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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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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
--------------
-------------------------------------------------------------
(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 May 10, 1996
- - ------------------------------------ ------------------------------
Common stock, $.001 par value 1,285,762
Class B Outstanding as of May 10, 1996
- - ------------------------------------ ------------------------------
Common stock, $.001 par value NONE
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<PAGE>
<PAGE>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 2
Consolidated Statement of Operations for the periods
ended March 31, 1995 and 1996 (Unaudited)................... 3
Consolidated Balance Sheet at June 30, 1995 and
March 31, 1996 (Unaudited).................................. 4
Consolidated Statement of Stockholders' Deficit
for the nine months ended March 31, 1996 (Unaudited)........ 5
Consolidated Statement of Cash Flows for the nine months
ended March 31, 1995 and 1996 (Unaudited).................... 6-7
Notes to the Consolidated Financial Statements (Unaudited).... 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 12-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 23
Item 2 Changes in Securities.................................... 23
Item 3. Default upon Senior Securities........................... 23
Item 4. Submission of Matters to a Vote of Security Holders...... 23
Item 5. Other Information........................................ 23
Item 6. Exhibits and Reports on Form 8-K......................... 23
Signature 24
2
<PAGE>
<PAGE>
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
March 31, March 31,
------------- -----------------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Power generation revenue $ 13,641 $ 16,056 $ 28,615 $ 34,274
Management fees and operations &
maintenance revenues 922 1,298 3,182 3,775
---------- --------- --------- ---------
14,563 17,354 31,797 38,049
---------- --------- --------- ---------
Costs and expenses:
Operating 4,303 4,336 11,574 13,190
General and administrative 1,706 2,130 5,121 4,136
Charge for employee and director equity
participation programs 119 46 249 221
Depreciation and amortization 2,451 2,259 6,907 7,910
Lease expense to a related party 906 910 2,607 2,618
Lease expense to unrelated parties 602 697 1,784 1,875
Provision to reduce the carrying value
of certain facilities under deve 1,221 --- 1,221 ---
Charge for impairment of long-lived assets --- --- --- 83,359
---------- --------- --------- ---------
11,308 10,378 29,463 113,309
---------- --------- --------- --------
Income/(loss) from operations 3,255 6,976 2,334 (75,260)
Interest income 355 142 990 838
Other income 60 289 182 401
Interest expense on indebtedness to related
parties (1,628) (2,499) (4,438) (7,417)
Interest expense on indebtedness to unrelated
parties (4,032) (4,488) (11,264) (12,120)
Minority interests in loss of consolidated
subsidiaries --- --- --- 2,063
---------- --------- --------- ---------
Loss before (provision)/benefit for income taxes (1,990) 420 (12,196) (91,495)
(Provision)/benefit for income taxes (129) (111) (334) 7,474
---------- --------- --------- ---------
Net (loss)/income (2,119) 309 (12,530) (84,021)
Accumulated deficit at beginning of period (144,981) (248,252) (128,616) (157,182)
Dividends declared on preferred stock (2,905) (3,317) (8,431) (9,629)
Accretion of preferred stock (215) (215) (643) (643)
---------- --------- ---------- ---------
Accumulated deficit at end of period $ (150,220) $ (251,475) $ (150,220) $(251,475)
========== ========= ========== =========
Net (loss)/income applicable to common stock:
Net (loss)/income $ (2,119) $ 309 $ (12,530) $ (84,021)
Dividends declared on preferred stock (2,905) (3,317) (8,431) (9,629)
Accretion of preferred stock (215) (215) (643) (643)
Undeclared dividends on cumulative
preferred stock (2,454) (2,454) (7,363) (7,363)
---------- --------- --------- ---------
$ (7,693) $ (5,677) $ (28,967) $(101,656)
========== ========= ========== =========
Net loss per common share $ (6.05) $ (4.42) $ (22.85) $ (79.41)
========== ========= ========= =========
Weighted average number of common shares 1,271,267 1,282,968 1,267,930 1,280,111
========== ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
<PAGE>
CONSOLIDATED HYDRO, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share and per share amounts)
(Unaudited)
June 30 March 31
1995 1996
</TABLE>
<TABLE>
<CAPTION>
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents unrestricted $ 7,134 $ 5,279
Cash and cash equivalents restricted 9,387 8,912
Accounts receivable 6,612 10,936
Current portion of notes receivable 1,004 40
Prepaid expenses 1,345 1,539
------- --------
Total current assets 25,482 26,706
Property, plant and equipment, net 182,594 147,778
Facilities under development 40,974 1,013
Intangible assets, net 71,981 55,844
Investments and other assets 13,429 13,849
------- --------
$334,460 $245,190
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 9,059 $ 7,225
Current portion of long-term debt payable
to a related party 1,074 1,320
Current portion of long-term debt and
obligations under capital leases payable
to unrelated parties 4,700 5,091
------- -------
Total current liabilities 14,833 13,636
Long-term debt payable to related parties 82,903 88,391
Long-term debt and obligations under capital
leases payable to unrelated parties 166,917 174,137
Deferred credit, state income taxes and other
long-term liabilities 49,695 34,777
Minority interests in consolidated subsidiaries 2,063 ---
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 ($91,955 and $101,584 liquidation
preference at June 30, 1995 and March 31, 1996,
respectively) 84,690 94,962
------- -------
Total liabilities and mandatorily redeemable
preferred stock 401,101 405,903
------- -------
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, 1,814,771 shares issued and 1,278,698
and 1,285,762 shares outstanding at June 30, 1995
and March 31, 1996, respectively 2 2
Class B common stock, $.001 par value, 1,000,000
shares authorized, 246,510 unissued shares reserved,
no shares issued and outstanding --- ---
Additional paid-in capital, including $5,966 related
to warrants 13,497 13,497
Accumulated deficit (157,182) (251,475)
------- -------
(44,971) (139,264)
Less: Deferred compensation (609) (388)
Treasury stock (common: 548,473 shares),
at cost (21,061) (21,061)
------- -------
Total stockholders' deficit (66,641) (160,713)
------- -------
$ 334,460 $ 245,190
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4<PAGE>
<PAGE>
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(Amounts in thousands except shares and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
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
----------- -------- ----------- ----- --------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 110,000 $ 98,712 1,278,698 $ 2 $ 13,497 $ (157,182) $ (609) $ (21,061) $ (66,641)
Quarterly dividend of $22.66 per
share, mandatorily redeemable
Series H Preferred - September
30, 1995 (3,103) (3,103)
Quarterly dividend of $23.43 per
share, mandatorily redeemable
Series H Preferred - December
31, 1995 (3,209) (3,209)
Quarterly dividend of $24.22 per
share, mandatorily redeemable
Series H Preferred - March 31,
1996 (3,317) (3,317)
Issuance of Class A common stock,
$.001 par value 7,064 0
Accretion of Series H Preferred (643) (643)
Recognition of board of directors
and employee compensation expense
related to the issuance of common
stock 135 135
Compensation expense related to
conversion of Performance Unit
Plan to Stock Option Plan in 1993 86 86
Net loss (84,021) (84,021)
-------- ------- -------- ------- -------- ---------- ----------- ---------- ----------
Balance March 31, 1996 110,000 $ 98,712 1,285,762 $ 2 $ 13,497 $ (251,475) $ (388) $ (21,061) $(160,173)
======== ======== ========= ======= ======== ========== =========== ========== ==========
</TABLE>
5
<PAGE>
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (12,530) $ (84,021)
Adjustments to reconcile net loss to net cash used in
operating activities:
Charge for non-cash interest 11,625 13,065
Charge for employee and director equity participation
programs 249 221
Non-cash charge for impairment of long-lived assets --- 83,359
Provision to reduce the carrying value of certain
facilities under development 1,221 ---
Benefit relating to deferred tax liabilities --- (7,905)
Depreciation and amortization 6,907 7,910
Minority interests in loss of consolidated subsidiaries --- (2,063)
Decrease/(increase) in accounts receivable 890 (4,324)
Decrease/(increase) in prepaid expenses 74 (194)
Decrease in accounts payable and accrued expenses (45) (1,984)
----------- ----------
Net cash provided by operating activities 8,391 4,064
---------- ----------
Cash flows from investing activities:
Cost of acquisitions (35,564) ---
Cost of development expenditures (4,994) (1,758)
Decrease in long-term notes receivable 198 116
Increase in long-term notes receivable (260) (58)
Capital expenditures (2,016) (1,719)
Decrease in investments and other long-term assets 1,002 486
----------- ----------
Net cash used in investing activities (41,634) (2,933)
------------ ----------
Cash flows from financing activities:
Long-term borrowings from related parties 35,900 ---
Long-term borrowings from unrelated parties 995 101
Payments to a related party on long-term borrowings --- (269)
Payments to unrelated parties on long-term borrowings (3,103) (3,357)
(Decrease)/increase in other long-term liabilities (451) 64
------------ ---------
Net cash provided by/(used in) financing activities 33,341 (3,461)
------------ ---------
Net increase/(decrease) in cash and cash equivalents 98 (2,330)
Cash and cash equivalents, at beginning of period 14,155 16,521
------------ ---------
Cash and cash equivalents, at end of period $ 14,253 $ 14,191
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid to related party $ --- $ 2,720
=========== =========
Interest paid to unrelated parties $ 4,868 $ 4,848
=========== =========
Income taxes, net $ 307 $ 506
=========== =========
</TABLE>
(continued)
6
<PAGE>
CONSOLIDATED HYDRO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Mar. 31 Mar. 31
1995 1996
---- ----
<S> <C> <C>
Schedule of noncash financing activities:
Investing:
The Company acquired the common stock or
hydroelectric assets of certain entities
amounting to the following:
Fair value of assets acquired $ 45,724 $ ---
Cash paid 35,564 ---
----------- ---------
Liabilities assumed $ 10,160 $ ---
=========== ==========
</TABLE>
7<PAGE>
<PAGE>
NOTE 1 - ORGANIZATION
Consolidated Hydro, Inc., (together with its consolidated subsidiaries the
"Company"), organized in July 1985, is engaged in the acquisition, operation,
management and development of hydroelectric power plants which produce
electricity from the flow of water through turbines. As of March 31, 1995 and
1996, it had ownership interests in, leased and/or operated projects with a
total operating capacity of approximately 362 and 344 megawatts ("MW"),
respectively. Additionally, the Company has formed a new subsidiary the
principal focus of which will be the acquisition and development of thermal
energy plants to serve industrial and utility customers. The Company also holds
the right to develop certain pumped storage projects.
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 of normal recurring
accruals and a charge relating to the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121")) necessary to
present fairly its financial position as of June 30, 1995 and March 31, 1996 and
the results of its operations and changes in its financial position for the nine
months ended March 31, 1995 and 1996. These financial statements should be read
in conjunction with the June 30, 1995 Audited Consolidated Financial Statements
and Notes thereto ("June 1995 Financials"), previously filed on Form 10-K.
Certain amounts have been reclassified in 1995 to conform with 1996
presentation.
NOTE 3 - ADOPTION OF SFAS 121
The Company implemented SFAS 121 in the second quarter of fiscal 1996. This
statement establishes accounting standards for determining impairment of
long-lived assets and long-lived assets to be disposed of. The Company
periodically assesses the realizability of its long-lived assets and evaluates
such assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets (or group of assets) may not be
recoverable. For an asset 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. Assets to be disposed of are stated at the lower of their carrying amount
or fair value less cost to sell.
In light of the Company's planned sale of certain of its conventional
hydroelectric projects, recent industry trends (including the continued decline
in electricity prices and other factors stemming from the deregulation of the
electric power industry), the timing of the expiration of the fixed rate period
of some of its long-term power sales contracts and other indications of a
decline in the fair value of certain of its conventional hydroelectric projects,
the Company determined that certain of these projects were impaired. 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.
Further, as of December 31, 1995, the Company had committed to a plan to
dispose of certain of its conventional hydroelectric projects. These projects
contributed $4.5 million and $1.9 million to operating revenues and operating
income (excluding the charge for impairment of long-lived assets), respectively,
for the nine months ended March 31, 1996.
As a result of the factors noted above, as of December 31, 1995 the Company
has recorded an impairment charge of $83.4 million as a component of its loss
from operations. In addition, a deferred tax benefit and a benefit for minority
interests in loss of consolidated subsidiaries of $7.9 million and $2.1 million,
respectively, was recorded as of that date. Of the total charges, $38.5 million
were attributable to pumped storage development assets, resulting in an
aggregate remaining carrying value of such assets of $0.1 million, and $44.9
million were attributable to certain conventional hydroelectric assets,
8
<PAGE>
<PAGE>
resulting in an aggregate remaining carrying value for such written-down assets
of $26.0 million. In accordance with SFAS 121, the carrying value of these
written-down assets now reflects management's best estimate as to their fair
value although there can be no assurance that future events or changes in
circumstances will not require that such assets, or other of the Company's
assets, be written down in the future.
In conjunction with the adoption of SFAS 121, during the third quarter the
Company re-evaluated the useful lives of certain property, plant and equipment
and intangible assets. This resulted in a reduction of the estimated useful
lives of these fixed and intangible assets. This change had the effect of
increasing the loss from operations and the net loss by $0.3 million ($.21 per
share) for the nine months ended March 31, 1996.
NOTE 4 - ACQUISITIONS
On February 16, 1995, the Company, through a wholly owned subsidiary, CHI
Acquisitions II, Inc., a Delaware corporation formerly known as HDG
Acquisitions, Inc. ("CHI Acquisitions II"), purchased 100% of the issued and
outstanding capital stock of Hydro Development Group, Inc., a New York
corporation ("HDG"). See the June 1995 Financials for additional information.
The following unaudited pro forma financial information for the nine months
ended March 31, 1995 has been prepared assuming the acquisition of HDG occurred
at the beginning of the period presented. The information for the nine months
ended March 31, 1996 reflects the actual results of HDG as included in the
Company's results.
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended March 31,
1995 1996
---- ----
(Pro forma) (As Reported)
<S> <C> <C>
Operating Revenues $ 36,646 $ 38,049
========= ===========
Net loss $ (13,780) $ (84,021)
========= ===========
Net loss per common share $ (23.83) $ (79.41)
========= ===========
Weighted average number of common shares 1,267,930 1,280,111
========= ===========
</TABLE>
The pro forma financial information does not purport to be indicative of
the financial performance which would have resulted had the acquisition
occurred at the beginning of the period presented.
9
<PAGE>
<PAGE>
NOTE 5 - LONG-TERM DEBT
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 its working capital facility (the
"DnB Facility") with Den norske Bank ("DnB"). 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, has 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 and the twelve months ended March
31, 1996, and expects that it will be unable to meet the covenant for the twelve
months ended June 30, 1996. DnB has proposed to the Company an amendment to the
DnB Facility which includes among other things: the required waivers, revised
ratios and other covenant revisions and a reduction in the amount committed
under the facility. The Company has not agreed to any of these proposed terms
and 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 required waivers are 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 use of the DnB Facility for additional working capital purposes
during fiscal 1996.
NOTE 6 - ISSUANCE OF SERIES F AND G PREFERRED STOCK
In February 1996, Ms. Carol H. Cunningham, the Company's Executive
Vice-President and Chief Development Officer, exercised her option under an
existing agreement with the Company to have the Company issue 1,279 shares of
its 8% Senior Convertible Voting Preferred Stock (the "Series F Preferred
Stock") and 1,279 shares of its 9.85% Junior Convertible Voting Preferred Stock
(the "Series G Preferred Stock") in exchange for shares of Summit Energy Storage
Inc. ("SES") stock (or vested options therefor) owned by Ms. Cunningham. The
Company plans to issue Series F Preferred Stock and Series G Preferred Stock
during the fourth fiscal quarter and will record the Series F Preferred Stock
and the Series G Preferred Stock, when issued, at the nominal fair value of the
SES stock received.
NOTE 7 -TERMINATION OF O&M CONTRACT
An operations and maintenance ("O&M") contract relating to one project (33
megawatts) in the West region was terminated pursuant to its terms effective as
of January 1, 1996. Although this project represented a significant portion of
the Company's total megawatt capacity for the region, it did not represent
significant revenues for the Company as a whole and, therefore, management
believes this termination will not have a material adverse effect on the
Company's results of operations or financial condition.
10
<PAGE>
<PAGE>
NOTE 8 - INDUSTRY MATTERS
The Company understands that on October 6, 1995, Niagara Mohawk Power
Corporation ("NIMO"), a customer of the Company, submitted a proposal to the New
York State Public Service Commission in which, among other items, NIMO proposed
that it be relieved of its obligations under contracts with independent power
producers that NIMO considers uneconomic. While offering to renegotiate such
contracts, NIMO proposed that, should negotiations fail and NIMO be unable to
gain alternative economic relief, NIMO would seek to take possession of
associated projects through the power of eminent domain. In its press release
announcing this proposal, NIMO indicated that it would consider the possibility
of restructuring under Chapter 11 of the U.S. bankruptcy code should its
proposal prove unachievable. The Company understands that the ratings of the
debt securities of NIMO were lowered to below investment grade following NIMO's
filing of the proposal. The Company believes that the ratings of the debt
securities of most of the other utilities which purchase power from the Company
are investment grade, but there can be no assurance of the long-term credit
worthiness of any of the Company's customers.
11<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company is engaged in the acquisition, operation, management and
development of hydroelectric power plants, which produce electricity from the
flow of water through turbines. The Company's projects are located in 15 states
and one Canadian province. Additionally, the Company has formed a new subsidiary
the principal focus of which will be the acquisition and development of thermal
energy plants to serve industrial and utility customers.
The Company's existing projects are clustered in four regions: the
Northeast (including three Canadian projects), 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 rapidly, primarily by acquiring existing
hydroelectric facilities in the United States. On March 31, 1996, the Company
had a 100% ownership or long-term lease interest in 67 projects (153 megawatts),
a partial ownership interest in 14 projects (86 megawatts), and operations and
maintenance ("O&M") contracts with 10 projects (105 megawatts), including the
acquisition of hydroelectric projects or interests in hydroelectric projects or
O&M agreements with an aggregate operating capacity of 50 megawatts since
January 1995. The acquisition of Hydro Development Group Inc. ("HDG"), which was
acquired by the Company on February 16, 1995, had a material impact on
operations. An O&M contract relating to one project (33 megawatts) in the West
region was terminated pursuant to its terms effective January 1, 1996. Although
this project represented a significant portion of the Company's total megawatt
capacity for the region, it did not represent significant revenues for the
Company as a whole and, therefore, management believes this termination will not
have a material adverse effect on the Company's results of operations or
financial condition.
CHI sells substantially all of the electric energy and capacity from its
U.S. projects to electric 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.
Effective December 31, 1995, the Company has significantly written down the
carrying values of its pumped storage development assets as well as certain of
its conventional hydroelectric assets. The Company's pumped storage development
assets have been written down to $0.1 million, and certain of its conventional
hydroelectric assets have been written down to $26.0 million. The Company has
determined that it is highly unlikely that the Company will successfully develop
its pumped storage projects. See "Nine Months Ended March 31, 1996 compared to
Nine Months Ended March 31, 1995 - SFAS 121 - Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
12
<PAGE>
<PAGE>
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 2 to 31 years. Fluctuations in revenues and related cash flow are generally
attributable to increasing megawatts in operation, coupled with variations in
water flow and the effect of escalating contract rates in the Company's power
purchase agreements.
Management Fees and Operations & Maintenance Revenues
O&M contracts 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 facility. An O&M arrangement with a potential acquisition candidate allows the
Company to obtain first-hand operating information and thereby better analyze a
potential acquisition.
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.
Certain Key Operating Results and Trends
The information provided in the following tables 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 growth by region and ownership 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 long-term consistent water flow and
attractive power purchase contract rates.
13
<PAGE>
<PAGE>
This information should be read in conjunction with the June 30, 1995
Audited Consolidated Financial Statements and Notes thereto ("June 1995
Financials"), previously filed on Form 10-K.
Power Producing Facilities:
<TABLE>
<CAPTION>
As of As of As of
June 30, 1995 March 31, 1995 March 31, 1996
------------------- -------------- --------------
MWs #Projects MWs #Projects MWs #Projects
<S> <C> <C> <C> <C> <C> <C>
Northeast:
100% Ownership (1) 104.72 45 104.72 45 102.20 44
Partial Ownership (2) 52.37 8 52.37 8 52.37 8
O&M Contracts (3) 80.14 3 80.14 3 80.14 3
--------- ---- --------- ---- --------- ----
Total 237.23 56 237.23 56 234.71 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) 51.98 6 34.98 5 19.48 (4) 5 (4)
---------- ---- --------- ---- ---------- ----
Total 61.66 11 44.66 10 29.16 10
========= ==== ========= ==== ========= ====
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) 155.21 68 155.21 68 152.69 67
Partial Ownership (2) 85.66 14 85.66 14 85.66 14
O&M Contracts (3) 138.21 11 121.21 10 105.71(4) 10(4)
---------- ---- --------- ---- ---------- ----
Total 379.08 93 362.08 92 344.06 91
========= ==== ========= ==== ========= ====
- - ------------
<FN>
(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 termination of an O&M contract pursuant to its terms effective
January 1, 1996.
</TABLE>
Selected Operating Information:
<TABLE>
<CAPTION>
Quarter Ended March 31, Nine Months Ended March 31,
1995 1996 1995 1996
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Power generation revenues (thousands) (1) $ 13,641(2) $ 16,056(2) $ 28,615(3) $ 34,274(3)
Kilowatt hours produced (thousands) 174,276(4) 199,775(4) 383,160(5) 447,824(5)
Average rate per kilowatt hour (1) 7.8(cent)(6) 8.0(cent)(6) 7.5(cent)(7) 7.7(cent)(7)
- - ---------
<FN>
(1) Limited to projects included in consolidated revenues.
(2) Includes $993 and $1,763 resulting from the acquisition of HDG for the
three months ended March 31, 1995 and 1996, respectively.
(3) Includes $993 and $4,114 resulting from the acquisition of HDG for the nine
months ended March 31, 1995 and 1996, respectively.
(4) Includes 15,298 and 27,150 kWh resulting from the acquisition of HDG for
the three months ended March 31, 1995 and 1996, respectively.
(5) Includes 15,298 and 64,325 kWh resulting from the acquisition of HDG for
the nine months ended March 31, 1995 and 1996, respectively.
(6) Excluding the acquisition of HDG, the average rate per kilowatt hour is
8.0(cent)and 8.3(cent)for the three months ended March 31, 1995 and 1996,
respectively.
(7) Excluding the acquisition of HDG, the average rate per kilowatt hour is
7.5(cent)and 7.9(cent)for the nine months ended March 31, 1995 and 1996,
respectively.
</TABLE>
14
<PAGE>
<PAGE>
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 flow 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 flow 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):
<TABLE>
<CAPTION>
Quarter Ended March 31, Nine Months Ended March 31,
---------------------------------------- ---------------------------------------
1995 1996 1995 1996
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Northeast Below Average Above Average Below Average Above Average
Southeast Above Average Above Average Above Average Above Average
West Above Average Below Average Average Below Average
Northwest Below Average Above Average Below Average Above Average
- - ---------
<FN>
(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.
</TABLE>
Production of energy by the Company is typically greatest in its third and
fourth fiscal quarters (January through June), when water flow is at its highest
at most of the Company's projects, and lowest in the first fiscal quarter (July
through September). The amount of water flow in any given period will have a
direct effect on the Company's production, revenues and cash flow.
The following tables, which show revenues from power sales and kilowatt
hour production by fiscal quarter, respectively, highlight the seasonality of
the Company's revenue stream. These tables should be reviewed in conjunction
with the water flow information included above.
Power Generation Revenues (1):
<TABLE>
<CAPTION>
Fiscal 1995 (2) Fiscal 1996(2)
----------------- -------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
First Fiscal Quarter $ 7,471 18.7 $ 5,580(4) 16.3
Second Fiscal Quarter 7,503 18.8 12,638(4) 36.9
Third Fiscal Quarter 13,641(3) 34.2 15,056(4) 46.8
Fourth Fiscal Quarter 11,265(3) 28.3
---------- -------- ---------- --------
Total $39,880 100.0 $34,274 100.0
========== ======== ========== ========
- - -----------------
<FN>
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue representing claims for lost
generation, recoverable from an insurance company.
(3) Includes $993 and $1,453 resulting from the acquisition of HDG, in the
third and fourth fiscal quarters, respectively.
(4) Includes $533, $1,818 and $1,763 resulting from the acquisition of HDG, in
the first, second and third fiscal quarters, respectively.
</TABLE>
15<PAGE>
<PAGE>
Kilowatt Hours Produced (1):
<TABLE>
<CAPTION>
Fiscal 1995(2) Fiscal 1996(2)
----------------- ------------------
kWh % kWh %
<S> <C> <C> <C> <C>
First Fiscal Quarter 105,456 19.6 84,427(4) 18.9
Second Fiscal Quarter 103,428 19.2 163,622(4 36.5
Third Fiscal Quarter 174,276(3) 32.3 199,775(4) 44.6
Fourth Fiscal Quarter 156,084(3) 28.9
---------- --------- ----------- -------
Total 539,244 100.0 447,824 100.0
========== ======== =========== =======
<FN>
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of the business interruption revenue
recoverable as a result of insurance claims.
(3) Includes 15,298 and 22,439 kWh resulting from the acquisition of HDG in the
third and fourth fiscal quarters, respectively.
(4) Includes 8,754, 28,421 and 27,150 kWh resulting from the acquisition of HDG
in the first, second and third fiscal quarters, respectively.
</TABLE>
Quarter Ended March 31, 1996 compared to Quarter Ended March 31, 1995
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
$2.4 million (17.6%), from $13.6 million to $16.0 million for the quarters ended
March 31, 1995 and 1996, respectively. Excluding the results of HDG, acquired on
February 16, 1995 and located in the Northeast region, power generation revenue
increased $1.7 million (13.5%), from $12.6 million to $14.3 million.
Projects located in the Northeast region experienced a $1.3 million
increase in revenues resulting from the effects of above average water flow and
precipitation for the third quarter of fiscal 1996 as compared to below average
water flow and precipitation for the same period in fiscal 1995.
The Southeast experienced a minimal increase in revenues of $0.1 million.
For the West and Northwest regions combined, revenues increased $0.3
million due to above average water flow and precipitation in the Northwest
region, an area which contributes significantly to total revenues of the
combined regions, for the third quarter of fiscal 1996 as compared to below
average water flow and precipitation for the same period in fiscal 1995.
On a Company-wide basis, revenue per kilowatt hour increased by 2.6%, from
7.8(cent) to 8.0(cent), in the 1995 fiscal period versus the 1996 fiscal period,
respectively. Excluding results of HDG, revenue per kilowatt hour increased
3.8%, from 8.0(cent) to 8.3(cent), primarily as a result of variations in the
production mix among the various projects resulting primarily from the effects
of year-to-year variation in water flow and contract rates for each individual
project.
Management Fees and Operations & Maintenance Revenues
Management fees and O&M contract revenue increased by $0.4 million (44.4%),
from $0.9 million to $1.3 million for the quarters ended March 31, 1995 and
1996, respectively. Excluding the results of HDG, management fees and O&M
revenues increased $0.3 million (33.3%), from $0.9 million to $1.2 million,
primarily due to the recording of a production-based incentive fee and an
increase in O&M revenues related to significant repair work in the Northwest
region.
Costs and Expenses
Operating Expenses. Operating expenses remained constant at $4.3 million
for the quarters ended March 31, 1995 and 1996, respectively. Excluding the
results of HDG, operating expenses decreased by $0.3 million (7.5%) from $4.0
million to $3.7 million primarily due to a self-insurance deductible associated
with a Northeast region insurance claim in the third quarter of fiscal 1995, an
overall decrease in insurance premiums due to a change in carriers effective
July 1, 1995, offset by an increase in time spent by certain management
personnel (who previously charged their time to general and administrative
activities) on operating activities.
General and Administrative Expenses. General and administrative expenses
increased $0.4 million (23.5%) from $1.7 million to $2.1 million for the
quarters ended March 31, 1995 and 1996, respectively, primarily due to an
increase in acquisition related activity of the Company's newly formed
subsidiary (CHI Power, Inc.) coupled with the expensing of pumped storage
development costs which were previously capitalized, partially offset by a
reduction in time spent by certain management personnel on general and
administrative activities. There was no impact on general and administrative
expenses resulting from the acquisition of HDG.
16
<PAGE>
<PAGE>
Interest Expense
Interest expense increased by $1.3 million (22.8%), from $5.7 million to
$7.0 million for the quarters ended March 31, 1995 and 1996, respectively.
Excluding the results of HDG, interest expense increased by $0.9 million
(17.3%), from $5.2 million to $6.1 million primarily due to the increasing
principal balance of the Company's 12% Senior Discount Notes due 2003, Series B
(the "Senior Discount Notes") which results in a corresponding increase in
interest expense.
Issuance of Series F and G Preferred Stock
In February 1996, Ms. Carol H. Cunningham, the Company's Executive
Vice-President and Chief Development Officer, exercised her option under an
existing agreement with the Company to have the Company issue 1,279 shares of
its 8% Senior Convertible Voting Preferred Stock (the "Series F Preferred
Stock") and 1,279 shares of its 9.85% Junior Convertible Voting Preferred Stock
(the "Series G Preferred Stock") in exchange for shares of Summit Energy Storage
Inc. ("SES") stock (or vested options therefor) owned by Ms. Cunningham. The
Company plans to issue Series F Preferred Stock and Series G Preferred Stock
during the fourth fiscal quarter and will record the Series F Preferred Stock
and the Series G Preferred Stock, when issued, at the nominal fair value of the
SES stock received.
Nine Months Ended March 31, 1996 compared to Nine Months Ended March 31, 1995
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
$5.7 million (19.9%), from $28.6 million to $34.3 million for the nine months
ended March 31, 1995 and 1996, respectively. Excluding the results of HDG,
acquired on February 16, 1995 and located in the Northeast region, power
generation revenue increased $2.5 million (9.1%), from $27.6 million to $30.1
million.
Projects located in the Northeast region experienced a $2.0 million
increase in revenues resulting from the effects of above average water flow and
precipitation in the nine months ended March 31, 1996 as compared to below
average water flow and precipitation for the same period in fiscal 1995.
The Southeast experienced a $0.4 million decrease in revenues due to lost
revenues associated with flooding damage in fiscal 1996, coupled with ongoing
repairs principally at one project diminishing its availability.
For the West and Northwest regions combined, revenues increased $0.9 due to
above average water flow and precipitation in the Northwest region, an area
which contributes significantly to total revenues of the combined regions, in
the nine months ended March 31, 1996 as compared to below average water flow and
precipitation for the same period in fiscal 1995.
On a Company-wide basis, revenue per kilowatt hour increased by 2.7%, from
7.5(cent) to 7.7(cent), in the 1995 fiscal period versus the 1996 fiscal period,
respectively. Excluding the fiscal 1996 results of HDG, revenue per kilowatt
hour increased 5.3%, from 7.5(cent) to 7.9(cent), primarily as a result of
variations in the production mix among the various projects resulting primarily
from the effects of year-to-year variation in water flow and contract rates for
each individual project.
Management Fees and Operations & Maintenance Revenues
Management fees and O&M contract revenue increased by $0.6 million (18.8%),
from $3.2 million to $3.8 million for the nine months ended March 31, 1995 and
1996, respectively. Excluding the results of HDG, management fees and O&M
revenues increased by $0.3 million (9.7%), from $3.1 million to $3.4 million,
primarily due to an increase in O&M activity and production based incentive fees
in the Northwest and Northeast.
Costs and Expenses
Operating Expenses. Operating expenses increased by $1.6 million (13.8%),
from $11.6 million to $13.2 million, for the nine months ended March 31, 1995
and 1996, respectively. Excluding the results of HDG, operating expenses
increased by $0.1 million (0.9%), from $11.2 million to $11.3 million, primarily
due to an increase in time spent by certain management personnel (who previously
charged their time to general and administrative activities) on operating
activities, offset by a decrease in self-insurance deductibles associated with
insurance claims and by an overall decrease in insurance premiums due to a
change in carriers effective July 1, 1995.
17
<PAGE>
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased $1.0 million (19.6%) from $5.1 million to $4.1 million for the nine
months ended March 31, 1995 and 1996, respectively, primarily due to a reduction
in time spent by certain management personnel on general and administrative
activities, a reduction in international acquisition activities and an overall
cost reduction effort by the Company. There was no impact on general and
administrative expenses resulting from the acquisition of HDG.
Interest Expense
Interest expense increased by $3.8 million (24.2%), from $15.7 million to
$19.5 million for the nine months ended March 31, 1995 and 1996, respectively.
Excluding the results of HDG, interest expense increased by $1.5 million (9.9%),
from $15.2 million to $16.7 million primarily due to the increasing principal
balance of the Senior Discount Notes which results in a corresponding increase
in interest expense.
18
<PAGE>
<PAGE>
SFAS 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
The Company implemented SFAS 121 in the second quarter of fiscal 1996. This
statement establishes accounting standards for determining impairment of
long-lived assets and long-lived assets to be disposed of. The Company
periodically assesses the realizability of its long-lived assets and evaluates
such assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets (or group of assets) may not be
recoverable. For assets in use or under development, impairment is determined to
exist if the estimated future cash flow associated with the asset, undiscounted
and without interest charges, is less than the carrying amount of the asset.
When the estimated future cash flow indicates that the carrying amount of the
asset will not be recovered, the asset is written down to its fair value. Assets
to be disposed of are stated at the lower of their carrying amount or fair value
less cost to sell.
In light of the Company's planned sale of certain of its conventional
hydroelectric projects, recent industry trends (including the continued decline
in electricity prices and other factors stemming from the deregulation of the
electric power industry), the timing of the expiration of the fixed rate period
of some of its long-term power sales contracts and other indications of a
decline in the fair value of certain of its conventional hydroelectric projects,
the Company determined that certain of these projects were impaired. 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.
Further, as of December 31, 1995, the Company had committed to a plan to
dispose of certain of its conventional hydroelectric projects. These projects
contributed $4.5 million and $1.9 million to operating revenues and operating
income (excluding the charge for impairment of long-lived assets) for the nine
months ended March 31, 1996, respectively.
As a result of the factors noted above, as of December 31, 1995 the Company
has recorded an impairment charge of $83.4 million as a component of its loss
from operations. In addition, a deferred tax benefit and a benefit for minority
interests in loss of consolidated subsidiaries of $7.9 million and $2.1 million,
respectively, was recorded as of that date. Of the total charges, $38.5 million
were attributable to pumped storage development assets, resulting in an
aggregate remaining carrying value of such assets of $0.1 million, and $44.9
million were attributable to certain conventional hydroelectric assets,
resulting in an aggregate remaining carrying value for such written-down assets
of $26.0 million. In accordance with SFAS 121, the carrying value of these
written-down assets now reflects management's best estimate as to their fair
value although there can be no assurance that future events or changes in
circumstances will not require that such assets, or other of the Company's
assets, be written down in the future.
In conjunction with the adoption of SFAS 121, during the third quarter the
Company re-evaluated the useful lives of certain property, plant and equipment
and intangible assets. This resulted in a reduction of the estimated useful
lives of these fixed and intangible assets. This change had the effect of
increasing the loss from operations and the net loss by $0.3 million ($.21 per
share) for the nine months ended March 31, 1996.
Minority Interests in Loss of Consolidated Subsidiaries
The Company recognized a benefit of approximately $2.1 million for the nine
months ended March 31, 1996 resulting from the minority shareholders' interest
in the loss of certain consolidated subsidiaries related to the write-down of
pumped storage development assets in accordance with SFAS 121 (as discussed
above).
Benefit for Income Taxes
The Company recognized a deferred tax benefit of approximately $7.9 million
for the nine months ended March 31, 1996. The benefit relates to the write-down
of certain long-lived assets in accordance with SFAS 121 (discussed above). The
effective tax rate of the deferred benefit recognized from the write-down
differs from the federal statutory rate due to the reduction of deferred tax
liabilities offset by the increase in the valuation allowance attributable to
tax assets related to net operating loss carryforwards. The valuation allowance
increased due to the reduction of taxable temporary differences for book
depreciation and amortization previously projected to be recognized during the
net operating loss carryforward period.
19
<PAGE>
<PAGE>
Liquidity and Capital Resources
As more fully described in the Consolidated Financial Statements and
related Notes thereto included herein, the cash flow of the Company was
comprised of the following:
<TABLE>
<CAPTION>
Nine months end
March 31, 1995 March 31, 1996
------------------- ------------------
(amounts in thousands)
<S> <C> <C>
Cash provided by/(used in):
Operating activities $ 8,391 $ 4,064
Investing activities (41,634) (2,933)
Financing activities 33,341 (3,461)
------------ ------------
Net increase/(decrease) in cash $ 98 $ (2,330)
============ ============
</TABLE>
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
does not expect its capital requirements in connection with the development of
pumped storage projects to be material in the near term.
For the nine months ended March 31, 1996, the cash flow provided by
operating activities was principally the result of the $84.0 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 and a $4.3 million increase
in accounts receivable offset by $7.9 million of depreciation and amortization
and $13.1 million of a charge for non-cash interest. The cash flow used in
investing activities was primarily attributable to a $1.7 million cost of
capital expenditures and a $1.8 million investment in pumped storage and
conventional development during fiscal 1996. Of these expenditures,
approximately $1.2 million was attributable to capitalized interest costs, and
$0.9 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 $3.6 million of project
debt.
Cash provided by operating activities decreased by $4.3 million for the
nine months ended March 31, 1996 as compared to the nine months ended March 31,
1995. The decrease resulted from a $3.1 million increase in income before
depreciation and amortization, a charge for non-cash interest, a charge for
impairment of long-lived assets, the tax benefit resulting from a charge for
impairment of long-lived assets, minority shareholders' interest in loss of
consolidated subsidiaries, provision to reduce the carrying value of certain
facilities under development and employee and director equity programs, offset
by a $7.4 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 its 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 nine months ended March 31, 1995, the cash flow provided by
operating activities was principally the result of the $12.5 million net loss
for such period offset by $6.9 million of depreciation and amortization, $11.6
million of a charge for non-cash interest, $1.2 million for a provision to
reduce the carrying value of certain facilities under development, and a $0.9
million decrease in accounts receivable. The cash flow used in investing
activities was primarily attributable to the $35.5 million acquisition of HDG
and $5.0 million of investment in pumped storage and conventional development.
Of these development expenditures, approximately $2.5 million was attributable
to the funding of committed development capital for the Summit Pumped Storage
Project, and $0.4 million was financed through non-recourse debt for the River
Mountain Pumped Storage Project. The cash flow provided by financing activities
20
<PAGE>
<PAGE>
was primarily due to repayment of $3.1 million of project debt offset by a $36.9
million increase in borrowings, of which $35.9 million of debt was incurred for
the HDG acquisition.
Cash provided by operating activities increased by $11.0 million for the
nine months ended March 31, 1995 as compared to the nine months ended March 31,
1994. The increase resulted from a $4.4 million increase in income before
depreciation and amortization, a charge for non-cash interest, employee and
director equity programs, provision to reduce the carrying value of certain
facilities under development, and the cumulative effect of an accounting change,
coupled with a $6.6 million increase in other operating items (receivables,
prepaid expenses, accounts payable and accrued expenses).
Summary of Indebtedness
<TABLE>
<CAPTION>
Principal Amount Outstanding as of
-----------------------------------
June 30, 1995 March 31, 1996
--------------- ----------------
(amounts in thousands)
<S> <C> <C>
Company debt, excluding
non-recourse debt of subsidiaries $ 134,506 $ 151,131
Non-recourse debt of subsidiaries 121,088 117,808
Current portion of long-term debt (5,774) (6,411)
------------ ------------
Total long-term debt obligations $ 249,820 $ 262,528
============ ============
</TABLE>
Den norske Bank AS ("DnB"), provides the Company with the $20 million
working capital facility (the "DnB Facility"), which has an initial expiration
date of June 30, 1997 and ranks pari passu with the Senior Discount Notes. Under
certain limited circumstances, pursuant to the terms of the DnB Facility, DnB
has the right 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 notice to the Company.
Borrowings under the DnB Facility may be used for working capital and other
purposes including, without limitation, O&M expenses, general and administrative
expenses, capital improvements and debt service shortfalls (including those
caused by water flow fluctuations), acquisitions and to provide letters of
credit as may be necessary in conjunction with certain of the Company's power
purchase agreements, or otherwise, and for other general corporate purposes.
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 its working capital facility (the
"DnB Facility") with Den norske Bank ("DnB"). 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, has 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 and the twelve months ended March
31, 1996, and expects that it will be unable to meet the covenant for the twelve
months ended June 30, 1996. DnB has proposed to the Company an amendment to the
DnB Facility which includes among other things: the required waivers, revised
ratios and other covenant revisions and a reduction in the amount committed
under the facility. The Company has not agreed to any of these proposed terms
and 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 required waivers are 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
21
<PAGE>
<PAGE>
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 use of the DnB Facility for additional working capital purposes
during fiscal 1996.
The electric power industry in the U.S. faces considerable uncertainty
regarding its future structure. The performance of the Company in the future
will be affected by a number of trends. First, the Company competes for
opportunities 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 power generation assets on favorable economic terms in
such an environment are increasingly limited. Second, prices for electricity
have declined in recent years as a result of reductions in the cost of power
produced from natural gas due to lower natural gas prices and technological
improvements which have lowered the capital cost and increased the efficiency of
combustion turbines and other competing technologies. Third, 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 and could, along
with other factors, lead to additional attempts by public utility companies to
renegotiate existing power purchase agreements. These trends are limiting and
are expected to continue to limit the Company's near-term opportunities to
acquire or develop additional hydroelectric capacity at acceptable rates of
return. These trends, the Company's financial condition and the planned sale of
certain of its conventional hydroelectric assets were important aspects of the
Company's decision to adopt SFAS 121 as of December 31, 1995. Growth through the
acquisition of both operating projects and O&M contracts will be a critical
factor in the Company's future.
The Company expects that, through the third calendar quarter of 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 Senior Discount Notes.
The Company currently anticipates that it will need to obtain additional debt or
equity financing, or utilize 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 its obligations under the Series F Preferred Stock and its
capital expenditure and working capital requirements at such time. In addition,
the Company anticipates needing to obtain further financing in order to make the
principal payments on the Senior Discount Notes at their maturity in 2003 and to
redeem the Series H Preferred Stock at its 2003 mandatory redemption date. There
can be no assurance that any such additional financings, asset sale proceeds or
other sources of funds will be available to the Company or that the terms would
be favorable or acceptable to the Company. 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.
Forward Looking Statements
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 e
vents 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 described in the three immediately
preceding paragraphs; risks related to hydroelectric, thermal, 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.
22
<PAGE>
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
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 due to excessive debt levels, high interest
rates, and/or principal amortization schedules that exceeded available project
cash flow. In addition, the Company continues to believe, by acquiring these
projects for little or no equity investment, it will be able to renegotiate the
non-recourse loans involved and enhance the equity value of the underlying
projects.
As of March 31, 1996, non-recourse project loans, aggregating $14.8
million, remain in default. The Company is working closely with the lenders
involved and believes that satisfactory resolution can be achieved. In the
unlikely event of loan acceleration, the Company is likely to abandon
substantially all of these projects due to the immateriality of its investment
and the non-recourse nature of the applicable loans. The Company believes that
any such abandonment will have no material adverse effect on the Company, its
financial condition or its results of operations.
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 its working capital facility
(the "DnB Facility") with Den norske Bank ("DnB"). 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, has 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 and the twelve months
ended March 31, 1996, and expects that it will be unable to meet the covenant
for the twelve months ended June 30, 1996. DnB has proposed to the Company an
amendment to the DnB Facility which includes among other things: the required
waivers, revised ratios and other covenant revisions and a reduction in the
amount committed under the facility. The Company has not agreed to any of these
proposed terms and 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 required waivers are 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 use of the DnB Facility for additional working
capital purposes during fiscal 1996.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1. Financial Data Schedule (3 months)
Exhibit 27.2. Financial Data Schedule (9 months)
(b) Reports on Form 8-K
NONE
23
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: May 14, 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
24
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