================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 33-69762
CHI ENERGY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1138478
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 Washington Boulevard, Stamford, Connecticut 06901
----------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (203) 425-8850
NONE
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class A Outstanding as of November 11, 1998
- ----------------------------- ------------------------------------
Common stock, $.01 par value 9,085,290
Class B Outstanding as of November 11, 1998
- ----------------------------- ------------------------------------
Common stock, $.01 par value 914,710
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................ 2
Consolidated Statement of Operations for the three months and nine months
ended September 30, 1998 and 1997 (Unaudited)............................... 3
Consolidated Balance Sheet at September 30, 1998
and December 31, 1997 (Unaudited).......................................... 4
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 1998 (Unaudited).................... 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1998 and 1997 (Unaudited)............................... 6-7
Notes to Consolidated Financial Statements (Unaudited) ........................ 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 10-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 20
Item 2 Changes in Securities and Use of Proceeds...................................... 20
Item 3. Defaults upon Senior Securities................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders............................ 20
Item 5. Other Information.............................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................... 20
Signature
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHI ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
2
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Reorganized Predecessor Reorganized Predecessor
Company Company Company Company
------- ------- ------- -------
Three Months Ended Nine Months Ended
September 30, September 30,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues:
Power generation revenue $ 8,259 $ 6,422 $ 37,156 $ 34,961
Management fees and operations & maintenance revenues 2,134 1,927 5,291 4,630
Equity income in partnership interests and other
partnership income 221 73 2,989 997
----------- ----------- ---------- ----------
10,614 8,422 45,436 40,588
----------- ----------- ---------- ----------
Costs and expenses:
Operating 4,706 4,591 13,613 13,752
General and administrative 1,814 1,388 7,023 6,690
Charge for employee and director equity participation
programs - - - 50
Reorganization costs - 3,230 - 3,230
Depreciation and amortization 1,823 2,176 5,514 6,506
Lease expense to a related party - 923 - 2,677
Lease expense to unrelated parties 1,576 571 4,513 1,716
(Adjustment to)/charge for impairment of long-lived
assets - (75) - 420
----------- ----------- ---------- ----------
9,919 12,804 30,663 35,041
----------- ----------- ---------- ----------
Income/(loss) from operations 695 (4,382) 14,773 5,547
Interest income 509 540 1,143 1,562
Other income 23 33 332 423
Interest expense on indebtedness to related parties - (2,447) - (7,795)
Interest expense on indebtedness to unrelated parties (2,008) (4,351) (6,177) (13,923)
----------- ----------- ---------- ----------
(Loss)/income before benefit/(provision) for
income taxes (781) (10,607) 10,071 (14,186)
Benefit/(provision) for income taxes 295 (117) (4,208) (1,458)
Extraordinary gain on extinguishment of debt - -- - 36
----------- ----------- ---------- ----------
Net (loss)/income $ (486) $ (10,724) $ 5,863 $ (15,608)
=========== =========== ========== ==========
Net (loss)/income applicable to common stock:
Net (loss)/income $ (486) $ (10,724) $ 5,863 $ (15,608)
Dividends declared on preferred stock - (3,370) - (11,073)
Accretion of preferred stock - (179) - (608)
Undeclared dividends on cumulative preferred stock - (2,511) - (7,725)
----------- ----------- ---------- ----------
$ (486) $ (16,784) $ 5,863 $ (35,014)
=========== =========== ========== ==========
Net (loss)/income per common share (a) $ (0.05) n/a $ 0.59 n/a
Weighted average number of common shares (a) 10,000,000 n/a 10,000,000 n/a
</TABLE>
(a) Share and per share data are not meaningful on or prior to November 7, 1997
due to the significant change in the capital structure in connection with the
Plan of Reorganization.
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1 9 9 8 1 9 9 7
--------- --------
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents unrestricted $ 17,041 $ 6,869
Cash and cash equivalents restricted 4,871 5,129
Accounts receivable, net 6,031 7,957
Prepaid expenses and other current assets 1,877 1,406
----------- ----------
Total current assets 29,820 21,361
Property, plant and equipment, net 92,029 93,692
Reorganization value in excess of amounts allocable to identifiable assets, net 12,484 17,300
Intangible assets, net 46,207 47,800
Investments and other long-term assets 40,263 41,808
----------- ----------
$ 220,803 $ 221,961
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 6,786 $ 7,990
Current portion of long-term debt 6,486 5,355
----------- ----------
Total current liabilities 13,272 13,345
Long-term debt and obligations under capital leases 74,636 82,616
Deferred credit, state income taxes and other long-term liabilities 41,227 40,195
Commitments and contingencies
----------- ----------
Total liabilities 129,135 136,156
----------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value, 20,000,000 shares authorized
Class A common stock, 9,085,290 shares issued and outstanding 91 91
Class B common stock, 914,710 shares issued and outstanding 9 9
Additional paid-in capital, including $2,064 related to warrants 85,000 85,000
Retained earnings 6,568 705
----------- ----------
Total stockholders' equity 91,668 85,805
----------- ----------
$ 220,803 $ 221,961
=========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Amounts in thousands except shares and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------
Number Additional Total
of Shares Par Paid-in Retained Stockholders'
Outstanding Value Capital Earnings Equity
------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1997 10,000,000 $ 100 $ 85,000 $ 705 $ 85,805
Net income - - - 5,863 5,863
------------- ------------- ------------ ------------- --------------
Balance September 30, 1998 10,000,000 $ 100 $ 85,000 $ 6,568 $ 91,668
============= ============= ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
------- -------
Nine Months Ended
September 30,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 5,863 $ (15,608)
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities
before reorganization items:
Non-cash interest and other charges 503 15,764
Reorganization expenses - 3,230
Non-cash charge for impairment of long-lived assets - 420
Change in deferred tax liabilities 3,525 645
Depreciation and amortization 5,514 6,506
Decrease/(increase) in the provision for uncollectable accounts
receivable 95 (96)
Distributed earnings of affiliates 190 118
Income from sale of partnership assets (930) -
Decrease in accounts receivable 1,831 1,055
Increase in prepaid expenses and other current assets (471) (811)
Decrease in accounts payable and accrued expenses (611) (1,674)
---------- ----------
Net cash provided by operating activities before reorganization items 15,509 9,549
---------- ----------
Operating cash flows used for reorganization items:
Professional fees (201) -
---------- ----------
Net cash used for reorganization items (201) -
---------- ----------
Net cash provided by operating activities 15,308 9,549
---------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets - 2,329
Proceeds from sale of partnership assets 930 -
Cost of development expenditures - (1,290)
Capital expenditures (1,772) (2,709)
Decrease/(increase) in investments and other long-term assets 1,355 (5,006)
---------- ----------
Net cash provided by/(used in) investing activities 513 (6,676)
---------- ----------
Cash flows from financing activities:
Long-term borrowings from unrelated parties - 119
Payments to a related party on long-term borrowings - (2,144)
Payments to unrelated parties on long-term borrowings (5,920) (4,224)
Cost of reorganization - (748)
Increase in other long-term liabilities 13 244
---------- ----------
Net cash used in financing activities (5,907) (6,753)
---------- ----------
Net increase/(decrease) in cash and cash equivalents 9,914 (3,880)
Cash and cash equivalents, at beginning of period 11,998 31,671
---------- ----------
Cash and cash equivalents, at end of period $ 21,912 $ 27,791
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Reorganized Predecessor
Company Company
------- -------
Nine Months Ended
September 30,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid to related party $ - $ 2,505
=========== ===========
Interest paid to unrelated parties $ 5,801 $ 3,919
=========== ===========
Income taxes, net $ 326 $ 436
=========== ===========
Schedules of noncash investing and financing activities:
The Company acquired the common stock or hydroelectric assets of certain entities
amounting to the following:
Fair value of assets acquired $ - $ 28
Cash paid - -
----------- -----------
Liabilities assumed $ - $ 28
=========== ===========
</TABLE>
Reorganization value in excess of amounts allocable to identifiable assets and
accounts payable and accrued expenses decreased by $392 for the nine months
ended September 30, 1998 as a result of the reversal of a current tax liability.
Reorganization value in excess of amounts allocable to identifiable assets and
deferred credit, state income taxes and other long-term liabilities decreased by
$2,593 for the nine months ended September 30, 1998 as a result of the reversal
of tax valuation allowances related to net operating loss carryforwards.
Reorganization value in excess of amounts allocable to identifiable assets and
long-term debt and obligations under capital leases decreased by $1,037 for the
nine months ended September 30, 1998 as a result of the termination of a land
option agreement.
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts
in thousands except per share amounts or otherwise noted)
(Unaudited)
NOTE 1 - ORGANIZATION
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company"), has been engaged in the
energy business since its founding in 1985. Its principal business is the
development, operation and management of industrial energy and other
infrastructure assets and of hydroelectric power plants. Currently, all of the
Company's revenue is derived from the ownership and operation of hydroelectric
facilities. Industrial infrastructure assets include power plants, steam
boilers, air compressors, water and wastewater treatment facilities, and other
utility-type facilities that support the manufacture of products in capital
intensive process industries such as pulp and paper, chemicals, textile, food
and beverage, etc. As of September 30, 1998 and 1997, the Company had ownership
interests in, leased and/or operated projects with a total operating capacity of
334 and 336 megawatts ("MW"), respectively.
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") and filed a plan of reorganization (the "Plan
of Reorganization") and a disclosure statement. The Bankruptcy Court entered an
order confirming the Plan of Reorganization on October 23, 1997 and the Plan of
Reorganization became effective on November 7, 1997 (the "Effective Date").
As of the Effective Date, the Company adopted fresh start reporting in
accordance with American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). The accompanying consolidated financial
statements reflect the use of fresh start reporting as required by SOP 90-7, in
which assets and certain liabilities were adjusted to their fair values and
resulted in the creation of a new reporting entity (the "Reorganized Company")
with no retained earnings or accumulated deficit as of November 7, 1997.
Accordingly, the consolidated financial statements for the periods prior to and
including November 7, 1997 (the "Predecessor Company") are not comparable to the
consolidated financial statements presented subsequent to November 7, 1997. A
black line has been drawn on the accompanying consolidated financial statements
to distinguish between the Reorganized Company and Predecessor Company balances.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading.
The results of operations for the interim periods shown in this report are
not necessarily indicative of the results to be expected for the fiscal year. In
the opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly its financial position as of
September 30, 1998 and December 31, 1997 and the results of its operations and
changes in its financial position for the nine months ended September 30, 1998
and 1997. These financial statements should be read in conjunction with the
December 31, 1997 Audited Consolidated Financial Statements and Notes thereto.
8
<PAGE>
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On August 20, 1997, a former employee of the Company filed a civil action
against the Company in Connecticut Superior Court, District of New Haven
entitled Carol H. Cunningham v. Consolidated Hydro, Inc. alleging that the
Company breached its employment agreement with her. On or about October 13,
1997, the former employee filed a proof of claim in the Bankruptcy Court for
approximately $7.3 million plus unliquidated amounts based primarily on the
allegations in the civil action (the "Claim"). On November 25, 1997, the Company
filed an objection to the Claim on the grounds that, among other things, the
former employee failed to satisfy her obligations under her employment contract
with the Company. The Company is vigorously defending the Claim and Management
believes that the Company's liability with respect to the Claim, if any, will
not have a material adverse effect on the Company's financial position or
results of operations.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
CHI Energy, Inc., formerly Consolidated Hydro, Inc. ("CHI", and together
with its consolidated subsidiaries, the "Company"), has been engaged in the
energy business since its founding in 1985 and is currently principally engaged
in the development, operation and management of industrial energy and other
infrastructure assets and of hydroelectric power plants. Currently, all of the
Company's revenue is derived from the ownership and operation of hydroelectric
facilities (the Company's "hydroelectric business"). As of September 30, 1998,
the Company's operating hydroelectric projects are located in 14 states in the
United States and one province in Canada. The Company believes its future growth
will come primarily from its industrial infrastructure business.
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court") and filed a plan of reorganization (the "Plan
of Reorganization") and a disclosure statement. The Bankruptcy Court entered an
order confirming the Plan of Reorganization on October 23, 1997 and the Plan of
Reorganization became effective on November 7, 1997 (the "Effective Date").
As of the Effective Date, CHI adopted fresh start reporting in accordance
with American Institute of Certified Public Accountants Statement of Position
90-7 "Financial Reporting by Entities in Reorganization Under The Bankruptcy
Code," which resulted in the creation of a new reporting entity. The
accompanying financial information for the nine months ended September 30, 1998
reflects the financial condition and results of operations of the new reporting
entity (the "Reorganized Company") while financial information for the nine
months ended September 30, 1997 relates to the former reporting entity (the
"Predecessor Company").
The Company's existing U.S. hydroelectric projects are clustered in four
regions: the Northeast, Southeast, Northwest and West, with a concentration in
the Northeast. CHI has developed what it believes to be an efficient "hub"
system of project management designed to maximize the efficiency of each
facility's operations. The economies of scale created by this system include
reduced costs related to centralized administration, operations, maintenance,
engineering, insurance, finance and environmental and regulatory compliance. The
hub system and the Company's operating expertise have enabled the Company to
successfully integrate acquisitions within its current portfolio and increase
the efficiency and productivity of its projects.
Historically, growth in the Company's business occurred primarily by
acquiring existing hydroelectric facilities in the United States. As of
September 30, 1998, the Company had a 100% ownership or long-term lease
interests in 51 projects (138 megawatts), a partial ownership interest in 10
projects (81 megawatts), and operations and maintenance ("O&M") contracts with
23 projects (115 megawatts).
CHI sells substantially all of the electric energy and capacity from its
U.S. projects to public utility companies pursuant to take or pay power purchase
agreements. These contracts vary in their terms but typically provide scheduled
rates throughout the life of the contracts, which are generally for a term of 15
to 40 years from inception.
The electric power industry in the United States is undergoing significant
structural changes, evolving from a highly regulated industry dominated by
monopoly utilities to a deregulated, competitive industry providing energy
customers with an increasing degree of choice among sources of electric power
supply. The Company believes that it is well positioned to take advantage of new
business opportunities occasioned by electric industry restructuring in the U.S.
and by other trends within its target customer group, which includes industrial
companies. The Company will seek to capitalize on these new opportunities in
energy-related products and services by taking advantage of its existing
technical and financial expertise and using its geographic presence in most U.S.
regions and Eastern Canada to realize economies of scale in development,
acquisition, administration, operation and maintenance of facilities.
10
<PAGE>
A principal business focus of the Company is to develop, acquire, operate
and manage industrial energy facilities and related industrial infrastructure
assets in such sectors as pulp and paper, petroleum refining, chemicals,
textiles, and other energy-intensive industries (the Company's "industrial
infrastructure business"). Industrial infrastructure assets include assets such
as those used to produce electricity, steam, or chilled water, or facilities
used for chemical recovery, storage, and water and wastewater treatment. These
assets are typically assets that are necessary but ancillary to the customer's
primary manufacturing activities. By outsourcing its infrastructure assets to
the Company, the customer may derive a financial benefit and may also benefit
from the opportunity to focus its resources on its primary business, while CHI
may benefit from the long-term revenue stream resulting from such an
arrangement.
The performance of the Company in the future will be affected by a number
of factors, in addition to the structural changes to the electric power industry
described above. The Company competes for hydroelectric and industrial energy
projects with a broad range of electric power producers including other
independent power producers of various sizes and many well-capitalized domestic
and foreign industry participants such as utilities, equipment manufacturers and
affiliates of industrial companies, many of whom are aggressively pursuing power
development programs and have relatively low return-on-capital objectives.
Federal regulators and a number of states, including some in which the
Company operates, have opened access to the transmission grid and are exploring
ways in which to further increase competition in electricity markets, most
notably by instituting customer choice of power suppliers at the retail level.
Although the character and extent of this deregulation are as yet unclear, the
Company expects that these efforts will increase uncertainty with respect to
future power prices and make it more difficult to obtain long-term power
purchase contracts.
Power Generation Revenue
The Company's revenues are derived principally from selling electrical
energy and capacity to utilities under long-term power purchase agreements which
require the contracting utilities to purchase energy generated by the Company.
The Company's present power purchase agreements have remaining terms of up to 28
years. After the expiration of such power purchase agreements, rates generally
are expected to change to the purchasing utility's avoided cost for delivered
energy, which avoided cost rates are likely to be lower than expiring power
purchase agreement rates. Fluctuations in revenues and related cash flows are
generally attributable to changes in projects in operation, coupled with
variations in water flows and the effect of escalating and declining contract
rates in the Company's power purchase agreements.
Management Fees and Operations & Maintenance Revenues
O&M contracts, from which management fees and operations and maintenance
revenues are derived, generally enable the Company to maximize the use of its
available resources and to generate additional income.
Equity Income In Partnership Interests and Other Partnership Income
In accordance with generally accepted accounting principles, certain of the
Company's partnership interests are accounted for under the equity and the cost
methods of accounting. Fluctuations in equity income and other partnership
income are generally attributable to variations in results of operations and
timing of cash distributions of certain partnerships.
Operating Expenses
Operating expenses consist primarily of project-related costs such as
labor, repairs and maintenance, supplies, insurance and real estate taxes.
Operating expenses include direct expenses related to the production of power
generation revenue as well as direct costs associated with O&M contracts which
are either rebillable to applicable third party owners directly or not
rebillable since they are covered through an established management fee.
Lease Expense
Lease expense includes operating leases associated with some of the
hydroelectric projects as well as leases for the corporate and regional
administrative offices. Certain leases provide for payments that are based upon
power sales revenue or cash flow for specific projects. Hence, varying project
revenues will impact overall lease expense, year-to-year.
11
<PAGE>
Certain Key Operating Results and Trends
The information provided in the tables below is included to provide an
overview of certain key operating results and trends which, when read in
conjunction with the narrative discussion that follows, is intended to provide
an enhanced understanding of the Company's results of operations. These tables
include information regarding the Company's ownership of projects by region as
well as information on regional precipitation. As presented, the Company's
project portfolio is concentrated in the Northeastern United States, a region
characterized by relatively consistent long-term water flow and power purchase
contract rates which are higher than in most other regions of the country.
This information should be read in conjunction with the December 31, 1997
Audited Consolidated Financial Statements and related Notes thereto.
Power Producing Facilities
<TABLE>
<CAPTION>
As of As of As of
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
MWs #Projects MWs #Projects MWs #Projects
--- --------- --- --------- --- ---------
<S> <C> <C> <C> <C> <C> <C>
Northeast:
100% Ownership (1) 90.88 29 90.88 29 90.88 29
Partial Ownership (2) 52.37 8 52.37 8 52.37 8
O&M Contracts (3) 92.16 19 92.16 19 92.16 19
--------- ---- --------- ---- --------- ----
Total 235.41 56 235.41 56 235.41 56
========= ==== ========= ==== ========= ====
Southeast:
100% Ownership (1) 27.42 13 27.42 13 27.42 13
Partial Ownership (2) -- -- -- -- -- --
O&M Contracts (3) -- -- -- -- -- --
--------- ---- --------- ---- --------- ----
Total 27.42 13 27.42 13 27.42 13
========= ==== ========= ==== ========= ====
West:
100% Ownership (1) 5.38 3 5.38 3 5.38 3
Partial Ownership (2) 4.20 1 4.20 1 4.20 1
O&M Contracts (3) 18.80 3 19.08 4 19.08 4
--------- ---- --------- ---- --------- ----
Total 28.38 7 28.66 8 28.66 8
========= ==== ========= ==== ========= ====
Northwest:
100% Ownership (1) 14.71 6 14.71 6 14.71 6
Partial Ownership (2) 24.00(4) 1(4) 24.96 2 24.96 2
O&M Contracts (3) 4.34 1 4.34 1 4.34 1
--------- ---- --------- ---- --------- ----
Total 43.05 8 44.01 9 44.01 9
========= ==== ========= ==== ========= ====
Total:
100% Ownership (1) 138.39 51 138.39 51 138.39 51
Partial Ownership (2) 80.57(4) 10(4) 81.53 11 81.53 11
O&M Contracts (3) 115.30 23 115.58 24 115.58 24
--------- ---- --------- ---- --------- ----
Total 334.26 84 335.50 86 335.50 86
========= ==== ========= ==== ========= ====
</TABLE>
- ------------
(1) Defined as projects in which the Company has 100% of the economic interest.
(2) Defined as projects in which the Company's economic interest is less than
100%.
(3) Defined as projects in which the Company is an operator pursuant to O&M
contracts with the project's owner or owners. The Company does not have any
ownership interest in such projects.
(4) Reflects the sale of one project (0.96 megawatts) on June 18, 1998.
12
<PAGE>
Selected Operating Information:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Power generation revenues (thousands) (1) $ 8,259 $ 6,422 $ 37,156 $ 34,961
Kilowatt hours produced (thousands) (1) 108,649 95,852 492,973 468,252
Average rate per kilowatt hour (1) 7.6(cent) 6.7(cent) 7.5(cent) 7.5(cent)
</TABLE>
- ---------
(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)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
1998 1997 1998 1997
------------------- ------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Northeast Above Average Below Average Above Average Average
Southeast Below Average Below Average Average Average
West Average Below Average Above Average Below Average
Northwest Average Average Above Average Above Average
</TABLE>
- ---------
(1) These determinations were made by management based upon water flow in areas
where the Company's projects are located and may not be applicable to the
entire region.
Production of energy by the Company is typically greatest from January
through June, when water flow is at its highest at most of the Company's
projects, and lowest from July through September. The amount of water flow in
any given period will have a direct effect on the Company's production, revenues
and cash flow.
The following tables, which show revenues from power sales and kilowatt
hour production by quarter, respectively, highlight the seasonality of the
Company's revenue stream. These tables should be reviewed in conjunction with
the water flow information included above.
13
<PAGE>
Power Generation Revenues (in thousands) (1)
<TABLE>
<CAPTION>
Twelve months ended Twelve months ended
December 31, 1998 December 31, 1997
--------------------- -----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
First Quarter $ 14,712 39.6 $ 15,078(2) 34.4
Second Quarter 14,185 38.2 13,461 30.7
Third Quarter 8,259 22.2 6,422 14.7
Fourth Quarter 8,837 20.2
--------- -------- --------- ---------
Total $ 37,156 100.0 $ 43,798 100.0
========= ======== ========= =========
</TABLE>
- -----------------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $195 for the three months ended
March 31, 1997.
Kilowatt Hours (kWh) Produced (in thousands) (1)
<TABLE>
<CAPTION>
Twelve months ended Twelve months
December 31, 1998 ended December 31, 1997
---------------------- -------------------------
kWh % kWh %
--- - --- -
<S> <C> <C> <C> <C>
First Quarter 192,355 39.0 193,576(2) 33.3
Second Quarter 191,969 39.0 178,824 30.7
Third Quarter 108,649 22.0 95,852 16.5
Fourth Quarter 113,601 19.5
--------- ----- ---------- ------
Total 492,973 100.0 581,853 100.0
========= ===== ========== ======
</TABLE>
- -------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the business interruption production equivalent of 3,429 kWh
for the three months ended March 31, 1997.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
by $1.9 million (29.7%), from $6.4 million to $8.3 million for the three months
ended September 30, 1997 and 1998, respectively.
The Northeast region experienced increased revenues of $1.8 million
primarily as a result of above average water flows throughout the region.
The West and Northwest regions (combined) experienced increased revenues of
$0.2 million due to greatly increased water flows in the West.
The Southeast region experienced decreased revenues of $0.1 million
primarily as a result of the expiration and renegotiation, at reduced rates, of
some of the power purchase agreements.
The Company as a whole experienced increased revenue per kilowatt hour of
0.9(cent) (13.4%) from 6.7(cent) to 7.6(cent) in the three months ended
September 30, 1997 and 1998, respectively, primarily as a result of variations
in the production mix and contract rates among various projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
operations & maintenance revenues increased by $0.2 million (10.5%) from $1.9
million to $2.1 million for the three months ended September 30, 1997 and 1998,
respectively, primarily due to a performance-based incentive fee earned during
1998 and increased levels of rebillable work performed during the three months
ended September 30, 1998 versus the comparable period in 1997.
14
<PAGE>
Equity Income in Partnership Interests and Other Partnership Income.
Equity income in partnership interests and other partnership income increased by
$0.1 million (100%) from $0.1 million to $0.2 million for the three months ended
September 30, 1997 and 1998, respectively, primarily due to increased water
flows in the Northeast region which resulted in increased equity income in the
Northeast Partnerships.
Costs and Expenses
General and Administrative Expenses. General and administrative expenses
increased by $0.4 million (28.6%) from $1.4 million to $1.8 million for the
three months ended September 30, 1997 and 1998, respectively, primarily due to
increased development expenses related to the Company's industrial
infrastructure business.
Reorganization Costs. Reorganization costs decreased by $3.2 million for
the three months ended September 30, 1998. These costs were incurred during the
three months ended September 30, 1997 in conjunction with the Plan of
Reorganization.
Depreciation and Amortization. Depreciation and amortization decreased by
$0.4 million (18.2%) from $2.2 million to $1.8 million for the three months
ended September 30, 1997 and 1998, respectively, due to the revaluation of the
Company's assets and their respective useful lives in conjunction with the
adoption of fresh start reporting.
Interest Expense
Interest expense decreased by $4.8 million (70.6%) from $6.8 million to
$2.0 million for the three months ended September 30, 1997 and 1998,
respectively. The decrease was primarily due to the cessation of the accrual of
interest on CHI's 12% Senior Discount Notes due 2003, Series B which were
canceled in conjunction with the Plan of Reorganization.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Operating Revenues
Power Generation Revenue. The Company's power generation revenue increased
by $2.2 million (6.3%), from $35.0 million to $37.2 million for the nine months
ended September 30, 1997 and 1998, respectively.
The Northeast region experienced increased revenues of $2.3 million
primarily as a result of above average water flows throughout the region;
partially offset by prolonged lost generation at four of its New York sites as a
result of a severe ice storm which crippled the Northeastern United States and
Southern Quebec during January of 1998.
The Southeast region experienced decreased revenues of $0.5 million
primarily as a result of the expiration and renegotiation, at reduced rates, of
some of the power purchase agreements.
The West and Northwest regions (combined) experienced increased revenues of
$0.4 million due to greatly increased water flows in the West; partially offset
by a decrease resulting from the decommissioning of three facilities aggregating
7.01 megawatts in September of 1997.
The Company as a whole experienced consistent revenue per kilowatt hour of
7.5(cent) in the nine months ended September 30, 1997 and 1998, respectively.
Management Fees and Operations & Maintenance Revenues. Management fees and
operations & maintenance revenues increased by $0.7 million (15.2%) from $4.6
million to $5.3 million for the nine months ended September 30, 1997 and 1998,
respectively, primarily due to a performance-based incentive fee earned during
1998 and increased levels of rebillable work performed during the nine months
ended September 30, 1998 versus the comparable period in 1997. An 80.14
megawatt, 3 site O&M agreement, generating annual O&M revenues of approximately
$0.3 - $0.4 million, expired during October 1998.
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income increased by $2.0
million (200.0%) from $1.0 million to $3.0 million for the nine months ended
September 30, 1997 and 1998, respectively, primarily due to an increased
distribution received from a minority owned partnership which owns a
hydroelectric project located in the Northeast and a $0.9 million one-time cash
distribution received from the sale of assets in connection with the dissolution
of a partnership in the West, in which the Company had general and limited
partnership interests.
15
<PAGE>
Costs and Expenses
Reorganization Costs. Reorganization costs decreased by $3.2 million for
the nine months ended September 30, 1998. These costs were incurred during the
nine months ended September 30, 1997 in conjunction with the Plan of
Reorganization.
Depreciation and Amortization. Depreciation and amortization decreased by
$1.0 million (15.4%) from $6.5 million to $5.5 million for the nine months ended
September 30, 1997 and 1998, respectively, due to the revaluation of the
Company's assets and their respective useful lives in conjunction with the
adoption of fresh start reporting.
Adjustment to/Charge for Impairment of Long-Lived Assets. Adjustment
to/charge for impairment of long-lived assets decreased by $0.4 million (100%)
from $0.4 million to zero for the nine months ended September 30, 1997 and 1998,
respectively, due to the $0.3 million write-down of assets to fair market value
for the three facilities decomissioned in the West and the $0.4 million
write-off of a Canadian project; offset by the upward adjustment of $0.3 million
to the sale price of the assets of CHI Maine which had previously been adjusted
downward in accordance with SFAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" during the nine
months ended September 30, 1997.
Interest Expense
Interest expense decreased by $15.5 million (71.4%) from $21.7 million to
$6.2 million for the nine months ended September 30, 1997 and 1998,
respectively. The decrease was primarily due to the cessation of the accrual of
interest on CHI's 12% Senior Discount Notes due 2003, Series B which were
canceled in conjunction with the Plan of Reorganization.
16
<PAGE>
Liquidity and Capital Resources
As more fully described in the September 30, 1998 Unaudited Consolidated
Financial Statements and related Notes thereto included herein, the cash flow of
the Company was comprised of the following:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
---------------------- ----------------------
Nine months ended
September 30, 1998 September 30, 1997
----------------------- ---------------------
(amounts in thousands)
<S> <C> <C>
Cash provided by/(used in):
Operating activities $ 15,308 $ 9,549
Investing activities 513 (6,676)
Financing activities (5,907) (6,753)
------------- -------------
Net increase/(decrease) in cash $ 9,914 $ (3,880)
============= =============
</TABLE>
The Company has historically financed its capital needs and acquisitions
through long-term debt, preferred stock and limited partner capital
contributions and, to a lesser extent, through cash provided by operating
activities. The Company's principal capital requirements are those associated
with acquiring and developing new projects, as well as upgrading existing
projects. The Company has secured a $15.0 million working capital and letter of
credit facility which provides additional liquidity to support the Company's
existing operations as well as its future growth. See "--Summary of
Indebtedness."
For the nine months ended September 30, 1998, the cash flow provided by
operating activities was principally the result of the $5.9 million net income
for such period, adjusted for $5.5 million of depreciation and amortization, a
$3.5 million change in deferred tax liabilities, $0.5 million of non-cash
interest and other charges, $0.2 million of distributed earnings of affiliates,
a $1.8 million decrease in accounts receivable, and a $0.1 million decrease in
the provision for uncollectable accounts receivable offset by $0.2 million of
cash used for reorganization items, $0.9 million income from sale of partnership
assets, a $0.5 million increase in prepaid expenses and other current assets and
a $0.6 million decrease in accounts payable and accrued expenses. The cash flow
provided by investing activities was primarily attributable to a $1.4 million
decrease in investments and other long-term assets and $0.9 million of proceeds
from sale of partnership assets, partially offset by $1.8 million of capital
expenditures. The cash flow used in financing activities was primarily due to
the repayment of $5.9 million of project debt.
Cash provided by operating activities increased by $5.8 million for the
nine months ended September 30, 1998 as compared to the nine months ended
September 30, 1997. The increase resulted from a $3.6 million increase in income
before depreciation and amortization, non-cash interest and other charges,
reorganization expenses, income from sale of partnership assets, non-cash charge
for impairment of long lived assets, change in deferred tax liabilities and
distributed earnings of affiliates and a $2.4 million increase resulting from
variations in other operating items (accounts receivable, provision for
uncollectable accounts receivable, prepaid expenses and accounts payable and
accrued expenses) offset by a $0.2 million decrease from cash used for
reorganization items.
For the nine months ended September 30, 1997, the cash flow provided by
operating activities was principally the result of the $15.6 million net loss
for such period, adjusted for $15.8 million of non-cash interest and other
charges, $6.5 million of depreciation and amortization, $3.2 million of
reorganization expenses, $0.1 million of distributed earnings of affiliates, a
$0.4 million non-cash charge for impairment of long-lived assets, a $1.1 million
decrease in accounts receivable and a $0.6 million change in deferred tax
liabilities offset by a $0.8 million increase in prepaid expenses and other
current assets, a $0.1 million increase in the provision for uncollectable
accounts receivable and a $1.7 million decrease in accounts payable and accrued
expenses. The cash flow used in investing activities was primarily attributable
to a $5.0 million increase in investments and other long-term assets, $2.7
million of capital expenditures and $1.3 million of development expenditures
partially offset by $2.3 million of proceeds from disposition of assets. The
cash flow used in financing activities was primarily due to the repayment of
$6.4 million of project debt and $0.7 million of costs of reorganization
partially offset by $0.1 million in long-term borrowings and a $0.2 million
increase in other long-term liabilities.
17
<PAGE>
Summary of Indebtedness
<TABLE>
<CAPTION>
Principal Amount Outstanding as of
September 30, 1998 December 31, 1997
-------------------- --------------------
(amounts in thousands)
<S> <C> <C>
Non-recourse debt of subsidiaries $81,122 $87,971
Current portion of long-term debt (6,486) (5,355)
------------ ------------
Total long-term debt obligations $74,636 $82,616
============ ============
</TABLE>
On March 31, 1998, the Company obtained a $15.0 million secured revolving
credit facility with an initial expiration date of December 31, 1999 (the
"Facility"). The Company will use proceeds from the Facility to support its
development, acquisition and operating activities. Upon expiration of the
Facility, any outstanding revolving loans will, at the Company's option, be
converted into a five year term loan. As of November 11, 1998, no revolving
loans were outstanding under the Facility and $6.3 million of letters of credit
have been issued and are outstanding.
Year 2000 Issue
The year 2000 issue is the result of computer software programs that were
written using two digits rather than four to define the applicable year. If the
Company's computer software programs with date-sensitive functions are not year
2000 compliant, they may recognize a date using "00" as the year 1900 rather
than the year 2000. If not corrected, many computer applications could fail or
create erroneous results.
The Company's year 2000 plan addresses all information technology ("IT")
systems, including proprietary and third party software, as well as non-IT
systems, including the embedded technology in various devices operated by the
Company. Testing of hardware and software systems, which is 90% complete, is
scheduled to be completed by June 30, 1999. Testing performed to date, including
correspondence with approximately 90% of the Company's significant vendors, has
revealed that all of the Company's vendors are currently year 2000 compliant or
will be compliant by September 30, 1999, and that the Company's current systems
are either compliant or are scheduled to be upgraded by September 30, 1999. The
Company has developed a year 2000 compliance questionnaire and intends to query
all of its customers as to the status of year 2000 compliance by December 31,
1998 and expects to receive responses by March 31, 1999. In the event any of the
Company's customers are not year 2000 compliant, there is a possibility that the
Company would not be able to deliver power to such customers. However,
substantially all of the Company's customers are contractually obligated to
purchase generated power pursuant to take or pay power purchase agreements, and
the Company has adequate systems to measure any generation the customer's system
may not have recorded, so there is minimal risk of lost revenues to the Company.
In accordance with the plan, testing of automated operational systems, which is
30% complete, is scheduled to be completed by June 30, 1999. Testing performed
to date has revealed that the logic controller embedded in the automated
operational systems is not date sensitive.
The costs incurred to date in relation to the Company's year 2000 plan are
approximately ten thousand dollars and future costs are estimated at forty-five
thousand dollars, including internal labor. Management does not expect any
significant exposure in the event of year 2000 non-compliance by third party
vendors or customers; therefore, a formal contingency plan is not required.
Cautionary Statement Regarding 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 events which may not prove to be accurate. The
forward looking statements involve risks and uncertainties including, but not
limited to, the uncertainties relating to industry trends; risks related to
hydroelectric, industrial energy and other acquisition and development projects;
risks related to the Company's power purchase contracts; risks and uncertainties
related to weather conditions; and other risk factors detailed herein and in
other of the Company's Securities and Exchange Commission filings.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
CHI is involved in various legal proceedings which are routine and
incidental to the conduct of its business and the Plan of Reorganization. CHI's
management currently believes that none of the pending claims against the
Company will have a material adverse effect on the Company.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
NONE
20
<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: November 11, 1998 CHI ENERGY, INC.
By: /s/ Neil A. Manna
--------------------------------
Neil A. Manna
Vice President of Finance,
Controller and Treasurer
signing on behalf of the
registrant and as Principal
Accounting Officer
21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 21,912 21,912
<SECURITIES> 0 0
<RECEIVABLES> 6,374 6,374
<ALLOWANCES> (343) (343)
<INVENTORY> 0 0
<CURRENT-ASSETS> 29,820 29,820
<PP&E> 95,724 95,724
<DEPRECIATION> (3,695) (3,695)
<TOTAL-ASSETS> 220,803 220,803
<CURRENT-LIABILITIES> 13,272 13,272
<BONDS> 81,122 81,122
0 0
0 0
<COMMON> 100 100
<OTHER-SE> 91,568 91,568
<TOTAL-LIABILITY-AND-EQUITY> 220,803 220,803
<SALES> 0 0
<TOTAL-REVENUES> 10,614 45,436
<CGS> 0 0
<TOTAL-COSTS> 8,105 23,640
<OTHER-EXPENSES> 1,814 7,023
<LOSS-PROVISION> (95) (95)
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (781) 10,071
<INCOME-TAX> 295 (4,208)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (486) 5,863
<EPS-PRIMARY> (0.05) 0.59
<EPS-DILUTED> (0.05) 0.59
</TABLE>
