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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 33-69762
CHI ENERGY, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 06-1138478
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 Washington Boulevard, Stamford, Connecticut 06901
----------------------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (203) 425-8850
NONE
----
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class A Outstanding as of May 12, 1999
- --------------------------------------- ------------------------------
Common stock, $.01 par value 9,085,290
Class B Outstanding as of May 12, 1999
- --------------------------------------- ------------------------------
Common stock, $.01 par value 914,710
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements............................................................ 2
Consolidated Statement of Income for the three months
ended March 31, 1999 and 1998 (Unaudited)................................... 3
Consolidated Balance Sheet at March 31, 1999
and December 31, 1998 (Unaudited).......................................... 4
Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1999 (Unaudited)....................... 5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1999 and 1998 (Unaudited)................................... 6-7
Notes to Consolidated Financial Statements (Unaudited) ........................ 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 9-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 17
Item 2 Changes in Securities and Use of Proceeds...................................... 17
Item 3. Defaults upon Senior Securities................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders............................ 17
Item 5. Other Information.............................................................. 17
Item 6. Exhibits and Reports on Form 8-K............................................... 17
Signature
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHI ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
2
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF INCOME
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Operating revenues:
Power generation revenue $ 14,016 $ 14,712
Management fees and operations & maintenance revenues 1,095 1,512
Equity income in partnership interests and other partnership income 562 1,231
----------- -----------
15,673 17,455
----------- -----------
COSTS AND EXPENSES:
Operating 3,725 4,601
General and administrative 1,979 2,335
Depreciation and amortization 1,814 1,828
Lease expense 1,497 1,430
----------- -----------
9,015 10,194
----------- -----------
Income from operations 6,658 7,261
INTEREST INCOME 325 272
OTHER INCOME 92 191
INTEREST EXPENSE (1,695) (2,112)
----------- -----------
Income before provision for income taxes 5,380 5,612
PROVISION FOR INCOME TAXES (2,165) (993)
----------- -----------
NET INCOME $ 3,215 $ 4,619
=========== ===========
BASIC AND DILUTED NET INCOME PER COMMON SHARE $ 0.32 $ 0.46
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 10,000,000 10,000,000
</TABLE>
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>
MARCH 31, DEC. 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents unrestricted $ 15,673 $ 16,106
Cash and cash equivalents restricted 5,592 5,672
Accounts receivable, net of allowance for doubtful
accounts of $444 and $443, respectively 8,196 4,728
Prepaid expenses and other current assets 2,654 2,029
----------- -----------
Total current assets 32,115 28,535
PROPERTY, PLANT AND EQUIPMENT, NET 92,135 92,331
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS, NET 10,894 11,805
INTANGIBLE ASSETS, NET 44,866 45,535
INVESTMENTS AND OTHER LONG-TERM ASSETS 40,630 41,378
----------- -----------
$ 220,640 $ 219,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 7,826 $ 9,816
Current portion of long-term debt and obligations under capital leases 6,459 6,327
----------- -----------
Total current liabilities 14,285 16,143
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 72,964 74,486
DEFERRED CREDIT, STATE INCOME TAXES AND OTHER LONG-TERM LIABILITIES 40,570 39,349
COMMITMENTS AND CONTINGENCIES
----------- -----------
Total liabilities 127,819 129,978
----------- -----------
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 7,721 4,506
----------- -----------
Total stockholders' equity 92,821 89,606
----------- -----------
$ 220,640 $ 219,584
=========== ===========
</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 THREE MONTHS ENDED MARCH 31, 1999
(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 RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING VALUE CAPITAL EARNINGS EQUITY
------------ ----------- -------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 - - 10,000,000 $ 100 $ 85,000 $ 4,506 $ 89,606
Net income 3,215 3,215
------------ ----------- -------------- ----------- ------------- ------------ --------------
BALANCE MARCH 31, 1999 - - 10,000,000 $ 100 $ 85,000 $ 7,721 $ 92,821
============ =========== ============== =========== ============= ============ ==============
</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>
THREE MONTHS ENDED
MARCH 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,215 $ 4,619
Adjustments to reconcile net income to net cash provided by
operating activities before reorganization items:
Non-cash interest and other charges 164 185
Provision relating to deferred tax liabilities 1,883 622
Depreciation and amortization 1,814 1,828
Undistributed earnings of affiliates (466) (106)
Increase in accounts receivable (3,468) (1,381)
Increase in prepaid expenses and other current assets (625) (359)
Decrease in accounts payable and accrued expenses (1,990) (1,354)
----------- ----------
Net cash provided by operating activities before
reorganization items 527 4,054
----------- ----------
Operating cash flows used for reorganization items:
Professional fees - (188)
----------- ----------
Net cash used for reorganization items - (188)
----------- ----------
Net cash provided by operating activities 527 3,866
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (837) (136)
Decrease in escrow deposits 1,202 320
Decrease/(increase) in investments and other long-term assets 12 (33)
----------- ----------
Net cash provided by investing activities 377 151
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings (1,424) (1,374)
Increase in other long-term liabilities 7 2
----------- ----------
Net cash used in financing activities (1,417) (1,372)
----------- ----------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (513) 2,645
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 21,778 11,998
----------- ----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 21,265 $ 14,643
=========== ==========
</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>
THREE MONTHS ENDED
MARCH 31,
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 1,685 $ 2,057
=========== ==========
Income taxes $ 127 $ 375
=========== ==========
</TABLE>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As a result of the settlement of certain pre-reorganization
contingencies and the realization of net operating loss credits,
during the three months ended March 31, 1998, reorganization value in
excess of amounts allocable to identifiable assets decreased by
$1,659. In addition, long-term debt and obligations under capital
leases decreased by $1,037 and deferred credit, state income taxes and
other long-term liabilities decreased by $622.
As a result of the settlement of certain pre-reorganization
contingencies and the realization of net operating loss credits,
during the three months ended March 31, 1999, reorganization value in
excess of amounts allocable to identifiable assets and deferred
credit, state income taxes and other long term liabilities decreased
by $697.
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. ("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
energy and other infrastructure assets and of hydroeletric power plants.
Currently, all of the Company's revenue is derived from the ownership and
operation of hydroelectric facilities. As of March 31, 1999 and 1998, the
Company had ownership interests in, leased and/or operated projects with a total
operating capacity of 254 and 336 megawatts ("MW"), respectively.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") have been omitted pursuant to such rules
and regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading.
The results of operations for the interim periods shown in this report are
not necessarily indicative of the results to be expected for the fiscal year. In
the opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly its financial position as of
March 31, 1999 and December 31, 1998 and the results of its operations and
changes in its financial position for the three months ended March 31, 1999 and
1998. These financial statements should be read in conjunction with the December
31, 1998 Audited Consolidated Financial Statements and Notes thereto.
Certain prior period amounts have been reclassified to conform with current
period presentation.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
There has been no significant change in the status of legal proceedings
filed against the Company since December 31, 1998 and management believes that
these legal proceedings will not have a material adverse effect on the Company's
financial position or results of operations.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
CHI Energy, 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, acquisition,
operation and management of energy and other infrastructure assets and of
hydroelectric power plants. Currently, all of the Company's revenue is derived
from the ownership and operation of hydroelectric facilities (the Company's
"hydroelectric business"). The Company's operating hydroelectric projects are
located in 14 states and one Canadian province.
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 into its current portfolio and increase the
efficiency and productivity of its projects.
Since its inception, the Company has expanded primarily by acquiring
existing hydroelectric facilities in the United States. As of March 31, 1999,
the Company had a 100% ownership or long-term lease interests in 50 projects
(138 megawatts), a partial ownership interest in 11 projects (99 megawatts), and
operations and maintenance ("O&M") contracts with 18 projects (17 megawatts).
CHI sells substantially all of the electric energy and capacity from its
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.
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 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, textiles, food and beverage, etc. 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.
9
<PAGE>
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 27
years. After the expiration of such power purchase agreements, rates generally
change to the purchasing utility's avoided cost for delivered energy or market
rates, which are likely to be lower than expiring power purchase agreement
rates. Fluctuations in revenues and related cash flows are generally
attributable to changes in projects in operation, coupled with variations in
water flows and the effect of escalating and declining contract rates in the
Company's power purchase agreements.
Management Fees and Operations & Maintenance Revenues
O&M contracts, from which management fees and operations and maintenance
revenues are derived, generally enable the Company to maximize the use of its
available resources and to generate additional income.
Equity Income In Partnership Interests and Other Partnership Income
In accordance with generally accepted accounting principles, certain of the
Company's partnership interests are accounted for under the equity and the cost
methods of accounting. Fluctuations in equity income and other partnership
income are generally attributable to variations in results of operations and
timing of cash distributions of certain partnerships.
Operating Expenses
Operating expenses consist primarily of project-related costs such as
labor, repairs and maintenance, supplies, insurance and real estate taxes.
Operating expenses include direct expenses related to the production of power
generation revenue as well as direct costs associated with O&M contracts which
are rebillable to applicable third party owners directly or not rebillable since
they are covered through an established management fee.
Lease Expense
Lease expense includes operating leases associated with some of the
hydroelectric projects as well as leases for the corporate and regional
administrative offices. Certain leases provide for payments that are based upon
power sales revenue or cash flow for specific projects. Hence, varying project
revenues will impact overall lease expense, year-to-year.
10
<PAGE>
CERTAIN KEY OPERATING RESULTS AND TRENDS
The information in the tables below provides 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, 1998
Audited Consolidated Financial Statements and related Notes thereto.
Power Producing Facilities
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, 1999 DECEMBER 31, 1998 MARCH 31, 1998
-------------- ----------------- --------------
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) 70.77 9 70.77(4) 9(4) 52.37 8
O&M Contracts (3) 11.32 15 12.02(5) 16(5) 92.16 19
------- ---- ------- ---- ------- ----
Total 172.97 53 173.67 54 235.41 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) 1.80(6) 2(6) 18.80 3 19.08 4
------- ---- ------- ---- ------- ----
Total 11.38 6 28.38 7 28.66 8
======= ==== ======= ==== ======= ====
Northwest:
100% Ownership (1) 14.61 5 14.61(7) 5(7) 14.71 6
Partial Ownership (2) 24.00 1 24.00(8) 1(8) 24.96 2
O&M Contracts (3) 4.34 1 4.34 1 4.34 1
------- ---- ------- ---- ------- ----
Total 42.95 7 42.95 7 44.01 9
======= ==== ======= ==== ======= ====
Total:
100% Ownership (1) 138.29 50 138.29 50 138.39 51
Partial Ownership (2) 98.97 11 98.97 11 81.53 11
O&M Contracts (3) 17.46 18 35.16 20 115.58 24
------- ---- ------- ---- ------- ----
Total 254.72 79 272.42 81 335.50 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 addition of one project (18.40 megawatts) on November 11,
1998.
(5) Reflects the termination of three O&M contracts (80.17 megawatts) on
October 31, 1998.
(6) Reflects the termination of one O&M contract (17.00 megawatts) on January
31, 1999.
(7) Reflects the sale of one project (0.10 megawatts) on December 31, 1998.
(8) Reflects the dissolution of one project (0.96 megawatts) on June 18, 1998.
11
<PAGE>
Selected Operating Information (1):
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ -------------
Power generation revenues (thousands) $ 14,016 $ 14,712
Kilowatt hours produced (thousands) 175,172 192,355
Average rate per kilowatt hour 8.0(cents) 7.6(cents)
- ---------
(1) Limited to projects included in consolidated revenues.
As the above tables indicate, the Company's portfolio of operating projects
may fluctuate from year to year in terms of total operating megawatts. The
Company expects to develop, acquire, sell, or discontinue operations of certain
projects, as it has in the past, if it perceives such actions to be beneficial.
In the case of O&M contracts, such contracts are subject to termination for a
variety of reasons. The total number of operating megawatts in the Company's
portfolio is not necessarily indicative of overall financial results. In
addition, the Company's industrial infrastructure business may or may not
involve the ownership or operation of electric generation facilities, and
therefore may have a material impact on future revenues without a corresponding
increase in operating megawatts.
Precipitation, Water Flow and Seasonality
The amount of hydroelectric energy generated at any particular facility
depends upon the quantity of water flow at the site of the facility. Dry periods
tend to reduce water flow at particular sites below historical averages,
especially if the facility has low storage capacity. Excessive water flow may
result from prolonged periods of higher than normal precipitation, or sudden
melting of snow packs, possibly causing flooding of facilities and/or a
reduction of generation until water flows return to normal.
Water flow is generally consistent with precipitation. However, snow and
other forms of frozen precipitation will not necessarily increase water flow in
the same period of such precipitation if temperatures remain at or below
freezing. "Average," as it relates to water flow, refers to the actual long-term
average of historical water flows at the Company's facilities for any given
year. Typically, these averages are based upon hydrologic studies done by
qualified engineers for periods of 20 to 50 years or more, depending on the flow
data available with respect to a particular site. Over an extended period (e.g.,
10 to 15 years) water flows would be expected to be average, whereas for shorter
periods (e.g., three months to three years) variation from average is likely.
Each of the regions in which the Company operates has distinctive precipitation
and water flow characteristics, including the degree of deviation from average.
Geographic diversity helps to minimize short-term variations.
Water Flow by Region (1)
THREE MONTHS ENDED MARCH 31,
1999 1998
------------------- -------------------
Northeast Average Above Average
Southeast Average Average
West Below Average Above Average
Northwest Above Average Average
- ---------
(1) These determinations were made by management based upon water flow in areas
where the Company's projects are located and may not be applicable to the
entire region.
Production of energy by the Company is typically greatest in January
through June, when water flow is at its highest at most of the Company's
projects, and lowest in 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.
12
<PAGE>
Power Generation Revenues (in thousands) (1)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- -----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
First Quarter $ 14,016 100.0 $ 14,712 33.6
Second Quarter 14,185 32.3
Third Quarter 8,259 18.8
Fourth Quarter 6,712 15.3
-------- ------- -------- ------
Total $ 14,016 100.0 $ 43,868 100.0
======== ======= ======== ======
</TABLE>
- -----------------
(1) Limited to projects included in consolidated revenues.
Kilowatt Hours (kWh) Produced (in thousands) (1)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- ---------------------
KWH % KWH %
--- - --- -
<S> <C> <C> <C> <C>
First Quarter 175,172 100.0 192,355 32.9
Second Quarter 191,969 32.8
Third Quarter 108,649 18.6
Fourth Quarter 92,139 15.7
-------- ------- -------- ------
Total 175,172 100.0 585,112 100.0
======== ======= ======== ======
</TABLE>
- -------------
(1) Limited to projects included in consolidated revenues.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Operating Revenues
Power Generation Revenue. The Company's power generation revenue decreased
by $0.7 million (4.8%), from $14.7 million to $14.0 million for the three months
ended March 31, 1998 and 1999, respectively.
The Northeast region experienced a minimal increase in revenues of $0.1
million.
The Southeast region experienced decreased revenues of $0.6 million for the
three months ended March 31, 1999 primarily as a result of low water flows along
a river which services three sites and the expiration of certain power purchase
agreements.
The West and Northwest regions (combined) experienced decreased revenues of
$0.2 million for the three months ended March 31, 1999, primarily due to low
water flows in the West.
The Company as a whole experienced increased revenue per kilowatt hour of
0.4(cent) (5.3%), from 7.6(cent) to 8.0(cent) in the three months ended March
31, 1998 versus the three months ended March 31, 1999, respectively, primarily
as a result of positive variations in the production mix and increased contract
rates at certain projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
O&M revenues decreased by $0.4 million (26.7%) from $1.5 million to $1.1 million
for the three months ended March 31, 1998 and 1999, respectively, due to lower
levels of rebillable work performed and the termination of five O&M contracts.
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income decreased $0.6
million (50.0%) from $1.2 million to $0.6 million for the three months ended
March 31, 1998 and 1999, respectively, primarily due to a $1.0 million decrease
resulting from a distribution received from a minority owned partnership which
owns a hydroelectric project located in the Northeast during the three months
ended March 31, 1998; offset by a $0.4 million increase due to the addition of a
49% owned project during November 1998.
13
<PAGE>
Costs and Expenses
Operating Expenses. Operating expenses decreased by $0.9 million (19.6%),
from $4.6 million to $3.7 million for the three months ended March 31, 1998 and
1999, respectively, primarily due to (i) decreased salaries and benefits
expenses due to personnel reductions; (ii) decreased repairs and maintenance
expenses in the Northeast due to abnormally high expenses incurred during the
three months ended March 31, 1998 as a result of a severe ice storm in January
1998; and (iii) decreased O&M contract costs due to lower levels of rebillable
work performed and the termination of two O&M contracts during January 1999.
General and Administrative Expenses. General and administrative expenses
decreased by $0.3 million (13.0%) from $2.3 million to $2.0 million for the
three months ended March 31, 1998 and 1999, respectively, primarily due to
decreased business development expenditures and a decrease in net worth taxes
due to the timing of recognition of net worth tax liabilities; offset by
increased salaries and benefits expenses.
Interest Expense
Interest expense decreased by $0.4 million (19.0%), from $2.1 million to
$1.7 million, for the three months ended March 31, 1998 and 1999, respectively.
The decrease was due to lower principal balances on outstanding debt, lower
interest rates and the modification of terms of a note payable which resulted in
an effective interest rate of 0% during the three months ended March 31, 1999.
Income Taxes
For the three months ended March 31, 1999, the Company's effective income
tax rate of 40.2% differed from the federal statutory rate primarily due to
current state and alternative minimum tax liability.
LIQUIDITY AND CAPITAL RESOURCES
As more fully described in the March 31, 1999 Unaudited Consolidated
Financial Statements and related Notes thereto included herein, the cash flow of
the Company was comprised of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
----------------------- ---------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash provided by/(used in):
Operating activities $ 527 $ 3,866
Investing activities 377 151
Financing activities (1,417) (1,372)
--------- ---------
Net (decrease)/increase in cash $ (513) $ 2,645
========= =========
</TABLE>
The Company's primary source of liquidity is internally generated cash from
operations. Management believes that cash provided by operations will be
sufficient to satisfy all of the Company's working capital, capital expenditure
and debt service requirements during 1999. Available external sources of
liquidity include a $15.0 million secured revolving working capital and letter
of credit facility (see - "Summary of Indebtedness"). This facility provides
additional liquidity to support the Company's existing operations as well as its
future growth. As of May 12, 1999, $5.7 million of letters of credit have been
issued and are outstanding and $9.3 million was available for working capital
purposes or additional letter of credit issuances. In addition, should growth
opportunities warrant significant additional cash requirements, the Company may
pursue other external sources of funds through debt and/or equity offerings.
For the three months ended March 31, 1999, the cash flow provided by
operating activities was principally the result of the $6.6 million of net
income adjusted for non-cash items, offset by $6.1 million of cash utilized by a
change in operating assets and liabilities. Significant non-cash items include a
$1.9 million provision relating to deferred tax liabilities, $1.8 million of
depreciation and amortization and $0.5 million of undistributed earnings of
affiliates. The cash flow provided by investing activities was primarily
attributable to a $1.2 million decrease in escrow deposits offset by $0.8
14
<PAGE>
million of capital expenditures. The cash flow used in financing activities was
due to the repayment of $1.4 million of project debt.
Cash provided by operating activities decreased by $3.3 million for the
three months ended March 31, 1999, as compared to the three months ended March
31, 1998. The decrease resulted from a difference in cash utilized by a change
in operating assets and liabilities of $2.8 million and a decrease in net income
adjusted for non-cash items of $0.5 million. The difference in cash utilized by
a change in operating assets and liabilities is mainly attributed to timing of
cash receipts and payments.
Summary of Indebtedness
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OUTSTANDING AS OF
MARCH 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Non-recourse debt of subsidiaries $79,423 $80,813
Current portion of long-term debt (6,459) (6,327)
------------ ------------
Total long-term debt obligations $72,964 $74,486
============ ============
</TABLE>
In March 1998, the Company obtained a $15.0 million secured revolving
working capital and letter of credit facility with an initial expiration date of
December 31, 1999 (the "Facility"). The Company may use proceeds from the
Facility to support its development, acquisition and operating activities. Upon
expiration of the Facility, any outstanding revolving loans will, at the
Company's option, be converted into a five year term loan. The interest rate on
the revolving loans is prime + 1.5%. As of May 12, 1999, no revolving loan has
been drawn under the Facility and $5.7 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 IT hardware and software systems, which is 90% complete, is
scheduled to be completed by June 30, 1999. Testing performed to date, including
correspondence with the Company's significant vendors, has revealed that all of
the Company's vendors are currently year 2000 compliant and that the Company's
current systems are either compliant or are scheduled to be upgraded by
September 30, 1999. The Company has queried all of its customers as to the
status of year 2000 compliance and expects to receive remaining responses by
June 30, 1999. Responses received to date indicate that the applicable customers
are year 2000 compliant. 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 non-IT automated operational systems, which is 75% 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 twenty-nine thousand dollars and additional costs are estimated at
thirty-one thousand dollars. These costs consist entirely of software and labor
related expenditures. 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.
15
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
16
<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. 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
17
<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 13, 1999 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
18
<PAGE>
EXHIBIT INDEX
Exhibit 27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 21,265
<SECURITIES> 0
<RECEIVABLES> 8,640
<ALLOWANCES> (444)
<INVENTORY> 0
<CURRENT-ASSETS> 32,115
<PP&E> 97,898
<DEPRECIATION> (5,763)
<TOTAL-ASSETS> 220,640
<CURRENT-LIABILITIES> 14,285
<BONDS> 79,423
0
0
<COMMON> 100
<OTHER-SE> 92,721
<TOTAL-LIABILITY-AND-EQUITY> 220,640
<SALES> 0
<TOTAL-REVENUES> 15,673
<CGS> 0
<TOTAL-COSTS> 7,036
<OTHER-EXPENSES> 1,979
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 1,695
<INCOME-PRETAX> 5,380
<INCOME-TAX> (2,165)
<INCOME-CONTINUING> 3,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,215
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
