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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 33-69762
CHI ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1138478
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 Washington Boulevard, Stamford, Connecticut 06901
------------------------------------------------- ------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (203) 425-8850
NONE
---------------------------------------------------------------
(Former name or former address, if changed since last report.)
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 whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No __
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class A Outstanding as of May 14, 1998
--------------------------------------- ------------------------------
Common stock, $.01 par value 9,085,290
Class B Outstanding as of May 14, 1998
--------------------------------------- ------------------------------
Common stock, $.01 par value 914,710
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INDEX
Page No.
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..................................... 2
Consolidated Statement of Income for the three months
ended March 31, 1998 and 1997 (Unaudited)............. 3
Consolidated Balance Sheet at March 31, 1998
and December 31, 1997 (Unaudited).................... 4
Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1998 (Unaudited). 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and 1997 (Unaudited)............. 6-7
Notes to Consolidated Financial Statements (Unaudited) .. 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 10-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 18
Item 2 Changes in Securities and Use of Proceeds................ 18
Item 3. Defaults upon Senior Securities.......................... 18
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Item 5. Other Information........................................ 18
Item 6. Exhibits and Reports on Form 8-K......................... 18
Signature
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHI ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
2
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands except share and per share amounts)
(Unaudited)
REORGANIZED PREDECESSOR
COMPANY COMPANY
THREE MONTHS ENDED
MARCH 31,
1998 1997
------- -------
OPERATING REVENUES:
Power generation revenue $ 14,712 $ 15,078
Management fees and operations & maintenance revenues 1,512 1,457
Equity income in partnership interests and other partnership income 1,231 241
-------- --------
17,455 16,776
-------- --------
COSTS AND EXPENSES:
Operating 4,601 4,208
General and administrative 2,275 1,997
Charge for employee and director equity participation programs - 25
Depreciation and amortization 1,828 2,162
Lease expense to a related party - 801
Lease expense to unrelated parties 1,430 655
Adjustment to impairment of long-lived assets - (323)
------- --------
10,134 9,525
------- --------
Income from operations 7,321 7,251
INTEREST INCOME 272 455
OTHER INCOME 191 132
INTEREST EXPENSE ON INDEBTEDNESS TO RELATED PARTIES - (2,656)
INTEREST EXPENSE ON INDEBTEDNESS TO UNRELATED PARTIES (2,112) (4,693)
------- ------
Income before (provision)/benefit for income taxes 5,672 489
(PROVISION)/BENEFIT FOR INCOME TAXES (1,053) 142
------- ------
NET INCOME $ 4,619 $ 631
======= ======
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK:
Net income $ 4,619 $ 631
Dividends declared on preferred stock - (3,788)
Accretion of preferred stock - (214)
Undeclared dividends on cumulative preferred stock - (2,703)
------- --------
$ 4,619 $ (6,074)
======= ========
NET INCOME PER COMMON SHARE (A) $ 0.46 n/a
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (A) 10,000,000 n/a
(a) Share and per share data are not meaningful on or prior to November 7, 1997
due to the significant change in the capital structure in connection
with the Plan of Reorganization.
The accompanying notes are an integral part of the consolidated financial
statements.
3
CHI ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share and per share amounts)
(Unaudited)
MARCH 31, DEC. 31,
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents unrestricted $ 8,226 $ 6,869
Cash and cash equivalents restricted 6,417 5,129
Accounts receivable, net 9,338 7,957
Prepaid expenses and other current assets 1,765 1,406
-------- --------
Total current assets 25,746 21,361
PROPERTY, PLANT AND EQUIPMENT, NET 92,776 93,692
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE
TO IDENTIFIABLE ASSETS, NET 15,356 17,300
INTANGIBLE ASSETS, NET 47,207 47,800
INVESTMENTS AND OTHER LONG-TERM ASSETS 41,627 41,808
--------- ---------
$ 222,712 $ 221,961
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,448 $ 7,990
Current portion of long-term debt 5,446 5,355
Total current liabilities 11,894 13,345
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 80,158 82,616
DEFERRED CREDIT, STATE INCOME TAXES AND OTHER
LONG-TERM LIABILITIES 40,236 40,195
COMMITMENTS AND CONTINGENCIES -------- -------
Total liabilities 132,288 136,156
======== ========
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued - -
Common stock, $.01 par value, 20,000,000
shares authorized
Class A common stock, 9,085,290 shares issued
and outstanding 91 91
Class B common stock, 914,710 shares issued
and outstanding 9 9
Additional paid-in capital, including $2,064 related
to warrants 85,000 85,000
Retained earnings 5,324 705
--------- ---------
Total stockholders' equity 90,424 85,805
--------- ---------
$ 222,712 $ 221,961
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
4
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(Amounts in thousands except shares and per share amounts)
(Unaudited)
PREFERRED STOCK COMMON STOCK
NUMBER NUMBER ADDITIONAL TOTAL
OF SHARES REPORTED OF SHARES PAR PAID-IN RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING VALUE CAPITAL EARNINGS EQUITY
---------- -------- ----------- ----- --------- -------- -------------
BALANCE DECEMBER 31, 1997 - - 10,000,000 $ 100 $ 85,000 $ 705 $ 85,805
Net income 4,619 4,619
BALANCE MARCH 31, 1998 - - 10,000,000 $ 100 $ 85,000 $ 5,324 $ 90,424
The accompanying notes are an integral part of the consolidated financial
statements.
5
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
REORGANIZED PREDECESSOR
COMPANY COMPANY
----------- -----------
THREE MONTHS ENDED
MARCH 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,619 $ 631
Adjustments to reconcile net income to net cash provided by
operating activities before reorganization items:
Non cash interest and other charges 185 5,262
Non cash adjustment to impairment of long lived assets - (323)
Change in deferred tax liabilities 622 -
Depreciation and amortization 1,828 2,162
Undistributed earnings of affiliates (106) (211)
Increase in accounts receivable (1,381) (1,614)
Increase in prepaid expenses and other current assets (359) (515)
Decrease in accounts payable and accrued expenses (1,354) (621)
------- ------
Net cash provided by operating activities
before reorganization items 4,054 4,771
------- ------
Operating cash flows used for reorganization items:
Professional fees (188) --
------ -------
Net cash used for reorganization items (188) --
------ -------
Net cash provided by operating activities 3,866 4,771
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets - 323
Cost of development expenditures - (452)
Capital expenditures (136) (428)
Decrease/(increase) in investments and other long term assets 287 (832)
------- ------
Net cash provided by/(used in) investing activities 151 (1,389)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long term borrowings from unrelated parties - 103
Payments to a related party on long term borrowings - (158)
Payments to unrelated parties on long term borrowings (1,374) (1,127)
Increase/(decrease) in other long term liabilities 2 (14)
-------- --------
Net cash used in financing activities (1,372) (1,196)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,645 2,186
-------- --------
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 11,998 31,671
-------- --------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 14,643 $ 33,857
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
(continued)
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------ ------------
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest paid to related party $ - $ 834
=========== ===========
Interest paid to unrelated parties $ 2,057 $ 1,377
=========== ===========
Income taxes, net $ 375 $ 73
=========== ===========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reorganization value in excess of amounts allocable to identifiable assets and
deferred credit, state income taxes and other long-term liabilities decreased by
$622 for the three months ended March 31, 1998 as a result of the reversal of
tax valuation allowances related to net operating loss carryforwards.
Reorganization value in excess of amounts allocable to identifiable assets and
long-term debt and obligations under capital leases decreased by $1,037 for the
three months ended March 31, 1998 as a result of the termination of a land
option agreement.
The accompanying notes are an integral part of the consolidated
financial statements.
7
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts or otherwise noted)
(Unaudited)
NOTE 1 - ORGANIZATION
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company"), has been engaged in the
energy business since its founding in 1985. Its principal business is the
development, operation and management of industrial energy and other
infrastructure assets and of hydroeletric power plants. Currently, all of the
Company's revenue is derived from the ownership and operation of hydroelectric
facilities. Industrial infrastructure assets include power plants, steam
boilers, air compressors, water and wastewater treatment facilities, and other
utility-type facilities that support the manufacture of products in capital
intensive process industries such as pulp and paper, chemicals, textile, food
and beverage, etc. As of March 31, 1998 and 1997, the Company had ownership
interests in, leased and/or operated projects with a total operating capacity of
336 and 343 megawatts ("MW"), respectively.
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 a plan of reorganization (the "Plan
of Reorganization") and a disclosure statement. The Bankruptcy Court entered an
order confirming the Plan of Reorganization on October 23, 1997 and the Plan of
Reorganization became effective on November 7, 1997 (the "Effective Date").
As of the Effective Date, the Company adopted fresh start reporting in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). The accompanying consolidated financial
statements reflect the use of fresh start reporting as required by SOP 90-7, in
which assets and certain liabilities were adjusted to their fair values and
resulted in the creation of a new reporting entity (the "Reorganized Company")
with no retained earnings or accumulated deficit as of November 7, 1997.
Accordingly, the consolidated financial statements for the periods prior to and
including November 7, 1997 (the "Predecessor Company") are not comparable to the
consolidated financial statements presented subsequent to November 7, 1997. A
black line has been drawn on the accompanying consolidated financial statements
to distinguish between the Reorganized Company and Predecessor Company balances.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") have been omitted pursuant to such rules
and regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading.
The results of operations for the interim periods shown in this report are
not necessarily indicative of the results to be expected for the fiscal year. In
the opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly its financial position as of
March 31, 1998 and December 31, 1997 and the results of its operations and
changes in its financial position for the three months ended March 31, 1998 and
1997. These financial statements should be read in conjunction with the December
31, 1997 Audited Consolidated Financial Statements ("December 1997 Financials")
and Notes thereto.
8
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts or otherwise noted)
(Unaudited)
NOTE 3 - CREDIT FACILITY
On March 31, 1998, the Company obtained a $15,000 secured revolving credit
facility with an initial expiration date of December 31, 1999 (the "Facility").
The Company will use proceeds from the Facility to support its development,
acquisition and operating activities. Upon expiration of the Facility, any
outstanding revolving loans will, at the Company's option, be converted into a
five year term loan. The interest rate on the revolving loans is prime + 1.5%.
As of May 14, 1998, no revolving loans were outstanding under the Facility and
$1,100 of letters of credit have been issued.
NOTE 4 - TAXES
The Company's current tax provision differs from the statutory effective
tax rate mainly due to the utilization of net operating loss carryforwards which
previously have been offset by a valuation allowance.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
There has been no significant change in the status of legal proceedings
filed against the Company since December 31, 1997 and management believes that
these legal proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---- RESULTS OF OPERATIONS
GENERAL
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company"), has been engaged in the
energy business since its founding in 1985 and is currently principally engaged
in the development, operation and management of industrial energy and other
infrastructure assets and of hydroelectric power plants. Currently, all of the
Company's revenue is derived from the ownership and operation of hydroelectric
facilities (the Company's "hydroelectric business"). The Company's operating
hydroelectric projects are located in 15 states in the United States and one
province in Canada. The Company believes its future growth will come primarily
from its industrial infrastructure business.
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 a plan of reorganization (the "Plan
of Reorganization") and a disclosure statement. The Bankruptcy Court entered an
order confirming the Plan of Reorganization on October 23, 1997 and the Plan of
Reorganization became effective on November 7, 1997 (the "Effective Date").
As of the Effective Date, CHI adopted fresh start reporting in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7 "Financial Reporting by Entities in Reorganization Under The Bankruptcy
Code," ("SOP 90-7") which resulted in the creation of a new reporting entity.
The accompanying financial information for the three months ended March 31, 1998
reflects the financial condition and results of operations of the new reporting
entity (the "Reorganized Company") while financial information for the three
months ended March 31, 1997 relates to the former reporting entity (the
"Predecessor Company").
The Company's existing U.S. hydroelectric projects are clustered in four
regions: the Northeast, Southeast, Northwest and West, with a concentration in
the Northeast. CHI has developed what it believes to be an efficient "hub"
system of project management designed to maximize the efficiency of each
facility's operations. The economies of scale created by this system include
reduced costs related to centralized administration, operations, maintenance,
engineering, insurance, finance and environmental and regulatory compliance. The
hub system and the Company's operating expertise have enabled the Company to
successfully integrate acquisitions within 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. As of March 31, 1998, the Company had a 100%
ownership or long-term lease interests in 51 projects (138 megawatts), a partial
ownership interest in 11 projects (82 megawatts), and operations and maintenance
("O&M") contracts with 24 projects (116 megawatts).
CHI sells substantially all of the electric energy and capacity from its
U.S. projects to public utility companies pursuant to take or pay power purchase
agreements. These contracts vary in their terms but typically provide scheduled
rates throughout the life of the contracts, which are generally for a term of 15
to 40 years from inception.
The 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 believes that it is well positioned 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. The Company will seek to capitalize on these new opportunities in
energy-related products and services by taking advantage of its existing
technical and financial expertise and using its geographic presence in most U.S.
regions and Eastern Canada to realize economies of scale in development,
acquisition, administration, operation and maintenance of facilities.
10
A principal business focus of the Company is to develop, acquire, operate
and manage industrial energy facilities and related industrial infrastructure
assets in such sectors as pulp and paper, petroleum refining, chemicals,
textiles, and other energy-intensive industries (the Company's "industrial
infrastructure business"). Industrial infrastructure assets include assets such
as those used to produce electricity, steam, or chilled water, or facilities
used for chemical recovery, storage, and water and wastewater treatment. These
assets are typically assets that are necessary but ancillary to the customer's
primary manufacturing activities. By outsourcing its 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 primary business, while CHI
may benefit from the long-term revenue stream resulting from such an
arrangement.
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. 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.
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.
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 28
years. After the expiration of such power purchase agreements, rates generally
change to the purchasing utility's avoided cost for delivered energy, which
avoided cost rates are likely to be lower than expiring power purchase agreement
rates. Fluctuations in revenues and related cash flows are generally
attributable to changes in projects in operation, coupled with variations in
water flows and the effect of escalating and declining contract rates in the
Company's power purchase agreements.
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.
11
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 December 31, 1997
Audited Consolidated Financial Statements ("December 1997 Financials") and
related Notes thereto.
Power Producing Facilities
AS OF AS OF AS OF
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1997
---------------- ------------------ --------------
MWS #PROJECTS MWS #PROJECTS MWS #PROJECTS
--- --------- --- --------- --- ---------
Northeast:
100% Ownership (1) 90.88 29 90.88 29 90.88 29
Partial Ownership (2) 52.37 8 52.37 8 52.37 8
O&M Contracts (3) 92.16 19 92.16 19 92.16 19
--------- ---- --------- ---- --------- ----
Total 235.41 56 235.41 56 235.41 56
====== === ====== === ====== ===
Southeast:
100% Ownership (1) 27.42 13 27.42 13 27.42 13
Partial Ownership (2) -- -- -- -- -- --
O&M Contracts (3) -- -- -- -- -- --
--------- ---- --------- ---- --------- ----
Total 27.42 13 27.42 13 27.42 13
====== === ====== === ====== ===
West:
100% Ownership (1) 5.38 3 5.38(4) 3(4) 5.48 4
Partial Ownership (2) 4.20 1 4.20 1 4.20 1
O&M Contracts (3) 19.08 4 19.08 4 19.48 5
--------- ---- --------- ---- ---------- ----
Total 28.66 8 28.66 8 29.16 10
====== === ====== === ====== ===
Northwest:
100% Ownership (1) 14.71 6 14.71(5) 6(5) 21.72 9
Partial Ownership (2) 24.96 2 24.96 2 24.96 2
O&M Contracts (3) 4.34 1 4.34 1 4.34 1
--------- ---- --------- ---- ---------- ----
Total 44.01 9 44.01 9 51.02 12
====== === ====== === ====== ===
Total:
100% Ownership (1) 138.39 51 138.39(4)(5) 51(4)(5) 145.50 55
Partial Ownership (2) 81.53 11 81.53 11 81.53 11
O&M Contracts (3) 115.58 24 115.58 24 115.98 25
----------- ---- ----------- ---- ---------- ----
Total 335.50 86 335.50 86 343.01 91
====== === ====== === ====== ===
- ------------
(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 one project (0.10 megawatts) on July 17, 1997. (5)
Reflects the decommissioning of 3 projects (7.01 megawatts) on September 9,
1997.
12
Selected Operating Information:
THREE MONTHS ENDED MARCH 31,
1998 1997
----------- -------------
Power generation revenues (thousands)(1) $ 14,712 $ 15,078(2)
Kilowatt hours produced (thousands)(1) 192,355 193,576
Average rate per kilowatt hour (1) 7.6(cent) 7.8(cent)
- ---------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $195.
Precipitation, Water Flow and Seasonality
The amount of hydroelectric energy generated at any particular facility
depends upon the quantity of water flow at the site of the facility. Dry periods
tend to reduce water flow at particular sites below historical averages,
especially if the facility has low storage capacity. Excessive water flow may
result from prolonged periods of higher than normal precipitation, or sudden
melting of snow packs, possibly causing flooding of facilities and/or a
reduction of generation until water flows return to normal.
Water flow is generally consistent with precipitation. However, snow and
other forms of frozen precipitation will not necessarily increase water flow in
the same period of such precipitation if temperatures remain at or below
freezing. "Average," as it relates to water flow, refers to the actual long-term
average of historical water flows at the Company's facilities for any given
year. Typically, these averages are based upon hydrologic studies done by
qualified engineers for periods of 20 to 50 years or more, depending on the flow
data available with respect to a particular site. Over an extended period (e.g.,
10 to 15 years) water flows would be expected to be average, whereas for shorter
periods (e.g., three months to three years) variation from average is likely.
Each of the regions in which the Company operates has distinctive precipitation
and water flow characteristics, including the degree of deviation from average.
Geographic diversity helps to minimize short-term variations.
Water Flow by Region (1)
THREE MONTHS ENDED MARCH 31,
1998 1997
------------------- -------------------
Northeast Above Average Above Average
Southeast Average Average
West Above Average Above Average
Northwest Average Above Average
- ---------
(1) These determinations were made by management based upon water flow in areas
where the Company's projects are located and may not be applicable to the
entire region.
Production of energy by the Company is typically greatest from January
through June, when water flow is at its highest at most of the Company's
projects, and lowest from 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 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.
13
Power Generation Revenues (in thousands) (1)
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- -----------------------
$ % $ %
-- -- -- --
First Quarter $ 14,712 100.0 $15,078(2) 34.4
Second Quarter 13,461 30.7
Third Quarter 6,422 14.7
Fourth Quarter 8,837 20.2
Total $ 14,712 100.0 $ 43,798 100.0
========= ===== ======= =====
- -----------------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $195 for the three months ended
March 31, 1997.
Kilowatt Hours (kWh) Produced (in thousands) (1)
TWELVE MONTHS ENDED TWELVE MONTHS
DECEMBER 31, 1998 ENDED DECEMBER 31,
1997
---------------------- ----------------------
KWH % KWH %
--- -- --- --
First Quarter 192,355 100.0 193,576(2) 33.3
Second Quarter 178,824 30.7
Third Quarter 95,852 16.5
Fourth Quarter 113,601 19.5
------------ -------- ----------- --------
Total 192,355 100.0 581,853 100.0
============ ======== =========== ========
- -------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 3,429 kWh of the business
interruption revenue for the three months ended March 31, 1997.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Operating Revenues
- ------------------
Power Generation Revenue. The Company's power generation revenue decreased
by $0.4 million (2.6%), from $15.1 million to $14.7 million for the three months
ended March 31, 1997 and 1998, respectively.
The Northeast region experienced relatively consistent revenues due to
increased water flows at one of the major sites during the three months ended
March 31, 1998; offset by prolonged lost generation at four of its New York
sites as a result of a severe ice storm which crippled the Northeast United
States and Southern Quebec during the three months ended March 31, 1998.
The Southeast region experienced decreased revenues of $0.3 million for the
three months ended March 31, 1998 as a result of the expiration and
renegotiation, at reduced rates, of some of the power purchase agreements.
The West and Northwest regions (combined) experienced a minimal decrease in
revenues of $0.1 million.
The Company as a whole experienced decreased revenue per kilowatt hour of
0.2(cent) (2.6%), from 7.8(cent) to 7.6(cent) in the three months ended March
31, 1997 versus the three months ended March 31, 1998, respectively, primarily
as a result of variations in the production mix and contract rates among the
various projects.
14
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income increased $1.0
million (500.0%) from $0.2 million to $1.2 million for the three months ended
March 31, 1997 and 1998, respectively, primarily due to an increased
distribution received from a minority owned partnership which owns a
hydroelectric project located in the Northeast due to increased funds available
for distribution during the three months ended March 31, 1998.
Costs and Expenses
- ------------------
Operating Expenses. Operating expenses increased by $0.4 million (9.5%),
from $4.2 million to $4.6 million for the three months ended March 31, 1997 and
1998, respectively, primarily due to (i) increased repairs and maintenance in
the Northeast resulting from a severe ice storm during the three months ended
March 31, 1998 and (ii) increased operations and maintenance expenditures in the
West.
General and Administrative Expenses. General and administrative expenses
increased by $0.3 million (15.0%) from $2.0 million to $2.3 million for the
three months ended March 31, 1997 and 1998, respectively, due to an increase in
net worth taxes as a result of an increase in the Company's stockholders equity
in conjunction with the Plan of Reorganization and adoption of fresh start
reporting.
Adjustment to Impairment of Long-Lived Assets. During the three months
ended March 31, 1997, the carrying value of certain assets to be disposed of was
adjusted upward by $0.3 million to reflect adjustments to the sale price of
certain of those assets in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Depreciation and Amortization. Depreciation and amortization decreased by
$0.4 million (18.2%) from $2.2 million to $1.8 million for the three months
ended March 31, 1997 and 1998, respectively, due to the revaluation of the
Company's assets and their respective useful lives in conjunction with the
adoption of fresh start reporting.
Interest Expense
- ----------------
Interest expense decreased by $5.2 million (71.2%), from $7.3 million to
$2.1 million for the three months ended March 31, 1997 and 1998, respectively.
The decrease was primarily due to the cessation of the accrual of interest on
CHI's 12% Senior Discount Notes due 2003, Series B which were canceled in
conjunction with the Plan of Reorganization.
Income Taxes
- ------------
For the three months ended March 31, 1998, the Company's current tax
provision differs from the statutory effective tax rate mainly due to the
utilization of net operating loss carryforwards which previously have been
offset by a valuation allowance.
15
LIQUIDITY AND CAPITAL RESOURCES
As more fully described in the March 31, 1998 Unaudited Consolidated
Financial Statements and related Notes thereto included herein, the cash flow of
the Company was comprised of the following:
REORGANIZED COMPANY PREDECESSOR COMPANY
---------------------- ----------------------
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
---------------------- --------------------
(AMOUNTS IN THOUSANDS)
Cash provided by/(used in):
Operating activities $ 3,866 $ 4,771
Investing activities 151 (1,389)
Financing activities (1,372) (1,196)
------------- ------------
Net increase in cash $ 2,645 $ 2,186
======== =======
The Company has historically financed its capital needs and acquisitions
through long-term debt, preferred stock and limited partner capital
contributions and, to a lesser extent, through cash provided by operating
activities. The Company's principal capital requirements are those associated
with acquiring and developing new projects, as well as upgrading existing
projects. The Company has secured a $15.0 million working capital and letter of
credit facility which provides additional liquidity to support the Company's
existing operations as well as its future growth. See "--Summary of
Indebtedness. "
For the three months ended March 31, 1998, the cash flow provided by
operating activities was principally the result of the $4.6 million net income
for such period, adjusted for $1.8 million of depreciation and amortization, a
$0.6 million increase in deferred tax liabilities and $0.2 million of non-cash
interest and other charges offset by $0.1 million of undistributed earnings of
affiliates, $0.2 million cash used for reorganization items, a $1.4 million
decrease in accounts payable and accrued expenses, a $1.4 million increase in
accounts receivable and a $0.4 million increase in prepaid expenses and other
current assets. The cash flow provided by investing activities was primarily
attributable to a $0.3 million decrease in investments and other long term
assets offset by $0.1 million of capital expenditures. The cash flow used in
financing activities was primarily due to the repayment of $1.4 million of
project debt.
Cash provided by operating activities decreased by $0.9 million for the
three months ended March 31, 1998 as compared to the three months ended March
31, 1997. The decrease resulted from a $0.4 million decrease in income before
depreciation and amortization, non-cash interest and other charges, non-cash
adjustment to impairment of long-lived assets, change in deferred tax
liabilities and undistributed earnings of affiliates, a $0.3 million decrease
resulting from variations in other operating items (accounts receivable, prepaid
expenses, accounts payable and accrued expenses) and a $0.2 million decrease in
cash used for reorganization items.
For the three months ended March 31, 1997, the cash flow provided by
operating activities was principally the result of the $0.6 million net income
for such period, adjusted for $5.3 million of non-cash interest and other
charges and $2.2 million of depreciation and amortization offset by a $1.6
million increase in accounts receivable, a $0.6 million decrease in accounts
payable and accrued expenses, a $0.5 million decrease in prepaid expenses and
other current assets, $0.2 million of undistributed earnings of affiliates and a
$0.3 million non-cash adjustment for impairment of long-lived assets. The cash
flow used in investing activities was primarily attributable to a $0.8 million
increase in investments and other long-term assets, $0.4 million of capital
expenditures and $0.5 million investment in pumped storage and conventional
development offset by $0.3 million in proceeds from the disposition of assets.
The cash flow used in financing activities was due primarily to repayment of
$1.3 million of project debt.
16
Summary of Indebtedness
PRINCIPAL AMOUNT OUTSTANDING AS OF
MARCH 31, 1998 DECEMBER 31, 1997
-------------------- ---------------------
(AMOUNTS IN THOUSANDS)
Non-recourse debt of subsidiaries $85,604 $87,971
Current portion of long-term debt (5,446) (5,355)
------------ -----------
Total long-term debt obligations $80,158 $82,616
======= =======
In October 1993, 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. Under certain limited
circumstances, pursuant to the terms of the 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, 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 $0.7 million at May 14, 1998 in accordance with the terms of the
Amendment.
On March 31, 1998, the Company obtained a $15.0 million secured revolving
credit facility with an initial expiration date of December 31, 1999 (the
"Facility"). The Company will use proceeds from the Facility to support its
development, acquisition and operating activities. The Facility replaced the DnB
Facility. Upon expiration of the Facility, any outstanding revolving loans will,
at the Company's option, be converted into a five year term loan. As of May 14,
1998, no revolving loans were outstanding under the Facility and $1.1 million of
letters of credit have been issued. The Company anticipates that it will replace
the remaining $0.7 million of letters of credit issued under the DnB Facility
with similar letters of credit issued under the Facility by June 30, 1998.
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 industry trends; risks related to
hydroelectric, industrial energy 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------
Not Applicable
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CHI is involved in various legal proceedings which are routine and
incidental to the conduct of its business and the Plan of Reorganization. CHI's
management currently believes that none of the pending claims against the
Company will have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Loan and Security Agreement dated as of March 31,
1998 between CHI Energy, Inc. and Lyon Credit
Corporation
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
NONE
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 14, 1998 CHI ENERGY, INC.
By: /s / Neil A. Manna
--------------------------------------
Neil A. Manna
Vice President of Finance,
Controller and Treasurer
signing on behalf of the registrant
and as Principal Accounting Officer