===============================================================================
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 September 30, 1996
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: 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
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 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 November 1, 1996
- --------------------------------------- ----------------------------------
Common stock, $.001 par value 1,285,762
Class B Outstanding as of November 1, 1996
- --------------------------------------- ----------------------------------
Common stock, $.001 par value NONE
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INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 2
Consolidated Statement of Operations for the three months
ended September 30, 1996 and 1995 (Unaudited)............. 3
Consolidated Balance Sheet at September 30, 1996
and June 30, 1996 (Unaudited)............................ 4
Consolidated Statement of Stockholders' Deficit
for the three months ended September 30, 1996
(Unaudited)............................................... 5
Consolidated Statement of Cash Flows for the three months
ended September 30, 1996 and 1995 (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............. 10-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 18
Item 2 Changes in Securities........................................ 18
Item 3. Default 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 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED HYDRO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
(Unaudited)
Three Months Ended
September 30,
-------------
1 9 9 6 1 9 9 5
------- -------
Operating revenues:
Power generation revenue $ 8,855 $ 5,363
Management fees and operations & maintenance
revenues 1,540 1,416
Equity income/(loss) in partnership interests
and other partnership income 117 (130)
------- ------
10,512 6,649
------ -----
Costs and expenses:
Operating 4,926 4,645
General and administrative 1,290 802
Charge for employee and director equity
participation programs 25 87
Depreciation and amortization 2,175 2,849
Lease expense to a related party 890 811
Lease expense to unrelated parties 507 602
9,813 9,796
----- -----
Income/(loss) from operations 699 (3,147)
Interest income 324 364
Other income 19 34
Interest expense on indebtedness to related parties (2,583) (2,457)
Interest expense on indebtedness to unrelated parties (4,834) (3,773)
------ ------
Loss before provision for income taxes (6,375) (8,979)
Provision for income taxes (116) (87)
------- ------
Net loss (6,491) (9,066)
Accumulated deficit at beginning of period (259,427)(157,182)
Dividends declared on preferred stock (3,544) (3,103)
Accretion of preferred stock (214) (214)
--------- --------
Accumulated deficit at end of period $(269,676)(169,565)
========= ========
Net loss applicable to common stock:
Net loss $ (6,491)$ (9,066)
Dividends declared on preferred stock (3,544) (3,103)
Accretion of preferred stock (214) (214)
Undeclared dividends on cumulative
preferred stock (2,454) (2,454)
------ ------
$ (12,703)$ (14,837)
========= =========
Net loss per common share $ (9.88)$ (11.60)
======= ========
Weighted average number of common shares 1,285,762 1,278,698
========= =========
The accompanying notes are an integral part of
the consolidated financial statements.
3
CONSOLIDATED HYDRO, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share and per share amounts)
(Unaudited)
Sept. 30 June 30
1 9 9 6 1 9 9 6
Assets
Current assets:
Cash and cash equivalents unrestricted $ 12,325 $ 10,598
Cash and cash equivalents restricted 7,667 13,236
Accounts receivable, net 4,684 7,854
Prepaid expenses and other current assets 1,877 1,353
----- -----
Total current assets 26,553 33,041
Property, plant and equipment, net 125,754 126,133
Facilities under development 1,653 1,217
Intangible assets, net 49,982 50,746
Assets to be disposed of 15,167 15,066
Investments and other long-term assets 19,580 18,454
------ ------
$ 238,689 $244,657
========= ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 8,649 $ 10,496
Current portion of long-term debt
payable to a related party 1,614 2,305
Current portion of long-term debt
and obligations under capital
leases payable to unrelated parties 4,101 4,157
----- -----
Total current liabilities 14,364 16,958
Long-term debt payable to related parties 90,209 87,406
Long-term debt and obligations under capital
leases payable to unrelated parties 177,355 172,752
Deferred credit, state income taxes and other
long-term liabilities 33,250 37,564
Minority interests in consolidated subsidiaries --- ---
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 ($108,556 and $105,012 liquidation
preference at September 30 and June 30, 1996,
respectively) 102,362 98,604
------- ------
Total liabilities and mandatorily
redeemable preferred stock 417,540 413,284
Stockholders' deficit:
Preferred stock, $.01 par value, at redemption
value of $1,000 per share:
Series F, 55,000 shares authorized, issued
and outstanding ($55,000 liquidation preference) 49,356 49,356
Series G, 55,000 shares authorized, issued
and outstanding ($55,000 liquidation preference) 49,356 49,356
Class A common stock, $.001 par value, 9,000,000
shares authorized, 4,576,925 unissued shares reserved,
1,834,235 shares issued and 1,285,762 shares outstanding
at September 30 and June 30, 1996 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 (269,676)(259,427)
-------- --------
(157,465)(147,216)
Less: Deferred compensation (325) (350)
Treasury stock (common: 548,473 shares),
at cost (21,061) (21,061)
------- -------
Total stockholders' deficit (178,851)(168,627)
-------- --------
$ 238,689 $244,657
========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
4
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(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 Accumulated Deferred Treasury Stockholders'
Outstanding Amount Outstanding Value Capital Deficit Compensation Stock Deficit
----------- ------ ----------- ----- ------- ------- ------------ ----- -------
Balance June 30, 1996 110,000 $ 98,712 1,285,762 $ 2 $ 13,497 $ (259,427) $ (350) $(21,061) $ (168,627)
Quarterly dividend of
$25.88 per share,
mandatorily redeemable
Series H Preferred -
September 30, 1996 (3,544) (3,544)
Accretion of Series H
Preferred (214) (214)
Recognition of board of
directors and employee
compensation expense
related to the issuance
of common stock 25 25
Net loss (6,491) (6,491)
------- -------- --------- --- -------- ---------- ------ -------- ----------
Balance September 30, 1996 110,000 $ 98,712 1,285,762 $ 2 $ 13,497 $ (269,676) $ (325) $(21,061) $ (178,851)
======= ======== ========= === ======== ========== ====== ======== ==========
5
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
Three Months Ended
September 30,
1 9 9 6 1 9 9 5
Cash flows from operating activities:
Net loss $ (6,491) $(9,066)
Adjustments to reconcile net loss to net
cash provided by/(used in) operating activities:
Charge for non-cash interest 4,761 4,237
Charge for employee and director equity
participation programs 25 87
Depreciation and amortization 2,175 2,849
Decrease in accounts receivable 3,170 2,645
Increase in prepaid expenses and other (524) (474)
Decrease in accounts payable and accrued
expenses (1,847) (1,170)
------ ------
Net cash provided by/(used in)
operating activities 1,269 (892)
----- ----
Cash flows from investing activities:
Cost of development expenditures (436) (1,301)
Decrease in long-term notes receivable --- 113
Increase in long-term notes receivable --- (57)
Capital expenditures (1,133) (614)
Increase in investments and other
long-term assets (1,126) (179)
------ ----
- -
Net cash used in investing activities (2,695) (2,038)
------ ------
Cash flows from financing activities:
Long-term borrowings from unrelated parties 18 77
Payments to a related party on long-term borrowings (1,161) (126)
Payments to unrelated parties on long-term borrowings (1,267) (768)
(Decrease)/increase in other long-term liabilities (6) 8
------ ------
Net cash used in financing activities (2,416) (809)
------ ------
Net decrease in cash and cash equivalents (3,842) (3,739)
Cash and cash equivalents, at beginning of period 23,834 16,682
-------- --------
Cash and cash equivalents, at end of period $ 19,992 $ 12,943
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid to related party $ 1,736 $ 927
======== ========
Interest paid to unrelated parties $ 1,238 $ 1,163
======== ========
Income taxes, net $ 132 $ 264
======== ========
6
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
Schedule of noncash financing activities:
Mandatorily redeemable preferred stock increased $214 for the three months ended
September 30, 1996 and 1995, respectively, as a result of the accretion of the
difference between the fair market value at issuance and the redemption value.
Series H mandatorily redeemable preferred stock increased $3,544 and $3,103 for
the three months ended September 30, 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 $9,069 and
$8,094 for the three months ended September 30, 1996 and 1995, respectively, as
a result of non-cash interest.
The accompanying notes are an integral part of
the consolidated financial statements
7
CONSOLIDATED HYDRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts or
otherwise noted)
(Unaudited)
NOTE 1 - ORGANIZATION
Consolidated Hydro, Inc., (together with its consolidated
subsidiaries, the "Company"), organized in July 1985, is principally engaged in
the development, operation and management of hydroelectric power plants. As of
September 30, 1996, and 1995, it had ownership interests in, leased and/or
operated projects with a total operating capacity of approximately 345 and 379
megawatts ("MW"), respectively. In November 1995, the Company established a
subsidiary for the purpose of developing, acquiring, operating and managing
industrial energy facilities and related industrial assets. Currently, all of
the Company's revenue is derived from the ownership and operation of
hydroelectric facilities.
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 September 30, 1996 and June 30, 1996 and the results of its operations and
changes in its financial position for the three months ended September 30, 1996
and 1995. These financial statements should be read in conjunction with the June
30, 1996 Audited Consolidated Financial Statements ("June 1996 Financials") and
Notes thereto.
Certain amounts have been reclassified in fiscal 1997 to conform with
fiscal 1996 presentation.
NOTE 3 - ADOPTION OF SFAS 121
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.
The Company has reached agreements to sell 20 of its smaller projects
in Maine and New Hampshire, aggregating approximately 16.75 megawatts of
capacity, to a single purchaser for an aggregate price of approximately $16.0
million including working capital. The Company anticipates that it will receive
half of the proceeds from each sale in cash at closing and the balance within 90
days of closing. The sales are subject to customary conditions precedent for
transactions of this nature. It is expected that the sale of the Maine projects,
representing 75% of the total transaction value, will close by December 15,
1996. The closing of the sale of the New Hampshire projects will occur
subsequent to the Maine closing due to the timing of required regulatory
approvals. Under the terms of the agreements, the Company will continue to
operate and maintain the projects for a period of up to 15 years pursuant to an
operations and maintenance ("O&M") contract. The total operating revenue and
income from operations from the 20 projects during the three months ended
September 30, 1996 was $0.9 million and $0.2 million, respectively. The total
operating revenue and loss from operations for the three months ended September
30, 1995 was $0.2 million and $0.3 million, respectively. Although the
transactions if completed will provide greater liquidity to the Company, there
can be no assurance that they will be consummated on the terms currently
anticipated. These assets have been classified as Assets to be disposed of and
are stated at the lower of their carrying amount or fair value less estimated
costs to sell.
8
CONSOLIDATED HYDRO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts or
otherwise noted)
(Unaudited)
NOTE 3 - ADOPTION OF SFAS 121 (continued)
In light of the Company's planned sale of certain of its conventional
hydroelectric projects (as mentioned above), 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 in fiscal 1996 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. See Note 4 to the June
1996 Financials.
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 $0.3 million (.23(cent) per share) for the three
months ended September 30, 1996.
NOTE 4 - STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS 123") on July 1, 1996.
Pursuant to SFAS 123, companies can elect, but are not required, to recognize
compensation expense for all stock-based awards, using a fair value methodology.
The Company has adopted the "disclosure only" provisions permitted by SFAS 123
pursuant to which the Company is required to disclose pro forma net income and
earnings per share (if presented), as if the fair value method had been applied.
These disclosures will be included in the Company's June 30, 1997 financial
statements.
NOTE 5 - SUBSEQUENT EVENTS
PURCHASE OF NON-RECOURSE PROJECT LOAN
On October 30, 1996, the Company purchased a $14,500 non-recourse
project term loan relating to four of its existing hydroelectric projects from a
bank for $4,575. Financing for the purchase was obtained in the form of a $5,200
non-recourse loan from another bank which was used to fund the note purchase,
certain required reserves and closing costs. An additional $2,000 credit
facility is also available for up to one year to finance certain project
enhancements. The $5,200 non-recourse 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,
fixed ten days prior to any loan payment date. Principal and interest payments
are to be made quarterly in arrears and mandatory prepayments as required, if
any, are to be made annually.
ISSUANCE OF SERIES F AND G PREFERRED STOCK
The Company plans to issue 1,279 shares each of its 8% senior
convertible voting Series F preferred stock and its 9.85% junior convertible
voting Series G preferred stock to Ms. Carol H. Cunningham in exchange for
shares of Summit Energy Storage Inc. stock (or vested options therefor) owned by
Ms. Cunningham during the second quarter of fiscal 1997. See Note 13 to the June
1996 Financials.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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 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. On September 30, 1996, the Company had a 100%
ownership or long-term lease interest in 67 projects (153 megawatts) including
20 projects under contract for sale, a partial ownership interest in 14 projects
(86 megawatts), and operations and maintenance ("O&M") contracts with 11
projects (106 megawatts).
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.
The Company has begun 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 below 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."
In fiscal 1996, the Company had significantly written 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. See Note 4 to the June 1996 Financials. The Company has determined
that it is highly unlikely that the Company will successfully develop its pumped
storage projects.
10
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 ranging
from 1 to 30 years. Fluctuations in revenues and related cash flows are
generally attributable to increasing megawatts 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. Additionally,
the Company, in some instances, prefers to obtain an O&M contract prior to
acquiring a hydroelectric facility. An O&M arrangement with a potential
acquisition candidate allows the Company to obtain first-hand operating
information and utilize it to better analyze a potential acquisition.
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 method 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 by region of projects 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 June 1996
Financials and related Notes thereto.
Power Producing Facilities
As of As of As of
September 30, 1996 June 30, 1996 September 30, 1995
------------------ ---------------- ------------------
MWs #Projects MWs #Projects MWs #Projects
Northeast:
100% Ownership (1) 102.20(4) 44(4) 102.20(4) 44(4) 104.72 45
Partial Ownership (2) 52.37 8 52.37 8 52.37 8
O&M Contracts (3) 80.84 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) 1.35 1 1.35 1 1.35 1
Partial Ownership (2) 8.33 4 8.33 4 8.33 4
O&M Contracts (3) 19.48 5 19.48 5 51.98 6
--------- ---- --------- ---- ---------- ----
Total 29.16 10 29.16 10 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) 6.09 2 6.09 2 6.09 2
--------- ---- --------- ---- ---------- ----
Total 52.77 13 52.77 13 52.77 13
====== === ====== === ====== ===
Total:
100% Ownership (1) 152.69(4) 67(4) 152.69(4) 67(4) 155.21 68
Partial Ownership (2) 85.66 14 85.66 14 85.66 14
O&M Contracts (3) 106.41 11 105.71 10 138.21 11
----------- ---- ----------- ---- ---------- ----
Total 344.76 92 344.06 91 379.08 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) Includes 20 projects (16.8 megawatts) with respect to which the Company has
reached an agreement to sell, subject to certain conditions, but which the
Company would continue to operate if sold.
12
Selected Operating Information:
Three months ended September 30,
1996 1995
------------ -----------
Power generation revenues (thousands)(1) $ 8,855 $ 5,363
Kilowatt hours produced (thousands)(1) 125,197 80,596
Average rate per kilowatt hour(1) 7.1(cent) 6.7(cent)
- ---------
(1) Limited to projects included in consolidated revenues.
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 September 30,
1996 1995
---------------- -----------------
Northeast Above Average Below Average
Southeast Below Average Above Average
West Below Average Below Average
Northwest Above Average Below 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 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 (in thousands) 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 Fiscal 1996
----------------- ---------------------
$ % $ %
- - - -
First Fiscal Quarter $ 8,855(2) 100.0 $ 5,363 10.8
Second Fiscal Quarter 12,355 24.8
Third Fiscal Quarter 15,744 31.6
Fourth Fiscal Quarter 16,299 32.8
---------- -------
Total $49,761(2) 100.0
====== =====
- -----------------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $175 and $840 representing claims
for lost generation recoverable from an insurance company for the three
months ended September 30, 1996 and for the fiscal year ended June 30,
1996, respectively.
13
Kilowatt Hours Produced (1)
Fiscal 1997 Fiscal 1996
----------------- ---------------
kWh % kWh %
--- - --- -
First Fiscal Quarter 125,197(2) 100.0 80,596 12.4
Second Fiscal Quarter 160,088 24.7
Third Fiscal Quarter 195,540 30.3
Fourth Fiscal Quarter 211,440 32.6
------- -----
Total 647,664(2) 100.0
======= =====
- -------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 2,682 kWh and 15,335 kWh of the
business interruption revenue recoverable as a result of insurance claims
for the three months ended September 30, 1996 and for the fiscal year ended
June 30, 1996, respectively.
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995
Operating Revenues
Power Generation Revenue. Power generation revenue increased by $3.5
million (64.8%), from $5.4 million to $8.9 million for the first quarter of
fiscal 1996 and 1997, respectively.
The Northeast region experienced increased revenues of $3.2 million,
due to above average water flows and precipitation for the first quarter of
fiscal 1997 as compared to below average water flows and precipitation for the
same period in fiscal 1996.
The Southeast region experienced increased revenues of $0.2 million,
primarily due to non-reimbursable business interruption after the occurrence of
an insurable event in August 1995.
The West and Northwest regions combined experienced increased revenues
of $0.1 million, 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, for the first quarter of fiscal 1997
as compared to below average water flows and precipitation for the same period
in fiscal 1996.
The Company as a whole experienced increased revenue per kilowatt hour
of 6.0%, from 6.7(cent) to 7.1(cent) 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.
Management Fees and Operation & Maintenance Revenues. Management fees
and O&M contract revenue remained relatively constant, increasing by $0.1
million (7.1%), from $1.4 million to $1.5 million for the first quarter of
fiscal 1996 and 1997, respectively.
Costs and Expenses
Operating Expenses. Operating expenses increased $0.3 million (6.5%),
from $4.6 million to $4.9 million for the first quarter of fiscal 1996 and 1997,
respectively. The increase was primarily due to an increase in insurance
premiums coupled with an increase in normal operating and maintenance costs.
General and Administrative Expenses. General and Administrative
expenses increased by $0.5 million (62.5%), from $0.8 million to $1.3 million
for the first quarter of fiscal 1996 and 1997, respectively. The increase was
primarily due to: (i) an increase in acquisition costs and general and
administrative salaries related to CHI Power, Inc., coupled with a reimbursement
received last year from a partner for current and previous international
acquisition costs; and (ii) a credit recorded by the Company representing the
current cash surrender value of one of its former officer's life insurance
policies recorded during the first quarter of fiscal 1996.
14
Depreciation and Amortization. Depreciation and amortization decreased
by $0.6 million (21.4%), from $2.8 million to $2.2 million for the first quarter
of fiscal 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 in the first quarter of fiscal 1997 as compared to the same period
in fiscal 1996.
Interest Expense
Interest expense increased by $1.2 million (19.4%), from $6.2 million
to $7.4 million for the first quarter of fiscal 1996 and 1997, respectively. The
increase was 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 for the first quarter of fiscal 1997, that had previously
been capitalized during the same period in fiscal 1996.
Liquidity and Capital Resources
As more fully described in the September 30, 1996 Unaudited
Consolidated Financial Statements and related Notes thereto included herein, the
cash flow of the Company was comprised of the following:
Three Months ended
September 30, 1996 September 30, 1995
------------------ ------------------
(amounts in thousands)
Cash provided by/(used in):
Operating activities....... $ 1,269 $ (892)
Investing activities....... (2,695) (2,038)
Financing activities....... (2,416) (809)
------------ ------------
Net decrease in cash........... $ (3,842) $ (3,739)
======= =======
The Company has historically financed its capital needs and
acquisitions through long-term debt and limited partner capital contributions
and, to a lesser extent, through cash provided from 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 is
currently limiting its pumped storage activities to the minimum necessary to
maintain the viability of the Summit project and the monitoring of market
conditions relevant to the project with the intention of pursuing commitments
for the balance of the project's capacity. Consequently, the Company does not
expect its capital requirements in connection with the development of pumped
storage projects to be material in the near term. Capital expenditures for the
year ended June 30, 1997 relating to upgrading existing projects or regulatory
compliance related work are expected to be approximately $3.7 million.
For the three months ended September 30, 1996, the cash flow provided
by operating activities was principally the result of the $6.5 million net loss
for such period, coupled with a $1.8 million decrease in accounts payable and
accrued expenses, offset by $2.2 million of depreciation and amortization, $4.8
million from a charge for non-cash interest and a $3.2 million decrease in
accounts receivable. The cash flow used in investing activities was primarily
attributable to a $1.1 million investment in upgrading existing conventional
projects during the first quarter of fiscal 1997 and a $1.1 million increase in
other long term assets. The cash flow used in financing activities was due
primarily to repayment of $2.4 million of project debt.
Cash provided by operating activities increased by $2.2 million for
the three months ended September 30, 1996 as compared to the three months ended
September 30, 1995. The increase resulted from a $2.4 million increase in income
before depreciation and amortization, non-cash interest and employee and
director equity programs offset by a $0.2 million decrease in other operating
items (receivables, prepaid expenses, accounts payable and accrued expenses).
The Company has undertaken a number of measures to reduce costs,
including salary reductions (ranging from 5% to 15% for the Company's
senior-most managers effective July 1, 1995), the relocation of its executive
office to lower cost office space in December 1995, changes in travel and
expense policies and the reduction of insurance premiums through a change to a
lower cost carrier. The Company continues to manage its administrative and
operating costs with the goal of continued cost containment.
For the three months ended September 30, 1995, the cash flow used in
operating activities was principally the result of the $9.1 million net loss for
such period, coupled with a $1.2 million decrease in accounts payable and
accrued expenses, offset by $2.8 million of depreciation and amortization, $4.2
million from a charge for non-cash interest and
15
a $2.6 million decrease in accounts receivable. The cash flow used in investing
activities was primarily attributable to a $1.3 million investment in pumped
storage and conventional development, coupled with a $0.6 million investment in
upgrading existing conventional projects during the first quarter of fiscal
1996. Of these expenditures, approximately $0.6 million was attributable to
capitalized interest costs, and $0.3 million was attributable to the funding of
committed development capital for the Summit project. The cash flow used in
financing activities was due primarily to repayment of $0.9 million of project
debt.
Cash provided by operating activities decreased by $4.0 million for
the three months ended September 30, 1995 as compared to the three months ended
September 30, 1994. The decrease resulted from a $2.7 million decrease in income
before depreciation and amortization, non-cash interest, employee and director
equity programs, in addition to a $1.3 million decrease in other operating items
(receivables, prepaid expenses, accounts payable and accrued expenses).
Summary of Indebtedness
Principal Amount Outstanding as of
September 30, 1996 June 30, 1996
------------------ -------------
(amounts in thousands)
Company debt, excluding non-recourse debt
of subsidiaries $ 160,200 $ 151,131
Non-recourse debt of subsidiaries 113,079 115,489
Current portion of long-term debt (5,715) (6,462)
------------ ------------
Total long-term debt obligations $ 267,564 $ 260,158
======= =======
In October 1993, one of the Company's former senior lenders, Den
norske Bank AS ("DnB"), provided the Company with a $20 million unsecured
working capital facility (the "DnB Facility"), which has an initial 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
agreement, DnB has 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.
As of September 30, 1996 and June 30, 1996, the Company was in
compliance with its covenants under the DnB Facility. However, as of March 31,
1996 based on the Company's financial performance for the twelve month period
then ended, the Company continued to be unable to meet one of the financial
covenants as required under the DnB Facility. In response to an earlier request
from the Company, the bank had waived compliance with respect to the covenant
for the twelve month period ended September 30, 1995 and, pending a further
review of the Company's performance and opportunities, had limited availability
under the DnB Facility to $6.1 million, the amount outstanding to provide
letters of credit at September 27, 1995. Due to the extremely low water flow in
the Northeast region during the fourth quarter of fiscal 1995 and the first
quarter of fiscal 1996, and because the measurement contained in the financial
covenant is applied at the end of each fiscal quarter on the basis of the four
most recently completed quarters, the Company was unable to meet the covenant
for the twelve months ended December 31, 1995.
DnB has not waived the previous defaults by the Company, but has
offered to do so in conjunction with the execution by the Company of an
amendment which will, among other things, change the final expiration date of
the DnB Facility to June 30, 1998 from June 30, 1997, reduce (in steps) the
total commitment under the DnB Facility from approximately $6.0 million at
September 30, 1996 to zero at June 30, 1998, limit the use of the facility to
letters of credit and modify certain financial covenants. The Company is
currently negotiating the amendment and waiver with DnB. There can be no
assurance that the Company and DnB will reach agreement on the terms of such an
amendment. If the additional waiver is not granted, the Company may need to
replace some or all of the outstanding letters of credit with cash deposits or
other letters of credit which could be more expensive, if available. If the
Company fails to reach agreement with DnB and the outstanding letters of credit
are not replaced, it is likely that the letters of credit under the DnB Facility
will be drawn upon. If the indebtedness created by such drawn letters of credit
is not paid when due, a default under the DnB Facility would occur and all
amounts outstanding thereunder would become due and payable after the passage of
applicable notice and grace periods. The Company does not currently expect that
it will require a revolving credit facility such as the DnB Facility for
additional working capital purposes 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
16
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 the project and in several recent
instances 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, are exploring ways in which to increase competition in
electricity markets, most notably by opening access to the transmission grid.
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.
The Company expects that, through calendar 1998, it will generate
sufficient cash flows from existing operations to meet its capital expenditure
and working capital requirements. 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. In
order to meet such obligations, the Company currently anticipates that it will
have to rely on proceeds from asset sales, additional debt or equity offerings
or other sources. However, the Company also currently anticipates that it may
not be able to obtain the necessary additional debt or equity financing or
sufficient proceeds from asset sales or other sources in order 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 8% Senior Convertible Voting Preferred Stock and its capital
expenditure and working capital requirements at such time. As a result, it may
be necessary to restructure the Company's debt and equity structure either
before or at such time. In addition, the Company anticipates that it would need
to obtain financing for 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. There can be no assurance that any such additional financing
will be available to the Company. Also, the Company may consider from time to
time, either prior to 1998 or thereafter, the use of available cash, if any, to
engage in repurchases of the Senior Discount Notes, subject to applicable
contractual restrictions and other appropriate uses, in negotiated transactions
or at market prices. There can be no assurance that, if the Company decides to
engage in repurchases of the Senior Discount Notes, any Senior Discount Notes
will be available for repurchase by the Company on terms that would be favorable
or acceptable to the Company.
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.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
NONE
Item 3. Default upon Senior Securities
As of September 30, 1996 and June 30, 1996, the Company was in
compliance with its covenants under the DnB Facility. However, as of March 31,
1996 based on the Company's financial performance for the twelve month period
then ended, the Company continued to be unable to meet one of the financial
covenants as required under the DnB Facility. In response to an earlier request
from the Company, the bank had waived compliance with respect to the covenant
for the twelve month period ended September 30, 1995 and, pending a further
review of the Company's performance and opportunities, had limited availability
under the DnB Facility to $6.1 million, the amount outstanding to provide
letters of credit at September 27, 1995. Due to the extremely low water flow in
the Northeast region during the fourth quarter of fiscal 1995 and the first
quarter of fiscal 1996, and because the measurement contained in the financial
covenant is applied at the end of each fiscal quarter on the basis of the four
most recently completed quarters, the Company was unable to meet the covenant
for the twelve months ended December 31, 1995.
DnB has not waived the previous defaults by the Company, but has
offered to do so in conjunction with the execution by the Company of an
amendment which will, among other things, change the final expiration date of
the DnB Facility to June 30, 1998 from June 30, 1997, reduce (in steps) the
total commitment under the DnB Facility from approximately $6.0 million at
September 30, 1996 to zero at June 30, 1998, limit the use of the facility to
letters of credit and modify certain financial covenants. The Company is
currently negotiating the amendment and waiver with DnB. There can be no
assurance that the Company and DnB will reach agreement on the terms of such an
amendment. If the additional waiver is not granted, the Company may need to
replace some or all of the outstanding letters of credit with cash deposits or
other letters of credit which could be more expensive, if available. If the
Company fails to reach agreement with DnB and the outstanding letters of credit
are not replaced, it is likely that the letters of credit under the DnB Facility
will be drawn upon. If the indebtedness created by such drawn letters of credit
is not paid when due, a default under the DnB Facility would occur and all
amounts outstanding thereunder would become due and payable after the passage of
applicable notice and grace periods. The Company does not currently expect that
it will require a revolving credit facility such as the DnB Facility for
additional working capital purposes during fiscal 1997.
The Company has acquired a number of projects in the past that
included non-recourse project debt as part of the liabilities assumed. In
certain instances, the Company believed that some of these projects would be
incapable of servicing such non-recourse debt but that by acquiring these
projects for little or no equity investment, it would be able to renegotiate the
non-recourse loans involved and enhance the equity value of the underlying
projects.
As of September 30, 1996, non-recourse project loans, aggregating
$14.5 million, remained in default. On October 30, 1996, the Company purchased
these loans from the bank for $4.6 million. As a result of this transaction,
these loans are no longer in default.
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
21.1 Listing of Subsidiaries
18
27.1 Financial Data Schedule
(b) Reports on Form 8-K
NONE
19
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: November 14, 1996 CONSOLIDATED HYDRO, INC.
By: /s/ Patrick J. Danna
----------------------------
Patrick J. Danna
Vice President, Controller
signing on behalf of the registrant
and as Chief Accounting Officer