UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[GRAPHIC OMITTED] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[GRAPHIC OMITTED] 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 February 10, 1997
---------------------------------- -----------------------------------
Common stock, $.001 par value 1,285,762
Class B Outstanding as of February 10, 1997
---------------------------------- -----------------------------------
Common stock, $.001 par value NONE
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Consolidated Statement of Operations for the three months and
six months ended December 31, 1996 and 1995 (Unaudited).... 3
Consolidated Balance Sheet at December 31, 1996
and June 30, 1996 (Unaudited)............................ 4
Consolidated Statement of Stockholders' Deficit
for the six months ended December 31, 1996 (Unaudited).... 5
Consolidated Statement of Cash Flows for the six months
ended December 31, 1996 and 1995 (Unaudited).............. 6-7
Notes to Consolidated Financial Statements (Unaudited) ..... 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2 Changes in Securities....................................... 21
Item 3. Default upon Senior Securities.............................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signature 23
CONSOLIDATED HYDRO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 JUNE 30, 1992
2
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
Operating revenues:
Power generation revenue $ 13,271 $ 12,355 $ 22,126 $ 17,718
Management fees and operations & maintenance revenues 1,152 1,061 2,692 2,477
Equity income in partnership interests and other partnership income 279 265 396 135
----------- -------- -------- --------
14,702 13,681 25,214 20,330
----------- -------- -------- --------
Costs and expenses:
Operating 3,912 4,151 8,854 8,796
General and administrative 1,847 1,187 3,120 1,989
Charge for employee and director equity participation programs 25 88 50 175
Depreciation and amortization 2,156 2,615 4,331 5,464
Lease expense to a related party 905 897 1,795 1,708
Lease expense to unrelated parties 563 548 1,070 1,150
(Adjustment)/charge for impairment of long-lived assets (412) 83,359 (412) 83,359
----------- -------- -------- ---------
8,996 92,845 18,808 102,641
----------- -------- -------- ---------
Income/(loss) from operations 5,706 (79,164) 6,406 (82,311)
Interest income 315 323 639 687
Other income 25 62 44 96
Interest expense on indebtedness to related parties (2,588) (2,461) (5,171) (4,918)
Interest expense on indebtedness to unrelated parties (4,666) (3,759) (9,500) (7,532)
Minority interests in loss of consolidated subsidiaries -- 2,063 -- 2,063
----------- ------- -------- --------
Loss before benefit for income taxes and extraordinary item (1,208) (82,936) (7,582) (91,915)
Benefit for income taxes 1,576 7,672 1,460 7,585
----------- ------- -------- --------
Income/(loss) before extraordinary item 368 (75,264) (6,122) (84,330)
Extraordinary gain on early extinguishment of debt (net of income tax of $3,41 5,622 -- 5,622 --
----------- ------- -------- --------
Net income/(loss) 5,990 (75,264) (500) (84,330)
Accumulated deficit at beginning of period (269,675) (169,565) (259,427) (157,182)
Dividends declared on preferred stock (3,664) (3,209) (7,208) (6,312)
Accretion of preferred stock (214) (214) (428) (428)
----------- -------- -------- --------
Accumulated deficit at end of period $ (267,563) $ (248,252) $ (267,563) $ (248,252)
=========== ========== ========= =========
Net loss applicable to common stock:
Net income/(loss) $ 5,990 $ (75,264) $ (500) $ (84,330)
Dividends declared on preferred stock (3,664) (3,209) (7,208) (6,312)
Accretion of preferred stock (214) (214) (428) (428)
Undeclared dividends on cumulative preferred stock (2,455) (2,455) (4,909) (4,909)
----------- --------- -------- ---------
$ (343) $ (81,142) $ (13,045) $ (95,979)
=========== ========= ======== =========
Net loss per common share:
Loss before extraordinary item $ (4.64) $ (63.46) $ (14.52) $ (75.06)
Extraordinary item 4.37 -- 4.37 --
----------- --------- -------- ---------
$ (0.27) $ (63.46) $ (10.15) $ (75.06)
=========== ========= ======== =========
Weighted average number of common shares 1,285,762 1,278,698 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)
Dec. 31 June 30
1 9 9 6 1 9 9 6
Assets
Current assets:
Cash and cash equivalents unrestricted $ 22,148 $ 10,598
Cash and cash equivalents restricted 9,523 13,236
Accounts receivable, net 8,129 7,854
Prepaid expenses and other current assets 1,169 1,353
----------- -------
Total current assets 40,969 33,041
Property, plant and equipment, net 125,230 126,133
Facilities under development 1,972 1,217
Intangible assets, net 49,279 50,746
Assets to be disposed of 3,808 15,066
Investments and other long-term assets 19,309 18,454
----------- ---------
$ 240,567 $ 244,657
=========== =========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 7,894 $ 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 4,320 4,157
----------- --------
Total current liabilities 13,828 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 167,209 172,752
Deferred credit, state income taxes and other long-term liabilities 39,794 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 ($112,220 and $105,012 liquidation
preference at December 31 and June 30, 1996, respectively) 106,240 98,604
----------- ---------
Total liabilities and mandatorily redeemable preferred stock 417,280 413,284
----------- ---------
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 December 31 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 (267,563) (259,427)
----------- --------
(155,352) (147,216)
Less: Deferred compensation (300) (350)
Treasury stock (common: 548,473 shares), at cost (21,061) (21,061)
----------- --------
Total stockholders' deficit (176,713) (168,627)
----------- --------
$240,567 $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 SIX MONTHS ENDED DECEMBER 31, 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)
Quarterly dividend
of $26.75 per share,
mandatorily redeemable
Series H Preferred -
December 31, 1996 (3,664) (3,664)
Accretion of Series
H Preferred (428) (428)
Recognition of employee
compensation expense
related to the issuance
of common stock 50 500
Net loss (500) (500)
--------- --------- ---------- --- -------- ---------- -------- --------- ----------
Balance December 31, 1996 110,000 $ 98,712 1,285,762 $ 2 $ 13,497 $ (267,563) $ (300) $ (21,061) $ (176,713)
========= ========= ========== ==== ======== ========== ======== ========= ==========
5
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
Six Months Ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Cash flows from operating activities:
Net loss $ (500) $ (84,330)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non-cash interest and other charges 10,328 8,574
Charge for employee and director equity participation programs 50 175
Non-cash (adjustment)/charge for impairment of long-lived assets (412) 83,359
Benefit relating to deferred tax liabilities (1,677) (7,905)
Extraordinary gain on early extinguishment of debt (5,622) ---
Depreciation and amortization 4,331 5,464
Minority interest in loss of consolidated subsidiaries --- (2,063)
Provision for uncollectible accounts receivable 96 ---
Increase in accounts receivable (1,205) (1,294)
Decrease in prepaid expenses and other current assets 131 128
Decrease in accounts payable and accrued expenses (1,913) (788)
----------- -------
Net cash provided by operating activities 3,607 1,320
----------- -------
Cash flows from investing activities:
Proceeds from disposition of assets 11,740 ---
Cost associated with disposition of assets (61) ---
Cost of development expenditures (755) (1,680)
Decrease in long-term notes receivable --- 53
Increase in long-term notes receivable --- (58)
Capital expenditures (2,353) (1,620)
Increase in investments and other long-term assets (855) (383)
----------- -------
Net cash provided by/(used in) investing activities 7,716 (3,688)
----------- -------
Cash flows from financing activities:
Payment of refinancing costs (310) ---
Long-term borrowings from unrelated parties 37 34
Payments to a related party on long-term borrowings (1,161) (126)
Payments to unrelated parties on long-term borrowings (2,046) (1,717)
Decrease in other long-term liabilities (6) (77)
----------- ---------
Net cash used in financing activities (3,486) (1,886)
----------- ---------
Net increase/(decrease) in cash and cash equivalents 7,837 (4,254)
Cash and cash equivalents, at beginning of period 23,834 16,682
----------- --------
Cash and cash equivalents, at end of period $ 31,671 $ 12,428
=========== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid to related party $ 2,589 $ 1,843
========== ========
Interest paid to unrelated parties $ 2,365 $ 2,530
========== ========
Income taxes, net $ 231 $ 450
========== ========
(continued)
6
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
(continued)
Schedule of noncash financing activities:
Series H mandatorily redeemable preferred stock increased $428 for the six
months ended December 31, 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 $7,208 and $6,312 for
the six months ended December 31, 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 $10,053 and
$9,016 for the six months ended December 31, 1996 and 1995, respectively, as a
result of non-cash interest.
In connection with the disposition of certain assets by the Company, the Company
reduced its long-term debt by approximately $1.2 million.
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 December 31, 1996,
and 1995, it had ownership interests in, leased and/or operated projects with a
total operating capacity of approximately 343 and 377 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
December 31, 1996 and June 30, 1996 and the results of its operations and
changes in its financial position for the six months ended December 31, 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 1996 to conform with
fiscal the 1997 presentation.
NOTE 3 - REFINANCING OF NON-RECOURSE PROJECT LOAN
On October 30, 1996, the Company arranged to have a financial institution
purchase a $13,759 non-recourse project term loan (the "Old Loan") relating to
four of its existing hydroelectric projects for $5,000, including certain
required reserves and closing costs of $500, (the "New Loan"). An additional
$2,000 credit facility is also available under the New Loan for up to one year
to finance certain project enhancements. A subsidiary of the Company was
assigned an interest in the balance of the Old Loan on a basis fully
subordinated to the New Loan. As a result, the Company has recorded a $5,622
Extraordinary gain on early extinguishment of debt, net of certain transaction
costs of approximately $224 and income tax of $3,414, on its Statement of
Operations for the three months and six months ended December 31, 1996.
The New Loan, which matures in the year 2008, accrues interest at a fixed
rate of 10.17% per annum through October 29, 2003. Thereafter, through October
30, 2008, interest accrues on a quarterly basis, at a rate equal to the three
year U.S. Treasury Note Rate plus 390 basis points. Principal and interest
payments are to be made quarterly in arrears and mandatory prepayments, if
required, are to be made annually. Costs associated with obtaining the New Loan
have been capitalized and are included in Intangible assets, net on the
Company's Balance Sheet as of December 31, 1996.
8
NOTE 4 - SALE OF CONSOLIDATED HYDRO MAINE, INC.
On December 23, 1996, the Company through its wholly owned subsidiary, CHI
Universal, Inc., a Delaware corporation ("CHI Universal"), sold Consolidated
Hydro Maine, Inc., a Delaware corporation ("CHI Maine"), to Ridgewood Maine
Hydro Partners, L.P., a Delaware limited partnership (the "Partnership"). CHI
Maine owned and operated 15 hydroelectric projects located in the State of Maine
with an aggregate capacity of 11.32 megawatts (the "Projects"). The sale was
made pursuant to an Agreement of Merger dated as of July 1, 1996 (the "Merger
Agreement"), by and among CHI Maine, CHI Universal, CHI Ridgewood Maine Hydro
Corporation and the Partnership.
On the Closing Date (as defined in the Merger Agreement), all of the issued
and outstanding capital stock of CHI Maine was sold to the Partnership for cash.
The total sales price aggregated approximately $12.9 million, and the
Partnership assumed a long-term lease obligation of approximately $1.2 million
related to one of the Projects.
Under a separate agreement with the Partnership, the Company will continue
to operate and maintain the Projects and provide certain administrative services
to the Partnership for an initial period of up to 15 years.
The following unaudited pro forma financial information for the six months
ended December 31, 1996 and 1995 has been prepared assuming the disposition of
CHI Maine occurred at the beginning of the periods presented.
(Unaudited)
Six Months Ended December 31,
1996 1995
---- ----
(Pro forma) (Pro forma)
Operating Revenues $ 24,184 $ 19,851
========= =========
Net loss $ (972) $ (64,943)
========= ========
Net loss per common share $ (10.51) $ (59.90)
========= ========
Weighted average number of
common shares 1,285,762 1,278,698
========= =========
NOTE 5 - WORKING CAPITAL FACILITY AMENDMENT
In October 1993, one of the Company's former senior lenders, Den norske
Bank AS ("DnB"), provided the Company with a $20.0 million unsecured working
capital facility (the "DnB Facility"), which originally had an expiration date
of June 30, 1997. On December 3, 1996, the Company amended the DnB Facility (the
"Amendment") which Amendment, among other things, waived previous defaults by
the Company, changed the final expiration date of the DnB Facility to June 30,
1998, reduced (in steps) the total commitment under the DnB Facility from
approximately $6.0 million at September 30, 1996 to zero at June 30, 1998,
limited the use of the DnB Facility solely to letters of credit and modified
certain financial covenants. Since the execution of the Amendment, the Company
has reduced the outstanding letters of credit under the DnB Facility to
approximately $3.1 million in accordance with the terms of the Amendment.
9
NOTE 6 - 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.
In fiscal 1996, in light of the Company's planned sale of certain of its
conventional hydroelectric projects, recent industry trends (including the
continued decline in electricity prices and other factors stemming from the
deregulation of the electric power industry), the timing of the expiration of
the fixed rate period of some of its long-term power sales contracts and other
indications of a decline in the fair value of certain of its conventional
hydroelectric projects, the Company determined, pursuant to SFAS 121, that
certain of these projects (including properties which are not included among
those to be sold) were impaired pursuant to the criteria established under SFAS
121. The Company also determined that due to the factors noted above, as well as
its current financial position, it is highly unlikely that the Company will
successfully develop its pumped storage projects. See Note 4 to the June 1996
Financials.
The carrying value of the CHI Maine assets has been adjusted upward by $0.4
million to reflect adjustments to the sales price of the assets. This adjustment
has been included in (Adjustment)/charge for impairment of long-lived assets on
the Statement of Operations for the three and six months ended December 31,
1996.
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 December 31, 1996.
NOTE 7 - FINANCIAL ADVISOR
In December 1996, the Company retained Houlihan Lokey Howard & Zukin, Inc.,
a specialty investment banking firm, to provide financial advisory services to
the Company in connection with the formulation and potential implementation of
financial restructuring options for the Company.
NOTE 8 - SUBSEQUENT EVENT
ISSUANCE OF SERIES F PREFERRED AND SERIES G PREFERRED
On January 31, 1997, the Company issued 1,279 shares each of its 8% senior
convertible voting preferred stock ("Series F Preferred") and its 9.85% junior
convertible voting preferred stock ("Series G Preferred") to Ms. Carol H.
Cunningham in exchange for shares of Summit Energy Storage Inc. common stock (or
vested options therefor) owned by Ms. Cunningham. The financial statement impact
of this exchange is not material.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Consolidated Hydro, Inc. ("CHI", and together with its consolidated
subsidiaries the "Company") is principally engaged in the development, operation
and management of hydroelectric power plants. The Company's operating
hydroelectric projects are located in 15 states and one Canadian province. In
November 1995, the Company established a subsidiary, CHI Power, Inc., for the
purpose of developing, acquiring, operating and managing industrial energy
facilities and related industrial assets.
The Company's existing U.S. projects are clustered in four regions: the
Northeast, Southeast, Northwest and West, with a concentration in the Northeast.
CHI has developed what it believes to be an efficient "hub" system of project
management designed to maximize the efficiency of each facility's operations.
The economies of scale created by this system include reduced costs related to
centralized administration, operations, maintenance, engineering, insurance,
finance and environmental and regulatory compliance. The hub system and the
Company's operating expertise have enabled the Company to successfully integrate
acquisitions 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 December 31, 1996, the Company had a 100%
ownership or long-term lease interest in 52 projects (141 megawatts) including 5
projects under contract for sale, a partial ownership interest in 14 projects
(86 megawatts), and operations and maintenance ("O&M") contracts with 25
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 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.
11
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.
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.
12
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 30, 1996
Audited Consolidated Financial Statements ("June 1996 Financials") and related
Notes thereto.
Power Producing Facilities
As of As of As of
December 31, 1996 June 30, 1996 December 31, 1995
MWs #Projects MWs #Projects MWs #Projects
Northeast:
100% Ownership (1) 90.88(4)(5) 29(4)(5) 102.20 44 102.20 44
Partial Ownership (2) 52.37 8 52.37 8 52.37 8
O&M Contracts (3) 92.16(4) 19(4) 80.14 3 80.14 3
--------- ---- --------- ---- --------- ----
Total 235.41 56 234.71 55 234.71 55
====== === ====== === ====== ===
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) 4.34 1 6.09 2 6.09 2
---------- ---- --------- ---- --------- ----
Total 51.02 12 52.77 13 52.77 13
====== === ====== === ====== ===
Total:
100% Ownership (1) 141.37(4)(5) 52(4)(5) 152.69 67 152.69 67
Partial Ownership (2) 85.66 14 85.66 14 85.66 14
O&M Contracts (3) 115.98(4) 25(4) 105.71 10 138.21 11
---------- ---- ----------- ---- ----------- ----
Total 343.01 91 344.06 91 376.56 92
====== === ====== === ====== ===
- ------------
(1) Defined as projects in which the Company has 100% of the economic interest.
(2) Defined as projects in which the Company's economic interest is less than
100%.
(3) Defined as projects in which the Company is an operator pursuant to O&M
contracts with the project's owner or owners. The Company does not have any
ownership interest in such projects.
(4) Reflects the sale of 15 projects (11.32 megawatts) on December 23, 1996,
and the addition of those same projects as O&M Contracts.
(5) Includes 5 projects (5.43 megawatts) with respect to which the Company has
reached an agreement to sell, subject to certain conditions.
13
Selected Operating Information:
Quarter Ended December 31, Six Months Ended December 31,
1996 1995 1996 1995
----------- ------------- --------------- ---------------
Power generation revenues (thousands) $ $ 12,355 $ 22,126 $ 17,718
(1) 13,271
Kilowatt hours produced (thousands) 166,323 160,088 291,520 240,684
(1)
Average rate per kilowatt hour (1) 8.0(cent) 7.7(cent) 7.6(cent) 7.4(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)
Quarter Ended December 31, Six Months Ended December 31,
1996 1995 1996 1995
------------------- ------------------- -------------------- -----------------
Northeast Above Average Above Average Above Average Average
Southeast Average Above Average Average Above Average
West Below Average Below Average Below Average Below Average
Northwest Above Average Below Average 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 40.0 $ 5,363 10.8
(2)
Second Fiscal Quarter 13,271 60.0 12,355 24.8
(2)
Third Fiscal Quarter 15,744 31.6
Fourth Fiscal Quarter 16,299 32.8
---------- -------- ------------ ---------
Total $ 22,126 100.0 $49,761(2) 100.0
====== ===== ======= =====
- -----------------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $175, $234 and $840 representing
claims for lost generation recoverable from an insurance company for the
three months ended September 30, 1996 and December 31, 1996, and the fiscal
year ended June 30, 1996, respectively, $1,129 of which has been recovered.
14
Kilowatt Hours Produced (1)
Fiscal 1997 Fiscal 1996
----------------- ---------------------
kWh % kWh %
First Fiscal Quarter 125,197(2) 42.9 80,596 12.4
Second Fiscal Quarter 166,323(2) 57.1 160,088 24.7
Third Fiscal Quarter 195,540 30.3
Fourth Fiscal Quarter 211,440 32.6
----------- ----- ------- -----
Total 291,520 100.0 647,664(2) 100.0
======= ===== ======= =====
- -------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 2,682 kWh, 3,300 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 December 31, 1996,
and for the fiscal year ended June 30, 1996, respectively.
Three Months Ended December 31, 1996 Compared to Three Months Ended December 31,
1995
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
by $0.9 million (7.3%), from $12.4 million to $13.3 million for the three months
ended December 31, 1995 and 1996, respectively.
The Northeast region experienced increased revenues of $0.9 million, due to
well above average water flows and precipitation for the three months ended
December 31, 1996 as compared to slightly above average water flows and
precipitation for the three months ended December 31, 1995.
The Southeast region experienced a decrease in revenues of $0.2 million,
primarily due to average water flows and precipitation for the three months
ended December 31, 1996 as compared to above average water flows and
precipitation for the three months ended December 31, 1995.
The West and Northwest regions (combined) experienced increased revenues of
$0.2 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 three months ended December
31, 1996 as compared to below average water flows and precipitation in the
Northwest region for the three months ended December 31, 1995.
The Company as a whole experienced increased revenue per kilowatt hour of
0.3(cent) (3.9%), from 7.7(cent) to 8.0(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 Operations & Maintenance Revenues. Management fees and
O&M contract revenue remained relatively constant, increasing by $0.1 million,
from $1.1 million to $1.2 million for the three months ended December 31, 1995
and 1996, respectively.
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income remained relatively
constant at $0.3 million for the three months ended December 31, 1995 and 1996,
respectively.
Costs and Expenses
Operating Expenses. Operating expenses decreased $0.2 million (4.9%), from
$4.1 million to $3.9 million for the three months ended December 31, 1995 and
1996, respectively. The decrease was primarily due to: (i) a decrease in
salaries and benefits resulting from a reduction in staff; and (ii) a decrease
in maintenance and supplies, resulting from a decision to defer certain
maintenance in order to maximize revenue associated with high overall water
flows during the three months ended December 31, 1996 partially offset by an
increase in insurance premiums and other operating costs.
15
General and Administrative Expenses. General and administrative expenses
increased by $0.6 million (50.0%), from $1.2 million to $1.8 million for the
three months ended December 31, 1995 and 1996, respectively. The increase was
primarily due to (i) an increase in business development costs and general and
administrative salaries related to CHI Power, Inc.; (ii) the effect of expensing
pumped storage business development costs for the three months ended December
31, 1996 that had previously been capitalized during the three months ended
December 31, 1995; and (iii) costs associated with the formulation of financial
restructuring options for the Company, partially offset by a general decrease in
conventional hydroelectric business development costs.
Depreciation and Amortization. Depreciation and amortization decreased by
$0.4 million (15.4%), from $2.6 million to $2.2 million for the three months
ended December 31, 1995 and 1996, 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 disposed of and to be disposed of for the three months ended December 31,
1996 as compared to the three months ended December 31, 1995.
Interest Expense
Interest expense increased by $1.1 million (17.7%), from $6.2 million to
$7.3 million for the three months ended December 31, 1995 and 1996,
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 three months ended December 31,
1996, that had previously been capitalized during the three months ended
December 31, 1995.
SFAS 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
The Company implemented SFAS 121 during the three months ended December 31,
1995 and, as a result, an impairment charge of $83.4 million had been recorded
as a component of the Company's loss from operations. Included in the impairment
charge was an amount related to certain assets to be disposed of. The carrying
value of those assets has been adjusted upward by $0.4 million to reflect
adjustments to the sales price of the assets. This adjustment has been included
in (Adjustment)/charge for impairment of long-lived assets on the Statement of
Operations for the three and six months ended December 31, 1996.
Minority Interests in Loss of Consolidated Subsidiaries
The Company recognized a benefit of approximately $2.1 million for the
three months ended December 31, 1995 resulting from the recognition of minority
shareholders' interest in the loss of certain consolidated subsidiaries related
to the write-down of pumped storage business development assets in accordance
with SFAS 121 which reduced the value of minority interests recorded by the
Company to zero.
Benefit for Income Taxes
The Company recognized deferred benefits for income taxes (excluding
current provisions) of $1.7 million and $7.9 million for the three months ended
December 31, 1996 and 1995, respectively. For the fiscal 1997 period, the
deferred benefit for income tax relates to certain factors, principally due to
an increase in the amount of net operating losses ("NOL") expected to be
utilized during the NOL carryforward period. For the fiscal 1996 period, the
deferred tax benefit related to the write-down of certain long-lived assets in
accordance with SFAS 121.
Extraordinary Gain on Early Extinguishment of Debt
On October 30, 1996, the Company arranged to have a financial institution
purchase a $13,759 non-recourse project term loan (the "Old Loan") relating to
four of its existing hydroelectric projects for $5,000, including certain
required reserves and closing costs of $500, (the "New Loan"). An additional
$2,000 credit facility is also available under the New Loan for up to one year
to finance certain project enhancements. A subsidiary of the Company was
assigned an interest in the balance of the Old Loan on a basis fully
subordinated to the New Loan. As a result, the Company has recorded a $5,622
Extraordinary gain on early extinguishment of debt, net of certain transaction
costs of approximately $224 and income tax of $3,414, on its Statement of
Operations for the three months and six months ended December 31, 1996.
16
Six Months Ended December 31, 1996 compared to Six Months Ended December 31,
1995
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
by $4.4 million (24.9%), from $17.7 million to $22.1 million for the six months
ended December 31, 1995 and 1996, respectively.
The Northeast region experienced increased revenues of $4.0 million due to
above average water flows and precipitation for the six months ended December
31, 1996 as compared to average water flows and precipitation for the six months
ended December 31, 1995.
The Southeast region revenues remained constant for the six months ended
December 31, 1995 as compared to the six months ended December 31, 1996.
The West and Northwest regions (combined) experienced increased revenues of
$0.4 million primarily as a result of above average water flows and
precipitation in the Northwest region, an area which contributes significantly
to total revenues of the combined regions, for the six months ended December 31,
1996 as compared to below average water flows and precipitation in the Northwest
region for the six months ended December 31, 1995.
The Company as a whole experienced increased revenue per kilowatt hour of
0.2(cent) (2.7%), from 7.4(cent) to 7.6(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 Fee and Operations & Maintenance Revenues. Management fees and
O&M contract revenue remained relatively constant increasing by $0.2 million,
from $2.5 million to $2.7 million for the six months ended December 31, 1995 and
1996, respectively.
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income increased $0.3
million (300.0%), from $0.1 million to $0.4 million for the six months ended
December 31, 1995 and 1996, respectively. The increase is primarily due to above
average water flows and precipitation for the three months September 30, 1996 as
compared to the three months ended September 30, 1995 related to partnership
interests in the Northeast region.
Costs and Expenses
Operating Expenses. Operating expenses increased $0.1 million (1.1%), from
$8.8 million to $8.9 million for the six months ended December 31, 1995 and
1996, respectively. The increase was primarily due to an increase in insurance
premiums and other operating costs; offset by (i) a decrease in salaries and
benefits resulting from a reduction in staff; and (ii) a decrease in maintenance
and supplies, resulting from a decision to defer certain maintenance in order to
maximize revenue associated with high overall water flows during the six months
ended December 31, 1996.
General and Administrative Expenses. General and administrative expenses
increased $1.1 million (55.0%) from $2.0 million to $3.1 million for the six
months ended December 31, 1995 and 1996, respectively, primarily due to (i) an
increase in business development costs and general and administrative salaries
related to CHI Power, Inc.; (ii) a reimbursement received during the three
months ended September 30, 1995 from a partner for current and previous
international hydroelectric business development costs; (iii) costs associated
with the formulation of financial restructuring options for the Company; (iv) a
credit recorded by the Company representing current cash surrender value of one
of its former officer's life insurance policies recorded during the three months
ended September 30, 1995; and (v) the effect of expensing pumped storage
business development costs for the six months ended December 31, 1996, that had
previously been capitalized during the six months ended December 31, 1995,
partially offset by a general decrease in conventional hydroelectric business
development costs.
Interest Expense
Interest expense increased by $2.2 million (17.6%), from $12.5 million to
$14.7 million for the six months ended December 31, 1995 and 1996, respectively.
The increase is primarily due to the increasing principal balance of the Senior
Discount Notes which resulted in a corresponding increase in interest expense
and the effect of expensing interest for the six months ended December 31, 1996,
that had previously been capitalized during the six months ended December 31,
1995.
17
Liquidity and Capital Resources
As more fully described in the December 31, 1996 Unaudited Consolidated
Financial Statements and related Notes thereto included herein, the cash flow of
the Company was comprised of the following:
Six Months ended
December 31, 1996 December 31, 1995
--------------------- --------------------
(amounts in thousands)
Cash provided by/(used in):
Operating activities $ 3,607 $ 1,320
Investing activities 7,716 (3,688)
Financing activities (3,486) (1,886)
------------- ---------------
Net increase/(decrease) in cash $ 7,837 $ (4,254)
======== =========
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.
For the six months ended December 31, 1996, the cash flow provided by
operating activities was principally the result of the $0.5 million net loss for
such period, coupled with $10.3 million of non-cash interest and other charges,
$4.3 million of depreciation and amortization and a $0.1 million decrease in
prepaid expenses and other current assets, offset by a $5.6 million gain on
early extinguishment of debt, a $1.7 million deferred tax benefit, a $1.9
million decrease in accounts payable and accrued expenses, a $1.2 million
increase in accounts receivable and $0.4 million from an adjustment to a
non-cash charge for impairment of long-lived assets. The cash flow provided by
investing activities was primarily attributable to $11.7 million of net cash
proceeds received from the sale of the CHI Maine assets, offset by $2.4 million
of investments in upgrading existing conventional projects, $0.8 million for the
continued development of a new conventional hydroelectric project and a $0.9
million increase in other long term assets during fiscal 1997. The cash flow
used in financing activities was primarily due to the repayment of $3.2 million
of project debt.
Cash provided by operating activities increased by $2.3 million for the six
months ended December 31, 1996 as compared to the six months ended December 31,
1995. The increase resulted from a $3.3 million increase in income before
depreciation and amortization, non-cash interest and other charges, employee and
director equity programs, non-cash adjustment for impairment of long-lived
assets, gain on early extinguishment of debt and provision for uncollectible
accounts, offset by a $1.0 million decrease in other operating items
(receivables, prepaid expenses, accounts payable and accrued expenses).
For the six months ended December 31, 1995, the cash flow provided by
operating activities was principally the result of the $84.3 million net loss
for such period, adjusted for an $83.4 million non-cash charge for impairment of
long-lived assets, and benefits of $7.9 million and $2.1 million for deferred
tax and minority shareholders' interest in loss of consolidated subsidiaries,
respectively, resulting from such impairment charge, $0.8 million decrease in
accounts payable and accrued expenses, and a $1.3 million increase in accounts
receivable, offset by $5.5 million of depreciation and amortization and $8.6
million for non-cash interest. The cash flow used in investing activities was
primarily attributable to $1.6 million investment in upgrading existing
conventional projects and $1.7 million investments in pumped storage and
conventional development during fiscal 1996. Of the pumped storage and
conventional development expenditures, approximately $1.2 million was
attributable to capitalized interest costs, and $0.5 million was attributable to
the funding of committed development capital for the Summit and River Mountain
pumped storage projects. The cash flow used in financing activities was due
primarily to repayment of $1.8 million of project debt.
18
Cash provided by operating activities decreased by $2.6 million for the six
months ended December 31, 1995 as compared to the six months ended December 31,
1994. The decrease resulted from a $1.4 increase in income before depreciation
and amortization, non-cash interest, non-cash charge for impairment of
long-lived assets, tax benefit resulting from a charge for impairment of
long-lived assets, minority shareholders' interest in loss of consolidated
subsidiaries and employee and director equity programs, offset by a $4.0 million
decrease in other operating items (receivables, prepaid expenses, accounts
payable and accrued expenses).
Summary of Indebtedness
Principal Amount Outstanding as of
December 31, 1996 June 30, 1996
------------------ -------------
(amounts in thousands)
Company debt, excluding non-recourse debt
of subsidiaries $ 160,200 $ 151,131
Non-recourse debt of subsidiaries 103,152 115,489
Current portion of long-term debt (5,934) (6,462)
------------ ------------
Total long-term debt obligations $ 257,418 $ 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 originally had an expiration date
of June 30, 1997. The DnB Facility is pari passu with the Senior Discount Notes.
Under certain limited circumstances, pursuant to the terms of the 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.
On December 3, 1996, the Company amended the DnB Facility (the "Amendment")
which Amendment, among other things, waived previous defaults by the Company,
changed the final expiration date of the DnB Facility to June 30, 1998, reduced
(in steps) the total commitment under the DnB Facility from approximately $6.0
million at September 30, 1996 to zero at June 30, 1998, limited the use of the
DnB Facility solely to letters of credit and modified certain financial
covenants. Since the execution of the Amendment, the Company has reduced the
outstanding letters of credit under the DnB Facility to approximately $3.1
million in accordance with the terms of the Amendment. The Company does not
currently expect that it will require a revolving credit facility for additional
working capital during fiscal 1997.
The electric power industry in the United States is undergoing significant
structural changes, evolving from a highly regulated industry dominated by
monopoly utilities to a deregulated, competitive industry providing energy
customers with an increasing degree of choice among sources of electric power
supply. The Company will seek to become a provider of reliable, low-cost energy
and related products and services to industrial and utility customers, by taking
advantage of its existing technical and financial expertise and using its
geographic presence to realize economies of scale in administration, operation,
maintenance and insurance of facilities.
Nevertheless, the performance of the Company in the future will be affected
by a number of factors, in addition to the structural changes to the electric
power industry described above. First, the Company competes for hydroelectric
and industrial energy projects with a broad range of electric power producers
including other independent power producers of various sizes and many
well-capitalized domestic and foreign industry participants such as utilities,
equipment manufacturers and affiliates of industrial companies, many of whom are
aggressively pursuing power development programs and have relatively low
return-on-capital objectives. Opportunities to acquire or develop power
generation assets on favorable economic terms in such an environment are
increasingly limited, particularly with regard to hydroelectric facilities.
Second, the Company is highly leveraged and its debt service obligations, the
cash portion of which commence in January 1999, along with its preferred stock
obligations, the cash portion of which commence in September 1998, make it
difficult to source capital on favorable terms that would allow the Company to
successfully pursue significant acquisition and development opportunities. Such
leverage and debt service obligations also make it difficult to establish the
creditworthiness necessary to develop the project and in several recent
instances have adversely affected the Company's ability to obtain contracts to
develop products and services for its industrial and utility customers.
19
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 flow 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.
In December 1996, the Company retained Houlihan Lokey Howard & Zukin, Inc.,
a specialty investment banking firm, to provide financial advisory services to
the Company in connection with the formulation and potential implementation of
financial restructuring options for 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.
20
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.
On December 3, 1996, the Company amended the DnB Facility (the "Amendment")
which Amendment, among other things, waived previous defaults by the Company,
changed the final expiration date of the DnB Facility to June 30, 1998, reduced
(in steps) the total commitment under the DnB Facility from approximately $6.0
million at September 30, 1996 to zero at June 30, 1998, limited the use of the
DnB Facility solely to letters of credit and modified certain financial
covenants. Since the execution of the Amendment, the Company has reduced the
outstanding letters of credit under the DnB Facility to approximately $3.1
million in accordance with the terms of the Amendment.
The Company 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.
On October 30, 1996, the Company refinanced non-recourse project loans,
aggregating $13.8 million with another financial institution for $5.0 million,
including certain required reserves and closing costs of $0.5 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
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Amendment of Restated Certificate of Incorporation
10.1 Amendment dated as of July 1, 1996 to the Revolving Credit
Agreement between Consolidated Hydro, Inc. and Den norske Bank
ASA
10.2 First Amended and Restated Credit Agreement dated as of October
15, 1996 between Lyon Credit Corporation and BP Hydro Finance
Partnership
27.1 Financial Data Schedule
(b) Reports on Form 8-K
NONE
22
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: February 13, 1997 CONSOLIDATED HYDRO, INC.
By: /s / Patrick J. Danna
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Patrick J. Danna
Vice President, Controller
signing on behalf of the registrant
and as Chief Accounting Officer