<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 033-69762
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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of voting stock held by non-affiliates of the
Registrant is not available since there is no public market for the stock.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS A OUTSTANDING AS OF MARCH 25, 1999
---------------------------------- -----------------------------------
Common stock, $.01 par value 9,085,290
CLASS B OUTSTANDING AS OF MARCH 25, 1999
---------------------------------- -----------------------------------
Common stock, $.01 par value 914,710
Page 1 of 88
Exhibit Index begins on page 77
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CHI ENERGY, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business..............................................................3
Item 2. Properties...........................................................16
Item 3. Legal Proceedings....................................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..............................................................18
Item 6. Selected Financial Data..............................................20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................23
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...........35
Item 8. Financial Statements.................................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................68
PART III
Item 10. Directors and Executive Officers of the Registrant...................68
Item 11. Executive Compensation...............................................71
Item 12. Security Ownership of Certain Beneficial Owners and Management.......75
Item 13. Certain Relationships and Related Transactions.......................76
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......77
2
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PART I
ITEM 1. BUSINESS
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 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"). In addition, the Company is pursuing the
acquisition and development of non-hydroelectric generating facilities that fit
its strategic and return on investment objectives.
Based on operating megawatts, the Company is the largest independent,
non-utility affiliated hydroelectric power producer in the United States. As of
December 31, 1998, the Company owned, operated or leased 81 projects in the
United States and Canada, with aggregate capacity of approximately 272
megawatts.
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.
CHI is a Delaware corporation. The Company's executive and administrative
offices are located at 680 Washington Boulevard, Stamford, Connecticut 06901 and
its telephone number is (203) 425-8850.
INDUSTRIAL INFRASTRUCTURE BUSINESS
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.
CHI's industrial infrastructure business is strongly related to energy
production but is NOT traditional cogeneration or independent power plant
development. In the traditional cogeneration model, a developer finances and
builds a power plant at an industrial facility, typically producing electricity
that is sold at wholesale to the local electric utility and steam that is sold
at retail to the industrial company. In contrast, CHI's industrial
infrastructure business can involve a wide range of capital-intensive
infrastructure assets, such as steam generators, air compressors, storage
facilities, water management systems, and chemical recovery boilers. The
transaction may or may not include electricity generation. The customer may seek
to receive cash for, or monetize, such assets if already existing, or to
construct such assets, either new or as an upgrade or expansion of existing
facilities. CHI will acquire or develop the assets, operate and manage them, and
sell back the resulting products (steam, chilled water, compressed air,
electricity, etc.) to the customers under a long-term contract, generally at
retail, although individual project circumstances may include the sale of
electricity to utilities or power marketers.
The Company terms its approach to industrial customers as "asset
partnering," due to the need and desirability of working closely with customers
to arrive at a mutually beneficial technical and financial outcome. CHI's
approach includes providing the required products and services in large part on
the basis of a requirements contract, by which the customer is usually only
required to pay for products actually purchased and used. This approach differs
from more typical arrangements in which industrial customers sign so-called
"take-or-pay" contracts that, in effect, guarantee payments to the provider
regardless of actual use. In addition, when properly structured, the use of
requirements-based contracts permits off-balance sheet accounting treatment of
the transaction for the industrial customer.
3
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The Company believes the potential market for its industrial infrastructure
business in North America is very large, represented by approximately $40
billion in annual energy-related expenditures and $50 billion in annual capital
expenditures on the part of companies in energy-intensive manufacturing sectors.
While the Company believes it possesses the expertise to successfully complete
transactions in this market, the Company has not completed any such transactions
as of March 25, 1999. However, the Company has identified and is working with
certain prospective customers in evaluating specific development agreements for
infrastructure facilities.
The Company has integrated its industrial infrastructure business with its
hydroelectric business and has hired individuals with experience in industrial
energy project development, finance, management, and operations. The Company
believes it possesses expertise in certain areas applicable to both business
segments, including project development, operation, management, administration,
and financial structuring. In addition, the Company has offices in several U.S.
states as well as Canada, affording a geographic base from which to effectively
pursue both businesses.
HYDROELECTRIC BUSINESS
The Company's operating hydroelectric projects are located in 14 states and
one Canadian province. The U.S. projects are clustered in four regions: the
Northeast, Southeast, Northwest and West, with a concentration in the Northeast,
a region characterized by relatively consistent long-term water flow and power
purchase contract rates which are higher on average than in most other regions
of the country. Additionally, the Company has a 49% ownership interest in an
18.40 megawatt hydroelectric project in Newfoundland, Canada, which it also
operates. The Company currently derives all of its revenues from the ownership
and operation of hydroelectric facilities.
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 Company's
hub system and operating expertise have enabled it to successfully integrate
acquisitions into its current portfolio and increase the efficiency and
productivity of its projects. The Company has found that the most efficient way
to operate its projects is to have several projects in a geographic area with
operators who can go to any of the projects as needed. Each of the Company's
regions is broken up into several smaller areas for purposes of assigning
project operators. To address more technical matters the Company bases
maintenance personnel and other technicians at its hubs, with more sophisticated
equipment and a more widely varied inventory of spare parts and supplies than
are kept at an individual project, all available for dispatch to each project.
As of December 31, 1998, the Company had a 100% ownership or long-term
lease interest in 50 projects (138 megawatts), a partial ownership interest in
11 projects (99 megawatts) and operations and maintenance ("O&M") contracts with
20 projects (35 megawatts). The Company sells substantially all of the output
from these 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. See "-- Conventional Hydroelectric
Projects -Power Purchase Agreements".
CHI's initial strategy when it was established in 1985 was to consolidate
the ownership and operation of small, independently-owned hydroelectric plants
in the U.S. During the late 1970's, development of small hydroelectric power
facilities was stimulated by rising oil prices, the enactment by Congress of the
Public Utility Regulatory Policies Act of 1978 ("PURPA") and the adoption of the
regulations thereunder, and certain tax incentives, including the business
energy tax credit and the investment tax credit. PURPA reduced regulatory
procedures for small non-utility power production facilities (known as
"Qualifying Facilities" or "QFs") and required electric utilities to purchase
power from such facilities at a price based on the purchasing utility's full
avoided cost, which is equal to the incremental cost that would have been
incurred if the utility had generated the energy itself or purchased it from
another source. See "-- Energy and Environmental Regulation - Energy
Regulation".
Hydroelectric power is a reliable, cost-effective and non-polluting source
of energy that generally offers the following advantages: (i) it is a proven
technology that has existed essentially unchanged for many years; (ii) it uses
water as a renewable, non-depleting and non-polluting source of energy; (iii) it
has relatively low operating and labor costs, with no fuel costs; (iv)
hydroelectric power facilities typically have economic lives of 50 years or
more; and (v) hydroelectric power facilities can produce other beneficial
impacts such as recreational enhancements, flood control and water supply
management. The disadvantages of hydroelectric power include seasonality,
dependence on satisfactory levels of precipitation and water flow, a
4
<PAGE>
factor which creates difficulty in predicting generating levels for discrete
periods, and, in some cases, environmental impact on both aquatic life and
certain recreational uses near facilities.
Starting in 1985 with an operating portfolio of 6 small projects totaling 5
megawatts of capacity, CHI grew rapidly in terms of numbers of projects and
megawatts owned and operated, as well as in terms of gross revenues. At that
time, the Company anticipated that the electric utility industry would remain
heavily regulated and noncompetitive, that purchased power rates for output from
QF projects such as the Company's would not decline, and that hydroelectric
power, as a renewable resource, would generally be viewed favorably by
regulators. Beginning in the early 1990s, however, the electric power industry
in the United States began to undergo significant structural changes, evolving
from a highly regulated industry dominated by monopoly utilities to what is
becoming a deregulated, competitive industry providing energy customers with an
increasing degree of choice among sources of electric power supply. Reductions
in prices for electricity, increased efficiency of combustion turbines and other
competing technologies and the deregulation and restructuring of the electric
power industry created a climate of uncertainty with respect to future power
prices and made it more difficult to obtain long-term power purchase contracts,
thereby severely limiting the Company's near-term opportunities to acquire or
develop additional hydroelectric capacity at acceptable rates of return. At the
same time, competition for the acquisition of available hydroelectric assets has
intensified, with the Company's competitors including other independent power
producers 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.
CHI believes that future growth opportunities in its hydroelectric business
will primarily consist of: (i) potential acquisition of additional hydroelectric
projects, possibly as the result of utility asset divestitures; (ii) contract
operation, maintenance and management of hydroelectric projects for others; and
(iii) potential project development opportunities, primarily in Canada and
certain overseas markets. The Company intends to pursue such opportunities on a
selective basis, based on the likelihood of success and expected return on
investment.
5
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CONVENTIONAL HYDROELECTRIC PROJECTS
The following tables set forth the Company's projects as of December 31,
1998 with 100% ownership, with partial ownership and with O&M contracts:
PROJECTS WITH 100% OWNERSHIP AS OF DECEMBER 31, 1998
(INCLUDING SALE-LEASEBACKS)
<TABLE>
<CAPTION>
POWER
PURCHASE FERC DATE OF CHI
AGREEMENT LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT OF
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OPERATIONS(1)
- ------- -------- ----------------------- ------------ ----- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Apalache......... Greer, SC Duke Power Co. Dec. 1999(2) Jul. 2024 0.40 May 1989
Aziscohos (3).... Wilson Mill, ME Central Maine Power Co. Jul. 2008 Mar. 2025 5.31 Jun. 1988
Barber Dam....... Boise, ID Idaho Power Co. Jul. 2022 Nov. 2023 4.14 Dec. 1992
Bear Creek....... Shingletown, CA Pacific Gas & Electric Dec. 2015 Exempt 3.20 Feb. 1990
Beaver Valley.... Beaver Falls, PA Duquesne Power Open-Ended(4) Exempt 1.30 Feb. 1995
Boott(3)......... Lowell, MA Commonwealth Elec. Apr. 2023 Apr. 2023 24.82 Dec. 1986
Coneross......... Seneca, SC City of Seneca Jun. 2000 Mar. 2015 0.90 May 1989
Groton Electric Light
Crescent......... Russell, MA Dept. Oct. 2009(5) May 2024 1.50 Feb. 1995
Vermont Electric Power
Dewey's Mill..... Hartland, VT Producers, Inc. Jul. 2015 Dec. 2032 1.90 Aug. 1993
Dexter........... Dexter, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 4.30 Feb. 1995
Diamond Island... Watertown, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 1.20 Feb. 1995
Dietrich Drop.... Dietrich, ID Idaho Power Co. Jul. 2022 Apr. 2037 4.77 Dec. 1992
Eagle & Phenix(6) Columbus, GA Fieldcrest Cannon Jun. 2006 Feb. 2009 4.26 Jun. 1991
Fowler #7........ Fowler, NY Niag. Mohawk Power Corp. Dec. 2019 Oct. 2002 0.90 Feb. 1995
Virginia Elec. Power Co. &
Fries............ Fries, VA Apalachian Power Co. May 1999 May 2020 5.21 May 1989
Geo-Bon II....... Lincoln County, ID Idaho Power Co. Mar. 2020 Exempt 1.00 Jun. 1994
Groton Electric Light
Glendale......... Stockbridge, MA Dept. Oct. 2009(5) Oct. 2009 0.70 Feb. 1995
Goodyear Lake.... Milford, NY NY State Elec. & Gas Corp. Aug. 2010 Feb. 2019 1.30 Feb. 1995
Great Falls Lower Somersworth, NH Public Serv. Co. of NH Dec. 2011 Apr. 2022 1.29 Jul. 1985
Hailesboro #3.... Fowler, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 0.90 Feb. 1995
Hailesboro #4.... Fowler, NY Niag. Mohawk Power Corp. Dec. 2023 Dec. 2002 1.80 Feb. 1995
Hailesboro #6.... Fowler, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 0.90 Feb. 1995
Franklin County,
High Falls....... NY NY State Elec. & Gas Corp. Dec. 2002 Jan. 2026 1.75 Oct. 1993
High Shoals...... High Shoals, NC Duke Power Co. Apr. 2012 Exempt 1.56 Jul. 1993
Kelley's Falls... Manchester, NH Public Serv. Co. of NH Dec. 2005 Mar. 2024 0.45 Dec. 1985
Kings River...... Fresno, CA Pacific Gas & Electric Jan. 2021 Jul. 2037 1.35 Jun. 1994
Kinneytown....... Seymour, CT CT Light & Power Nov. 2016 Exempt 2.36 Nov. 1986
LaChute Lower(3). Ticonderoga, NY Niag. Mohawk Power Corp. Dec. 2015 Exempt 3.60 Dec. 1987
LaChute Upper(3). Ticonderoga, NY Niag. Mohawk Power Corp. Dec. 2015 Exempt 4.90 Dec. 1987
Lawrence......... Lawrence, MA New England Power Co. Dec. 2011(7) Nov. 2028 16.80 Jul. 1986
Long Shoals...... Long Shoals, NC Duke Power Co. Nov. 1999 Exempt 0.75 Jul. 1993
Low Line Rapids.. Kimberly, ID Idaho Power Co. Jun. 2022 Exempt 2.80 Dec. 1992
Municipal Elec. Auth. of
Milstead......... Milstead, GA GA Apr. 2000 Exempt 1.00 Jul. 1993
Vermont Electric Power
Ottauquechee..... N. Hartland, VT Producers, Inc. Sept. 2017 Exempt 1.89 Jun. 1994
Sept.
Pelzer Lower..... Williamston, SC Duke Power Co. 1999(2) Nov. 2017 3.30 Feb. 1990
Sept.
Pelzer Upper..... Pelzer, SC Duke Power Co. 1999(2) Nov. 2017 2.00 Feb. 1990
Piedmont......... Piedmont, SC Duke Power Co. Dec. 1999(2) Dec. 2018 1.00 May 1989
Rollinsford...... Rollinsford, NH Public Serv. Co. of NH Sept. 2013 Aug. 2021 1.49 Oct. 1986
Rock Creek II.... Twin Falls, ID Idaho Power Co. Jul. 2019 Aug. 2036 1.90 Dec. 1992
Salmon Falls..... South Berwick, ME Public Serv. Co. of NH Dec. 2006 Dec. 2037 1.20 Jul. 1986
Scotts Flat...... Nevada City, CA Pacific Gas & Electric Dec. 2004 Exempt 0.83 Feb. 1990
</TABLE>
6
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<TABLE>
<CAPTION>
POWER
PURCHASE DATE OF CHI
AGREEMENT FERC LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT OF
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OPERATIONS(1)
- ------- -------- ----------------------- ------------ ----- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Theresa......... Theresa, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 1.30 Feb. 1995
Victory Mills... Saratoga, NY Niag. Mohawk Power Corp. Dec. 2025 Apr. 2024 1.66 Dec. 1986
Walden.......... Walden, NY NY State Elec. & Gas Corp. Mar. 1999(8) May 2022 2.82 Apr. 1986
Ware Shoals..... Ware Shoals, SC Duke Power Co. Dec. 1999(2) Sept. 2001 6.20 May 1989
West Hopkinton.. West Hopkinton, NH Public Serv. Co. of NH Nov. 2012 Exempt 1.00 Jul. 1985
Willimantic I... Willimantic, CT CT Light & Power Dec. 2018 Nov. 2025 0.77 Dec. 1991
Willimantic II.. Willimantic, CT CT Light & Power Dec. 2018 Sept. 2025 0.77 Dec. 1991
Woodside I...... Norris, SC Duke Power Co. Dec. 1999(2) Non-Jurisdictional 0.40 May 1989
Woodside II..... Cateechee, SC Duke Power Co. Dec. 1999(2) Non-Jurisdictional 0.44 May 1989
------
Number of Projects: 50 Megawatt Subtotal: 138.29
======
</TABLE>
- ----------
(1) Whichever is later.
(2) The power purchase agreements for these projects were renewed at negotiated
rates subject to termination upon twelve months notice.
(3) These projects are subject to sale-leaseback arrangements pursuant to which
the Company is the lessee.
(4) Agreement remains in effect as long as Duquesne Power's tariff with PA
Public Utility Commission remains valid and effective.
(5) The term of the power purchase agreement may be extended by mutual
agreement.
(6) Revenue is derived pursuant to a lease arrangement.
(7) The term of the power purchase agreement may be extended through 2028 at
the option of the utility.
(8) The original power purchase agreement for this project expired in November,
1998. As of December 1998, the project is operating pursuant to an interim
power purchase arrangement, pending a new power purchase agreement.
PROJECTS WITH PARTIAL OWNERSHIP AS OF DECEMBER 31, 1998(1)
<TABLE>
<CAPTION>
POWER PURCHASE DATE OF CHI
AGREEMENT FERC LICENSE APPROXIMATE ACQUISITION OR
EXPIRATION EXPIRATION CAPACITY IN COMMENCEMENT
PROJECT LOCATION POWER PURCHASING ENTITY DATE DATE MEGAWATTS OF OPERATIONS(2)
- ------- -------- ----------------------- ------------ ----------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Copenhagen........ Copenhagen, NY Niag. Mohawk Power Corp. Dec. 2023 Exempt 3.30 Feb. 1995
Denley Dam........ Lyonsdale, NY Niag. Mohawk Power Corp. Dec. 2026 Exempt 1.50 Feb. 1995
Hillsborough...... Hillsborough, NH Public Serv. Co. of NH Jul. 2004 Exempt 1.20 Nov. 1989
Lower Saranac..... Saranac, NY NY State Elec. & Gas Oct. 2029 May 2027 9.30 Jun. 1992
Port Leyden....... Lyonsdale, NY Niag. Mohawk Power Corp. Dec. 2026 Exempt 2.00 Feb. 1995
Pyrites........... Canton, NY Niag. Mohawk Power Corp. Dec. 2023 Aug. 2023 8.20 Feb. 1995
Rock Island....... Lyonsdale, NY Niag. Mohawk Power Corp. Dec. 2026 Exempt 1.90 Feb. 1995
Sheldon Springs... Sheldon, VT Vermont Electric Power Aug. 2016 Sept. 2024 24.97 Sept. 1993
Producers, Inc.
Slate Creek....... Lakehead, CA PacifiCorp Dec. 2018(3) Exempt 4.20 May 1990
Star Lake......... Newfoundland, Canada Newfoundland and Oct. 2023 Exempt 18.40 Nov. 1998
Labrador Hydro
Twin Falls........ North Bend, WA Puget Sound Power & Dec. 2025 Apr. 2035 24.00 Apr. 1989
Light Co. -----
Number of Projects: 11 Megawatt Subtotal: 98.97
=====
</TABLE>
- ----------
(1) Projects with Partial Ownership are defined as those projects in which the
Company has an equity (or equivalent) investment of less than 100%.
(2) Whichever is later.
(3) The term of the power purchase agreement may be extended through 2023 at
the option of the utility.
7
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PROJECTS WITH OPERATION AND MAINTENANCE CONTRACTS AS OF DECEMBER 31, 1998(1)
<TABLE>
<CAPTION>
APPROXIMATE CAPACITY DATE OF
IN MEGAWATTS O&M CONTRACT
------------ ------------
<S> <C> <C> <C>
Barker Mill Lower Auburn, ME 1.50 Jul. 1996
Barker Mill Upper Auburn, ME 0.95 Jul. 1996
Brown's Mill Dover-Foxcroft, ME 0.59 Jul. 1996
Champlain Spinners. Whitehall, NY 0.70 Aug. 1996
Combie North Grass Valley, CA 0.30 Feb. 1990
Combie South Grass Valley, CA 1.50 Feb. 1990
Damariscotta Damariscotta, ME 0.46 Jul. 1996
Eustis Eustis, ME 0.25 Jul. 1996
Gardiner Gardiner, ME 1.00 Jul. 1996
Great Works South Berwick, ME 0.53 Jul. 1996
Lower Wilson Greenville, ME 0.57 Jul. 1996
Mechanic Falls Mechanic Falls, ME 1.30 Jul. 1996
Milo Milo, ME 0.60 Jul. 1996
New Dam Sanford/Alfred, ME 0.78 Jul. 1996
Norway Norway, ME 0.32 Jul. 1996
Old Falls West Kennebunk, ME 0.47 Jul. 1996
Pittsfield Pittsfield, ME 1.05 Jul. 1996
Pumpkin Hill Lowell, ME 0.95 Jul. 1996
Terminus Tulare County, CA 17.00 Apr. 1995
Weeks Falls North Bend, WA 4.34 Jun. 1990
--------
Number of Projects: 20 Megawatt Subtotal: 35.16
========
</TABLE>
(1) These are projects where the Company's only current significant interest is
through operation and maintenance contracts.
Total Number of Projects: 81
Total Megawatts Owned, Leased or Operated: 272.42
========
SALE OF HYDROELECTRIC FACILITIES. On December 23, 1996, the Company sold 15
of its then 100% owned hydroelectric facilities in Maine, aggregating 11.32
megawatts. In connection with this sale, the Company executed a contract to
operate and maintain the facilities for an initial period of up to 15 years. See
Note 5 of the Notes to Consolidated Financial Statements.
DECOMMISSIONING OF CONVENTIONAL HYDROELECTRIC ASSETS. On September 9, 1997,
the Company terminated a Power Purchase Agreement (the "PPA") with PacifiCorp,
the purchasing utility, relating to three of its projects located in Oregon,
aggregating 7.01 megawatts. The Company received a cash payment to terminate
production, surrender the PPA and remove all facilities associated with these
projects in accordance with certain terms and conditions. See Note 6 of the
Notes to Consolidated Financial Statements.
POWER PURCHASE AGREEMENTS. As of December 31, 1998, substantially all
energy and capacity of the Company's existing wholly-owned projects in the
United States was being sold to 18 public utilities pursuant to take or pay
long-term power purchase agreements with remaining terms ranging from
approximately 3 months to 27 years. The Company's power purchase agreements
generally require the utility to purchase all energy delivered by the relevant
facility. These power purchase agreements generally do not provide for
termination prior to expiration except in the case of either continuing
nonperformance by the Company or certain events of bankruptcy or insolvency of
the project subsidiary.
The Company's power purchase agreements have either fixed or fluctuating
rates or a combination thereof. Fluctuating rate and combination rate contracts
are generally based on avoided costs or a percentage thereof, and typically
incorporate minimum prices which enable the Company to benefit from increases in
energy prices but insulate it against significant decreases. The Company's fixed
rate contracts often contain: (i) blended rates typically based on projected
annual avoided costs averaged over a 15 to 30 year period; or (ii) an escalation
factor that reflects estimated increases in projected annual avoided cost over
the term of the contract. The escalation factor is often indexed to the Gross
Domestic Product ("GDP") deflator. The Company also has contracts that provide
for fixed rates or escalating fixed rates for up to 20 years (from inception),
followed by adjustable rates based on a fixed percentage of actual annual
avoided costs for the remaining term.
8
<PAGE>
Certain power purchase contracts provide for different rates based on peak or
off-peak generation of energy. As the Company's existing contracts mature or
change from fixed rates to rates based on avoided cost, the Company will receive
lower prices for its power to the extent that the currently low market price for
electricity continues. Prices for electricity have remained low as a result of
reductions in the cost of power produced from natural gas due to lower natural
gas prices and technological improvements which have lowered the capital cost
and increased the efficiency of combustion turbines and other competing
technologies. 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 to further increase competition in electricity markets by such
means as customer choice of generation 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 additional long-term power
purchase contracts.
All of the Company's existing hydroelectric facilities in the United States
are QFs under PURPA, which requires utilities to purchase power from QFs, and
exempts QFs from most utility regulatory requirements. Pursuant to PURPA,
electric utilities are required to purchase power from QFs at prices based on
the utilities' avoided cost. Implementation of the regulations is delegated to
state public utility commissions which may, at their discretion, establish
long-term rates for a specified period higher than short-term avoided costs or
may provide other kinds of incentives to QFs. In recent years, a number of
utilities have begun to challenge certain provisions of PURPA as no longer
appropriate in the current U.S. energy market. See "-- Energy and Environmental
Regulation".
The following table sets forth the Company's power sales by customer for
the year ended December 31, 1998:
<TABLE>
<CAPTION>
COMBINED
REVENUES OF
REVENUES OF PROJECTS
PROJECTS IN REVENUES OF 100% OWNED
CONSOLIDATED PROJECTS AND
RESULTS OF PARTIALLY PARTIALLY
OPERATIONS % OWNED % OWNED %
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Niagara Mohawk Power Corp...................... $ 8,797,365 20.0 $ 4,267,415 19.4 $13,064,780 19.8
Commonwealth Electric Co....................... 9,649,160 22.0 -- -- 9,649,160 14.6
Vermont Electric Power Producers, Inc.......... 1,254,208 2.9 7,345,256 33.4 8,599,464 13.1
New England Power Co........................... 5,459,512 12.4 -- -- 5,459,512 8.3
Puget Sound Power & Light Co................... -- -- 5,372,055 24.4 5,372,055 8.2
N.Y. State Electric & Gas Corp................. 1,527,549 3.5 3,241,256 14.7 4,768,805 7.2
Central Maine Power Co......................... 3,883,382 8.9 -- -- 3,883,382 5.9
Idaho Power Co................................. 2,885,051 6.6 -- -- 2,885,051 4.4
Duke Power Co.................................. 2,260,582 5.2 -- -- 2,260,582 3.4
Public Service Co. of NH....................... 1,838,081 4.2 323,028 1.5 2,161,109 3.3
PacifiCorp..................................... 1,644,533 3.7 234,225 1.0 1,878,758 2.9
Virginia Power Co.............................. 1,238,533 2.8 -- -- 1,238,533 1.9
Newfoundland and Labrador Hydro................ -- -- 1,225,715 5.6 1,225,715 1.9
Groton Electric Light Dept..................... 954,398 2.2 -- -- 954,398 1.4
All other customers............................ 2,475,533 5.6 -- -- 2,475,533 3.7
----------- ----- ----------- ----- ----------- -----
Total $43,867,887 100.0% $22,008,950 100.0% $65,876,837 100.0%
=========== ===== =========== ===== =========== =====
</TABLE>
9
<PAGE>
Substantially all of the Company's existing power purchase agreements
contain scheduled rates for delivered energy through 1999 or later, which
protects the Company from decreases in energy prices and avoided costs from
current levels until such time when the scheduled rate portion of the contract
expires. Thereafter, certain contracts expire and others provide for prices
based upon avoided cost. In general, the scheduled rates exceed the current
avoided cost for delivered energy which is being influenced by an increasingly
deregulated and competitive energy market. Lower avoided costs of energy could
significantly reduce the rates received by the Company under a particular
contract once the period of scheduled rates terminates and could make it more
difficult in the future for the Company to obtain contracts which can
economically support development of new projects or the continued operation of
certain existing projects.
The following table summarizes the actual or expected basis for determining
future rates which are anticipated to be in effect under current and anticipated
future power purchase agreements for the Company's existing consolidated
projects. To develop the information below, the Company first computed the
average annual revenue for each project included in consolidated power sales
revenues using actual revenues for each of the last three calendar years ended
December 31, 1998. This "revenue mix" was then applied to each of the respective
project's power purchase agreement terms on the assumption that the Company's
consolidated project portfolio and average revenue mix remains unchanged for the
ten-year period shown in the table. Power purchase agreements which expire
during the ten-year period shown are assumed to result in revenues based upon
avoided cost or market rates for the period subsequent to contract expiration.
The information shown below is not intended to represent actual future results,
but is believed to be indicative of the portion of existing revenue that will be
subject to avoided cost or market rates during the period shown. No assurance
can be provided as to what the actual avoided cost or market rate risk will be
for the period shown.
<TABLE>
<CAPTION>
% OF CURRENT % OF CURRENT REVENUES SUBJECT
REVENUES SUBJECT TO TO RATES DETERMINED PURSUANT
MINIMUM FIXED OR TO AVOIDED COST OR MARKET
CALENDAR YEAR SCHEDULED RATES(1) RATES
------------- ------------------ -----
<S> <C> <C>
1999 ............................. 87.1 12.9
2000 ............................. 86.4 13.6
2001 ............................. 65.3 34.7
2002 ............................. 65.3 34.7
2003 ............................. 62.5 37.5
2004 ............................. 62.5 37.5
2005 ............................. 61.6 38.4
2006 ............................. 60.1 39.9
2007 ............................. 59.4 40.6
2008 ............................. 59.4 40.6
</TABLE>
(1) Includes contracts with GDP or other similar adjustment provisions.
In recent years, several public utility companies have approached
independent power producers (each an "IPP"), including the Company, to
renegotiate specified rates in their power purchase agreements, alleging that
these agreements force the utilities to purchase power from IPPs at rates higher
than current avoided cost, resulting in higher rates to consumers. Niagara
Mohawk Power Corporation ("NIMO"), a customer of the Company which accounted for
approximately 18.4%, 20.3%, 17.9% and 20.0% of consolidated power sales revenues
in the fiscal years ended June 30, 1996 and 1997, the six months ended December
31, 1997, and the year ended December 31, 1998, respectively, has in the past
issued statements and taken action, including legal action, indicating its
desire to be relieved of its obligations under contracts with IPPs that NIMO
considers uneconomic.In addition, NIMO has reached agreement with certain IPPs
to terminate or restructure their contracts. Neither NIMO's legal actions nor
its agreements with other IPPs have affected the Company. However, NIMO has also
unilaterally imposed a "generation cap" on three of the fifteen power purchase
agreements it has with the Company, claiming reduced rates for power produced
over a cap specified by the utility, and has withheld approximately $0.9 million
of revenues to date. In response, the Company, in conjunction with other IPPs,
has sought redress in court and expects the case to be decided during 1999.
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<PAGE>
Although the Company believes that its power purchase agreements are valid,
binding and enforceable contracts, there can be no assurance that additional
customers of the Company will not attempt to modify their contracts with the
Company and, if such attempts succeed, that any such modifications will not have
a material adverse effect on the Company's future revenues. Additionally,
increased competition in the electricity industry might cause certain utilities
to become higher credit risks. Although the ratings of the debt securities of
many of the utilities which purchase power from the Company are currently
investment grade, there can be no assurance of the long-term creditworthiness of
any of the Company's customers. Should any customer fail, it would be difficult
for the Company to replace an existing long-term contract with a new contract
with another customer on similar economic terms in the current environment.
PRECIPITATION, WATER FLOW AND SEASONALITY. For hydroelectric facilities,
the amount of 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, particularly 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
at such sites until water flows return to normal. In cases of reduced or excess
water flow, energy generation at such sites may be diminished. Pursuant to the
Company's power purchase agreements, any diminished energy generation will have
an adverse effect on revenues from that facility. While the Company does not
have business interruption insurance to cover lost revenues as a result of
drought or dry periods, the Company carries business interruption insurance to
cover, among other things, the loss of revenues above certain deductible levels,
and subject to applicable insurance policy sub-limits and overall limits,
arising from interruption of electricity generation due to damage caused by
flooding and other catastrophic events. There can be no assurance that such
coverage will remain available on acceptable terms.
Production of electricity 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 Company normally shuts down
selected operations for periods during the relatively dry third quarter in order
to perform routine maintenance. The amount of water flow in any given period
will have a direct effect on the Company's production, revenues and cash flow.
ENERGY AND ENVIRONMENTAL REGULATION
ENERGY REGULATION. The Company is subject to federal and state (or in
Canada, provincial) energy laws and regulations in connection with the
development and operation of its hydroelectric and industrial projects.
Depending on the project, these laws and regulations may govern the ownership
structure of the projects, the rates, terms and conditions under which the
Company may sell electric output from the projects to utilities or other
customers, and the procedures under which these projects are constructed and
operated. In the U.S., federal laws that affect the Company's business include:
(i) the Federal Power Act of 1935 ("FPA"); (ii) the Electric Consumer Protection
Act of 1986; (iii) the Public Utilities Holding Company Act of 1935 ("PUHCA");
(iv) PURPA; and (v) the National Energy Policy Act of 1992.
Under the FPA, substantially all of the Company's existing hydroelectric
projects are subject to varying degrees of regulation by the Federal Energy
Regulatory Commission ("FERC"), either as projects licensed by FERC or
determined by FERC to be exempt from licensing requirements. FERC license
compliance requirements and other regulatory requirements under the FPA can be
complicated and expensive and can subject the Company to future regulatory
requirements the nature and costs of which are currently unknown.
The exemptions afforded by PURPA to QFs from extensive federal and state
regulation are important to the Company and its competitors. Each of the
operating conventional hydroelectric projects in the U.S. that the Company
currently owns, operates or in which it has an investment meets the requirements
under PURPA for being a QF. As an owner of QFs, the Company is exempt from many
of the provisions of the FPA and PUHCA. However, some larger hydroelectric
facilities (if acquired or developed by the Company) would not qualify as QFs.
In addition, the Company believes that certain energy facilities that it may
acquire or develop in the future may not be QFs. The Company does not intend for
its industrial energy facilities to be principally engaged in the sale of
electric power to electric utilities at wholesale rates. However, to the extent
they may sell such power, they may be subject to regulation by FERC or by the
public service commissions in the states in which they operate or sell power.
11
<PAGE>
ELECTRIC INDUSTRY RESTRUCTURING. In recent years the federal government and
many state governments have begun consideration of proposed legislation or
regulations that would partially or wholly deregulate the electric power
industry and institute competition at the level of retail electricity customers.
The Company believes that such restructuring, including significant elements of
retail competition, is likely within the next few years with a variety of
potential impacts both positive and negative on the Company. In the area of
acquiring and developing industrial energy facilities, removing restrictions on
retail sales of energy to industrial customers is likely to enhance the
Company's prospects for completing transactions with such customers. In the area
of hydroelectric generation, it is uncertain to what extent the Company's
smaller hydroelectric facilities would be competitive in a fully deregulated
energy market without the current benefits of PURPA that require electric
utilities to purchase the output from these facilities. While the Company
believes that its existing long-term power purchase contracts with utilities are
legally binding for the duration of the contracts, there can be no assurance
that the provisions of these contracts will not be affected by future
legislation or regulation dealing with electric industry restructuring. See
"--Conventional Hydroelectric Projects -- Power Purchase Agreements".
ENVIRONMENTAL REGULATION. The Company is subject to extensive federal,
state (or in Canada, provincial) and local environmental laws and regulations
applicable to the development and operation of its projects. Environmental laws
and regulations may affect the Company's operations by delaying construction of
a project or, although the Company has never experienced such an event, the
closing down of an operating project for a period of time. In addition,
environmental laws and regulations may affect the development time, site
selection and permitting of new projects. The development of a power generation
project typically requires numerous licenses, permits, approvals and
certificates from governmental agencies. Procedures followed by certain of these
permitting authorities may be affected by political factors.
The Company monitors applicable environmental laws and regulations and
evaluates its facilities for compliance with applicable standards. Based on
current trends, however, the Company expects that environmental and land use
regulation will become more stringent. Accordingly, the Company plans to
continue to place a strong emphasis on the development and use of its available
technology to minimize potentially harmful effects on the environment that may
result from the operation of its facilities. In addition, the Company has
developed expertise and experience in obtaining necessary licenses, permits and
regulatory approvals.
The Company's hydroelectric facilities are subject to environmental
regulatory requirements pursuant to their FERC licenses or exemptions or, in the
case of facilities not subject to FERC jurisdiction, applicable state
environmental requirements. The Company's prospective industrial infrastructure
and other energy facilities are likely to be subject to federal and state laws
and regulations governing atmospheric emissions and, in some cases, governing
the discharge of effluents into water bodies. Environmental regulatory
requirements for such facilities are often complex, and specific requirements
are dependent upon the nature of the individual project and site.
COMPETITION
In its industrial infrastructure business, the Company competes with a
large number of well-capitalized companies, including U.S. and foreign electric
utilities and their affiliates, which are also attempting to serve the energy
needs of industrial companies. However, the Company believes that there are
relatively few companies seeking to serve the industrial market in the same
manner as the Company, principally through requirements-based contracts and by
offering multiple products and services.
In its hydroelectric business, the Company competes both with smaller and
regional independent hydroelectric development companies and with other
independent energy producers, utilities and utility subsidiaries for the rights
to acquire, develop or operate additional conventional hydroelectric projects,
which may cause fewer projects to be available at prices that will permit the
level of return on investment which the Company seeks. Recent years have seen an
increase in competition for available properties from large, well-capitalized
companies, thereby driving down competitive rates of return and making it more
difficult for the Company to successfully acquire additional projects.
12
<PAGE>
PROPERTIES OWNED AND LEASED
The Company leases its administrative offices at 680 Washington Boulevard,
Stamford, Connecticut under a lease calling for annual payments of approximately
$170,000 per year. Additional administrative offices and maintenance facilities
are leased in Houston, Texas; Greenville, South Carolina; Anderson, California;
Boise and Twin Falls, Idaho; Andover, Massachusetts; Bellevue, Washington; and
Montreal, Canada, with aggregate annual rental payments of approximately
$300,000. The Company owns administrative offices in Lawrence, Massachusetts and
Dexter, New York and a maintenance facility in Sanford, Maine.
In addition to the foregoing, the Company owns and leases real estate in
California, Connecticut, Georgia, Idaho, Massachusetts, Maine, New Hampshire,
New York, North Carolina, Pennsylvania, South Carolina, Vermont, Virginia and
Washington. Except for certain small non-hydroelectric real estate parcels, this
additional real estate constitutes property used in the hydroelectric generating
projects operated by the Company. In the case of each of the conventional
hydroelectric projects owned or leased by the Company, the project generally
consists of a dam, water rights and interests and rights in real estate
sufficient for the purposes of operating the facility, a powerhouse for the
generation of electricity and other necessary equipment. Except as listed in the
table entitled "Projects with Partial Ownership as of December 31, 1998" under
"Conventional Hydroelectric Projects" above, such property and the federal and
state permits and licenses are owned or leased by one or more subsidiaries of
the Company or various limited partnerships in which such subsidiaries are the
sole general and limited partners. The water rights held by the Company are
subject to various restrictions and limitations with respect to environmental
and other matters. In the opinion of management, none of such restrictions will
have a material adverse effect on the business or operations of the Company.
EMPLOYEES
The Company employs approximately 142 full-time and 51 part-time and
temporary employees as of December 31, 1998. The Company's current employees are
not represented by a collective bargaining group, and management considers its
relations with employees to be good.
FINANCIAL RESTRUCTURING OF CHI; CHANGE OF FISCAL YEAR
Prior to November 7, 1997, CHI had a highly leveraged capital structure and
substantial future cash requirements related to corporate debt and mandatorily
redeemable preferred stock, specifically, to then-existing 12% Senior Discount
Notes, due 2003 (the "Senior Discount Notes") and the 13 1/2% Cumulative
Redeemable Preferred Stock (the "Series H Preferred"). The high leverage and
future cash requirements of the Company made it difficult to establish the
creditworthiness and credibility necessary to consummate industrial
infrastructure and other new business transactions. The Company believed it
would be unable to satisfy certain future corporate dividend and interest
payment obligations on a timely basis as well as meet other Company obligations.
In order to capitalize on the expertise, capabilities and opportunities it
believes it has in the industrial infrastructure and hydroelectric business
segments, the Company concluded that it was necessary to deleverage its capital
structure. To that end, the Company in the fall of 1996 entered into discussions
with substantial holders of its Senior Discount Notes and Series H Preferred, as
well as with holders of its 8% Senior Convertible Voting Preferred Stock (the
"Series F Preferred") and 9.85% Junior Convertible Voting Preferred Stock (the
"Series G Preferred", and together with the Series H Preferred and Series F
Preferred, the "Old Preferred Stock") in an effort to restructure the Company's
significant financial obligations.
In June 1997, CHI reached an agreement in principle with an informal
committee of institutions that owned, or represented beneficial holders that
owned, approximately 89.2% of CHI's then outstanding Senior Discount Notes on
the terms of a restructuring to be accomplished pursuant to a plan of
reorganization for CHI (the "Plan of Reorganization") under chapter 11, Title 11
of the United States Code (the "Bankruptcy Code"). On August 8, 1997, pursuant
to a disclosure statement, dated August 8, 1997 (the "Disclosure Statement"),
CHI commenced a prepetition solicitation of votes by the holders of Senior
Discount Notes and Old Preferred Stock to accept or reject the Plan of
Reorganization. Under the Plan of Reorganization, the holders of Senior Discount
Notes and Old Preferred Stock were the only holders of impaired claims and
impaired equity interests entitled to receive a distribution and, therefore,
pursuant to section 1126 of the Bankruptcy Code, were the only holders entitled
to vote on the Plan of Reorganization. At the conclusion of the 32-day
solicitation period, the Plan of Reorganization had been accepted by holders of
100% of the Senior Discount Notes and by holders of greater than 97% of the Old
Preferred Stock.
13
<PAGE>
On September 15, 1997, CHI commenced a case under chapter 11 of the
Bankruptcy Code (the "Chapter 11 Case") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"), and filed the Plan of
Reorganization and the Disclosure Statement. None of CHI's subsidiaries
commenced a case under the Bankruptcy Code. On October 23, 1997, the Bankruptcy
Court entered an order confirming the Plan of Reorganization, which became
effective November 7, 1997 (the "Effective Date").
Through the implementation of the Plan of Reorganization on and after the
Effective Date, CHI's most significant financial obligations were restructured
as follows: $202 million in face amount of outstanding Senior Discount Notes
were converted into, among other things, $15 million in cash and 100% of the
shares of CHI's new common stock, consisting of shares of new class A common
stock (the "New Class A Common Stock") and shares of new class B common stock
(the "New Class B Common Stock", and together with the New Class A Common Stock,
the "New Common Stock"), subject to dilution from the New Warrants and the
Management Options (each as described below); the holders of the Old Preferred
Stock exchanged such stock for warrants to purchase up to 12.5% of the New
Common Stock, consisting of series B warrants (the "New Series B Warrants") and
series C warrants (the "New Series C Warrants", and together with the New Series
B Warrants, the "New Warrants"), subject to dilution from the Management
Options; and CHI's old common stock (the "Old Common Stock") was canceled. CHI's
senior management received options to purchase up to an aggregate of 7.5% of the
New Class A Common Stock, (the "Management Options"), subject to dilution from
the New Warrants. See Part II, Item 5, "Market for the Registrant's Common
Equity and Related Stockholder Matters" for information with respect to the New
Common Stock, New Warrants and Management Options. As a result of the
restructuring, CHI no longer has any significant parent company debt
obligations. However, during March 1998 CHI obtained a secured $15 million
working capital and letter of credit facility.
Pursuant to the Plan of Reorganization, CHI adopted, on the Effective Date,
the Amended CHI By-Laws and a Restated CHI Certificate of Incorporation.
Pursuant to CHI's Restated Certificate of Incorporation, as of the Effective
Date, CHI's name was changed from Consolidated Hydro, Inc. to CHI Energy, Inc.
In addition, its fiscal year-end was changed from June 30 to December 31.
CERTAIN RISK FACTORS
Certain statements contained in this Form 10-K 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 agreements;
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. Certain of these risks are discussed more fully below and should be
carefully considered along with the other matters described herein.
LEVERAGED PROJECT FINANCING. The Company's existing hydroelectric projects
are, and its future hydroelectric and other energy and infrastructure projects,
if any, would likely be financed using a variety of structures primarily
consisting of limited recourse or non-recourse debt. As of December 31, 1998,
the Company had $80.8 million (exclusive of the Boott project operating lease)
of direct project financing obligations that are limited recourse or
non-recourse to CHI. As limited recourse or, except to the extent set forth
below, non-recourse obligations, each such obligation is structured to be fully
serviced out of each applicable project's cash flow, generally without any claim
against CHI's general corporate funds. In the event of a project default and
assuming CHI is unable or chooses not to cure such default within applicable
cure periods (if any), the lenders or lessor would generally have rights to the
facility, related contracts and all licenses and permits necessary to operate
the facility and, in the event of foreclosure after such a default, the Company
might not retain any interest in such project.
Certain project acquisitions have been financed by General Electric Capital
Corporation ("GECC"), which has required the guarantee of CHI Acquisitions, Inc.
("CHI Acquisitions"), a subsidiary of CHI which is the parent of each of the
entities formed to acquire such projects. Thus, each such project is vulnerable
in the event of a default by any of the other projects owned indirectly by CHI
Acquisitions. Although all of this guaranteed financing has been repaid, a
performance guarantee relating to one project remains in effect. Certain other
projects acquired by CHI Acquisitions II, Inc. ("CHI Acquisitions
14
<PAGE>
II"), a subsidiary of CHI, were financed by CHI Acquisitions II with two loans
from GECC. One such loan has been secured by the projects acquired and the other
loan by the cash flows of certain other projects of which CHI Acquisitions II is
the parent. See Note 12 of the Notes to Consolidated Financial Statements for
additional information.
DEPENDENCE ON PRECIPITATION AND EFFECTS OF VARIATIONS IN WATER FLOW AND
SEASONALITY. The amount of hydroelectric energy generated at any particular
conventional hydroelectric facility depends upon the quantity of water flow at
the site of the facility. In cases of reduced or excessively high water flow,
energy generation at such site may be diminished, particularly if the facility
has low storage capacity. Pursuant to the Company's power purchase agreements,
any diminished energy generation will have an adverse effect on revenues from
that facility. While the Company does not have business interruption insurance
to cover lost revenues as a result of drought or dry periods, the Company
carries business interruption insurance to cover, among other things, the loss
of revenues above certain deductible levels, and subject to applicable insurance
policy sub-limits, and overall limits arising from interruption of electricity
generation due to damage caused by flooding and other catastrophic events. There
can be no assurance that such coverage will remain available on acceptable
terms.
Production of electricity 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.
CHANGES IN APPLICABLE RATES; ENERGY PRICE DECLINES. From calendar years
1999 through 2008, rates paid to the Company pursuant to power purchase
agreements representing approximately 40.6% of the Company's average power sales
revenues (calculated on a rolling three year basis) will be affected by changes
from scheduled rates to rates based either on the applicable utilities' then
current avoided cost or on prices determined in a competitive market. Use of
avoided cost is driven by either the specific terms of certain power purchase
agreements or the expiration of the remaining agreements during the period
presented and the assumed utility purchase of project generation, in accordance
with the requirements of PURPA and the regulations adopted thereunder. A
utility's avoided cost rate is equal to the incremental cost that would have
been incurred if the utility had generated the energy itself or purchased it
from another source. Consequently, the Company's revenue at such time will be
adversely affected if the then current utility avoided cost rate is lower than
the scheduled rate previously in effect.
The majority of the generating capacity of the Company's operating projects
is contracted through 2020. However, if energy prices remain at current levels
or decline, the rates negotiated by the Company for new contracts, contract
rates based upon utility avoided costs or extensions of existing contracts could
be adversely affected.
DEPENDENCE ON COMMONWEALTH ELECTRIC COMPANY ("CEC"), NIMO, NEW ENGLAND
POWER COMPANY ("NEPCO"), CENTRAL MAINE POWER COMPANY ("CMP") AND IDAHO POWER
COMPANY ("IPCO"); CREDITWORTHINESS OF THE COMPANY'S CUSTOMERS. A substantial
portion of the Company's power is sold to five customers pursuant to various
long-term power purchase agreements. Sales to CEC, NIMO, NEPCO, CMP and IPCO
represented approximately 22.0%, 20.0%, 12.4%, 8.9% and 6.6%, respectively, of
the consolidated revenues of the Company for the year ended December 31, 1998.
The Company is not aware of any specific circumstances that might materially
affect its revenues pursuant to the sale of power to these customers. However,
given the uncertainties associated with electric industry restructuring, there
can be no assurance that one or more of these customers will not attempt to
modify their contracts with the Company or that their future credit worthiness
will not be adversely affected.
ENERGY AND ENVIRONMENTAL REGULATION. All of the Company's existing
operating hydroelectric projects, while exempt from public utility regulation,
are subject to varying degrees of regulation by FERC and state agencies.
Substantially all of the Company's generating capacity has either been licensed
or granted an exemption from licensing as required under the FPA. There is no
guarantee that a FERC license can be obtained or renewed. Although the Company
has not encountered significant difficulties in transferring, amending or
obtaining licenses, there can be no assurance that it will not encounter
significant difficulties in this regard in the future, nor can there be any
assurance that existing regulations will not be revised or that new regulations
will not be adopted or become applicable to the Company that could have an
adverse effect on its operations.
The Company's activities require numerous permits, approvals and
certificates from appropriate federal, state and local government agencies as
well as compliance with certain environmental protection legislation and the
FPA. While the Company believes it has obtained the requisite approvals for its
existing operations and that its business is operated in
15
<PAGE>
accordance with applicable law, it remains subject to a varied and complex body
of regulations that both public officials and private individuals may seek to
enforce. Such laws and regulations may affect operations by delaying
construction or forcing a temporary or permanent closure of a project and may
affect site selection or permitting of new projects. Based on current trends,
the Company expects that environmental and land use regulation will become more
stringent. There can be no assurance that existing regulations will not be
revised or that new regulations that could have an adverse effect on its
operations will not be adopted or become applicable to the Company nor can there
be any assurance that the Company will be able to obtain all necessary licenses,
permits, approvals and certificates for proposed projects or that completed
facilities will comply with all applicable statutes or regulations.
UNCERTAINTY AS TO FUTURE OPPORTUNITIES IN HYDROELECTRIC BUSINESS. The
Company believes that opportunities to continue to expand its conventional
hydroelectric business are principally through the acquisition of additional
facilities and the securing of O&M contracts rather than the development of new
hydroelectric facilities in North America. There can be no assurance that the
Company will be able to take advantage of such opportunities on terms acceptable
to it, nor can there be any assurance that the Company will be able to obtain
financing with respect to such opportunities. In addition, a number of industry
issues, including issues related to the availability, term and pricing of future
power purchase agreements and higher acquisition prices resulting from increased
competition may limit the Company's near-term opportunities to acquire
additional hydroelectric capacity at acceptable rates of return.
In addition, the Company believes that near-term prospects for successful
development of new hydroelectric facilities in North America, in particular the
United States, are limited, due to regulatory restrictions that increase the
cost of hydroelectric development combined with the current energy market, in
which low energy prices often do not make hydroelectric development economically
attractive.
UNCERTAINTY AS TO FUTURE OPPORTUNITIES IN INDUSTRIAL INFRASTRUCTURE
BUSINESS. The Company is pursuing opportunities to develop, acquire, operate and
manage industrial energy facilities and related industrial assets in such
sectors as pulp and paper, petroleum refining, chemicals, textiles, and other
energy-intensive industries. Currently, all of the Company's revenue is derived
from the ownership and operation of hydroelectric facilities. The Company
believes that opportunities exist for industrial infrastructure transactions and
that it possesses the required technical and development expertise to complete
such transactions successfully. As of March 25, 1999, the Company has not
completed any such transaction, and there can be no assurance that any such
transaction will occur.
SIGNIFICANT HOLDERS. Two holders hold approximately 74% of the outstanding
voting shares of the New Common Stock. For a list of such holders, see Part III,
Item 12, "Security Ownership of Certain Beneficial Owners and Management." If
holders of significant numbers of shares of the New Common Stock were to act
together, such holders would be in a position to control the outcome of most
actions requiring stockholder approval. This concentration of ownership could
also facilitate or hinder a negotiated change of control of CHI and,
consequently, have an impact upon the value of the New Common Stock. In that
regard, all holders of New Common Stock are subject to a new stockholders'
agreement (the "New Stockholders' Agreement"), which agreement includes, among
other things, certain "drag along" and "tag along" rights.
EVENTS OCCURRING SUBSEQUENT TO DECEMBER 31, 1998
Effective March 9, 1999, Charles F. Goff, Jr. was elected Chairman and
Interim Chief Executive Officer of the Company, replacing James T. Stewart who
resigned. Mr. Goff has been a member of CHI's board of directors since 1997.
Previously, he was founder, Chairman, and Chief Executive Officer of Destec
Energy, Inc., one of the largest independent power producers in the world, with
24 projects totaling 5,136 megawatts at the time of its sale in 1997. See Part
III, Item 10, "Directors and Executive Officers of the Registrant."
ITEM 2. PROPERTIES
The information concerning properties required by Item 2 is set forth in
Part I, Item 1, of this Form 10-K.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
As described above, CHI completed a financial restructuring, effective
November 7, 1997, including confirmation of its Plan of Reorganization filed in
a chapter 11 reorganization case (no. 97-1924(SLR)) in the United States
Bankruptcy Court for the District of Delaware.
On September 2, 1997, a then-shareholder of CHI filed a civil action
against CHI, certain of its current and former officers and directors and Morgan
Stanley Dean Witter & Co. in Connecticut Superior Court, Judicial District of
Stamford, entitled CHARLES J. LINDSAY V. CONSOLIDATED HYDRO, INC., ET AL.,
alleging, among other things, that the officers and directors of CHI breached
their fiduciary duty to the holders of CHI's Old Common Stock by proposing a
Plan of Reorganization that eliminated CHI's Old Common Stock. On December 18,
1997, the Company and each of the other defendants filed a motion to strike the
complaint and dismiss the action on the grounds that, among other things, the
allegations raised in the complaint were barred as a matter of law. On March 16,
1998, prior to the scheduled hearing on the Company's and the other defendants'
motion to strike the complaint, and dismiss the action, the plaintiff agreed to
withdraw the complaint without prejudice to his right to amend and to replead
the complaint. Subsequently, the plaintiff filed a substitute complaint in which
CHI is not named as a defendant, although CHI continues to provide
indemnification for certain of the remaining defendants in the case.
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. A trial date has been set during the second quarter of 1999.
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.
The Company is involved in various legal proceedings which are routine
litigation matters incidental to the conduct of its business. CHI's management
currently believes that none of this litigation, if determined adversely to the
Company, would have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
year ended December 31, 1998 through the solicitation of proxies or otherwise.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 25, 1999, to the best of the Company's knowledge, the number of
holders of record of the New Class A Common Stock of CHI was 22, and the number
of holders of record of the New Class B Common Stock was one. There is no
established public trading market for the New Common Stock of the Company. No
dividends were declared on either class of CHI's New Common Stock during the
year ended December 31, 1998 or during the period from November 8, 1997 to
December 31, 1997. CHI presently intends to retain earnings to fund working
capital and for general corporate purposes. In addition, pursuant to its working
capital agreement, CHI is prohibited from paying dividends and therefore does
not anticipate paying cash dividends on shares of the New Common Stock in the
foreseeable future.
Pursuant to the Plan of Reorganization, on the Effective Date, 20,000,000
shares of New Common Stock were authorized as follows: 9,085,290 shares of New
Class A Common Stock and 914,710 shares of New Class B Common Stock which were
issued on the Effective Date and 10,000,000 additional shares of New Common
Stock which may be issued as either New Class A Common Stock or New Class B
Common Stock, as applicable. Of the 10,000,000 shares of New Common Stock which
were authorized on the Effective Date but not issued, 1,337,127 shares are
reserved for issuance if, as and when the holders of the New Warrants exercise
such warrants and 810,811 shares of New Class A Common Stock are reserved for
issuance, if as and when, the holders of the Management Options exercise such
options. In addition, 10,000,000 shares of preferred stock were authorized, none
of which were issued.
The following is a description of the two classes of New Common Stock, the
two classes of New Warrants and the Management Options issued on the Effective
Date, as well as a summary of the principal provisions of the registration
rights agreement (the "Registration Rights Agreement") and the New Stockholders'
Agreement which became effective on the Effective Date:
NEW CLASS A COMMON STOCK. Pursuant to the Plan of Reorganization, on the
Effective Date, 9,085,290 shares of New Class A Common Stock were issued and
distributed to substantially all of the holders of Senior Discount Notes and
810,811 shares of New Class A Common Stock were reserved to satisfy the
obligation of CHI under the Management Options. For a discussion of the
Management Options, see Part I, Item 1, "--Financial Restructuring of CHI;
Change of Fiscal Year" and Part III, Item 11, "Executive Compensation". Each
share of New Class A Common Stock will entitle its holder to one vote. Holders
of New Class A Common Stock will have the right to participate proportionately
in dividends, if any, distributed by the Company.
NEW CLASS B COMMON STOCK. Pursuant to the Plan of Reorganization, on the
Effective Date, 914,710 shares of New Class B Common Stock were issued and
distributed to a holder of Senior Discount Notes. Each share of New Class B
Common Stock will entitle its holder to one-hundredth (1/100) of one vote. The
holder of New Class B Common Stock will have the right to participate
proportionately in dividends, if any, distributed by the Company. The New Class
B Common Stock was issued to a holder of Senior Discount Notes, at such holder's
request, to provide to such holder reduced voting rights in CHI. Pursuant to the
Restated Certificate of Incorporation of CHI, upon any transfer of shares of New
Class B Common Stock, the shares of New Class B Common Stock will automatically
convert into an equal number of shares of New Class A Common Stock.
NEW SERIES B WARRANTS. The New Series B Warrants, which were issued to the
holders of the Old Preferred Stock on the Effective Date and expire on the sixth
anniversary thereof, entitle such holders to subscribe for the purchase of up to
an aggregate of 7.5% of the New Common Stock, subject to dilution due to the
issuance by the Company of shares of New Common Stock pursuant to the exercise
of the New Series C Warrants and the Management Options by the holders thereof.
The New Series B Warrants are exercisable for up to 1% of the New Common Stock
of CHI if, as and when the total capital (debt and equity) invested in
industrial infrastructure projects (as described in Part I, Item 1, "Business --
Industrial Infrastructure Business") that either (i) close within 3 years from
the Effective Date or (ii) are subject to a legally binding and enforceable
agreement between CHI or any of its subsidiaries and a party sponsoring a
development or acquisition of such industrial infrastructure projects within
such 3 year-period AND thereafter close within the term of the New Series B
Warrants, equals or exceeds $60 million. The additional New Series B Warrants
exercisable for the remaining 6.5% of the New Common Stock vest incrementally
if, as and when the total capital invested in industrial infrastructure projects
increases from $60 million to $450 million within the parameters set forth
above. The exercise price per share of the New Common Stock subject to the New
Series B Warrants is $10. The New Series B Warrants will have customary
antidilution provisions and protections against certain extraordinary
distributions.
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<PAGE>
NEW SERIES C WARRANTS. The New Series C Warrants, which were issued to the
holders of the Old Preferred Stock on the Effective Date and expire on the
eighth anniversary thereof, entitle such holders to subscribe for the purchase
of up to an aggregate of 5.0% of the New Common Stock, subject to dilution due
to the issuance by CHI of shares of New Common Stock pursuant to the exercise of
the New Series B Warrants or the Management Options by the holders thereof. The
exercise price per share of the New Common Stock subject to the New Series C
Warrants was determined by reference to the accreted value of the Senior
Discount Notes as of September 15, 1997 (the date CHI commenced its Chapter 11
Case), which was approximately $183 million. The exercise price per share of the
New Common Stock subject to the New Series C Warrants is $18.36. The New Series
C Warrants will contain customary antidilution provisions and protections
against certain extraordinary distributions.
MANAGEMENT OPTIONS. The Management Options, which were issued to certain
members of CHI's management on the Effective Date pursuant to a 1997 stock
option plan and management option agreements (the "1997 Stock Option Plan and
Management Option Agreements") and expire on the seventh anniversary thereof,
are exercisable for the purchase of up to an aggregate of 7.5% of the New Class
A Common Stock, subject to dilution due to the issuance by CHI of shares of New
Common Stock pursuant to the exercise of the New Series B Warrants or the New
Series C Warrants by the holders thereof. The Management Options contain
customary antidilution provisions and protections against certain extraordinary
distributions.
REGISTRATION RIGHTS AGREEMENT. Each person or entity who received a
distribution of New Common Stock, New Warrants or New Common Stock issued upon
the exercise of the New Warrants or the Management Options pursuant to the Plan
of Reorganization is entitled to become a party to the Registration Rights
Agreement. Under the Registration Rights Agreement, holders of the New Common
Stock and New Warrants (including shares of New Common Stock issued upon the
exercise thereof) are entitled to certain demand and incidental (or "piggyback")
registration rights, and holders of the Management Options are entitled to
certain incidental (or "piggyback") registration rights with respect to shares
of New Class A Common Stock issued upon the exercise thereof. The Registration
Rights Agreement contains customary suspension, "hold back", indemnification
/contribution and priority provisions.
NEW STOCKHOLDERS' AGREEMENT. Under the terms of the Plan of Reorganization,
each holder (including each original recipient and transferee of an original
recipient or other transferee) of the New Common Stock and of the New Common
Stock issued upon exercise of the New Warrants or the Management Options
(collectively, the "New Securities") is bound by the New Stockholders'
Agreement. The New Stockholders' Agreement contains certain provisions relating
to the size and composition of the Board of Directors of CHI. In addition, the
New Stockholders' Agreement provides that each holder of New Common Stock is
entitled to participate on a pro-rata basis in any sale of 50% or more of the
outstanding New Common Stock and that each holder of New Securities (including,
in certain circumstances, holders of New Warrants and Management Options) may be
required to sell its New Securities in any sale of 66-2/3% or more of the New
Common Stock.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
As discussed in Part I Item 1, the Company emerged from its chapter 11
proceedings on the Effective Date. In accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting By
Entities In Reorganization Under The Bankruptcy Code", the Company applied fresh
start reporting as of the Effective Date which resulted in significant changes
to the valuation of certain Company assets and liabilities, and to its
stockholders' equity. In connection with the adoption of fresh start reporting,
a new entity was deemed created for financial reporting purposes. The periods
prior to and including the Effective Date have been designated "Predecessor
Company" and the period subsequent to the Effective Date has been designated
"Reorganized Company".
The following Statement of Operations and Balance Sheet Data has been
derived from financial statements audited by PricewaterhouseCoopers LLP,
independent accountants. The data set forth below should be read in conjunction
with the Consolidated Financial Statements for the year ended December 31, 1998,
the November 8, 1997 - December 31, 1997 period, the July 1, 1997 - November 7,
1997 period and the fiscal years ended June 30, 1997, 1996, 1995 and 1994 and
the related Notes thereto, and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations":
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------- ---------------------------------------------------------
Year Nov. 8 - July 1 - Fiscal Year Ended June 30,
Ended Dec. 31, Nov. 7, ----------------------------------------------
Dec. 31, 1998 1997 1997 1997 1996 1995 1994
------------- ---- ---- ---- ---- ---- ----
(Dollars in Thousands,
Except Per Share Amounts) (Dollars in Thousands)
------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Operating Revenues:
Power generation revenue $43,868 $ 6,598 $ 8,661 $ 50,665 $ 49,761 $ 39,387 $ 36,184
Management fees
and operation & maintenance revenue 7,059 1,437 2,713 5,395 4,986 4,326 5,677
Equity income in partnership
interests and other partnership income 3,285 203 212 1,320 737 245 335
------- ------- -------- -------- -------- --------- ---------
Total revenue 54,212 8,238 11,586 57,380 55,484 43,958 42,196
------- ------- -------- -------- -------- --------- ---------
Costs and expenses
Operating 18,337 2,566 6,588 18,015 17,957 15,895 16,466
General and administrative 9,754 1,199 2,217 8,575 6,578 6,899 7,394
Charge for employee and director equity
participation programs (1) -- -- -- 100 259 339 670
Reorganization costs(2) -- -- 3,978 -- -- -- --
Fair value adjustments(2) -- -- 4,855 -- -- -- --
Depreciation and amortization 7,334 1,105 3,009 8,661 9,846 9,625 8,679
Lease expense 5,896 900 2,001 5,764 6,072 5,753 5,386
(Adjustment to)/charge for impairment of
long-lived assets -- -- (75) 83 87,202 1,272 --
------- ------- -------- -------- -------- --------- ---------
Total costs and expenses 41,321 5,770 22,573 41,198 127,914 39,783 38,595
------- ------- -------- -------- -------- --------- ---------
Income/(loss) from operations 12,891 2,468 (10,987) 16,182 (72,430) 4,175 3,601
Interest income 1,488 242 739 1,661 1,032 1,416 1,052
Other income 459 6 57 434 368 185 107
Gain on adjustment to project development
debt -- -- 8,568 -- -- -- --
Interest expense (8,048) (1,260) (7,741) (29,591) (26,876) (21,778) (18,980)
Minority interests in loss/(income) of
consolidated subsidiaries -- -- -- -- 2,063 3 (15)
------- ------- -------- -------- -------- --------- ---------
Income/(loss) before income taxes,
extraordinary
items and cumulative effect of
accounting change 6,790 1,456 (9,364) (11,314) (95,843) (15,999) (14,235)
(Provision)/benefit for income taxes (2,989) (751) 114 272 7,512 (277) (155)
------- ------- -------- -------- -------- --------- ---------
Income/(loss) before extraordinary items and
cumulative effect of accounting change 3,801 705 (9,250) (11,042) (88,331) (16,276) (14,390)
Extraordinary items (3)
Gain on extinguishment of debt (net of
income tax of $0 and $3,414 as of
November 7, 1997 and June 30, 1997,
respectively) -- -- 87,218 5,658 -- -- --
------- ------- -------- -------- -------- --------- ---------
Income/(loss) before cumulative effect of
accounting change 3,801 705 77,968 (5,384) (88,331) (16,276) (14,390)
Cumulative effect of accounting change (4) -- -- -- -- -- -- (19,204)
------- ------- -------- -------- -------- --------- ---------
Net income/(loss) $ 3,801 $ 705 $ 77,968 $ (5,384) $(88,331) $ (16,276) $ (33,594)
======= ======= ======== ======== ======== ========= =========
Net income per common share,
basic(5) $ .38 $ .07 -- -- -- -- --
Cash dividends per common share -- -- -- -- -- -- --
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------- ---------------------------------------------------------
Year Nov. 8 - July 1 - Fiscal Year Ended June 30,
Ended Dec. 31, Nov. 7, ----------------------------------------------
Dec. 31, 1998 1997 1997 1997 1996 1995 1994
------------- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Megawatts operated 272.42 335.50 335.50 342.61 343.66 379.08 329.08
Capital expenditures
Cost of acquisitions and partnership interests $ -- $ -- $ -- $ -- $ -- $ 35,503 $ 15,230
Cost of development expenditures -- -- -- 2,045 1,968 6,086(6) 8,319(6)
All other capital expenditures associated with
operating projects, including changes in other
long-term assets, net 2,691 375 2,430 9,226 3,460 2,288 (332)
Interest, net (7) 6,560 1,018 7,002 27,930 25,844 20,362 17,928
Cash interest, net (8) 5,969 1,190 2,876 6,962 7,725 4,702 4,009
Ratios and Other Data:
EBDIAT (9) 20,684 3,604 (3,096) 25,613 25,376 15,696 13,166
EBDIAT/Interest, net (10) 3.15 3.54 10,098 2,317 468 4,666 4,762
EBDIAT/Cash interest, net (10) 3.47 3.80 5,233 3.68 3.28 3.34 3.28
Ratio of earnings to fixed charges (12) 1.73 2.18 -- -- -- -- --
Deficiency of earnings to fixed charges(11)(12) -- -- 9,387 11,350 97,417 18,850 16,429
Ratio of earnings to fixed charges
and Preferred Stock Dividends (13) 1.73 2.18 -- -- -- -- --
Deficiency of earnings to fixed charges
and Preferred Stock Dividends (11)(13) -- -- 15,447 37,241 121,149 40,958 37,117
</TABLE>
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------- ----------------------------------------
June 30,
Dec. 31, Dec. 31, ----------------------------------------
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents 21,778 11,998 32,502 23,834 16,682 14,155
Current assets 28,535 21,361 41,003 33,041 25,454 24,649
Total assets 219,584 221,961 243,628 244,657 330,617 286,827
Current liabilities 16,143 13,345 13,924 16,061 13,602 9,990
Long-term debt 74,486 82,616 262,615 260,158 248,887 201,620
Mandatorily redeemable preferred stock -- -- 114,372 98,604 84,690 72,401
Stockholders' equity/(deficit) 89,606 85,805 (189,679) (168,627) (66,641) (38,414)
</TABLE>
- ----------
(1) This non-cash charge accounts for the equity entitlements granted to
certain key employees and certain directors pursuant to both the
arrangements surrounding the conversion of the old class B common stock to
old class A common stock and the vested entitlements under employment
equity programs which have been canceled.
(2) These amounts were the result of the implementation of fresh start
reporting. See Note 2 of the Notes to Consolidated Financial Statements.
(3) For the period from July 1, 1997 to November 7, 1997, as a result of the
Plan of Reorganization, a gain on extinguishment of debt of approximately
$87,218 was recorded. The fiscal year ended June 30, 1997 amount results
from the purchase of a non-recourse project term loan, $14,500 at June 30,
1996, for $5,000, including certain required reserves and closing costs of
approximately $500. The gain recorded is net of certain transaction costs
of approximately $187 and income tax of $3,414.
(4) Represents the adoption of Statement of Financial Accounting Standards No.
109, "ACCOUNTING FOR INCOME TAXES". See Note 3 of the Notes to Consolidated
Financial Statements.
(5) Share and per share data for the Predecessor Company 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.
(6) These amounts were substantially funded with proceeds from outside lenders
on a non-recourse basis or sales of CHI equity securities.
(7) Interest, net is defined as interest expense less interest income.
(8) Cash interest, net is defined as cash interest expense less cash interest
income.
(9) EBDIAT is defined as income/(loss) from operations plus depreciation,
amortization, other non-cash charges to income and other income. EBDIAT and
EBDIAT ratios are not measures of performance or financial condition under
generally accepted accounting principles, but are presented to provide
21
<PAGE>
additional information related to fixed charge service capability. EBDIAT
should not be considered in isolation or as a substitute for other measures
of financial performance or liquidity under generally accepted accounting
principles.
(10) Computations resulting in a ratio of less than one are disclosed as a
deficiency and represent the dollar amount of EBDIAT required to attain a
ratio of one-to-one.
(11) Computations resulting in a ratio of less than one are disclosed as a
deficiency and represent the dollar amount of earnings required to attain a
ratio of one-to-one.
(12) For the purpose of calculating the ratio of earnings to fixed charges,
earnings are determined by adding fixed charges (excluding capitalized
interest) to income/(loss) before provision for income taxes, extraordinary
items and cumulative effect of accounting change. Fixed charges consist of
interest expense, amortization of debt issuance costs and the imputed
interest on the Company's Boott facility lease, which is accounted for as
an operating lease. The resulting deficiencies primarily reflect non-cash
charges. An analysis of such non-cash charges and the resulting ratio or
deficiency adjusted for such charges follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------- ----------------------------------------------------
Year Nov. 8 - July 1 - Fiscal Year Ended June 30,
Ended Dec. 31, Nov. 7, -----------------------------------------
Dec. 31, 1998 1997 1997 1997 1996 1995 1994
------------- ---- ---- ---- ---- ---- ----
(Dollars in Thousands) (Dollars in Thousands)
------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-cash interest $ 591 $ 70 $ 4,865 $ 19,709 $ 18,629 $16,610 $14,629
Depreciation and amortization 7,334 1,105 3,009 8,661 9,846 9,625 8,679
Other non-cash (gains)/charges, net -- -- (75) (5,475) 87,461 1,611 670
------ ------ ------- -------- -------- ------- -------
Total non-cash charges $7,925 $1,175 $ 7,799 $ 22,895 $115,936 $27,846 $23,978
====== ====== ======= ======== ======== ======= =======
Resulting ratio of earnings
to fixed charges 2.58 3.11 1.38 1.36 1.61 1.34 1.32
</TABLE>
(13) For the purpose of calculating the ratio of earnings to fixed charges and
preferred stock dividends, earnings are determined by adding fixed charges
(excluding capitalized interest) and preferred stock dividends to
income/(loss) before provision for income taxes, extraordinary items and
cumulative effect of accounting change. Preferred stock dividends consist
of the cumulative undeclared dividends on Series F and Series G Preferred
Stock and dividends and accretion on the Series H Preferred Stock. The
resulting deficiencies primarily reflect non-cash charges. The analysis of
such non-cash charges is the same as that set forth in the preceding
footnote and the resulting ratio or deficiency adjusted for such charges
follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
------------------- ----------------------------------------------------
Year Nov. 8 - July 1 - Fiscal Year Ended June 30,
Ended Dec. 31, Nov. 7, -----------------------------------------
Dec. 31, 1998 1997 1997 1997 1996 1995 1994
------------- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Resulting ratio of earnings
to fixed charges and
preferred stock dividends 2.58 3.11 -- -- -- -- --
Resulting deficiency of earnings
to fixed charges and
preferred stock dividends -- -- $2,793 $14,346 $5,213 $13,112 $13,139
</TABLE>
22
<PAGE>
ITEM 7. 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, 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.
As of November 7, 1997, (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," ("SOP 90-7") which resulted in the creation of a new
reporting entity. The accompanying financial information for the year ended
December 31, 1998 and the period from November 8, 1997 to December 31, 1997
reflects the financial condition and results of operations of the new reporting
entity (the "Reorganized Company") while prior period financial information
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 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 December 31, 1998,
the Company had a 100% ownership or long-term lease interest in 50 projects (138
megawatts), a partial ownership interest in 11 projects (99 megawatts), and
operations and maintenance ("O&M") contracts with 20 projects (35 megawatts).
On December 23, 1996, the Company sold 15 of its then 100% owned
hydroelectric facilities ("CHI Maine"), located in the Northeast region. In
connection with the disposition, the Company executed a contract to operate and
maintain the facilities for an initial period of up to 15 years. See Note 5 to
the Notes to Consolidated Financial Statements included herewith.
On September 9, 1997, the Company terminated a power purchase agreement
with the purchasing utility relating to three of its projects located in Oregon.
See Note 6 to the Notes to Consolidated Financial Statements included herewith.
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 Company seeks opportunities to provide energy-related products and
services to industrial and utility customers so as to permit the Company to move
away from relying exclusively on hydroelectric power ownership and operation in
a business climate driven largely by legislation and regulation and the
structural industry trends described in Part I Item 1, "--Hydroelectric
Business."
For purposes of the discussion of results of operations for the six months
ended December 31, 1997, the results of the Predecessor Company and Reorganized
Company have been combined.
23
<PAGE>
POWER GENERATION REVENUE
The Company's revenues are derived principally from selling electrical
energy and capacity to utilities under long-term power purchase agreements which
require the contracting utilities to purchase energy generated by the Company.
The Company's present power purchase agreements have remaining terms 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. See Part I, Item 1, "Conventional Hydroelectric Projects" for a
discussion of the percentage of current revenues subject to minimum fixed or
scheduled rates and the percentage of current revenues subject to rates
determined pursuant to avoided cost. 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.
24
<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
Consolidated Financial Statements and the related Notes thereto, included
herein.
POWER PRODUCING FACILITIES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1998 1997 1997
---- ---- ----
MEGAWATTS #PROJECTS MEGAWATTS #PROJECTS MEGAWATTS #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(6) 9(6) 52.37 8 52.37 8
O&M Contracts (3) 12.02(7) 16(7) 92.16 19 92.16 19
------ --- ------ --- ------ ---
Total 173.67 54 235.41 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(4) 3(4) 5.48 4
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 28.76 9
====== === ====== === ====== ===
Northwest:
100% Ownership (1) 14.61(8) 5(8) 14.71(5) 6(5) 21.72 9
Partial Ownership (2) 24.00(9) 1(9) 24.96 2 24.96 2
O&M Contracts (3) 4.34 1 4.34 1 4.34 1
------ --- ------ --- ------ ---
Total 42.95 7 44.01 9 51.02 12
====== === ====== === ====== ===
Total:
100% Ownership (1) 138.29 50 138.39 51 145.50 55
Partial Ownership (2) 98.97 11 81.53 11 81.53 11
O&M Contracts (3) 35.16 20 115.58 24 115.58 24
------ --- ------ --- ------ ---
Total 272.42 81 335.50 86 342.61 90
====== === ====== === ====== ===
</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 (0.10 megawatts) on July 17, 1997.
(5) Reflects the decommissioning of three projects (7.01 megawatts) on
September 9, 1997.
(6) Reflects the addition of one project (18.40 megawatts) on November 11,
1998.
(7) Reflects the loss of three O&M contracts (80.14 megawatts) on October 31,
1998.
(8) Reflects the sale of one project (0.10 megawatts) on December 31, 1998.
(9) Reflects the dissolution of one project (0.96 megawatts) on June 18, 1998.
25
<PAGE>
SELECTED OPERATING INFORMATION(1)
<TABLE>
<CAPTION>
TWELVE SIX MONTHS TWELVE
MONTHS ENDED ENDED TWELVE MONTHS MONTHS ENDED
DEC. 31, DEC. 31, ENDED JUNE 30,
1998 1997(3) JUNE 30, 1997 1996
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Power generation revenues (thousands) $ 43,868 $ 15,259 $ 50,665 $ 49,761
Kilowatt hours produced (thousands) 585,112 209,453 663,920 647,664
Average rate per kilowatt hour 7.5(cent) 7.3(cent) 7.6(cent) 7.7(cent)(2)
</TABLE>
- ----------
(1) Limited to projects included in consolidated revenues.
(2) Excluding results of the CHI Maine projects, the average rate per kilowatt
hour was 7.6(cent)for the twelve months ended June 30, 1996.
(3) Comprised of results of the Predecessor Company from July 1, 1997 through
November 7, 1997 and the Reorganized Company from November 8, 1997 through
December 31, 1997.
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
action 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 October 1998 the Company experienced an
estimated loss of $0.3 million per year in revenue resulting from the
discontinuation of three O&M contracts for 80.14 MW of capacity. However, an
estimated gain of $1.0 million in annual revenue resulted from the November
1998 addition of an 18.40 MW hydroelectric project to its portfolio. 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)
<TABLE>
<CAPTION>
SIX MONTHS
TWELVE MONTHS ENDED TWELVE MONTHS TWELVE MONTHS
ENDED DEC. 31, ENDED ENDED
DEC. 31, 1998 1997(2) JUNE 30, 1997 JUNE 30, 1996
-------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Northeast Average Below Average Above Average Above Average
Southeast Below Average Below Average Average Average
West Above Average Below Average Below Average Above Average
Northwest Above Average Above Average Above Average Above Average
</TABLE>
- ----------
(1) These determinations were made based upon water flow in areas where the
Company's projects are located and may not be applicable to the entire
region.
(2) Determination based on water flows of the Predecessor Company from July 1,
1997 through November 7, 1997 and the Reorganized Company from November 8,
1997 through December 31, 1997.
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 present 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.
26
<PAGE>
POWER GENERATION REVENUES (IN THOUSANDS)(1)
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS TWELVE MONTHS
TWELVE MONTHS ENDED ENDED ENDED
ENDED DEC. 31, JUNE 30, JUNE 30,
DEC. 31, 1998 1997(4) 1997(2)(5) 1996(2)(6)
---------------- --------------- --------------- ---------------
$ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jan. 1 - Mar. 31 14,712 33.6 -- -- 15,078 29.8 15,744(3) 31.6
Apr. 1 - Jun. 30 14,185 32.3 -- -- 13,461 26.5 16,299(3) 32.8
Jul. 1 - Sep. 30 8,259 18.8 6,422 N/A 8,855 17.5 5,363 10.8
Oct. 1 - Dec. 31 6,712 15.3 8,837 N/A 13,271 26.2 12,355 24.8
------ ----- ------ --- ------ ----- ------ -----
Total 43,868 100.0 15,259 N/A 50,665 100.0 49,761 100.0
====== ===== ====== === ====== ===== ====== =====
</TABLE>
- ----------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $840 and $604 representing claims
for lost generation recoverable from an insurance company for the twelve
months ended June 30, 1996 and 1997, respectively.
(3) Includes $1,763 and $1,744 of power generation revenues from the CHI Maine
projects, which were sold on December 23, 1996 for the three months ended
March 31, 1996 and June 30, 1996, respectively.
(4) Comprised of results of the Predecessor Company from July 1, 1997 through
November 7, 1997 and the Reorganized Company from November 8, 1997 through
December 31, 1997.
(5) Comprised of the period from July 1 - December 31, 1996 and January 1 -
June 30, 1997.
(6) Comprised of the period from July 1 - December 31, 1995 and January 1 -
June 30, 1996.
KILOWATT HOURS ("KWH") PRODUCED (IN THOUSANDS)(1)
<TABLE>
<CAPTION>
SIX MONTHS TWELVE MONTHS TWELVE MONTHS
TWELVE MONTHS ENDED ENDED ENDED
ENDED DEC. 31, JUNE 30, JUNE 30,
DEC. 31, 1998 1997(4) 1997(2)(5) 1996(2)(6)
---------------- ---------------- ---------------- ----------------
KWH % KWH % KWH % KWH %
--- - --- - --- - --- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jan. 1 - Mar. 31 192,355 32.9 -- -- 193,576 29.2 195,540(3) 30.2
Apr. 1 - Jun. 30 191,969 32.8 -- -- 178,824 26.9 211,440(3) 32.7
Jul. 1 - Sep. 30 108,649 18.6 95,852 N/A 125,197 18.9 80,596 12.4
Oct. 1 - Dec. 31 92,139 15.7 113,601 N/A 166,323 25.0 160,088 24.7
------- ----- ------- --- ------- ----- ------- -----
Total 585,112 100.0 209,453 N/A 663,920 100.0 647,664 100.0
======= ===== ======= === ======= ===== ======= =====
</TABLE>
- ----------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 15,335 and 9,412 kWh of the business
interruption revenue recoverable as a result of insurance claims for the
twelve months ended June 30, 1996 and 1997, respectively.
(3) Includes production of 19,310 and 19,106 kWh from the CHI Maine projects,
which were sold on December 23, 1996, for the three months ended March 31,
1996 and June 30, 1996, respectively.
(4) Comprised of kilowatt hours produced from July 1, 1997 through November 7,
1997 for the Predecessor Company and from November 8, 1997 through December
31, 1997 for the Reorganized Company
(5) Comprised of the period from July 1 - December 31, 1996 and January 1 -
June 30, 1997.
(6) Comprised of the period from July 1 - December 31, 1995 and January 1 -
June 30, 1996.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
OPERATING REVENUES
POWER GENERATION REVENUE. The Company's power generation revenue decreased
by $6.8 million (13.4%) from $50.7 million to $43.9 million for the fiscal year
ended June 30, 1997 and the year ended December 31, 1998, respectively.
Excluding the effects of the sale of CHI Maine on December 23, 1996, power
generation revenue decreased by $4.9 million (10.0%), from $48.8 million to
$43.9 million for the fiscal year ended June 30, 1997 and the year ended
December 31, 1998, respectively.
The Northeast region experienced decreased revenues of $3.4 million
primarily as a result of above average water flows throughout the region during
the fiscal year ended June 30, 1997 as compared to average water flows during
the year ended December 31, 1998, coupled with lost generation at four of its
New York sites for six months as a result of a severe ice storm which crippled
the Northeastern United States and Southern Quebec during January 1998.
27
<PAGE>
The Southeast region experienced decreased revenues of $1.4 million
primarily as a result of average water flows throughout the region during the
fiscal year ended June 30, 1997 as compared to below average water flows during
the year ended December 31, 1998 and the expiration and renegotiation, at
reduced rates, of some of the power purchase agreements.
The West and Northwest regions (combined) experienced a minimal decrease of
$0.1 million.
The average rate earned by the Company decreased by 0.1(cent) (1.3%) from
7.6(cent) to 7.5(cent) in the fiscal year ended June 30, 1997 versus the year
ended December 31, 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 $1.7 million (31.5%) from $5.4
million to $7.1 million for the fiscal year ended June 30, 1997 and the year
ended December 31, 1998, respectively. Excluding the addition of the CHI Maine
O&M contract on December 23, 1996, management fees and operations & maintenance
revenues increased by $0.5 million (10.2%) from $4.9 million to $5.4 million for
the fiscal year ended June 30, 1997 and the year ended December 31, 1998,
respectively, primarily due to increased levels of rebillable work performed
during the year ended December 31, 1998 versus the fiscal year ended June 30,
1997.
EQUITY INCOME IN PARTNERSHIP INTERESTS AND OTHER PARTNERSHIP INCOME. Equity
income in partnership interests and other partnership income increased by $2.0
million (153.8%) from $1.3 million to $3.3 million for the fiscal year ended
June 30, 1997 and the year ended December 31, 1998, respectively, primarily due
to an increased distribution of $1.0 million 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 in connection with the
dissolution of a partnership in the West, in which the Company had general and
limited partnership interests.
COSTS AND EXPENSES
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $1.2 million (14.0%) from $8.6 million to $9.8 million for the fiscal year
ended June 30, 1997 and the year ended December 31, 1998, respectively. The
increase is primarily due to (i) a $1.7 million increase in development
expenditures associated with the industrial infrastructure business; (ii) a $1.2
million increase in salaries and benefits, including a $0.7 million severance
accrual; and (iii) a $0.7 million increase in net worth and franchise taxes due
to the Company's improved financial position; offset by a $2.4 million decrease
resulting from the accrual of reorganization expenses during the fiscal year
ended June 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.4 million (16.1%) from $8.7 million to $7.3 million for the fiscal year ended
June 30, 1997 and the year ended December 31, 1998, respectively, due to the
revaluation of the Company's assets in conjunction with the adoption of fresh
start reporting.
INTEREST EXPENSE
Interest expense decreased by $21.6 million (73.0%) from $29.6 million to
$8.0 million for the fiscal year ended June 30, 1997 and the year ended December
31, 1998, respectively. The decrease was primarily due to the cessation of
accruing interest on CHI's 12% Senior Discount Notes due 2003, Series B (the
"Senior Discount Notes") as of September 15, 1997, the date CHI commenced its
case under chapter 11 of Bankruptcy Code. See Note 1 of the Notes to
Consolidated Financial Statements.
INCOME TAXES
The Company's effective income tax rate was 44.0% on net income for the
year ended December 31, 1998. The effective rate was higher than the federal
statutory rate primarily due to deferred tax assets for which the Company did
not recognize a current tax benefit and current state tax liability. The
Company's effective income tax rate was 2.4% on loss before extraordinary items
for the fiscal year ended June 30, 1997. The effective rate on loss before
extraordinary items was lower than the federal statutory rate primarily due to
deferred tax assets for which the Company did not recognize a current tax
benefit. In addition, for the fiscal year ended June 30, 1997, the effective
income tax rate of 37.6% on the extraordinary gain was higher
28
<PAGE>
than the federal statutory rate primarily due to current state tax liability.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996
OPERATING REVENUES
POWER GENERATION REVENUE. The Company's power generation revenue decreased
by $6.8 million (30.8%) from $22.1 million to $15.3 million for the six months
ended December 31, 1996 and 1997, respectively. Excluding the effects of the
sale of CHI Maine on December 23, 1996, power generation revenue decreased by
$4.9 million (24.3%) from $20.2 million to $15.3 million for the six months
ended December 31, 1996 and 1997, respectively.
The Northeast region experienced decreased revenues of $4.0 million due to
below average water flows and precipitation for the six months ended December
31, 1997 as compared to above average water flows for the six months ended
December 31, 1996.
The Southeast region experienced decreased revenues of $0.4 million due to
below average water flows and precipitation for the six months ended December
31, 1997, as compared to average water flows and precipitation for the six
months ended December 31, 1996.
The West and the Northwest regions (combined) experienced decreased
revenues of $0.5 million due to the decommissioning of three projects totaling
7.01 megawatts. See Note 6 of the Notes to Consolidated Financial Statements.
The average rate earned by the Company decreased by 0.3(cent) (3.9%) from
7.6(cent) to 7.3(cent) per kilowatt hour for the six months ended December 31,
1996 and 1997, respectively. Excluding the 1996 results of CHI Maine, revenue
per kilowatt hour decreased by 0.6(cent) (7.6%) from 7.9(cent) to 7.3(cent) for
the six months ended December 31, 1996 and 1997, respectively, primarily as a
result of variations in the production mix and contract rates among the various
projects. In addition, due to the decommissioning of three projects,
approximately 3.5 million kilowatt hours of production were sold at a rate of
0.8(cent) per kilowatt hour during the six months ended December 31, 1997, while
the average rate for these projects during the six months ended December 31,
1996 was 7.7(cent) per kilowatt hour.
MANAGEMENT FEES AND OPERATIONS & MAINTENANCE REVENUES. Management fees and
O&M contract revenue increased by $1.4 million (51.9%), from $2.7 million to
$4.1 million for the six months ended December 31, 1996 and 1997, respectively.
Excluding the addition of the CHI Maine O&M contract, management fees and O&M
contract revenue increased $0.8 million (29.6%) from $2.7 million to $3.5
million for the six months ended December 31, 1996 and 1997, respectively. The
increase was primarily due to an increase in O&M rebillable contract costs and a
generation incentive bonus.
COSTS AND EXPENSES
OPERATING EXPENSES. Operating expenses increased by $0.3 million (3.4%)
from $8.9 million to $9.2 million for the six months ended December 31, 1996 and
1997, respectively. Excluding the 1996 results of the CHI Maine projects and the
1997 addition of the CHI Maine O&M contract, operating expenses increased $0.6
million (7.4%) from $8.1 million to $8.7 million for the six months ended
December 31, 1996 and 1997, respectively. This increase was primarily due to (i)
an increase in O&M rebillable contract costs; and (ii) an increase in
non-recurring maintenance and supplies, partially offset by (i) a decrease in
travel expense; and (ii) a decrease in the provision for uncollectable accounts
receivable.
REORGANIZATION COSTS. Reorganization costs amounted to $4.0 million for the
six months ended December 31, 1997. These costs represent (i) $1.5 million of
fees and expenses for the Company's financial, legal, and other professional
advisors associated with the Company's financial restructuring and the legal
counsel representing the holders of the Company's then-existing Senior Discount
Notes and (ii) a $2.5 million non-cash write-off of loan acquisition costs
related to the Senior Discount Notes.
FAIR VALUE ADJUSTMENTS. As a result of the application of fresh start
reporting, in accordance with SOP 90-7, fair value adjustments of $4.9 million
were recorded on the Effective Date.
29
<PAGE>
GAIN ON ADJUSTMENT TO PROJECT DEVELOPMENT DEBT
During the period from July 1, 1997 to December 31, 1997, the Company wrote
off certain of its project development debt resulting in a gain of $8.6 million.
This debt was contingent upon the successful development (including the
financing thereof) of pumped storage projects, which management believes will
not be successfully developed by the Company and the exercise of options on land
and a mine which was to be used as an underground reservoir for the projects.
INTEREST EXPENSE
Interest expense decreased by $5.7 million (38.8%) from $14.7 million to
$9.0 million for the six months ended December 31, 1996 and 1997, respectively.
Excluding the 1996 results of the CHI Maine projects, interest expense decreased
by $5.6 million (38.4%) from $14.6 million to $9.0 million for the six months
ended December 31, 1996 and 1997, respectively. The decrease is primarily due to
the cessation of accruing interest on the Senior Discount Notes as of September
15, 1997. See Note 1 of the Notes to Consolidated Financial Statements.
EXTRAORDINARY GAIN
As a result of the reorganization, a gain on extinguishment of debt of
$87.2 million was recorded on the Effective Date.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
OPERATING REVENUES
POWER GENERATION REVENUE. The Company's power generation revenue increased
by $0.9 million (1.8%), from $49.8 million to $50.7 million for the fiscal years
ended June 30, 1996 and 1997, respectively. Excluding the effects of the sale of
CHI Maine on December 23, 1996, power generation revenue increased by $4.4
million (9.5%), from $46.3 million to $50.7 million for the fiscal years ended
June 30, 1996 and 1997, respectively.
The Northeast region experienced increased revenues of $3.9 million due to
well above average water flows and precipitation for the fiscal year ended June
30, 1997 as compared to slightly above average water flows and precipitation for
the fiscal year ended June 30, 1996.
The Southeast region experienced a minimal increase of $0.1 million.
The West and Northwest regions (combined) experienced increased revenues of
$0.4 million primarily as a result of well above average water flows and
precipitation in the Northwest region for the fiscal year ended June 30, 1997,
as compared to slightly above average water flows and precipitation in the
Northwest region for the fiscal year ended June 30, 1996, coupled with the
addition of three newly-consolidated projects in the West region on January 1,
1997.
The average rate earned by the Company decreased by 0.1(cent) (1.3%) from
7.7(cent) to 7.6(cent) per kilowatt hour in the fiscal year ended June 30, 1996
versus the fiscal year ended June 30, 1997, respectively, primarily as a result
of variations in the production mix and contract rates among the various
projects. Excluding the fiscal year ended June 30, 1996 results of CHI Maine,
revenue per kilowatt hour remained constant at 7.6(cent) in the fiscal years
ended June 30, 1996 and 1997, respectively.
MANAGEMENT FEES AND OPERATIONS & MAINTENANCE REVENUES. Management fees and
O&M contract revenue increased by $0.4 million (8.0%) from $5.0 million to $5.4
million for the fiscal years ended June 30, 1996 and 1997, respectively.
Excluding the addition of the CHI Maine O&M contract, management fees and O&M
contract revenue remained relatively constant, decreasing by $0.1 million (2.0%)
from $5.0 million to $4.9 million for the fiscal years ended June 30, 1996 and
1997, respectively.
EQUITY INCOME IN PARTNERSHIP INTERESTS AND OTHER PARTNERSHIP INCOME. Equity
income in partnership interests and other partnership income increased $0.6
million (85.7%) from $0.7 million to $1.3 million for the fiscal years ended
June 30, 1996 and 1997, respectively. The increase is primarily due to increased
revenues earned by partnership interests in the Northeast region as a result of
above average water flows and precipitation for the fiscal year ended June 30,
1997 as compared to the fiscal year ended June 30, 1996.
30
<PAGE>
COSTS AND EXPENSES
OPERATING EXPENSES. Operating expenses increased by $0.1 million (0.6%)
from $17.9 million to $18.0 million for the fiscal years ended June 30, 1996 and
1997, respectively. Excluding the effects of the sale of the CHI Maine projects
and the addition of the CHI Maine O&M contract, operating expenses increased by
$0.4 million (2.3%), from $17.2 million to $17.6 million for the fiscal years
ended June 30, 1996 and 1997, respectively. The increase was primarily due to
(i) an increase in revenue related expenses resulting from increased power
generation; (ii) an increase in insurance premiums; (iii) an increase in the
provision for uncollectable accounts receivable and (iv) smaller increases in
other operating costs, partially offset by: (i) a decrease in salaries and
benefits resulting from a decrease in operating employees in the West region,
coupled with an increase in the allocation of company-wide operating labor
charged to capitalized projects; (ii) a decrease in expenses related to
insurance deductibles during the current fiscal year and (iii) a decrease in
non-recurring environmental and regulatory expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $2.0 million (30.3%) from $6.6 million to $8.6 million for the fiscal
years ended June 30, 1996 and 1997, respectively. The increase was primarily due
to: (i) costs associated with the formulation of financial restructuring options
for the Company; (ii) the effect of expensing, rather than capitalizing, certain
pumped storage business development costs for the six months ended December 31,
1996 and (iii) an increase in other business development costs, partially offset
by (i) a decrease in administrative salaries and benefits resulting from a
reduction in severance accruals made for a former officer of the Company and
(ii) a decrease in industry related membership dues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $1.1
million (11.2%) from $9.8 million to $8.7 million, for the fiscal years ended
June 30, 1996 and 1997, respectively. The decrease was primarily due to a
write-down of impaired assets in the fiscal year ended June 30, 1996 as a result
of the implementation of the Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and the cessation of depreciation expense taken on
assets to be disposed of for the fiscal year ended June 30, 1996 as compared to
the fiscal year ended June 30, 1997.
SFAS 121 - ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. Included in the impairment charge was an
amount related to certain assets to be disposed of. During the fiscal year ended
June 30, 1997, the carrying value of certain of those assets was adjusted upward
by $0.7 million to reflect the actual sale price of the assets. In addition, the
Company wrote down the carrying values of certain development costs and certain
of its conventional hydroelectric assets held for disposal resulting in a
combined impairment charge of $0.8 million. Each of the above described
adjustments has been included in charge for impairment of long-lived assets on
the Statement of Operations for the fiscal year ended June 30, 1997.
INTEREST EXPENSE
Interest expense increased by $2.7 million (10.0%), from $26.9 million to
$29.6 million for the fiscal years ended June 30, 1996 and 1997, respectively.
Excluding the fiscal year ended June 30, 1996 results of the CHI Maine projects,
interest expense increased by $2.8 million (10.4%) from $26.8 million to $29.6
million for the fiscal years ended June 30, 1996 and 1997, respectively. The
increase is primarily due to the increasing principal balance of the Company's
Senior Discount Notes which resulted in a corresponding increase in interest
expense and the effect of expensing interest on loans related to pumped storage
development for the six months ended December 31, 1996, which had previously
been capitalized during the six months ended December 31, 1995.
MINORITY INTERESTS IN LOSS OF CONSOLIDATED SUBSIDIARIES
The Company recognized a benefit of approximately $2.1 million for the
fiscal year ended June 30, 1996 resulting from the recognition of minority
shareholders' interest in the loss of certain consolidated subsidiaries related
to the write-down of pumped storage business development assets in accordance
with SFAS 121 which reduced the value of minority interests recorded by the
Company to zero.
31
<PAGE>
INCOME TAXES
The Company's effective income tax rate was 2.4% on loss before
extraordinary items for the fiscal year ended June 30, 1997. The effective rate
on loss before extraordinary items was lower than the federal statutory rate
primarily due to deferred tax assets for which the Company did not recognize a
current tax benefit. In addition, for the fiscal year ended June 30, 1997, the
effective income tax rate of 37.6% on the extraordinary gain was higher than the
federal statutory rate primarily due to current state tax liability. The
Company's effective income tax rate was 7.8% on net loss for the fiscal year
ended June 30, 1996. The effective rate was lower than the federal statutory
rate primarily due to deferred tax assets for which the Company did not
recognize a current tax benefit.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
On October 30, 1996, the Company arranged to have a financial institution
purchase a $13.8 million non-recourse project term loan (the "Old Loan")
relating to four of its existing hydroelectric projects for $5.0 million,
including certain required reserves and closing costs of $0.5 million (the "New
Loan"). An additional $2.0 million credit facility was also available under the
New Loan for up to one year to finance certain project enhancements. A
subsidiary of CHI was assigned an interest in the balance of the Old Loan on a
basis fully subordinated to the New Loan. As a result, the Company has recorded
a $5.7 million Extraordinary gain on extinguishment of debt, net of certain
transaction costs of approximately $0.2 million and income tax of $3.4 million,
on its Statement of Operations for the fiscal year ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As more fully described in the Consolidated Financial Statements and
related Notes thereto, the cash flow of the Company was comprised of the
following:
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
--------------------------------- ------------------------------------------------
(IN THOUSANDS) (IN THOUSANDS)
TWELVE MONTHS NOV. 8 - JULY 1 - TWELVE MONTHS TWELVE MONTHS
ENDED DEC. 31, NOV. 7, ENDED ENDED
DEC. 31, 1998 1997 1997 JUNE 30, 1997 JUNE 30, 1996
-------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net cash provided by/(used in)
Operating activities......... 18,176 $ 2,327 $ (1,457) $14,172 $16,750
Investing activities......... (1,737) (876) (425) 731 (5,720)
Financing activities......... (6,659) (10,718) (9,355) (6,235) (3,878)
------- -------- -------- ------- -------
Net increase/(decrease) in cash
and cash equivalents............ $ 9,780 $ (9,267) $(11,237) $ 8,668 $ 7,152
======= ======== ======== ======= =======
</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 March 25, 1999, no revolving
loans have been drawn under the facility; however, $5.7 million of letters of
credit have been issued and therefore $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.
32
<PAGE>
For the year ended December 31, 1998, the cash provided by operating
activities of $18.2 million was principally the result of the $13.4 million of
net income adjusted for non-cash items, and $4.8 million of cash generated from
a change in operating assets and liabilities, including the collection of a $1.6
million receivable related to an insurance claim offset by non-recurring
payments of $0.2 million for reorganization items. Other significant non-cash
items include $7.3 million of depreciation and amortization, a $2.5 million
provision relating to deferred tax liabilities and $0.7 million of non-cash
interest and other charges. The cash used in investing activities of $1.7
million was primarily attributable to $3.1 million of capital expenditures,
offset by $0.9 million of net cash proceeds received from the sale of assets and
a $0.4 million decrease in investments and other long-term assets. The cash used
in financing activities of $6.7 million was due to the repayment of project
debt.
Cash provided by operating activities increased by $4.0 million for the
year ended December 31, 1998 as compared to the fiscal year ended June 30, 1997.
The increase resulted from a difference in cash generated from operating assets
and liabilities of $7.1 million, offset by a decrease in net income adjusted for
non-cash items of $3.1 million. The difference in net income adjusted for
non-cash items is mainly attributed to a reduction in operating revenues of $3.2
million. Cash provided by changes in operating assets and liabilities included a
one-time cash inflow due to receipt of payment from a $1.6 million insurance
claim during the year ended December 31, 1998.
SUMMARY OF INDEBTEDNESS (IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
------------------------------------- --------------------------------------
PRINCIPAL AMOUNT OUTSTANDING AS OF PRINCIPAL AMOUNT OUTSTANDING AS OF
DEC. 31, DEC. 31, JUNE 30, JUNE 30,
1998 1997 1997 1996
---------------- ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
Company debt, excluding non-recourse
debt of subsidiaries $ -- $ -- $ 169,813 $ 151,131
Non-recourse debt of subsidiaries 80,813 87,971 100,268 115,489
Current portion of long-term debt (6,327) (5,355) (7,466) (6,462)
-------- -------- --------- ---------
Total long-term debt obligations $ 74,486 $ 82,616 $ 262,615 $ 260,158
======== ======== ========= =========
</TABLE>
In October 1993, Den norske Bank AS ("DnB"), provided the Company with a
$20.0 million unsecured working capital facility (the "DnB Facility"), which
originally had an expiration date of June 30, 1997. On December 3, 1996, the
Company amended the DnB Facility, which, among other things, waived previous
defaults by the Company, changed the final expiration date of the DnB Facility
to June 30, 1998, reduced (in steps) the total commitment under the DnB Facility
from approximately $5.9 million at June 30, 1996 to zero at June 30, 1998 and
limited the use of the DnB Facility solely to letters of credit and modified
certain financial covenants. The DnB Facility expired on June 22, 1998.
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 "New Facility") which replaced the DnB Facility. The
Company may use proceeds available under the New Facility to support its
development, acquisition and operating activities. Upon expiration of the New
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 March 25, 1999, no revolving loans have been drawn under
the New Facility and $5.7 million of letters of credit have been issued and are
outstanding.
On March 20, 1997, the Company, at a meeting with certain holders of the
Senior Discount Notes (the "Bondholders"), announced an outline for its current
business strategy and made a proposal to restructure its outstanding debt and
equity. Subsequently, the Bondholders formed a committee to discuss a possible
restructuring with the Company (the "Unofficial Bondholders' Committee"). On
June 4, 1997, CHI reached an agreement in principle with the Unofficial
Bondholders' Committee on the terms of the plan of reorganization ("Plan of
Reorganization"). On August 8, 1997, pursuant to a disclosure statement dated
August 8, 1997, CHI commenced the solicitation of votes from holders of Senior
Discount Notes and holders of the 13 1/2% Cumulative Redeemable Preferred Stock,
8% Senior Convertible Voting Preferred Stock and 9 1/2% Junior Convertible
Voting Preferred Stock (collectively the "Old Preferred Stock") for the
acceptance or rejection of the Plan of Reorganization.
33
<PAGE>
This solicitation was conducted prior to the filing by CHI of a case under
chapter 11 of the Bankruptcy Code so as to significantly shorten the pendency of
the case and to simplify its administration. The solicitation was successfully
completed on September 9, 1997, and CHI commenced the chapter 11 case on
September 15, 1997 in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). None of CHI's subsidiaries commenced a case
under the Bankruptcy Code. The Bankruptcy Court confirmed the Plan of
Reorganization on October 23, 1997 and the Company emerged from bankruptcy
effective November 7, 1997.
Under the Plan of Reorganization, CHI's Senior Discount Notes were
converted into, among other things, $15.0 million in cash and 100% of the shares
of CHI's new common stock issued on the Effective Date (the "New Common Stock"),
subject to dilution from the New Warrants and the Management Options (each as
described as follows); the holders of Old Preferred Stock exchanged such stock
for warrants to purchase up to 12.5% of the New Common Stock (the "New
Warrants"), subject to dilution from the Management Options; and CHI's old
common stock was canceled. CHI's senior management received options to purchase
up to an aggregate of 7.5% of the New Class A Common Stock (the "Management
Options"), subject to dilution from the New Warrants. In addition, certain
members of CHI's senior management team entered into new employment agreements
in connection with the restructuring.
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 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 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 70% 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 fifteen 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.
34
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
(POST-EMERGENCE)
To the Board of Directors
and Stockholders of CHI Energy, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of CHI Energy,
Inc., (formerly Consolidated Hydro, Inc. (CHI) and its subsidiaries
(collectively, the "Company") at December 31, 1998 and 1997 and the results of
their operations and their cash flows for the year ended December 31, 1998 and
the eight weeks ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Notes 1 and 2 to the consolidated financial statements, on
October 23, 1997, the United States Bankruptcy Court for the District of
Delaware confirmed CHI Energy, Inc.'s plan of reorganization (the "Plan").
Confirmation of the Plan resulted in the discharge of certain claims against CHI
that arose before September 15, 1997 and substantially alters the rights and
interests of certain debt and equity securities holders as provided for in the
Plan. The Plan became effective on November 7, 1997 and the parent company
emerged from bankruptcy. In connection with its emergence from bankruptcy, CHI
adopted fresh-start reporting as of November 8, 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 17, 1999
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
(PRE-EMERGENCE)
To the Board of Directors
and Stockholders of CHI Energy, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of CHI
Energy, Inc. (formerly Consolidated Hydro, Inc.) and its subsidiaries
(collectively, the "Company") at June 30, 1997, and the results of their
operations, stockholders' equity (deficit) and their cash flows for the eighteen
weeks ended November 7, 1997 and for each of the two years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 1 and 2 to the consolidated financial statements, on
September 15, 1997, CHI Energy, Inc., the parent company, filed a petition with
the United States Bankruptcy Court for the District of Delaware under the
provisions of Chapter 11 of the Bankruptcy Code. None of the Company's
subsidiaries were party to the case under the Bankruptcy Code. The Company's
plan of reorganization became effective on November 7, 1997 and the parent
company emerged from bankruptcy. In connection with its emergence from
bankruptcy, the company adopted fresh-start reporting as of November 8, 1997.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 27, 1998
37
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
---------------------- -----------------------------------
YEAR ENDED NOV. 8 TO JULY 1 TO FISCAL YEAR ENDED
DEC. 31 DEC. 31 NOV. 7 JUNE 30, JUNE 30,
1 9 9 8 1 9 9 7 1 9 9 7 1 9 9 7 1 9 9 6
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Power generation revenue $ 43,868 $ 6,598 $ 8,661 $ 50,665 $ 49,761
Management fees and operations & maintenance revenues 7,059 1,437 2,713 5,395 4,986
Equity income in partnership interests and other
partnership income 3,285 203 212 1,320 737
--------- --------- --------- --------- ---------
54,212 8,238 11,586 57,380 55,484
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Operating 18,337 2,566 6,588 18,015 17,957
General and administrative 9,754 1,199 2,217 8,575 6,578
Charge for employee and director equity participation programs -- -- -- 100 259
Reorganization costs -- -- 3,978 -- --
Fair value adjustments -- -- 4,855 -- --
Depreciation and amortization 7,334 1,105 3,009 8,661 9,846
Lease expense to a related party 1,274 3,549 3,532
Lease expense to unrelated parties 5,896 900 727 2,215 2,540
(Adjustment to)/charge for impairment of long-lived assets -- -- (75) 83 87,202
--------- --------- --------- --------- ---------
41,321 5,770 22,573 41,198 127,914
--------- --------- --------- --------- ---------
Income/(loss) from operations 12,891 2,468 (10,987) 16,182 (72,430)
INTEREST INCOME 1,488 242 739 1,661 1,032
OTHER INCOME 459 6 57 434 368
GAIN ON ADJUSTMENT TO PROJECT DEVELOPMENT DEBT -- -- 8,568 -- --
INTEREST EXPENSE ON INDEBTEDNESS TO RELATED PARTIES (2,752) (10,519) (9,927)
INTEREST EXPENSE ON INDEBTEDNESS TO UNRELATED PARTIES (8,048) (1,260) (4,989) (19,072) (16,949)
MINORITY INTERESTS IN LOSS OF CONSOLIDATED SUBSIDIARIES -- -- -- -- 2,063
--------- --------- --------- --------- ---------
Income/(loss) before (provision)/benefit for
income taxes and extraordinary item 6,790 1,456 (9,364) (11,314) (95,843)
--------- --------- --------- --------- ---------
(PROVISION)/BENEFIT FOR INCOME TAXES (2,989) (751) 114 272 7,512
Income/(loss) before extraordinary item 3,801 705 (9,250) (11,042) (88,331)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NET OF INCOME TAX OF
ZERO AND $3,414 AS OF NOVEMBER 7 AND JUNE 30, 1997,
RESPECTIVELY) -- -- 87,218 5,658 --
--------- --------- --------- --------- ---------
NET INCOME/(LOSS) $ 3,801 $ 705 $ 77,968 $ (5,384) $ (88,331)
========= ========= ========= ========= =========
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK:
Net income/(loss) $ 3,801 $ 705 $ 77,968 $ (5,384) $ (88,331)
Dividends declared on preferred stock -- -- (3,370) (14,911) (13,057)
Accretion of preferred stock -- -- (179) (857) (857)
Undeclared dividends on cumulative preferred stock -- -- (2,511) (10,123) (9,818)
--------- --------- --------- --------- ---------
$ 3,801 $ 705 $ 71,908 $ (31,275) $(112,063)
========= ========= ========= ========= =========
BASIC AND DILUTED NET INCOME PER COMMON SHARE (A) $ 0.38 $ 0.07
========= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES (A) 10,000,000 10,000,000
========== ==========
</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.
38
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
PREDECESSOR
REORGANIZED COMPANY COMPANY
DEC. 31, DEC. 31, JUNE 30,
1 9 9 8 1 9 9 7 1 9 9 7
--------- --------- ---------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents unrestricted $ 16,106 $ 6,869 $ 24,247
Cash and cash equivalents restricted 5,672 5,129 8,255
Accounts receivable, net of allowance for doubtful accounts of $443, $439
and $382, respectively 4,728 7,957 6,803
Prepaid expenses and other current assets 2,029 1,406 1,698
--------- --------- ---------
Total current assets 28,535 21,361 41,003
PROPERTY, PLANT AND EQUIPMENT, NET 92,331 93,692 125,954
FACILITIES UNDER DEVELOPMENT - - 100
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS, NET 11,805 17,300 -
INTANGIBLE ASSETS, NET 45,535 47,800 47,785
ASSETS TO BE DISPOSED OF - - 1,914
INVESTMENTS AND OTHER ASSETS 41,378 41,808 26,872
--------- --------- ---------
$ 219,584 $ 221,961 $ 243,628
========= ========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,816 $ 7,990 $ 6,458
Current portion of longterm debt payable to a related party - - 3,234
Current portion of longterm debt and obligations under capital leases payable
to unrelated parties 6,327 5,355 4,232
--------- --------- ---------
Total current liabilities 16,143 13,345 13,924
LONGTERM DEBT PAYABLE TO RELATED PARTIES - - 90,918
LONGTERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES PAYABLE TO UNRELATED PARTIES 74,486 82,616 171,697
DEFERRED CREDIT, STATE INCOME TAXES AND OTHER LONGTERM LIABILITIES 39,349 40,195 42,396
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED STOCK, $.01 PAR VALUE, AT REDEMPTION
VALUE OF $1,000 PER SHARE, JUNIOR IN LIQUIDATION PREFERENCE TO SERIES F
PREFERRED STOCK:
Series H, 136,950 shares authorized, issued and outstanding ($119,923
liquidation preference at June 30, 1997), canceled on November 7, 1997 - - 114,372
--------- --------- ---------
Total liabilities and mandatorily redeemable preferred stock 129,978 136,156 433,307
--------- --------- ---------
STOCKHOLDERS' EQUITY/(DEFICIT):
PREFERRED STOCK, $.01 PAR VALUE, AT REDEMPTION VALUE OF $1,000 PER SHARE:
Series F, 56,279 shares authorized issued and outstanding at June 30, 1997
($56,279 liquidation preference at June 30, 1997), canceled on Nov. 7, 1997 - - 49,356
Series G, 56,279 shares authorized issued and outstanding at June 30, 1997
($56,279 liquidation preference at June 30, 1997), canceled on Nov. 7, 1997 - - 49,356
PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, NO SHARES ISSUED - - -
COMMON STOCK, $.001 PAR VALUE
Class A common stock, $.001 par value, 9,000,000 shares authorized, 3,831,683
unissued shares reserved, 1,834,235 shares issued and 1,285,762 shares
outstanding at June 30, 1997, canceled on Nov. 7, 1997 - - 2
Class B common stock, $.001 par value, 1,000,000 shares authorized, 246,510
unissued shares reserved, no shares issued and outstanding, canceled on Nov. 7, 1997 - - -
COMMON STOCK, $.01 PAR VALUE, 20,000,000 SHARES AUTHORIZED
Class A common stock, 9,085,290 shares issued and outstanding at December 31,
1998 and 1997 91 91 -
Class B common stock, 914,710 shares issued and outstanding at December 31,
1998 and 1997 9 9 -
ADDITIONAL PAIDIN CAPITAL, INCLUDING $2,064 RELATED TO WARRANTS AT DECEMBER 31,
1998 AND 1997 AND $5,966 RELATED TO WARRANTS AT JUNE 30, 1997 85,000 85,000 13,497
RETAINED EARNINGS/(ACCUMULATED DEFICIT) 4,506 705 (280,579)
--------- --------- ---------
89,606 85,805 (168,368)
Less: Deferred compensation - - (250)
Treasury stock (common: 548,473 shares at June 30, 1997), at cost,
canceled on November 7, 1997 - - (21,061)
--------- --------- ---------
Total stockholders' equity/(deficit) 89,606 85,805 (189,679)
--------- --------- ---------
$ 219,584 $ 221,961 $ 243,628
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
39
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands except share amounts)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------ RETAINED
NUMBER NUMBER ADDITIONAL EARNINGS
OF SHARES REPORTED OF SHARES PAR PAID-IN (ACCUMULATED
OUTSTANDING AMOUNT OUTSTANDING VALUE CAPITAL DEFICIT)
----------- -------- ----------- ----- ---------- ------------
PREDECESSOR COMPANY
<S> <C> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 1995 110,000 $ 98,712 1,278,698 $ 2 $ 13,497 $ (157,182)
Annual dividend of $95.34 per share,
mandatorily redeemable Series H Preferred (13,057)
Accretion of Series H Preferred (857)
Issuance of Class A common stock, $.001 par value 7,064
Recognition of board of directors and employee
compensation expense related to the issuance
of common stock
Compensation expense related to conversion of
Performance Unit Plan to Stock Option Plan in 1993
Net loss (88,331)
-------- -------- ---------- ----- -------- ----------
BALANCE JUNE 30, 1996 110,000 98,712 1,285,762 2 13,497 (259,427)
Annual dividend of $108.88 per share,
mandatorily redeemable Series H Preferred (14,911)
Accretion of Series H Preferred (857)
Recognition of employee compensation
expense related to the issuance of
common stock
Issuance of preferred stock 2,558
Net loss (5,384)
-------- -------- ---------- ----- -------- ----------
BALANCE JUNE 30, 1997 112,558 98,712 1,285,762 2 13,497 (280,579)
Dividend of $24.63 per share, mandatorily
redeemable Series H Preferred July 1, 1997
to September 14, 1997 (3,370)
Accretion of Series H Preferred (179)
Net income 77,968
Fair value adjustments (112,558) (98,712) 8,714,238 98 71,503 206,160
-------- -------- ---------- ----- -------- ----------
REORGANIZED COMPANY
BALANCE NOVEMBER 7, 1997 -- -- 10,000,000 100 85,000 --
Net income 705
-------- -------- ---------- ----- -------- ----------
BALANCE DECEMBER 31, 1997 -- -- 10,000,000 100 85,000 705
Net income 3,801
-------- -------- ---------- ----- -------- ----------
BALANCE DECEMBER 31, 1998 -- -- 10,000,000 $ 100 $ 85,000 $ 4,506
-======= ======== ========== ===== ======== ==========
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFERRED TREASURY EQUITY
COMPENSATION STOCK (DEFICIT)
------------ -------- ------------
<S> <C> <C> <C>
PREDECESSOR COMPANY
BALANCE JUNE 30, 1995 $ (609) $ (21,061) $ (66,641)
Annual dividend of $95.34 per share,
mandatorily redeemable Series H Preferred (13,057)
Accretion of Series H Preferred (857)
Issuance of Class A common stock, $.001 par value
Recognition of board of directors and employee
compensation expense related to the issuance
of common stock 160 160
Compensation expense related to conversion of
Performance Unit Plan to Stock Option Plan in 1993 99 99
Net loss (88,331)
------ --------- ---------
BALANCE JUNE 30, 1996 (350) (21,061) (168,627)
Annual dividend of $108.88 per share,
mandatorily redeemable Series H Preferred (14,911)
Accretion of Series H Preferred (857)
Recognition of employee compensation
expense related to the issuance of
common stock 100 100
Issuance of preferred stock
Net loss (5,384)
------ --------- ---------
BALANCE JUNE 30, 1997 (250) (21,061) (189,679)
Dividend of $24.63 per share, mandatorily
redeemable Series H Preferred July 1, 1997
to September 14, 1997 (3,370)
Accretion of Series H Preferred (179)
Net income 77,968
Fair value adjustments 250 21,061 200,360
------ --------- ---------
REORGANIZED COMPANY
BALANCE NOVEMBER 7, 1997 -- -- 85,100
Net income 705
------ --------- ---------
BALANCE DECEMBER 31, 1997 -- -- 85,805
Net income 3,801
------ --------- ---------
BALANCE DECEMBER 31, 1998 -- -- $ 89,606
====== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
40
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
----------------------- ---------------------------------
YEAR ENDED NOV. 8 TO JULY 1 TO FISCAL YEAR ENDED
DEC. 31 DEC. 31 NOV. 7 JUNE 30, JUNE 30,
1 9 9 8 1 9 9 7 1 9 9 7 1 9 9 7 1 9 9 6
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) $ 3,801 $ 705 $ 77,968 $ (5,384) $(88,331)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities before
reorganization items:
Noncash interest and other charges 668 32 4,629 21,279 18,440
Reorganization costs -- -- 3,978 -- --
Fair value adjustments -- -- 4,855 -- --
Provision/(benefit) relating to deferred tax liabilities 2,485 571 (213) (1,032) (7,951)
Extraordinary gain on extinguishment of debt -- -- (87,218) (5,658) --
Gain on adjustment to project development debt -- -- (8,568) -- --
Noncash (adjustment to)/charge for impairment of
longlived assets -- -- (75) 83 87,202
Gain on disposal of assets (24) -- (17) -- --
Depreciation and amortization 7,334 1,105 3,009 8,661 9,846
Minority interests in loss of consolidated subsidiaries -- -- -- -- (2,063)
Distributed/(undistributed) earnings of affiliates 18 90 788 (696) (317)
Income from sale of partnership assets (930) -- -- -- --
Decrease/(increase) in accounts receivable 3,229 (1,643) 546 240 (1,399)
(Increase)/decrease in prepaid expenses and
other current assets (623) 415 (123) (375) (40)
Increase/(decrease) in accounts payable and accrued
expenses 2,419 1,598 (267) (2,946) 1,363
-------- -------- -------- -------- --------
Net cash provided by/(used in) operating activities
before reorganization items 18,377 2,873 (708) 14,172 16,750
-------- -------- -------- -------- --------
Operating cash flows used for reorganization items:
Professional fees (201) (546) (749) -- --
-------- -------- -------- -------- --------
Net cash used for reorganization items (201) (546) (749) -- --
-------- -------- -------- -------- --------
Net cash provided by/(used in) operating activities 18,176 2,327 (1,457) 14,172 16,750
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets 24 -- 2,006 12,002 --
Proceeds from sale of partnership assets 930 -- -- -- --
Cost of development expenditures -- -- -- (2,045) (2,381)
Capital expenditures (3,103) (230) (1,109) (4,358) (2,230)
Decrease/(increase) in investments and other longterm assets 412 (646) (1,322) (4,868) (1,109)
-------- -------- -------- -------- --------
Net cash (used in)/provided by investing activities (1,737) (876) (425) 731 (5,720)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of refinancing costs -- -- -- (310) --
Longterm borrowings from unrelated parties 4 9 149 120
Payments to a related party on longterm borrowings -- -- (2,271) (2,304) (269)
Payments to unrelated parties on longterm borrowings (6,673) (296) (2,245) (3,999) (4,018)
Increase/(decrease) in other longterm liabilities 14 (426) 152 229 289
Payment to holders of Senior Discount Notes (10,000) (5,000)
-------- -------- -------- -------- --------
Net cash used in financing activities (6,659) (10,718) (9,355) (6,235) (3,878)
-------- -------- -------- -------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 9,780 (9,267) (11,237) 8,668 7,152
CASH AND CASH EQUIVALENTS, AT BEGINNING OF THE PERIOD 11,998 21,265 32,502 23,834 16,682
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, AT END OF THE PERIOD $ 21,778 $ 11,998 $ 21,265 $ 32,502 $ 23,834
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
41
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands)
(continued)
<TABLE>
<CAPTION>
REORGANIZED COMPANY PREDECESSOR COMPANY
---------------------- -------------------------------
YEAR ENDED NOV. 8 TO JULY 1 TO FISCAL YEAR ENDED
DEC. 31 DEC. 31 NOV. 7 JUNE 30, JUNE 30,
1 9 9 8 1 9 9 7 1 9 9 7 1 9 9 7 1 9 9 6
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow information:
CASH PAID DURING THE PERIOD FOR:
Interest paid to a related party $ -- $ -- $ 819 $4,275 $2,720
======= ===== ======= ====== ======
Interest paid to unrelated parties $ 7,484 $ 290 $ 2,100 $5,047 $6,865
======= ===== ======= ====== ======
Income taxes, net $ 483 $ 112 $ 379 $ 288 $ 622
======= ===== ======= ====== ======
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>
As a result of the settlement of certain prereorganization contingencies and the
realization of net operating loss credits, during the year ended December 31,
1998, reorganization value in excess of amounts allocable to identifiable assets
decreased by $4,479. In addition, accounts payable and accrued expenses
decreased by $392, deferred credit, state income taxes and other longterm
liabilities decreased by $3,050 and longterm debt and obligations under capital
leases decreased by $1,037.
Series H mandatorily redeemable preferred stock increased $179 for the period
from July 1 to November 7, 1997, and $857 for each of the fiscal years ended
June 30, 1997 and 1996 as a result of the accretion of the difference between
the fair market value at issuance and the redemption value.
Series H mandatorily redeemable preferred stock increased $3,370, $14,911 and
$13,057 for the period from July 1 to November 7, 1997, and the fiscal years
ended June 30, 1997 and 1996, respectively, as a result of declared dividends
which increased the liquidation preference.
Longterm debt and obligations under capital leases increased by $10,189, $18,682
and $16,625 for the period from July 1 to November 7, 1997, and the fiscal years
ended June 30, 1997 and 1996, respectively, as a result of noncash interest
accrued on the Senior Discount Notes.
In accordance with the Plan of Reorganization, the Company exchanged New Common
Stock for Senior Discount Notes and New Warrants for Old Preferred Stock. See
Note 1.
The accompanying notes are an integral part of the consolidated
financial statements.
42
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
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 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. As of
December 31, 1998 and 1997 and June 30, 1997 and 1996, the Company had ownership
interests in, leased and/or operated projects with a total operating capacity of
272, 336, 343 and 344 megawatts ("MW"), respectively.
On June 4, 1997, CHI, the holders of a majority of the Company's 13 1/2%
Cumulative Redeemable Preferred Stock (the "Series H Preferred"), 8% Senior
Convertible Voting Preferred Stock (the "Series F Preferred") and 9 1/2% Junior
Convertible Voting Preferred Stock (the "Series G Preferred", and together with
the Series H Preferred and the Series F Preferred, the "Old Preferred Stock") as
well as an informal committee of institutions that owned, or represented
beneficial holders that owned, approximately 89.2% of CHI's outstanding 12%
Senior Discount Notes due 2003 (the "Senior Discount Notes") (the "Unofficial
Bondholders' Committee") reached an agreement in principle on the terms of a
restructuring to be accomplished pursuant to a plan of reorganization (the "Plan
of Reorganization") under chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). On
August 8, 1997, pursuant to a disclosure statement (the "Disclosure Statement"),
CHI commenced a prepetition solicitation of votes by the holders of Senior
Discount Notes and Old Preferred Stock to accept or reject the Plan of
Reorganization. Under the Plan of Reorganization, the holders of Senior Discount
Notes and Old Preferred Stock were the only holders of impaired claims and
impaired equity interests entitled to receive a distribution, and therefore,
pursuant to section 1126 of the Bankruptcy Code, were the only holders entitled
to vote on the Plan of Reorganization. At the conclusion of the 32-day
solicitation period, the Plan of Reorganization had been accepted by holders of
100% of the Senior Discount Notes and by holders of greater than 97% of the Old
Preferred Stock.
On September 15, 1997, CHI commenced its case under chapter 11 of the
Bankruptcy Code and filed the Plan of Reorganization and the 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").
Through the implementation of the Plan of Reorganization on and after the
Effective Date, CHI's most significant financial obligations were restructured
as follows: $202 million in face amount of outstanding Senior Discount Notes
were converted into, among other things, $15 million in cash and 100% of the
shares of CHI's new common stock, consisting of shares of new class A common
stock (the "New Class A Common Stock") and shares of new class B common stock
(the "New Class B Common Stock", and together with the New Class A Common Stock,
the "New Common Stock") subject to dilution from the New Warrants and the
Management Options (each as described below); the holders of the Old Preferred
Stock exchanged such stock for warrants to purchase up to 12.5% of the New
Common Stock, consisting of series B warrants (the "New Series B Warrants") and
series C warrants (the "New Series C Warrants", and together with the New Series
B Warrants, the "New Warrants") subject to dilution from the Management Options;
and CHI's old common stock (the "Old Common Stock") was canceled. CHI's senior
management received options to purchase up to an aggregate of 7.5% of the New
Class A Common Stock (the "Management Options"), subject to dilution from the
New Warrants. As a result of the restructuring, CHI no longer has any
significant parent company debt obligations.
43
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 2 - FRESH START REPORTING
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 "Company", or 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.
The Company adopted fresh start reporting since holders of existing voting
shares before filing and confirmation of the Plan of Reorganization received
less than 50% of the voting shares of the emerging entity and its reorganization
value was less than its post-petition liabilities and allowed claims. As a
result of the restructuring and the application of fresh start reporting as
required by SOP 90-7, a gain on extinguishment of debt of approximately $87.2
million, reorganization costs of approximately $4.0 million and fair value
adjustments of approximately $4.9 million were recorded in the Predecessor
Company Statement of Operations for the period ended November 7, 1997.
The total reorganization value assigned to the Company's net assets was
determined, by independent valuation, by calculating projected cash flows before
debt service requirements, for a fifteen year period, plus an estimated terminal
value. The discount rates used to value the Company ranged from 10% to 24%
depending on the risks associated with discrete cash flow components of the
Company. The above calculations resulted in an estimated reorganization value
attributable to equity of approximately $85.1 million of which the
reorganization value in excess of amounts allocable to identifiable assets was
approximately $17.5 million. The reorganization value in excess of amounts
allocable to identifiable assets will be amortized over fifteen years.
The effect of the Plan of Reorganization and the implementation of fresh
start reporting on the Company's consolidated balance sheet as of November 7,
1997 was as follows:
<TABLE>
<CAPTION>
Pre Fresh-Start Reorganization Fair Value Fresh Start
Balance Sheet Adjustments (1) Adjustments (2) Balance Sheet
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Current assets $ 34,342 $ (5,000) $ 29,342
Property, plant and equipment, net 125,037 (30,971) 94,066
Reorganization value in excess of
amounts allocable to identifiable
assets -- 17,453 17,453
Intangible assets, net 44,320 3,790 48,110
Other assets 27,763 13,590 41,353
-------- -------- ------- --------
Total $231,462 $ (5,000) $ 3,862 $230,324
======== ======== ======= ========
</TABLE>
44
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 2 - FRESH START REPORTING (CONTINUED)
<TABLE>
<CAPTION>
Pre Fresh-Start Reorganization Fair Value Fresh Start
Balance Sheet Adjustments (1) Adjustments (2) Balance Sheet
------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Current liabilities $ 12,392 $ 10,000 $ 301 $ 22,693
Long-term debt 82,505 (71) 82,434
Deferred income taxes 31,111 (1,053) 2,360 32,418
Liabilities subject to compromise 183,603 (183,603) --
Mandatorily redeemable preferred
stock subject to compromise 117,921 (117,921) --
Other long-term liabilities 1,552 6,127 7,679
Preferred stock 98,713 (98,713) --
Common stock 2 98 100
Additional paid-in capital 13,497 71,503 85,000
Accumulated deficit (288,523) 293,378 (4,855) --
Deferred compensation (250) 250 --
Treasury stock (21,061) 21,061 --
--------- --------- -------- --------
Total $ 231,462 $ (5,000) $ 3,862 $230,324
========= ========= ======== ========
</TABLE>
- ----------
(1) To record transactions associated with the Plan of Reorganization as
described in Note 1 and eliminate the accumulated deficit.
(2) To record adjustments to assets and liabilities to reflect their estimated
fair value, including the establishment of reorganization value in excess
of amounts allocable to identifiable assets.
CHANGE IN FISCAL YEAR-END
Effective November 7, 1997, the Company changed its fiscal year-end from
June 30 to December 31. The unaudited results of operations for the six months
ended December 31, 1996 are as follows:
<TABLE>
<S> <C>
Revenues $ 25,214
========
Income from operations $ 6,346
========
Loss before benefit for
income taxes and extraordinary item $ (7,642)
Benefit for income taxes 1,520
--------
Loss before extraordinary item (6,122)
Extraordinary gain on
extinguishment of debt
(net of tax of $3,414) 5,622
--------
Net loss $ (500)
========
</TABLE>
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.
45
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CHI Energy,
Inc., its subsidiaries, the majority of which are wholly owned, and partnership
interests. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
to conform with current year presentation.
USE OF MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE
Emerging Issues Task Force ("EITF") Issue 91-6, "Revenue Recognition of
Long-Term Power Sales Contracts" addressed and reached consensus on certain
revenue recognition questions raised by the terms and pricing arrangements of
long-term power sales contracts between non-utility power generators and
rate-regulated utilities. EITF Issue 96-17, "Revenue Recognition Under Long-Term
Power Sales Contracts That Contain Both Fixed and Variable Pricing Terms" ("EITF
96-17") addressed and reached consensus on additional revenue recognition
questions raised by such contracts. EITF 96-17 requires the recognition of
income at the lower of actual amounts billed or the average rate to be billed
over the life of the contract for contracts which have both fixed and variable
pricing terms. The Company is in compliance with the accounting treatments
discussed and the consensus reached.
Management fees and operations and maintenance revenues are earned in
conjunction with operation and maintenance services provided to third parties
under contractual agreements. Costs associated with rendering these services are
included in operating expenses.
EQUITY INCOME FROM PARTNERSHIPS AND OTHER PARTNERSHIP INCOME
As a result of fresh start reporting as described in Note 2, the Company's
investments in partnership interests were adjusted to their estimated fair value
as of the Effective Date. In accordance with generally accepted accounting
principles, these investments are accounted for under either the equity method
or the cost method of accounting. Investments accounted for under the equity
method of $16,932, $8,494 and $8,177 at December 31, 1998 and 1997 and June 30,
1997, respectively, are included as part of long-term investments.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with maturities
when purchased of three months or less to be cash equivalents. A portion of cash
is restricted by specific project-related agreements, which generally mandate
that cash must first be utilized solely for funding operations and/or the
payment of debt associated with the project. As a result, restricted cash is
generally not available for general corporate purposes.
PROPERTY, PLANT AND EQUIPMENT
As a result of fresh start reporting as described in Note 2, property,
plant, and equipment was adjusted to estimated fair value as of the Effective
Date and historical accumulated depreciation was eliminated. Plant and equipment
are depreciated on a straight-line basis over the remaining estimated useful
lives of the respective assets (originally 50 years for dam and appurtenant
structures and 30 years for mechanical and electrical equipment). Depreciation
expense was $4,127, $603, $2,026, $5,654 and $6,042 for the year ended December
31, 1998, the period from November 8, 1997 to December 31, 1997, the period from
July 1, 1997 to November 7, 1997 and the fiscal years ended June 30, 1997 and
1996, respectively.
46
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment additions are recorded at cost (Note 9).
Renewals and betterments that increase the useful lives of the assets are
capitalized. Repair and maintenance expenditures that increase the efficiency of
the assets are expensed as incurred.
ASSETS TO BE DISPOSED OF
Assets to be disposed of are stated at the lower of their carrying amount
or fair value less estimated costs to sell.
FACILITIES UNDER DEVELOPMENT
Costs associated with facilities under development, including acquisition
costs of property, plant and equipment, intangible assets and investments are
transferred to construction in progress or investments as appropriate, upon the
commencement of construction. Facilities under development are those that have
not yet commenced the construction phase primarily because all the requisite
permits and contracts have not yet been obtained and generally represent a
higher level of risk than those projects under construction. As a result of
fresh start reporting as described in Note 2, the Company wrote off its
remaining investment in pumped storage projects previously classified as
facilities under development on the balance sheet.
INTEREST CAPITALIZATION
The Company capitalizes interest costs associated with the development and
construction of its facilities in accordance with Statement of Financial
Accounting Standards No. 34 "Capitalization of Interest Cost". Interest
capitalized in the period from July 1, 1997 to November 7, 1997 and the fiscal
years ended June 30, 1997 and 1996 is disclosed in Note 12.
INTANGIBLE ASSETS
Intangible assets principally include costs incurred in connection with
power purchase agreements, Federal Energy Regulatory Commission ("FERC")
licenses and goodwill, all of which are capitalized and amortized on a
straight-line basis over the periods to be benefited by such costs, ranging from
2 to 40 years (Note 10). Legal, compliance and other related expenditures
incurred in connection with the maintenance of power purchase agreements and
FERC licenses are capitalized and amortized over the remaining term of the
applicable contract or license. As a result of fresh start reporting as
described in Note 2, intangible assets were adjusted to estimated fair value as
of the Effective Date and historical accumulated amortization was eliminated. In
addition, the Company wrote off any remaining balance of goodwill. Amortization
expense was $2,601, $412, $983, $3,007 and $3,804 in the year ended December 31,
1998, the period from November 8, 1997 to December 31, 1997, the period from
July 1, 1997 to November 7, 1997 and the fiscal years ended June 30, 1997 and
1996, respectively. Management periodically reviews intangible assets for
potential impairments.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Value") results from the application of fresh start reporting
as described in Note 2, which requires the Predecessor Company's unidentified
intangibles, net of amortization, to be reduced to zero and a new amount to be
recorded equaling the excess of the fair value of the Company over the fair
value allocated to its identifiable assets. This excess is classified as
Reorganization Value and is being amortized on a straight-line basis over a
fifteen-year period. Reorganization Value was reduced by $4,479 during the year
ended December 31, 1998 as a result of the reversal of tax valuation allowances
related to net operating loss carryforwards and the settlement of certain
pre-reorganization contingencies. Amortization was $1,017 and $152 in the year
ended December 31, 1998 and the period from November 8, 1997 to December 31,
1997, respectively.
47
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERSE CONTRACTS
As a result of fresh start reporting as described in Note 2, certain
projects with unfavorable power purchase contracts were determined to be
generating net cash outflows. This resulted in the recording of an adverse
contract liability. The Company amortizes adverse contracts over the life of the
project loan for which the applicable project assets have been pledged as
security. Amortized benefit of $411 and $62 was recorded in the year ended
December 31, 1998 and the period from November 8, 1997 to December 31, 1997,
respectively.
BUSINESS DEVELOPMENT COSTS
The Company expenses all business development related costs as incurred
until a viable purchase and sale agreement, or other material project
development document, is signed in respect of a prospective transaction. From
that date forward, all third party, project specific, business development
related costs are capitalized. No business development related costs were
capitalized during the year ended December 31, 1998.
TREASURY STOCK
The Company accounts for treasury stock under the cost method. As a result
of fresh start reporting as described in Note 2, the Company canceled its Old
Common Stock and treasury stock as of the Effective Date.
INCOME TAXES
The Company provides for deferred income taxes based on differences in
reporting certain income and expense items for federal income tax and financial
reporting purposes. The Company accounts for energy and investment tax credits
using the flow-through method as a reduction of the provision for federal income
taxes in the year in which such credits are utilized. The Company accounts for
income taxes under the liability method required by Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS 109").
NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing the net income
for the period by the weighted average number of common shares outstanding in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share" ("SFAS 128"). In the year ended December 31, 1998 and the period from
November 8, 1997 to December 31, 1997, the exercise of stock options and
warrants were excluded from diluted net income per common share under the
treasury stock method as inclusion of such was antidilutive.
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist principally of investments in short term
interest bearing instruments and because of the short-term maturity of these
items, the carrying amount approximates fair value.
48
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM INVESTMENTS
The carrying value of investments held in escrow accounts approximates fair
value based on their near-term maturity. Such investments are classified as
long-term on the Balance Sheet due to restrictions imposed under certain
contractual agreements. Investments in affiliates of the Company which are
accounted for on the cost basis have no quoted market prices. An adjustment was
made to estimate fair market value as of the Effective Date as a result of fresh
start reporting as described in Note 2. However, at December 31, 1998 and prior
to the Effective Date, a reasonable estimate of fair value could not be made
without incurring excessive costs.
LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
Market rate obligations approximate their fair value because of interest
rates which fluctuate with market rates.
The fair value of fixed rate obligations is based on discounted future cash
flows using rates currently available to the Company for non-recourse
project-finance loans with similar terms and average maturities. In connection
with fresh start reporting as described in Note 2, fixed rate obligations were
adjusted to fair value as of the Effective Date. Loans related to the Company's
pumped storage development assets have a fair value based on the prospects of
the project development and fair value of such assets.
At June 30, 1997, the fair values of the Senior Discount Notes and Series H
Preferred were based on the midpoint of a range of values prepared by a third
party in connection with the Plan of Reorganization. As of the Effective Date,
the Senior Discount Notes and Series H Preferred were converted into, among
other things, New Common Stock, Series B Warrants and Series C Warrants.
Accordingly, the Senior Discount Notes and Series H Preferred are no longer
outstanding.
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
December 31, 1998 December 31, 1997 June 30, 1997
----------------- ----------------- -------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents 21,778 21,778 11,998 11,998 32,502 32,502
Long-term investments:
Escrow deposits 9,127 9,127 9,787 9,787 8,184 8,184
Investments in affiliates 14,561 --(1) 23,016 23,016 10,501 --(1)
Long-term debt:
Market rate obligations 31,132 31,132 33,029 33,029 33,208 33,208
Fixed rate obligations 21,389 21,859 24,216 24,216 26,518 27,631
Pumped storage obligations 7,939 -- 8,588 -- 15,905 100
Senior Discount Notes -- -- -- -- 169,813 81,400
Series H Preferred -- -- -- -- 114,372 882
</TABLE>
(1) An estimate of fair value could not be made because it is not practicable.
49
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 5 - SALE OF CONSOLIDATED HYDRO MAINE, INC.
On December 23, 1996, the Company through its wholly owned subsidiary, CHI
Universal, Inc., a Delaware corporation ("CHI Universal"), sold Consolidated
Hydro Maine, Inc., a Delaware corporation ("CHI Maine"), to Ridgewood Maine
Hydro Partners, L.P., a Delaware limited partnership (the "Partnership"). CHI
Maine owned and operated 15 hydroelectric projects located in the state of Maine
with an aggregate capacity of 11.32 megawatts (the "Projects"). The sale was
made pursuant to an Agreement of Merger dated as of July 1, 1996 (the "Merger
Agreement"), by and among CHI Maine, CHI Universal, Ridgewood Maine Hydro
Corporation and the Partnership. These assets were reported at their carrying
value of $11.3 million in Assets to be disposed of on the Balance Sheet as of
June 30, 1996.
On the Closing Date (as defined in the Merger Agreement), all of the issued
and outstanding capital stock of CHI Maine was sold to the Partnership for cash.
After final adjustments, the total sale price aggregated approximately $12.9
million and the Partnership assumed a long-term lease obligation of
approximately $1.2 million related to one of the Projects. In the fiscal year
ended June 30, 1997, the carrying value was adjusted upward by $0.7 million as a
result of adjustments to the final sales price of the assets (Note 7).
The following unaudited pro forma financial information for the fiscal
years ended June 30, 1997 and 1996 has been prepared assuming the disposition of
CHI Maine occurred at the beginning of the periods presented.
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------------------------------------
Fiscal Year Ended June 30,
------------------------------------------------------------------
1997 1996
---- ----
(PRO FORMA) (AS REPORTED) (PRO FORMA) (AS REPORTED)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating Revenues $ 56,350 $ 57,380 $ 51,967 $ 55,484
======== ======== ======== ========
Net loss $ (5,742) $ (5,384) $(71,486) $(88,331)
======== ======== ======== ========
</TABLE>
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.
NOTE 6 - DECOMMISSIONING OF CONVENTIONAL HYDROELECTRIC ASSETS
On September 9, 1997, the Company through its wholly owned subsidiary,
Joseph Hydro Company, Inc., a Delaware corporation ("Joseph"), terminated the
Power Purchase Agreement ("PPA") with PacifiCorp, the purchasing utility,
relating to three of its projects located in Oregon, aggregating 7.01 MW of
capacity (the "Joseph Projects"). Joseph received a cash payment of $2,815,
pursuant to a termination agreement between Joseph and PacifiCorp, to terminate
production and delivery of power from the Joseph Projects, surrender the PPA and
remove all facilities associated with the Joseph Projects in accordance with
certain terms and conditions. After payment of certain fees, transaction and
removal costs totaling approximately $840, the Company applied the remaining,
approximately $1,975, as a pre-payment on the General Electric Capital
Corporation ("GECC") B Term Loan (the "GECC B Loan") as the assets of the Joseph
Projects secured the GECC B Loan. During the period from July 1, 1997 to
November 7, 1997, a credit adjustment to the impairment charge of $75 was
recorded (Note 7). The Company has completed the removal of all facilities of
the Joseph Projects as of December 31, 1998.
50
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 7 -- STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121 "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF" ("SFAS 121")
The Company implemented SFAS 121 in the second quarter of the fiscal year
ended June 30, 1996. This statement establishes accounting standards for
determining impairment of long-lived assets and long-lived assets to be disposed
of. The Company periodically assesses the realizability of its long-lived assets
and evaluates such assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets (or group of
assets) may not be recoverable. For assets in use or under development,
impairment is determined to exist if the estimated future cash flow associated
with the asset, undiscounted and without interest charges, is less than the
carrying amount of the asset. When the estimated future cash flow indicates that
the carrying amount of the asset will not be recovered, the asset is written
down to its fair value.
In the fiscal year ended June 30, 1996, in light of the Company's planned
sale of certain of its conventional hydroelectric projects, recent industry
trends (including the continued decline in electricity prices and other factors
stemming from the deregulation of the electric power industry), the timing of
the expiration of the fixed rate period of some of its long-term power sales
contracts and other indications of a decline in the fair value of certain of its
conventional hydroelectric projects, the Company determined pursuant to SFAS 121
that certain of these projects (including properties which were not included
among those to be sold) were impaired pursuant to the criteria established under
SFAS 121. The Company also determined that due to the factors noted above, it
was highly unlikely that the Company would successfully develop its pumped
storage projects.
In the fiscal year ended June 30, 1996, the Company recorded an impairment
charge of $87.2 million as a component of its loss from operations. In addition,
a deferred tax benefit and a benefit for minority interests in loss of
consolidated subsidiaries of $8.0 million and $2.1 million, respectively, were
recorded as of that date. Of the total charges, $38.5 million was attributable
to pumped storage development assets, resulting in an aggregate remaining
carrying value of such assets of $0.1 million, $44.9 million was attributable to
certain conventional hydroelectric assets, resulting in an aggregate remaining
carrying value for such written down assets of $26.0 million, and $3.8 million
was attributable to an other than temporary decline in the value of certain
investments in partnerships which own hydroelectric facilities, resulting in an
aggregate remaining carrying value of such assets of $0.8 million.
In the fiscal year ended June 30, 1997, the Company recorded an impairment
charge of $0.1 million as a component of income from operations. The total
charges include an upward adjustment of $0.7 million to the carrying value of
the CHI Maine assets as a result of adjustments to the final sales price of the
assets, a $0.4 million charge attributable to certain conventional hydroelectric
assets held for decommissioning resulting in a carrying value of such assets of
$1.9 million, and a $0.4 million charge attributable to the write-off of certain
development costs, resulting in a carrying value of zero.
In the period from July 1, 1997 to November 7, 1997, the Company recorded
an upward adjustment of $0.1 million to the carrying value of the Joseph
Projects as a result of adjustments to the final sales price of the assets.
In the year ended December 31, 1998 and the period from November 8, 1997 to
December 31, 1997, no additional impairment charge was recorded against income
from operations.
In conjunction with the adoption of SFAS 121, during the third quarter of
the fiscal year ended June 30, 1996, the Company re-evaluated the useful lives
of certain property, plant and equipment and intangible assets. This resulted in
a reduction of the estimated useful lives of these fixed and intangible assets.
This change had the effect of decreasing the income from operations and the net
income, net of tax provision, by approximately $0.4 million, increasing the loss
from operations and the net loss, net of tax benefit, by approximately $1.0
million and decreasing the income from operations and increasing the net loss,
net of tax benefit, by $0.5 million for the period from July 1, to November 7,
1997 and the fiscal years ended June 30, 1997 and 1996, respectively.
51
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 8 - POWER GENERATION CONTRACTS
The Company operates facilities which qualify as small power production
facilities under the Public Utility Regulatory Policies Act ("PURPA"). PURPA
requires that each electric utility company, operating at the location of a
small power production facility, as defined, purchase the electricity generated
by such facility at a specified or negotiated price.
The Company sells substantially all of its electrical output to public
utility companies pursuant to long-term power purchase agreements, of which the
remaining terms range between 3 months and 27 years. Consolidated power
generation revenues, by major customer, for the year ended December 31, 1998,
the period from November 8, 1997 to December 31, 1997, the period from July 1,
1997 to November 7, 1997 and the fiscal years ended June 30, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
-------------------------------- --------------------------------------------
Fiscal Fiscal
Year Ended Nov. 8 - July 1 - Year Ended Year Ended
Dec. 31 Dec. 31, Nov. 7, June 30, June 30,
1998 1997 1997 1997 1996
------------- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Commonwealth Electric Co. $ 9,649 $ 1,451 $1,563 $ 10,685 $ 9,528
Niagara Mohawk Power Corp. 8,797 1,554 1,181 10,285 9,139
New England Power Co. 5,460 841 963 6,184 5,133
Central Maine Power Co. 3,883 732 1,334 4,615 8,341
Idaho Power Co. 2,885 123 1,657 3,258 2,983
All other customers 13,194 1,897 1,963 15,638 14,637
------- ------- ------ -------- -------
$43,868 $ 6,598 $8,661 $ 50,665 $49,761
======= ======= ====== ======== =======
</TABLE>
During the fiscal years ended June 30, 1997 and 1996 the amount shown for
Commonwealth Electric Co. includes approximately $212 and $72, respectively, of
business interruption revenue representing lost generation recoverable from an
insurance company as a result of an insurance claim.
Increased competition in the electricity industry might cause certain
utilities to become higher credit risks. Although the ratings of the debt
securities of many of the utilities which purchase power from the Company are
currently investment grade, there can be no assurance of the long-term
creditworthiness of any of the Company's customers. Should any customer fail, it
would be difficult for the Company to replace an existing long-term contract
with a new contract with another customer on similar economic terms in the
current environment.
52
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 9 - PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment includes assets acquired or refinanced under
capitalized lease obligations of $20,353, $22,138 and $24,455 at December 31,
1998 and 1997 and June 30, 1997, respectively (Note 12).
Property, plant and equipment comprise the following at December 31, 1998
and 1997 and June 30, 1997:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
-------------------------------------------- --------------- Range of
December 31, 1998 December 31, 1997 June 30, 1997 Asset Lives
------------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C>
Land $ 3,738 $ 3,738 $ 3,738
Dam and appurtenant structures 49,414 48,651 71,101 50 years
Mechanical and electrical equipment 38,721 38,173 70,738 30 years
Buildings and other 2,346 1,819 4,777 3-12 years
Construction in progress 2,841 1,914 1,851
---------------- ---------------- --------------
97,060 94,295 152,205
Less - accumulated depreciation (4,729) (603) (26,251)
---------------- ---------------- --------------
$ 92,331 $ 93,692 $ 125,954
================ ================ ==============
</TABLE>
NOTE 10 - INTANGIBLE ASSETS
Intangible assets comprise the following at December 31, 1998 and 1997 and
June 30, 1997:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
-------------------------------------------- --------------- Range of
December 31, 1998 December 31, 1997 June 30, 1997 Asset Lives
------------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C>
Power purchase contracts $ 39,264 $ 39,264 $ 23,958 3 - 32 years
FERC licenses 6,926 6,926 16,234 4 - 40 years
Goodwill -- -- 17,740 40 years
Other intangibles 2,364 2,022 7,881 2 - 40 years
---------- ---------- ---------
48,554 48,212 65,813
Less - accumulated
amortization (3,019) (412) (18,028)
---------- ---------- ---------
$ 45,535 $ 47,800 $ 47,785
========== ========== =========
</TABLE>
The majority of the Company's projects have been issued FERC licenses
(extending through years ranging from 2001 to 2037) or have qualified for
exemption from FERC licensing.
53
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following at
December 31, 1998 and 1997 and June 30, 1997:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
December 31, December 31, June 30,
1998 1997 1997
--------- --------- ---------
<S> <C> <C> <C>
Accrued interest $ 954 $ 1,121 $ 1,226
Accounts payable 1,082 492 218
Accrued lease expense payable to a related party -- -- 1,595
Accrued lease expense 2,083 2,093 437
Accrued compensation 1,720 1,539 945
Accrued severance 715 65 198
Other accrued expenses 3,262 2,680 1,839
--------- --------- ---------
$ 9,816 $ 7,990 $ 6,458
========= ========= =========
</TABLE>
54
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 12 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and capitalized lease obligations comprise the following at
December 31, 1998 and 1997 and June 30, 1997:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------- -------
December 31, December 31, June 30,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Parent Company Debt:
Debt guaranteed or issued by the Parent Company directly -
12% Senior Discount Notes due 2003. -- -- $169,813
-------- -------- --------
-- -- 169,813
-------- -------- --------
Non-Recourse Debt of Subsidiaries secured by project assets
unless otherwise noted:
Capitalized lease obligations maturing at various dates
through 2008. $ 20,353 $ 22,138 24,455
Term loan agreement with an investor due in quarterly
payments through 2003, interest payable at the Commercial
Paper ("CP") Rate, as defined, plus a margin of 4.0%,
(8.88%, 9.65% and 9.62% at December 31, 1998 and 1997 and
June 30, 1997, respectively). 26,958 27,584 27,584
Term loan agreement with an investor due in quarterly
payments through 2013, interest at 11.59%. 2,902 3,188 5,254
Term loan agreement with a bank, principal due in quarterly
payments through 2008. Interest payable quarterly at a
fixed annual rate of 10.17% through October 29, 2003 and
thereafter through maturity, at the U.S. Treasury Note
Rate, as defined, plus a margin of 3.9%. 2,772 4,094 5,000
Note payable to an insurance company, due in monthly
payments through 2007, interest at 12.7%. 6,490 7,391 6,858
Notes payable to an insurance company, due December 31,
2008. Interest on $2,060 of principal payable monthly at
6.5%. 6,157 6,400 6,538
Term loan agreement with a bank, due in quarterly payments
through 2006, interest at the London Interbank Offered
Rate ("LIBOR"), as defined, plus a margin of 2.0% (7.06%,
7.81% and 7.78% at December 31, 1998 and 1997 and June
30, 1997, respectively). 1,006 2,096 2,211
</TABLE>
55
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 12 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
------------------- -------
December 31, December 31, June 30,
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
Unsecured notes payable to investors, interest payable
annually at various rates. -- 1,036 5,902
Term loan agreement with a bank, due in quarterly payments
through 2006, interest at LIBOR, as defined, plus a margin
of 2.0% (7.06%, 7.81% and 7.78% at December 31,
1998 and 1997 and June 30, 1997, respectively). 1,718 1,753 1,766
Unsecured notes payable to investors, interest payable annually
at the prime rate, as defined (7.75%, 8.50% and 8.50% at
December 31, 1998 and 1997 and June 30, 1997,
respectively) for certain notes and 15% for other notes. 3,067 2,792 4,299
Security deed held by the previous owners of a hydroelectric
facility, due June 18, 1999. Interest payable monthly at
11.5%. 1,000 1,000 1,000
Notes payable to an insurance company, due in quarterly
payments through 2005, interest at 8.5%. 622 680 787
Term loan agreement with a bank, due in quarterly payments
through 2006, interest at LIBOR, as defined, plus a
margin of 2.0% (7.06%, 7.81% and 7.78% at December 31,
1998 and 1997 and June 30, 1997, respectively). 1,130 1,244 1,283
Term loan agreement with a bank, due in quarterly payments
through 2006, interest at LIBOR, as defined, plus a margin
of 2.0% (7.06%, 7.81% and 7.78% at December 31,
1998 and 1997 and June 30, 1997, respectively). 320 352 364
Unsecured notes payable to private investors, due December
31, 1999 and 2003, including accrued interest. Interest
accrues annually at 12%. A minimum of 3.6% of such interest
is due in cash each December 31 and if not paid, accrues
interest at a penalty rate equal to the stated
rate plus 3.0%. 1,031 919 820
Other long-term liabilities with various rates and
maturities. 5,287 5,304 6,147
------- ------- --------
80,813 87,971 100,268
------- ------- --------
Total debt and obligations under capital leases 80,813 87,971 270,081
Less: current portion (6,327) (5,355) (7,466)
------- ------- --------
Total long-term debt and obligations under capital leases $74,486 $82,616 $262,615
======= ======= ========
</TABLE>
56
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 12 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
Total interest charges associated with the above obligations were as
follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- --------------------------------------------
Year Fiscal Year Fiscal Year
Ended Nov. 8 - July 1 - Ended Ended
Dec. 31, 1998 Dec. 31, 1997 Nov. 7, 1997 June 30, 1997 June 30, 1996
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Total Interest $ 8,048 $1,260 $ 7,809 $29,780 $ 28,581
Capitalized Interest -- -- $ 68 $ 189 $ 1,705
</TABLE>
The aggregate long-term debt payments due each year ending December 31,
including capitalized lease obligations, net of amounts representing interest
totaling $9,976, are as follows:
<TABLE>
<S> <C>
1999 $ 6,327
2000 5,271
2001 5,609
2002 5,953
2003 6,374
Thereafter 51,279
--------
$ 80,813
========
</TABLE>
The Senior Discount Notes were issued at a substantial discount from their
principal amount and provided for cash payment of interest commencing January
15, 1999. The issue price represented a yield to maturity of 12% computed on a
basis of semi-annual compounding until reaching face value in 1998, after which
interest would have become payable semi-annually at the stated 12% rate. The
Senior Discount Notes were due July 15, 2003 but could have been redeemed at any
time on or after July 15, 1998 at the Company's option, in whole or in part, at
100% of their principal amount plus accrued interest. The Senior Discount Notes
contained restrictive covenants providing for limitations on indebtedness and
restrictions on payments of dividends or distributions of capital stock, among
other restrictions. Through the implementation of the Plan of Reorganization as
of the Effective Date, $202 million in face amount of outstanding Senior
Discount Notes were converted into, among other things, $15 million in cash and
100% of the shares of CHI's New Common Stock, subject to dilution from the New
Warrants and the Management Options (Note 1).
In October 1993, Den norske Bank AS ("DnB") provided the Company with a
$20,000 unsecured working capital facility (the "DnB Facility"), which
originally had an expiration date of June 30, 1997. On December 3, 1996, the
Company amended the DnB Facility, which, among other things, waived previous
defaults by the Company, changed the final expiration date of the DnB Facility
to June 30, 1998, reduced (in steps) the total commitment under the DnB Facility
from $5,941 at June 30, 1996 to zero at June 30, 1998 and limited the use of the
DnB Facility solely to letters of credit and modified certain financial
covenants. The DnB Facility expired on June 22, 1998.
57
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 12 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
In March 1998, the Company obtained a $15,000 secured revolving working
capital and letter of credit facility with an initial expiration date of
December 31, 1999 (the "New Facility") which replaced the DnB Facility. The
Company may use proceeds available under the New Facility to support its
development, acquisition and operating activities. Upon expiration of the New
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 March 17, 1999, no revolving loans have been drawn under
the New Facility and $5,684 of letters of credit have been issued and are
outstanding. Fees on each outstanding letter of credit are 2.0% per annum on the
available amount of such letter of credit, payable annually in arrears.
As of December 31, 1998, capitalized lease obligations consist primarily of
two lease financing transactions. The leases have initial terms that extend
through 2003 and 2008, with renewal options in minimum one and five year
increments. These leases require that lease payment reserves, with provisions
for escalations in the event certain power sales rates are not attained, be
maintained for the respective terms of the leases. Certain of these reserves
must be in cash with the balance in either cash or letters of credit from an
acceptable issuer. As a result of fresh start reporting, the recorded value of
these lease obligations was adjusted to reflect fair value due to market rate
changes as of the Effective Date.
To the extent that it is anticipated that the minimum cash components will
not be used to fund operation expenses or lease payments in the next fiscal
year, these minimum cash components have been included in Investments and other
assets in the accompanying Balance Sheet. Minimum rental commitments under these
leases for the five years following December 31, 1998 and thereafter are
included in the table above.
In conjunction with the acquisition of Hydro Development Group, Inc., a New
York Corporation, ("HDG"), the Company entered into a Credit and Reimbursement
Agreement dated February 15, 1995, with GECC. The agreement provides for two
term loans, the GECC A Term Loan ("GECC A Loan") and the GECC B Loan, a
revolving credit facility, and two letters of credit in support of HDG project
obligations. The GECC A Loan, with an outstanding principal balance at December
31, 1998 of $26,958, is secured by the stock and assets of the HDG projects. The
GECC B Loan, with an outstanding principal balance at December 31, 1998 of
$2,902, is secured by certain other projects owned by the Company (Note 6). Each
of these loans is non-recourse to CHI. The agreement also provides for a $3,000
revolving credit facility through 2013, to be drawn as necessary to pay
principal and interest due on the term loans in the case of insufficient funds
resulting from unusually low water flow. The $3,000 revolving credit facility
shall bear interest at a rate equal to the CP Rate, as defined, plus a margin of
5%. GECC has also provided two letters of credit totaling $350 in support of
certain HDG projects.
A term loan agreement with a bank in the original amount of $14,500 was
assumed in conjunction with the acquisition of certain hydroelectric assets. On
October 30, 1996, the Company arranged to have a financial institution purchase
this non-recourse project term loan, $13,759 at the date of purchase, (the "Old
Loan") for $5,000, including certain required reserves and closing costs of $500
(the "New Loan"). An additional $2,000 credit facility was also available under
the New Loan for up to one year to finance certain project enhancements. A
subsidiary of the Company was assigned an interest in the balance of the Old
Loan on a basis fully subordinated to the New Loan. As a result, the Company
recorded a $5,658 extraordinary gain on extinguishment of debt, net of certain
transaction costs of approximately $187 and income tax of $3,414, on its
Statement of Operations for the fiscal year ended June 30, 1997.
The $2,772 New Loan, which matures in the year 2008, accrues interest at a
fixed rate of 10.17% per annum through October 29, 2003. Thereafter, through
October 30, 2008, interest accrues on a quarterly basis, at a rate equal to the
three year U.S. Treasury Note Rate plus a margin of 3.9%. Principal and interest
payments are to be made quarterly in arrears and mandatory prepayments, if
required, are to be made annually. Costs associated with obtaining the New Loan
have been capitalized and are included in Intangible assets, net on the
Company's Balance Sheet as of December 31, 1998. As a result of fresh start
reporting, the recorded value of this loan was adjusted to reflect fair value
due to market rate changes as of the Effective Date.
58
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 12 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
The $6,490 note payable to an insurance company was assumed in connection
with an acquisition by the Company. Pursuant to the terms of the note,
substantially all of the acquired hydroelectric assets (approximately $21,800 at
December 31, 1998) have been pledged as security. As a result of fresh start
reporting, the recorded value of this note was adjusted to reflect fair value
due to market rate changes as of the Effective Date.
On December 31, 1998, the Company modified the terms of its 11.25%, $6,157
note payable to an insurance company which was assumed in connection with
another acquisition by the Company. The insurance company has agreed to accept
6.5% interest only monthly payments on a new $2,060 Senior Note with principal
due December 31, 2008 and contingent payments on an 11.5%, $2,940 Subordinated
Note. Beginning on December 31, 2002, the Subordinated Note may be converted
into 85-100% of the common equity of the related projects, subject to the
Company's option to redeem the Subordinated Note upon notice of conversion. The
modification of the terms of this note qualified for accounting treatment under
Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and
Creditors for Troubled Debt Restructurings" ("SFAS 15"). In accordance with SFAS
15, no gain was recognized upon modification and the carrying value of the note
was not adjusted. In addition, the modifications have resulted in an effective
interest rate of 0%; therefore, no interest expense will be recognized. Pursuant
to the terms of the notes, substantially all of the acquired hydroelectric
assets (approximately $1,100 at December 31, 1998) have been pledged as
security.
The $1,006 term loan agreement with a bank (the "Loan Agreement") was
entered into in connection with the acquisition of certain hydroelectric
facilities. The Loan Agreement is secured by the stock of the Company's
subsidiary which acquired the hydroelectric facilities and the subsidiary's
interest in certain limited partnerships as well as certain notes payable, by
these limited partnerships, to the Company.
The $1,718 term loan agreement with a bank was originally assumed by the
Company as an interim loan in conjunction with the acquisition of a
hydroelectric facility.
The $3,067 unsecured notes payable to investors relate to the financing for
one of the Company's pumped storage development projects, River Mountain.
Interest is payable annually on December 31, at the prime rate of interest, as
defined, for certain notes and 15% for other notes. Unpaid interest balances are
added to the outstanding principal at each December 31, and accrue interest at
the applicable interest rate.
The $1,000 security deed is secured by substantially all of the related
hydroelectric facility's assets (approximately $900 at December 31, 1998).
The $622 note payable to an insurance company was assumed in connection
with an acquisition by the Company. Pursuant to the terms of the note,
substantially all of the acquired hydroelectric assets (approximately $200 at
December 31, 1998) have been pledged as security. As a result of fresh start
reporting, the recorded value of this note was adjusted to reflect fair value
due to market rate changes as of the Effective Date.
The $1,130 term loan agreement with a bank was originally assumed by the
Company as an interim loan in conjunction with the acquisition of a
hydroelectric facility. Pursuant to the terms of the agreement, substantially
all of the acquired hydroelectric assets (approximately $4,000 at December 31,
1998) have been pledged as security.
The $320 term loan agreement with a bank was entered into in connection
with the acquisition of a hydroelectric facility. Pursuant to the terms of the
note, substantially all of the acquired hydroelectric assets (approximately $500
at December 31, 1998) have been pledged as security.
The $1,031 unsecured notes payable to private investors relate to the
financing for Consolidated Pumped Storage, Inc. ("CPS") for which warrants were
also issued to the holder for the purchase of 10% of CPS common stock. Interest
accrues annually at 12%. A minimum of 3.6% of such interest is due in cash each
December 31 and if not paid, is added to the outstanding principal balance which
earns interest at a penalty rate equal to the stated rate plus 3.0%.
59
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 12 - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
A $1,223 note payable to a utility is included in "Other long-term
liabilities with various rates and maturities". As a result of fresh start
reporting, the recorded value of this note was adjusted to reflect fair value
due to market rate changes as of the Effective Date.
During the period from July 1, 1997 to November 7, 1997, the Company wrote
off certain of its project development debt resulting in a gain of $8,568. This
debt was contingent upon the successful development (including the financing
thereof) of pumped storage projects which management believes will not be
successfully developed by the Company and the exercise of options on land and a
mine which was to be used as an underground reservoir for the projects.
NOTE 13 - MANDATORILY REDEEMABLE PREFERRED STOCK
Until the Effective Date, the Series H Preferred, issued for $70,299, was
recorded net of issuance costs of $3,083 and the value attributed to the
detached warrants of $5,916. The recorded value of the Series H Preferred at
November 7, 1997 and June 30, 1997 and 1996 was adjusted to reflect non-cash
dividends declared of $3,370, $14,911 and $13,057, respectively. In addition,
the recorded value was also adjusted by $179, $857 and $857, representing
accretion of the issuance costs and attached warrant value, in the period from
July 1 to November 7, 1997 and the fiscal years ended June 30, 1997 and 1996.
Through the implementation of the Plan of Reorganization as of the
Effective Date, the Series H Preferred and the other components of the Old
Preferred Stock were exchanged for the New Warrants (Note 1).
NOTE 14 - CAPITAL STOCK
CHANGE IN CAPITAL STRUCTURE
Through the implementation of the Plan of Reorganization as of the
Effective Date, CHI issued shares of New Class A Common Stock and New Class B
Common Stock and all shares of CHI's Old Common Stock were canceled.
NEW COMMON STOCK
Pursuant to the Plan of Reorganization, on the Effective Date, 20 million
shares of New Common Stock were authorized as follows: 9,085,290 shares of New
Class A Common Stock, 914,710 shares of New Class B Common Stock and 10,000,000
additional shares of New Common Stock which may be issued as either New Class A
Common Stock or New Class B Common Stock, as applicable. Of the 10,000,000
shares of New Common Stock which were authorized on the Effective Date but not
issued, 1,337,127 shares are reserved for issuance if, as and when the holders
of the New Warrants exercise such warrants and 810,811 shares of New Class A
Common Stock are reserved for issuance if, as and when the holders of the
Management Options exercise such options.
Pursuant to the Plan of Reorganization, on the Effective Date, 9,085,290
shares of New Class A Common Stock were issued and distributed to substantially
all of the holders of the Senior Discount Notes and 810,811 shares of New Class
A Common Stock were reserved to satisfy the obligation of CHI under the
Management Options (Note 15). Each share of New Class A Common Stock entitles
its holder to one vote. The holders of New Class A Common Stock have the right
to participate proportionately in dividends, if any, distributed by the Company.
60
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 14 - CAPITAL STOCK (CONTINUED)
Pursuant to the Plan of Reorganization, on the Effective Date, 914,710
shares of New Class B Common Stock were issued and distributed to a holder of
the Senior Discount Notes. Each share of New Class B Common Stock entitles its
holder to a one hundredth (1/100) of one vote. The holder of New Class B Common
Stock has the right to participate proportionately in dividends, if any,
distributed by the Company. The New Class B Common Stock was issued to a holder
of the Senior Discount Notes, at such holder's request, to provide to such
holder reduced voting rights in CHI. Pursuant to the Restated Certificate of
Incorporation of CHI, upon any transfer of shares of New Class B Common Stock,
the shares of New Class B Common Stock automatically convert into an equal
number of shares of New Class A Common Stock.
NEW SERIES B WARRANTS
The New Series B Warrants, which were issued to the holders of the Old
Preferred Stock on the Effective Date and expire on the sixth anniversary of the
Effective Date, entitle such holders to subscribe for the purchase of up to an
aggregate of 7.5% of the New Common Stock, subject to dilution due to the
issuance by the Company of shares of New Common Stock pursuant to the exercise
of the New Series C Warrants and the Management Options by the holders thereof.
The New Series B Warrants are exercisable for up to 1% of the New Common Stock
of CHI if, as and when the total capital (debt and equity) invested in
industrial infrastructure projects that either (i) close within 3 years from the
Effective Date or (ii) are subject to a legally binding and enforceable
agreement between CHI or any of its subsidiaries and a party sponsoring a
development or acquisition of such industrial infrastructure project within such
3 year period and thereafter close within the term of the warrants, equals or
exceeds $60 million. The additional New Series B Warrants exercisable for the
remaining 6.5% of the New Common Stock vest incrementally if, as and when the
total capital invested in industrial infrastructure projects increases from $60
million to $450 million within the parameters set forth above. The exercise
price per share of the New Common Stock subject to the New Series B Warrants is
$10. The New Series B Warrants have customary antidilution provisions, and
protections against extraordinary distributions.
NEW SERIES C WARRANTS
The New Series C Warrants, which were issued to the holders of the Old
Preferred Stock on the Effective Date and expire on the eighth anniversary
thereof, entitle such holders to subscribe for the purchase of up to an
aggregate of 5.0% of the New Common Stock, subject to dilution due to the
issuance by the Company of shares of New Common Stock pursuant to the exercise
of the New Series B Warrants and the Management Options by the holders thereof.
The exercise price per share of the New Common Stock subject to the New Series C
Warrants was determined by reference to the accreted value of the Senior
Discount Notes as of September 15, 1997 (the date CHI commenced its Chapter 11
case) which was approximately $183 million. The exercise price per share of the
New Common Stock subject to the New Series C Warrants is $18.36. The New Series
C Warrants contain customary antidilution provisions, and protections against
certain extraordinary distributions.
REGISTRATION RIGHTS AGREEMENT
Each person or entity who received a distribution of New Common Stock, New
Warrants or New Common Stock issued upon the exercise of the New Warrants or the
Management Options pursuant to the Plan of Reorganization is entitled to become
a party to a registration rights agreement as of the Effective Date (the
"Registration Rights Agreement"). Under the Registration Rights Agreement,
holders of the New Common Stock and New Warrants (including shares of New Common
Stock issued upon the exercise thereof) are entitled to certain demand and
incidental (or "piggyback") registration rights, and holders of the Management
Options are entitled to certain incidental (or "piggyback") registration rights
with respect to shares of New Class A Common Stock issued upon the exercise
thereof. The Registration Rights Agreement contains customary suspension, "hold
back", indemnification/contribution and priority provisions.
61
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 14 - CAPITAL STOCK (CONTINUED)
NEW STOCKHOLDERS' AGREEMENT
Under the terms of the Plan of Reorganization, each holder (including each
original recipient and transferee of an original recipient or other transferee)
of the New Common Stock and of the New Common Stock issued upon exercise of the
New Warrants or the Management Options (collectively, the "New Securities") is
bound by a new stockholders' agreement as of the Effective Date (the "New
Stockholders' Agreement"). The New Stockholders' Agreement contains certain
provisions relating to the size and composition of the Board of Directors of
CHI. In addition, the New Stockholders' Agreement provides that each holder of
New Common Stock is entitled to participate on a pro-rata basis in any sale of
50% or more of the outstanding New Common Stock and that each holder of New
Securities (including, in certain circumstances, holders of New Warrants and
Management Options) may be required to sell its New Securities in any sale of 66
2/3% or more of the New Common Stock.
NEW PREFERRED STOCK
Under the terms of the Plan of Reorganization, 10,000,000 shares of
preferred stock with a par value of $0.01 per share (the "New Preferred Stock")
were authorized by CHI. There were no shares of New Preferred Stock issued and
outstanding on December 31, 1998.
SERIES F AND SERIES G PREFERRED STOCK
Through the implementation of the Plan of Reorganization as of the
Effective Date, the shares of Series F Preferred and Series G Preferred were
exchanged for the New Warrants, subject to dilution from Management Options
(Note 1).
Dividends on the Series F Preferred and Series G Preferred were cumulative
(amounting to $53,540, $51,029 and $40,906 at November 7, 1997 and June 30, 1997
and 1996, respectively) and were payable annually in arrears upon declaration by
the Company's Board of Directors. The cumulative undeclared dividends in arrears
per share as of June 30, 1997 were $413.33 for the original 55,000 shares of
Series F Preferred and $107.11 for the 1,279 shares of Series F Preferred issued
subsequently, and $508.92 for the original 55,000 shares of Series G Preferred
and $131.88 for the 1,279 shares of Series G Preferred issued subsequently. The
cumulative undeclared dividends in arrears per share as of June 30, 1996 were
$333.33 and $410.42 for the Series F Preferred and Series G Preferred,
respectively.
SERIES H PREFERRED STOCK
Through the implementation of the Plan of Reorganization as of the
Effective Date, Series H Preferred was exchanged for the New Warrants, subject
to dilution from Management Options (Note 1).
62
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 14 - CAPITAL STOCK (CONTINUED)
The initial liquidation preference of the Series H Preferred was $513.32
per share at issuance on June 22, 1993 and $875.67 per share on June 30, 1997.
The liquidation preference was increased as a form of payment for declared
dividends required quarterly in arrears, computed based on the then current
liquidation preference, until increasing the liquidation preference to $1,000
per share on June 30, 1998, after such time the dividends were to become payable
in cash from legally available funds, when, and if declared by the Board of
Directors.
NOTE 15 - MANAGEMENT OPTIONS, DIRECTOR COMPENSATION AND 401(K) PLAN
MANAGEMENT OPTIONS
As of the Effective Date, the Company granted 810,811 Management Options to
acquire New Class A Common Stock at an exercise price of $10 per share pursuant
to the Management Option Plan to certain CHI employees. The Management Options
entitle such holders to purchase up to an aggregate of 7.5% of the New Class A
Common Stock, subject to dilution due to the issuance by CHI, of shares of New
Common Stock pursuant to the exercise of the New Series B Warrants and the New
Series C Warrants by the holders thereof. With the exception of 20,000 fully
vested and exercisable options granted to Charles F. Goff, Jr. on the Effective
Date, the Management Options will vest, or have vested and become exercisable as
follows:
<TABLE>
<S> <C>
Effective Date 33 1/3% of the Management Options
December 31, 1998 22 2/9% of the Management Options
December 31, 1999 22 2/9% of the Management Options
December 31, 2000 22 2/9% of the Management Options
</TABLE>
The Management Options will also become vested and exercisable upon a
change in control of CHI. The Management Options granted as of the Effective
Date will terminate on the seventh (7th) anniversary of the Effective Date
unless terminated at an earlier date following termination of an optionee's
employment. Management Options issued subsequent to the Effective Date may have
different exercise prices or vesting provisions, in accordance with the
Management Option Plan. No employee of CHI will be eligible under the Management
Option Plan to be granted Management Options to purchase more than 350,000
shares of New Class A Common Stock.
63
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 15 - MANAGEMENT OPTIONS, DIRECTOR COMPENSATION AND 401(K) PLAN (CONTINUED)
A summary of the activity in the Company's stock options for the period
from the Effective Date to December 31, 1998 is presented below:
<TABLE>
<CAPTION>
Number of Shares Exercise Price
--------------------- -------------------
<S> <C> <C>
Options granted on the Effective Date 810,811 $ 10.00
Options exercised -- --
Options canceled -- --
-------- -------
Outstanding at December 31, 1997 810,811 $ 10.00
Options exercised -- --
Options canceled (11,811) 10.00
Options issued 8,478 10.00
-------- -------
Outstanding at December 31, 1998 807,478 $ 10.00
======== =======
Exercisable at December 31, 1998 457,453 $ 10.00
======== =======
Weighted average remaining
Contractual life (years) 6
========
</TABLE>
The Company applies the principles of Accounting Principles Board Opinion
No. 25 in accounting for employee stock option plans. Compensation cost as
determined on the basis of SFAS No. 123 "Accounting for Stock-Based
Compensation," ("SFAS 123") would have been recorded based on the estimated fair
value of stock options granted on the Effective Date. The total fair value of
these options was $2,201 based upon the Black-Scholes option pricing model. The
following assumptions were used in the Black-Scholes option pricing model (i)
risk-free interest rate of approximately 6.2%, (ii) expected life of seven
years, (iii) 30% volatility, and (iv) no expected dividends. Had compensation
cost been determined based on the estimated fair value at the grant date
consistent with the method of SFAS 123, the Company's net income and net income
per share would have decreased by approximately $700 and $105 and $.07 and $.01,
respectively, for the year ended December 31, 1998 and the period from November
8, 1997 to December 31, 1997.
DIRECTOR COMPENSATION
Non-employee Directors of the Company, are entitled to receive an annual
retainer of $40 for services as a director, plus $2 for attendance at each
meeting of the Board of Directors as well as each committee meeting attended.
401(K) PLAN
The Company provides a defined contribution 401(k) plan which covers
substantially all of its domestic employees subject to certain prequalification
requirements. Costs of the plan were charged to operations as compensation
expense.
64
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 16 - TAXES
The (provision)/benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- --------------------------------------------
Year Fiscal Year Fiscal Year
Ended Nov. 8 - July 1 - Ended Ended
Dec. 31, 1998 Dec. 31, 1997 Nov. 7, 1997 June 30, 1997 June 30, 1996
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Federal income taxes $ (200) $(100) $ -- $ (408) $ (283)
State income taxes (304) (80) (99) (352) (156)
Deferred tax (provision)/benefits (2,485) (571) 213 (2,382) 7,951
------- ----- -------- ------- --------
$(2,989) $(751) $ 114 $(3,142) $ 7,512
======= ===== ======== ======= ========
</TABLE>
The (provision)/benefit for income taxes differs from an amount computed by
applying the statutory income tax rate to pre-tax income, as follows:
<TABLE>
<CAPTION>
Reorganized Company Predecessor Company
----------------------------- --------------------------------------------
Year Fiscal Year Fiscal Year
Ended Nov. 8 - July 1 - Ended Ended
Dec. 31, 1998 Dec. 31, 1997 Nov. 7, 1997 June 30, 1997 June 30, 1996
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Tax (provision)/benefit at US
statutory rate $(2,377) $(518) $(27,265) $ 731 $ 32,542
State income tax expense (304) (80) (99) (352) (156)
Losses without current tax
benefit -- -- (383) (3,113) (24,591)
Alternative minimum tax (200) (100) -- (408) (283)
Reorganization value in excess
of amounts allocable to
identifiable assets -- (53) -- -- --
Restructuring charges -- -- (1,392) -- --
Debt extinguishment -- -- 30,552 -- --
Corporate recapitalization -- -- 1,700 -- --
Project debt adjustment -- -- (2,999) -- --
Other (108) -- -- -- --
------- ----- -------- ------- --------
$(2,989) $(751) $ 114 $(3,142) $ 7,512
======= ===== ======== ======= ========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
--------------------------------------- -------------
December 31, 1998 December 31, 1997 June 30, 1997
----------------- ----------------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss $ 17,345 $ 19,604 $ 21,925
Tax credits 4,635 5,652 4,237
Lease payment obligations 7,504 7,393 9,504
Original issue discount -- -- 22,235
Pumped storage development costs 6,750 6,750 8,624
Valuation reserve (32,765) (35,227) (50,056)
-------- -------- --------
Total deferred tax assets, net 3,469 4,172 16,469
-------- -------- --------
</TABLE>
65
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 16 - TAXES (CONTINUED)
<TABLE>
<CAPTION>
Predecessor
Reorganized Company Company
--------------------------------------- -------------
December 31, 1998 December 31, 1997 June 30, 1997
----------------- ----------------- -------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and Amortization $ 35,893 $ 37,161 $ 47,662
-------- -------- --------
Total deferred tax liabilities 35,893 37,161 47,662
-------- -------- --------
Net deferred tax liability $ 32,424 $ 32,989 $ 31,193
======== ======== ========
</TABLE>
The deferred tax benefit of approximately $8.0 million for the fiscal year
ended June 30, 1996 relates to the write-down of certain long-lived assets in
accordance with SFAS 121 (Note 7). The effective tax rate of the deferred
benefit recognized from the write-down differs from the federal statutory rate
due to the reduction of deferred tax liabilities offset by an increase in the
valuation allowance attributable to net operating loss ("NOL") carryforwards.
The valuation allowance decreased by $2,462 primarily due to a decrease in
the gross deferred tax assets relating to the utilization of NOL carryforwards
and expiring tax credits.
At December 31, 1998 and 1997 and June 30, 1997, the Company had U.S.
federal tax NOLs of $48,684, $56,013 and $64,485, respectively, expiring through
2012. Of the amounts at December 31, 1998, the Company has available acquired
federal income tax net operating loss ("Acquisition NOL") carryforwards in the
amount of $4,767 representing unused losses accumulated by certain entities
prior to their acquisition by the Company. These NOLs, which expire in varying
amounts beginning in 2001, are restricted in terms of utilization.
At December 31, 1998, the Company has $2,752 of investment, energy and
Alternative Minimum Tax ("AMT") credits available to reduce future income taxes
for federal income tax reporting purposes which begin to expire during the year
2000. Additionally, the Company has available investment, energy and AMT credits
in the amount of $1,883, representing unused credits accumulated by certain
entities prior to their acquisition by the Company. These credits, which are
restricted in terms of utilization, will begin to expire in 1999.
The Company's NOL carryforwards for federal income tax purposes were
reduced by $15,712 due to the discharge of indebtedness under the Plan of
Reorganization as described in Note 1.
Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of the
NOL and tax credit carryforwards which can be utilized in future years.
66
<PAGE>
CHI ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except shares and per share amounts or
as otherwise noted)
NOTE 17 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
The Company has several non-cancelable operating leases expiring through
2080. The majority of these leases require annual lease payments based upon a
percentage of gross or net revenues, as defined in the respective lease
agreements, and provide for minimum annual payments to the lessor.
Minimum rental commitments under non-cancelable operating leases for the
five years following December 31, 1998 are approximately $5,000 per year and
approximately $22,800 thereafter.
LEGAL PROCEEDINGS
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. A trial date has been set during the second quarter of 1999.
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.
PUMPED STORAGE DEVELOPMENT
Management believes that its pumped storage projects will not be
successfully developed by the Company. However, the Company maintains certain
debt obligations related to project commitments entered into during pumped
storage development.
NOTE 18 - RELATED PARTY TRANSACTIONS
GECC is a former minority stockholder of and is currently a significant
lender and provider of partnership equity to the Company and/or its projects,
through project financing, including the HDG transaction. Transactions indicated
on the face of the financial statements as related party transactions include
those with GECC. As of the Effective Date, GECC is no longer a related party.
Michael B. Peisner and Stephen E. Champagne, assistant secretaries of the
Company and certain of its subsidiaries, are partners in the law firm of Curtis
Thaxter Stevens Broder & Micoleau ("Curtis Thaxter") which provides certain
legal services to the Company. Subsequent to the Effective Date, the Company has
no other related party transactions.
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the executive officers ("Executive Officers") and the directors
("Directors") of CHI, their ages as of March 25, 1999, and positions with CHI
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Charles F. Goff, Jr. 58 Chairman, Interim Chief Executive Officer and Director
Edward M. Stern 40 President, Chief Operating Officer, Secretary and Director
Michael I. Storch 47 Executive Vice President
James F. Groelinger 54 Senior Vice President
Pascal J. Brun 49 Senior Vice President
Rickey J. Cashatt 46 Senior Vice President
Daniel S. Pease 44 Senior Vice President
Mary V. Gilbert 37 Senior Vice President, Chief Financial Officer1
J. Christopher Hocker 48 Vice President
Neil A. Manna 36 Vice President, Controller and Treasurer
James J. Duplessie 39 Director
Michael J. Petrick 37 Director
</TABLE>
- ---------------
1 Effective April 1, 1999, Ms. Gilbert will no longer serve as the Chief
Financial Officer of the Company. She will, however, remain in an executive
capacity.
68
<PAGE>
The Executive Officers and Directors of the Company are:
CHARLES F. GOFF, JR., CHAIRMAN, INTERIM CHIEF EXECUTIVE OFFICER AND
DIRECTOR -- Mr. Goff has served as a Director of the Company since 1997 and was
elected Chairman and Chief Executive Officer effective March 9, 1999. He
previously served as Chairman and Chief Executive Officer of Destec Energy,
Inc., a major worldwide independent power developer, producer and marketer that
owns power generation and gasification facilities which produce, sell and market
electricity, steam and synthetic fuel gas. Prior to its sale in 1997, Destec had
interests in 24 operating projects with a total rated equivalent capacity of
approximately 5,136 megawatts and over three million pounds per hour of steam.
In addition, Mr. Goff has served as a member of Boards of Directors of APD
Partnership (a joint venture between The Dow Chemical Company and Apache
Corporation), Magma Power Company, Dow Pipeline Company and Boride Products,
Inc. Prior to forming Destec, Mr. Goff served 25 years with Dow in various
energy and business management executive positions. Mr. Goff graduated from the
University of Texas, where he earned a bachelor's degree in business
administration.
EDWARD M. STERN, PRESIDENT, CHIEF OPERATING OFFICER, SECRETARY AND
DIRECTOR-- Mr. Stern was elected President and COO of the Company in September
1996 and a Director in November 1997. He previously served as Executive Vice
President, Secretary and General Counsel of CHI with primary responsibility for
the company's legal, human resources, communications, financial, acquisitions,
risk management and environmental and regulatory compliance functions. Prior to
joining CHI in April 1991, Mr. Stern was a Vice President with BayBank, Inc., a
northeastern financial services organization, where for six years he specialized
in energy project finance, foreclosures, debt restructurings and asset
management. He received JD and MBA degrees from Boston University. Mr. Stern is
a member of the Massachusetts Bar and the Federal Energy Bar.
MICHAEL I. STORCH, EXECUTIVE VICE PRESIDENT -- Mr. Storch began his
employment with CHI in June 1987. He is responsible for strategic planning
relative to the future development and growth of the Company. Previously, he was
responsible for operations of hydroelectric facilities owned by CHI and its
affiliates, and for financial matters related to the Company, including its
existing operations, acquisitions, and development. Before joining CHI he served
as Vice President -- Corporate Development for G.O. Holdings Management, Inc., a
management company controlled by Anglo-French financier Sir James Goldsmith. For
the preceding ten years, he was employed by the accounting firm of Price
Waterhouse in various capacities, last serving as Senior Audit Manager. Mr.
Storch holds a Bachelor of Business Administration degree from Baruch College.
He is a member of the American Institute of Certified Public Accountants and the
New York State Society of Certified Public Accountants.
JAMES F. GROELINGER, SENIOR VICE PRESIDENT -- Mr. Groelinger joined CHI in
1997 after five years as an independent consultant and business unit head
specializing in the development and financial structuring aspects of energy
projects in the U.S. and internationally. Mr. Groelinger currently serves as
head of the Company's business development team. His more than 30 years of
experience include positions as a director of Putnam, Hayes & Bartlett, Inc., an
international strategy management consulting firm, and chief financial officer
of U.S. Synthetic Fuels Corporation. Mr. Groelinger holds a Finance MBA from
Temple University and a Bachelors degree in Chemical Engineering from City
College of New York.
PASCAL J. BRUN, SENIOR VICE PRESIDENT OF CHI; PRESIDENT, CHI CANADA INC. --
Mr. Brun joined CHI in June 1988. He is currently responsible for acquisition,
development and operation of hydroelectric facilities in Canada. Previously, he
served as CHI's Vice President for Corporate Development, responsible for
acquisition of operating projects in the United States and Canada. Prior to
joining CHI, he was a Vice President for the SNC Group, Ltd., a large Canadian
engineering and construction company, and a Project Manager for T. Pringer &
Sons, Engineers. He holds Bachelors and Masters degrees in Applied Sciences from
Laval University and an MBA degree from the University of Montreal.
RICKEY J. CASHATT, SENIOR VICE PRESIDENT -- Mr. Cashatt joined CHI in
January 1996. He is currently responsible for the construction and operation of
industrial energy facilities of the Company, as well as providing development
support. Before joining CHI, Mr. Cashatt was a senior project manager for Destec
Engineering, Inc., responsible for directing the development and construction of
simple cycle and combined cycle plants in the United States and internationally.
Mr. Cashatt also served as a project manager with similar responsibilities for
CRS Sirrine Engineers, Inc. prior to his employment at Destec Engineering, Inc.
He began his career with International Paper Company, responsible for
hydroelectric and combustion power plant installation and upgrades. Mr. Cashatt
holds a degree in electrical engineering from North Carolina State and is a
registered professional engineer.
69
<PAGE>
DANIEL S. PEASE, SENIOR VICE PRESIDENT -- Mr. Pease joined CHI as a
Construction Manager in 1986, and was made Vice President of Construction in
1988 before advancing to his current position in 1992. In his previous capacity,
he was responsible for planning and managing construction related to
Company-owned facilities, and for advising on engineering and construction
aspects of development and acquisition opportunities. Currently, he is
responsible for management of all of the Company's operating hydroelectric
facilities, as well as for engineering and construction activities of the
Company. Prior to joining CHI, he was a construction supervisor for Walsh
Construction Company of Connecticut, serving on several major hydroelectric and
nuclear construction projects. He holds a BS degree from the University of
Connecticut.
MARY V. GILBERT, SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER -- Ms.
Gilbert joined CHI in July 1996 and was named to her current position in January
1997. She is currently responsible for the Company's accounting, tax, financial
reporting, treasury, human resource and information systems functions as well as
providing financial support for development and acquisition opportunities. Prior
to joining CHI, she served in several capacities with CRSS, Inc., most recently
as Vice President, Controller of the parent company. Previously she had served
as Chief Financial Officer of CRSS Capital, its independent power subsidiary.
Prior to joining CRSS, Ms. Gilbert was employed by Ernst and Young for six
years, last holding the position of audit manager. Ms. Gilbert received a
Bachelor of Science degree in accounting from the University of Colorado at
Boulder. She is a Certified Public Accountant and is a member of the American
Institute of Certified Public Accountants and the Texas Society of Certified
Public Accountants. Effective April 1, 1999, Ms. Gilbert will no longer serve as
the Chief Financial Officer of the Company. She will, however, remain in an
executive capacity, focusing primarily on growth related activities.
J. CHRISTOPHER HOCKER, VICE PRESIDENT -- Mr. Hocker joined CHI in November
1990 as Director of Communications. Currently, he coordinates CHI's business
development efforts and also is responsible for internal and external
communications relating to the Company and its major projects in development and
for public affairs related to the Company's involvement in national industry
associations. Prior to joining CHI, he was an independent consultant
specializing in communications related to the energy and environmental
industries. His previous experience also includes serving as Marketing Manager
for Morrison-Knudsen Engineers, Inc., specifically related to hydroelectric,
environmental and transportation projects. He served as a Director of the
National Hydropower Association. Mr. Hocker received a BA degree from Stanford
University in 1973.
NEIL A. MANNA, VICE PRESIDENT CONTROLLER AND TREASURER -- Mr. Manna joined
CHI in 1990 as Assistant Controller. He is currently responsible for day to day
financial control of the Company. He previously served as the Vice President of
Financial Planning with primary responsibilities for the Company's budgeting and
risk management functions.. Prior to joining CHI, he served as Controller for
the sales promotion division of Marketing Corporation of America, and was also
employed by the accounting firm of Price Waterhouse. Mr. Manna received a
Bachelors degree in accounting from the University of Connecticut and a Finance
MBA degree from Fairfield University. He is a Certified Public Accountant and a
member of the American Institute of Certified Public Accountants.
JAMES J. DUPLESSIE, DIRECTOR -- Mr. Duplessie is currently an Executive
Director of United Bank of Switzerland ("UBS"). He joined UBS in June 1998
following its merger with Swiss Bank Corporation, where he was an Executive
Director since 1995. Previously, Mr. Duplessie was an Executive Director of
O'Connor & Associates. He received a B.A. in Economics from Washington and Lee
University in 1981, an MBA from Tulane University in 1984 and a JD from Wake
Forest University in 1987.
MICHAEL J. PETRICK, DIRECTOR -- Mr. Petrick is currently a Managing
Director in the fixed income division of Morgan Stanley Dean Witter & Co.
("Morgan Stanley"), and has been with Morgan Stanley since 1989. Prior to
joining Morgan Stanley, Mr. Petrick was a Vice President and Portfolio Manager
for First Interstate Bancorp in Los Angeles. In addition, Mr. Petrick currently
serves on the boards of Marvel Enterprises and Premium Standard Farms. Mr.
Petrick received a BA in Economics and Chemistry from Grinnell College in 1984
and an MBA degree from the University of Chicago in 1987.
There are no family relationships among the Directors and officers.
The Board of Directors has established an Executive Compensation Committee
comprised of Messrs. Goff, Petrick and Duplessie and an Audit Committee
comprised of Messrs. Goff, Petrick and Duplessie. During his tenure as Interim
Chief Executive Officer, Mr. Goff will not serve on either of these committees.
70
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
compensation of the following Executive Officers for services rendered during
the twelve months ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Other Annual Stock All Other
Name and Compensation ($) Compensation Option Compensation
Principal Position Year Salary Bonus ($) Grants (#) ($)(6)
- ------------------ ---- -------------------- --- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
James T. Stewart(1)........................ 1998 325,000 162,500 -- -- 8,592
Chairman and Chief Executive Officer 1997 311,538(4) 325,000 -- 250,000 6,572
---
1996 238,380 58,750 -- -- --
Edward M. Stern(2)......................... 1998 250,000 125,000 -- -- 6,853
President, Chief Operating Officer, 1997 247,991(4) 149,700 -- 115,000 5,085
---
Secretary and Director 1996 210,331 75,000 1,650 -- 4,620
Michael I. Storch 1998 250,000 83,333 -- -- 7,182
Executive Vice President 1997 259,512(4) 39,990 -- 55,000 4,800
---
1996 238,000 45,000 1,025 -- 12,500
Mary V. Gilbert 1998 180,000 60,000 -- -- 6,702
Senior Vice President, Chief Financial
Officer(3) 1997 153,077(4) 62,500 -- 55,000 1,258
---------- ---
1996 46,274(5) 27,500 -- -- --
Daniel S. Pease 1998 130,000 28,000 -- -- 6,810
Senior Vice President - Operations 1997 130,327(4) 27,500 -- 45,000 5,457
---
1996 119,700 27,500 -- -- 3,854
</TABLE>
- --------------------------
(1) Mr. Stewart resigned from his position as Chairman and Chief Executive
Officer effective March 9, 1999.
(2) Mr. Stern was elected President and Chief Operating Officer of the Company
in September 1996 and a Director of the Company in November 1997.
(3) Effective April 1, 1999, Ms. Gilbert will no longer serve as the Company's
Chief Financial Officer.
(4) The salaries listed for 1997 include an extra bi-weekly pay period, or
twenty-seven pay periods for the year, whereas the other years listed
include twenty-six pay periods.
(5) Compensation represents salary from July 15, 1996, the commencement of Ms.
Gilbert's employment with the Company.
(6) Comprised of contributions made by the Company to the 401(k) plan and life
insurance premiums paid by the Company on behalf of each Executive Officer.
71
<PAGE>
The following table sets forth information with respect to the following
Executive Officers concerning the exercise of options during the year ended
December 31, 1998 of the Company and unexercised options held as of December 31,
1998.
AGGREGATED OPTION EXERCISES DURING THE YEAR ENDED DECEMBER 31, 1998
AND YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options At In-the-money Options
December 31, 1998 (#) At December 31, 1998 ($)(2)
--------------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James T. Stewart 138,875 111,125(3) -- --
Edward M. Stern 63,883 51,117 -- --
Michael I. Storch 30,553 24,447 -- --
Mary V. Gilbert 30,553 24,447(4) -- --
Daniel S. Pease 24,998 20,002 -- --
</TABLE>
- --------------------------
(1) No options were exercised by any of the above Executive Officers during the
year ended December 31, 1998.
(2) Calculated using the difference between the fair market value of the
securities underlying the options and the exercise price of the options.
Based on information available to the Company, the fair market value of the
options did not exceed the exercise price of the options at December 31,
1998.
(3) Mr. Stewart forfeited all of these options effective March 9, 1999.
(4) Ms. Gilbert will forfeit 19,000 of these options and vest in the remaining
5,447 options effective April 1, 1999.
72
<PAGE>
EMPLOYMENT CONTRACTS. On the Effective Date, CHI entered into substantially
similar employment agreements with James T. Stewart, Edward M. Stern, Michael I.
Storch and Mary V. Gilbert. The agreements provide that each of the
aforementioned officers serve in the position set forth opposite such officer's
name listed on the table entitled "Summary Compensation Table" above. The
employment agreements of each of Messrs. Stewart and Stern provide for an
initial three year term, and those of each of Mr. Storch and Ms. Gilbert provide
for an initial two year term. The term of each employment agreement is subject
to automatic extension for successive 12 month periods (unless CHI notifies the
executive officer of its intent not to renew the employment agreement prior to
January 1 in any year, commencing with January 1, 2000 in the case of Messrs.
Stewart and Stern and January 1, 1999 in the case of Mr. Storch and Ms.
Gilbert).
Pursuant to the employment contracts, if an executive officer's employment
is terminated by CHI or the executive officer resigns during the term of the
employment agreement (other than in certain specified circumstances), such
executive will receive, among other benefits, monthly severance payments equal
to such officer's base compensation (excluding bonuses) for a period equal to
the shorter of (i) 24 months from the date of termination in the case of Messrs.
Stewart and Stern, and 18 months from the date of termination in the case of Mr.
Storch and Ms. Gilbert or (ii) nine months following the date on which the term
of the employment agreement expires in the case of Messrs. Stewart and Stern and
six months following the date on which the term of the employment agreement
expires in the case of Mr. Storch and Ms. Gilbert.
On March 9, 1999, James T. Stewart resigned his position as Chairman and
Chief Executive Officer of the Company. He will receive monthly severance
payments in accordance with the terms of his employment agreement.
Effective April 1, 1999, Ms. Gilbert will no longer serve as the Company's
Chief Financial Officer and will no longer have an employment contract with the
Company. Ms. Gilbert will, however, remain in an executive capacity with the
Company, focusing primarily on its growth related activities.
Mr. Stern and Mr. Storch will each receive base salaries of $250,000 for
1999. In addition to base compensation, Mr. Stern and Mr. Storch are eligible
(i) to receive an annual bonus equal up to 150% of his base salary, in the case
of Mr. Stern, and up to 100% of his base salary, in the case of Mr. Storch, (ii)
to participate in benefits plans, (iii) to receive Management Options, and (iv)
to receive disability and death benefits. For a discussion of the Management
Options, see "1997 Stock Option Plan and Management Option Agreement" below. The
contract expiration date for Mr. Stern is December 31, 2000 and for Mr. Storch
is December 31, 1999.
On March 9, 1999, CHI entered into an agreement with Charles F. Goff, Jr.
The agreement provides for Mr. Goff to serve in the position of Chairman and
Interim Chief Executive Officer for a minimum three month term. His compensation
will consist of an initial payment of approximately $86,000 plus $15,000 per
month.
DIRECTOR COMPENSATION. Non-employee directors of the Company are entitled
to receive an annual retainer of $40,000 for services as a director, plus $2,000
for attendance at each meeting of the Board of Directors as well as each
committee meeting attended.
SENIOR MANAGEMENT BENEFITS POLICY. In 1992, CHI's Board of Directors
adopted a Senior Management Benefits Policy covering certain of the Company's
executive officers listed herein in Part III, Item 10, "Directors and Officers
of the Registrant" (the "Participants") which offers severance, supplemental
life insurance and supplemental disability insurance benefits subject to
entering into a non-competition agreement. In 1996, the Company expanded the
eligibility under the policy to include officers of certain of its subsidiaries.
Each Participant is entitled to, under certain circumstances, between 12 and 26
weeks of severance pay. In addition, each Participant shall be provided with
$150,000 of supplemental term life insurance, or such other amount or type of
insurance as determined by the Board of Directors, and supplemental disability
benefits of up to one year subject to a maximum aggregate benefit of $200,000.
To the extent that benefits under the Senior Management Benefits Policy
duplicate benefits which a Participant is entitled to receive under any other
arrangement with the Company, such benefits will not be additive.
73
<PAGE>
1997 STOCK OPTION PLAN AND MANAGEMENT OPTION AGREEMENTS. Pursuant to the
Plan of Reorganization, as of the Effective Date, Management Options to acquire
New Class A Common Stock at an exercise price of $10 per share of New Class A
Common Stock were granted pursuant to the Management Option Plan to certain CHI
employees (including each of the executive officers mentioned above). The
Management Options entitle such holders to purchase up to an aggregate of 7.5%
of the New Class A Common Stock, subject to dilution due to the issuance by CHI
of shares of New Common Stock pursuant to the exercise of the New Warrants. With
the exception of 20,000 fully vested and exercisable options granted on the
Effective Date and an additional 60,000 fully vested and exercisable options
granted on March 9, 1999 to Charles F. Goff, Jr., the Management Options issued
on the Effective Date will vest, or have vested and become exercisable as
follows:
<TABLE>
<S> <C>
Effective Date - 33 1/3% of the Management Options
December 31, 1998 - 22 2/9% of the Management Options
December 31, 1999 - 22 2/9% of the Management Options
December 31, 2000 - 22 2/9% of the Management Options
</TABLE>
The Management Options will also become vested and exercisable upon a
change in control of CHI. The Management Options granted as of the Effective
Date will terminate on the seventh anniversary of the Effective Date unless
terminated at an earlier date following termination of an optionee's employment.
In accordance with the Management Option Plan, Management Options issued
subsequent to the Effective Date may have different exercise prices or vesting
provisions. No employee of CHI will be eligible under the 1997 Stock Option Plan
and Management Option Agreements to be granted Management Options to purchase
more than 350,000 shares of New Class A Common Stock.
74
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's New Class A Common Stock and New Class B Common Stock
as of March 26, 1999 by (i) each stockholder, who, to the best of the Company's
knowledge, owns beneficially more than 5% of either the outstanding shares of
New Class A Common Stock or New Class B Common Stock, (ii) each of the Company's
Directors , (iii) each of the Executive Officers whose names appear in the
"Summary Compensation Table" and (iv) all Directors and Executive Officers as a
group. Except as otherwise indicated, each named person has voting and
investment power over the listed shares, and such voting and investment power is
exercised solely by the named person or shared with a spouse.
<TABLE>
<CAPTION>
New Class A New Class B Voting
Common Stock Common Stock Power
Directors, Executive Officers ----------------------- ------------------------ ----------
and 5% Stockholders Number %(1) Number %(1) %
------------------------------ ------ ---- ------ ---- -
<S> <C> <C> <C> <C> <C>
Morgan Stanley Dean Witter & Co.
1585 Broadway
New York, N.Y. 10036 3,610,630 39.74% -- -- 39.70%
United Bank of Switzerland
299 Park Avenue
New York, N.Y. 10171 3,137,206 34.53% -- -- 34.50%
Gem Capital Management
70 East 55th Street
New York, N.Y. 10022 475,000 5.23% -- -- 5.22%
Merrill Lynch Asset Management
800 Scudders Mill Road
Plainsboro, N,J. 08536 454,883 5.01% 914,710 100% 5.10%
Charles F. Goff, Jr.(2)(3) 80,000 0.88% -- -- 0.88%
James T. Stewart(2)(4) 138,875 1.53% -- -- 1.53%
Edward M. Stern(2)(5) 63,883 0.70% -- -- 0.70%
Michael I. Storch(2) 30,553 0.34% -- -- 0.34%
Mary V. Gilbert(2) 30,553 0.34% -- -- 0.34%
Daniel S. Pease(2) 24,998 0.28% -- -- 0.28%
All Directors and Executive Officers
as a group(2) 314,135 3.46% -- -- 3.45%
</TABLE>
- ---------------
(1) Ownership percentages are calculated in accordance with SEC Rule 13d -
3(d)(1) and, therefore, exclude the dilutive effects of outstanding
warrants and stock options. Consequently, these percentages do not
represent ownership on a fully diluted basis as disclosed in Part I, Item
1, "Business".
(2) All shares are represented by vested, exercisable stock options.
(3) Mr. Goff was elected Chairman and Interim Chief Executive Officer effective
March 9, 1999.
(4) Mr. Stewart resigned from his position as Chairman and Chief Executive
Officer effective March 9, 1999.
(5) The options granted to Mr. Stern are owned by a trust for the benefit of
Mr. Stern's family (for which Mr. Stern does not act as trustee) and as
such, Mr. Stern disclaims beneficial ownership of these options.
75
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GECC is a former minority stockholder of and is currently a significant
lender and provider of partnership equity to the Company and/or its projects,
through project financing, including the HDG transaction. As of the Effective
Date, GECC is no longer a related party.
Michael B. Peisner and Stephen E. Champagne, assistant secretaries of the
Company and certain of its subsidiaries, are partners in the law firm of Curtis
Thaxter Stevens Broder & Micoleau ("Curtis Thaxter") which provides certain
legal services to the Company. Subsequent to the Effective Date, the Company has
no other related party transactions.
76
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K PAGE
<S> <C>
(a) 1.Financial Statements
Report of Independent Accountants 36
Consolidated Statements of Operations for the year ended
December 31, 1998, the period from November 8, 1997
to December 31, 1997, the period from July 1, 1997
to November 7, 1997, and the two fiscal years ended
June 30, 1997 and 1996 38
Consolidated Balance Sheet at December 31, 1998 and 1997
and June 30, 1997 39
Consolidated Statement of Stockholders' Equity for the for
the year ended December 31, 1998, the period from
November 8, 1997 to December 31, 1997, the period
from July 1, 1997 to November 7, 1997, and the two
fiscal years ended June 30, 1997 and 1996 40
Consolidated Statement of Cash Flows for the year ended
December 31, 1998, the period from November 8, 1997
to December 31, 1997, the period from July 1, 1997
to November 7, 1997, and the two fiscal years ended
June 30, 1997 and 1996 41
Notes to Consolidated Financial Statements 43
(a) 2.Financial Statement Schedules
</TABLE>
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
Individual financial statements of the Registrant have been omitted because
consolidated financial statements of the Registrant and all its subsidiaries are
furnished.
(a) 3.Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
++++++2.1 Disclosure Statement dated August 8, 1997
++++++2.2 Plan of Reorganization under Chapter 11 of the Bankruptcy
Code of Consolidated Hydro, Inc.
+++++++3.1 Restated Certificate of Incorporation of Consolidated Hydro,
Inc.
+++++++3.2 By-Laws of CHI Energy, Inc.
+3.5 Certificate of Incorporation and Bylaws of Summit Energy
Storage Inc.
+++++++10.1 Stockholders Agreement
+++++++10.2 Registration Rights Agreement
+++++++10.3 Employment Agreements
+++++++10.4 CHI Energy, Inc. 1997 Stock Option Plan and Form Management
Option Agreement
++++++10.5 Form of Series B Warrant
++++++10.6 Form of Series C Warrant
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.7 Power Purchase Agreement between Boott Hydropower, Inc. and
Commonwealth Electric Company, dated January 10, 1983 and
amendment dated March 6, 1985
+10.8 Participation Agreement dated as of December 1, 1985
among Boott Hydropower, Inc., General Electric Credit
Corporation, Corporation Investments, Inc. and United States
Trust Company of New York, as Owner Trustee and amendment
thereto dated as of February 26, 1988
+10.9 Lease Agreement dated as of December 1, 1985 between United
States Trust Company of New York, as Owner Trustee, and
Boott Hydropower, Inc. and amendments thereto dated as of
December 12, 1986 and February 26, 1988
+10.10 Power Purchase Agreement between Lawrence Hydroelectric
Associates, Essex Company and New England Power Company
(Lawrence Project), dated January 1, 1985
+10.11 Mortgage and Security Agreement from Lawrence Hydroelectric
Associates to New England Power Company, dated January 1,
1985
+10.12 Indenture of Mortgage, dated as of September 8, 1981,
between Lawrence Hydroelectric Associates and State Street
Bank and Trust Company, Trustee, and Supplemental Indentures
dated as of January 1, 1985, October 1, 1987 and July 1,
1988
+10.13 Agreement between International Paper Company and Niagara
Mohawk Power Corporation (LaChute Lower Project), dated
March 7, 1986
+10.14 Agreement between International Paper Company and Niagara
Mohawk Power Corporation (LaChute Upper Project), dated
March 7, 1986
+10.15 Participation Agreement dated as of December 31, 1987 among
LaChute Hydro Company, Inc., Philip Morris Credit
Corporation, the Financial Institutions listed on Schedule
II thereto, The Connecticut Bank and Trust Company, National
Association, as Indenture Trustee, and The Connecticut
National Bank, as Owner Trustee
+10.16 Lease Agreement dated as of December 31, 1987 between
LaChute Hydro Company, Inc. and The Connecticut National
Bank, as Owner Trustee
+10.17 Indenture and Amended and Restated Building Loan Mortgage
and Security Agreement dated as of December 31, 1987 between
The Connecticut National Bank, as Owner Trustee and The
Connecticut Bank and Trust Company, National Association, as
Indenture Trustee
+10.18 Tax Indemnification Agreement dated as of December 31, 1987
between LaChute Hydro Company, Inc. and Philip Morris Credit
Corporation
+10.19 Tax Indemnification Agreement dated as of December 31, 1987
between LaChute Hydro Company, Inc. and General Electric
Capital Corporation
+10.20 Power Purchase Agreement between Androscoggin Reservoir
Company and Central Maine Power Company (Aziscohos Project),
dated October 23, 1984
+10.21 Participation Agreement dated as of September 1, 1988 among
Aziscohos Hydro Company, Inc., NYNEX Credit Company, The CIT
Group/Equipment Financing, Inc., The Connecticut National
Bank, as Indenture Trustee, and Meridian Trust Company, as
Owner Trustee
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.22 Lease Agreement dated as of September 1, 1988 between
Meridian Trust Company, as +10.22 Owner Trustee, and
Aziscohos Hydro Company, Inc.
+10.23 Indenture, Mortgage and Security Agreement dated as of
September 1, 1988 between Meridian Trust Company, as Owner
Trustee and The Connecticut National Bank, as Indenture
Trustee
+10.24 Indenture of Lease dated as of January 15, 1986 between
Aziscohos Hydro Company, Inc. and Androscoggin Reservoir
Company, and amendments thereto dated March 13, 1986 and as
of September 1, 1988
+10.25 Collateral Assignment of Lease dated September 1, 1988
between Aziscohos Hydro Company, Inc. and Central Maine
Power Company
+10.26 Tax Indemnification Agreement dated as of September 6, 1988
between Aziscohos Hydro Company, Inc., Consolidated Hydro,
Inc. and NYNEX Credit Company
+10.27 Purchase Power Agreement dated December 29, 1987, between
Duke Power Company and Riegel Power Corporation as assigned
to Aquenergy Systems, Inc. by Assignment dated July 27, 1988
+10.28 Note Purchase Agreement between UNUM Life Insurance Company
of America and Aquenergy Systems, Inc. dated as of
November 1, 1988
+10.29A Mortgage and Security Agreement dated as of November 1, 1988
from Aquenergy Systems, Inc. to The Connecticut Bank and
Trust Company, National Association, as Trustee (Ware Shoals
Project)
+10.30 Loan Agreement dated June 18, 1991, between Fieldcrest
Cannon, Inc. as lender and Eagle & Phenix Hydro Company,
Inc. as borrower setting forth terms and conditions for the
loan evidenced by the Promissory Note described in item A
above
+10.31 Security Deed dated June 18, 1991 from Eagle & Phenix Hydro
Company, Inc. to Fieldcrest Cannon, Inc. as security for the
Promissory Note described item A above
+10.32 Security Agreement dated June 18, 1991, between Eagle &
Phenix Hydro Company, Inc. as grantor and Fieldcrest Cannon
Inc. as secured party as security for the Promissory Note
described in item A above
+10.33 Lease agreement dated January 18, 1991, between Eagle &
Phenix Hydro Company, Inc. as lessor and Fieldcrest Cannon,
Inc. as lessee
+10.34 Agreement for the sale of electricity to Virginia Electric &
Power Company dated July 29, 1988, between Virginia Electric
& Power Company and Aquenergy Systems, Inc.
+10.35 Deed of Trust and Security Agreement dated as of November 1,
1988 from Aquenergy Systems, Inc. to The Connecticut Bank
and Trust Company, National Association, as Trustee (Fries
Project)
+10.36A Purchase Power Agreement between Duke Power Company and
Pelzer Hydro Company, Inc. dated February 15, 1991 (Upper
Pelzer)
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.36B Purchase Power Agreement between Duke Power Company and
Pelzer Hydro Company, Inc. dated February 15, 1991 (Lower
Pelzer)
+10.37 Second Amended and Restated Certificate and Agreement of
Limited Partnership of Catalyst Slate Creek Hydroelectric
Partnership, dated as of July 18, 1989 and
Amendment No. 1. dated as of May 9, 1990 thereto
+10.38 Restated and Amended Power Purchase Agreement between
Catalyst Slate Creek Hydroelectric Partnership and
PacifiCorp, dba Pacific Power & Light Company and Utah Power
& Light Company, dated May 8, 1990
+10.39 Lease Agreement dated September 9, 1986, between Wallowa
Hydro Associates, Ltd. as lessee and Roy & Wilfred Daggett
as lessors as amended on April 13, 1988, as assigned to
Joseph Hydro Company, Inc. by Assignment and Assumption of
Leases dated July 31, 1991
+10.40 Lease Agreement dated September 9, 1986, between Wallowa
Hydro Associates, Ltd. as lessee and Rex W. and Zela G.
Ziegler as lessors as amended on April 13, 1988, as assigned
to Joseph Hydro Company, Inc. by Assignment and Assumption
of Leases dated July 31, 1991
+10.41 Lease Agreement dated August 8, 1986 between Wallow Hydro
Associates, Ltd. as lessee and Dale L. Potter as lessor, as
assigned to Joseph Hydro Company, Inc. by Assignment and
Assumption of Leases dated July 31, 1991
+10.42 Amended and Restated Power Purchase Agreement dated July 31,
1991, between Joseph Hydro Company, Inc. and PacifiCorp
Electric Operations
+10.43 Agreement between Wallowa Valley Improvement District No. 1
and Cook Electric, Inc. dated January 6, 1981, as amended on
February 2, 1982, December 13, 1982, December 27, 1982,
September 13, 1983, and July 31, 1991, as assigned to Joseph
Hydro Company, Inc. by Assignment and Consent Agreement
dated July 31, 1991
+10.44 Agreement between Joseph Hydro Associates, Ltd. and the
Little Sheep Creek Property Owners Association as assigned
to Joseph Hydro Company Inc. by Assignment and Assumption of
Contracts dated July 31, 1991
+10.45 American Arbitration Association Order No. 75 110 0110 85
dated September 16, 1983, as assigned to Joseph Hydro
Company, Inc. by Assignment and Assumption of Contracts
dated July 31, 1991
+10.46 Contract between the Connecticut Light and Power Company and
Kinneytown Hydro Company, Inc. (Kinneytown Project) dated
December 2, 1986
+10.47 Open-End Electricity Purchase Agreement Mortgage and
Security Agreement between Kinneytown Hydro Company, Inc.
and the Connecticut Light and Power Company dated April 29,
1988
+10.48 Amended and Restated Agreement of Limited Partnership, dated
as of December 22, +10.48 1989, of Twin Falls Hydro
Associates, L.P.
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.49 Tax Indemnification Agreement, dated as of December 22,
1989, between The Connecticut National Bank, as LP Trustee,
and CHI Acquisitions, Inc. (Exhibit G to item 10.48)
+10.50 Agreement between New York State Electric & Gas Corporation
and Walden Power Corporation dated as of August 2, 1982
+10.51 Lease between Barbara Gurman Lewis and Walden Power
Corporation dated as of August 24, 1982
+10.52 Lease between the Village of Walden and Walden Power
Corporation dated as of August 5, 1982
+10.53 Stock Subscription Agreement dated as of March 30, 1988
among Consolidated Hydro, Inc., Summit Energy Storage Inc.,
Acres International Corporation, Commonwealth Securities and
Investments, Inc. and seven individuals
+10.54 Memorandum of Understanding between Kvaerner Brug A/S,
Boving & Co., Limited, EB Kraftgenerering a.s.
(Powergeneration), and Consolidated Hydro, Inc., dated April
12, 1988
+10.55 Agreement between Kvaerner Brug A/S, Boving & Co., Limited,
EB Kraftgenerering a.s. (Power generation), Summit Energy
Storage Inc., dated April 12, 1988
+10.56 Agreement between Kvaerner Brug A/S, Boving & Co., Limited,
EB Kraftgenerering a.s. (Power generation), Consolidated
Hydro Inc., Summit Energy Storage Inc., dated April 12, 1988
+10.57 Agreement for Energy Services for Summit Energy Storage
Project between Summit Energy Storage Inc. and Acres
International Corporation dated March 30, 1988
+10.50 Letter Agreement dated March 30, 1988 between Summit Energy
Storage Inc. and Acres International Corporation
+10.59 Mitigation Agreement between Summit Energy Storage Inc. and
the City of Norton, Ohio dated May 14, 1990
+10.60 Memorandum of Understanding concerning commitment to lease
between Summit Energy Storage Inc. and Ohio Edison Company,
dated October 8, 1991
+10.61 Agreement concerning specified facility transmission and
dispatching service between Summit Energy Storage Inc. and
Ohio Edison Company, dated October 8, 1991
+10.62A Technical Services Agreement dated June 5, 1992 between
Summit Energy Storage Inc. and Morrison Knudsen Corporation
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.62B Promissory notes dated March 19, 1990 (a) in the principal
amount of $658,500 from Summit Energy Storage Inc. to EB
Kraftgenerering a.s. and (b) in the principal amount of
$341,500 from Summit Energy Storage Inc. to Kvaerner Hydro
Power A/S
+10.63 Promissory note dated May 30, 1991 in the principal amount
of $110,000 from Summit Energy Storage Inc. EB
Kraftgenerering a.s. (Powergeneration)
+10.64 Promissory note dated November 26, 1991 in the principal
amount $500,000 from Summit Energy Storage Inc. to Witoco
Venture Corporation
+10.65 Promissory note dated October 31, 1991 in the principal
amount of $277,778 from Summit Energy Storage Inc. to Andrea
Rich, in her capacity as Trustee of the Howard Rich Trust
for the benefit of Daniel Rich
+10.66 Promissory note dated October 31, 1991 in the principal
amount of $222,222 from Summit Energy Storage Inc. to Andrea
Rich, in her capacity as Trustee of the Howard Rich Trust
for the benefit of Joseph Rich
+10.67A Letter agreements between Summit Energy Storage Inc. and
Curtis Thaxter Stevens Broder & Micoleau dated June 15,
1988, August 29, 1990 and June 21, 1991
+10.67B Kidder, Peabody & Co., Incorporated Fee Letter, dated
September 5, 1989
+10.68 Letter Agreement dated September 26, 1989 between
Consolidated Pumped Storage, Inc. and JDJ Energy Company,
Inc.
+10.69 Conveyance, Pledge, Security and Shareholders Agreement
dated as of September 15, 1990 among Consolidated Pumped
Storage Arkansas, Inc., Consolidated Pumped Storage, Inc.
and JDJ Energy Company, Inc.
+10.70 Loan Agreement and Supply Commitment dated as of September
28, 1990 among Consolidated Pumped Storage Arkansas, Inc.,
Consolidated Pumped Storage, Inc. and Voith Hydro, Inc.
+10.71 Loan Agreement and Supply Commitment dated as of December
18, 1991 among Consolidated Pumped Storage Arkansas, Inc.,
Consolidated Pumped Storage, Inc. and Siemens Power
Ventures, Inc.
+10.72A Warrant to purchase up to 10 shares of common stock of
Consolidated Pumped Storage, Inc. issued to Andrea Rich
+10.72B Securities Purchase Agreement between Consolidated Hydro,
Inc., and BCC Brown Finance (Curacao) N.V., dated June 29,
1992
+10.73 Employment Agreement between Consolidated Hydro, Inc. and
Olof S. Nelson dated March 25, 1992
+10.74 Employment Agreement between Consolidated Hydro, Inc. and
Michael I. Storch dated March 25, 1992
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.75 Employment Agreement between Consolidated Hydro, Inc. and
Carol H. Cunningham dated March 25, 1992
+10.76A Side letter with Carol H. Cunningham dated March 25, 1992
+10.76B Incentive Compensation and Transition Employment Agreement
for the Eagle and Phenix projects, dated December 18, 1992
+10.77 Stockholders, Optionholders and Warrantholders Agreement
among Consolidated Hydro, Inc. and its stockholders,
optionholders and warrantholders dated March 25, 1992
+10.78 Purchase Agreement dated March 25, 1992 among Consolidated
Hydro, Inc., Madison +10.78 Group, L.P., and The Morgan
Stanley Leveraged Equity Fund II, L.P.
+10.79 Amended and Restated Acquisition Facility Agreement between
Consolidated Hydro, Inc. and General Electric Capital
Corporation dated March 25, 1992
+10.80 Note Pledge and Security Agreement between General Electric
Capital Corporation and CHI Acquisitions, Inc., dated June
22, 1993
+10.81 Amendment and Agreement among General Electric Capital
Corporation, and its subsidiaries, dated June 22, 1993
+10.82 Reimbursement Agreement between CHI Acquisitions, Inc.,
Consolidated Hydro Southeast, Inc., Joseph Hydro Company,
Inc., and General Electric Capital Corporation, dated June
22, 1993
+10.83 Kidder, Peabody & Co. Letter Agreement, dated July 19, 1991
+10.84 Participation Agreement dated September 9, 1993 among CHI
Acquisitions, Inc., Sheldon Springs Power Company, Sheldon
Vermont Hydro Company, Inc., GECC and Aircraft Services
Corporation
+10.85 Agreement of Limited Partnership of Sheldon Springs Hydro
Associates, L.P. dated September 9, 1993
+10.86 Loan Agreement dated September 10, 1993 among Missisquoi
Associates, Sheldon Springs Hydro Associates, L.P. and GECC
+10.87 Long-Term, Firm Levelized and Non-Levelized Purchase
Agreement, executed on July 23, 1986, between Vermont Power
Exchange, Inc. and Missisquoi Associates
+10.88 Revolving Credit Agreement among Consolidated Hydro, Inc.,
as the Borrower, the Banks Listed in Schedule I and Den
norske Bank AS, as Agent, dated as of October 14, 1993
+10.89 Warrant Agreement dated as of November 1, 1993, between
Consolidated Hydro, Inc. and SES Partners II, L.P.
+10.90 Stock Option Plan
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+10.91 Form of Stock Option Agreement
+10.92 Form of Indemnifications Agreement
+10.93 Form of Amended and Restated Indenture for the Notes between
Consolidated Hydro, Inc. and Shawmut Bank Connecticut,
National Association, as trustee
+10.94 Form of Exchange Debenture Indenture (including form of
debenture)
+10.95 Registration Rights Agreement, dated June 15, 1993, between
Consolidated Hydro, Inc. and Morgan Stanley
++10.96 Credit and Reimbursement Agreement dated as of February 15,
1995 among CHI Acquisitions II, Inc., Hydro Development
Group Inc., Beaver Valley Power Company, Littleville Power
Company, Inc., Consolidated Hydro Southeast, Inc., Pelzer
Hydro Company, Inc., Joseph Hydro Company, Inc., Slate Creek
Hydro Company, Inc., CHI Acquisitions, Inc., the Lenders
from time to time party thereto, and General Electric
Capital Corporation, as Agent for the Lenders.
+++10.97 Deed of Trust, Assignment of rents and Fixture Filing dated
as of May 10, 1990 between Slate Creek Hydro Associates,
L.P. (f/k/a Catalyst Slate Creek Hydroelectric Partnership),
in favor of First American Title Insurance Company, trustee,
f/b/o General Electric Capital Corp. ("GECC"), recorded in
Book 2595, Page 805, as assigned by GECC to CHI
Acquisitions, Inc. by Assignment of Beneficial Interest
Under Deed of Trust, dated February 15, 1995, recorded in
Book 3260, Page 629, as amended by Modification of Deed of
Trust, dated February 15, 1995, recorded in Book 3260, Page
635, as further assigned by CHI Acquisitions, Inc. to Slate
Creek Hydro Company, Inc., by Assignment of Deed of Trust
dated February 15, 1995, recorded in book 3260, Page 647,
and as further assigned by CHI Acquisitions, Inc. to GECC by
Assignment of Beneficial Interest Under Deed of Trust dated
February 15, 1995 and recorded in Book 3260, Page 651.
+++10.98 Mortgage from Pelzer Hydro Company, Inc. to General Electric
Capital Corporation, dated as of February 15, 1995.
+++10.99 Power Purchase Agreement by and between Niagara Mohawk Power
Corporation and Pyrites Associates, dated as of April 22,
1985, as amended by First Amendment dated as of March 22,
1993.
+++10.100 Lease Agreement between Pyrites Associates (lessee) and St.
Lawrence County Industrial Development Agency, dated June 1,
1985 and recorded in Book 992, Page 742, as amended by First
Amendment dated June 3, 1993 and recorded in book 1072, Page
921.
+++10.101 Pyrites Project Agreement dated November 18, 1982 between
Hydro Development Group Inc. and Hydra-Co Enterprises, Inc.
+++10.102 Cataldo Hydro Power Associates Partnership Agreement dated
October 12, 1983.
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
+++10.103 Agreement of Limited Partnership of Black River Hydro
Associates, dated as of November 23, 1983, as amended by
First Amendment dated as of October 14, 1984 and undated,
unexecuted Second Amendment.
+++10.104 Amended and Restated Power Purchase Agreement - Port Leyden
Plant by and between Black River Hydro Associates and
Niagara Mohawk Power Corporation, dated as of October 15,
1984, as amended by amendments dated October 15, 1984 and
June 18, 1993, respectively.
+++10.105 Lease by and between Lewis County Industrial Development
Agency (Lessor) and Black River Hydro Associates (Lessee),
dated 02/01/85 and recorded in Liber 454 of Deeds, Page 191,
as amended by amendments dated 04/01/86, 05/26/88 and
07/07/93, respectively, the latter being recorded in Liber
565 of Deeds, Page 51.
+++10.106 Indenture of Trust, Mortgage and Assignment given by Lewis
County Industrial Development Agency to Chase Manhattan
Bank, N.A., dated 02/01/85, as supplemented by instruments
dated 04/01/86, 10/31/91 and 07/07/93, the latter being
recorded in Liber 393 of Mortgages, Page 165.
+++10.107 Power Purchase Agreement by and between Hydro Development
Group Inc. and Niagara Mohawk Power Corporation, dated
December 16, 1993 (Dexter, Copenhagen and other Projects).
+++10.108 Mortgage Restatement Agreement between Hydro Development
Group Inc. and General Electric Capital Corporation dated
February 15, 1995 and recorded in the Jefferson County
Clerk's Office in Liber 1362, Page 033.
+++10.109 Project Agreement by and between Hydro Development Group,
Inc. and Hydra-Co Enterprises, Inc., dated November 18,
1982.
+++10.110 Agreement by and between Hydro Development Group, Inc., and
Hydra-Co Enterprises, Inc. dated as of May 23, 1994.
+++10.111 Employment Agreement between Consolidated Hydro, Inc. and
Edward M. Stern dated November 1, 1994.
+++10.112 Termination Agreement between Consolidated Hydro, Inc. and
Olof S. Nelson dated June 27, 1996.
+++10.113 Employment Agreement between Consolidated Hydro, Inc. and
James T. Stewart dated July 1, 1996.
+++++++10.114 Employment Agreement dated as of October 31, 1997, by and
between Consolidated Hydro, Inc. and Michael I. Storch.
+++++++10.115 Employment Agreement dated as of October 31, 1997 by and
between Consolidated Hydro, Inc. and Edward M. Stern.
+++++++10.116 Employment Agreement dated as of October 31, 1997, by and
between Consolidated Hydro, Inc. and Mary V. Gilbert.
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
++++++++10.117 Amendment dated as of July 1, 1996 to the Revolving Credit
Agreement between Consolidated Hydro, Inc. and Den norske
Bank ASA
++++++++10.118 First Amended and Restated Credit Agreement dated as of
October 15, 1996 between Lyon Credit Corporation and BP
Hydro Finance Partnership.
++++10.119 Agreement of Merger, dated as of July 1, 1996, by and among
Consolidated Consolidated Hydro Maine, Inc., CHI Universal,
Inc., Ridgewood Maine Hydro Corporation and Ridgewood Maine
Hydro Partners, L.P.
++++10.120 Letter of Agreement, dated November 15, 1996, amending
Agreement of Merger, dated as of July 1, 1996, by and among
Consolidated Hydro Maine, Inc., CHI Universal, Inc.,
Consolidated Hydro, Inc., Ridgewood Maine Hydro Corporation
and Ridgewood Maine Hydro Partners, L.P.
++++10.121 Letter Agreement, dated December 3, 1996, amending Agreement
of Merger, dated as of July 1, 1996, by and among
Consolidated Hydro Maine, Inc., CHI Universal, Inc.,
Consolidated Hydro, Inc., Ridgewood Maine Hydro Corporation
and Ridgewood Maine Hydro Partners, L.P.
+++++10.122 Amended Engagement Letter, dated as of May 30, 1997, between
Consolidated Hydro, Inc. and Houlihan Lokey Howard and
Zukin, Inc.
++++++10.123 Bill of Sale dated June 13, 1997, between TKO Power, Inc.
and Ralphs Ranches, Inc.
++++++10.124 Termination Agreement dated September 9, 1997, between
Joseph Hydro Company, Inc. and PacifiCorp.
++++++10.125 Purchased Power Agreement between Duke Power and Mill Shoals
Hydro Company, Inc., dated August 12,1997.
10.126 Amended and Restated Trust Indenture dated as of December
31, 1998 between Aquenergy Systems, Inc and UNUM Life
Insurance Company of America, as Trustee.
10.127 Agreement dated as of March 9, 1999 between Charles F. Goff,
Jr. and CHI Energy, Inc.
12.1 Statements regarding computation of ratios
21.1 List of Subsidiaries of Registrant
27.1 Financial Data Schedule
+ Incorporated by reference to the respective exhibit to the
Company's Registration Statement on Form S-1 (File No.
33-69762).
++ Incorporated by reference to the Company's Current Report on
Form 8- K dated May 2, 1995.
+++ Incorporated by reference to the Company's Report on Form
10-K for the fiscal year ended June 30, 1996.
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
++++ Incorporated by reference to the Company's Report on Form
8-K dated December 23, 1996, as amended by Form 8-K/A dated
March 7, 1997.
+++++ Incorporated by reference to the Company's Current Report on
Form 8- K dated June 4, 1997.
++++++ Incorporated by reference to the Company's Report on Form
10-K for the fiscal year ended June 30, 1997.
+++++++ Incorporated by reference to the Company's Report on Form
10-K for the transition period from July 1, 1997 to December
31, 1997.
++++++++ Incorporated by reference to the Company's Report on Form
10-Q for the quarterly period ended December 31, 1996.
</TABLE>
(b) Reports on Form 8-K:
NONE.
87
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHI ENERGY, INC.
(Registrant)
Date: March 30, 1999 By: /s/ Charles F. Goff, Jr.
------------------------------
Chairman, Interim Chief Executive Officer
and Director
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
by:
/s/ Charles F. Goff, Jr.
- ------------------------------
Charles F. Goff, Jr. Chairman, Interim Chief Executive Officer March 30, 1999
and Director
by:
/s/ Edward M. Stern
- ------------------------------
Edward M. Stern President, Chief Operating Officer, March 30, 1999
Secretary, and Director
by:
/s/ Mary V. Gilbert
- ------------------------------
Mary V. Gilbert Senior Vice President, Chief Financial Officer March 30, 1999
(principal financial officer)
by:
/s/ Neil A. Manna
- ------------------------------
Neil A. Manna Vice President, Controller and Treasurer March 30, 1999
(principal accounting officer)
by:
/s/ Michael J. Petrick
- ------------------------------
Michael J. Petrick Director March 30, 1999
by:
/s/ James J. Duplessie
- ------------------------------
James J. Duplessie Director March 30, 1999
</TABLE>
88
<PAGE>
Exhibit 10.126
AMENDED AND RESTATED TRUST INDENTURE
DATED AS OF DECEMBER 31, 1998
BETWEEN
AQUENERGY SYSTEMS, INC.
AND
UNUM LIFE INSURANCE COMPANY OF AMERICA, AS TRUSTEE
RE:
$2,060,000 SENIOR NOTES DUE 2008
$2,940,000 SUBORDINATED NOTES DUE 2008
<PAGE>
TABLE OF CONTENTS
SECTION 1. INTERPRETATION OF AGREEMENT; DEFINITIONS. 2
Section 1.1 Definitions 2
Section 1.2 Accounting Principles 8
SECTION 2. THE NOTES. 9
Section 2.1 The Senior Notes 9
Section 2.2 The Subordinated Notes 9
Section 2.3 Priority for Application of Funds 10
Section 2.4 Certificate of Authentication 10
Section 2.5 Payment of the Senior Notes; Deferrals 10
Section 2.6 Conversion of the Subordinated Notes; Company's
Rights of Redemption and First Offer 11
Section 2.7 The Note Register 13
Section 2.8 Transfers and Exchanges 13
Section 2.9 New Notes 14
Section 2.10 Cancellation of Notes 14
Section 2.11 Trustee as Agent 15
Section 2.12 Ownership 15
Section 2.13 Security for the Notes 15
SECTION 3. PARTICULAR COVENANTS OF THE COMPANY. 15
Section 3.1 Warranty of Title 15
Section 3.2 To Pay Principal and Interest, etc 15
Section 3.3 Note Agreement, Mortgage and Assignment Covenants 15
Section 3.4 Legal Existence, etc 16
Section 3.5 Maintenance of Lien: Recording 16
Section 3.6 Further Assurances: After-Acquired Property 17
Section 3.7 Maintenance of Property 17
Section 3.8 Maintenance of Insurance 17
Section 3.9 Application of Insurance and Condemnation Proceeds 19
Section 3.10 Payment of Taxes and Other Charges; Compliance
with Laws 20
Section 3.11 Limitation on Liens 21
Section 3.12 Sale of Assets or Merger 22
Section 3.13 Permitted Indebtedness 22
Section 3.14 Permitted Distributions 23
Section 3.15 Transactions with Affiliates; O&M Agreement 23
Section 3.16 Acquisition of Notes 23
Section 3.17 Financial and Business Information 23
Section 3.18 Business and Property of the Constituent Companies 25
Section 3.19 Power Sale Agreements 25
Section 3.20 Project Expenses 25
Section 3.21 Qualified Employees 26
i
<PAGE>
SECTION 4. RESERVE ACCOUNT; SECURITY INTEREST; DEPOSIT AND APPLICATION OF
MONEYS. 26
Section 4.1 Reserve Account 26
Section 4.2 Withdrawals from the Reserve Account 27
Section 4.3 Payments by Power Companies 28
Section 4.4 Investment of Funds 29
Section 4.5 Security Interest in Reserve Account and Operating
Account 29
SECTION 5. PREPAYMENT OF NOTES. 30
Section 5.1 Optional Prepayments 30
Section 5.2 Notice of Optional Prepayments 30
Section 5.3 Allocation of Partial Prepayments 30
SECTION 6. REMEDIES OF THE TRUSTEE AND THE NOTEHOLDERS. 31
Section 6.1 Definition of Event of Default; Acceleration of
Maturity 31
Section 6.2 Completed Default; Acceleration of Maturity 32
Section 6.3 Suits for Enforcement; Power of Sale 33
Section 6.4 Foreclosure and Sale of Mortgaged Property 34
Section 6.5 Adjournment of Sale 34
Section 6.6 Trustee May Execute Conveyances and Deliver
Possession; Sale a Bar 34
Section 6.7 Receipt Sufficient Discharge for Purchaser 35
Section 6.8 Sale to Accelerate Notes 35
Section 6.9 Application of Proceeds of Sale 35
Section 6.10 Purchase of Mortgaged Property 36
Section 6.11 Trustee Entitled to Appointment of Receiver 36
Section 6.12 Trustee May Enforce Rights Without Notes 36
Section 6.13 Notice of Event of Default; Waiver 37
Section 6.14 Limitation on Noteholders'Right to Sue 37
Section 6.15 Remedies Cumulative 38
Section 6.16 Delay or Omission Not a Waiver 38
Section 6.17 Waiver of Extension, Appraisement, Stay, Laws 38
Section 6.18 Control of Remedies by Noteholders 38
Section 6.19 Trustee may File Proofs of Claims 39
Section 6.20 Right of Trustee to Perform Covenants, etc 39
Section 6.21 Remedies Subject to Provisions of Law 40
SECTION 7. CONCERNING THE TRUSTEE. 40
Section 7.1 Duties of Trustee 40
Section 7.2 Trustee's Liability 40
Section 7.3 No Responsibility of Trustee for Recitals 42
Section 7.4 Compensation and Expenses of Trustee;
Indemnification; Lien Therefor 42
Section 7.5 Moneys Received by Trustee; Trust Funds
Segregation 42
Section 7.6 Trustee May Hold Notes 43
Section 7.7 Resignation of Trustee 43
ii
<PAGE>
Section 7.8 Removal of Trustee 43
Section 7.9 Appointment of Successor Trustee 43
Section 7.10 Succession of Successor Trustee 44
Section 7.11 Eligibility of Trustee 44
Section 7.12 Successor Trustee by Merger 44
SECTION 8. SUPPLEMENTAL INDENTURES; WAIVERS. 45
Section 8.1 Supplemental Indentures Without Noteholders'
Consent 45
Section 8.2 Waivers and Consents by Noteholders; Supplemental
Indentures With Noteholders'Consent 45
Section 8.3 Notice of Supplemental Indenture 46
Section 8.4 Opinion of Counsel Conclusive as to Supplemental
Indenture 46
SECTION 9. MISCELLANEOUS. 47
Section 9.1 Evidence of Action by Noteholders 47
Section 9.2 Defeasance 47
Section 9.3 Release of Lien 47
Section 9.4 Indenture for Benefit of Parties Hereto 47
Section 9.5 Severability 48
Section 9.6 Addresses for Notices and Demands 48
Section 9.7 Successors and Assigns 48
Section 9.8 Counterparts; Descriptive Headings 48
Section 9.9 Governing Law 48
Section 9.10 No Personal Recourse 48
Section 9.11 Reimbursement of Noteholder Expenses 49
iii
<PAGE>
AMENDED AND RESTATED TRUST INDENTURE
TRUST INDENTURE dated as of December 31, 1998 (herein, as the same may
be amended or supplemented from time to time, called the "Indenture") between
AQUENERGY SYSTEMS, INC., a South Carolina corporation (the "Company"), whose
post office address is P.O. Box 8597, 1311 A Miller Road, Greenville, South
Carolina 29604, and UNUM LIFE INSURANCE COMPANY OF AMERICA, a Maine corporation,
as Trustee (the "Trustee"), whose post office address is 2211 Congress Street,
Portland, Maine 04122.
WHEREAS, the defined terms used in this Indenture shall have the
respective meanings indicated in Section 1.1 unless elsewhere defined or the
context shall otherwise require; and
WHEREAS, the Company has previously issued the aggregate principal
amount of $8,000,000 of its 11.25% Secured Notes due 1988-2003; and
WHEREAS, in connection with the 11.25% Secured Notes due 1988-2003, the
Company entered into an Indenture with the Trustee dated November 1, 1988 (the
"Original Indenture"); and
WHEREAS, the Company, with the consent of the Trustee and the
Noteholders, proposes to substitute for the Secured Notes and all amounts due
thereunder and under the Original Indenture (i) $2,060,000 of its 6.5% Senior
Notes and (ii) $2,940,000 of its 11.5% Subordinated Notes (the Senior Notes and
the Subordinated Notes together the ("Notes"), which Notes are to be issued
under and secured by this Indenture; and
WHEREAS, the parties have agreed to amend and restate the Original
Indenture; and
WHEREAS, all things necessary to make this Indenture the valid
obligation of the Company according to its tenor and effect have been done or
authorized;
NOW, THEREFORE, in consideration of the premises and of the sum of Ten
Dollars and of other good and valuable consideration, the receipt whereof is
hereby acknowledged upon the execution and delivery of this Indenture, the
Original Indenture is hereby amended and restated in its entirety; the Company
declares that the purpose of this Indenture is to secure the equal and pro rata
payment of the principal of and premium, if any, and interest on the Notes at
any time outstanding hereunder according to their tenor and the provisions
hereof, and to secure the faithful performance and observance of all the
covenants and provisions in the Notes, the Note Agreement, the Mortgages, the
Assignment and in this Indenture contained, and to declare the terms and
conditions upon which the Notes will be secured, authenticated, issued,
transferred and exchanged, and upon which the trusts hereof are to be
administered by the Trustee;
THE TRUSTEE DOES HEREBY DECLARE THAT it will hold in trust for the
benefit of the holders of the Notes (but only to the extent of its legal
qualification under the laws of any particular jurisdiction to receive and hold
Property therein for the purposes hereof) all the right,
<PAGE>
title and interest in and to all mortgages, deeds or pledges or similar security
instruments now or hereafter executed and delivered by the Company to the
Trustee, as such mortgages, deeds, pledges or similar security instruments have
been amended or restated, together with all right, title and interest thereby
granted, conveyed, mortgaged or assigned and all proceeds and avails thereof
(all such Properties so held by the Trustee bing sometimes herein referred to as
the "Mortgaged Property").
TO HAVE AND TO HOLD all and singular the Mortgaged Property whether now
owned or held or hereafter acquired, unto the Trustee, its successors in trust
and assigns forever;
IN TRUST, NEVERTHELESS, with power of sale, for the equal and ratable
benefit and security of the Notes from time to time outstanding hereunder,
without preference, priority or distinction of any thereof over any other by
reason of difference in time of issuance, sale, authentication, delivery or
otherwise, and for the enforcement of the payment of the principal of, premium
if any, and interest on the Notes in accordance with their terms, and all other
sums payable under this Indenture or on the Notes, and observance and
performance of the provisions of the Note Agreement, the Mortgages, the
Assignment and this Indenture, all as herein provided.
IT IS HEREBY COVENANTED, DECLARED AND AGREED, that the Notes are to be
issued, authenticated, delivered and secured, and that the Mortgaged Property is
to be held, dealt with and disposed of by the Trustee, upon and subject to the
provisions of this Indenture.
IT IS ALSO HEREBY COVENANTED, DECLARED AND AGREED, that this Indenture
shall constitute a security agreement under the Uniform Commercial Code as in
effect in the applicable jurisdiction or jurisdictions to the extent provided in
Section 4.5 hereof.
SECTION 1. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 1.1 Definitions . Unless the context otherwise requires, the
terms hereinafter set forth when used herein shall have the following meanings
and the following definitions shall be equally applicable to both the singular
and plural forms of any of the terms herein defined:
"Affiliate" means any Person, which, directly or indirectly, through
one or more intermediaries controls, or is controlled by, or is under common
control with, the Person in question. Without limitation, Coneross and CHI-SE
are Affiliates of the Company. The term "control" means the possession directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of its equity interest,
by contract or otherwise.
"Agency Agreement" means the letter agreement between the Trustee, the
Note Purchasers and CHI-SE, dated December 31, 1998, appointing CHI-SE agent for
the Trustee and the Note Purchasers with respect to actions to be taken by
CHI-SE pursuant to Section 4 hereof.
"Aquenergy III" means Aquenergy III Limited Partnership, formerly a
South Carolina limited partnership, which was under common control with the
Company.
2
<PAGE>
"Assignment" means the Assignment of Mortgage and Security Agreement
dated as of November 1, 1988 with respect to the Lien of the Company on the
Coneross Project and related Mortgaged Property.
"Budget Changes" has the meaning assigned thereto in Section 3.17(d)
hereof.
"Business Day" means any day other than a Saturday, Sunday or a legal
holiday for banks in the States of South Carolina or Massachusetts.
"Cash Report" means a monthly report setting forth the cash activity of
the Reserve Account.
"CHI-SE" means Consolidated Hydro Southeast, Inc., a Delaware
corporation, which is under common control with the Company and a successor in
interest to Aquenergy III.
"Closing Date" means such date as shall be specified by not less than
five Business Days' prior written notice from the Company to the Note
Purchasers, upon which date delivery of the Notes will be made in exchange for
delivery for cancellation of the notes outstanding under the Existing Indenture,
as more fully set forth in the Note Agreement.
"Company Agreements" means the Operative Agreements to which the
Company is a party.
"Company Mortgaged Property" means the fee simple estate of the Company
in the Company Projects and related water rights, easements, improvements,
equipment, other personal property, manufacturers' warranties, current and
future Power Sale Agreements, operation and maintenance agreements, and all
rights, licenses, permits, easements and exemptions relating thereto and other
appurtenances thereto.
"Company Mortgages" means each and every mortgage, deed of trust,
security agreement, collateral assignment, pledge or similar security instrument
executed and delivered by the Company to the Trustee, including, without
limitation, the Mortgage and Security Agreements and the Deed of Trust and
Security Agreement dated as of November 1, 1988, with respect to the Woodside I,
Piedmont, Woodside II, Apalache, Fries and Ware Shoals Projects, under and
pursuant to which the Company has mortgaged to the Trustee the Mortgaged
Property described therein.
"Company Projects" means the Woodside I, Piedmont, Woodside II,
Apalache, Fries and Ware Shoals Projects collectively, and "Company Project"
means any of the Company Projects individually.
"Coneross" means Coneross Power Corporation, a South Carolina
corporation, which is under common control with the Company.
"Coneross Agreements" means the Operative Agreements to which Coneross
is a party.
3
<PAGE>
"Coneross Mortgage" means each and every mortgage, deed of trust,
security agreement, collateral assignment, pledge or similar security instrument
executed and delivered by Coneross to the Company, including, without
limitation, the Mortgage and Security Agreement dated as of November 1, 1988,
with respect to the Coneross Project, under and pursuant to which Coneross has
mortgaged to the Company the Mortgaged Property described therein.
"Coneross Mortgaged Property" means the fee simple estate of Coneross
in the Coneross Project and related water rights, easements, improvements,
equipment, other personal property, manufacturers' warranties, current and
future Power Sale Agreements, operation and maintenance Agreements, and all
rights, licenses, permits, easements and exemptions relating thereto and other
appurtenances thereto.
"Coneross Project" means the hydroelectric generating facility owned by
Coneross.
"Consolidated Net Cash Flow After Priority Payments" has the meaning
assigned thereto in Section 2.2 hereof.
"Constituent Companies" means the Company and Coneross.
"Constituent Companies Agreements" means the Company Agreements and the
Coneross Agreements.
"Conversion Agreement" has the meaning assigned thereto in Section
2.6(a) hereof.
"Debt Service Account" has the meaning assigned thereto in Section
4.1(a) hereof, and applies only to the Original Indenture.
"Debt Service Payment Date" means, with respect to the Senior Notes,
the last day of each month from January 31, 1999 to December 31, 2008,
inclusive.
"Default" shall mean any event which would constitute an Event of
Default if all requirements in connection therewith for the giving of notice,
the lapse of time, and the happening of any further condition, event or act, had
been satisfied.
"Duke" means Duke Power Company, a North Carolina corporation, the
electric power purchaser under the Power Sale Agreements for the Piedmont,
Woodside I, Woodside II, Apalache and Ware Shoals Projects.
"Effective Date" means December 31, 1998.
"Event of Default" shall mean any of the Events of Default referred to
in Section 6.1 hereof.
"Fair Market Value" means the price that would be paid assuming the
sale were between a willing buyer and a willing unrelated seller. If the parties
are unable to agree on such price
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within fifteen (15) Business Days of the receipt of reasonably complete
information as part of a proposal by either of them, they shall retain the
services of a professional appraiser who has experience in the appropriate
industries, nominated by the Company and reasonably acceptable to the holders of
the Subordinated Notes who are proposing to sell. If the parties cannot agree on
the appraiser within fifteen (15) Business Days of initial nomination, or such
longer period as the parties have agreed, then each party shall choose a single
appraiser, and the two appraisers thus chosen shall choose the third appraiser,
which third appraiser shall perform the appraisal. If the first two appraisers
cannot agree on the third appraiser within ten (10) Business Days of submission,
such appraiser shall be chosen by the American Arbitration Association.
"Final Budget" has the meaning assigned thereto in Section 3.17(d)
hereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board that are applicable to the
circumstances as of the date of determination. Whenever any accounting term is
used herein which is not otherwise defined, it shall be interpreted in
accordance with GAAP.
"Indebtedness" shall mean and include (i) all items which in accordance
with GAAP would be included in determining total liabilities as shown on the
liability side of a balance sheet as of the date at which Indebtedness is to be
determined, other than partners' or shareholders' equity (ii) indebtedness
secured by any Lien existing on Property owned subject to such Lien, whether or
not the Indebtedness secured thereby shall have been assumed, and (iii)
guarantees, endorsements and other contingent obligations in respect of
indebtedness of others.
"Letter of Credit" has the meaning assigned thereto in Section 4.1(c)
hereof.
"Lien" means any interest in Property securing an obligation owed to,
or a claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and including but not
limited to the security interest or Lien arising from a mortgage, deed of trust,
security agreement, encumbrance, pledge, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes. The term "Lien" shall
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property. for the purposes of this Indenture, each
Constituent Company shall be deemed to be the owner of any Property which it has
acquired or holds subject to a conditional sale agreement, financing lease or
other arrangement pursuant to which title to the Property has been retained by
or vested in some other Person for security purposes.
"Management Fees" has the meaning ascribed in the O&M Agreement.
"Mortgaged Property" means the Company Mortgaged Property and the
Coneross Mortgaged Property collectively.
"Mortgages" means the Company Mortgages and the Coneross Mortgage
collectively,
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and "Mortgage" means any of the Mortgages individually.
"Note" means any of, and "Notes" shall mean all of, the then
outstanding Notes, including the Senior Notes and the Subordinated Notes. The
term "outstanding" when used with reference to Notes shall mean, as of any
particular time, all Notes authenticated and delivered by the Trustee under this
Indenture, except:
(a) Notes theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Notes for the payment of which moneys in the necessary
amount to pay all principal, premium, if any, and interest due and
payable thereon shall have been deposited in trust with the Trustee;
(c) Notes in lieu of or in substitution for which other Notes
shall have been authenticated and delivered pursuant to the terms of
Section 2.8; and
(d) Notes held or acquired by the Company or any Affiliate.
"Note Agreement" means the Note Exchange Agreement, dated as of
December 31, 1998, between the Company and each of the Note Purchasers.
"Noteholders" means, at any time, the current holders of the Notes.
"Note Purchasers" means UNUM Life Insurance Company of America, in its
individual capacity, and First UNUM Life Insurance Company, as purchasers under
the Note Agreement collectively, and "Note Purchaser" means either of the Note
Purchasers individually.
"Note Register" shall have the meaning specified in Section 2.7 hereof.
"O&M Agreement" means the Operation, Maintenance and Administration
Agreement, dated as of December 31, 1998, between the Company, Coneross and
CHI-SE.
"Officer's Certificate" means a certificate signed (i) in the case of a
corporation, by its President or any Vice President; (ii) in the case of a
trust, by the trustee thereof, provided that if such trustee is a bank or trust
company, such certificate shall be signed by any authorized officer thereof; and
(iii) in the case of a partnership, by a general partner thereof, provided that
if such general partner is a corporation, such certificate shall be signed by
the President or any Vice President of such corporation.
"Operating Account" has the meaning provided in Section 5.1 of the O&M
Agreement.
"Operating Report" means a monthly summary of any material
developments, including material deviations from the budget, catastrophes and
material regulatory developments.
"Operative Agreements" means the Note Agreement, the Indenture, the
Mortgages, the Assignment and the Power Sale Agreements.
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"Operator" has the meaning provided in the O&M Agreement; the original
Operator is CHI-SE.
"Opinion of Counsel" means an opinion in writing signed by legal
counsel who shall be satisfactory to the Trustee, and who may be counsel to the
Company.
"Person" shall mean an individual, partnership, corporation, trust,
unincorporated association or other organization, or a government or any
department or agency thereof.
"Power Companies" means any party, other than a Constituent Company, to
a Power Sale Agreement, including but not limited to Duke, Seneca, Virginia
Power, and Appalachian Power Company, collectively, and "Power Company" means
any of the Power Companies individually.
"Power Sale Agreements" means the existing Power Sale Agreements listed
on Schedule I attached hereto, and any new Power Sale Agreement entered into by
a Constituent Company as permitted under Section 3.19 below, collectively, and
"Power Sale Agreement" means any of the Power Sale Agreements individually.
"Power Sales Report" means a monthly report setting forth the actual
power production and revenues of each Project and the amounts budgeted for such
Project for such month.
"Preliminary Budget" has the meaning assigned thereto in Section
3.17(d) hereof.
"Project Expenses" has the meaning provided in Section 5.1 of the O&M
Agreement.
"Projects" means the Company Projects and the Coneross Project as
listed on Schedule I attached hereto collectively, and "Project" means any of
the Projects individually; each of the Projects may be referred to by name
according to the reference in the first column of Schedule I.
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"PURPA" means the Public Utility Regulatory Policies Act of 1978, as
amended.
"Redeemed Portion" has the meaning assigned thereto in Section 2.6(d)
hereof.
"Reserve Account" has the meaning assigned thereto in Section 4.1(b)
hereof.
"Responsible Officer" with respect to the Company or any other Person,
means the President or any Vice President (whether or not designated by a number
o word or words before or after the title "vice president"), or any other
officer customarily performing functions similar to those performed by any of
the above designated officers, and, with respect to a particular matter, any
other officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
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"Security" shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
"Seneca" means the City of Seneca, South Carolina, a municipality, the
electric power purchaser under the Power Sale Agreement for the Coneross
Project.
"Senior Notes" means the Company's 6.5% senior notes due 2008, more
fully described in Section 2.1 hereof.
"Subordinated Notes" means the Company's 11.5% subordinated notes due
2008, more fully described in Section 2.2 hereof.
"Target Amount" has the meaning assigned thereto in Section 4.2 hereof.
"Virginia Power" means Virginia Electric and Power Company, a Virginia
Public Service corporation, the electric power purchaser under the Power Sale
Agreement for the Fries Project.
Section 1.2 Accounting Principles . Where the character or amount of
any asset or liability or item of income or expense is required to be determined
or any consolidation or other accounting computation is required to be made for
the purposes of this Indenture, the same shall be done in accordance with GAAP,
to the extent applicable.
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SECTION 2. THE NOTES.
Section 2.1 The Senior Notes .
(a) The Senior Notes shall be issued as fully registered Notes
in substantially the form attached hereto as Exhibit A. The Notes shall be
designated the Company's 6.5% Senior Notes due 2008 and shall be issued in the
aggregate principal amount of $2,060,000.
(b) The Senior Notes shall be dated the date of issuance
thereof (except in the case of Senior Notes issued pursuant to Section 2.9),
shall bear interest on the unpaid principal amount thereof and on any balance of
unpaid interest at the rate of 6.5% per annum payable monthly (computed, in each
case, as if each full calendar month consisted of 30 days and each calendar year
consisted of 360 days); and will be otherwise in the form of Exhibit A hereto.
(c) The Senior Notes shall be secured as provided in Section
2.13 hereof.
(d) The Senior Notes may be prepaid as provided in Section 5
hereof.
(e) In the event that the Company exercises its rights
provided in Section 2.6(b) or 2.6(c), the holders of the Senior Notes shall have
the right to put and accelerate payment on the Senior Notes, as provided in
Section 2.6(d).
Section 2.2 The Subordinated Notes .
(a) The Subordinated Notes shall be issuable as fully
registered Notes in substantially the form attached hereto as Exhibit B. The
Subordinated Notes shall be designated the Company's 11.5% Subordinated Notes
due 2008 and shall be issued in the aggregate principal amount of $2,940,000.
(b) The Subordinated Notes shall be dated the date of issuance
thereof (except in the case of Notes issued pursuant to Section 2.9), shall bear
interest on the unpaid principal amount thereof, but shall be payable only on
the terms as specified herein and will otherwise be in the form of Exhibit B,
hereto. Payment on the Subordinated Notes shall be subordinate to the Company's
obligations to pay Project Expenses, interest and principal on the Senior Notes,
and Management Fees, as provided in Sections 4.2 and 6.9 hereof.
(c) The Subordinated Notes shall be secured as provided in
Section 2.13 hereof.
(d) The Subordinated Notes may be prepaid as provided in
Section 5 hereof.
(e) The Company shall have no current debt service obligation
with respect to the Subordinated Notes except to the extent of Consolidated Net
Cash Flow After Priority Payments (as defined below), such payment to be made at
the time provided in Section 4.2(b).
"Consolidated Net Cash Flow After Priority Payments" means, for any
year, the
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following, computed on the basis used in the cash flow projections attached as
Schedule 5.2 to the O&M Agreement: (i) aggregate operating revenues from sale of
electricity from all Projects owned by the Constituent Companies for such
period, less (ii) all amounts paid, regardless of the source of payment, in
accordance with the provisions of Section 4.2(a) and the first priority of
Section 4.2(b) below.
Section 2.3 Priority for Application of Funds . The Company's funds
shall be applied in the order of priority set forth Section 4.2.
Section 2.4 Certificate of Authentication . Only such Notes as shall
bear thereon a certificate of authentication substantially in the form set forth
in Exhibit A or Exhibit B hereto shall be entitled to the benefits of this
Indenture or be valid or obligatory for any purpose. Such certificate by the
Trustee upon any Note executed by the Company shall be conclusive evidence that
the Note so authenticated has been duly authenticated and delivered hereunder
and that the holder is entitled to the benefits of this Indenture. The
authentication by the Trustee of any Note issued hereunder shall not be
construed as a representation or warranty by the Trustee as to the validity or
security of this Indenture or of such Note, and the Trustee shall in no respect
be liable or answerable for the use made of such Note or the proceeds thereof.
Section 2.5 Payment of the Senior Notes; Deferrals .
(a) The principal and interest on the Notes shall be payable
at the principal office of the Trustee, in lawful money of the United States of
America.
(b) Notwithstanding anything contained herein or in the Senior
Notes to the contrary, in the event that Company funds are not sufficient, as
determined pursuant to Section 4.2 hereof, to pay one or more installments of
interest due under the Senior Notes, with notice as set forth below, the Company
may defer all or any portion of the installment payment of interest then due, as
long as it has not deferred more than $65,000 at any one time outstanding,
exclusive of interest accrued on deferred amounts of interest. The Company shall
furnish notice to the Trustee of each such deferral on the applicable Debt
Service Payment Date.
(c) Notwithstanding the provisions of the preceding paragraph
(a), upon written request by any Noteholder, payment of interest on such Senior
Notes shall be made by wire transfer in immediately available Federal reserve
funds to such bank in the continental United States as shall be specified in
writing to the Company by such Noteholder, and such Noteholder (or the Person
for whom such Noteholder is a nominee) before selling, transferring or otherwise
disposing of such Senior Note, shall note thereon all payments of interest
theretofore received by such holder. All payments so made shall be valid and
effective to satisfy and discharge the liability upon such Senior Note to the
extent of the sums so paid.
(d) In the event the Trustee shall have received any payment
on the Senior Notes or other payment under this Indenture for any Noteholder,
the Trustee agrees to wire transfer such funds to such Noteholder at the address
provided pursuant to the Note Agreement on the date of receipt of such funds if
they are received in good funds by the Trustee prior to noon local time, or if
such funds are received after 12:00 noon, on the next day on which banks in New
York City, New York and Pittsburgh, Pennsylvania shall be open for business, or
if such
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funds received shall not be good funds, on the date the Trustee shall have good
funds, subject to the foregoing time provisions.
Section 2.6 Conversion of the Subordinated Notes; Company's Rights of
Redemption and First Offer .
(a) Right to Convert. Pursuant to a letter agreement of even
date herewith (the "Conversion Agreement"), on and after the fourth anniversary
of the Effective Date, or sooner as provided in Section 6.1, the holders of the
Subordinated Notes shall have the right, subject to the provisions of this
Section 2.6, to convert all, but not less than all, of the Subordinated Notes
into common stock of the Company. No Subordinated Note outstanding after the
effective date of such conversion shall be of any further force or effect.
(b) Company's Right to Redeem Subordinated Notes on
Conversion. Except as provided in Section 6.1, before any of the Subordinated
Notes may be converted, the holders of all outstanding Subordinated Notes shall
first give written notice to the Trustee and the Company of their intent to
convert. The Company shall thereupon have the option, but not the obligation, to
redeem from the holders of the Subordinated Notes all, but not less than all of
the Subordinated Notes. The redemption price for the Subordinated Notes shall in
no event exceed the lesser of (i) Fair Market Value, or (ii) the aggregate
amount of principal, interest and costs then payable under the Subordinated
Notes. Within 60 days after the giving of notice by the holders of the
Subordinated Notes, the Company shall give written notice to the holders of the
Subordinated Notes stating whether or not it elects to exercise this right to
redeem the Subordinated Notes. Failure by the Company to give such notice within
such time shall be deemed an election by the Company not to exercise such
option. After the holders of the Subordinated Notes have received notice of the
Company's intention with respect to this right of redemption, the holders of the
Subordinated Notes and the Company shall agree on a closing date for either the
Company's redemption or the conversion by the holders of the Subordinated Notes,
whichever is applicable. The closing on any conversion shall be 180 days after
the original notice of intent from such holders, or as soon thereafter as is
possible. The closing date for the Company's redemption shall be not less than
30 days nor more than 90 days after the giving of such notice by the Company.
(c) Company's Right of First Offer on Sales and Other
Transfers. Before any of the Subordinated Notes may be offered to be sold or
otherwise transferred to any Person other than an Affiliate of the original Note
Purchasers, the holders of the Subordinated Notes shall first give written
notice to the Trustee and the Company of their intent to sell or transfer, which
notice shall contain a proposed price at which the Company shall have the right
to purchase all (but not less than all) of the Subordinated Notes proposed to be
sold; such price may be stated in terms of an amount which yields a "spread"
from a benchmark interest rate (for example, 400 basis points over the rate on
five-year U.S. Treasury notes); such price shall in no event exceed the
aggregate amount of principal, interest and costs payable under the Subordinated
Notes proposed to be sold.
Within thirty (30) days after the giving of notice by the holders of
the Subordinated Notes, the Company shall give written notice to the holders of
the Subordinated Notes stating (i)
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whether or not it elects to exercise the right to purchase such Subordinated
Notes, and (ii) if so, whether the proposed price is acceptable; if the proposed
price is not acceptable, such notice shall contain the Company's proposal of an
alternative price. Failure by the Company to give any such notice within such
time shall be deemed an election by the Company not to exercise such option.
Within thirty (30) days after the giving of a notice by the Company
stating an alternative price, the holders of the Subordinated Notes shall give
written notice to the Company as to whether the alternative price is acceptable.
If such price is acceptable, the holders of the Subordinated Notes shall so
state in a notice to the Company, whereupon there shall be a binding agreement
for the purchase and sale of the Subordinated Notes at the Company's alternative
price. If such price is not acceptable, the holders of the Subordinated Notes
shall so state in a notice to the Company, and such holders shall thereafter be
free to sell such Subordinated Notes at a price greater than the Company's
proposed alternative price; provided that if the closing on any sale or transfer
to a third party does not take place within 180 days after the original notice
of intent from the holders, the Company's rights hereunder shall be reinstated.
If the Company elects not to exercise its rights hereunder in any other
fashion, whether by failure to respond as provided above, by notice of waiver,
or otherwise, the holders of such Subordinated Notes shall thereafter be free to
sell such Subordinated Notes at a price not less than their proposed price;
provided that if the closing on any sale or transfer to a third party does not
take place within 210 days after the original notice of intent from the holders,
the Company's rights hereunder shall be reinstated.
If the Company and such holders agree on a price as outlined above, the
closing date for the Company's purchase shall be not less than 30 days nor more
than 90 days after the date on which the holders of the Subordinated Notes give
notice to the Company of their acceptance of the Company's alternative price.
(d) Put Right. In the event that the Company exercises its
right of redemption pursuant to Section 2.6(b) or redeems Subordinated Notes
pursuant to its right of first offer pursuant to Section 2.6(c), the holders of
the Senior Notes shall have the option, but not the obligation, to put the
Senior Notes and require the Company to pay the holders of the Senior Notes all
amounts of principal, interest and deferred interest then due and owing on the
Senior Notes. In cases where Section 2.6(c) is applied to a portion of the
Subordinated Notes which is less than 100% (the "Redeemed Portion"), then the
put right under this Section 2.6(d) shall apply only to the same percentage of
Senior Notes as the Redeemed Portion, ratably among holders of the Senior Notes
according to the aggregate amount of Senior Notes for which the put right is
sought to be exercised. The payment by the Company of such amounts shall be due
on the closing date of the purchase by the Company of the Subordinated Notes, as
provided in Section 2.6(b) or (c).
Section 2.7 The Note Register . The Company shall cause to be kept at
the principal office of the Trustee a register for the registration and transfer
of Notes (herein called the "Note Register"). The names and addresses of the
holders of the Notes, the transfers of the Notes and the names and addresses of
the transferees of all Notes shall be registered in the Note Register.
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Section 2.8 Transfers and Exchanges.
(a) The holder of any Note may transfer, subject to the
Company's rights referenced in Section 2.6(b) or (c) hereof, such Note upon the
surrender thereof at the principal office of the Trustee. Thereupon, the Company
shall execute in the name of the transferee a new Note or Notes in aggregate
unpaid principal amount equal to the aggregate unpaid principal amount of the
Note so surrendered by in form showing the original principal amount with an
endorsement of payments theretofore made affixed thereto and the Trustee shall
authenticate and deliver such new Note or Notes to such transferee.
(b) The holder of any Note may at any time surrender such Note
at the principal office of the Trustee in exchange for an equal aggregate
principal amount of Notes in any authorized denominations.
(c) All Notes presented or surrendered for exchange or
transfer shall be accompanied by a written instrument or instruments of
assignment or transfer, in form satisfactory to the Trustee, duly executed by
the registered holder or by his attorney fully authorized in writing. The
Company shall not be required to make a transfer or an exchange of any Note for
a period of ten (10) days preceding any payment date with respect thereto.
(d) In case any Note shall become mutilated or be destroyed,
lost or stolen, the Company, upon the written request of the holder thereof,
shall execute, and the Trustee shall authenticate and deliver, a new Note in
exchange and substitution for the mutilated Note, or in lieu of and substitution
for the Note so destroyed, lost or stolen, which new Note shall be in an
aggregate unpaid principal amount equal to the aggregate unpaid principal amount
of such destroyed, lost or stolen Note but in form showing the original
principal amount with an endorsement of payments theretofore made affixed
thereto. In every case the applicant for a substituted Note shall furnish to the
Company and to the Trustee such security or indemnity as may be required by them
to save each of them harmless from all risks, and the applicant shall also
furnish to the Company and to the Trustee evidence to their satisfaction of the
mutilation, destruction, loss or theft of the applicant's Note and of the
ownership thereof. If a Note Purchaser, or another holder having a new worth not
less than $10,000,000, or either's nominee, is the owner of any mutilated,
destroyed, lost or stolen Note, then the affidavit of its president, Vice
President, Assistant Vice President, Second Vice President or Treasurer in form
reasonably satisfactory to the Company and the Trustee setting forth the fact of
mutilation, destruction, loss or theft and such holder's ownership of the Note
at the time of such mutilation, destruction, loss or theft shall be accepted as
satisfactory evidence thereof, and no indemnity shall be required as a condition
to execution and delivery of a new Note other than the written agreement of such
holder, in form satisfactory to the Company and the Trustee, to indemnify the
Company and the Trustee.
Section 2.9 New Notes.
(a) Each new Note (herein in this Section 2.9 called a New
Note) issued pursuant to Section 2.8 in exchange for or in substitution or in
lieu of an outstanding Note
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(herein in this Section 2.9 called an Old Note) shall be dated the date of such
Old Note. The Trustee shall mark on each New Note (i) the date to which interest
and principal have been paid on such Old Note, and (ii) all payments and
prepayments of principal previously made on such Old Note which are allocable to
such New Note. Interest shall be deemed to have been paid on such New Note to
the date on which interest shall have been paid on such Old Note, and all
payments and prepayments of principal marked on such New Note, as provided in
clause (ii) above, shall be deemed to have been made thereon.
(b) Upon the issuance of a New Note pursuant to Section 2.8,
the Company may require the payment of a sum to reimburse it for, or to provide
it with funds for, the payment of any tax other governmental charge connected
therewith but no other charge shall be made in connection with the transfer or
exchange.
(c) All New Notes issued pursuant to Section 2.8 in exchange
for or in substitution or in lieu of Old Notes shall be valid obligations of the
Company evidencing the same outstanding debt as the Old Notes and shall be
entitled to the benefits and security of this Indenture to the same extent as
the Old Notes.
Section 2.10 Cancellation of Notes . All Notes surrendered for the
purpose of payment, redemption, transfer or exchange shall be delivered to the
Trustee for cancellation or, if surrendered to the Trustee, shall be canceled by
it, and no Notes shall be issued in lieu thereof except as expressly required or
permitted by any of the provisions of this Indenture. The Trustee shall hold all
such canceled Notes until this Indenture shall have been discharged, at which
time the Trustee shall either deliver such canceled Notes in a manner necessary
to effect the discharge and release of this Indenture of record or, if no such
delivery is necessary, shall deliver such canceled Notes to the Company. The
Trustee shall deliver a certificate to the Company specifying any cancellation
of Notes which has been made. If the Company or any Affiliate shall acquire any
of the Notes, however, such acquisition shall not operate as a redemption or
satisfaction of the indebtedness represented by such Notes unless and until the
same are surrendered to the Trustee for cancellation, which the Company agrees
shall be done promptly.
Section 2.11 Trustee as Agent . The Trustee is hereby appointed the
agent of the Company for the payment, registration, transfer and exchange of
Notes. Subject to the provisions of Section 2.5 and Section 7.1, Notes may be
presented for payment at, and notices or demands with respect to the Notes or
this Indenture may be served or made at, the principal office of the Trustee,
provided that copies of all such notices or demands shall be delivered to the
Company.
Section 2.12 Ownership . The Person in whose name any Note shall be
registered shall be deemed and treated as the owner thereof for all purposes of
this Indenture and neither the Company nor the Trustee shall be affected by any
notice to the contrary. Payment of or on account of the principal of, premium,
if any, and interest on such Note shall be made only to or upon the order in
writing of such registered owner. For the purpose of any request, direction or
consent hereunder, the Company and the Trustee may deem and treat the registered
owner of any Note as the owner thereof without production of such Note.
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Section 2.13 Security for the Notes . Subject to the priority of
payment provisions pursuant to Section 4.2 hereof, the Notes are ratably secured
by a first priority security interest in the Mortgaged Property, as evidenced by
the Mortgages.
SECTION 3. PARTICULAR COVENANTS OF THE COMPANY.
The Company covenants with the Trustee for the benefit of the Trustee
and the holders of the Notes as follows:
Section 3.1 Warranty of Title . Subject only to the Lien of the
Mortgages and Liens permitted thereby, the Constituent Companies have good and
marketable fee simple title to, and are lawfully possessed of, all of the
Mortgaged Property and have full right, power and authority to mortgage and
pledge the same for the purposes hereof; and will warrant and defend title
thereto to the Trustee against claims of all persons whomsoever, subject as
aforesaid.
Section 3.2 To Pay Principal and Interest, etc . The Company will duly
and punctually pay or cause to be paid, without extension, except as otherwise
provided, the principal of and interest on each of the Notes at the time and
place and in the manner mentioned in the Notes and herein.
Section 3.3 Note Agreement, Mortgage and Assignment Covenants . Each
and all of the terms, provisions, restrictions, covenants and agreements set
forth in the Note Agreement, the Mortgages and the Assignment, and in each and
every supplement thereto or amendment thereof which may at any time or from time
to time be executed and delivered by the parties thereto, or their successors
and assigns, are incorporated herein by reference to the same extent as though
each and all of said terms, provisions, restrictions, covenants and agreements
were fully set out herein and as though any amendment or supplement to the Note
Agreement and Mortgage and Assignment were fully set out in an amendment or
supplement to this Indenture; and the Company does hereby covenant and agree
well and truly to abide by, perform and be governed and restricted by each and
all of the matters provided for by the Note Agreement, the Mortgages and the
Assignment and so incorporated herein to the same extent and with the same force
and effect as if each and all of said terms, provisions, restrictions, covenants
and agreements so incorporated herein by reference were set out and repeated
herein at length.
Section 3.4 Legal Existence, etc . The Company will preserve and keep
in force and effect the legal existence of the Constituent Companies and all
material licenses and permits reasonably necessary to the proper conduct of
their business. Without limiting the foregoing, the Company will maintain in
good standing all licenses, franchises, exemptions and permits necessary to
operate the Projects, and will cause the Projects at all times to be and remain
qualified small power producers so that the sale of all electric power from the
Projects is subject to the guidelines contained in PURPA or any successor
legislation thereto, so long as such legislation remains in effect.
Section 3.5 Maintenance of Lien: Recording .
(a) The Company will, at its expense, take all necessary
action to maintain
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and preserve the Lien of this Indenture and each Mortgage so long as any
principal of or interest on any Notes is outstanding.
(b) The Company will, forthwith after the execution and
delivery of this Indenture and each Mortgage and thereafter from time to time,
cause this Indenture and each Mortgage and Assignment and any related financing
statements to be filed, registered and recorded in such manner and in such
places as may be required by law in order to publish notice of and fully to
protect the Lien thereof and of each Mortgage in respect of, upon, and the
interest of the Trustee in, the Mortgaged Property; and the Company will cause
any continuation statements required by applicable law in respect of each
Mortgage to be timely filed at the expense of the Company in such manner and in
such places as may be required by law in order to fully preserve and protect the
rights of the holders of the Notes. From time to time the Company will perform
or cause to be performed any other act as provided by law and will execute or
cause to be executed any and all further instruments that may be required by law
or requested by the Trustee for such protection. To the extent permitted by
applicable law, the Company will pay or cause to be paid all filing,
registration and recording taxes and fees incident to such filing, registration
and recording, and all expenses incident to the preparation, execution and
acknowledgment of this Indenture and each Mortgage and Assignment, and of any
instrument of further assurance, and all federal or state stamp taxes and other
taxes, duties, imposts, assessments and charges arising out of or in connection
with the execution and delivery of this Indenture and each Mortgage and
Assignment and such instrument of further assurance.
Section 3.6 Further Assurances: After-Acquired Property.
(a) The Company will do, execute, acknowledge and deliver, or
cause to be done, executed, acknowledged and delivered, all such further acts,
deeds, conveyances, mortgages, assignments, transfers and assurances as the
Trustee reasonably may require for the perfection and maintenance of the Liens
being herein provided for.
(b) All right, title and interest of the Constituent Companies
in and to all extensions, improvements, betterments, renewals, substitutes and
replacements of, and all additions and appurtenances to, the Mortgaged Property,
or any part thereof, hereafter constructed or acquired by the Constituent
Companies, immediately upon such construction or acquisition, and without any
further mortgaging, conveyance or assignment, shall become and be part of the
Mortgaged Property and shall be subject to the Lien of this Indenture as fully
and completely and with the same effect as though now owned by the Constituent
Companies, but at any and all times the Constituent Companies will execute and
deliver or cause to be executed and delivered to the Trustee any and all such
further assurances, mortgages, conveyances or assignments thereof and other
instruments with respect thereto as the Trustee may reasonably require for the
purpose of expressly and specifically subjecting the same to the Lien of this
Indenture.
Section 3.7 Maintenance of Property . The Constituent Companies will at
all times maintain, preserve and keep their Property in good condition and make
all necessary renewals, replacements, additions, betterments and improvements
thereto, including those reflected in the budget attached hereto as Exhibit
3.17(d), provided that if any capital expenditure item reflected
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on such budget is required by any governmental authority, but is not, in the
opinion of the Company, reasonably required in connection with the operation or
maintenance of a Project, the Company may delay such work to the extent
permitted under applicable law, provided that it shall not thereby jeopardize
any license or permit.
Section 3.8 Maintenance of Insurance . The Company will maintain with
financially sound and reputable insurers, insurance with respect to all
Properties owned by the Constituent Companies and their business against such
casualties and contingencies, of such types (including fire and extended
coverage, business interruption, and general comprehensive public liability
insurance) and in such amounts as is customary in the case of companies engaged
in the same or similar business and similarly situated. Such insurance may be
maintained pursuant to "blanket" policies covering the Constituent Companies and
the Projects as part of a group of direct and indirect subsidiaries and other
affiliates of CHI Energy, Inc. and the assets of such entities.
Without limiting the foregoing, the Company shall:
(a) keep the Mortgaged Property and all insurable Property
owned by the Constituent Companies fully insured against all physical
loss, including loss by fire, earthquake, windstorm, explosion, flood
and theft, with extended coverage, in an amount not less than the full
insurable value thereof (i.e., the actual replacement cost, without
allowing for depreciation, and excluding foundation and excavation
costs and costs of underground flues, pipes, drains and other
uninsurable items) as determined from time to time, provided that such
insurance shall in any event be in amounts sufficient to prevent any
Constituent Company from being a co-insurer of any partial loss under
the applicable policies, and such policies of insurance shall provide
that (i) the loss, if any, thereunder shall be payable to the Trustee
under a standard mortgagee loss payable clause in form and substance
satisfactory to the Trustee, and (ii) such policies shall not be
canceled for any reason other than non-payment of premiums without at
least thirty (30) days' prior written notice to the Trustee; such
policies shall not be canceled because of non-payment of premiums
without at least ten (10) days' prior written notice to the Trustee;
such policies may have a deductible of $100,000 for physical damage and
thirty (30) days' business interruption, subject to changes in the
insurance market, with any change in such deductibles subject to
approval of a majority in interest of the Noteholders, such approval
not to be unreasonably withheld or delayed;
(b) maintain all such workmen's compensation or similar
insurance as may be required by law with respect to the business
operations of the Constituent Companies;
(c) maintain use and occupancy (or business interruption)
insurance, covering sudden and unexpected interruption of the
operations of the Constituent Companies, in whole or in part, by reason
of the total or partial suspension of, or interruption in, the
operation of the Projects caused by the damage to or destruction of any
part of its electric generating and transmission facilities, with such
exceptions as are customarily imposed by insurers, in an amount
sufficient to comply with the lesser of (i) the requirements of a
standard 50% gross earnings business interruption form and covering an
interruption in operations for at least 45 days, or (ii) coverage of
all Project Expenses of the Constituent
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Companies, and the payment of the principal of and interest on the
Notes when due and payable, starting fifteen (15) days and continuing
for one (1) year after such interruption, provided, however that in
lieu of the above, a reasonable deductible in the form of a waiting
period will be permitted; and
(d) maintain excess liability insurance in excess of $200,000
against claims for bodily injury, death or property damage occurring
on, in or about the Property of the Constituent Companies and liability
insurance, covering the operations of the Constituent Companies, with
single-limit coverage of not less than $25,000,000 per occurrence and
in the aggregate for bodily injury or death to any person and for
property damage, and with umbrella excess liability coverage against
claims for bodily injury or death to any person and for property
damage, and such policies of insurance shall provide that (i) the
Trustee and the holders of the Notes shall be named as additional
insured parties thereunder, and (ii) such policies shall not be
canceled for any reason other than non-payment of premiums without at
least thirty (30) days' prior written notice to the Trustee; such
policies shall not be canceled because of non-payment of premiums
without at least ten (10) days' prior written notice to the Trustee;
The Company shall, on or before the Closing Date, furnish the Note
Purchasers and the Trustee with certificates or other satisfactory evidence of
maintenance of the insurance required hereunder and shall with respect to any
renewal policy or policies, furnish certificates evidencing such renewal not
less than ten (10) days prior to the expiration date of the original policy or
policies. Each such certificate or other evidence of insurance shall identify
the insurance carrier, the type of insurance, the coverage limits and the policy
term. On or before the Closing Date and thereafter annually while any of the
Notes are still outstanding, the Company will deliver to the Trustee a report by
a firm of independent insurance brokers (which may be the Company's regular
insurance agency) chosen by the Company and satisfactory to the Trustee setting
forth the insurance obtained by the company pursuant to this Section and then in
effect and stating that, in the opinion of such firm, such insurance complies
with the requirements of this Section.
Section 3.9 Application of Insurance and Condemnation Proceeds.
(a) All proceeds of any insurance, including without
limitation, fire and extended coverage insurance covering the Mortgaged Property
and all other insurable Property of the Constituent Companies, but excluding
public liability and business interruption insurance, received by the Trustee
under the provisions of this Indenture, any Mortgage and/or Note Agreement, or
any instruments supplemental hereto or thereto, or under any policies of
insurance covering the Mortgaged Property or any part thereof (except in cases
where the amount of proceeds received is less than $300,000, a Default or an
Event of Default under this Indenture shall not exist, the Mortgaged Property is
not impaired and the Trustee and the Note Purchasers do not deem themselves
insecure with respect to the Liens of this Indenture or any of the Mortgages, in
which case the amount payable in respect of any such loss may be received by the
appropriate Constituent Company, and if received by the appropriate Constituent
Company, and if received by the Trustee shall be paid over to the appropriate
Constituent Company for its use in paying for replacement or repairs of or
substitutes for the damaged or destroyed Property), shall be held by the Trustee
as part of the Mortgaged Property and shall be applied by the Trustee
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as follows:
(i) if the total amount of the proceeds of such
insurance received by the Trustee shall in the case of any one loss
equal or exceed $300,000, and if within sixty (60) days after receipt
of such proceeds a Constituent Company shall have given written notice
to the Trustee and the holders of the Notes that it intends to repair,
replace or restore the Mortgaged Property, such proceeds shall be paid
to such Constituent Company from time to time upon delivery by such
Constituent Company to the Trustee of an Officer's Certificate
accompanied by an approving certificate of an architect or engineer
selected by such Constituent Company and approved by the Trustee, for
the purpose of paying, or reimbursing such Constituent Company for the
payment of, the reasonable cost, as shown by such certificate, or
repairing or replacing part or all of the Property damaged or
destroyed, but only if written application is made therefor within six
(6) months of the receipt of such proceeds by the Trustee, and then
only for and to the extent that the Constituent Company shows by such
architect's or engineer's certificate or other evidence satisfactory to
the Trustee that the portion of such proceeds remaining on deposit with
the Trustee together with any additional funds irrevocably allocated or
otherwise provided for in a manner satisfactory to the Trustee for such
purpose, shall be sufficient to complete such repairs or replacements
and restore the Mortgaged Property as nearly as possible to the market
value and usefulness which existed immediately prior to the damage or
destruction free from Liens except the Mortgage and Permitted
Encumbrances. Every such application for the payment of such insurance
moneys shall state that such Constituent Company is not in default
under any of the terms and provisions of this Indenture and shall be
accompanied by an Opinion of Counsel to the effect that upon completion
of the repair or replacement such Property will be subject to the Lien
of the Mortgage, subject only to such Liens as are permitted hereunder.
(ii) In the event the insurance moneys shall not have
been applied to one or more of the purposes specified in Section
3.9(a)(i) hereof within the six-month period provided for thereby, or
if the Constituent Company shall not have given notice of its intention
to repair, replace or restore the Mortgaged Property within sixty (60)
days of receipt of such insurance moneys, then the Trustee shall apply
such insurance moneys in a manner consistent with Section 4.2 hereof in
an amount sufficient to exhaust such cash as nearly as may be upon
giving the Constituent Company ten (10) days' advance notice of its
intent so to do, any balance remaining after prepayment to be released
to the Constituent Company.
(b) Moneys received by the Trustee in connection with the
release of Property, including moneys received by the Trustee by reason of the
exercise of the power of eminent domain with respect to any part of the
Mortgaged Property, shall be held by the Trustee as part of the Mortgaged
Property and shall be held and disbursed or applied in the same manner and upon
the same terms and conditions as provided for in Section 3.9(a) hereof in
respect of insurance proceeds.
(c) Notwithstanding the foregoing provisions of this Section
3.9, if an Event of Default has occurred and is continuing to the actual
knowledge of a responsible officer or
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employee of the Trustee, all amounts received by the Trustee under this
Indenture shall be applied in the manner provided for in Section 6.9 hereof in
respect of proceeds and avails of the Mortgaged Property.
Section 3.10 Payment of Taxes and Other Charges; Compliance with Laws.
(a) The Company will pay or cause to be paid, before they
become delinquent:
(i) all taxes, assessments and governmental
charges or levies imposed upon the Constituent Companies or their
Property, and
(ii) all claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like Persons which, if
unpaid, might result in the creation of a Lien upon Property of the
Constituent Companies;
provided that items of the foregoing description need not be paid while being
contested in good faith and by appropriate proceedings so long as adequate book
reserves have been established with respect thereto, and the title of a
Constituent Company to and its right to use its Property is not materially and
adversely affected thereby.
(b) The Constituent Companies will not be in violation of any
laws, ordinances or governmental rules or regulations to which they are subject
and will not fail to obtain any licenses, permits, franchises or other
governmental authorizations necessary to the ownership, use or operation of
their Properties or to the conduct of their business, which violation or failure
to obtain might materially and adversely affect the business, prospects,
profits, Properties or condition (financial or otherwise) of a Constituent
Company; provided that nothing contained in this Section 3.10(b) shall require
compliance with any law, ordinance, rule or regulation the validity or
applicability of which is being contested in good faith and by appropriate
proceedings so long as the title of a Constituent Company to and its right to
use its Property is not materially and adversely affected thereby.
Section 3.11 Limitation on Liens . The Company will not create or incur
or suffer to be incurred or to exist, any Lien of any kind upon any Property of
the Constituent Companies including the Mortgaged Property or any of the items
of machinery, equipment and other personal Property located therein or thereon,
whether now owned or hereafter acquired, or upon any income or proceeds
therefrom, except the following:
(a) liens for property taxes and assessments or governmental
charges or levies and liens securing claims or demands of mechanics and
materialmen, provided that payment thereof is not overdue, is being contested in
good faith by appropriate actions or proceedings and the title of each
Constituent Company to and its right to use its Property is not materially and
adversely affected thereby;
(b) liens of or resulting from any judgment or award, the time
for the appeal or petition for rehearing of which shall not have expired, or in
respect of which a Constituent
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Company shall at any time in good faith be prosecuting an appeal or proceeding
for a review and in respect of which a stay of execution pending such appeal or
proceeding for review shall have been secured;
(c) liens, charges, encumbrances and priority claims
incidental to the conduct of business or the ownership of Properties and assets
(including warehousemen's, mechanics', materialmen's and attorneys' liens and
landlords' liens), and deposits, pledged or liens to secure payment of premiums
on insurance purchased in the usual course of business or in connection with
workmen's compensation, unemployment insurance or social security legislation,
or to secure the performance of bids, tenders or trade contracts, or to secure
statutory obligations, surety or appeal bonds or other liens of like general
nature incurred in the ordinary course of business and not in connection with
the borrowing of money, provided in each case, the obligation secured is not
overdue or, if overdue, is being contested in good faith by appropriate actions
or proceedings and the title of each Constituent Company to and its right to use
its Property is not materially and adversely affected thereby;
(d) minor survey exceptions or minor encumbrances, easements
or reservations of, or rights of others for rights-of-way, utilities and other
similar purposes, or zoning or other restrictions as to the use of real
properties, which encumbrances, easements, reservations, rights and restrictions
do not in the aggregate materially detract from the value of said properties or
materially impair their use in the operation of the business of the Constituent
Companies, including without limitation all matters listed as exceptions to
title or exclusions from coverage from the title insurance policies issued
pursuant to the Original Indenture, as such policies have been supplemented; and
(e) the Lien of this Indenture and the related Mortgages.
Section 3.12 Sale of Assets or Merger . Each Constituent Company will
not (a) except in the ordinary course of business or as permitted in Section
3.14, sell, lease, transfer or otherwise dispose of all or any substantial part
of its assets, (b) sell, lease, transfer or otherwise dispose of any of the
Mortgaged Property owned by it, or (c) consolidate with or be a party to a
merger with any other Person, provided, however that the Company may transfer
title to the Apalache Project to a third party upon ten (10) days' prior written
notice to the holders of the Notes and the Trustee, so long as the proceeds, if
any, of such transfer, are applied in accordance with the priorities set forth
in Section 4.2 below.
Section 3.13 Permitted Indebtedness . The Constituent Companies will
not create, guarantee, assume or suffer to exist, or in any manner be or become
liable in respect of, any Indebtedness of any kind or character, except:
(a) Indebtedness of the Company evidenced by the Notes
outstanding hereunder;
(b) current operating liabilities incurred in the ordinary
course of business and not more than ninety (90) days past due unless being
contested in good faith;
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(c) indemnities entered into in the ordinary course of
business in connection with the sale and transmission of electricity from the
Projects, and indemnities benefitting governmental entities with respect to
operation of the Projects; and
(d) all obligations under the O&M Agreement, including,
without limitation, the Management Fees.
Section 3.14 Permitted Distributions . Except to the extent permitted
in this Indenture, the Constituent Companies will not at any time make any
distribution, either directly or indirectly, in respect of or on account of any
of the equity interests in the Constituent Companies or directly or indirectly
purchase, redeem or retire any equity interest in the Constituent Companies.
Section 3.15 Transactions with Affiliates; O&M Agreement . Except with
respect to entering into the O&M Agreement (which is hereby approved by the
Trustee and the Noteholders), the Constituent Companies will not enter into any
transaction, including without limitation, the purchase, sale or exchange of
Property or the rendering of any service, with any Affiliate except in the
ordinary course of and pursuant to the reasonable requirements of such
Constituent Company's business and upon fair and reasonable terms no less
favorable to the Constituent Company than would obtain in a comparable
arms'-length transaction with a Person not an Affiliate. The Company shall not
amend or alter the O&M Agreement in any material respect, nor terminate it
before December 31, 2003, nor consent to any of the foregoing, without the prior
written approval of a majority in interest of the Noteholders, which approval
shall not be unreasonably withheld or delayed.
Section 3.16 Acquisition of Notes . Except as provided pursuant to
Section 2.6(b) or (c) hereof, neither the Company nor any Affiliate will,
directly or indirectly, acquire or make any offer to acquire any Notes unless
the Company or such Affiliate has offered to acquire Notes, pro rata, from all
holders of the Notes and upon the same terms. In case the Company acquires any
Notes, such Notes shall thereafter be canceled and no Notes shall be issued in
substitution therefor.
Section 3.17 Financial and Business Information .
(a) Monthly Financial and Operating Reporting. As soon as
practicable after the end of each month, and in any event, within thirty (30)
days thereafter, the Company shall deliver to Trustee, for each Project (i) a
Power Sales Report, in the form attached hereto as Exhibit 3.17(a)(i), (ii) a
Cash Report, in the form attached hereto as Exhibit 3.17(a)(ii) and (iii) an
Operating Report.
(b) Quarterly Financial Reporting. As soon as practicable
after the end of each quarterly fiscal period of the Company, and in any event
within sixty (60) days thereafter, the Company will deliver to the Trustee:
(i) a combined balance sheet for the Projects
as at the end of such quarter;
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(ii) a combined statement of income and a
combined statement of changes in financial
position of the Projects for such quarter
and for the portion of the fiscal year
ending with such quarter, setting forth in
each case in comparative form the figures
for the corresponding periods in the
previous fiscal year, all in reasonable
detail and certified as complete and
correct, subject to changes resulting from
normal year-end adjustments, by a duly
authorized officer of the Company; and
(iii) a statement setting forth in comparative
form the budgeted expenditures for such
quarter and the actual expenditures for the
quarter.
(c) Annual Financial Reporting. As soon as practicable after
the end of each fiscal year, including fiscal year 1998, and in any event within
120 days thereafter, the Company shall submit to the Trustee:
(i) a combined balance sheet of the Projects as
at the end of the fiscal year; and
(ii) a combined statement of income and a
statement of changes in financial position
of the Projects for the fiscal year.
setting forth in each case in comparative form the figures for the previous
fiscal year, all in reasonable detail and accompanied by an opinion thereon of
PricewaterhouseCoopers LLP or other independent certified public accountants
reasonable acceptable to the Trustee and the Noteholders, which opinion shall
state that such financial statements fairly present the financial condition of
the Projects, have been prepared in accordance with GAAP consistently applied
and that the examination of such accountants in connection with such financial
statements has been made in accordance with generally accepted auditing
standards, and accordingly, included such tests of the accounting records and
such other auditing procedures as were considered necessary in the
circumstances.
(d) Annual Budget. The Company shall submit a preliminary
draft of the annual operating budget for each Project (the "Preliminary Budget")
to the Noteholders not less than thirty (30) days prior to the end of the fiscal
year. The Preliminary Budget, together with any establishment of or changes to
the Target Amount, as provided in Section 4.2 below, shall be not become
effective until it is approved by a majority in interest of the Noteholders,
which approval shall not be unreasonably withheld; provided that if the
Noteholders have not notified the Company of their approval or disapproval of
the Preliminary Budget within thirty (30) days after it was submitted to the
Noteholders, the Preliminary Budget shall be automatically approved. Not more
than thirty (30) days after the end of the fiscal year, the Company shall submit
to the Trustee and the Noteholders a final annual budget (the "Final Budget"),
including a reconciliation of any material changes in the budget from the
preliminary to final stage (the "Budget Changes"). The Final Budget shall
contain a forecast of the operating profit for each subsequent calendar year for
the remaining term of the Notes. The Budget Changes shall not
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become effective until approved by a majority in interest of the Noteholders,
which approval shall not be unreasonably withheld; provided that if the
Noteholders have not notified the Company of their approval or disapproval of
the Budget Changes within thirty (30) days after they were submitted to the
Noteholders, the Final Budget shall be automatically approved. The Note
Purchasers hereby approve Exhibit 3.17(d) and all capital expenditures reflected
therein.
(e) Other Information. The Company will, upon reasonable
request, periodically meet with the Noteholders to discuss the financial
situation of the Company and the Constituent Companies. The Noteholders may, at
any time, reasonably request other financial information from the Company and
shall have the right, upon reasonable request to inspect the books and records
of the Company. The Company will provide such other information to the Trustee
and the Noteholders with reasonable promptness.
Section 3.18 Business and Property of the Constituent Companies . Each
Constituent Company shall engage in no business other than the ownership,
operation and maintenance of the Project or Projects owned by it, and shall own
no Property other than such Project or Projects and such other property as may
be necessary or appropriate to the ownership and operation thereof and all
related activities necessary or otherwise incidental thereto.
Section 3.19 Power Sale Agreements . Each Constituent Company shall not
amend, or permit to be amended, any of the Power Sale Agreements, except (a) as
may be required by governmental authorities of competent jurisdiction or (b)
where the effect of such amendment is not likely to have a material adverse
effect on the ability of such Constituent Company to perform its obligations
hereunder. Nothing in this Indenture shall prevent a Constituent Company (i)
from entering into a new Power Sale Agreement at the then-prevailing fair market
rates, so long as any such Power Sale Agreement may be terminated by such
Constituent Company within one year from any given point in time, or (ii) from
terminating or permitting an existing Power Sale Agreement to terminate in order
to enter into a new Power Sale Agreement meeting the requirements of clause (i)
above, so long the change in Power Sale Agreements does not have any material
adverse effect that is not avoidable under the circumstances.
Section 3.20 Project Expenses . The Constituent Companies shall not,
without the prior written consent of a majority in interest of the Noteholders,
incur or pay Project Expenses in excess of the amounts stated in the applicable
Budget, (a) as to any combined component (e.g., a line item corresponding to the
line items in Exhibit 3.17(d), with the information consolidated for all of the
Projects) of Project Expenses, if the total amount for such component is more
than ten thousand dollars ($10,000) from the same item as detailed (i) for
fiscal year 1999, in the pro forma budget supplied to the Note Purchasers on the
date hereof and attached as Exhibit 3.17(d) hereto, or (ii) for any succeeding
fiscal year, in the previous fiscal year's final annual budget prepared in
accordance with this Section 3.17(d), or (b) an aggregate increase of fifty
thousand dollars ($50,000) for the overall Budget, provided, however that this
requirement of prior approval shall not apply to excess expenses paid or
incurred as a result of either an emergency situation or a mandate from any
governmental authority. In such a situation the Company shall notify the
Noteholders as soon as practicable as to the circumstances surrounding the
excess expense.
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Section 3.21 Qualified Employees . At all times during the term of this
Indenture, the Constituent Companies shall, either directly or indirectly
through Operator, retain competent employees who are knowledgeable in the
operation and maintenance of the Projects. This provision shall not confer any
right upon the Trustee or the Noteholders to determine or designate the hiring
or firing of any employee of any Constituent Company or Operator.
SECTION 4. RESERVE ACCOUNT; SECURITY INTEREST; DEPOSIT AND APPLICATION
OF MONEYS.
Section 4.1 Reserve Account .
(a) Requirements Prior to Amendment and Restatement. Under the
Original Indenture, there was created and established with the Trustee a special
fund known as the "Aquenergy Systems Debt Service Reserve (therein called the
"Debt Service Account"). The required balance under the Original Indenture was
$600,000, subject to the other provisions of such Original Indenture. In lieu of
maintaining $600,000 in the Debt Service Account, the Company was allowed to
furnish the Trustee with an irrevocable letter of credit in the amount of
$600,000.
(b) Requirements Hereunder: Change of Name and Permitted Uses.
The Debt Service Account is hereby renamed the "Aquenergy Systems Debt Service
Reserve and Working Capital Account" (herein called the "Reserve Account").
Contemporaneously with the execution of this Indenture, the Reserve Account is
being transferred to the Operator, as agent for the Trustee, and the Operator
and the Trustee are entering into the Agency Agreement. The name in which the
Reserve Account is initially held is "Consolidated Hydro Southeast as Agent for
Trustee on Aquenergy Reserve Account". The Reserve Account shall receive all
rents, income and proceeds from the Projects, including without limitation all
sums payable by the Power Companies pursuant to the Power Sales Agreements.
Funds on deposit in the Reserve Account shall be managed in accordance with the
provisions of Section 4.2 by the Operator, as agent for the Trustee, so long as
the Agency Agreement is in effect, and thereafter by the Trustee.
(c) Requirements Hereunder: Required Amount; Letter of Credit.
The balance in the Reserve Account may be drawn down, so long as the other
requirements of this Indenture, including but not limited to those in Section
4.2, are met. In lieu of maintaining cash in the Reserve Account as provided
herein, the Company may furnish the Operator or the Trustee with an irrevocable
Letter of Credit (the "Letter of Credit") in an amount not less than the amount
required under Section 4.2, and no greater than $600,000 with a term of no less
than twelve (12) months, issued by a bank having capital, surplus and undivided
profits of not less than $50,000,000. The Letter of Credit shall provide that
the Trustee, or the Operator, as agent for the Trustee, may draw upon it (a) in
full if the Letter of Credit, or any replacement thereof required hereunder, is
not replaced by a new Letter of Credit substantially similar to the Letter of
Credit at least thirty (30) days prior to the expiration of the then current
Letter of Credit or (b) in part or in full, and without limitation on the number
of permitted draws thereon, upon notice to the issuer of the Letter of Credit
that the Trustee, or the Operator, as agent for the Trustee is entitled to make
such a draw under this Indenture. The Trustee reaffirms that the existing Letter
of Credit, issued by Lyon Credit Corporation, is acceptable. The Company affirms
that it has no
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direct or indirect reimbursement obligation in respect of any such letter of
credit.
Section 4.2 Withdrawals from the Reserve Account .
(a) On the last Business Day of each month following the
Closing Date, provided that no Event of Default has occurred and is continuing,
the following distributions and payments shall be made from the Reserve Account
in the following priorities:
First: withdraw and transfer to the Operating Account the
aggregate amount of all sums due for Project Expenses which
are required to be transferred pursuant to the O&M Agreement
provided, however that the Operator, so long as it remains
agent of the Trustee may, in its discretion, withdraw such
funds earlier than the last Business Day of each month;
Second: subject to Section 2.5(b), withdraw and transfer to
the holders of the Senior Notes an amount equal to the amount
of interest then due and owing on the Senior Notes, but only
to the extent that such payment shall not cause the aggregate
of the balances in the Reserve Account and the Operating
Account to fall below the amount required under Section 5.1 of
the O&M Agreement as it exists on the date hereof;
(b) On or before the date each year following the Effective
Date when Management Fees are due under the O&M Agreement, so long as the O&M
Agreement is in effect, and thereafter on the date when Management Fees would
have been due, and provided that no Event of Default has occurred and is
continuing, the following distributions and payments shall be made from the
Reserve Account in the following priorities; provided that the withdrawals
specified in subsection (a) above shall be made before making any withdrawal
specified in this subsection (b).
First: withdraw and transfer to the Operator an amount equal
to the amount of Management Fees then due and owing pursuant
to the O&M Agreement, to the extent that such payment shall
not cause the aggregate of the balances in the Reserve Account
and the Operating Account to fall below the amount required
under Section 5.1 of the O&M Agreement as it exists on the
date hereof; Second: withdraw and transfer to the holders of
the Subordinated Notes an amount equal to the amount of debt
service due and owing on the Subordinated Notes as provided in
Section 2.2(e), provided that such payment shall not cause the
combined balance of the Reserve Account and the Operating
Account to fall below the greater of the Target Amount or the
amount required under Section 5.1 of the O&M Agreement as it
exists on the date hereof.
The "Target Amount" is an amount determined by Company and derived from
the annual budget of the Company prepared and approved pursuant to Section
3.17(d) which is projected to be sufficient, along with reasonably projected
cash flows from Project operations, to meet any projected cash flow shortfalls
during the three (3)-year period starting on January 1 of the then-current year.
The Target Amount shall be an amount which will, assuming that such projections
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are accurate, ensure the ability of the Company to fund payment during such
period of all amounts described in Subsection 4.2 (a) above and priority First
of Subsection 4.2(b) above.
(c) Any amount to be withdrawn under this Section 4.2 shall be
evidenced by an Officer's Certificate of the Company delivered to the Trustee
not less than three (3) days prior to such date.
Section 4.3 Payments by Power Companies . As more fully set forth in
the granting clauses of the Mortgages and in the Assignment, the Company has
granted or assigned to the Trustee, as applicable, a security interest in, among
other things, the Projects and all rents, income and proceeds thereof, including
without limitation all sums payable by the Power Companies pursuant to the Power
Sale Agreements, as security for the Notes. As more fully set forth in the
Agency Agreement, the Trustee has appointed the Operator as its agent for the
purpose of receiving and managing those sums paid under the Power Sale
Agreements. At any time the Trustee shall have directed the Power Companies to
pay all sums payable under the Power Sale Agreements directly to the Trustee, as
provided in the Agency Agreement, such sums shall be applied by the Trustee as
follows:
(a) So long as no Event of Default has occurred and is continuing,
the amounts from time to time received by the Trustee which
constitute payments under the Power Sale Agreements shall be
applied by the Trustee in a manner consistent with Section 4.2
of this Indenture.
(b) If an Event of Default has occurred and is continuing, all
such amounts received by the Trustee shall be held for
application and applied in the manner provided for in Section
6.9 of this Indenture with respect to the proceeds and avails
of the Mortgaged Property.
Section 4.4 Investment of Funds . Moneys on deposit in the Reserve
Account and the Operating Account, and any other moneys held by the Company
pursuant to this Indenture shall, to the extent consistent with withdrawals
required to be made therefrom, be invested and reinvested by the Trustee, or the
Operator, as agent for the Trustee as directed by the Operator, so long as the
O&M Agreement remains in effect, and thereafter, as directed by the Company, in
(i) securities issued, guaranteed or insured by the United States or any of its
agencies with maturities of not more than thirty (30) days from the date
acquired; (ii) certificates of deposit, but only if fully insured by the Federal
Deposit Insurance Corporation, with maturities of not more than thirty (30) days
from the date acquired, issued by a U.S. federal or state chartered commercial
bank of recognized standing, which has capital and unimpaired surplus in excess
of $500,000,000 and which bank or its holding company has a short-term
commercial paper rating of at least A-1 or the equivalent by Standard & Poor's
Corporation or at least P-1 or the equivalent by Moody's Investors Service,
Inc.; (iii) repurchase agreements and reverse repurchase agreements with terms
of not more than seven (7) days from the date acquired, for securities of the
type described in clause (i) above and entered into only with commercial banks
having the qualifications described in clause (ii) above; and (iv) commercial
paper, other than commercial paper issued by the Company or any of its
Affiliates, issued by any Person incorporated under the laws of the United
States or any state thereof and rated at least A-1 or the
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equivalent thereof by Standard & Poor's Corporation or at least P-1 or the
equivalent thereof by Moody's Investors Service, Inc., in each case with
maturities of not more than thirty (30) days from the date acquired.
Notwithstanding the foregoing, to the extent any that the combined balance in
the Reserve Account and the Operating Account exceeds the amount required under
Section 5.1 of the O&M Agreement as it exists on the date hereof, the amount of
such excess may be invested in securities with maturities longer than 30 days,
up to six (6) months, so long as the maturity date is reasonably likely to occur
before the funds are needed.
Section 4.5 Security Interest in Reserve Account and Operating Account.
The Company hereby assigns, conveys, mortgages, pledges and transfers to the
Trustee and grants to the Trustee a continuing lien on and valid and enforceable
security interest, prior in right to all other security interests, liens and
encumbrances, in and to the Trustee as additional security for the payment of
the principal and interest on the Notes all of the Company's right, title and
interest, whether now existing or hereafter acquired, in and to the following
(all being collectively referred to as the "Collateral"):
(a) all sums of money, from any source whatsoever, now or
hereafter transferred to and comprising the Reserve Account and the Operating
Account, including all cash proceeds derived from the Collateral and paid into
the Account and any and all interest and dividends or other income derived from
any such monies;
(b) all statements, certificates, passbooks and instruments
representing the Reserve Account and the Operating Account and all dividends,
cash and other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for the Reserve Account and the
Operating Account;
(c) the Letter of Credit;
(d) all books, records, blueprints, ledger cards, files,
correspondence, computer programs, tapes, disks and related data processing
software that at any time evidence or contain information relating to any of the
property described in subparts (a) - (c) above or are otherwise necessary or
helpful in the collection thereof of realization thereon; and
(e) to the extent not otherwise included, all additions,
substitutions, replacements, proceeds and accessions of and to any and all of
the Collateral.
SECTION 5. PREPAYMENT OF NOTES.
Section 5.1 Optional Prepayments . The Company shall have the
privilege, on any Debt Service Payment Date, of prepaying all or any portion of
the principal of the Notes (but if a portion, then not less than $100,000 or an
integral multiple of $10,000 in excess thereof), by payment of the principal
amount of the Notes to be prepaid, and accrued interest thereon to the date of
prepayment. No prepayment shall be made on the Subordinated Notes until all
principal and accrued interest, including deferred interest, shall have been
paid on the Senior Notes. No premium or penalty shall be due on any prepayment
under this Section 5.1.
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Section 5.2 Notice of Optional Prepayments . The Company will give
written notice of any optional prepayment of principal of any of the Notes to
each holder thereof (with a copy to the Trustee) not less than ten (10) days nor
more than thirty (30) days before the date fixed for such optional prepayment
specifying (a) such date, (b) the Section of this Indenture under which the
prepayment is to be made, (c) the principal amount of the holder's Notes to be
prepaid on such date, and (d) the accrued interest applicable to the prepayment.
Notice of prepayment having been so given, the aggregate principal amount of the
Notes specified in such notice and accrued interest thereon shall become due and
payable on the prepayment date.
Section 5.3 Allocation of Partial Prepayments . The aggregate amount of
each required or optional partial prepayment of the Notes shall be allocated
first to the Senior Notes, among the holders of the Senior Notes to be prepaid
at the time outstanding in proportion to the respective unpaid principal amounts
of the Senior Notes to be prepaid then outstanding. No amount shall be allocated
to the Subordinated Notes until all principal and accrued interest on the Senior
Notes has been paid in full. To the extent that any Subordinated Notes are
prepaid in compliance with the foregoing, the aggregate amount of each required
or optional partial prepayment shall be allocated among the holders of the
Subordinated Notes to be prepaid at the time outstanding in proportion to the
respective unpaid principal amounts of the Subordinated Notes to be prepaid then
outstanding.
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SECTION 6. REMEDIES OF THE TRUSTEE AND THE NOTEHOLDERS.
Section 6.1 Definition of Event of Default; Acceleration of Maturity .
The following events are hereby defined for all purposes of this Indenture as
"Events of Default":
(a) The Company shall fail to pay the principal of or premium
or interest on any Note when the same shall have become due; or
(b) Any Constituent Company shall fail to perform or comply
with or cause to be performed or complied with any agreement, condition,
covenant or term to be performed or complied with by it contained in any of the
Mortgages, the Assignment or the Note Agreement and such failure shall not have
been remedied within the period of grace, if any, allowed with respect thereto;
or
(c) Any Constituent Company shall fail to perform or comply
with or cause to be performed or complied with any agreement, condition,
covenant or term contained in any covenant or agreement contained in Sections
3.4, 3.5, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14 or 3.18 hereof, or default shall be
made in the payment of the principal of or interest on any Indebtedness of the
Company or any Constituent Company for borrowed money, as and when the same
shall become due and payable by the lapse of time, by declaration, by call for
redemption or otherwise, and such default shall continue beyond the period of
grace, if any, allowed with respect thereto; or
(d) Any Constituent Company shall fail to perform or comply or
cause to be performed or complied with any agreement, condition, covenant or
term contained in any other provision of this Indenture and such failure
continues for more than thirty (30) days after the earlier of (i) notice from
the Trustee to the Company specifying such failure and demanding the same to be
remedied, or (ii) such failure shall first become known to any Responsible
Officer of any Constituent Company; provided, that if cure of such failure
reasonably requires more than 30 days, such period shall be extended to the
extent required, so long as the Constituent Company diligently pursues such cure
throughout such period; or
(e) Any Constituent Company shall be in default under any
Power Sale Agreement and such default shall not have been remedied within the
period of grace, if any, allowed with respect thereto; or
(f) Any warranty, representation or other statement by or on
behalf of any Constituent Company contained in the Note Agreement, this
Indenture or any Mortgage or Assignment or in any certificate or instrument
furnished in compliance with or in reference to the Note Agreement, this
Indenture or any Mortgage or Assignment is false or misleading in any material
respect; or
(g) A custodian, receiver, liquidator or trustee of any
Constituent Company or of any of the Property of any Constituent Company is
appointed by court order and such order remains in effect for more than sixty
(60) days; or an order for relief is entered in respect of any Constituent
Company, or any of the Property of any Constituent Company is sequestered by
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court order and such order remains in effect for more than sixty (60) days; or a
petition is filed against any Constituent Company under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, and is
not dismissed or stayed within sixty (60) days after such filing; or
(h) Any Constituent Company files a petition in voluntary
bankruptcy or seeking relief under any provision of any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, or
consents to the filing of any petition against it under any such law; or
(i) Any Constituent Company is generally not paying its debts
as such debts become due, or becomes insolvent or bankrupt, or makes an
assignment for the benefit of creditors or a custodian (including, without
limitation, receiver, liquidator or trustee) of such Constituent Company, or of
all or any part of the Property of such Constituent Company, is appointed by
court order or takes possession and such order remains in effect or such
possession continues for more than sixty (60) days; or
(j) Final judgment or judgments for the payment of money
aggregating in excess of $100,000 is or are outstanding against the Constituent
Companies and any one of such judgments has been outstanding for more than
thirty (30) days from the date of its entry or such lesser period of time as may
be allowed for appeal from such judgment and has not been discharged in full or
stayed.
If one or more Events of Default shall happen and be continuing, then,
and in each and every such case, but subject always to the provisions of Section
6.13 hereof, either the Trustee, by notice in writing to the Company, or the
holders of not less than 25% in principal amount of the Notes then outstanding,
by notice in writing to the Company and to the Trustee, may declare the
principal amount of all Notes, if not already due and payable, to be immediately
due and payable, and upon any such declaration all principal of and accrued
interest on the Notes shall become and be immediately due and payable. At such
time, the holders of the Subordinated Notes may exercise their conversion rights
under Section 2.6(a), notwithstanding that this may occur prior to the fourth
anniversary of the Effective Date, and the Company shall have no right of
redemption under Section 2.6(b).
Section 6.2 Completed Default; Acceleration of Maturity . Upon
declaration by the Trustee or the holders of the Notes of the acceleration of
maturity of the Notes in accordance with Section 6.1 (unless rescinded or
annulled pursuant to Section 6.13) then the Company shall pay to the Trustee for
the benefit of the holders of the Notes then outstanding, the whole amount which
then shall have become due on all such Notes for principal of and interest on
the Notes. In case the Company shall fail to pay the same forthwith, the
Trustee, in its own name or as trustee of an express trust, shall be entitled to
recover judgment for the whole amount so due and unpaid against the Company
and/or any other obligor on the Notes. The right of the Trustee to recover such
judgment shall not be affected by the exercise of any other right, power or
remedy for the enforcement of the provisions of this Indenture. The Trustee in
its discretion may exercise in addition all other rights and powers described
herein as it may deem best for the protection and enforcement of the interests
and rights of the Trustee and of the holders of the Notes then
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outstanding.
Section 6.3 Suits for Enforcement; Power of Sale . In case of the
happening of an Event of Default as defined in Section 6.1, the Trustee from
time to time in its discretion may exercise, in addition to all other rights and
powers described herein or permitted under applicable law, all or any of the
following powers as it may deem best for the protection and enforcement of the
interests and rights of the Trustee and of the holders of the Notes then
outstanding:
(a) the Trustee may in its own name and as trustee of an
express trust protect and enforce its rights and the rights of the Noteholders
by bringing such actions, at law or in equity or before any administrative
tribunal, as the Trustee, being advised by counsel, shall deem appropriate,
including, without limitation, actions for the specific performance of any
covenant hereof, or of the Notes, and for the foreclosure of any one or more of
the Mortgages; and the Trustee shall be entitled, in its own name and as trustee
of an express trust, to recover judgment for any and all sums then, or during
any Event of Default, becoming due and payable by the Company under any
provision hereof or of the Notes or Mortgages, including, without limitation,
any deficiency in the payment of all amounts due under the provisions hereof or
of the Notes or Mortgages, remaining after any sale of the Mortgaged Property in
foreclosure proceedings or by virtue of the Trustee's power of sale or
otherwise, and, in addition thereto, such amounts as shall be sufficient to
cover the reasonable costs and expenses of collection, including reasonable
attorneys' fees, and of other proceedings hereunder, and to collect out of the
Property of each Constituent Company in any manner provided by law all amounts
adjudged or decreed to be payable;
(b) the Trustee as a matter of contract right and not as a
penalty shall be entitled to the appointment of a receiver of, or may enter upon
and take possession of, all or any part of the Mortgaged Property and such
receiver or the Trustee shall thereupon be entitled to operate all or any part
of the Mortgaged Property and to make all expenditures and to take all actions
necessary or desirable therefor, and to collect and retain all income and
earnings arising from such Property or business;
(c) the Trustee may, with or without entry as aforesaid, sell
all or any part of the Mortgaged Property at public or private sale, upon such
notice, in such manner, at such time or times, and upon such terms consistent
with the applicable laws of the respective States wherein such Mortgaged
Property is located, as the Trustee may determine; and
(d) the Constituent Companies, to the extent permitted by law,
shall not claim any rights under any stay, valuation, exemption or extension
law, and each of them hereby waives any right of redemption which it may have in
respect of the Mortgaged Property.
Section 6.4 Foreclosure and Sale of Mortgaged Property . To the extent
permitted by applicable law, if at the time such action may be lawful and always
subject to compliance with any mandatory legal requirements, in the event of any
sale made under or by virtue of this Indenture, whether made under the power of
sale herein granted or under or by virtue of judicial proceedings or decree of
foreclosure and sale, the whole of the Mortgaged Property may be sold in one
parcel and as an entirety, or in separate parcels or lots, as the Trustee may
reasonably
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determine, or as it may be directed by the written direction of the holders of
not less than 66-2/3% in principal amount of the Notes then outstanding.
Section 6.5 Adjournment of Sale . The Trustee may adjourn from time to
time any sale by it to be made under the provisions of this Indenture, by
announcement at the time and place appointed for such sale or for such adjourned
sale or sales; and, except as otherwise provided by law, the Trustee, without
further notice or publication, may make such sale at the time and place to which
the same shall be so adjourned.
Section 6.6 Trustee May Execute Conveyances and Deliver Possession;
Sale a Bar . Upon the completion of any sale or sales made under or by virtue of
this Indenture, the Trustee shall execute and deliver to the accepted purchaser
or purchasers a good and sufficient deed, or good and sufficient deeds, and
other instruments conveying, assigning and transferring all its estate, right,
title and interest in and to the premises, Properties, privileges and rights so
sold. The Trustee is hereby irrevocably appointed the true and lawful
attorney-in-fact of each Constituent Company, in its name and stead or in the
name of the Trustee, to make all necessary conveyances, assignments, transfers
and deliveries of the premises and the Property, privileges and rights so sold
and for that purpose the Trustee may execute all necessary deeds and instruments
of assignment and transfer, and may substitute one or more Persons with like
power, each Constituent Company hereby ratifying and confirming all that its
said attorneys or such substitute or substitutes shall lawfully do by virtue
hereof. Nevertheless, each Constituent Company, if so requested in writing by
the Trustee, shall ratify and confirm any such sale or sales by executing and
delivering to the Trustee or to such purchaser or purchasers all such
instruments as may be advisable, in the judgment of the Trustee, for the purpose
and as may be designated in such request.
Any such sale or sales made under or by virtue of this Indenture,
whether made under the power of sale herein granted or under or by virtue of
judicial proceedings or of a judgment or decree of foreclosure and sale, shall
operate to divest all estate, right, title, interest, claim or demand
whatsoever, whether at law or in equity, of any Constituent Company, in and to
the premises, Property, privileges and rights so sold, and shall be a perpetual
bar both at law and in equity against such Constituent Company, its successors
and assigns, and against any and all Persons claiming or who may claim the same,
or any part thereof from, through or under any Constituent Company, its
successors or assigns.
Section 6.7 Receipt Sufficient Discharge for Purchaser . The receipt of
the Trustee or of the court officer conducting any such sale for the purchase
money paid at any such sale shall be a sufficient discharge therefor to any
purchaser of the Property, or any part thereof, sold as aforesaid; and no such
purchaser or his representatives, grantees or assigns, after paying such
purchase money and receiving such receipt, shall be bound to see the application
of such purchase money upon or for any trust or purpose of this Indenture, or
shall be answerable in any manner whatsoever for any loss, misapplication or
non-application of any such purchase money or any part thereof, nor shall any
such purchaser be bound to inquire as to the necessity or expediency of any such
sale.
Section 6.8 Sale to Accelerate Notes . In the event of any sale made
under or by
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virtue of this Section 6, whether made under the power of sale herein granted or
under or by virtue of judicial proceedings or of a valid judgment or decree of
foreclosure and sale, the principal of the Notes, if not previously due,
immediately thereupon shall become due and payable, anything in the Notes or in
this Indenture to the contrary notwithstanding.
Section 6.9 Application of Proceeds of Sale . The purchase money
proceeds or avails of any sale as a result of this Section 6, together with any
other sums which then may be held by the Trustee under this Indenture as part of
the Mortgaged Property or the proceeds thereof pursuant to this Section 6, shall
be applied as follows:
First: To the payment pro rata of the reasonable costs and
expenses of foreclosure or suit, if any, and of such sale, and to the
extent permitted by applicable law, the reasonable compensation of the
Trustee, its agents, attorneys and counsel, and of all proper expenses,
liability and advances incurred or made hereunder by the Trustee, and
of all taxes, assessments or Liens superior to the Lien of these
presents, except any taxes, assessments, or other superior Lien subject
to which said sale may have been made;
Second: To the amount of interest, including deferred
interest, and principal then due and owing on the Senior Notes, and in
case such proceeds shall be insufficient to pay in full the whole
amount so due, owing or unpaid, then ratably according to the aggregate
amount of principal outstanding on such Senior Notes;
Third: To the payment of all sums then due and owing for
Project Expenses pursuant to the O&M Agreement;
Fourth: To the payment of all Management Fees then due and
owing pursuant to the O&M Agreement; and
Fifth: To the amount then owing or unpaid on the Subordinated
Notes for principal and interest; and in case such proceeds shall be
insufficient to pay in full the whole amount so due, owing or unpaid
upon the Subordinated Notes, then ratably according to the aggregate of
principal outstanding on such Notes; and
Sixth: To the payment of the surplus, if any, to the Company,
its successors or assigns, upon the written request of the Company or
to whomsoever may be lawfully entitled to receive the same.
Section 6.10 Purchase of Mortgaged Property : To the extent permitted
by applicable law, if at the time such action may be lawful and always subject
to compliance with any mandatory legal requirements, upon any sale made under or
by virtue of this Indenture, whether made under the power of sale herein granted
or under or by virtue of judicial proceedings or of a judgment or decree of
foreclosure and sale, the Trustee or any Noteholder or Noteholders may bid for
and purchase the Mortgaged Property being sold, and upon compliance with the
terms of sale, may hold, retain and possess and dispose of such Property in his
or their own absolute right without further accountability; and any purchaser at
any such sale may, in paying the purchase
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price, turn in any of the Notes in lieu of cash to the amount which shall, upon
distribution of the net proceeds of such sale, be payable thereon. In case the
amounts so payable thereon shall be less than the amount due thereon, said Notes
shall be returned to the holders thereof after a notation of such partial
payment shall have been made thereon.
Section 6.11 Trustee Entitled to Appointment of Receiver . To the
extent permitted by applicable law, if at the time such action may be lawful and
always subject to compliance with any mandatory legal requirements, each
Constituent Company further covenants that upon the happening of any Event of
Default and thereafter during the continuance of such Event of Default unless
the same shall have been waived as hereinafter provided, the Trustee shall be
entitled, as a matter of right, if it shall so elect, (a) forthwith and without
declaring the principal of the Notes to be due and payable, or (b) after
declaring the same to be due and payable, or (c) with or without the filing of a
bill in equity to foreclose the lien on this Indenture with respect to any or
all of the Mortgaged Property or to enforce the specific performance hereof or
in aid thereof or with or without the commencement of any other judicial
proceeding to enforce any right of the Trustee or of the holders of the Notes,
to the appointment of a receiver or receivers of all or part of the Mortgaged
Property and of all the earnings, revenues rents, issues, profits and income
thereof, with such powers as the court making such appointment shall confer,
which may include any or all of the powers which the Trustee is authorized to
exercise by the provisions of Section 6.3(b). Each Constituent Company, if
requested so to do by the Trustee, will consent to the appointment of any such
receiver as aforesaid.
Section 6.12 Trustee May Enforce Rights Without Notes . All rights of
action under this Indenture or under any of the Notes may be enforced by the
Trustee without the possession of any of the Notes and without the production
thereof at any trial or other proceedings relative thereto. Any such suit or
proceedings instituted by the Trustee shall be brought in its own name or as
Trustee, and any recovery of judgment shall be, subject to the rights of the
Trustee, for the ratable benefit of the holders of the Notes outstanding.
Section 6.13 Notice of Event of Default; Waiver . The Trustee shall
promptly after obtaining actual knowledge of any Default or Event of Default
give notice thereof by mail, first-class postage prepaid, to the holders of all
Notes at the time outstanding. The holders of at least 66-2/3% in principal
amount of the Notes at the time outstanding hereunder may waive any Default or
Event of Default hereunder and its consequences which result from the failure of
any Constituent Company to comply with any provisions of this Indenture,
compliance with which can be waived by such holders pursuant to Section 8.2. In
case of any such waiver, or in case any proceedings taken on account of any such
Default or Event of Default shall be discontinued or abandoned or determined
adversely to the Trustee, then and in every such case, each Constituent Company,
the Trustee and the holders of the Notes shall be restored to their former
positions and rights hereunder respectively. No such waiver shall extend to any
subsequent or other Default or Event of Default or impair any right consequent
thereon.
Section 6.14 Limitation on Noteholders' Right to Sue . No holder of any
Note shall have any right to institute any suit, action or proceeding at law or
in equity growing out of any provision of this Indenture, or for the foreclosure
or enforcement of this Indenture, unless and until an Event of Default shall
have happened and unless and until such holder shall have
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previously given to the Trustee written notice of the happening of such Event of
Default and of the continuance thereof as hereinbefore provided, and also
(except as hereinafter provided) unless and until the holders of at least 25% in
principal amount of the Notes then outstanding shall have made written request
upon the Trustee and shall have afforded to it a reasonable opportunity to
institute such action, suit or proceeding in its own name, and unless also the
Trustee shall have been offered security and indemnity satisfactory to it
against the costs, expenses and liabilities to be incurred therein or thereby,
and the Trustee shall have neglected or refused to institute any such action,
suit or proceeding within a reasonable time after receipt of such notification,
request and offer of indemnity; and such notification, request, offer of
indemnity and refusal or neglect are hereby declared in every such case to be
conditions precedent to the institution by such Noteholder of any such action,
suit or proceeding; it being understood and intended and being expressly
covenanted by the holder of every Note with every other holder and with the
Trustee that no one or more holders of the Notes shall be entitled to take any
action or institute any such suit to enforce the payment of his Notes if and to
the extent that the taking of such action or the institution or prosecution of
any such suit or the entry of judgment therein would under applicable law result
in a surrender, impairment, waiver or loss of the Lien of this Indenture upon
the Mortgaged Property, or any part thereof, as security for Notes held by any
other Noteholder, or shall have any right in any manner whatever to affect,
disturb or prejudice the rights of the holders of any other of the Notes, or to
enforce any right hereunder, except in the manner herein provided, and for the
equal, ratable and common benefit of all holders of the Notes. Nothing in this
Section 6 or elsewhere in this Indenture or in the Notes contained, however,
shall affect or impair the obligation of the Company, which is unconditional and
absolute, to pay the principal of, and the interest on, the Notes to the
respective holders of the Notes, in the manner and at the time and places
therein respectively expressed, nor shall it affect or impair the right of the
respective holders of the Notes, by an action at law upon the promises to pay
therein contained, to enforce such payment.
Section 6.15 Remedies Cumulative . No remedy herein conferred upon or
reserved to the Trustee or to the holders of the Notes is intended to be
exclusive of any other remedy or remedies, and each and every such remedy shall
be cumulative, and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute.
Section 6.16 Delay or Omission Not a Waiver . No delay or omission of
the Trustee, or of any holder of the Notes, to exercise any right or power
accruing upon any Default or Event of Default, shall impair any such right or
power, or shall be construed to be a waiver of any such Default or Event of
Default or an acquiescence therein; and every power and remedy given by this
Indenture to the Trustee or to the holders of the Notes may be exercised from
time to time and as often as may be deemed expedient by the Trustee or by the
holders of the Notes.
Section 6.17 Waiver of Extension, Appraisement, Stay, Laws . The
Constituent Companies will not at any time insist upon, or plead, or in any
manner whatever claim or take any benefit or advantage of, any stay or extension
law wherever enacted, now or at any time hereafter in force, which may affect
the covenants and terms of performance of this Indenture; nor claim, take or
insist upon any benefit or advantage of any law now or hereafter in force
providing for the valuation or appraisement of the Mortgaged Property, or any
part thereof, prior to any sale or sales thereof which may be made pursuant to
any provision herein contained, or
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pursuant to the decree, judgment or order of any court of competent
jurisdiction; nor after any such sale or sales, claim or exercise any right
under any statute heretofore or hereafter enacted by the United States of
America or by any state or territory, or otherwise, to redeem the Property so
sold or any part thereof; and each Constituent Company hereby expressly waives
all benefits or advantage of any such law or laws, and covenants not to hinder,
delay or impede the execution of any power herein granted or delegated to the
Trustee, but to suffer and permit the execution of every power as though no such
law or laws had been made or enacted.
Section 6.18 Control of Remedies by Noteholders . Notwithstanding any
other provision of this Section 6, the holders of at least 66-2/3% in principal
amount of the Notes from time to time outstanding shall have the right, by an
instrument in writing delivered to the Trustee, to determine which of the
remedies herein set forth shall be adopted and to direct the time, method and
place of conducting all proceedings to be taken under the provisions of this
Indenture for the enforcement thereof or of the Notes; provided, however, that
the Trustee shall have the right to decline to follow any such direction if the
Trustee shall be advised by counsel that the action or proceeding so directed
may not lawfully be taken or would be unjustly prejudicial to holders of Notes
not parties to such direction.
Section 6.19 Trustee may File Proofs of Claims . The Trustee is hereby
appointed, and each and every holder of the Notes, by receiving and holding the
same, shall be conclusively deemed to have appointed the Trustee, the true and
lawful attorney-in-fact of such holder, with authority to make or file, in its
own name as trustee of an express trust or otherwise as it shall deem advisable,
in any receivership, insolvency, liquidation, bankruptcy, arrangement,
reorganization or other judicial proceedings relative to the Company or any
other obligor upon the Notes or the other Constituent Companies or to their
respective creditors or Property, any and all claims, proofs of debt, petitions,
consents, other documents and amendments of any thereof, as may be necessary or
advisable in order to have the claims of the Trustee and of the holders of the
Notes allowed in any such proceeding, and to collect and receive any moneys or
other Property payable or deliverable on any such claim, proof of debt, petition
or other document and to distribute the same after the deduction of the charges
and expenses of the Trustee, and to execute and deliver any and all other papers
and documents and to do and perform any and all other acts and things, as they
may deem necessary or advisable in order to enforce in any such proceedings any
of the claims of the Trustee and of any such holders in respect of any of the
Notes; and any receiver, assignee, trustee or debtor in any such proceedings is
hereby authorized, and each and every holder of the Notes, by receiving and
holding the same, shall be deemed to have authorized any such receiver,
assignee, trustee or debtor, to make any such payment or delivery to or on the
order of the Trustee, and in the event that the Trustee shall consent to the
making of such payments or deliveries directly to the holders of the Notes to
pay to the Trustee any amount due it for compensation and expenses, including
reasonable counsel fees, incurred by it down to the date of such payment or
delivery; provided, however, that nothing herein contained shall be deemed to
authorize or empower the Trustee to consent to or accept or adopt, on behalf of
any holder of Notes, any plan of reorganization or readjustment of the Company
affecting the Notes or the rights of any holder thereof, or to authorize or
empower the Trustee to vote in respect of the claim of any holder of any Note in
any such proceedings.
Section 6.20 Right of Trustee to Perform Covenants, etc . If any
Constituent Company
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shall fail to make any payment or perform any act required to be made or
performed hereunder, the Trustee, without waiving or releasing any obligation or
Default, may (but shall be under no obligation to) at any time thereafter make
such payment or perform such act for the account and at the expense of one or
more of the Constituent Companies, and may enter upon the Mortgaged Property or
any part thereof for such purpose and take all such action thereof as, in the
opinion of the Trustee, may be necessary or appropriate therefor. All sums so
paid by the Trustee and all costs and expenses (including without limitation,
reasonable attorneys' fees and expenses) so incurred, together with interest
thereon at the "prime rate" as published by The Wall Street Journal on the date
such costs was incurred, from the date of payment or incurrence, shall be
secured hereby in priority to the indebtedness evidenced by the Notes and shall
be paid by the Company to the Trustee on demand. The Trustee in making any
payment authorized under this Section relating to taxes or assessments may do so
according to any bill, statement or estimate procured from the appropriate
public office without inquiry into the accuracy of such bill, statement or
estimate or into the validity of any tax assessment, sale, forfeiture, tax Lien
or title or claim thereof. The Trustee, in performing any act hereunder, shall
be the sole judge of whether any Constituent Company is required to perform the
same under the terms of this Indenture.
Section 6.21 Remedies Subject to Provisions of Law . All rights,
remedies and powers provided by this Section 6 may be exercised only to the
extent that the exercise thereof does not violate any applicable provision of
law in the premises, and all the provisions of this Section 6 are intended to be
subject to all applicable mandatory provisions of law which may be controlling
in the premises and to be limited to the extent necessary so that they will not
render this Indenture invalid or unenforceable under the provisions of any
applicable law.
SECTION 7. CONCERNING THE TRUSTEE.
The Trustee accepts the trusts hereunder and agrees to perform the
same, but only upon the terms and conditions hereof, including the following, to
all of which the Constituent Companies and the respective holders of the Notes
at any time outstanding by their acceptance thereof agree:
Section 7.1 Duties of Trustee . The Trustee undertakes (a) except while
an Event of Default actually known to the Trustee shall have occurred and be
continuing, to perform such duties and only such duties as are specifically set
forth in this Indenture, and (b) while an Event of Default actually known to the
Trustee shall have occurred and be continuing, to exercise such of the rights
and powers as are vested in it by this Indenture, and to use the same degree of
care and skill in its exercise as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs.
The Trustee, upon receipt of instruments furnished to the Trustee
pursuant to the provisions of this Indenture, shall examine the same to
determine whether or not such instruments appear to conform to the requirements
of this Indenture.
Section 7.2 Trustee's Liability . No provision of this Indenture shall
be construed to relieve the Trustee from liability for its own negligent action,
negligent failure to act, or its own
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willful misconduct, except that:
(a) unless an Event of Default shall have occurred and be
continuing, the Trustee shall not be liable except for the performance of such
duties as are specifically set forth in this Indenture and no implied covenants
or obligations shall be read into this Indenture against the Trustee but the
duties and obligations of the Trustee shall be determined solely by the express
provisions of this Indenture; and
(b) in the absence of bad faith on the part of the Trustee,
the Trustee may rely upon the authenticity of, and the truth of the statements
and the correctness of the opinions expressed in, and shall be protected in
acting upon, any resolution, Officer's Certificate, Opinion of Counsel, Note,
request, notice, consent, waiver, order, signature guaranty, notarial seal,
stamp, acknowledgment, verification, appraisal, report, stock certificate or
other paper or document believed by the Trustee to be genuine and to have been
signed, affixed or presented by the proper party or parties; and
(c) in the absence of bad faith on the part of the Trustee,
whenever the Trustee, or any of its agents, representatives, experts or counsel,
shall consider it necessary or desirable that any matter be proved or
established, such matter (unless other evidence in respect thereof be herein
specifically prescribed) may be deemed to be conclusively proved and established
by an Officer's Certificate; provided, however, that the Trustee, or such agent,
representative, expert or counsel, may require such further and additional
evidence and make such further investigation as it or they may consider
reasonable; and
(d) the Trustee may consult with counsel and the advice or
opinion of such counsel shall be full and complete authorization and protection
in respect of any action taken or suffered hereunder in good faith and in
accordance with such advice or Opinion of Counsel; and
(e) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with any
direction or request of a holder or holders of the Notes with which the Trustee
is required by the provisions hereof to comply; and
(f) the Trustee shall not be liable for any error of judgment
made in good faith by an officer of the Trustee unless it shall be proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(g) the Trustee shall not be deemed to have knowledge of any
Default or Event of Default unless and until a responsible officer or employee
of the Trustee shall have actual knowledge thereof or have received written
advice thereof from the holder of any Note; and
(h) whether or not an Event of Default shall have occurred,
the Trustee shall not be under any obligation to take any action under this
Indenture (including action under Section 6.18 hereof) which may tend to involve
it in any expense or liability, the payment of which within a reasonable time is
not, in its reasonable opinion, assured to it by the security afforded to it by
the terms of this Indenture, unless and until requested in writing so to do by
one
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or more holders of Notes, outstanding hereunder and furnished, from time to time
as they may require, with reasonable security and indemnity; and
(i) whether or not an Event of Default shall have occurred,
whenever it is provided in this Indenture that the Trustee consent to any act or
omission by any Person or that the Trustee exercise its discretion in any
manner, the Trustee may (but need not) seek the written acquiescence of the
holders of at least 66-2/3% in principal amount of the Notes then outstanding
and, unless written evidence of such acquiescence has been received by the
Trustee, it shall be fully justified in refusing so to consent or so to exercise
its discretion.
Section 7.3 No Responsibility of Trustee for Recitals . The recitals
and statements contained herein and in the Notes (except for the Trustee's
certificate of authentication endorsed on the Notes) shall be taken as the
recitals and statements of each Constituent Company, and the Trustee assumes no
responsibility for the correctness of the same.
The Trustee makes no representation as to the validity or sufficiency
of this Indenture, or of the Notes secured hereby, the security hereby or
thereby afforded, the title of any Constituent Company to the Mortgaged Property
or the descriptions thereof, or the filing or recording or registering of this
Indenture or any other document.
The Trustee shall not be concerned with or accountable to anyone for
the use or application of any deposited moneys which shall be released or
withdrawn in accordance with the provisions of this Indenture or of any Property
or securities or the proceeds thereof which shall be released from the Lien
hereof in accordance with the provisions of this Indenture.
Section 7.4 Compensation and Expenses of Trustee; Indemnification; Lien
Therefor . The Company covenants to pay to the Trustee such compensation for its
services hereunder as shall be agreed to by the Company and the Trustee, or, in
the absence of such agreement, reasonable compensation therefor (which shall not
be limited by any provision of law in regard to the compensation of a trustee of
an express trust); provided, that so long as the Trustee is also a Noteholder,
such compensation shall be $1.00 per year. In addition, the Company covenants to
pay, or reimburse, the Trustee for all reasonable expenses incurred hereunder,
including the reasonable compensation, expenses and disbursements of such
agents, representatives, experts and counsel as the Trustee may employ in
connection with the exercise and performance of any of its "non-routine" powers
and duties hereunder as Trustee; provided however, that reimbursement of
compensation, expenses and disbursements covered under Section 9.11 shall be
subject to the same limits as are contained therein. For the purposes hereof,
"non-routine" duties are those, such as filing UCC continuation statements,
which the Trustee would not also perform in its capacity as one of two or more
Noteholders.
The Company will also indemnify and save the Trustee, its agents,
employees and representatives, harmless against any expenses (including
reasonable attorneys' fees), liabilities and damages, not arising from its own
willful default or negligence, which it or any of them may incur in the exercise
and performance of its rights, powers, trusts, duties and obligations hereunder.
As security for the performance of the obligations of the Company under
this Section 7.4,
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the Trustee shall be secured hereby in priority to the Indebtedness evidenced by
the Notes.
Section 7.5 Moneys Received by Trustee; Trust Funds Segregation . All
moneys received by the Trustee under or pursuant to any provision of this
Indenture shall constitute trust funds for the purpose for which they were paid
or are held, but need not be segregated in any manner from other moneys, and may
be held or deposited under such conditions as may be prescribed by law for trust
funds.
Section 7.6 Trustee May Hold Notes . The Trustee or any officer or
director of the Trustee may acquire and hold Notes, offset funds or deposits
with it other than funds held by it as Trustee and otherwise deal with the
Constituent Companies or with any other company having relations with any of the
Constituent Companies, in the same manner and to the same extent and with like
effect as though it were not Trustee or such officer or director; provided that
nothing contained in this Section 7.6 shall be deemed to modify, amend or waive
any of the duties and obligations of the Trustee to the holders of the Notes as
set forth in this Indenture.
Section 7.7 Resignation of Trustee . The Trustee may resign and be
discharged from the trusts created hereby. Such resignation shall be
accomplished by delivering notice thereof, by first-class mail, postage prepaid,
to the Company and all holders of the Notes at the time outstanding, specifying
a date (not earlier than sixty (60) days after the date of such notice) when
such resignation shall take effect.
Such resignation shall take effect on the day specified in such notice,
unless previously a successor Trustee shall have been appointed as provided in
Section 7.10, in which event such resignation shall take effect immediately upon
the appointment of such successor Trustee.
Section 7.8 Removal of Trustee . The Trustee may be removed at any
time, but only for the reasons specified in Section 7.7, by an instrument or
instruments in writing executed by the holders of at least 66-2/3% in aggregate
principal amount of the Notes at the time outstanding and delivered to the
Trustee with a copy to the Company, specifying the removal and the date when it
shall take effect.
Section 7.9 Appointment of Successor Trustee . In case at any time the
Trustee shall resign or be removed or become incapable of acting, a successor
Trustee may be appointed by the holders of at least 66-2/3% in aggregate
principal amount of the Notes at the time outstanding, so long as such successor
is reasonably acceptable to the Company, by an instrument or instruments in
writing executed by such Noteholders and filed with such successor Trustee with
a copy of such instrument or instruments to the Company.
Until a successor Trustee shall be so appointed by the Noteholders, the
Company shall appoint a successor Trustee to fill such vacancy, by an instrument
in writing delivered to the successor Trustee. If all or substantially all of
the Mortgaged Property shall be in the possession of one or more receivers,
trustees, liquidators or assignees for the benefit of creditors, then such
receivers, trustees, custodians, liquidators or assignees may, by an instrument
in writing delivered to the successor Trustee, appoint a successor Trustee.
Promptly after any such appointment, the Company, or any such receivers,
trustees, custodians, liquidators or assignees,
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as the case may be, shall give notice thereof by first class mail, postage
prepaid, to each holder of Notes at the time outstanding.
Any successor Trustee so appointed by the Company, or such receivers,
trustees, custodians, liquidators or assignees, shall immediately and without
further act be superseded by a successor Trustee appointed by the holders of a
66-2/3% in aggregate principal amount of the Notes then outstanding.
If a successor Trustee shall not be appointed pursuant to this Section
within ninety (90) days after a vacancy shall have occurred in the office of
Trustee, the holder of any Note or such retiring Trustee (unless the retiring
Trustee is being removed) may apply to any court of competent jurisdiction to
appoint a successor Trustee, and such court may thereupon, after such notice, if
any, as it may consider proper, appoint a successor Trustee.
Section 7.10 Succession of Successor Trustee . Any successor Trustee
appointed hereunder shall execute, acknowledge and deliver to the Company and
the predecessor Trustee an instrument accepting such appointment, and thereupon
such successor Trustee, without any further act, deed, conveyance or transfer,
shall become vested with the title to the Mortgaged Property, and with all the
rights, powers, trusts, duties and obligations of the predecessor Trustee in the
trust hereunder, with like effect as if originally named as Trustee herein.
Upon the request of any such successor Trustee, however, the
Constituent Companies and the predecessor Trustee shall execute and deliver such
instruments of conveyance and further assurances and do such other things as may
reasonably be required for more fully and certainly vesting and confirming in
such successor Trustee the title to the Mortgaged Property and all such rights,
powers, trusts, duties and obligations of the predecessor Trustee hereunder, and
the predecessor Trustee shall also assign and deliver to the successor Trustee
any property subject to the Lien of this Indenture which may then be in its
possession.
Any Trustee which has resigned or been removed shall nevertheless
retain all rights of indemnity, including any Lien upon the Mortgaged Property
afforded to it by Section 7.4.
Section 7.11 Eligibility of Trustee . The Trustee may be a Note Holder
or other Person appointed by the Noteholders and approved by the Company, which
approval shall not be unreasonably withheld or delayed.
Section 7.12 Successor Trustee by Merger . Any corporation into which
the Trustee may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Trustee
shall be a party, shall be the successor of the Trustee hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything to the contrary contained herein notwithstanding.
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SECTION 8. SUPPLEMENTAL INDENTURES; WAIVERS.
Section 8.1 Supplemental Indentures Without Noteholders' Consent . The
Constituent Companies and the Trustee from time to time and at any time, subject
to the restrictions in this Indenture contained, may, without consent of the
holders of the Notes, enter into an indenture or indentures supplemental hereto
and which thereafter shall form a part hereof for any one or more or all of the
following purposes:
(a) to add to the covenants and agreements to be observed
by, and to surrender any right or power reserved to or conferred upon, any of
the Constituent Companies;
(b) to evidence the succession of another business entity to
any of the Constituent Companies, or successive successions, and the assumption
by the successor entity to the covenants, agreements and obligations of such
Constituent Company; provided that any such succession and assumption is
permitted by the terms of this Indenture;
(c) to subject to the Lien of this Indenture additional
Property hereafter acquired by any of the Constituent Companies or others and
intended to be subjected to the Lien of the Indenture, and to correct or amplify
the description of any Property subject to the Lien of this Indenture;
(d) to permit the qualification of this Indenture under the
Trust Indenture Act of 1939, as amended, or any similar Federal statute
hereafter in effect, except that nothing herein contained shall permit or
authorize the inclusion of the provisions referred to in Section 316(a)(2) of
said Trust Indenture Act of 1939 or any corresponding provision in any similar
Federal statute hereafter in effect; or
(e) for any other purpose not inconsistent with the terms of
this Indenture, or to cure any ambiguity or cure, correct or supplement any
defect or inconsistent provision of this Indenture or any supplement;
and the Constituent Companies covenant to perform all requirements of any such
supplemental indenture. No restriction or obligation imposed upon any of the
Constituent Companies may, except as otherwise provided in this Indenture, be
waived or modified by such supplemental indentures, or otherwise.
Section 8.2 Waivers and Consents by Noteholders; Supplemental
Indentures With Noteholders' Consent . Upon the waiver or consent of the holders
of at least 66-2/3% in aggregate principal amount of the Notes at the time
outstanding (a) a Constituent Company may take any action prohibited, or omit
the taking of any action required, by any of the provisions of this Indenture or
any indenture supplemental hereto, or (b) the Constituent Companies and the
Trustee may enter into an indenture or indentures supplemental hereto for the
purpose of adding, changing, or eliminating any provisions of this Indenture or
of any indenture supplemental hereto or modifying in any manner the rights and
obligations of the holders of the Notes and the Constituent Companies; provided
that no such waiver or supplemental indenture shall:
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(i) impair or affect the right of any holder to
receive payments or prepayments of the principal of and
interest on its Note, as therein and herein provided, without
the consent of such holder;
(ii) permit the creation of any Lien prior to, or on
a party with, the Lien of this Indenture with respect to any
of the Mortgaged Property, without the consent of the holders
of all the Notes at the time outstanding;
(iii) effect the deprivation of any holder of the
Notes of the benefit of the Lien of this Indenture upon all or
any part of the Mortgaged Property without the consent of such
holder of the Notes;
(iv) reduce the percentage of the aggregate principal
amount of Notes the holders of which are required to waive any
provision or consent to the taking of any such action or the
execution of any supplemental indenture pursuant to this
Section, without the consent of the holders of all of the
Notes at the time outstanding; or
(v) modify the rights, duties or immunities of the
Trustee without its consent.
Section 8.3 Notice of Supplemental Indenture . Promptly after the
execution by the Constituent Companies and the Trustee of any supplemental
indenture or agreement pursuant to the provisions of Section 8.1 or 8.2 hereof,
the Company shall give written notice, setting forth in general terms the
substance of such supplemental indenture together with a conformed copy thereof,
mailed first class postage prepaid, to each holder of the Notes at its address
set forth in the Note Register. Any failure of the Company to give such notice,
or any defect therein, shall not, however in any way impair or affect the
validity of any such supplemental indenture or agreement.
Section 8.4 Opinion of Counsel Conclusive as to Supplemental Indenture.
The Trustee is hereby authorized to join with the Company in the execution of
any such supplemental indenture authorized or permitted by the terms of this
Indenture to make the further agreements and stipulations which may be therein
contained, and the Trustee may receive an Opinion of Counsel and an Officer's
Certificate as conclusive evidence that any supplemental indenture executed
pursuant to the provisions of this Section 8 complies with the requirements of
this Section 8.
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SECTION 9. MISCELLANEOUS.
Section 9.1 Evidence of Action by Noteholders . Whenever in this
Indenture it is provided that the holders of a specified percentage in aggregate
principal amount of the Notes may take any action (including the making of any
demand or request, the giving of any notice, consent or waiver or the taking of
any other action), the fact that at the time of taking any such action the
holders of such specified percentage have joined therein may be evidenced by any
instrument or any number of instruments of similar tenor executed by holders of
the Notes in person or by attorney or proxy appointed in writing. The holding by
any Person of any of the Notes shall be proved by the Note Register.
Section 9.2 Defeasance . If the Company shall pay and discharge the
whole amount of the principal of and interest on all Notes at the time
outstanding and shall pay or cause to be paid all other sums payable hereunder
as and when due and payable, then and in that case all Property, rights and
interests hereby conveyed or assigned or pledged shall revert to the Company,
and the estate, right, title and interest of the Trustee and the holders of the
Notes therein shall thereupon cease, terminate and become void; and the Trustee,
in such case, on demand of the Company and at its cost and expense, shall
execute and deliver to the Company a proper instrument or proper instruments
acknowledging the satisfaction and termination of this Indenture, and shall
convey, assign and transfer, or cause to be conveyed, assigned or transferred,
and shall deliver or cause to be delivered, to the Company, all Property,
including money, then held by the Trustee, other than moneys deposited with the
Trustee for the payment of the principal of and interest on any Notes.
The indemnities of the Company to the Trustee contained in Section 7.4
shall survive such payment and discharge of the Notes and such satisfaction and
termination of this Indenture.
Section 9.3 Release of Lien . If the Company shall pay and discharge
the whole amount of the principal of and interest on the Notes as and when the
same shall be due and payable and shall pay or cause to be paid all other sums
payable hereunder, all Mortgaged Property, rights and interests hereby conveyed,
assigned or pledged shall revert to the Company, and the Trustee, on request of
the Company and at its cost and expense, shall execute and deliver a proper
instrument releasing the Lien of this Indenture and the Mortgages, and this
Indenture shall cease and be of no further force or effect.
Section 9.4 Indenture for Benefit of Parties Hereto . Nothing in this
Indenture, expressed or implied, is intended or shall be construed to confer
upon or to give to, any Person other than the parties hereto, and the holders of
the Notes, any right, remedy or claim under or by reason of this Indenture or
any covenant, condition or stipulation hereof; and the covenants, stipulations
and agreements in this Indenture contained are and shall be for the sole and
exclusive benefit of the parties hereto, their successors and assigns, and the
holders of the Notes.
Section 9.5 Severability . In case any one or more of the provisions
contained in this Indenture or in the Notes shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby.
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Section 9.6 Addresses for Notices and Demands . Any notice to or demand
upon the Trustee may be served or presented, and such demand may be made, at the
principal office of the Trustee, 2211 Congress Street, Portland, Maine, 04122,
Attention: Mr. David Murray. Any notice to or demand upon the Company shall be
deemed to have been sufficiently given or served by the Trustee for all purposes
by being mailed by registered or certified mail, postage prepaid, addressed to
the Company, P.O. Box 8597, 1311 A Miller Road, Greenville, SC 29604, Fax:
864-281-9634, or to the Company at such other address as may be filed in writing
by the Company with the Trustee. Any notice or report required by any provision
of this Indenture to be given or made to holders of the Notes shall be deemed to
have been sufficiently given or made if copies thereof are mailed by registered
or certified mail, postage prepaid, in a post office letter box, or sent via
facsimile transmission or by courier, addressed to each holder of the Notes at
the address of such holder set forth in the Register.
Section 9.7 Successors and Assigns . Whenever in this Indenture any of
the parties hereto is named or referred to, the successors and assigns of such
party shall be deemed to be included, and all the covenants, promises and
agreements in this Indenture contained by or on behalf of any of the Constituent
Companies, or by or on behalf on the Trustee, shall bind and inure to the
benefit of the respective successors and assigns, whether so expressed or not.
Section 9.8 Counterparts; Descriptive Headings . This Indenture is
being executed in any number of counterparts, each of which is an original and
all of which are identical. Each counterpart of this Indenture is to be deemed
an original hereof and all counterparts collectively are to be deemed but one
instrument. All signatures need not be on the same counterpart. The descriptive
headings of the several Sections of and Exhibits to this Indenture were
formulated, used and inserted in this Indenture for convenience only and shall
not be deemed to affect the meaning or construction of any of the provisions
hereof.
Section 9.9 Governing Law . This Indenture and the Notes shall be
governed by and construed in accordance with the laws of the State of Maine.
Section 9.10 No Personal Recourse . No personal recourse shall be had
for any claim based on this Indenture or the Notes against any owner of an
interest in the Constituent Companies, or any officer or employee, past, present
or future, of any such Constituent Company or of any successor body as such;
provided that the foregoing shall not limit the right of any Person to name one
or more of the Constituent Companies as a party defendant in any action or suit
for collection or foreclosure or in the exercise of any other remedy under this
Indenture or the Notes, so long as no judgment seeking personal liability shall
be asked for, taken or enforced against any owner of an interest in the
Constituent Companies, or any officer or employee, past, present or future, of
any such Constituent Company or of any successor body as such, and any pleadings
and docket entries relating thereto shall so indicate.
Section 9.11 Reimbursement of Noteholder Expenses . The Company
covenants to pay, or reimburse, the Noteholders for the reasonable expenses of
such agents, representatives, experts and counsel as the Noteholders may employ
for such matters as review of budgets, determining fair market value, evaluating
the performance of the Operator, evaluating the continuing economic viability of
the Projects, etc.; provided however, that reimbursement
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of compensation, expenses and disbursements for such agents, representatives,
and experts shall be limited to $10,000 in calendar year 1999 and $5,000 in each
subsequent year, with unused balances carrying forward to subsequent years.
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IN WITNESS WHEREOF, Aquenergy Systems, Inc. has caused this Indenture
to be executed on its behalf; and UNUM Life Insurance Company of America, in
evidence of its acceptance of the trusts hereby created, has caused this
Indenture to be executed on its behalf and its corporate seal to be hereto
affixed and attested, all as of the date first above written.
AQUENERGY SYSTEMS, INC.
By:
-------------------------------------
Its:
ATTEST:
- -------------------------
, Secretary
UNUM LIFE INSURANCE COMPANY
OF AMERICA, as Trustee
By:
-------------------------------------
Its:
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<PAGE>
In consideration of the benefit to the undersigned derived from use of
the proceeds of the Notes by the Company, the undersigned hereby executes the
foregoing Indenture for the purpose of acknowledging that Properties owned by it
are subject to Liens of the Trustee under said Indenture and that said Indenture
imposes certain obligations on it and on the ownership and operation of the
Projects owned by it, all of which obligations the undersigned covenants to
perform as set forth above.
CONEROSS POWER CORPORATION
By:
-------------------------------------
Its:
ATTEST:
- -------------------------
, Secretary
49
<PAGE>
SCHEDULE I
PROJECTS AND POWER SALE AGREEMENTS
<TABLE>
<CAPTION>
Power Purchasers; Date of
Project Location Agreement
------- -------- -------------------------
<S> <C> <C>
Woodside I 12 Mile Creek, Pickens Duke Power Company;
County, South Carolina February 13, 1998
Woodside II 12 Mile Creek, Pickens Duke Power Company;
County, South Carolina February 13, 1998
Ware Shoals Saluda River, Laurens and Duke Power Company;
Greenwood Counties, February 13, 1998
South Carolina
Apalache South Tyger River, Duke Power Company;
Spartanburg County, South February 13, 1998
Carolina
Piedmont Saluda River, Greenwood Duke Power Company;
and Anderson Counties, February 13, 1998
South Carolina
Coneross Oconee County, South City of Seneca,
Carolina S. Carolina;
July 10, 1985,
amended March 9,
1988
Fries New River, Grayson Virginia Electric
County, Virginia Power Company
(July 29, 1988) and
Appalachian Power
Company (April 28,
1994)
</TABLE>
<PAGE>
EXHIBIT 3.17(a)(i)
FORM OF POWER SALES REPORT
<PAGE>
EXHIBIT 3.17(a)(ii)
FORM OF CASH REPORT
<PAGE>
EXHIBIT 3.17(d)
BUDGET
<PAGE>
Exhibit 10.127
March 9, 1999
Mr. Charles F. Goff, Jr.
Chief Executive Officer
CHI Energy, Inc.
680 Washington Boulevard
Suite 500
Stamford, CT 06901
Re: Position of Interim Chief Executive Officer and
Chairman of the Board of Directors
-----------------------------------------------
Dear Charlie:
This letter confirms the terms pursuant to which you have agreed to serve as the
Chairman of the Board of Directors and interim Chief Executive Officer of CHI
Energy, Inc. (the "COMPANY").
Service
You agree to perform such services, duties and responsibilities consistent with
your position and as may be reasonably delegated to you by the Board of
Directors of the Company (the "BOARD"). You further agree to devote your full
working time and efforts, to the best of your ability and experience, to the
performance of your services, duties and responsibilities. You agree to be
available to perform such services for a period of three months, commencing on
March 10, 1999, and thereafter, on an at-will basis, as you and the Company may
agree.
Board Membership
You will remain a member of the Board. However, the Company will suspend any
director's fees that otherwise would be paid to you so long as you are the
interim Chief Executive Officer.
Compensation
The Company will pay a cash lump sum equal to $86,169.21 on or about March 15,
1999.
During your service as the interim Chief Executive Officer, the Company will pay
you a monthly base salary of $15,000.
<PAGE>
Mr. Charles F. Goff, Jr.
March 9, 1999
Page 2
Stock Options
Promptly upon your commencement of service as the interim Chief Executive
Officer, the Company will grant you non-qualified stock options under the
company's 1997 Stock Option Plan to purchase 60,000 shares of the Company's
Class A Common Stock at an exercise price of $10 per share. The options will
immediately vest upon your commencement as interim Chief Executive Officer.
Expense Reimbursement; Lodging and Automobile
The Company will pay or reimburse you for all reasonable and necessary expenses
incurred in carrying out your duties and responsibilities as the interim Chief
Executive Officer in accordance with the Company's business expense Policy in
effect from time to time, which shall include round-trip, first-class travel
expenses to the Company's principal office in Stamford, Connecticut, from
Florida incurred by you or your spouse, provided that such round-trip travel
does not exceed five times per month in the aggregate.
Since the Company will require you to perform your duties and responsibilities
at the Company's principal office and your service with the Company as the
interim Chief Executive Officer will be on a temporary basis , the Company will
make available for your use appropriate lodging, as well as an automobile, in
Stamford, Connecticut.
Employee Benefit Plans and Programs
You hereby decline participation and coverage under the Company's employee
benefit plans and programs.
This letter sets forth the terms of your service with the Company and supersedes
any prior understandings, representations or agreements, whether oral or
written. If the terms set forth herein are acceptable to you, please countersign
and date below, and return a copy of this letter to me at your earliest
convenience.
<PAGE>
Mr. Charles F. Goff, Jr.
March 9, 1999
Page 3
As you know, I'm looking forward to working with you.
Sincerely,
Edward M. Stern
AGREED AND ACCEPTED:
- ----------------------------------------
Charles F. Goff, Jr.
- ----------------------------------------
Date
cc: Mitch Petrick
James Duplessie
Neil Manna
Michelle Mejia
99026-Charlie Goff
<PAGE>
EXHIBIT 12.1
CHI ENERGY, INC.
STATEMENT REGARDING COMPUTATIONS OF RATIO/DEFICIENCY
OF EARNINGS TO FIXED CHARGES AND OF
RATIO/DEFICIENCY OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
--------------------- ---------------------------------------------------------
YEAR ENDED NOV. 8 TO JULY 1 TO
DEC. 31 DEC. 31 NOV. 7 FISCAL YEAR ENDED JUNE 30,
1998 1997 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income/(loss) before provision for income taxes,
extraordinary item and cumulative effect of
accounting changes $ 6,790 $ 1,481 $ (9,319) $(11,161) $ (95,712) $(15,899) $(14,126)
Add: Interest expense 8,048 1,260 7,741 29,591 26,876 21,778 18,980
Amortization of debt -- -- 108 448 448 448 451
Imputed interest - operating lease (a) 1,268 -- 677 1,436 1,533 1,621 1,705
------- -------- -------- -------- --------- -------- --------
Total earnings/(loss) $16,106 $ 2,741 $ (793) $ 20,314 $ (66,855) $ 7,948 $ 7,010
======= ======== ======== ======== ========= ======== ========
Fixed charges:
Interest expense $ 8,048 $ 1,260 $ 7,741 $ 29,591 $ 26,876 $ 21,778 $ 18,980
Capitalized interest -- -- 68 189 1,705 2,951 2,303
Amortization of debt -- -- 108 448 448 448 451
Imputed interest - operating lease (a) 1,268 -- 677 1,436 1,533 1,621 1,705
------- -------- -------- -------- --------- -------- --------
$ 9,316 $ 1,260 $ 8,594 $ 31,664 $ 30,562 $ 26,798 $ 23,439
======= ======== ======== ======== ========= ======== ========
Ratio of earnings to fixed charges 1.73 2.18 -- -- -- -- --
======= ======== ======== ======== ========= ======== ========
Deficiency of earnings to fixed charges -- -- $ 9,387 $ 11,350 $ 97,417 $ 18,850 $ 16,429
======= ======== ======== ======== ========= ======== ========
Preferred dividend requirement -- -- $ 6,060 $ 25,891 $ 23,732 $ 22,108 $ 20,688
======= ======== ======== ======== ========= ======== ========
Ratio of earnings to fixed charges and preferred
stock dividends 1.73 2.18 -- -- -- -- --
======= ======== ======== ======== ========= ======== ========
Deficiency of earnings to fixed charges and
preferred stock dividends -- -- $ 15,447 $ 37,241 $ 121,149 $ 40,958 $ 37,117
======= ======== ======== ======== ========= ======== ========
</TABLE>
(a) The percent of rent included above represents a reasonable approximation of
the interest factor.
<PAGE>
<TABLE>
<CAPTION>
Exhibit 21.1
SUBSIDIARIES AND WHOLLY-OWNED AFFILIATES OF CHI ENERGY, INC, #06-1138478
SUBSIDIARIES AND PARTNERSHIPS OF CHI ENERGY, INC.
FEDERAL I.D. NUMBERS
<S> <C> <C> <C>
Aquenergy Systems, Inc. 57-0736018 Eagle & Phenix Hydro Company, Inc. 06-1288081
Asotin Hydro Company, Inc. 06-1226531 Echo Summit Hydro Company, Inc. * 06-1396364
Aziscohos Hydro Company, Inc. 06-1163591 Essex Company 04-1291880
Beaver Water Power Company Fulcrum, Inc. 82-0391234
Beaver Valley Holdings Ltd. 31-0990607 Great Dam Corp. 04-2684057
Beaver Valley Power Company 31-0990606 Highfalls Hydro Company, Inc. 06-1383519
Bedard Electrics, Inc. * 15-0599437 Hosiery Mill Hydro Company, Inc. 06-1279378
Boott Hydropower, Inc. 04-2798952 Hydrodev, Inc. No FEID#: Canadian Corp.
BP Hydro Associates 06-1401488 Hydro Development Group, Inc. 16-1141332
BP Hydro Finance Partnership 06-1401492 Hydro Energies Corporation 03-0282579
CHI Acquisitions, Inc. 06-1259880 Iriquorp Acquisitions, Inc. * 16-1350126
CHI Acquisitions II, Inc. 06-1413523 Iriquorp Ltd. * 16-1283233
CHI Argentina USA, Inc. * 06-1391063 Iriquorp Steel Corporation 22-3039821
CHI-Black Canyon, Inc. (sold 12/31/98) 06-1325221 Joseph Hydro Company, Inc. * 06-1310385
CHI Canada, Inc. No FEID #: Canadian Corp. Kings River Hydro Company, Inc. 06-1390733
CHI-Felt Dam, Inc. * 06-1325223 Kinneytown Hydro Company, Inc. 06-1167454
CHI Finance, Inc. 06-1338722 LaChute Hydro Company, Inc. 06-1203686
CHI Highfalls, Inc. 06-1383520 Lawrence Hydroelectric Associates 04-2684094
CHI Hydroelectric Company, Inc. No FEID #: Canadian Corp. Les Developpements Hydroelectriques CHI, Inc. 06-1307651
CHI-Idaho, Inc. 06-1326247 Littlefield Hydro Company* 06-1163612
CHI-Magic Valley, Inc. 06-1325226 Littlefield Hydro Company, Inc.* 06-1163600
CHI Mountain States Operations, Inc. 06-1299910 Littleville Power Company, Inc. 04-2839064
CHI Operations, Inc. 06-1163588 Lower Saranac Corporation 13-3367119
CHI Patagonia, Inc.* 06-1370569 Mill Shoals Hydro Company, Inc. 06-1307652
CHI Philippines, Inc. * 06-1398884 Minnewawa Hydro Company, Inc.* 06-1163604
CHI-Pigeon Cove, Inc *. 06-1325222 North Canal Waterworks 04-6450580
CHI Power Inc. 06-1226530 Notch Butte Hydro Company, Inc. 06-1326248
CHI Power Marketing, Inc. 06-1257762 Ottauquechee Hydro Company, Inc. 06-1342764
CHI S.F., LP No FEID #: Canadian Partnership Pelzer Hydro Company, Inc. 06-1268834
CHI Universal, Inc. 06-1163590 Phoenix Hydro Company, Inc.* 06-1314432
CHI West, Inc. 06-1281001 Pioneer Hydro Company, Inc. * 06-1385379
CHI Western Operations, Inc. 06-1326249 Schoolfield Hydro Company, Inc.* 06-1261756
Coneross Power Corporation 57-0853383 Sheldon Vermont Hydro Company, Inc. 06-1325231
Consolidated Hydro Mountain States, Inc. 06-1299911 Slate Creek Hydro Company, Inc. 06-1292715
Consolidated Hydro New Hampshire, Inc. 06-1206274 Somersworth Hydro Company, Inc. 06-1163606
Consolidated Hydro New York, Inc. 06-1220156 TKO Power, Inc. 68-0134284
Consolidated Hydro Southeast, Inc. 06-1267066 Triton Power Company 14-1630384
Consolidated Hydro Vermont, Inc. 06-1254838 Twin Falls Hydro Company, Inc. 06-1263090
Coosa Pines Energy LLC (CHI Division) Ware Hydro Company, Inc. * 06-1320766
Coosa Pines Energy Holdings LLC (CHI Division) Willimantic Hydro Company, Inc. 06-1295505
Crosby Drive Investments, Inc. 04-3040899 Willimantic Power Corporation 03-0312305
MAJORITY OWNED SUBSIDIARIES AND PARTNERSHIPS OF CHI ENERGY, INC.
Cascade Energy Limited Partnership * 06-1367501 SOCAL Energy Limited Partnership * 06-1366760
Cascade Pumped Storage, Inc. 06-1366654 SOCAL Pumped Storage, Inc. 06-1366651
CHI Patagonia Investments, L.P. * 06-1370600 Societe de Cogeneration
Consolidated Pumped Storage Arkansas, Inc. 06-1302365 de St-Felicien, LP No FEID #: Canadian Partnership
Consolidated Pumped Storage, Inc. 06-1267071 Summit Energy Storage Inc. * 06-1230814
River Mountain Limited Partnership 06-1391062 Summit Finance, Inc. 06-1236388
AFFILIATES OF CHI ENERGY, INC.
Black River Hydro Associates 16-1214489
(Cataldo) Hydro Power Associates 16-1214491 Missisquoi Associates 82-0387855
Copenhagen Associates 16-1229159 Pyrites Associates 16-1211396
Hillsborough Hydroelectric, L.P. 13-3187877 Sheldon Springs Hydro Associates, L.P. 06-1383502
Hydrodev Societe en Commandite Slate Creek Hydro Associates, L.P. 13-3187471
No FEID #: Canadian Partnership Summit Energy Limited Partnership * 06-1344738
LaComb Hydro Limited Partnership 68-0105524 Twin Falls Hydro Associates, L.P. 06-1279573
(Final Return 12/31/98) Star Lake Hydro Partnership, GP
Lower Saranac Hydro Partners, L.P. 13-3532743 No FEID #: Canadian Partnership
3/30/1999 *Dormant EXHIBIT21.1
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE DECEMBER 31, 1998
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,778
<SECURITIES> 0
<RECEIVABLES> 5,171
<ALLOWANCES> (443)
<INVENTORY> 0
<CURRENT-ASSETS> 28,535
<PP&E> 97,060
<DEPRECIATION> (4,729)
<TOTAL-ASSETS> 219,584
<CURRENT-LIABILITIES> 16,143
<BONDS> 80,813
0
0
<COMMON> 100
<OTHER-SE> 89,506
<TOTAL-LIABILITY-AND-EQUITY> 219,584
<SALES> 0
<TOTAL-REVENUES> 54,212
<CGS> 0
<TOTAL-COSTS> 31,567
<OTHER-EXPENSES> 9,754
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,790
<INCOME-TAX> (2,989)
<INCOME-CONTINUING> 3,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,801
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
