TABLE OF CONTENTS
Restructuring Proposal............................................... 1
Proposed Process..................................................... 2
RESTRUCTURING PROPOSAL
A. Project Financing Agreements
Claim: $100.063 million as of June 30, 1997(1)
Treatment: Not impaired.
B. Working Capital Facility
New Facility to be entered into which will allow the Company access to
letters of credit of up to $35 million and provide up to $10 million of
seasonal working capital borrowings.
C. 12% Senior Discount Notes
Claim: $179.2 million as of June 30, 1997
Treatment: Accreted claim plus accrued interest to be exchanged
for (i) 87.5 percent of the New Common Equity of CHI,
subject to dilution from the Management Options and
New Warrants and (ii) up to $10 million of cash.
D. Series F 8% Senior Convertible Preferred Stock
Series H 13.5% Cumulative Redeemable Exchangeable Preferred Stock
Series G 9.85% Junior Convertible Preferred Stock
Claims: Series F $77.7 million as of June 30, 1997(2)
Series H $119.9 million as of June 30, 1997
Series G $83.0 million as of June 30, 1997(2)
Treatment: Preferred liquidation preference and accrued
dividends will be exchanged for (i) 12.5 percent of
the New Common Equity, subject to dilution from
Management Options and the New Warrants and (ii) the
New Warrants.
----------
1 Based on the Company's forecast; excludes Boott leveraged operating lease.
2 Excludes 1,279 shares of Series F and Series G preferred stock issued to
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ on January 31, 1997.
2
The New Warrants will have the following terms:
Term: 5 years from issuance
Equity Amount: 15% of the New Common Equity, subject to
dilution from Management Options
Strike Price: $150.0 million equity value
E. Common Stock, Options and Warrants
Treatment: Extinguished.
F. Management
The restructured company shall provide for a Management Incentive
Option Program of up to 10% of the restructured common equity.
PROPOSED PROCESS
- Formation of Informal Bondholders' Committee
- Execution of confidentiality agreements and restriction of the Informal
Bondholders' Committee
- Company presentation of confidential operating information and valuation
analyses to all parties in interest
- Bondholder Committee Due Diligence
- Negotiations with all parties in interest
- agreement in principle
- approval by Board of Directors of final agreement
- Solicitation Documents Prepared, Circulated and Reviewed
- Solicitation Period
- Consummation of the Restructuring
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report such as "should", "estimated",
"expect", and similar expressions which are not historical, involve risks and
uncertainties. In addition to the factors described in Consolidated Hydro,
Inc.'s (the "Company" or "CHI") Securities and Exchange Commission filings, the
following factors, among others, could cause the Company's financial performance
to differ materially from that expressed in any forward-looking statements made
by, or on behalf of, the Company: (i) unfavorable alterations of the government
regulations currently governing the electric utility/power generation industry;
(ii) below average levels of precipitation leading to below forecasted
production levels at the Company's hydroelectric power generators; (iii)
unexpected maintenance and/or repair costs required for the Company's existing
facilities; (iv) the ability to develop and implement the Company's strategic
initiatives; and (v) the outcome of the Company's discussions regarding the
potential restructuring and related transactions.
TABLE OF CONTENTS
Tab
Introduction.......................................................... 1
Restructuring Objectives.............................................. 2
Overview.............................................................. 3
Electric Power Generation Industry Highlights........ A
Company Overview..................................... B
Recent Events........................................ C
Historical Financial Performance..................... D
Holding Company Obligations and Liquidity Overview... E
Appendices............................................................ 4
Management Biographies............................... A
Parent Company Capital Structure Overview............ B
Relevant Article on Outsourcing...................... C
INTRODUCTION
As previously stated in its public filings, Consolidated Hydro, Inc. ("CHI" or
the "Company") may have to pursue a restructuring of its debt and equity
structure prior to the commencement of (i) cash dividends on its 13-1/2%
Cumulative Redeemable Exchangeable Preferred Stock on September 30, 1998 and
(ii) cash interest on its 12% Senior Discount Notes on January 15, 1999. The
Board of Directors of CHI has determined, based upon several factors (to be
discussed herein), to commence the process of restructuring its capital
structure. CHI has retained the law firm of Weil, Gotshal & ▇▇▇▇▇▇ ("▇▇▇▇
▇▇▇▇▇▇▇") as restructuring counsel and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ & ▇▇▇▇▇ ("▇▇▇▇▇▇▇▇
▇▇▇▇▇") as financial advisor. ▇▇▇▇ ▇▇▇▇▇▇▇ and ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ will assist the
Company in the restructuring process and participate in negotiations with CHI's
various constituencies.
The purpose of this limited introductory presentation is to provide parties in
interest with the following information:
- A summary of the Company's restructuring objectives;
- An overview of relevant highlights in the electric power generation
industry;
- An overview of the business strategy and environment under which CHI
is currently operating;
- An overview of the Company's business strategy, including a
description of the Company's pursuit of the Industrial
Infrastructure Business ("IIB");
- A summary of the pertinent recent events which have affected and
shaped the Company; including the management turnover which has
occurred during the past few years;
- A summary of CHI's historical financial performance, including an
indication of the historical unrestricted cash flow (after all
subsidiary cash obligations were paid) available for corporate
obligations; and
- An overview of CHI's capital obligations and projected liquidity.
2
RESTRUCTURING OBJECTIVES
- Rationalize the capital structure.
- Although the consolidated performance of the Company has improved
with Adjusted EBITDA having approximately doubled from $16.6 million
in the fiscal year ended June 30, 1994 to $32.6 million for the
latest 12 months ended December 31, 1996, the Adjusted Unrestricted
Cash Flow from the core hydroelectric business will likely be
insufficient to pay either the cash dividend requirements on the
Company's 13-1/2% Cumulative Redeemable Exchangeable Preferred Stock
commencing September 30, 1998 or the cash interest requirements on
the Company's 12% Senior Discount Notes commencing January 15, 1999.
($ in Millions) Projected Fiscal Year Ended June 30,
------------------------------------
Project Cash Obligations: 1997 1998 1999 2000
------------------------- ---- ---- ---- ----
Project Level Restricted Cash Requirements and Mandatory
Principal Payments at Project Level ($14.5) ($10.9) ($7.7) ($5.2)
Cash Interest on Project Debt (12.5) (12.0) (11.4) (10.8)
Capital Expenditures (3.5) (4.3) (2.9) (3.3)
----- ----- ----- -----
Total Project Cash Obligations ($30.5) ($27.2) ($22.0) ($19.3)
Corporate Level:
Cash Interest on 12% Senior Discount Notes 0.0 0.0 (12.1) (24.3)
Cash Dividends of Series H Preferred Stock 0.0 0.0 (18.5) (18.5)
--- --- ------ ------
Total Cash Requirements after Corporate
Obligations ($30.5) ($27.2) ($52.6) ($62.1)
======= ======= ======= =======
Cumulative Cash Requirements
After Corporate Obligations ($30.5) ($57.7) ($110.3) ($172.4)
======= ======= ======== ========
- A restructuring of the Series H Preferred Stock which converts to
cash pay on September 30, 1998 will not alleviate the need to
restructure the 12% Senior Discount Notes. Even if the quarterly
cash dividends on the Series H Preferred Stock are eliminated, the
Company will not have sufficient cash flow available to (i) fund the
on-going cash interest obligations on the 12% Senior Discount Notes
or (ii) ultimately retire the securities.
3
- Restructure corporate obligations based on Unrestricted Cash Flow rather
than Consolidated EBITDA.
- Consolidated EBITDA does not provide an appropriate measurement of
the Company's value or its ability to fund corporate obligations due
to the cash escrow and restricted cash requirements, debt service
requirements, and capital expenditure requirements at the project
level. Rather, Unrestricted Cash Flow from the projects after
corporate overhead must be reviewed to properly assess the Company's
ability to fund corporate or parent obligations.
($ in Millions) LTM Fiscal Year Ended June 30,
--------------------------
12/31/96 1996 1995 1994
-------- ---- ---- ----
Adjusted EBITDA1 $32.6 $28.9 $19.2 $16.6
===== ===== ===== =====
Unrestricted Cash Flow $8.4 $9.0 $7.4 $0.2
Change in Restricted Cash (0.0) (3.1) (5.3) 1.2
----- ----- ----- ---
Adjusted Unrestricted Cash Flow $8.4 $5.9 $2.0 $1.4
==== ==== ==== ====
- Provide financial flexibility to implement the Company's business plan.
- Realize the potential of IIB by, among other things, eliminating
CHI's parent company debt. This will eliminate concerns expressed by
potential IIB clients/"partners" regarding the Company's long-term
viability. This is significant given that (i) the commitments in an
IIB project are inherently long-term in nature and (ii) the
perceived uncertainty of the Company's long-term viability has, in
multiple cases, been the primary opposing force to management's IIB
efforts.
- Provide access to working capital facility.
- New bank facility will allow for (i) the utilization of letters of
credit for certain project escrow requirements and the release of
certain restricted cash and
----------
1 Represents EBITDA before operating lease expense associated with the
Company's Boott project.
4
(ii) enable the Company to initiate the development of projects
during the financing gap between project closing and equity funding.
- Maximize the recoveries to all parties in interest.
- Failure to complete a financial restructuring now will severely
impair or eliminate the potential value realizable from the new IIB
venture.
- Provide the Company with enough flexibility to effectively deal with the
gradual conversion in power sales pricing from above market rates to market
or avoided cost rates.
- Contractual rates for the sale of electricity average approximately
7.5(cent) to 8.5(cent) per kwh. Avoided cost will vary by project
but is expected to be about 3(cent) to 4(cent) per kwh on a present
value basis.
5
ELECTRIC POWER GENERATION INDUSTRY HIGHLIGHTS
- Over the last few years, the electric power industry in the U.S. has begun
undergoing significant structural changes, evolving from a highly regulated
industry dominated by monopoly utilities to a deregulated, competitive
industry providing energy customers with an increasing degree of choice
among sources of electric power supply.
- Regulators at both the Federal level and in many states, including some in
which the Company operates, are exploring ways in which to increase
competition in electricity markets, most notably by opening access to the
transmission grid.
- Although the character and extent of this deregulation are as yet unclear,
the Company expects that these efforts will increase uncertainty with
respect to future power prices and make it more difficult to obtain
long-term power purchase contracts from utilities.
- This business climate is limiting acquisition and development
opportunities, particularly with regard to hydroelectric facilities.
- Additionally, there has been a meaningful decline in the price of
electricity over the past few years as a result of several factors:
(i) deregulation of the natural gas and electric utility industries
creating increased competition based on "market" pricing;
(ii) technological enhancements;
(iii) increased efficiencies; and
(iv) more pervasive availability of low-cost equipment.
This dynamic adversely affected the pumped storage concept and has
threatened the profitability of individual projects switching to
avoided cost in the near future.
- The Company competes for hydroelectric and industrial energy projects with
a broad range of electric power producers, including other independent
power producers of various sizes and many well-capitalized domestic and
foreign industry participants such as utilities, equipment manufacturers
and affiliates or industrial companies, many of whom are aggressively
pursuing power development programs and have relatively low
return-on-capital objectives.
6
COMPANY OVERVIEW
Historically, the Company has been principally engaged in the development,
operation, and management of hydroelectric power plants. During the past decade,
the Company fueled its growth through acquisitions funded primarily via project
financing structures based on the Public Utility Regulating Policies Act of 1978
("PURPA").
However, more recently, a number of shifting external forces have necessitated a
refocusing of the Company's business strategy:
- Recent decreases in electricity prices, increased efficiency of
combustion turbines and other competing technologies, and the
deregulation and restructuring of the electric power industry, have
collectively created a climate of uncertainty with respect to future
power prices. As a result, it has become increasingly difficult to
obtain long-term power purchase contracts from utilities, severely
limiting the Company's near-term opportunities to acquire or develop
additional hydroelectric capacity at acceptable rates of return.
- In connection with the deregulation of the utility industry, it has
become increasingly uncertain whether the Company's smaller projects
will be competitive in a fully deregulated electricity market
without the current benefits of PURPA which requires electric
utilities to purchase 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
these contracts, there can be no assurance that the provisions of
these contracts will not be affected by future legislation or
regulation dealing with the continued restructuring of the electric
industry.
- The pursuit of pumped storage, which was initiated by the former
management team, has been substantially curtailed as a result of the
current electricity pricing dynamics which have rendered the concept
unfeasible in the current regulatory and economic environment.
During fiscal 1996, ▇▇▇ wrote-off approximately $38.5 million in
development assets associated with pumped storage and approximately
$45 attributable to certain conventional hydroelectric assets due to
the decline in fair value of these assets pursuant to SFAS 121 as a
result of the planned sale of certain assets, recent industry trends
and the timing of the expiration of the fixed rate period of some of
its long-term power sales contracts.
7
Hydroelectric Business Overview
- CHI was founded in 1985 and grew rapidly from six projects and five
megawatts to its current portfolio of 91 projects with a capacity of 344
megawatts.
- CHI is the largest independent hydroelectric power producer in the U.S.
- Projects are located in 15 states and one Canadian province.
- CHI is in the process of developing a 15-megawatt hydroelectric project
(Star Lake) in Newfoundland, Canada.
- After the sale of 14 projects located in Maine (which closed on December
23, 1996), CHI will have (i) full ownership of 52 projects, (ii) partial
ownership interest in 14 projects, and (iii) O&M contracts with 25
projects.
- The Company sells substantially all of the output from these projects,
excluding the Canadian projects, to public utility companies pursuant to
power purchase agreements which require the purchase of all power generated
by the Company.
- Currently, all of the Company's revenue is derived from the ownership
and/or operation of hydroelectric facilities.
- CHI has developed a "hub" system of project management designed (i) to
maximize the efficiency of each facility's operations and (ii) to generate
economies of scale for the Company as a whole.
- For the twelve months ended December 31, 1996, 89.9% of the Company's
revenue was realized 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's
hydroelectric facilities.
- The Company's present power purchase agreements have remaining terms
ranging from one to 30 years.
- Historically, fluctuations in revenues and related cash flows have been
generally attributable to increasing megawatts in operation, coupled with
variations in water flows. These factors, in addition to the dynamic
pricing arrangements at each project (as governed by power purchase
agreements and the expiration thereof) will continue to contribute to the
oscillating nature of the Company's results.
8
- For the twelve months ended December 31, 1996, 8.6% of the Company's
revenue was attributed to operation and management (O&M) contracts,
comprised of management fees and operations and maintenance revenues.
Generally, these contracts enable the Company to maximize the use of its
available resources and to generate additional income.
9
Industrial Infrastructure Business ("IIB") Overview
- CHI Power was founded in November 1995 to develop and establish the
Company's IIB operations.
- In conjunction with the above, a new management team with a proven track
record in IIB was brought in to execute the new business strategy.
- IIB involves the purchase and/or development of energy related assets from
energy intensive industrial companies. Essentially, an industrial company
can "outsource" its energy requirements through the sale of the asset to
CHI which then
(i) enhances the operations and management of the asset,
(ii) finances the asset on a project basis with less expensive
capital, and
(iii) provides the seller with capital from a non-revenue generating
asset to reinvest in its core business while continuing to
provide the necessary and required energy service to the
Company.
- This business is strongly related to energy production; however, it is not
traditional cogeneration or independent 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 acquires or develops the
assets, operates and manages them, and sells back the resulting product
(steam, chilled water, compressed air, electricity, etc.) to the customer
at retail under a long-term requirements-based contract, rather than
selling electricity to utilities at wholesale.
- CHI's industrial business is strategically focused on involving a wide
range of capital-intensive "utility" infrastructure assets, such as steam
generators, air compressors, storage facilities, water management systems,
and chemical recovery boilers -- a project may or may not include
electricity generation.
- However, the actual capital requirements for launching this business are
nominal given (i) the feasibility of arranging financing via non-recourse
project debt and (ii) that the funding of equity commitments occurs
following the development of the asset at the point of operation. As a
result, the potential downside of further developing this business is
relatively insignificant. Conversely, given the nascent nature of this new
industry, the upside is expected to be dramatic, particularly if CHI can
establish itself in the early stages of the industrial business.
10
- IIB should be attractive to customers seeking (i) to monetize power assets
or (ii) to construct energy related assets, either new or as an
upgrade/expansion of existing facilities.
- The potential IIB market is enormous. In North America alone, there is in
excess of $40 billion in annual energy-related expenditures and $50 billion
in annual capital spending among such industries as pulp and paper,
petroleum refining, chemicals, textiles and other energy-intensive
manufacturers.
- IIB will permit the Company to move away from relying exclusively on
hydropower ownership and operation in a business climate driven largely by
legislation and regulation and enveloped by pervasive uncertainty.
- CHI creates value in two areas:
(i) CHI's technical and management capabilities cover a wide range
of technologies and industrial assets, enhancing reliability
and reducing production costs. The Company's new management
team (see section "Recent Events" for details regarding the
recent turnover in Company management) has extensive
experience in (i) maximizing asset effectiveness, (ii)
managing asset portfolios, (iii) acquisition analysis, and
(iv) project financing.
(ii) The financial structure that CHI provides to the customer,
funded by lower-cost capital than if the customer were to
invest in the assets directly, results from the Company's
ability to provide financing with a high degree of leverage
(approximately 80% - 90%). In addition, CHI can structure the
transaction such that it can be project financed based on the
production expectations of the individual manufacturing
plant/mill. Further, a "requirements-based" rather than
"take-or-pay" contract allows the customer to leave the
obligation under the contract off balance sheet and mitigates
the need for a long-term debt obligation or its equivalent at
the corporate level. The result is a potential credit
enhancement opportunity for the customer.
- Management predicts after-tax returns to CHI on IIB projects to be in
excess of 17%.
- The following deals exemplify the experience and success acquired by ▇▇▇
▇▇▇▇▇▇▇ (appointed in July 1996 Chief Executive Officer and Chairman of
CHI) and his team from CRSS.
Stone Container
A subsidiary of CRSS and a subsidiary of Central Vermont Public Service
Company own an entity which provides 50 megawatts of capacity and energy to
Virginia Power.
11
The project structure developed by CRSS consisted of the
acquisition of an existing power sales agreement between Stone Container
Corp. and Virginia Power, concurrent with a long-term lease of power
generation assets at Stone Container's Hopewell, Virginia paper mill. The
leased asset completed in October 1992 produces electricity while
simultaneously providing black liquor processing services, steam, and other
utility services to Stone Container. The size of the project was
approximately $70 million.
▇▇▇▇▇ River
The Naheola Cogeneration Limited Partnership was established to develop,
own, and operate a chemical recovery unit facility at the Naheola Mill of
▇▇▇▇▇ River Pennington, Inc., in ▇▇▇▇▇▇▇▇▇▇, Alabama. The facility,
completed in March 1993, provides, under long-term contract, Black Liquor
Solids processing, steam, and compressed air requirements of the mill and
approximately 50% of the mill's electricity requirements. At the time of
the transaction, the project was jointly owned by CRSS and ▇▇▇▇▇ River
▇▇▇▇▇▇▇▇▇▇, Inc. (a subsidiary of ▇▇▇▇▇ River Corp.). The size of the
project was approximately $290 million.
12
RECENT EVENTS
- Management reorganization.
Certain employees of the Company have been replaced as the Board of
Directors identified the need for fresh, proven ideas and diversification.
The following former members of management have left the Company to pursue
other interests:
Position Formerly Held
----------------------
▇▇▇▇ ▇. ▇▇▇▇▇▇ Chairman, President, Chief Executive
Officer, Founder
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇ Executive V.P. and Chief Development
Officer; Chief Executive Officer,
Consolidated Pumped Storage Inc.
▇▇▇▇ ▇▇▇▇▇▇ Senior V.P. -- Finance
▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇ Senior V.P. -- Pumped Storage
Development
▇▇▇▇▇▇ ▇▇▇▇▇▇ V.P. -- Pumped Storage Development
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇. V.P. -- NE Operations
▇▇▇▇▇▇ ▇. ▇▇▇▇ V.P. -- Corporate Development-Western
Region
In order to expand and diversify the operations of the Company, the Board
of Directors of CHI recruited several new executives from other energy
related companies. ▇▇▇ ▇▇▇▇▇▇▇ and certain members of his team from CRSS
were hired to develop the sizeable industrial energy market which, to date,
has remained essentially untapped. New management (see Appendix A herein
for new management biographies) at CHI includes several executives from
CRSS:
Current Position at CHI Position Held at CRSS Capital
----------------------- -----------------------------
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Chairman, CEO CEO, President
▇▇▇▇▇▇ ▇. ▇▇▇▇▇ President, COO CHI Employee (formerly General Counsel of CHI)
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Chief Financial Officer Chief Financial Officer
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ Director, Operations Support, CHI Power Director, Operations Support
▇▇▇▇ ▇. ▇▇▇▇▇▇▇ Senior V.P. and General Mgr., CHI Power Director, Project Management
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ Senior V.P. -- Development, ▇▇▇ ▇▇▇▇▇ Director, Business Development
13
- Sale of 14 projects in Maine.
On December 23, 1996, the Company completed the sale of 14 projects in
Maine totaling 11.32 megawatts to certain entities controlled by Ridgewood
Power Corporation. The total cash purchase price, subject to certain
post-closing adjustments, was $12.8 million. The following chart summarizes
the historical unrestricted cash flow for the Maine projects:
($ in Thousands) Fiscal Year Ended June 30,
--------------------------
1996 1995 1994
---- ---- ----
Maine - Unrestricted Cash Flow $2,681.8 $2,509.3 $2,370.8
- Favorable operating results.
Power generation revenue and profit margins have recently been performing
favorably relative to previous years due to operational enhancements and
significant levels of precipitation over the past year. In addition, recent
flash financial reports have indicated that this positive performance has
continued into January and February of 1997.
Month of January 1997 Year-to-Date
------------------------------------------ -----------------------------------
Actual Budget Variance Actual Budget Variance
------ ------ -------- ------ ------ --------
Kilowatt Hours 62,599,109 50,088,000 24.98% 354,119,482 295,564,000 19.81%
Revenue $4,806,389 $3,909,000 22.96% $26,932,033 $22,160,000 21.53%
Month of February 1997 Year-to-Date
----------------------------------------- --------------------------------------
Actual Budget Variance Actual Budget Variance
------ ------ -------- ------ ------ --------
Kilowatt Hours 58,534,277 50,160,000 16.70% 412,653,758 345,724,000 19.336%
Revenue $4,503,907 $3,948,400 14.07% $31,435,940 $26,108,400 20.41%
14
- Organizational consolidation.
In an effort to minimize corporate overhead, the Company has been
eliminating unnecessary expenses. This decrease in fixed costs has also
contributed to improving operating margins. Cost cutting measures have
included, among other things, (i) consolidating corporate offices, (ii)
salary reductions for the Company's most senior managers, (iii) changes in
travel and expense policies and (iv) the reduction of insurance premiums
through a change to a lower cost carrier.
- Eventual pricing switch to avoided cost.
Substantially all of the projects owned by the holding company service
customers contractually bound to pay fixed rates pursuant to power purchase
agreements. During the next two decades, the pricing mechanisms in
substantially all of these agreements will switch to then-current avoided
cost. Assuming avoided cost for these projects approximates the current
price of electricity, this will, over time, result in a significant decline
in revenues from these facilities.
- Capital structure driven constraints on execution of business plan.
The new management team has been actively marketing the industrial
infrastructure business and has received significant interest in the
product. Unfortunately, to date CHI has not been able to close any IIB
transactions in large part due to the Company's complex capital structure,
high degree of leverage, and its potential inability to satisfy the
corporate obligations. Potential customers/"partners" are concerned that
the Company may not be able to satisfy its existing corporate obligations
when they (i) become cash-pay and (ii) mature.
The chart below lists the projects (i) which have either been lost or
stalled as a result of the foregoing impediment or (ii) are currently in
continuing discussions.
Type of Company Project Size Comments
--------------- ------------ --------
Pulp and Paper $250 - $500 million Lost to CRSS due to
concerns on financial
strength.
Food and Beverage $25 million Lost due to concerns on
balance sheet.
Petrochemical $150 million On hold - concerns on
balance sheet.
Pulp and Paper $200 million Lost to CRSS.
Pulp and Paper $50 - $150 million Discussions ongoing.
Utility/Oil and Gas $100 million Discussions ongoing.
Textile $25 million Discussions ongoing.
Metals $50 million Discussions ongoing.
15
Given this dynamic, a restructuring of CHI's balance sheet is necessary (i)
given that its current financial situation has made it extremely difficult
for CHI to pursue necessary and new strategic initiatives, particularly
those related to the IIB and (ii) to maximize the value of CHI. The timing
of the restructuring is critical given that the barriers to entry in the
IIB are increasing with every transaction closed by a competitor -- the
importance of the Company quickly establishing a track record cannot be
overemphasized.
16
HISTORICAL FINANCIAL PERFORMANCE
A summary of the Company's financial results for the fiscal year ended June 30,
1994 through the latest 12-month period ended December 31, 1996 is outlined
below:
LTM Fiscal Year Ended June 30,
--------------------------------------------
($ in Millions) 12/31/96 1996 1995 1994
-------- ---- ---- ----
Operating Revenues:
Power Sales $54.2 $49.8 $39.9 $36.2
Management and O&M Fees 5.2 5.0 4.3 5.7
Other Income 0.9 0.6 0.2 0.3
--- --- --- ---
Total Operating Revenues $60.3 $55.4 $44.0 $42.2
Total Operating, General & Admin. and Lease Expenses(2) 31.6 30.4 28.4 29.1
% of Revenues 52.4% 54.8% 64.7% 69.0%
Other Income 0.3 0.4 0.2 0.1
EBITDA $29.0 $25.4 $15.7 $13.2
EBITDA Margin 48.1% 45.8% 35.7% 31.2%
Add: Boott Leveraged Operating Lease 3.6 3.5 3.5 3.4
--- --- --- ---
Adjusted EBITDA $32.6 $28.9 $19.2 $16.6
Adjusted EBITDA Margin 54.1% 52.2% 43.7% 39.3%
Boott Lease Expense (3.6) (3.5) (3.5) (3.4)
Interest Income 1.0 1.0 1.4 1.1
Project Interest Expense (9.9) (9.2) (6.1) (5.0)
Total Cash Income Taxes (0.4) (0.5) (0.4) (0.3)
Changes in Working Capital (1.0) (0.0) 4.0 (5.5)
Changes in LT Assets and Liabilities (1.5) (1.1) 0.5 1.7
Capital Expenditures (3.0) (2.2) (2.9) (2.3)
Project Principal Repayments (5.7) (4.3) (4.9) (2.7)
----- ----- ----- -----
Unrestricted Cash Flow Before Changes in Restricted Cash $8.4 $9.0 $7.4 $0.2
----------
2 Excludes charge of impairment of long-lived assets.
17
Add: (Increase)/Decrease in Restricted Cash Balance (0.0) (3.1) (5.3) 1.2
----- ----- ----- ---
Adjusted Unrestricted Cash Flow(3) $8.4 $5.9 $2.0 $1.4
Adjusted Unrestricted Cash Flow Margin 13.9% 10.6% 4.6% 3.4%
LTM Fiscal Year Ended June 30,
--------------------------------------------
12/31/96 1996 1995 1994
-------- ---- ---- ----
Rainfall Indicator(4)
Northeast Above Above Below Below
Southeast Average Average Above Below
West Below Above Above Below
Northwest Above Above Below Average
Number of Projects 92 91 91 74
---
HOLDING COMPANY OBLIGATIONS AND LIQUIDITY OVERVIEW
($ in Millions)
Debt: 12/31/96 9/30/96 6/30/96 6/30/95 6/30/94 6/30/93
----- -------- ------- ------- ------- ------- -------
Non-Recourse Debt of Subsidiaries(5) $103.2 $113.1 $115.5 $119.4 $84.9 $80.6
Parent Company Debt(6) 160.2 160.2 151.1 134.5 119.7 112.1
----- ----- ----- ----- ----- -----
Total Debt $263.4 $273.3 $266.6 $253.9 $204.6 $202.5
====== ====== ====== ====== ====== ======
----------
3 Adjusted Unrestricted Cash Flow represents Hydro business cash flow
available for corporate obligations, after corporate overhead, and before
cost of completed acquisitions, retirement of subordinated debt, asset
sales, and cost of capitalized development expense (capitalized
development costs were $8.3, $5.8, $2.0, and $1.0 for the periods FY
1994, FY 1995, FY 1996 and LTM ended 12/31/96, respectively).
4 Represents assessment of water flow in a given year as compared to
historical rainfall patterns; approximately 80% of the Company's
performance is driven by water flow in the Northeast (represents
management's assessment). With respect to the LTM period ended 12/31/96,
indicator reflects six months ended 12/31/96.
5 Excludes Boott leveraged operating lease of $32.5 million as of December
31, 1996.
6 Excludes current accrued interest. Accrued interest is not considered
capitalized until the semi-annual interest payment dates of January 15
and July 15.
18
Parent Company Preferred Stock Issues:
-------------------------------------
Series F 8% Senior Conv. Voting Preferred Stock7 $55.0 $55.0 $55.0 $55.0 $55.0 $55.0
Cumulative Unpaid Dividends 18.3 18.3 18.3 13.9 9.5 5.1
---- ---- ---- ---- --- ---
Total $73.3 $73.3 $73.3 $68.9 $64.5 $60.1
Series H 13.5% Cumul. Redeem. Exch. Preferred $112.2 $108.6 $105.0 $92.0 $80.5 $70.5
Stock
Series G 9.85% Junior Conv. Voting Preferred $55.0 $55.0 $55.0 $55.0 $55.0 $55.0
Stock(7)
Cumulative Unpaid Dividends 22.6 22.6 22.6 17.2 11.7 6.3
---- ---- ---- ---- ---- ---
Total $77.6 $77.6 $77.6 $72.2 $66.7 $61.3
Total Preferred Stock Obligations $263.1 $259.5 $255.9 $233.0 $211.8 $192.0
====== ====== ====== ====== ====== ======
Total Capitalization $526.5 $532.7 $522.5 $486.9 $416.6 $394.4
====== ====== ====== ====== ====== ======
Significant Non-Recourse Project Debt
Balance Cross-collateralization
(in millions) as on Multiple Projects
Financing Lender of 12/31/96 Type
CHI Southeast Aquenergy
Financing UNUM $ 6.6 First Mortgage X
Aziscohos NYNEX Credit, CIT 10.2 Leveraged Sale Leaseback
CHI West Financing Bay Bank 2.4 Project Term Loan X
Eagle and Phoenix Fieldcrest ▇▇▇▇▇▇, Inc. 1.0 First Mortgage
Fuji Bank Financing Lyon Credit 5.0 Project Term Loan
HDG Financing GE Capital Corp. 34.0 Term Loans, Credit Facility X
Hydro Energies Corp. Bay Bank 1.4 Project Term Loan X
Financing
▇▇▇▇▇▇▇▇ Mutual of New York 7.4 Project Term Loan
LaChute Hydro Co. Financing ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, Insur- 14.7 Leveraged Sale Leaseback
ance Cos., GECC
Mill Shoals Co. Financing Indianapolis Life Insur- 0.8 Project Term Loan
ance Co.
----------
7 Excludes 1,279 shares of Series F and Series G preferred stock issued to
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ on January 31, 1997.
19
Ottauquechee Bay Bank 0.4 Project Term Loan X
Willimantic Hydro Co. Bay Bank 1.8 Project Term Loan X
Financing
Other (i.e., Summit and Various 17.5 Various
CPS)
Boott GE Capital Corp. 32.5 Leveraged Operating Lease
------
Total Project Debt and Leveraged Leases $135.7
All of the subsidiary project financings include cash funding, cash escrow or
restricted cash accounts. Generally, each financing requires funds to be
escrowed to cover the annual cash operating expenses, capital improvements, and
debt service of the specific project. Certain projects have significantly
increased cash escrow requirements over time, due to the requirements of the
underlying power sales contracts and the underlying project finance agreements.
Once cash escrows or restricted cash is funded on a project basis, excess funds
cannot be distributed to other subsidiaries or to the holding company, except
during small windows during the year, with timing varying project-by-project.
Although the subsidiary project financings are non-recourse to the holding
company, these obligations are structurally senior to the obligations of the
holding company due to their position at the operating assets. In addition, in
many cases, the project financings are cross-collateralized and therefore have
recourse to each other in the event of a default.
Liquidity Overview
- The consolidated financial performance of the Company (as previously
discussed) has steadily improved since the June 1993 recapitalization.
This has provided the Company with substantial liquidity for addressing
any significant shortfalls in historical water flows. However, as of
December 31, 1996, the Company had current cash obligations on only 19.6%
of its total debt and preferred stock capitalization (including project
debt). By July 15, 1998, it is estimated that current cash obligations
will exist on 71.8% of the Company's total debt and preferred stock
capitalization.
Actual Estimated
($ in Millions) 12/31/96 7/15/98
-------- -------
Non-Recourse Project Debt $103.2 $94.9
12% Senior Discount Notes 160.2 202.3
----- -----
Total Debt $263.4 $297.2
20
Series F 8% Senior Convertible
Preferred(8) $73.3 $82.1
Series H 13.5% Cumulative Redeemable
Exchangeable Preferred 112.2 137.0
Series G 9.85% Junior Convertible
preferred(8) 77.6 88.4
---- ----
Total Preferred $263.1 $307.5
Total Capitalization $526.5 $604.7
====== ======
Cash Accruing Obligations/Total
Capitalization 19.6% 71.8%
MANAGEMENT BIOGRAPHIES
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Chairman and Chief Executive Officer -- ▇▇. ▇▇▇▇▇▇▇ joined CHI
in November 1995 as President and Chief Executive Officer of CHI Power, Inc., a
newly-formed subsidiary. He was elected Chairman and Chief Executive Officer of
the Company effective July 1, 1996. Prior to joining CHI, ▇▇. ▇▇▇▇▇▇▇ had more
than 25 years of experience in the energy industry. He joined the engineering
and construction firm of CRS ▇▇▇▇▇▇▇ in 1985 as senior vice president,
responsible for creating its power division. In 1988 he became president and
chief executive officer of CRSS Capital, its independent power subsidiary, and
was responsible for developing more than $800 million in energy assets at seven
sites, with more than 1,300 equivalent megawatts. He became president of CRSS,
Inc., the parent company, in 1994. ▇▇. ▇▇▇▇▇▇▇ holds a bachelor's degree in
chemical engineering from Penn State University, a master's degree in chemical
engineering from the University of Pittsburgh, and is a registered Professional
Engineer.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇, President, Chief Operating Officer and Secretary -- ▇▇. ▇▇▇▇▇
was named to his current position with the Company in September 1996. 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, ▇▇. ▇▇▇▇▇
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. ▇▇. ▇▇▇▇▇ is a member of the Massachusetts Bar
and the Federal Energy Bar.
----------
8 Excludes 1,279 shares of Series F and Series G preferred stock issued to
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ on January 31, 1997.
21
▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Chief Financial Officer -- ▇▇. ▇▇▇▇▇▇▇ joined CHI in July 1996
and is responsible for various development and strategic planning functions of
the Company. Prior to joining CHI, she served in several capacities with CRSS
Inc. most recently as Vice President, Controller of the parent company
responsible for the accounting, financial, tax and human resource functions of
the company. Previously, she had served as Chief Financial Officer of CRSS
Capital, its independent power subsidiary. Prior to joining CRSS, ▇▇. ▇▇▇▇▇▇▇
was employed by ▇▇▇▇▇ and Young for six years, last holding the position of
audit manager. ▇▇. ▇▇▇▇▇▇▇ 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.
▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Director, Operations Support, CHI Power, Inc. -- ▇▇. ▇▇▇▇▇
has more than 25 years of experience in development, operations, and quality
control for industrial and utility facilities. Before joining CHI he was
Director of Operations Support for CRSS, responsible for directing operations
and maintenance for cogeneration and industrial facilities ranging from 18 to
350 megawatts, using wood waste coal, and natural gas. He also spent 16 years
with Public Service Company of New Mexico as a project engineer, project
manager, and director of Quality Assurance and Quality Control. ▇▇. ▇▇▇▇▇ holds
an electrical engineering degree from the University of New Mexico, and is a
registered professional engineer.
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Senior Vice President and General Manager, CHI Power, Inc. --
▇▇. ▇▇▇▇▇▇▇ 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 Power, ▇▇. ▇▇▇▇▇▇▇ 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. ▇▇. ▇▇▇▇▇▇▇ also served as a project
manager with similar responsibilities for CRS ▇▇▇▇▇▇▇ Engineers, Inc. prior to
that. He began his career with International Paper Company, responsible for
hydroelectric and combustion power plan installation and upgrades. ▇▇. ▇▇▇▇▇▇▇
holds a degree in electrical engineering from North Carolina State and is a
registered professional engineer.
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇, Senior Vice President, Development, CHI Power, Inc. -- ▇▇.
▇▇▇▇▇▇▇▇▇ began his employment with CHI in November 1995. He is responsible for
the marketing and business development functions of the Company that include
domestic and international opportunities of both hydro and industrial energy
projects. Prior to joining CHI, ▇▇. ▇▇▇▇▇▇▇▇▇
22
most recently served as a senior business developer for CRSS Inc. where he was
responsible for the development and negotiation of energy and industrial
transactions. Prior to that, he held numerous senior development positions with
other energy companies, beginning his career with General Electric Company. ▇▇.
▇▇▇▇▇▇▇▇▇ holds a degree in mechanical engineering from ▇▇▇▇▇▇▇ University, and
is a registered professional engineer.
23
PARENT COMPANY CAPITAL STRUCTURE OVERVIEW
Parent Company Debt
12% Senior Discount Notes due 2003, Series B (Public)
- Issued on June 22, 1993 with initial principal amount of $112,097,062.50.
Non-cash interest computed semi-annually compounding through July 15,
1998. Accreted principal amount as of July 15, 1998 will be $202,250,000
with semi-annual cash interest payments commencing on January 15, 1999.
Accreted principal amount as of September 30, 1996 was $160,200,202.50.
Accreted principal amount plus accrued interest as of June 30, 1997 will
be $179,153,387.
Parent Company Preferred Stock Issues
Series F 8% Senior Convertible Voting Preferred Stock
- 55,000 shares issued to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Leveraged Equity Fund II and The
Madison Group(9). Dividends are cumulative and payable annually in
arrears. Ranks senior to the Series H and Series G Preferred Stocks.
Liquidation preference of $1,000 per share plus accrued and declared
dividends. Shares are convertible into the Company's Class A Common,
subject to certain specified conditions, at the option of the holder,
through March 2007 at a share rate equivalent to the liquidation
preference divided by the conversion price (initially $40 per share,
subject to adjustment).
Series H 13.5% Cumulative Redeemable Exchangeable Preferred Stock (Public)
- 136,950 shares issued on June 22, 1993 as part of Rule 144A Senior
Discount Note Offering. Mandatorily redeemable on December 31, 2003 at
$1,000 per share plus accrued and unpaid dividends. Initial liquidation
preference of $513.32 per share which will increase as form of payment
for declared dividends required quarterly in arrears until accreting to
the liquidation preference of $1,000 per share on June 30, 1998. Cash
dividend requirements commence quarterly on September 30, 1998. The
Company, on any scheduled dividend payment date occurring on or after
June 30, 1998, may exchange the Series H Preferred for 13.5% Junior
Exchange Debentures
----------
9 Excludes 1,279 shares of Series F and Series G preferred stock issued to
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ on January 31, 1997.
24
in $1,000 principal amount for $1,000 liquidation preference. Dividend
rate will increase 0.25% per quarter to a maximum of 16.5% if the Company
fails to make the required dividend payments. After June 30, 1998, if
cash dividends are in arrears and unpaid for more than six quarters, the
Board of Directors will be increased by two directors and the holders of
the majority of the Series H Preferred will be entitled to elect two
directors of the expanded Board of Directors. Ranks junior to the Series
F Preferred and senior to the Series G Preferred.
Series G 9.85% Junior Convertible Voting Preferred Stock
- 55,000 shares issued to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Leveraged Equity Fund II and The
Madison Group10. Dividends are cumulative and payable annually in
arrears. Ranks junior to both the Series F and Series H Preferred Stocks.
Liquidation preference of $1,000 per share plus accrued and declared
dividends. Shares are convertible into the Company's Class A Common,
subject to certain specified conditions, at the option of the holder,
through March 2007, at a share rate equivalent to the liquidation
preference divided by the conversion price (initially $40 per share,
subject to adjustment).
Common Stock
- 1,285,762 total primary Class A shares issued and outstanding. Ownership
consists of current and former executive officers, entities with board
representation, and certain original minority investors. On a
fully-diluted basis,11. 4,615,045 Class A shares would be issued and
outstanding with the ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ Leveraged Equity Fund II owning
2,250,000 shares, or 48.8% of the fully-diluted Class A shares.
----------
10 Excludes 1,279 shares of Series F and Series G preferred stock issued to
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ on January 31, 1997.
11 Excludes 1,279 shares of Series F and Series G preferred stock issued to
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ on January 31, 1997.
