes payable to investors relates to the financing for the
Company's majority-owned subsidiary, Summit Energy Storage Inc. ("Summit").
Certain warrants were also issued by Summit as part of the terms of these notes.
Interest is payable annually at December 31 at the prime rate of interest, as
defined (8.50% and 8.25% at June 30, 1997 and 1996, respectively) for certain
notes and 10% for other notes. Unpaid interest balances are added to the
outstanding principal at each December 31, and accrue interest at the applicable
note interest rate.
The $1,766 term loan agreement was originally assumed by the Company as an
interim loan in conjunction with the acquisition of a hydroelectric facility.
The $4,299 notes payable to investors relates to the financing for one of
the Company's pumped storage development projects, River Mountain. 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 $1,000 security deed is secured by substantially all of the related
hydroelectric facility's assets (approximately $1,800 and $1,400 at June 30,
1997 and 1996).
The $787 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 $1,500 and
$1,400 at June 30, 1997 and 1996) have been pledged as security.
The $1,283 term loan agreement 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 $4,800 and $5,500 at June 30, 1997 and 1996)
have been pledged as security.
The $364 term loan agreement was undertaken by the Company in connection
with the acquisition of a hydroelectric facility. Pursuant to the terms of the
note, substantially all of the acquired hydroelectric assets (approximately
$1,400 and $1,100 at June 30, 1997 and 1996) have been pledged as security.
The $820 notes payable to private investors relates to the financing for
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, accrues interest at a
penalty rate equal to the stated rate plus 3.0%.
NOTE 12 - MANDATORILY REDEEMABLE PREFERRED STOCK
Series H Preferred, issued under the Refinancing for $70,299, is recorded
net of issuance costs of $3,083 and the value attributed to the detached
warrants of $5,916. The recorded value of the Series H Preferred at June 30,
1997 and 1996 was adjusted to reflect non-cash dividends declared of $14,911 and
$13,057, respectively. In addition, the recorded value in each year was also
adjusted by $857, representing accretion of the issuance costs and attached
warrant value in 1997 and 1996, which is being accreted over 10.5 years to the
redemption date.
See Note 1 and Note 20 for effects resulting from the implementation of
the Plan of Reorganization on and after the Effective Date.
61
NOTE 13 - CAPITAL STOCK
SERIES F AND SERIES G PREFERRED STOCK
In fiscal 1992, the Company consummated the Recapitalization pursuant to
the terms of the Purchase Agreement dated March 25, 1992 between the Company and
the Investor Group.
Under the terms of the Purchase Agreement, dated March 25, 1992, the
Investor Group purchased 55,000 shares of 8% Senior convertible voting preferred
stock ("Series F Preferred"), 55,000 shares of 9.85% Junior convertible voting
preferred stock ("Series G Preferred") and certain warrants, which have since
expired, for an aggregate purchase price of $110,000. Immediately prior to the
closing date of the Purchase Agreement, the Company exchanged class A common
stock for all shares of the then existing class B common stock on a one-for-one
basis and accelerated the issuance of 451,202 warrants deemed effective and
earned by GECC pursuant to the Acquisition Facility. Concurrent with the
issuance of the Series F Preferred and Series G Preferred, the Company approved
and issued warrants to the Investors (the "Investor Warrants") to purchase
809,192 shares of its class A common stock at a purchase price of $0.001 per
share. The Investor Warrants were never exercised and expired on March 25, 1997.
In addition, warrants for issuance to certain members of management (the
"Management Warrants") were approved concurrent with the issuance of the Series
F and Series G Preferred. The Management Warrants were never issued and expired
on March 25, 1997.
The Investor Group's $110,000 was allocated $54,975 to the Series F
Preferred, $54,975 to the Series G Preferred and $50 to the Investor Warrants.
The carrying value of the stock was reduced by $11,242 representing costs
associated with the issuance, allocated evenly between the two series. The
Series F Preferred and Series G Preferred are convertible into the Company's
class A common, subject to certain specified conditions, at the option of the
holder, through March 25, 2007 at a per share rate equivalent to the liquidation
preference ($1,000) divided by the conversion price (initially $40 per share,
subject to adjustment, as defined).
In February 1996, Ms. Carol H. Cunningham, the Company's then Executive
Vice-President and Chief Development Officer, exercised her option under an
existing agreement with the Company to have the Company issue 1,279 shares of
Series F Preferred and 1,279 shares of Series G Preferred in exchange for shares
of Summit stock (or vested options therefore) owned by Ms. Cunningham. The
Company subsequently issued such shares of Series F Preferred and Series G
Preferred with an effective date of February 28, 1996.
Dividends on the Series F Preferred and Series G Preferred are cumulative
(amounting to $51,029 and $40,906 at June 30, 1997 and 1996, respectively) and
are 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. The cumulative
undeclared dividends in arrears per share as of June 30, 1996 were $333.33 and
$410.42 for the Series F Preferred and Series G Preferred, respectively. Under
certain specified conditions constituting a "Trigger Date", as defined in the
Restated Certificate of Incorporation of the Company, the holders will be
entitled to convert any or all accrued and unpaid dividends into shares of class
A common stock by dividing such dividends by 85% of the Market Price, as
defined, of the class A common stock. The Company may redeem the Series F
Preferred and Series G Preferred, at its option: (i) anytime subsequent to March
25, 2000; or earlier (ii) if a public trading market for the Company's common
stock exists, the market value exceeds $60 per share, and the Investor Group,
upon redemption, will receive a minimum internal rate of return on their
investment of 30%. The redemption price will be equal to $1,000 per share plus
all accumulated and unpaid dividends. A public trading market for the class A
common stock is deemed to exist only if 30% of the fully diluted common stock,
owned by other than certain related parties, is freely tradable without further
registration.
62
NOTE 13 - CAPITAL STOCK (CONTINUED)
LIMITATIONS ON DIVIDENDS AND STOCK PURCHASES
The Company has reserved 246,510 shares of class B common stock for
issuance upon exercise of the Class B Warrants. The Purchase Agreement requires
that shares of unissued class A common stock be reserved in the amount necessary
to satisfy all of the obligations of issuance in the event of a conversion of
the Series F Preferred and Series G Preferred and/or the redemption of any
outstanding warrants, or a total of 3,831,683 and 4,576,925 shares at June 30,
1997 and 1996, respectively. It further provides for certain limitations
including limits on indebtedness, capital expenditures, investments, loans and
advances and further equity transactions.
SERIES H PREFERRED STOCK
In fiscal 1993, the Company completed the Refinancing under which 136,950
shares of Series H Preferred were issued. The Series H Preferred ranks senior to
all classes of common stock and the Series G Preferred stock and junior to the
Series F Preferred. The Series H Preferred is mandatorily redeemable on December
31, 2003 at $1,000 per share, plus accrued interest and unpaid dividends.
However, it may be redeemed, at the Company's option, any time after June 30,
1998, in whole or in part, at the then current liquidation preference plus all
accrued and unpaid dividends.
The initial liquidation preference of the Series H Preferred was $513.32
per share at issuance on June 22, 1993 and current liquidation preference was
$875.67 per share on June 30, 1997. The liquidation preference will be increased
as 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 will become payable in cash from legally available funds, when, and if
declared by the Board of Directors.
The Company may, at its option, on any scheduled dividend payment date
occurring on or after June 30, 1998, exchange the Series H Preferred, in whole,
for debentures with a principal amount of $1,000, bearing interest at 13.5%,
payable quarterly. The debentures would be general unsecured liabilities of the
Company and would rank junior to the Notes. The exchange debentures would be
issued in $1,000 principal amounts for each $1,000 of liquidation preference of
the Series H Preferred and a cash sum will be paid for all accrued but unpaid
dividends.
In the event the Company fails to make the required dividend payments, the
dividend rate rises 0.25% per quarter, to a maximum of 16.5%, until paid in
full. Among other restrictions and covenants, the Series H Preferred provides
for limitations on the payment of dividends or distribution of capital stock of
any of its Restricted Subsidiaries, as defined. After June 30, 1998, in the
event that cash dividends on the Series H Preferred are in arrears and unpaid
for more than six quarters, whether or not consecutive, the Board of Directors
of the Company will be increased by two directors and the holders of the
majority of the Series H Preferred, voting separately as a class, will be
entitled to elect two directors of the expanded Board of Directors. Such voting
rights and Board membership will continue until such time as all dividends in
arrears on the Series H Preferred are paid in full.
CHANGE IN CAPITAL STRUCTURE
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code and simultaneously filed the Plan of Reorganization. If the Plan
of Reorganization is confirmed by the Bankruptcy Court, CHI will emerge from
bankruptcy with a substantially different capital structure. The Plan of
Reorganization is described in Note 1 and Note 20.
63
NOTE 14 - EMPLOYEE EQUITY PROGRAMS, DIRECTOR COMPENSATION AND 401(K) PLANS
EMPLOYEE EQUITY PROGRAMS
The Company maintains a Stock Option Plan (the "SOP"). The SOP will be
replaced with a new stock option plan as of the Effective Date. The SOP provides
for a maximum number of 350,000 options, each to purchase one share of class A
common. Options are at the discretion of the Board of Directors on the basis of
exercise prices equal to fair market value, as defined, at the time of the
grant. Options granted prior to December 31, 1992 ratably vest daily over 5
years, however, options granted on December 31, 1992, and after, ratably vest
annually over 5 years. Vesting for certain options, under certain defined
circumstances, may be accelerated.
At June 30, 1997, 1996 and 1995, unvested SOP grants at less than Fair
Market Value, as defined, and converted from a pre-existing employee equity
program, amounted to zero, zero, and $99, respectively.
During fiscal 1997, and 1996 , no options to purchase stock were granted.
In fiscal 1995, options to purchase 47,000 shares of the Company's class A
common, exercisable at $50 per share, were granted to employees pursuant to the
SOP. Included in the charge for employee and director equity participation
programs were vested SOP grants valued at zero, $99 and $229 in 1997, 1996 and
1995, respectively. Since the exercise price is equivalent to the Fair Market
Value, as defined, at the time of issuance, no related compensation expense has
been recorded.
Transactions for 1997, 1996 and 1995 are summarized as follows:
1997 1996 1995
------------ ------------ ----------
Outstanding, beginning of year 268,781 323,286 279,805
Granted during the year -- -- 47,000
Forfeitures (44,734) (54,505) (3,519)
------------ ------------ ------------
Outstanding, end of year 224,047 268,781 323,286
======= ======= =======
Options eligible for exercise, end of year
(at prices ranging from $13.50 to $50.00 per share) 174,314 184,973 207,147
======= ======= =======
Options available for grant, end of year 125,953 81,219 26,714
======= ======= =======
64
NOTE 14 - EMPLOYEE EQUITY PROGRAMS, DIRECTOR COMPENSATION AND 401(K) PLANS
(CONTINUED)
Pursuant to an employment agreement dated November 1, 1994 between the
Company and an executive member of management, the Company granted 10,000 shares
of class A common at a purchase price of $.001 per share. The Company has the
right to repurchase these shares at a nominal price under certain defined
circumstances. As discussed below, deferred compensation related to this
issuance was recorded in 1995 and is being recognized ratably over a five-year
vesting period, per the terms of the agreement.
DIRECTOR COMPENSATION
Effective January 1, 1995, the Board of Directors approved a calendar year
1995 compensation package for all non-management board members entitling them to
receive $20 annual compensation in one of the following forms selected at their
discretion: (i) a $20 grant of class A common based upon $50 per share or (ii) a
$10 grant of class A common based upon $50 per share plus an annual retainer of
$10 paid quarterly. Director compensation in the form of 0 and 2,400 shares of
class A common was issued and $18 and $20 was paid as of June 30, 1996 and 1995,
respectively. Certain board members have elected to have their stock
entitlements issued to the employer or partnership with which they are
affiliated. In conjunction with this stock issuance, deferred compensation was
recorded and is being recognized over a calendar year. Effective January 1,
1996, compensation for non-management board members was suspended.
In fiscal 1996, there was no deferred compensation recorded related to the
above mentioned stock issuances to the board of directors and a member of
executive management. Included in the charge for employee and director equity
participation programs were vested board of directors and executive employee
stock grants valued at $160 in 1996.
Effective September 30, 1996, the Board of Directors reinstated compensation
for non-management directors of the Company as follows: (i) $10 annual retainer
payable quarterly in advance and (ii) $1.5 payable for each Board meeting
attended. There is no additional compensation for attendance or participation in
meetings of Board committees or for participation in any teleconference Board
meeting. In fiscal 1997, the Company paid $59.5 for non-management director
compensation.
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 in 1997, 1996 and 1995.
65
NOTE 15 - TAXES
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code and simultaneously filed the Plan of Reorganization. If the Plan
of Reorganization is confirmed by the Bankruptcy Court, the Company's Tax NOL
carryforwards will be significantly reduced, due to the discharge of
indebtedness under the Plan of Reorganization, and may be subject to a new
annual limitation. The Plan of Reorganization is described in Note 1 and Note
20.
The benefit/(provision) for income and franchise taxes consists of the
following for the years ended June 30:
1997 1996 1995
------------- --------------- ----------
Federal income taxes $ (408) $ (283) $ (220)
State income and franchise taxes (505) (287) (157)
Deferred tax benefits (2,382) 7,951 --
------------- ------------- --------------
$(3,295) $ 7,381 $ (377)
============= ============= ==============
The benefit/(provision) for income and franchise taxes differs from an
amount computed by applying the statutory income tax rate to pre-tax income, as
follows, for the years ended June 30:
1997 1996 1995
------------- ------------- ----------
Tax benefit at US statutory rate $ 731 $ 32,542 $ 5,405
State income tax expense (352) (156) (57)
State franchise tax expense (153) (131) (100)
Losses without current tax benefit (3,113) (24,591) (5,405)
Alternative minimum tax (408) (283) (220)
----------- ------------- ------------
$ (3,295) $ 7,381 $ (377)
============ ============= ============
Significant components of the Company's deferred tax assets and
liabilities as of June 30, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss $21,925 $22,865
Tax credits 4,237 5,851
Lease payment obligations 9,504 10,480
Original issue discount 22,235 15,598
Pumped storage development 8,624 15,785
costs
Valuation reserve (50,056) (49,266)
----------- -----------
Total deferred tax assets, net $16,469 21,313
----------- -----------
Deferred tax liabilities:
Tangible asset basis difference $36,205 $38,863
Intangible asset basis difference 11,457 11,097
----------- -----------
Total deferred tax liabilities 47,662 49,960
----------- -----------
Net deferred tax liability $31,193 $28,647
=========== ===========
66
NOTE 15 - TAXES (CONTINUED)
The deferred tax benefit of approximately $8.0 million for the year ended
June 30, 1996 relates to the write-down of certain long-lived assets in
accordance with SFAS 121 (see Note 5). The effective tax rate of the deferred
benefit recognized from the write-down differs from the federal statutory rate
due to the reduction of deferred tax liabilities offset by an increase in the
valuation allowance attributable to net operating loss carryforwards.
The valuation allowance increased by $790 primarily due to an increase in
the gross deferred tax asset relating to original issue discount, the future
benefits of which are not more likely than not to be realized, offset by
reductions in other gross assets as a result of tax attribute expirations and
tax basis reductions.
At June 30, 1997, 1996 and 1995, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes ("Tax NOL") of approximately
$64,485, $67,300 and $72,900, respectively, expiring through fiscal 2011. Of the
amounts at June 30, 1997, the Company has available acquired federal income tax
net operating loss ("Acquisition NOL") carryforwards in the amount of
approximately $6,432 representing unused losses accumulated by certain entities
prior to their acquisition by the Company. These NOLs, which expire in varying
amounts beginning with fiscal 2001, are restricted in terms of utilization.
At June 30, 1997, the Company has approximately $1,764 of investment, energy
and AMT credits available to reduce future income taxes for federal income tax
reporting purposes expiring during fiscal 2001 through 2003. Additionally, the
Company has available investment, energy and AMT credits in the amount of
approximately $2,473, 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 fiscal year 1998.
The utilization of $20,400 of the Company's Tax NOL carryforwards is
limited under current law to a maximum annual amount of approximately $3,400
plus the portion of this annual limitation not utilized in any prior year. As of
June 30, 1997, the aggregate amount of these NOLs which have accumulated under
this calculation and are available to be utilized currently is approximately
$14,800. The amount of the above noted tax credits which can be utilized in any
one future fiscal year is also restricted in the same manner as the restricted
Tax NOL carryforwards. Any future utilization of the Acquisition NOL or tax
credit carryforwards noted above would be reflected as a retroactive reduction
of goodwill, to the extent thereof, in accordance with the purchase method of
accounting.
NOTE 16 - COMMITMENTS
OPERATING LEASE COMMITMENTS
The Company has several non-cancelable operating leases expiring through
2078. 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 fiscal years following June 30, 1997 are approximately $4,900 per year.
67
NOTE 16 - COMMITMENTS (CONTINUED)
PUMPED STORAGE DEVELOPMENT
The Company has concluded that the prospects for successfully developing
its pumped storage projects are remote, and is currently limiting its pumped
storage activities to the minimum necessary to maintain the long-term viability
of these projects and the monitoring of market conditions relevant to the
projects. The Company has reduced the carrying value of its pumped storage
development assets to $0.1 million as a result of the adoption of SFAS 121 in
fiscal 1996.
INDEMNIFICATIONS
In connection with the financing of certain projects, it has been assumed
that certain tax benefits will be available. In the event that all or part of
certain tax benefits are subsequently determined to be unavailable, the related
project subsidiary and, in limited circumstances, the Company and/or
intermediate subsidiary thereof have agreed to indemnify for such lost tax
benefits. As of June 30, 1997, no claims have been made. It is management's
opinion that future material claims are unlikely.
NOTE 17 - INSURANCE CLAIMS
In August 1995, the Company experienced a property damage claim as a result
of a tropical storm. The claim, covered under the Company's umbrella property
and business interruption insurance policy, involves five projects located in
South Carolina, including Apalache, Lower Pelzer, Piedmont, Upper Pelzer and
Ware Shoals. The total claim as of June 30, 1997 was $3,462, of which
approximately $419 and $767 were recorded as business interruption revenue and
$1,607 and $669 were related to recoverable property damages at June 30, 1997
and 1996, respectively. The Company has received two partial payments of the
claim, totaling $2,127 and of the total payment received, $79 and $767 related
to business interruption revenue earned and $1,114 and $166 (net of the $100
self-insurance deductible) related to recoverable property damages incurred in
fiscal 1997 and 1996, respectively. As of June 30, 1997, the Company has
recorded a receivable of $1,335, of which $340 relates to business interruption
revenue earned and $995 relates to recoverable property damages incurred for the
Lower Pelzer project.
NOTE 18 - RELATED PARTY TRANSACTIONS
The Company has agreed to purchase certain specific and nonspecific project
related equipment, aggregating $3,000, from Asea Brown Boveri AS (formerly known
as EB Corporation), a related party company and/or an affiliate thereof, if and
when such equipment is required. Management believes that the prices to be paid
for the aforementioned equipment will be at prices substantially equal to those
which would be paid to an independent third party vendor.
GECC is a minority stockholder of and significant lender and provider of
partnership equity to the Company and/or its projects, through project
financings, including the HDG transaction. Transactions indicated on the face of
the financial statements as related party transactions include those with GECC.
68
NOTE 18 - RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions indicated on the face of the financial statements as related
party also include transactions with Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), affiliates of which are investors in the Company through The Morgan
Stanley Leveraged Equity Fund II, L.P.
On October 13, 1994, the Company engaged Morgan Stanley to provide the
Company with financial advice and assistance. In connection with that
assignment, Morgan Stanley has explored various options to increase shareholder
value including a possible sale of the Company or interests therein. The Company
has incurred approximately zero, $2 and $298 of fees to Morgan Stanley as of
June 30, 1997, 1996 and 1995, respectively.
NOTE 19 - EXECUTIVE EMPLOYEES
Effective June 30, 1996, Olof S. Nelson resigned as Chairman of the Board
of Directors, Director, President and Chief Executive Officer of the Company as
well as each of the executive and director positions Mr. Nelson held with any of
the Company's subsidiaries and affiliates. As a result of Mr. Nelson's
resignation, a severance accrual was established as of June 30, 1996 in the
amount of approximately $1.1 million and as of June 30, 1997, $0.2 million
remains.
NOTE 20 - SUBSEQUENT EVENTS
DECOMMISSIONING OF CONVENTIONAL HYDROELECTRIC ASSETS
In September 1997, the Company through its wholly owned subsidiary, Joseph
Hydro Company, Inc., a Delaware corporation ("Joseph"), terminated the PPA with
PacifiCorp, the purchasing utility, relating to three of its projects located in
Oregon, aggregating 7.01 MW of capacity (the "Joseph Projects"). Joseph received
a cash payment of $2,815, pursuant to the Termination Agreement between Joseph
and PacifiCorp, to terminate production and delivery of power from the Joseph
Projects, surrender the PPA and remove all facilities associated with the Joseph
Projects in accordance with certain terms and conditions. After payment of
certain fees, transaction and removal costs totaling approximately $915, the
Company applied the remaining approximately $1,900 as a pre-payment on the GECC
B Loan (the "GECC Loan") as the assets of the Joseph Projects secure the GECC
Loan (Note 11). The Company expects to substantially complete the removal of
all facilities of the Joseph Projects by the end of calendar 1997. These assets
are included at their carrying value of $1,900 in Assets to be disposed of on
the Balance Sheet as of June 30, 1997.
69
NOTE 20 - SUBSEQUENT EVENTS (CONTINUED)
RESTRUCTURING OF COMPANY
On June 4, 1997, CHI, the holders of a majority of the preferred stock
and an informal committee of institutions that own, or represent beneficial
holders that own, approximately 89.2% of CHI's outstanding Senior Discount Notes
(the "Unofficial Bondholders' Committee") reached an agreement in principle on
the terms of a restructuring to be accomplished pursuant to the Plan of
Reorganization under chapter 11 of the Bankruptcy Code. On August 8, 1997,
pursuant to the Disclosure Statement, CHI commenced a prepetition solicitation
of votes by the holders of Senior Discount Notes and preferred stock to accept
or reject the Plan of Reorganization. Under the Plan of Reorganization, the
holders of Senior Discount Notes and 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 that voted on the
Plan of Reorganization and by holders of greater than 98% of the Series F,
greater than 97% of the Series G and greater than 97% of the Series H Preferred,
that voted on the Plan of Reorganization.
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code in the Bankruptcy Court and filed the Plan of Reorganization and
the Disclosure Statement. None of CHI's subsidiaries has commenced a case under
the Bankruptcy Code. Pursuant to an order of the Bankruptcy Court signed on
September 15, 1997, a hearing before the Bankruptcy Court to consider
confirmation of the Plan of Reorganization is scheduled to be held on October
23, 1997. CHI anticipates (but can give no assurance) that, if the Bankruptcy
Court enters an order confirming the Plan of Reorganization on or about October
23, 1997, the Plan of Reorganization will become effective before December 31,
1997.
Through the implementation of the Plan of Reorganization on and after the
Effective Date, it is anticipated that CHI's most significant financial
obligations will be restructured as follows: $202 million in face amount of
outstanding Senior Discount Notes will be 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 Stockand shares of New Class B Common Stock to
be issued on the Effective Date, subject to dilution from the New Warrants and
the Management Options; the holders of the preferred stock will exchange such
stock for warrants to purchase up to 12.5% of the New Common Stock, subject to
dilution from the Management Options; and CHI's old common stock will be
cancelled. CHI's senior management will receive options to purchase up to an
aggregate of 7.5% of the New Class A Common Stock, subject to dilution from the
New Warrants. As a result of the restructuring, it is anticipated that, other
than a working capital facility to be entered into as of the Effective Date, CHI
will not have any significant debt obligations after the Effective Date.
If the Bankruptcy Court confirms the Plan of Reorganization, CHI will be
deemed to have adopted on the Effective Date the Amended CHI By-laws and a
Restated CHI Certificate of Incorporation, each of which has been filed in the
Bankruptcy Court as an exhibit to the Plan or Reorganization. Pursuant to CHI's
Restated Certificate of Incorporation, as of the Effective Date, CHI's name will
be changed from Consolidated Hydro, Inc. to CHI Energy, Inc. and the fiscal
year-end will be changed from June 30 to December 31.
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXISTING DIRECTORS AND EXECUTIVE OFFICERS
The names of the executive officers ("Executive Officers") of CHI and its
principal subsidiaries and the directors of CHI (the "Directors"), their ages as
of June 30, 1997, and positions with CHI are as follows:
NAME AGE POSITION
- - - ---- --- --------
James T. Stewart 49 Chairman, Chief Executive Officer and Director
Edward M. Stern 38 President, Chief Operating Officer and Secretary
Michael I. Storch 45 Executive Vice President -- Strategy and Development
Pascal J. Brun 48 Senior Vice President -- Canadian Development
Mary V. Gilbert 35 Senior Vice President and Chief Financial Officer
Daniel S. Pease 42 Senior Vice President -- Operations
Rickey J. Cashatt 45 Senior Vice President and General Manager, CHI Power, Inc.
Frank T. Giacalone 46 Senior Vice President -- Development, CHI Power, Inc.
Patrick J. Danna (1) 38 Vice President, Treasurer and Controller
J. Christopher Hocker 46 Vice President -- Corporate Affairs
Neil A. Manna 34 Vice President -- Finance, Controller and Treasurer
Nissan Boury 51 Director
Charles J. Micoleau 55 Director
Colin F. Raymond 27 Director
Frank V. Sica 46 Director
Michael H. Walkup 45 Director
- - - ---------------
(1) Mr. Danna resigned from his position at the Company, effective July 18,
1997.
71
The Executive Officers of the Company are elected by the Board of Directors
and serve at their discretion with no fixed term of office, except for Mrs. Mary
V. Gilbert, Mr. James T. Stewart, Mr. Michael I. Storch, and Mr. Edward M. Stern
who serve under certain employment contracts, the terms of which are discussed
in Item 11.
James T. Stewart, Chairman and Chief Executive Officer -- Mr. Stewart
joined CHI in November 1995 as President and Chief Executive Officer of CHI
Power, Inc., a newly-formed CHI subsidiary. He was elected Chairman and Chief
Executive Officer of the Company effective July 1, 1996. Prior to joining CHI,
Mr. Stewart had more than 25 years of experience in the energy industry. He
joined the engineering and construction firm of CRS Sirrine in 1985 as senior
Vice President, responsible for creating its power division. In 1988 he became
President and Chief Executive Officer of CRSS Capital, its independent power
subsidiary, and was responsible for developing more than $800 million in energy
assets at seven sites, with more than 1,300 equivalent megawatts. He became
President of CRSS, Inc., the parent company, in 1994. Mr. Stewart holds a
Bachelors degree in chemical engineering from Penn State University, a Masters
degree in chemical engineering from the University of Pittsburgh, and is a
registered Professional Engineer.
Edward M. Stern, President, Chief Operating Officer and Secretary -- Mr.
Stern was named to his current position with the Company in September 1996. 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 BayBank, Inc., a northeastern financial services
organization, where for six years he specialized in energy project finance,
foreclosures, debt restructurings and asset management. He received 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 -- Strategy and Development --
Mr. Storch began his employment with CHI in June 1987. He is 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 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.
Mary V. Gilbert, Senior Vice President and Chief Financial Officer -- Mrs.
Gilbert joined CHI in July 1996 as Senior Vice President of Finance for CHI
Power, Inc. She was named to her current position in January 1997 and is
presently responsible for the Company's accounting, tax, financial reporting,
treasury, human resource and information systems functions. Prior to joining
CHI, she served in several capacities with CRSS Inc., most recently as Vice
President, Controller of the parent company. Previously she had served as Chief
Financial Officer of CRSS Capital, its independent power subsidiary. Prior to
joining CRSS, Mrs. Gilbert was employed by Ernst and Young for six years, last
holding the position of audit manager. Mrs. Gilbert received a Bachelor of
Science degree in accounting from the University of Colorado at Boulder. She is
a Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants and the Texas Society of Certified Public
Accountants.
72
Daniel S. Pease, Senior Vice President -- Operations -- 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.
Rickey J. Cashatt, Senior Vice President and General Manager, CHI Power,
Inc. -- Mr. Cashatt joined CHI in January 1996. He is currently responsible for
the construction and operation of industrial energy facilities of the Company,
as well as providing development support. Before joining CHI Power, Mr. Cashatt
was a senior project manager for Destec Engineering Inc., responsible for
directing the development and construction of simple cycle and combined cycle
plants in the United States and internationally. Mr. Cashatt also served as a
project manager with similar responsibilities for CRS Sirrine Engineers, Inc.
prior to his employment at Destec Engineering, Inc. He began his career with
International Paper Company, responsible for hydroelectric and combustion power
plant installation and upgrades. Mr. Cashatt holds a degree in electrical
engineering from North Carolina State and is a registered professional engineer.
Frank T. Giacalone, Senior Vice President, Development, CHI Power, Inc. --
Mr. Giacalone began his employment with CHI in November 1995. He is responsible
for the marketing and business development functions of the Company that include
domestic and international opportunities of both hydro and industrial energy
projects. Prior to joining CHI, Mr. Giacalone most recently served as a senior
business developer for CRSS Inc. where he was responsible for the development
and negotiation of energy and industrial transactions. Prior to that he held
numerous senior development positions with other energy companies, beginning his
career with General Electric Company. Mr. Giacalone holds a degree in mechanical
engineering from Widener University and is a registered professional engineer.
J. Christopher Hocker, Vice President -- Corporate Affairs -- Mr. Hocker
joined CHI in November 1990 as Director of Communications. 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. He currently is a Director of the
National Hydropower Association. 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. Mr. Hocker received a
BA degree from Stanford University in 1973.
Neil A. Manna, Vice President --Finance, Controller and Treasurer -- Mr.
Manna joined CHI in 1990 as Assistant Controller. He is currently responsible
for day to day financial control of the Company, including accounting, treasury
and tax, as well as the Company's budgeting and risk management functions. Prior
to joining CHI he served as Controller for the sales promotion division of
Marketing Corporation of America, and also served as an audit senior for the
accounting firm of Price Waterhouse. Mr. Manna received a Bachelors degree in
accounting from the University of Connecticut in 1985 and an MBA degree with a
concentration in finance from Fairfield University in 1996. He is a Certified
Public Accountant and a member of the American Institute of Certified Public
Accountants.
Nissan Boury, Director -- Mr. Boury has been a Director of CHI since
January 1997. He is a Managing Director and founder of Claremont Capital
Corporation, a private equity investment firm based in New York City. Claremont
is the Manager of Madison Group, L.P., an investment fund registered in
Delaware. From 1980 to 1991, prior to forming Claremont, Mr. Boury was a
Managing Director and partner of E.M. Warburg, Pincus & Co., Inc., a financial
services firm specializing in private equity and money management with over
$10.0 billion in assets under management. Mr. Boury serves on the Board of
Directors of Kiowa Resources, Inc., Wyatt, Inc., Radiant Industries, Inc. and
Aqua Clear Industries, Inc. Mr. Boury received his BS and MBA degrees from New
York University.
73
Charles J. Micoleau, Director -- Mr. Micoleau has been a Director of CHI
since 1985. He is a partner in the law firm of Curtis Thaxter Stevens Broder &
Micoleau of Portland, Maine. He has been associated with this firm since 1978,
and his practice has been primarily associated with energy, environmental, and
regulatory law. He has represented a broad range of independent energy producers
and has been actively involved in the development of federal and state law
governing private energy sales. From 1970 to 1978, Mr. Micoleau was a member of
the staff of former Senator Edmund Muskie of Maine. He received his Bachelors
degree from Bowdoin College in 1963, his Masters degree in international finance
from The Johns Hopkins University in 1965, and his JD degree in 1977 from The
George Washington University.
Colin F. Raymond, Director -- Mr. Raymond has been a Director of CHI since
January 1997. He is an Associate of Morgan Stanley and Morgan Stanley Capital
Partners III, Inc. Previously, Mr. Raymond was an Associate with Wolfensohn &
Co. and J.P. Morgan & Co.'s corporate finance division. He also serves on the
Board of Directors of ARM Financial Group Inc. Mr. Raymond received his BA in
Economics from the University of Michigan in 1992.
Frank V. Sica, Director -- Mr. Sica has been a Director of CHI since 1992.
He is currently a Managing Director of Morgan Stanley, and has been with Morgan
Stanley since 1981, originally in the Mergers and Acquisitions Department and,
since 1988, with the Merchant Banking Division. He is a Director and a Vice
Chairman of MSLEF II and a Director of numerous companies including ARM
Financial Group, Inc., CSG Systems International, Inc., Fort James Corporation,
Pagemart, Inc., Pagemart Wireless, Inc. and Kohl's Department Stores, Inc. He is
also President of Morgan Stanley Ventures. Prior to joining Morgan Stanley, Mr.
Sica was an officer in the U.S. Air Force. He received a Bachelors degree from
Wesleyan University in 1973 and an MBA degree from the Tuck School of Business
at Dartmouth College in 1979.
Michael H. Walkup, Director -- Mr. Walkup has been a Director of CHI since
1988. He has been portfolio manager of The Witt-Touchton Company, a private
investment partnership in Tampa, Florida, since 1985, and has been employed by
that firm since 1982. He is also President of The Witoco Venture Corporation.
Mr. Walkup has obtained a BS degree in business administration, MBA degree, and
Masters degree in accountancy from the University of South Carolina.
There are no family relationships among the Directors and officers.
The Board of Directors has established an Executive Compensation Committee
comprised of Messrs. Sica and Walkup and an Audit Committee comprised of Messrs.
Walkup, Sica and Micoleau.
DIRECTORS AND EXECUTIVE OFFICERS AS OF THE EFFECTIVE DATE
Pursuant to CHI's Restated Certificate of Incorporation and the New
Stockholders' Agreement, the Board of Directors of reorganized CHI will consist
of seven Directors as follows: Morgan Stanley will have the right to designate
two Directors; Swiss Bank Corporation ("SBC") will have the right to designate
two Directors; management of CHI will have the right to designate two Directors;
and there will be one independent Director designated by the remaining members
of the Board of Directors. Procedures governing the nomination and election of
members of the Board of Directors are subject to a New Stockholders' Agreement,
dated as of the Effective Date.
As of the Effective Date, the initial Board of Directors of CHI will
only have five Directors, with Morgan Stanley and SBC each reserving the right
to appoint one of its two designees at a date following the Effective Date. The
initial members of the Board of Directors of restructured CHI will be as
follows: James T. Stewart (Chairman and CEO), Edward M. Stern (President & COO),
Michael J. Petrick (a Morgan Stanley designee), James DuPlessie (a SBC designee)
and one independent Director. The identity of the independent Director and the
compensation to be paid to the members of the Board of Directors of CHI will be
disclosed at, or immediately prior to the Confirmation Hearing.
74
The business experience of each of the directors and executive officers
as of the Effective Date (other than those whose experience is described above)
under "Existing Directors and Officers" during the past five years is as
follows:
Michael J. Petrick, Director -- Mr. Petrick is currently a Managing
Director in the fixed income division of Morgan Stanley & Co. Incorporated, 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. 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.
James DuPlessie, Director -- Mr. DuPlessie is currently an Executive
Director of Swiss Bank Corporation. He has been with Swiss Bank Corporation
since January 1996. Previously, Mr. Duplessie was an Executive Director of
O'Connor & Associates. He received a BA 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.
The existing Executive Officers of CHI will continue to serve as the
Executive Officers of reorganized CHI.
There are no family relationships among the contemplated Directors and
officers of reorganized CHI.
It is anticipated that the Board of Directors of restructured CHI will
establish an Executive Compensation Committee and an Audit Committee.
75
ITEM 11. EXECUTIVE COMPENSATION
HISTORICAL EXECUTIVE COMPENSATION
The following table sets forth the compensation of the named Executive
Officers for services rendered during the fiscal years ended June 30, 1997, 1996
and 1995 of the Company.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Other Annual All Other
Name and Fiscal Compensation ($) Compensation Stock Option Compensation
Principal Position Year Salary Bonus ($) Grants (#) ($)
- - - ------------------ ---- ------------ ---- ---------- ---
James T. Stewart(1)........................ 1997 300,000 250,000 -- -- 1,620(5)
Chief Executive 1996 156,365(2) -- -- -- 108,750(2)
Officer and Chairman 1995 -- -- -- -- --
Edward M. Stern(3)........................ 1997 231,762 165,000 6,150 -- 120(5)
President and 1996 188,846(4) -- 8,900 -- 20,221(5)
Chief Operating Officer 1995 165,000 40,000 7,920 7,500 10,214(5)
Michael I. Storch.......................... 1997 244,408 60,000 5,525 -- --
Executive Vice President 1996 226,216(4) -- 12,150 -- 17,500(5)
-- Strategy and Development 1995 222,175 40,000 7,870 -- 17,500(5)
Pascal J. Brun............................. 1997 120,524 52,822 4,969 -- 221(5)
Senior Vice President 1996 117,907(4) -- 2,464 -- 401(5)
-- Canadian Development 1995 119,050 19,000 2,500 2,000 375(5)
Mary V. Gilbert(6)......................... 1997 124,615(7) 52,500 -- -- 264(5)
Senior Vice President and 1996 -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- --
- - - --------------------------
(1) Mr. Stewart was elected Chief Executive Officer and a Director of the
Company as of July 1, 1996.
(2) Annual Compensation represents salary from November 1, 1995, the
commencement of Mr. Stewart's employment with the Company. Further, all
Other Compensation is comprised of a $50,000 sign-on bonus paid to Mr.
Stewart pursuant to an employment agreement dated November 1, 1995 naming
Mr. Stewart President and Chief Executive Officer of CHI Power, Inc. and
an accrued bonus of $58,750 pursuant to an employment agreement naming
Mr. Stewart Chief Executive Officer of the Company as of July 1, 1996.
(3) Mr. Stern was elected President and Chief Operating Officer of the
Company in September 1996.
(4) As of January 1, 1996, the Company has added the value of all
perquisites, except for 401(k) matching contributions and life insurance
premium payments covered under the senior management benefits policy,
into each executives base salary. Through December 31, 1995, these
perquisites were either excluded by definition from this table, or
included in Other Annual Compensation or All Other Compensation.
(5) Comprised of life insurance premiums paid by the Company on behalf of
each Executive Officer.
(6) Mrs. Gilbert was elected Senior Vice President and Chief Financial
Officer of the Company in January 1997.
(7) Annual Compensation represents salary from July 15, 1996, the
commencement of Mrs. Gilbert's employment with the Company.
STOCK OPTION GRANTS
There were no grants of stock options under the Company's stock option
plans to James T. Stewart, Edward M. Stern, Michael I. Storch, Pascal J. Brun or
Mary V. Gilbert as of the end of fiscal year ended June 30, 1997 and it is
anticipated that there will be no options granted for the period from July 1,
1997 until the Effective Date. See "Executive Compensation as of the Effective
Date -- 1997 Stock Option Plan and Management Option Agreements".
There were no options that remained unexercised as of the end of fiscal
year ended June 30, 1997.
76
Employment Contracts and Special Employment Arrangements. In June 1996, Mr.
Nelson resigned as Chairman of the Board of Directors, Director, President and
Chief Executive Officer of CHI as well as executive and director of each of the
Company's subsidiaries and affiliates. In conjunction with such resignation CHI
and Mr. Nelson entered into a termination agreement which superseded Mr.
Nelson's employment agreement. Pursuant to the termination agreement, Mr. Nelson
received a payment of $500,000 and in addition to certain other customary
benefits, he will receive an additional monthly payment of approximately $24,000
for a period of twenty months commencing in August, 1996.
In November 1995, the Company entered into an employment agreement with Mr.
James T. Stewart pursuant to which Mr. Stewart became President and Chief
Executive Officer of the Company's newly-formed, wholly-owned subsidiary, CHI
Power, Inc. In July 1996, the Company entered into a new three year employment
agreement (subject to automatic one year renewals absent notice of intent not to
renew) with Mr. Stewart which superseded the prior agreement. The new agreement
provides that Mr. Stewart will serve as the Company's Chief Executive Officer,
that the Company will use its best efforts to see that he is elected to the
Company's Board of Directors, and that he will receive an annual salary of
$300,000, which may be increased annually at the discretion of the Board. In
addition, upon execution of the new agreement Mr. Stewart received a bonus
payment of $58,750 and upon the achievement of certain targets to be agreed upon
by Mr. Stewart and the Board, Mr. Stewart will be eligible to receive annual
bonuses of up to 100% of his annual salary plus equity incentives to be
determined by the Board. In the event Mr. Stewart's employment is terminated by
CHI during the term of the employment agreement (other than in certain specified
circumstances) Mr. Stewart will receive monthly severance payments equal to the
monthly salary (excluding bonuses) for a period equal to the earlier of (A) the
date Mr. Stewart obtains subsequent employment and (B) the later of (i) the
second anniversary of Mr. Stewart's date of termination and (ii) the expiration
of the term of the employment agreement. As of the Effective Date, the new
agreement will be superseded by the employment agreements described in
"Executive Compensation as of the Effective Date - Employment Contracts and
Special Employment Arrangements", below.
In January 1997, the Company entered into employment agreements with
Messrs. Edward M. Stern and Michael I. Storch and Mrs. Mary V. Gilbert. The
agreements continue through June 1999 and are subject to automatic one year
renewal periods absent notice of intent not to renew. These superseded existing
agreements with Messrs. Stern and Storch, dated November 1994 and March 1992,
respectively. Under the terms of the agreements, Messrs. Stern and Storch and
Mrs. Gilbert are to receive annual salaries of $238,800, $249,900 and $150,000,
respectively, which may be increased annually at the discretion of the Board. In
addition, at the discretion of the Board, the executives shall be eligible to
receive annual incentive bonuses upon the achievement of certain goals and
objectives. Mr. Stern and Mrs. Gilbert will be eligible to receive bonuses of
this type of up to 75% and 50% of their base salaries, respectively. The
executives are also eligible to receive equity incentives to be determined by
the Board. In the event the executive's employment is terminated by the Company
during the term of the employment agreement (other than in certain specified
circumstances) the executives will receive monthly severance payments equal to
the executive's monthly salary (excluding bonuses) for a period equal to the
earlier of (A) the date the executive obtains subsequent employment and (B) the
later of (i) the second anniversary of the executives date of termination and
(ii) the expiration of the term of the employment agreement. As of the Effective
Date, each of these agreement will be superseded by the employment agreements
described in "Executive Compensation as of the Effective Date Employment
Contracts and Special Employment Arrangements", below.
Director Compensation. Compensation of Directors is discussed in Note 14 of
the Notes to Consolidated Financial Statements contained herein under Part II,
Item 8.
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 (the "Participants") (see Part III, Item 10)
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.
77
Stock Option Plan. Under CHI's Stock Option Plan, a committee composed of
directors not eligible to participate in the Stock Option Plan or other
stock-based compensation plans of CHI (the "Committee") is authorized to grant
non-qualified options to purchase shares of CHI's Common Stock to key employees
(including officers) as additional compensation for their services to the
Company. In addition, options qualifying as "incentive stock options" under
Section 422 of the Code may be granted to employees of the Company. Options for
up to 350,000 shares of CHI's Common Stock in the aggregate may be granted prior
to termination of the Plan on May 31, 2002, subject to adjustment in the event
of a stock split, stock dividend or other change in the Common Stock or the
capital structure of the Company. Options that expire unexercised may again be
issued under the Stock Option Plan subject to the foregoing limitations.
Options shall be exercisable over such period determined by the Committee,
but no option may remain exercisable more than ten years from the date of grant.
All options granted under the Stock Option Plan will be nontransferable other
than by will or the laws of descent and distribution, and each option is
exercisable, during the lifetime of the optionee, only by the optionee. Options
may be exercised for up to 12 months following termination of service under
those circumstances where such termination of service is due to convenience of
either the employee or the Company, retirement, permanent disability or death,
except where the employee has been terminated for cause, in which event such
options may be exercised for three months following such termination of
employment, subject in any case to the foregoing limitation on the maximum term
of options granted under the Stock Option Plan. The purchase price of Common
Stock in the case of an incentive stock option shall be such amount as may be
determined by the Committee, but in no event less than the fair market value of
such Common Stock on the date of grant, and in the case of a non-qualified stock
option, such amount as may be determined by the Committee, but in no event less
than the par value of such shares of Common Stock. The purchase price of Common
Stock subject to an option may be paid in cash, options or stock of the Company,
or a combination thereof, except where the employee has been terminated for
cause or such employee has terminated employment at such employee's convenience,
in which case a cashless exercise is subject to a penalty.
The Stock Option Plan also permits the satisfaction of federal income tax
or other tax withholding obligations arising on the exercise of an option by the
withholding of shares of Common Stock acquired under such option.
The Committee has discretion to determine the key employees who shall
participate in the Stock Option Plan, the number of shares of Common Stock
subject to options to be awarded to each participant, the vesting schedules of
options, the terms and conditions, if any, upon which such options may be
awarded and all other matters arising in the administration of the Stock Option
Plan.
As of June 30, 1997, 224,047 options have been granted and remain
outstanding of which 174,314 options have been vested, at exercise prices
ranging from $13.50 to $50 per option.
As of the Effective Date, CHI's Stock Option Plan will terminate, and will
be replaced with CHI Energy, Inc. 1997 Stock Option Plan. See "Executive
Compensation as of the Effective Date -- 1997 Stock Option Plan and Management
Option Agreements".
1992 Warrants/Special Stock Option Plan. Under the terms of the
Recapitalization, the Company approved and issued warrants to MSLEF II and
Madison (the "Investor Warrants") and approved warrants for issuance to certain
members of management (the "Management Warrants") (collectively, the "1992
Warrants"), to purchase 809,192 and 448,222 shares of its Class A Common Stock,
respectively. The 1992 Warrants allow for the purchase of the Company's Class A
Common Stock at a purchase price of $.001 per share. The 1992 Warrants were
never exercised and expired on March 25, 1997.
As of the Effective Date, the 1992 Warrants (and any rights relating
thereto) will be cancelled.
EXECUTIVE COMPENSATION AS OF THE EFFECTIVE DATE
Employment Contracts and Special Employment Arrangements. On the Effective
Date, CHI will enter into employment agreements with James T. Stewart, Edward M.
Stern, Michael I. Storch and Mary V. Gilbert. The agreements will provide that
each of the aforementioned officers will serve as the respective officer as set
forth opposite their names listed on the table entitled "Summary Compensation
Table" above. The respective terms of the employment agreements are between two
78
and three years. Post-Effective Date base compensation for each of the executive
officers executing employment agreements shall be as follows: (1) James T.
Stewart - $325,000; (2) Edward M. Stern - $250,000; (3) Michael I. Storch -
$250,000; and (4) Mary V. Gilbert - $180,000. In addition to base compensation,
the executive officers of reorganized CHI will be eligible for (i) an annual
bonus of up to 150% of base salary (depending on each executive's compensation
arrangement), (ii) participation in benefit plans, (iii) Management Options and
(iv) disability and death benefits. For a discussion of the Management Options,
see "1997 Stock Option Plan and Management Option Agreement," below. If an
executive officer's employment is terminated by reorganized CHI during the term
of the employment agreement (other than in certain circumstances) such executive
will receive monthly severance payments equal to the executive base compensation
(excluding bonuses) for a period equal to the earlier of (i) the second
anniversary of the date of termination and (ii) nine months following the date
on which the term of the employment agreement expires.
Director Compensation. The compensation of the Directors has not been
determined at this time. The amount of any compensation and the identity of the
independent Director will be disclosed at or immediately prior to the
confirmation hearing.
Senior Management Benefits Policy. It is anticipated that the Senior
Management Benefits Policy will be in effect after the Effective Date.
79
1997 Stock Option Plan and Management Option Agreements. Pursuant to the
Plan of Reorganization, it is expected that, prior to the Effective Date, the
Board of Directors of CHI will adopt the 1997 Stock Option Plan and Management
Option Agreements. 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 are being 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
reorganized CHI of shares of New Common Stock pursuant to the exercise of the
New Warrants. The Management Options will vest and become exercisable as
follows:
Effective Date - 33 1/3% of the Management
Options
First Anniversary - 22 2/9% of the Management
Thereof Options
Second Anniversary - 22 2/9% of the Management
Thereof Options
Third Anniversary - 22 2/9% of the Management
Thereof Options
The Management Options will also become vested and exercisable upon a
change in control of reorganized 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. No employee of reorganized 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.
80
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
EXISTING SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of CHI's class A common stock as of September 15, 1997 (i) by each
person known by the Company to own beneficially more than 5% of the common stock
of CHI; (ii) by each person known by the Company to own beneficially more than
5% of the outstanding voting Preferred Stock of CHI; (iii) by each director and
certain executive officers of CHI; and (iv) by all executive officers and
directors of CHI 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.
TITLE OF NUMBER OF PERCENT OF CLASS AS OF
NAME OF STOCKHOLDER OR DIRECTOR CLASS SHARES SEPTEMBER 15, 1997
- - - ------------------------------- ----- ------ ------------------
(i) More than 5% of Voting Common Stock of CHI
The Fiduciary Company(A) Class A 595,306 14.52% (H)
Madison Group, L.P. Class A (B) 500,000 12.20% (H)
The Morgan Stanley Leveraged Equity Fund II, L.P. Class A (C) 2,250,000 54.88% (H)
NAME OF
TITLE OF NUMBER OF PERCENT OF SERIES AS OF
NAME OF STOCKHOLDER OR DIRECTOR SERIES SHARES SEPTEMBER 15, 1997
- - - ------------------------------- ------ ------ ------------------
(ii) More than 5% of Voting Preferred Stock of CHI
Madison Group, L.P........................................... Series F 10,000 17.77%
Series G 10,000 17.77%
The Morgan Stanley Leveraged Equity Fund II, L.P............. Series F 45,000 79.96%
Series G 45,000 79.96%
NUMBER OF
SHARES OR PERCENT OF COMMON STOCK
TITLE OF SHARE AS OF
NAME OF STOCKHOLDER OR DIRECTOR CLASS EQUIVALENTS SEPTEMBER 15, 1997
- - - ------------------------------- ----- ----------- ------------------
(iii) Common Stock held by each director and certain executive officers of CHI
and related parties (G)
Michael I. Storch Class A 109,185 2.66%
Edward M. Stern (D)(F) Class A 34,600 .84%
Charles J. Micoleau(E) Class A 2,438 .06%
Michael H. Walkup Class A 400 .01%
(iv) All executive officers and directors of CHI and
related parties as a Group 192,236 4.61%
- - - ---------------
(A) The Fiduciary Company beneficially owns 595,306 shares of class A common
stock by virtue of its power to vote and dispose of such shares. The
economic interest in (i) 313,505 of such shares is owned by a trust for
the benefit of the descendants of Olof S. Nelson, (ii) 146,969 of such
shares is owned by a trust for the benefit of descendants of Robert B.
Milligan, Jr. a former director of the Company and former affiliate at
Madison Group, L.P. and (iii) the remainder of such shares is owned by
certain other trusts. Mr. Nelson and Mr. Milligan disclaim beneficial
ownership of these shares. Mr. Milligan is an affiliate of the Fiduciary
Company.
(B) Represents the number of class A common shares which Madison Group, L.P.
has beneficial ownership based upon the exercise of its conversion right
attached to its ownership of Series F and G Preferred Stock.
(C) Represents the number of class A common shares of which MSLEF II has
beneficial ownership based upon the exercise of its conversion rights
attached to its ownership of Series F and G Preferred Stock.
(D) Except as noted in footnotes (E) and (F), all shares are represented by
vested, exercisable stock options.
81
(E) 1,550 of Mr. Micoleau's shares are held by an IRA in trust for his
benefit.
(F) Includes 10,000 shares of class A common stock which may be repurchased
by the Company for a nominal price, under certain defined circumstances.
(G) Excludes certain stock entitlements earned as director compensation which
certain directors have relinquished all beneficial interests in. See Note
14 of the Notes to Consolidated Financial Statements.
(H) Ownership percentages are calculated in accordance with SEC Rule 13d -
3(d)(1) and, therefore, exclude the dilutive effects of outstanding
warrants, stock options and cumulative convertible dividends.
Consequently, these percentages do not represent ownership on a fully
diluted basis as disclosed in Part I Item 1 "Business".
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AS OF THE EFFECTIVE DATE
It is anticipated that through the implementation of the Plan of
Reorganization, as of the Effective Date, CHI's old class A common stock and
CHI's Preferred Stock will be cancelled. The holders of CHI's Senior Discount
Notes will be issued shares of New Common Stock on the Effective Date consisting
of approximately 9,085,517 shares of New Class A Common Stock and 914,483 shares
of New Class B Common Stock.
The following table sets forth certain information regarding the
approximate beneficial ownership of CHI's New Common Stock as of the Effective
Date by each person which CHI anticipates to beneficially own more than 5% of
the New Common Stock of CHI.
PERCENT OF
COMMON STOCK
AS OF THE
NAME OF STOCKHOLDER TITLE OF CLASS NUMBER OF SHARES EFFECTIVE DATE
------------------- -------------- ---------------- --------------
Morgan Stanley & Co., Incorporated Class A 3,610,000 36.1%
Swiss Bank Corporation and Affiliates Class A 3,136,000 31.4%
Merrill Lynch Asset Management Class A & Class B 1,520,000 15.2%
Stonehill Investment Corp. Class A 656,000 6.6%
Gem Capital Class A 605,000 6.1%
82
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RECAPITALIZATION AND THE MSLEF II AND MADISON RELATIONSHIPS
In early 1992, CHI sold to Madison and MSLEF II $55.0 million aggregate
liquidation value of the Series F Preferred Stock and $55.0 million aggregate
liquidation value of the Series G Preferred Stock and, together with the Series
F Preferred Stock, the "Investor Preferred Stock"). The terms of the Investor
Preferred Stock provide that, upon the occurrence of certain events (beyond
applicable cure periods, if any), including the failure by CHI to pay, when due,
a dividend or redemption payment on the Investor Preferred Stock, the breach by
CHI of any material covenant set forth in the purchase agreement relating to the
sale of the Investor Preferred Stock, the breach by CHI, in any material
respect, of any representation or warranty made in the purchase agreement
relating to the sale of the Investor Preferred Stock, the bankruptcy of CHI or
any of its significant subsidiaries, unsatisfied judgments (not covered by
insurance) in excess of $0.5 million against CHI or any of its subsidiaries,
failure by CHI to meet certain performance criteria and default by CHI or any of
its subsidiaries on any indebtedness of CHI (including the Notes) or any such
subsidiary other than any default on subsidiary indebtedness that is not
material to CHI and causes no cross default to other CHI or subsidiary
indebtedness (each an "Investor Event of Non-Compliance"), the Investors will
have the right to designate a majority of CHI's Board of Directors. As a result
of the failure of the Company to meet certain of the aforementioned performance
criteria, the Investors are entitled to declare an Investor Event of
Non-Compliance.
In connection with the Recapitalization, CHI and all of its stockholders,
optionholders and warrantholders entered into an Amended and Restated
Stockholders, Optionholders and Warrantholders Agreement, dated as of March 25,
1992. After giving effect to the use of proceeds of the Refinancing and an
amendment to such stockholders agreement to be executed in connection with such
use of proceeds to delete the provisions thereof relating to rights granted to
GECC as a preferred stockholder, such stockholders agreement includes
restrictions on CHI's ability to submit to a vote of stockholders matters
customarily decided by a board of directors; provisions requiring that the Board
of Directors initially consist of eight directors, five of which shall be
unaffiliated with the Investors; provisions entitling the Investors to appoint
two representatives to the Board of Directors so long as they hold an aggregate
of 10% of CHI's fully-diluted voting equity, excluding the 1992 Warrants and any
unexercisable or out-of-the-money options, warrants or convertible securities
(the Investors having separately agreed that if either of them ceases to hold
$2.0 million aggregate liquidation preference of Investor Preferred Stock (or an
equivalent amount of converted Common Stock), then the other Investor will be
entitled to appoint both representatives); restrictions on transfers of shares
held by other stockholders; and "demand" and "piggyback" registration rights for
the Investors with respect to certain securities of CHI, including the shares of
class A common stock issuable upon conversion of the Preferred Stock and the
exercise of the 1992 Warrants. such stockholders agreement, as so amended,
further provides for control of CHI by the Investors in those situations where
there has occurred an Investor Event of Non-Compliance pursuant to CHI's
Restated Certificate of Incorporation. In addition, such stockholders agreement
provides that such governance provisions would be binding on the holders of
voting equity, principally with respect to liquidation proposals. As of the
Effective Date, such stockholders agreement will be of no further force and
effect.
Morgan Stanley, an affiliate of MSLEF II, received an investment banking
fee from CHI in connection with the Recapitalization. Frank V. Sica, a Managing
Director of Morgan Stanley, and Colin F. Raymond, an Associate of Morgan
Stanley, are members of the Board of Directors of CHI.
In March 1996, Robert B. Milligan, Jr., a principal of the former general
partner of Madison resigned as a member of the Board of Directors of CHI and
certain of the Company's affiliates for which he served as a board member. In
January 1997, Nissan Boury was named to the CHI Board as Mr. Milligan's
replacement.
83
MORGAN STANLEY & CO. INCORPORATED
On October 13, 1994, the Company engaged Morgan Stanley to provide the
Company with financial advice and assistance. In connection with that
assignment, Morgan Stanley has explored various options to increase shareholder
value including a possible sale of the Company or interests therein. The Company
had incurred approximately $0, $0 and $0.3 million of fees to Morgan Stanley as
of June 30, 1997, 1996 and 1995, respectively, for such financial services.
Morgan Stanley also acted as Placement Agent in the Refinancing and received
placement fees in connection therewith. As of June 30, 1997, the Placement Agent
holds 44,303 shares of the Series H Preferred Stock for its own account.
GECC RELATIONSHIP
As a result of a Management buyout financed by GECC in 1988, GECC was a
principal stockholder of CHI until consummation of the Refinancing (See Part
III, Item 12, "Security Ownership of Certain Beneficial Owners and Management").
As part of the Refinancing, the Company purchased substantially all of GECC's
equity position in CHI and terminated a $24.0 million working capital facility
previously provided by GECC.
As of June 30, 1996, approximately $85.0 million of the GECC Acquisition
Facility remained available to fund future acquisitions of the Company, subject
to specific project financing approvals. All rights related to the Acquisition
Facility terminated on March 25, 1997. In addition to minor common stock
ownership interest, GECC has, through original investments and potential maximum
investments (e.g. letters of credit, revolving credit facilities), invested,
loaned or committed approximately $230.0 million to the Company.
ASEA BROWN BOVERI
The Company has agreed to purchase certain specific and nonspecific project
related equipment, aggregating $3 million, from Asea Brown Boveri IS ("ABB", the
parent company of Asea Brown Boveri AS), a stockholder of CHI (see "Principal
Stockholders"), if and when such equipment is required.
Summit Energy Storage, Inc. ("SES") has a memorandum of understanding (a)
to buy equipment and services from an ABB subsidiary within its area of
competency, other than civil engineering and construction management, on
customary arm's-length terms on a cost-plus or other mutually agreed basis, (b)
permitting such subsidiary to designate an SES board member and (c) pursuant to
which such subsidiary invested approximately $1.4 million and received preferred
stock with equivalent liquidation value and attached warrants to purchase common
stock held by CHI. The same ABB subsidiary made aggregate bridge loans totaling
approximately $1.0 million to SES and received additional warrants to purchase
unissued SES common stock. On a fully diluted basis, the warrants, if exercised,
would give ABB approximately 7% of SES common stock.
CURTIS THAXTER STEVENS BRODER & MICOLEAU
Charles J. Micoleau, a member of CHI's Board of Directors, is a partner in
the law firm of Curtis Thaxter Stevens Broder & Micoleau ("Curtis Thaxter"),
which provides certain legal services to the Company. For the fiscal year ended
June 30, 1997, the Company paid such firm approximately $0.3 million for legal
fees and expenses. In addition, other partners of Curtis Thaxter, John W.
Bernotavicz and Michael B. Peisner, are Assistant Secretaries of the Company and
certain of its subsidiaries. Curtis Thaxter is entitled to preferred stock of
SES with a liquidation value of $0.2 million, plus accrued dividends on such
stock, plus warrants for less than one percent of the fully diluted common stock
of SES, as deferred compensation for work done in connection with the
development of the Summit project. Members of Curtis Thaxter, exclusive of Mr.
Micoleau, are the beneficial owners of an aggregate of 2,143 shares of the
Company's Common Stock for which they paid cash.
84
OTHERS
CHI has entered into an agreement (the "Put and Call Agreement") with SES
Partners, L.P., a Delaware Limited Partnership (the "Partnership"). Pursuant to
the Put and Call Agreement, the Partnership has the right to sell to CHI in
certain circumstances (the "Put"), and CHI has the right to purchase from the
Partnership in certain circumstances (the "Call"), an option to purchase an
approximately 1.1% as of September 15, 1997 equity interest in SES (the
"Interest") from an existing shareholder of SES (the "Option"), which the
Partnership purchased from such shareholder. If the Put is exercised by the
Partnership (which it may do upon, among other things, initial funding of
construction financing of the Summit Project ("Project Financing"), abandonment
of Summit by SES or a sale by CHI of its equity interest in SES), then CHI would
issue approximately 6,000 shares of its class A common stock in exchange for the
Option, which would have an exercise price of $0.7 million. If the Call is
exercised by CHI (which it may do upon Project Financing), then CHI would pay
the greater of 70.0% of the fair market value of the Interest or the purchase
price of the Option ($0.3 million) for the Interest. CHI has also acquired an
option (the "Acres Option") to purchase from Acres approximately 115 shares
representing 7.1%, as of September 15, 1997, of the outstanding equity of SES.
Additionally, CHI has entered into an agreement pursuant to which SES Partners
II, L.P., a Delaware limited partnership (the "Milligan Partnership") acquired
from CHI a warrant (the "Milligan Warrant") pursuant to which, upon the
happening of certain events, the Milligan Partnership has the right to purchase
approximately 37,600 shares of Class A Common Stock of CHI, subject to customary
antidilution protection. Additionally, the Milligan Partnership has granted to
CHI an option to require the Milligan Partnership to sell the Milligan Warrant
to CHI for cash. CHI has granted to the Milligan Partnership an option (the
"Acres Option Call"), pursuant to which, upon the happening of certain events,
the Milligan Partnership has the right to either (i) transfer the Acres Option
to the Milligan Partnership or (ii) convey 100% of the economic benefits of the
Acres Option (net of certain expenses) to the Milligan Partnership in cash
immediately upon the liquidation of the SES equity interests underlying the
Acres Option, which shall occur as soon as practicable after the exercise of the
Acres Option Call by the Milligan Partnership. Certain Executive Officers and
Directors of CHI and certain of their affiliates are limited partners of the
Milligan Partnership. As of the Effective Date, the (i) Put and Call Agreement
dated as of June 20, 1993, by and among CHI , SES Partners, L.P. and Summit
Energy Storage Inc., (ii) Call Agreement dated as of November 1, 1993, by and
among CHI, SES Partners II, L.P. and Summit Energy Storage Inc. and (iii)
Warrant Agreement dated as of November 1, 1993, between CHI and SES Partners II,
L.P. will be of no further force or effect.
Witoco Venture Corporation ("Witoco"), a stockholder of CHI loaned SES $0.5
million in December 1991 and received a non-recourse note and attached warrants
in connection with the development of the Summit project.
Michael Walkup, President of Witoco, is also a member of CHI's Board of
Directors.
The Company believes that all of the foregoing transactions are on terms
that are no less favorable to the Company than could have been obtained from an
unaffiliated third party in a similar transaction.
85
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PAGE
(a) 1.Financial Statements
Report of Independent Accountants 41
Consolidated Statements of Operations for the three years
ended June 30, 1997 42
Consolidated Balance Sheet at June 30, 1997 and 1996 43
Consolidated Statement of Stockholders' Equity for the three years
ended June 30, 1997 44
Consolidated Statement of Cash Flows for the three years
ended June 30, 1997 45
Notes to Consolidated Financial Statements 47
(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 Form of Restated Certificate of Incorporation of Consolidated
Hydro, Inc. (to be adopted as of the Effective Date)
3.2 Form of By-Laws of CHI Energy, Inc. (to be adopted as of the
Effective Date)
+3.3A Certificate of Amendment of Restated Certificate of
Incorporation
+3.3B Restated Certificate of Incorporation and amendment thereto and
Bylaws, as amended, of Consolidated Hydro, Inc.
+3.4 Certificate of Designation of 13-1/2% Cumulative Redeemable
Exchangeable Preferred Stock, Series H, par value $0.01 per
share, of Consolidated Hydro, Inc.
+3.5 Certificate of Incorporation and Bylaws of Summit Energy Storage
Inc.
10.1 Form of Stockholders Agreement (to be adopted as of the
Effective Date)
10.2 Form of Registration Rights Agreement (to be adopted as of the
Effective Date)
10.3 Form of Employment Agreement (to be adopted as of the Effective
Date)
10.4 CHI Energy, Inc. 1997 Stock Option Plan and Management Option
Agreement (to be adopted prior to the Effective Date)
10.5 Form of Series B Warrant (to be adopted as of the Effective
Date)
10.6 Form of Series C Warrant (to be adopted as of the Effective
Date)
86
+10.7 Power Purchase Agreement between Boott Hydropower, Inc. and
Commonwealth Electric Company, dated January 10, 1983 and
amendment dated March 6, 1985
+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
87
+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
+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.
88
+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)
+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
89
+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.
+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
90
+10.62A Technical Services Agreement dated June 5, 1992 between Summit
Energy Storage Inc. and Morrison Knudsen Corporation
+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
91
+10.74 Employment Agreement between Consolidated Hydro, Inc. and
Michael I. Storch dated March 25, 1992
+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.
92
+10.90 Stock Option Plan
+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.
93
+++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 January 1, 1997, by and between
Consolidated Hydro, Inc. and Michael I. Storch.
10.115 Employment Agreement dated as of January 1, 1997 by and between
Consolidated Hydro, Inc. and Edward M. Stern.
10.116 Employment Agreement dated as of January 14, 1997, by and
between Consolidated Hydro, Inc. and Mary V. Gilbert.
94
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.
12.1 Statements regarding computation of ratios
21.1 List of Subsidiaries of Registrant
27.1 Financial Data Schedule
95
+ 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.
96
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on December 23,
1996, reporting the disposition of Consolidated Hydro Maine, Inc.
The required pro-forma financial statements were filed in an
amendment to the report on March 7, 1997.
The Company filed a Current Report on Form 8-K on March 20, 1997,
reporting the meeting of certain holders of the Company's 12%
Senior Discount Notes, announcing an outline for its current
business strategy and a proposal to restructure its outstanding
debt and equity.
The Company filed a Current Report on Form 8-K on June 4, 1997,
reporting the attainment of an agreement-in-principle for a
restructuring plan with an unofficial committee of bondholders
representing a majority of the 12% Senior Discount Notes and the
Series F, G, and Series H Preferred Stock.
97
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.
CONSOLIDATED HYDRO, INC.
(Registrant)
Date: September 26, 1997 By: /s/ James T. Stewart
--------------------------
James T. Stewart
Signature Title Date
--------- ----- ----
by: /s/James T. Stewart
--------------------------------
James T. Stewart Chairman and Chief Executive Officer September 26, 1997
by: /s/ Edward M. Stern
--------------------------------
Edward M. Stern President, Chief Operating Officer and Secretary September 26, 1997
by: /s/ Mary V. Gilbert
--------------------------------
Mary V. Gilbert Senior Vice President, Chief Financial Officer September 26, 1997
(principal financial officer)
by: /s/ Neil A. Manna
--------------------------------
Neil A. Manna Vice President --Finance, Controller September 26, 1997
and Treasurer (principal accounting officer)
by: /s/ Nissan Boury
--------------------------------
Nissan Boury Director September 26, 1997
by: /s/ Charles J. Micoleau
--------------------------------
Charles J. Micoleau Director September 26, 1997
by: /s/ Colin F. Raymond
--------------------------------
Colin F. Raymond Director September 26, 1997
by: /s/ Frank V. Sica
--------------------------------
Frank V. Sica Director September 26, 1997
by: /s/ Michael H. Walkup
--------------------------------
Michael H. Walkup Director September 26, 1997
98
EXHIBIT INDEX
-------------
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 Form of Restated Certificate of Incorporation of Consolidated
Hydro, Inc. (to be adopted as of the Effective Date)
3.2 Form of By-Laws of CHI Energy, Inc. (to be adopted as of the
Effective Date)
+3.3A Certificate of Amendment of Restated Certificate of
Incorporation
+3.3B Restated Certificate of Incorporation and amendment thereto and
Bylaws, as amended, of Consolidated Hydro, Inc.
+3.4 Certificate of Designation of 13-1/2% Cumulative Redeemable
Exchangeable Preferred Stock, Series H, par value $0.01 per
share, of Consolidated Hydro, Inc.
+3.5 Certificate of Incorporation and Bylaws of Summit Energy Storage
Inc.
10.1 Form of Stockholders Agreement (to be adopted as of the
Effective Date)
10.2 Form of Registration Rights Agreement (to be adopted as of the
Effective Date)
10.3 Form of Employment Agreement (to be adopted as of the Effective
Date)
10.4 CHI Energy, Inc. 1997 Stock Option Plan and Management Option
Agreement (to be adopted prior to the Effective Date)
10.5 Form of Series B Warrant (to be adopted as of the Effective
Date)
10.6 Form of Series C Warrant (to be adopted as of the Effective
Date)
+10.7 Power Purchase Agreement between Boott Hydropower, Inc. and
Commonwealth Electric Company, dated January 10, 1983 and
amendment dated March 6, 1985
+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
+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)
+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.
+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
+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
+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
+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.
+++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 January 1, 1997, by and between
Consolidated Hydro, Inc. and Michael I. Storch.
10.115 Employment Agreement dated as of January 1, 1997 by and between
Consolidated Hydro, Inc. and Edward M. Stern.
10.116 Employment Agreement dated as of January 14, 1997, by and
between Consolidated Hydro, Inc. and Mary V. Gilbert.
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.
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.