================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 33-69762
CHI ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1138478
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
680 Washington Boulevard, Stamford, Connecticut 06901
----------------------------------------------- ------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (203) 425-8850
NONE
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
-- --
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
-- --
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class A Outstanding as of November 10, 2000
--------------------------------- -----------------------------------
Common stock, $.01 par value 9,085,290
Class B Outstanding as of November 10, 2000
--------------------------------- -----------------------------------
Common stock, $.01 par value 914,710
================================================================================
38684.0003
<PAGE>
<TABLE>
<CAPTION>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements............................................................ 2
Consolidated Statement of Operations for the three months and nine months
ended September 30, 2000 and 1999 (Unaudited)............................... 3
Consolidated Balance Sheet at September 30, 2000 (Unaudited)
and December 31, 1999....................................................... 4
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2000 (Unaudited).................... 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 2000 and 1999 (Unaudited)............................... 6-7
Notes to Consolidated Financial Statements (Unaudited) ........................ 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 10-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 18
Item 6. Exhibits and Reports on Form 8-K............................................... 18
Signature
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHI ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
2
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
--------- ---------
2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Power generation revenue $ 8,556 $ 6,382 $ 39,879 $ 30,618
Management fees and operations & maintenance revenues 1,774 1,262 3,979 3,616
Equity income in partnership interests and other partnership income 156 (2) 1,374 1,133
------------ ------------ ------------ ------------
10,486 7,642 45,232 35,367
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Operating 4,665 3,963 12,485 11,486
General and administrative 1,735 1,163 4,321 4,744
Depreciation and amortization 1,941 1,868 5,881 5,538
Lease expense 1,634 1,529 4,967 4,344
------------ ------------ ------------ ------------
9,975 8,523 27,654 26,112
------------ ------------ ------------ ------------
Income/(loss) from operations 511 (881) 17,578 9,255
INTEREST INCOME 509 383 1,274 1,116
OTHER INCOME 138 14 553 186
INTEREST EXPENSE (1,569) (1,663) (4,779) (5,054)
------------ ------------ ------------ ------------
(Loss)/income before benefit/(provision) for income taxes and
extraordinary items (411) (2,147) 14,626 5,503
BENEFIT/(PROVISION) FOR INCOME TAXES 170 863 (5,950) (2,214)
------------ ------------ ------------ ------------
(Loss)/income before extraordinary items (241) (1,284) 8,676 3,289
EXTRAORDINARYGAIN ON EXTINGUISHMENT OF DEBT (NET OF INCOME TAX OF
$157 AND $1,267 FOR THE THREE MONTHS AND THE NINE MONTHS
ENDED SEPTEMBER 30, 2000, RESPECTIVELY) 198 -- 222 --
------------ ------------ ------------ ------------
NET (LOSS)/INCOME $ (43) $ (1,284) $ 8,898 $ 3,289
============ ============ ============ ============
BASIC AND DILUTED NET (LOSS)/INCOME PER COMMON SHARE BEFORE
EXTRAORDINARY ITEMS $ (0.02) $ (0.13) $ 0.87 $ 0.33
BASIC AND DILUTED NET (LOSS)/INCOME PER COMMON SHARE -- $ (0.13) $ 0.89 $ 0.33
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 10,000,000 10,000,000 10,000,000 10,000,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED BALANCE SHEET
(Amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
SEPT 30, DEC. 31,
2 0 0 0 1 9 9 9
------- -------
ASSETS (unaudited) (audited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents unrestricted $ 12,644 $ 9,674
Cash and cash equivalents restricted 6,005 6,280
Accounts receivable, net of allowance for doubtful accounts of $878 and $608, respectively 4,042 7,472
Prepaid expenses and other current assets 3,703 3,067
------- -------
Total current assets 26,394 26,493
PROPERTY, PLANT AND EQUIPMENT, NET 134,472 109,184
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS, NET 3,022 8,655
INTANGIBLE ASSETS, NET 56,369 58,959
INVESTMENTS AND OTHER LONG-TERM ASSETS 36,160 35,641
-------- --------
$256,417 $238,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 12,683 $ 10,945
Current portion of long-term debt and obligations under capital leases 10,490 11,455
-------- --------
Total current liabilities 23,173 22,400
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 72,270 70,001
DEFERRED CREDITS, STATE INCOME TAXES AND OTHER LONG-TERM LIABILITIES 51,106 48,057
COMMITMENTS AND CONTINGENCIES
-------- --------
Total liabilities 146,549 140,458
-------- --------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 5,806 3,695
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, none and 10,000,000 shares authorized, no shares issued -- --
Common stock, $.01 par value, 20,000,000 shares authorized
Class A common stock, 9,085,290 shares issued and outstanding 91 91
Class B common stock, 914,710 shares issued and outstanding 9 9
Additional paid-in capital, including $2,064 related to warrants 85,385 85,000
Retained earnings 18,577 9,679
-------- --------
Total stockholders' equity 104,062 94,779
-------- --------
$256,417 $238,932
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financials
statements.
4
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------- ------------
NUMBER NUMBER ADDITIONAL TOTAL
OF SHARES REPORTED OF SHARES PAR PAID-IN RETAINED STOCKHOLDERS'
OUTSTANDING AMOUNT OUTSTANDING VALUE CAPITAL EARNINGS EQUITY
-------------- ------------ --------------- --------- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1999 - - 10,000,000 $ 100 $ 85,000 $ 9,679 $ 94,779
Stock options granted 385 385
Net income 8,898 8,898
-------------- ------------ --------------- --------- ------------- ------------ ----------------
BALANCE SEPTEMBER 30, 2000 - - 10,000,000 $ 100 $ 85,385 $ 18,577 $ 104,062
============== ============ =============== ========= ============= ============ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financials
statements.
5
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT 30,
--------
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,898 $ 3,289
Adjustments to reconcile net income to net cash provided by operating
activities:
Non-cash interest and other charges 831 578
Change in deferred revenue (339) (39)
Provision relating to deferred tax liabilities 5,119 1,926
Extraordinary gain on extinguishment of debt, net of tax (222) --
Depreciation and amortization 5,881 5,538
Undistributed earnings of affiliates (803) (85)
Decrease/(increase) in accounts receivable 3,159 (412)
Increase in prepaid expenses and other current assets (636) (628)
Increase/(decrease) in accounts payable and accrued expenses 1,767 (347)
-------- --------
Net cash provided by operating activities 23,655 9,820
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Project construction expenditures (27,659) (7,190)
Capital expenditures (870) (2,333)
Decrease in investments and other long-term assets 284 1,303
Purchase of partnership interests, net of cash acquired -- (6,692)
-------- --------
Net cash used in investing activities (28,245) (14,912)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 16,356 --
Payments on borrowings (11,416) (4,679)
Contribution from minority interest 2,111 --
Increase in other long-term liabilities 234 --
-------- --------
Net cash provided by/(used in) financing activities 7,285 (4,679)
-------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 2,695 (9,771)
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 15,954 21,778
-------- --------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD 18,649 12,007
LESS: RESTRICTED CASH (6,005) (5,369)
-------- --------
CASH AND CASH EQUIVALENTS, UNRESTRICTED $ 12,644 $ 6,638
======== ========
</TABLE>
The accompanying notes are an integral part of the financials statements.
6
<PAGE>
CHI ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in thousands except share and per share amounts)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT 30,
--------
2 0 0 0 1 9 9 9
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,988 $ 4,730
======= =======
Income taxes $ 392 $ 394
======= =======
</TABLE>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
As a result of the settlement of certain pre-reorganization
contingencies and the realization of net operating loss credits,
during the nine months ended September 30, 2000 and 1999,
reorganization value in excess of amounts allocable to identifiable
assets decreased by $5,235 and $1,683, respectively, and deferred
credits, state income taxes and other long term liabilities
decreased by $2,921 and $1,683, respectively. In addition, during
the nine months ended September 30, 2000, long term debt decreased
by $3,445.
During the nine months ended September 30, 1999, the Company
purchased additional partnership interests in two partnerships for
$7,337, resulting in 100% ownership of both partnerships. In
conjuction with the acquisitions, liabilities were assumed as
follows:
PARTNERSHIP
INTERESTS
---------
Fair value of non-cash assets acquired $ 12,201
Cash acquired 645
Prior ownership interests (5,385)
Cash paid (7,337)
------------
Liabilities assumed $ 124
============
The accompanying notes are an integral part of the financials statements.
7
<PAGE>
NOTE 1 - ORGANIZATION
CHI Energy, Inc. ("CHI", and together with its consolidated subsidiaries,
the "Company"), has been engaged in the energy business since its founding in
1985. Its principal business strategy is the development, acquisition, operation
and management of renewable energy and other environmentally beneficial
facilities and assets. Renewable energy sources generally include hydroelectric,
biomass, landfill gas, wind, photovoltaic and geothermal generating facilities
and related assets. Currently, all of the Company's revenue is derived from the
ownership and operation of hydroelectric facilities. As of September 30, 2000
and 1999, the Company had ownership interests in, leased and/or operated
projects with a total operating capacity of 255 and 254 megawatts ("MW"),
respectively.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been omitted pursuant to such rules and
regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading.
The results of operations for the interim periods shown in this report are
not necessarily indicative of the results to be expected for the fiscal year. In
the opinion of the Company's management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly its financial position as of
September 30, 2000 and December 31, 1999 and the results of its operations and
changes in its financial position for the three and nine months ended September
30, 2000 and 1999. These financial statements should be read in conjunction with
the December 31, 1999 audited Consolidated Financial Statements and Notes
thereto.
Certain prior period amounts have been reclassified to conform with current
period presentation.
NOTE 3 - ACQUISITION
On November 30, 1999, the Company acquired an additional 50% ownership
interest in Copenhagen Associates, a partnership which owns a 3.3 MW
hydroelectric facility for $2.5 million. The Company now has a 100% ownership
interest in this partnership. The transaction was funded with unrestricted cash.
The Company has applied purchase accounting for the acquisition on a step
acquisition basis. Accordingly, the results of operations have been included in
the Company's consolidated financial statements since the date of acquisition.
The following unaudited pro forma consolidated results of operations for
the nine months ended September 30, 1999 assume the acquisition occurred as of
the beginning of the period presented:
Pro forma Actual
--------- ------
Operating revenues $35,612 $35,367
Net income $3,288 $3,289
Basic and diluted net income per common share $0.33 $0.33
Weighted average number of common shares 10,000,000 10,000,000
The pro forma results are not necessarily indicative of the results that
would have been obtained if the acquisition had been completed as of the
beginning of the fiscal period presented, nor are they necessarily indicative of
future consolidated results.
8
<PAGE>
NOTE 4 - FACILITIES UNDER DEVELOPMENT
The Company has entered into an agreement to develop, construct and operate
30 MW of wind power capacity. The total cost of the project is estimated to be
approximately $39.8 million, which will be funded though an equity contribution
by the Company of $14.8 million and project debt of approximately $25.0 million.
As of September 30, 2000, the Company has funded approximately $13.2 million of
its equity commitment. The project is currently under construction and is
expected to commence commercial operations during December 2000.
The Company has also entered into an agreement to develop, construct and
operate a 23 MW biomass cogeneration facility in Quebec, Canada. The total cost
of the facility is estimated to be approximately $41.0 million, which was
partially funded though an equity contribution by the Company of approximately
$9.3 million during 1999 and an equity contribution by another partner of
approximately $5.7 million. Remaining costs will be funded via project debt of
approximately $26.0 million. The facility is currently under construction and is
expected to commence commercial operation during the second quarter of 2001.
NOTE 5 - EXTRAORDINARY ITEMS
On September 18, 2000, a wholly-owned subsidiary of the Company purchased
its non-recourse debt plus accrued interest totaling $593 for $200. Concurrent
with this transaction, $38 of previously capitalized loan acquisition costs were
written off, resulting in an extraordinary gain of $198 ($.02 per share), net of
related income taxes of $157.
On April 1, 2000, a wholly-owned subsidiary of the Company sold its
interest in River Mountain Limited Partnership. Concurrent with this
transaction, $3,445 of debt was extinguished and reorganization value in excess
of amounts allocable to identifiable assets was decreased by $2,314, resulting
in an extraordinary gain of $24 ($.002 per share), net of related income taxes
of $1,107.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On August 20, 1997, a former employee of the Company filed a civil action
against the Company in Connecticut Superior Court, District of New Haven
entitled Carol H. Cunningham v. Consolidated Hydro, Inc. alleging that the
Company breached its employment agreement with her. On or about October 13,
1997, the former employee filed a proof of claim in the Bankruptcy Court for
approximately $7.3 million plus unliquidated amounts based primarily on the
allegations in the civil action (the "Claim"). On November 25, 1997, the Company
filed an objection to the Claim on the grounds that, among other things, the
former employee failed to satisfy her obligations under her employment contract
with the Company. Arguments were held in the trial during the first quarter of
2000, but a verdict has not yet been reached. The Company has vigorously
defended 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.
NOTE 7 - SUBSEQUENT EVENTS
On October 19, 2000, the Company acquired 60% of the common shares of
Optigaz, Inc. (formerly known as Societe de Cogeneration Meloche, Inc.), for
approximately $0.7 million. Optigaz, Inc. owns a 1.85 MW landfill gas project
near Montreal, Canada. The project is currently engaged in commercial
operations.
On October 30, 2000, the Company entered into a merger agreement with Erga,
S.p.A. ("Erga"), a wholly-owned subsidiary of Enel, S.p.A. ("Enel"), whereby
Erga will acquire 100% of the Company from existing shareholders for $170
million in cash. Erga is a renewable energy company with geothermal,
hydroelectric, wind power and photovoltaic capacity of approximately 1,700 MW.
Enel is the world's largest publicly listed utility with generating capacity of
approximately 56,000 MW. The transaction, which is subject to certain closing
conditions, is expected to close by the end of 2000.
On November 9, 2000, the shareholders of Energy Photovoltaics, Inc. ("EPV")
approved a share purchase agreement whereby the Company, through a limited
liability corporation formed with two partners ("LLC"), would purchase $14.0
million of EPV convertible preferred stock, thereby giving the LLC an initial
66.7% voting interest in EPV. The Company's investment in the LLC will be
approximately $5.2 million. EPV is engaged in the development, manufacture and
commercialization of technologies and systems to produce thin film photovoltaic
modules. The agreement, which is subject to certain closing conditions, is
expected to close by the end of 2000.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
CHI Energy, Inc. ("CHI", and together with its consolidated subsidiaries,
the "Company"), has been engaged in the energy business since its founding in
1985 and is currently principally engaged in the development, acquisition,
operation and management of renewable energy and related, environmentally
beneficial facilities and assets. Currently, all of the Company's revenue is
derived from the ownership and operation of hydroelectric facilities (the
Company's "hydroelectric business"). The Company's operating hydroelectric
projects are located in 14 states and one Canadian province.
The Company's existing U.S. hydroelectric projects are clustered in four
regions: the Northeast, Southeast, Northwest and West, with a concentration in
the Northeast. CHI has developed what it believes to be an efficient "hub"
system of project management designed to maximize the efficiency of each
facility's operations. The economies of scale created by this system include
reduced costs related to centralized administration, operations, maintenance,
engineering, insurance, finance and environmental and regulatory compliance. The
hub system and the Company's operating expertise have enabled the Company to
successfully integrate acquisitions into its current portfolio and increase the
efficiency and productivity of its projects.
Since its inception, the Company has expanded primarily by acquiring
existing hydroelectric facilities in the United States. As of September 30,
2000, the Company had a 100% ownership or long-term lease interest in 51
projects (149 megawatts), a partial ownership interest in 9 projects (87
megawatts), and operations and maintenance ("O&M") contracts with 19 projects
(19 megawatts).
CHI sells substantially all of the electric energy and capacity from its
projects to public utility companies pursuant to take or pay power purchase
agreements. These contracts vary in their terms but typically provide scheduled
rates throughout the life of the contracts, which are generally for a term of 15
to 40 years from inception.
The Company believes that it is well positioned to take advantage of new
business opportunities in renewables, occasioned both by electric industry
restructuring in the U.S. and other countries and by increasing public interest
in environmental issues such as global climate change and other potential
effects of fossil fuel consumption. 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 the
development, acquisition, administration, operation and maintenance of
facilities.
Renewable (also known as "green," "sustainable," or "environmentally
preferred") energy is defined broadly to include energy produced by
hydroelectric, biomass, landfill gas, wind, photovoltaic, geothermal and various
forms of waste conversion. Related environmental projects may include waste
treatment, recycling or other facilities that serve such purposes as pollution
reduction and resource conservation. In addition to its hydroelectric assets,
the Company has a 23 MW biomass plant and 30 MW of wind power capacity under
construction and seeks to acquire and develop a diversified portfolio of
projects using a variety of renewable and related technologies, applying its
existing core competencies (including financing, operations, asset management,
environmental permitting and project management) that have been developed
through its hydroelectric business.
The Company believes that electric industry restructuring, which is rapidly
taking place both in the United States and overseas, is converging with
widespread environmental concerns to create a favorable business opportunity for
renewable energy. In the United States, electric supply competition at the
retail level has begun or is scheduled to begin in several states. In nearly
half of the states, restructuring legislation or regulations also provide for
favorable treatment of renewable energy through portfolio standards, subsidies,
and other requirements and incentives, and the Company expects this trend to
continue as other states move closer to deregulation. Meanwhile, public support
for renewables has intensified in connection with growing concern over global
climate change and international pressures to limit or reduce greenhouse gases.
A strong, active environmental lobby at the state and federal levels favors
action to promote renewables and is using restructuring in the electric industry
as a vehicle to institute incentive programs. Further, there is an emerging
market for "emissions reduction credits" or "greenhouse gas credits" paid by
fossil fuel-based generators to generators of renewable energy. There is also a
possibility of future government action to create a national market for such
credits.
10
<PAGE>
In addition, in states where retail competition has begun or is scheduled
to begin soon, there are active efforts to market green energy to retail
customers who have indicated a willingness to pay a premium to promote
environmentally beneficial technologies. While the commercial success of these
marketing efforts is not yet established, they have served to publicize the
benefits of renewable energy to a wide audience. Meanwhile, large industrial
companies appear to be seeking public approval by publicizing their purchases of
green energy.
The renewables business includes many companies seeking to own or develop
renewable projects. Many such companies are small and focused on a single
technology. The Company believes that few are seeking to build a diversified
portfolio of renewable projects in the same manner as the Company.
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 26
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, both of which are likely to be lower than expiring power purchase
agreement rates. Fluctuations in revenues and related cash flows are generally
attributable to changes in projects in operation, coupled with variations in
water flows and the effect of escalating and declining contract rates in the
Company's power purchase agreements.
Management Fees and Operations & Maintenance Revenues
O&M contracts, from which management fees and operations and maintenance
revenues are derived, generally enable the Company to maximize the use of its
available resources and to generate additional income.
Equity Income In Partnership Interests and Other Partnership Income
In accordance with generally accepted accounting principles, certain of the
Company's partnership interests are accounted for under the equity or the cost
methods of accounting. Fluctuations in equity income and other partnership
income are generally attributable to variations in results of operations and
timing of cash distributions of certain partnerships.
Operating Expenses
Operating expenses consist primarily of project-related costs such as
labor, repairs and maintenance, supplies, insurance and real estate taxes.
Operating expenses include direct expenses related to the production of power
generation revenue as well as direct costs associated with O&M contracts which
are either rebillable to applicable third party owners directly or not
rebillable since they are covered through an established management fee.
Lease Expense
Lease expense includes operating leases associated with some of the
hydroelectric projects as well as leases for the corporate and regional
administrative offices. Certain hydroelectric project leases provide for
payments that are based upon power sales revenue or cash flow for specific
projects. Hence, varying project revenues will impact overall lease expense,
year-to-year.
11
<PAGE>
CERTAIN KEY OPERATING RESULTS AND TRENDS
The information 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, 1999
audited Consolidated Financial Statements and related Notes thereto.
Power Producing Facilities
<TABLE>
<CAPTION>
AS OF AS OF AS OF
SEPTEMBER 30, 2000 DECEMBER 31, 1999 SEPTEMBER 30, 1999
------------------ ----------------- ------------------
MWS #PROJECTS MWS #PROJECTS MWS #PROJECTS
--- --------- --- --------- --- ---------
<S> <C> <C> <C> <C> <C> <C>
Northeast:
100% Ownership (1) 102.38 31 102.38(4) 31(4) 99.08 30
Partial Ownership (2) 59.27 7 59.27(4) 7(4) 62.57 8
O&M Contracts (3) 11.32 15 11.32 15 11.32 15
--------- ---- --------- ---- --------- ----
Total 172.97 53 172.97 53 172.97 53
========= ==== ========= ==== ========= ====
Southeast:
100% Ownership (1) 27.02(5) 12(5) 27.42 13 27.42 13
Partial Ownership (2) -- -- -- -- -- --
O&M Contracts (3) 1.20 1 -- -- -- --
--------- ---- --------- ---- --------- ----
Total 28.22 13 27.42 13 27.42 13
========= ==== ========= ==== ========= ====
West:
100% Ownership (1) 5.38 3 5.38 3 5.38 3
Partial Ownership (2) 4.20 1 4.20 1 4.20 1
O&M Contracts (3) 1.80 2 1.80 2 1.80 2
--------- ---- --------- ---- --------- ----
Total 11.38 6 11.38 6 11.38 6
========= ==== ========= ==== ========= ====
Northwest:
100% Ownership (1) 14.61 5 14.61 5 14.61 5
Partial Ownership (2) 24.00 1 24.00 1 24.00 1
O&M Contracts (3) 4.34 1 4.34 1 4.34 1
--------- ---- --------- ---- --------- ----
Total 42.95 7 42.95 7 42.95 7
========= ==== ========= ==== ========= ====
Total:
100% Ownership (1) 149.39 51 149.79 52 146.49 51
Partial Ownership (2) 87.47 9 87.47 9 90.77 10
O&M Contracts (3) 18.66 19 17.46 18 17.46 18
--------- ---- --------- ---- --------- ----
Total 255.52 79 254.72 79 254.72 79
========= ==== ========= ==== ========= ====
</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 purchase of the remaining ownership interest of one
project (3.30 megawatts) on November 30, 1999.
(5) Reflects the sale of one project (.40 megawatts) on May 3, 2000.
12
<PAGE>
<TABLE>
<CAPTION>
Selected Operating Information (1):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Power generation revenues (thousands) $ 8,556 $ 6,382 $ 39,879 $ 30,618
Kilowatt hours produced (thousands) 116,791 84,707 493,290 405,384
Average rate per kilowatt hour 7.3(cent) 7.5(cent) 8.1(cent) 7.6(cent)
---------
(1) Limited to projects included in consolidated revenues.
</TABLE>
The Company's portfolio of operating projects may fluctuate from year to
year in terms of total operating megawatts. The Company expects to develop,
acquire, sell or discontinue operations of certain projects, as it has in the
past, if it perceives such actions to be beneficial. In the case of O&M
contracts, such contracts are subject to termination for a variety of reasons.
The total number of operating megawatts in the Company's portfolio is not
necessarily indicative of overall financial results.
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.
<TABLE>
<CAPTION>
Water Flow by Region (1)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
------------------- ------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Northeast Above Average Below Average Above Average Below Average
Southeast Below Average Below Average Below Average Below Average
West Average Average Average Average
Northwest Average Average Average Above Average
---------
(1) These determinations were made by management based upon water flow in areas
where the Company's projects are located and may not be applicable to the
entire region.
</TABLE>
Production of energy by the Company is typically greatest from January
through June, when water flow is at its highest at most of the Company's
projects, and lowest from July through September. The amount of water flow in
any given period will have a direct effect on the Company's production, revenues
and cash flow.
The following tables, which show revenues from power sales and kilowatt
hour production by quarter, respectively, highlight the seasonality of the
Company's revenue stream. These tables should be reviewed in conjunction with
the water flow information included above.
13
<PAGE>
<TABLE>
<CAPTION>
Power Generation Revenues (in thousands) (1)
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999(2)
--------------------- -----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
First Quarter $ 14,073 35.3 $ 14,016 33.9
Second Quarter 17,250 43.3 10,220 24.7
Third Quarter 8,556 21.4 6,382 15.4
Fourth Quarter 10,724 26.0
---------- --------- ---------- -------
Total $ 39,879 100.0 $ 41,342 100.0
========== ========= ========== =======
</TABLE>
-----------------
(1) Limited to projects included in consolidated revenues.
(2) Includes business interruption revenue of $907 representing claims for lost
generation recoverable from an insurance company for the twelve months
ended December 31, 1999.
<TABLE>
<CAPTION>
Kilowatt Hours (kWh) Produced (in thousands) (1)
TWELVE MONTHS ENDED TWELVE MONTHS
DECEMBER 31, 2000 ENDED DECEMBER 31, 1999(2)
---------------------- -------------------------
KWH % KWH %
--- - --- -
<S> <C> <C> <C> <C>
First Quarter 167,835 34.0 175,172 32.4
Second Quarter 208,664 42.3 145,505 27.0
Third Quarter 116,791 23.7 84,707 15.7
Fourth Quarter 134,322 24.9
-------- -------- ----------- --------
Total 493,290 100.0 539,706 100.0
======== ======== =========== ========
</TABLE>
-------------
(1) Limited to projects included in consolidated revenues.
(2) Includes the production equivalent of 15,483 kWh of the business
interruption revenue recoverable as a result of insurance claims for the
twelve months ended December 31, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Operating Revenues
------------------
Power Generation Revenue. The Company's power generation revenue increased
by $2.2 million (34.4%), from $6.4 million to $8.6 million for the three months
ended September 30, 1999 and 2000, respectively.
The Northeast region experienced increased revenues of $2.2 million
primarily as a result of above average water flows throughout the region.
The Company as a whole experienced decreased revenue per kilowatt hour of
0.2(cent) (2.7%) from 7.5(cent) to 7.3(cent) in the three months ended September
30, 1999 and 2000, respectively, primarily as a result of variations in the
production mix and contract rates among various projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
operations & maintenance revenues increased by $0.5 million (38.5%) from $1.3
million to $1.8 million for the three months ended September 30, 1999 and 2000,
respectively, primarily due to increased levels of rebillable work performed
during the three months ended September 30, 2000 versus the comparable period in
1999.
Costs and Expenses
------------------
Operating Expenses. Operating expenses increased by $0.7 million (17.5%)
from $4.0 million to $4.7 million for the three months ended September 30, 1999
and 2000, respectively, primarily due to the write-off of certain accounts
receivable and increased O&M costs due to higher levels of rebillable work
performed during the three months ended September 30, 2000 versus the comparable
period in 1999.
General and Administrative Expenses. General and administrative expenses
increased by $0.5 million (41.7%) from $1.2 million to $1.7 million for the
three months ended September 30, 1999 and 2000, respectively, primarily due to
increased expenditures for business development and compensation charges
associated with stock options granted during the three months ended September
30, 2000.
14
<PAGE>
Income Taxes
------------
For the three months ended September 30, 2000, the Company's effective
income tax rate of 41.4% differed from the federal statutory rate primarily due
to current state and federal alternative minimum tax liability.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Operating Revenues
------------------
Power Generation Revenue. The Company's power generation revenue increased
by $9.3 million (30.4%), from $30.6 million to $39.9 million for the nine months
ended September 30, 1999 and 2000, respectively.
The Northeast region experienced increased revenues of $9.9 million
primarily as a result of above average water flows throughout the region.
The Southeast region experienced decreased revenues of $0.5 million
primarily as a result of decreased water flows throughout the region and the
expiration and renegotiation, at reduced rates, of some of the power purchase
agreements.
The West and Northwest regions (combined) experienced decreased revenues of
$0.1 million due to decreased water flows in the Northwest.
The Company as a whole experienced increased revenue per kilowatt hour of
0.5(cent) (6.6%) from 7.6(cent) to 8.1(cent) in the nine months ended September
30, 1999 and 2000, respectively, primarily as a result of variations in the
production mix and contract rates among various projects.
Management Fees and Operations & Maintenance Revenues. Management fees and
operations & maintenance revenues increased by $0.4 million (11.1%) from $3.6
million to $4.0 million for the nine months ended September 30, 1999 and 2000,
respectively, primarily due to increased levels of rebillable work performed
during the nine months ended September 30, 2000 versus the comparable period in
1999.
Equity Income in Partnership Interests and Other Partnership Income. Equity
income in partnership interests and other partnership income increased by $0.3
million (27.3%) from $1.1 million to $1.4 million for the nine months ended
September 30, 1999 and 2000, respectively, primarily due to increased water
flows at partnerships in the Northeast and Canada, resulting in increased equity
income during the nine months ended September 30, 2000.
Costs and Expenses
------------------
Operating Expenses. Operating expenses increased by $1.0 million (8.7%)
from $11.5 million to $12.5 million for the nine months ended September 30, 1999
and 2000, respectively, primarily due to (i) the write-off of certain accounts
receivable, (ii) increased O&M costs due to higher levels of rebillable work
performed, (iii) increased repair and maintenance expenses resulting from
increased levels of required repairs during the nine months ended September 30,
2000, and (iv) higher payment in lieu of tax charges resulting from increased
power sales revenues during the nine months ended September 30, 2000.
Lease Expense. Lease expense increased by $0.7 million (16.3%) from $4.3
million to $5.0 million for the nine months ended September 30, 1999 and 2000,
respectively. The increase was primarily due to an increase in lease payments
that are based upon power sales revenues in the Northeast.
Income Taxes
------------
For the nine months ended September 30, 2000, the Company's effective
income tax rate of 40.7% differed from the federal statutory rate primarily due
to current state and federal alternative minimum tax liability.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As more fully described in the September 30, 2000 unaudited Consolidated
Financial Statements and related Notes thereto included herein, the cash flow of
the Company was comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------- ---------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash provided by/(used in):
Operating activities $ 23,655 $ 9,820
Investing activities (28,245) (14,912)
Financing activities 7,285 (4,679)
----------- ---------
Net increase/(decrease) in cash $ 2,695 $ (9,771)
=========== =========
</TABLE>
The Company's primary source of liquidity is cash generated 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 2000. Available external sources of
liquidity include a $35.0 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 November 10, 2000, $20.0 million was available for working
capital purposes or additional letter of credit issuances. In addition, should
growth opportunities warrant significant additional cash requirements, the
Company may pursue other external sources of funds through debt and/or equity
offerings.
For the nine months ended September 30, 2000, the cash flow provided by
operating activities was principally the result of the $19.4 million of net
income adjusted for non-cash items. Significant non-cash items include $5.9
million of depreciation and amortization, a $5.1 million provision relating to
deferred tax liabilities, $0.8 million of non-cash interest and other charges
and $0.8 million of undistributed earnings of affiliates. The cash flow used in
investing activities was primarily attributable to $27.7 million of project
construction expenditures and $0.9 million of capital expenditures. The cash
flow provided by financing activities was primarily due to $11.9 million of
borrowings related to the construction of a 23 MW biomass facility, $4.5 million
of borrowings under the working capital facility and $2.1 million of
contributions from a minority interest, offset by the repayment of $11.4 million
of debt.
Cash provided by operating activities increased by $13.9 million for the
nine months ended September 30, 2000 as compared to the nine months ended
September 30, 1999. The increase resulted from a $8.2 million increase in income
adjusted for non-cash items and a $5.7 million difference in cash provided by a
change in operating assets and liabilities. The difference in income adjusted
for non-cash items is mainly attributed to favorable operating conditions during
2000.
<TABLE>
<CAPTION>
Summary of Indebtedness
PRINCIPAL AMOUNT OUTSTANDING AS OF
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-------------------- --------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Company debt, excluding non-recourse
debt of subsidiaries $4,500 $5,550
Non-recourse debt of subsidiaries 78,260 75,906
Current portion of long-term debt (10,490) (11,455)
----------- -----------
Total long-term debt obligations $72,270 $70,001
=========== ===========
</TABLE>
In November 1999, the Company obtained a $35.0 million secured revolving
working capital and letter of credit facility with an initial expiration date of
December 31, 2001 (the "Facility"). Upon expiration of the Facility, any
outstanding revolving loans will, at the Company's option, be converted into a
five year term loan. The interest rate on revolving loans is prime +1.5% and
annual letter of credit fees are 2%. As of November 10, 2000, $6.0 million in
revolving loans were outstanding under the Facility and $9.0 million of letters
of credit were issued and outstanding.
16
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein that are not related to historical
facts may contain "forward looking" information, as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such statements are based on
the Company's current beliefs as to the outcome and timing of future events, and
actual results may differ materially from those projected or implied in the
forward looking statements. Further, certain forward looking statements are
based upon assumptions of future events which may not prove to be accurate. The
forward looking statements involve risks and uncertainties including, but not
limited to, the uncertainties relating to industry trends; risks related to
hydroelectric, renewable 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CHI is involved in various legal proceedings which are routine and
incidental to the conduct of its business. CHI's management currently believes
that none of the pending claims against the Company will have a material adverse
effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
NONE
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2000 CHI ENERGY, INC.
By: /s/ Thomas G. Beaumonte
---------------------------
Thomas G. Beaumonte
Controller and Treasurer
signing on behalf of the registrant
and as Principal Accounting Officer
