UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from
to
.
Commission File No. 001-33712
RENEGY HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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20-8987239
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer Identification No.)
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60 E. Rio Salado Parkway, Suite 1012
Tempe, Arizona 85281-9501
(Address of principal executive offices)
(480) 556-5555
(Registrants telephone number)
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
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of November 10, 2008 there were outstanding 6,304,312 shares of the issuers common stock,
par value $0.001, which is the only class of common stock outstanding.
RENEGY HOLDINGS, INC.
FORM 10-Q
September 30, 2008
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENEGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(Successor)
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(Predecessor)
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(Successor)
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(Predecessor)
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Revenues
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Power generation
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$
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3,179
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$
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$
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4,100
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$
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Wood product and other
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140
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217
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676
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997
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Total revenues
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3,319
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217
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4,776
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997
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Costs and expenses:
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Plant operating expenses
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3,917
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5,716
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Cost of wood product operations
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244
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(1,984
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)
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2,064
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3,311
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General, administrative and development
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2,787
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337
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8,698
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814
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Loss (gain) on sale or disposal of assets
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(2
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)
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(157
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)
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87
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Total costs and expenses
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6,948
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(1,649
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)
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16,321
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4,212
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Operating income (loss )
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(3,629
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)
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1,866
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(11,545
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)
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(3,215
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)
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Other income (expense):
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Interest income
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17
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141
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162
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670
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Other income
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19
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Interest expense
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(898
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)
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(155
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)
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(948
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(662
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)
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Other expense
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(63
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)
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(36
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(264
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(110
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)
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Debt commitment fees
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(265
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)
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(319
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)
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(791
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)
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(890
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Change in fair value of derivative instruments
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106
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(1,201
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)
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1,125
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588
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Net income (loss)
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$
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(4,732
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)
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$
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296
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$
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(12,242
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)
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$
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(3,619
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)
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Net income (loss) per common share:
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Basic and diluted
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$
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(0.76
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)
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$
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0.08
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$
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(1.97
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)
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$
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(0.96
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Weighted average shares:
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Basic and diluted
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6,208
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3,774
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6,208
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3,774
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See accompanying notes.
3
RENEGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
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September 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,897
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$
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9,769
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Restricted cash
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1,760
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2,411
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Short-term investments
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5,991
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Receivables
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1,198
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864
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Biomass fuel and inventories
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6,377
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5,128
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Prepaid expenses and other assets
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939
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362
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Total current assets
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12,171
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24,525
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Property and equipment:
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Land
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21
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Leasehold improvements
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783
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265
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Machinery and equipment
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10,296
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5,387
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Biomass plant
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63,392
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Construction in progress, biomass plant
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479
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54,626
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Construction in progress, other
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105
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981
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Less accumulated depreciation and amortization
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(3,365
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)
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(1,760
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)
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Total property and equipment
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71,711
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59,499
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Deferred financing costs, net
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2,468
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2,732
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Idle property and equipment
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1,375
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1,300
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Other assets
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312
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111
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Total assets
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$
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88,037
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$
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88,167
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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1,474
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$
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2,967
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Accrued payroll and benefits
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674
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789
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Accrued liabilities and other
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3,287
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2,103
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Non-revolving line of credit
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6,200
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Current portion of long-term debt
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2,105
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776
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Current portion of fair value of derivative instruments
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369
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389
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Total current liabilities
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14,109
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7,024
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Fair value of derivative instruments, net of current portion
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3,108
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4,213
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Convertible note
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1,000
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Long-term debt, net of current portion
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50,350
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50,942
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Other long-term liabilities
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269
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Total liabilities
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68,836
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62,179
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Stockholders equity:
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Preferred stock, $0.001 par value; 1,500 shares authorized, none issued
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Common stock, $0.001 par value; 43,000 shares authorized; 6,208 and 6,208
issued and outstanding, respectively
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6
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6
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Additional paid-in capital
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55,064
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49,606
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Accumulated deficit
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(35,869
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)
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(23,627
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)
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Accumulated other comprehensive income
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3
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Total stockholders equity
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19,201
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25,988
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Total liabilities and stockholders equity
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$
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88,037
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$
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88,167
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See accompanying notes.
4
RENEGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended September 30,
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2008
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2007
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(Successor)
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(Predecessor)
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Cash flows from operating activities:
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Net loss
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$
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(12,242
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)
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$
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(3,619
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)
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Adjustments to reconcile net loss from continuing operations to net
cash used in operating activities:
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Depreciation of property and equipment
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1,789
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611
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Impairment of long-lived assets
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109
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Amortization of deferred financing costs
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264
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|
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113
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Change in fair value of derivative instruments
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(1,125
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)
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(588
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)
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Provision for uncollectible accounts
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7
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Stock based compensation
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458
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Inventory and equipment losses related to fire
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486
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Gain on sale of available-for-sale investments
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(8
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)
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Loss (gain) on sale or disposal of assets
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11
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(8
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)
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Changes in operating assets and liabilities:
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Receivables
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(341
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)
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36
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Biomass fuel and inventories
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(1,407
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)
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(2,223
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)
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Prepaid expenses and other current assets
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(383
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)
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|
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(1,109
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)
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Accounts payable
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|
1,533
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|
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|
212
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|
Accrued payroll and benefits
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(115
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)
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|
82
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|
Accrued liabilities and other
|
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|
702
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|
|
|
|
693
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|
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|
|
|
|
|
|
|
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Net cash used in operating activities
|
|
|
(10,748
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)
|
|
|
|
(5,314
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)
|
|
|
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|
|
|
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Cash flows from investing activities:
|
|
|
|
|
|
|
|
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Proceeds from sale of available-for-sale investments
|
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|
5,996
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|
|
|
|
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Net change in restricted cash investments
|
|
|
651
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|
|
|
|
18,974
|
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Proceeds from sale of property and equipment
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|
4
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|
|
|
|
18
|
|
Additions to property and equipment
|
|
|
(16,170
|
)
|
|
|
|
(22,293
|
)
|
Change in other assets
|
|
|
(238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net cash used in investing activities
|
|
|
(9,757
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)
|
|
|
|
(3,301
|
)
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|
|
|
|
|
|
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|
See accompanying notes.
5
RENEGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS continued
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
(Successor)
|
|
|
|
(Predecessor)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
879
|
|
|
|
|
5,752
|
|
Proceeds from line of credit
|
|
|
6,200
|
|
|
|
|
|
|
Proceeds from issuance of convertible debt
|
|
|
1,000
|
|
|
|
|
|
|
Repayments of notes and leases payable
|
|
|
(446
|
)
|
|
|
|
(82
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)
|
Contributions from majority shareholder
|
|
|
5,000
|
|
|
|
|
|
|
Contributions from member
|
|
|
|
|
|
|
|
2,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,633
|
|
|
|
|
8,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(7,872)
|
|
|
|
|
(28
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
9,769
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,897
|
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash investing and financing activities
|
|
|
|
|
|
|
|
|
|
Additions of property, plant and equipment financed with payables
|
|
$
|
494
|
|
|
|
$
|
2,898
|
|
|
|
|
|
|
|
|
|
Additions of property, plant and equipment financed with capital leases
|
|
$
|
304
|
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Consolidation and Recent Accounting Pronouncements
Formation and Operations of the Company
.
Renegy Holdings, Inc. (Renegy, or the Company,)
was incorporated on May 1, 2007 as a wholly-owned subsidiary of Catalytica Energy Systems, Inc.
(Catalytica), a Delaware corporation, for purposes of completing the transaction contemplated by
the Contribution and Merger Agreement (the Contribution and Merger Agreement) dated as of May 8,
2007, as amended, by and among (i) the Company, (ii) Catalytica, (iii) Snowflake Acquisition
Corporation (Merger Sub), a Delaware corporation and wholly-owned subsidiary of the Company,
(iv) Renegy, LLC (Renegy LLC), an Arizona limited liability company, (v) Renegy Trucking, LLC
(Renegy Trucking), an Arizona limited liability company, (vi) Snowflake White Mountain Power,
LLC, an Arizona limited liability company (Snowflake and, together with Renegy LLC and Renegy
Trucking, the Snowflake entities), (vii) Robert M. Worsley (R. Worsley or Mr. Worsley),
(viii) Christi M. Worsley (C. Worsley and together with R. Worsley, the Worsleys) and (ix) the
Robert M. Worsley and Christi M. Worsley Revocable Trust (the Worsley Trust and, together with R.
Worsley and C. Worsley, Worsley).
On October 1, 2007, the parties to the Contribution and Merger Agreement completed the
transaction pursuant to the terms of the Contribution and Merger Agreement. In the transaction,
Catalytica and the Snowflake entities combined their businesses through the merger of Merger Sub
with and into Catalytica, with Catalytica surviving the merger, and the concurrent contribution to
Renegy by the Worsley Trust, the beneficial owners of the Snowflake entities, of all of the
outstanding equity interests of the Snowflake entities (the Merger Transaction). As a result of
the Merger Transaction, Catalytica and the Snowflake entities became wholly-owned subsidiaries of
Renegy.
In accordance with SFAS No. 141,
Business Combinations,
the Snowflake entities were
considered to have acquired Catalytica. Accordingly, the purchase price was allocated among the
fair values of the assets acquired and liabilities assumed of Catalytica, and the historical
results of the Snowflake entities became the basis of comparative historical information of the
combined company. Although the Company continued as the surviving legal entity after the Merger
Transaction, the accompanying information presents the results of the Company for the three and
nine months ended September 30, 2008 (Successor) and the comparative results of the Snowflake
entities for the three and nine months ended September 30, 2007 (Predecessor). All references to
the three or nine months ended September 30, 2008 refer to results of the Company. All references
to the three or nine months ended September 30, 2007 refer to the Predecessors results.
Prior to consummation of the Merger Transaction, Mr. Worsley operated the Snowflake entities
as single member Arizona limited liability corporations. In connection with consummation of the
Merger Transaction, Worsley became the majority stockholder of the Company. As of September 30,
2008, Worsley held approximately 57.2% of the Companys outstanding shares.
Description of Business
.
Renegy is a renewable energy company focused on acquiring, developing
and operating a portfolio of biomass power generation facilities to address an increasing demand
for economical power relying on alternative energy sources. The Company seeks to grow its portfolio
of renewable energy assets through the acquisition of existing biomass facilities (both operating
and idle), in addition to the development, construction and operation of new facilities. Other
business activities include an established fuel aggregation business, which collects and transports
forest thinning and woody waste biomass fuel to the Companys power plants, and which sell logs,
shaved wood products and other high value wood by-products to provide additional value to the
Companys primary business operations.
The Companys current biomass power generating assets include a 24 megawatt (MW) facility
near Snowflake, Arizona (the Snowflake plant), which began generating and selling commercial
power during the second quarter of 2008, and an idle 13 MW biomass plant in Susanville, California
(the Susanville plant), which the Company may refurbish and restart by early 2010. Renegy has
signed letters of intent for the acquisition of two additional biomass facilities; one related to
an operating 20 MW facility in Loyalton, California and another related to an idle 18 MW facility
in Ione, California. Although the formal letter of intent related to the Ione opportunity has
expired, the Company remains engaged in negotiations to acquire both biomass facilities, subject to
Renegys completion of final due diligence, entering into definitive purchase agreements for the
plants, securing necessary financing, and certain other closing conditions.
7
The Companys ability to achieve its business goals is contingent on its ability to secure
additional debt or equity financing as further discussed in Note 2, Operations and Financing.
Unaudited Interim Financial Information.
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles for interim financial
information generally accepted in the United States (GAAP) and with the instructions to Form 10-Q
and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. The balance sheet data for
December 31, 2007 was derived from audited financial statements, but does not include all
disclosures required by GAAP. This Form 10-Q report should be read in conjunction with Renegys
Annual Report on Form 10-KSB for the year ended December 31, 2007. Certain amounts reported in
previous periods have been reclassified to conform to the current period presentation. Operating
results for the three and nine months ended September 30, 2008 are not necessarily indicative of
the results that may be expected for any other interim period or for the full fiscal year.
The preparation of financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
Principles of Consolidation
.
Predecessor
The combined financial statements include the accounts of the Snowflake entities. All
material intercompany accounts and transactions have been eliminated in combination. All
material intercompany transactions were conducted at arms length in the opinion of
management of the Snowflake entities. The combined financial statements are presented as a
pooling of interests in accordance with AICPA Practice Bulletin 14,
Accounting and
Reporting by Limited Liability Companies and Limited Liability Partnerships
.
Successor
The consolidated financial statements include the accounts of Renegy and its wholly owned
subsidiaries. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Recent Accounting Pronouncements
.
In September 2006, the FASB issued SFAS No. 157 (SFAS
157),
Fair Value Measurements,
which addresses the measurement of fair value by companies when
they are required to use a fair value measure for recognition or disclosure purposes under GAAP,
and expands disclosures about fair value measurements. SFAS 157 provides a common definition of
fair value to be used throughout GAAP which is intended to make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. SFAS 157 is effective for
all financial assets and liabilities that are recognized or disclosed at fair value on a recurring
basis in an entitys financial statements issued for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position 157-2 (FSP 157-2),
Effective Date of
FASB Statement No. 157
, which delays the effective date of SFAS 157 for all nonfinancial assets
and liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until fiscal years beginning after November
15, 2008. The Company adopted the provisions of SFAS 157 for its financial assets and liabilities
on January 1, 2008, and the adoption did not have a material impact on its consolidated financial
statements. The Companys nonfinancial assets and liabilities that meet the deferral criteria set
forth in FSP 157-2 include long-lived assets measured at fair value for an impairment assessment
under FAS 144. The Company is currently assessing the impact, if any; the adoption of SFAS 157 for
nonfinancial assets and liabilities will have on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159),
The Fair Value Option for
Financial Assets and Financial Liabilities.
SFAS 159 allows an entity the irrevocable option to
elect fair value for the initial and subsequent measurement of certain financial assets and
liabilities on an instrument-by-instrument basis. Subsequent changes in fair value of these
financial assets and liabilities are recognized in earnings when they occur. SFAS 159 is effective
for an entitys financial statements issued for fiscal years beginning after November 15, 2007. The
Company adopted the provisions of SFAS 159 on January 1, 2008. The Company did not elect to measure
financial instruments and other items at fair value and therefore, the adoption did not have a
material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141R),
Business Combinations
,
which amends SFAS No. 141, and provides revised guidance for recognizing and measuring identifiable
assets and goodwill acquired, liabilities
assumed, and any non-controlling interest in the acquiree. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R will be effective for acquisitions completed on or
after January 1, 2009, and will be applied prospectively. The Company is currently assessing the
impact, if any; the adoption of SFAS 141R will have on its consolidated financial statements.
8
In December 2007, the FASB issued SFAS No. 160 (SFAS 160),
Non-controlling Interests in
Consolidated Financial Statements an amendment of ARB 51
, which establishes accounting and
reporting standards pertaining to ownership interests in subsidiaries held by parties other than
the parent, the amount of net income attributable to the parent and to the non-controlling
interest, changes in a parents ownership interest, and the valuation of any retained
non-controlling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the interests of the parent
and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning
on or after December 15, 2008. The Company is currently assessing the impact, if any; the adoption
of SFAS 160 will have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161 (SFAS 161),
Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133
, which requires enhanced
disclosures about an entitys derivative and hedging activities. SFAS 161 requires enhanced
disclosures about how and why an entity uses derivative instruments; how derivative instruments and
related hedged items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, and its related interpretations; and how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows.
SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption
encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods
at initial adoption. The Company is currently assessing the impact, if any; the adoption of SFAS
161 will have on the disclosures included in the consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162 (SFAS 162),
Hierarchy of Generally Accepted
Accounting Principles.
SFAS 162 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements. SFAS 162 is effective
60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to
AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles
. The adoption of SFAS 162 will not have an impact on our consolidated financial
position, results of operations or liquidity, as this new standard codifies existing GAAP, rather
than modifying GAAP.
Note 2. Operations and Financing
The Company and its Predecessor have incurred significant losses and negative cash flows since
inception. The Company has financed its operations and the construction of the Snowflake plant
primarily through the issuance of bonds, borrowings under construction and term loans with a bank,
cash and short-term investments obtained in the acquisition of Catalytica, proceeds from the sale
of Catalyticas SCR-Tech subsidiary, equity infusions from Worsley, proceeds from the issuance of
convertible debt to Worsley, and borrowings under a line of credit.
The Snowflake plant is currently generating and selling commercial power to Arizona Public
Service Co. (APS) and Salt River Project (SRP) in accordance with the terms of power purchase
agreements (PPAs) with those parties. However, the Snowflake Plant has not yet achieved term
conversion as defined in its credit agreement with CoBank. On September 30, 2008, the Borrowers
entered into the Eighth Amendment to Credit Agreement (the Eighth Amendment) with CoBank,
pursuant to which the parties extended the date by which the Borrowers must complete the conditions
precedent to term conversion of the construction loans, from September 30, 2008 to December 31,
2008. In addition, the Eighth Amendment modified the amortization schedules, related principle
payment amounts and due dates of the construction loans. As such, if certain milestones are not
reached by December 31, 2008, the entire principal amount of the Companys outstanding borrowings
with CoBank will not convert into term loans and will instead become immediately due and payable,
which would have a material adverse effect on the Companys financial position and cash flows.
Further, if the Company is out of compliance with any of its loan agreements under any of its
credit facilities, including a determination that there is a material adverse change, the
borrowings under such agreements would become due and payable, which would have a material adverse
effect on the Companys financial position and cash flows. In such event, the Company would be
required to seek an extension of the terms of such debt, seek to refinance such debt or seek
alternative debt or equity financing. No assurance can be given that such financing will be
available on acceptable terms, or at all.
9
The Company has significant negative cash flows due to (i) the Snowflake plant operations not
yet fully stabilizing, (ii) costs of biomass fuel aggregation, (iii) corporate overhead, and (iv)
interest payment obligations. The Company is aggressively seeking third party debt and equity
financing and is negotiating a potential sale of the Company. Additionally, the Company is
negotiating a potential transaction to monetize production tax credits and other tax attributes of
its Snowflake plant. No assurance can be given that the Company will be able to secure additional
financing on acceptable terms, or at all, or that a sale of the Company will occur.
During the first nine months of 2008, the Company secured and borrowed $6.2 million under a
line of credit from Comerica Bank (Comerica) that is guaranteed by Worsley, obtained an equity
infusion of $5.0 million from Worsley to cover certain cost overruns at the Snowflake plant, and
received a $1.0 million advance from Worsley. In August 2008, the advance from Worsley was
converted into a convertible note, which is described more fully in Note 8. The Companys cash
balances, along with any cash generated from its Snowflake operations, are not sufficient to
continue to meet its liquidity requirements. Pursuant to a second letter agreement (described in
Note 13), Worsley committed to use commercially reasonable efforts to personally provide the
Company up to an additional $4.0 million under the same terms as the convertible note as described
in Note 8, to fund operations for the remainder of 2008. Disruptions in the capital and credit
markets experienced during 2008 have adversely affected our ability to raise equity capital or
borrow money from banks or other potential lenders, as well as Mr. Worsleys ability to borrow
money from banks to support his efforts to fund the Companys liquidity requirements. Based in
significant part on Worsleys guarantee and his personal credit, on November 14, 2008, Comerica
agreed to suspend our $1.0 million liquidity covenant through December 31, 2008 and allow the
Company to utilize up to a maximum of $300,000 of its security deposit under its line of credit for
the sole purpose of meeting payroll obligations (see Note 8 for further details). However, even
with commercially reasonable efforts, there can be no assurance that any additional funding from
Worsley or any further credit accommodations from Comerica will be forthcoming.
If the Company is unable to secure additional financing from Worsley or third parties
in the very near future, or otherwise extend the Companys cash resources, the Company would be forced to cease operations. The
aforementioned conditions raise substantial doubt about the Companys ability to continue as a
going concern. The accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty.
Note 3. Other Financial Data
Statements of Operations Supplemental Information
Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Nine Months Ended,
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,732
|
)
|
|
$
|
296
|
|
|
$
|
(12,242
|
)
|
|
$
|
(3,619
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(4,732
|
)
|
|
$
|
296
|
|
|
$
|
(12,245
|
)
|
|
$
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
During the three months ended March 31, 2008, all of the Companys available-for-sale
securities matured or were liquidated and the proceeds were invested in cash equivalents.
At September 30, 2008, the balance of accumulated other comprehensive income (loss) was
zero.
Balance Sheets Supplemental Information
Biomass Fuel and Inventories
Biomass fuel represents organic materials consisting principally of wood chips, forest
slash, woody waste, and logs. After commencement of operations of the Snowflake plant
during the second quarter of 2008, the majority of biomass fuel will be processed and burned
in the power generation process in the Companys Snowflake plant. The costs of aggregating,
preparing, and storing those organic materials for use are capitalized as incurred. Such
costs include direct and indirect expenses of the fuel aggregation operations. Varying
quantities of wood chips are purchased from external sources and are capitalized at cost.
Materials used in the power generation process are relieved at weighted-average cost.
Prior to commencement of operations of the Snowflake plant, biomass fuel was classified as
inventories and accounted for in accordance with SFAS No. 151,
Inventory Costs
. Certain
lumber and mulch inventory was held for sale to retailers. Inventories were stated at the
lower of cost or market based on the first-in, first-out method. Abnormal costs related to
inefficiencies incurred in inventory procurement and aggregation, freight, and handling
costs were recognized as current period charges in cost of wood products operations and were
approximately $0.6 and $1.6 million during the three and nine months ended September 30,
2007, respectively.
During April and June 2007, the wood chip piles located adjacent to the Snowflake plant site
caught fire, resulting in a loss of approximately $3.3 million in the second quarter of
2007. During the third quarter of 2007, the Company received insurance claim reimbursements
related to the fire losses amounting to approximately $3.0 million, which was recorded as a
reduction of cost of goods sold during the third quarter of 2007.
Idle Property and Equipment
Idle property and equipment consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Susanville biomass plant
|
|
$
|
1,300
|
|
|
$
|
1,300
|
|
Sawmill equipment
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,375
|
|
|
$
|
1,300
|
|
|
|
|
|
|
|
|
In November 2007, the Company acquired an idle biomass plant in Susanville, California. The
property and equipment acquired in that purchase is classified as idle property and
equipment until efforts to refurbish the plant to operational status begin, anticipated for
early 2010. Sawmill equipment, which was written down to fair value during the three months
ended March 31, 2008 as described in Note 6, is classified as idle property and equipment
until a decision is made to sell the equipment or resume operations.
11
Long-Term Debt
The Companys long-term debt and capital lease obligations are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ID Bonds
Solid Waste Disposal Revenue Bonds, due 2037, principal
repayments required January 2014 through January 2026 per related letter
of credit, quarterly payments of interest at a variable rate determined by
the bond underwriter (1)
|
|
$
|
39,250
|
|
|
$
|
39,250
|
|
SWMP Construction Loan
construction loan to bank, converts to term
loan no later than December 31, 2008, principal payments through maturity in
January 2014, quarterly payments of interest at LIBOR plus 1.5% through
March 2013, then LIBOR plus 1.8% through maturity in January 2014 (1)(2)
|
|
|
9,302
|
|
|
|
9,302
|
|
Renegy Term Facility
construction loan to bank, converts to term loan no
later than December 31, 2008, principal payments through maturity in January
2013, quarterly payments of interest at 7.2% per annum through maturity (2)
|
|
|
1,492
|
|
|
|
1,471
|
|
Chase Loan
equipment loan to bank, bears interest at a fixed annual rate
of 6.6%, payable in sixty principal and interest payments of $33,000 from
June 2008 through May 2013
|
|
|
1,580
|
|
|
|
1,372
|
|
Other
|
|
|
831
|
|
|
|
323
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
52,455
|
|
|
|
51,718
|
|
Less current maturities
|
|
|
(2,105
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
50,350
|
|
|
$
|
50,942
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
ID Bonds and SWMP Construction Loan are subject to floating to fixed
interest rate swaps at closing through maturity (see Note 11).
|
|
(2)
|
|
On September 30, 2008, the credit agreement related to these loans was
amended to extend the term conversion date for these loans from September 30, 2008 to December 31, 2008
and to adjust the principal payment amounts and due dates. The maturity dates of the loans was not
effected by the amendment.
|
If certain milestones are not reached by December 31, 2008, the entire principal amount of
the Companys outstanding borrowings under the SWMP Construction Loan and Renegy Term
Facility will not convert into term loans and will instead become immediately due and
payable.
Note 4. Net Income (Loss) per Share (EPS)
Basic and diluted net loss per share is presented in accordance with SFAS No. 128,
Earnings
per Share
. Basic EPS is computed by dividing net income (loss) available to common stockholders
by the weighted-average number of common shares outstanding during each reporting period. For the
three and nine months ended September 30, 2008, the weighted average number of shares outstanding
is based on the actual number of shares outstanding for the period. For the three and nine months
ended September 30, 2007 of the Predecessor, the weighted average number of shares outstanding is
based on the number of shares of Renegy common stock issued to the Worsley Trust in the Merger
Transaction. Diluted EPS includes the effect of dilutive securities assumed to be exercised using
the treasury stock method (options and warrants) and the if-converted method (convertible
securities). As the potentially dilutive securities were anti-dilutive because net operating
losses were incurred for the three and nine months ended September 30, 2008 and for the nine months
ended September 30, 2007, they have been excluded from the computation of weighted-average shares
outstanding used in computing diluted net loss per share for each of those periods. For the three
months ended September 30, 2007, the Company reported net operating income. However, this period
reflects results of operations prior to the Merger Transaction, during which time no potentially
dilutive securities had yet been issued. Accordingly, no adjustment to the weighted average shares
used in computing diluted EPS was made for that period.
12
The following table provides descriptions and quantities of potentially dilutive securities
which were excluded from the computation of weighted-average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Nine Months Ended,
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007 (A)
|
|
|
2008
|
|
|
2007 (A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options (1)
|
|
|
705
|
|
|
|
|
|
|
|
616
|
|
|
|
|
|
Warrants (2)
|
|
|
60
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
Warrants (3)
|
|
|
2,473
|
|
|
|
|
|
|
|
2,473
|
|
|
|
|
|
Convertible securities (4)
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,738
|
|
|
|
|
|
|
|
3,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
|
Results of operations for the three and nine months ended September 30, 2007 reflect
results of operations prior to consummation of the Merger Transaction; at which point
no common share equivalents had yet been assumed or issued.
|
|
(1)
|
|
Exercise prices ranging from $5.11 to $185.50.
|
|
(2)
|
|
Warrants issued to a consultant with an exercise price of $6.34.
|
|
(3)
|
|
Warrants issues to Worsley Trust in connection with Merger Transaction, vesting in three
tranches conditioned upon the Companys acheivement of certain renewable energy-related
milestones, at an exercise price of $16.38 per share.
|
|
(4)
|
|
Convertible note to Worsley (see Note 8); assumes conversion based on $2.00 closing
market price of Renegy common stock on September 30, 2008.
|
Note 5. Stock Based Compensation
Stock based compensation is calculated by estimating the fair value of stock based awards at
the measurement date, in accordance with SFAS No. 123(R),
Share-Based Payment,
and is recognized
over the requisite service period, which typically equals the vesting period. The fair value of
grants with immediate vesting is immediately expensed. The measurement date for stock based awards
issued to nonemployees is determined in accordance with Emerging Issues Task Force 96-18,
"
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services
.
In January 2008, the Company granted 235,600 stock options to certain employees. In March
2008, the Company granted 100,000 stock options in connection with the employment of its chief
operating officer. Both sets of option grants have four year vesting periods and ten year
contractual terms.
In March 2008, the Company granted 81,300 stock options to members of Renegys board of
directors. These options vested immediately and have ten year contractual terms.
In January 2008, the Company issued warrants to purchase 60,000 shares of Renegys common
stock to a consultant. These warrants vest equally over twelve months, with the initial 5,000
shares vesting on February 1, 2008, and the warrants expire on January 1, 2015. Stock based
compensation related to these warrants is calculated by estimating the fair value of each tranche
as it vests.
13
The following amounts of stock based compensation, net of forfeitures, were recognized as a
component of general, administrative and development expenses in the accompanying financial
statements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Nine Months Ended,
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
61
|
|
|
$
|
|
|
|
$
|
368
|
|
|
$
|
|
|
Warrants
|
|
|
15
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76
|
|
|
$
|
|
|
|
$
|
459
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Impairment of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets
, the Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be fully recoverable. If
such a review indicates the carrying value of assets will not be recoverable, as measured based on
estimated undiscounted cash flows over their remaining life, the carrying amount would be adjusted
to fair value. The cash flow estimates contain managements best estimates, using appropriate and
customary assumptions and projections at the time.
During 2007, due to declines in lumber prices and increased operating costs, the Predecessor
ceased operating its sawmill and began leasing the sawmill facility and equipment to an independent
operator. In early 2008, this lease was cancelled. As this event represented a significant
adverse change in the extent or manner in which the sawmill asset group was being used, the Company
ceased depreciation of the asset group and performed an impairment test in which it determined the
carrying value of the sawmill asset group would not be recoverable. Accordingly, the Company
adjusted the carrying amount to fair value and recorded a $109,000 impairment charge in cost of
wood product operations during the first quarter of 2008.
Note 7. Revenue Concentrations and Major Receivables
Commencing with the generation of test and commercial power from its Snowflake plant in the
second quarter of 2008, the Company receives a majority of its revenues in connection with PPAs
secured with APS and SRP. The Company expects to receive the majority of its revenues for the
foreseeable future from the sale of electrical power in connection with those PPAs.
Two and four customers accounted for approximately 96% and 94% of the Companys revenues for
the three and nine months ended September 30, 2008, respectively. Two and six customers accounted
for approximately 65% and 83% of the Predecessors revenues for the three and nine months ended
September 30, 2007, respectively.
Two customers accounted for 95% of the Companys trade accounts receivables at September 30,
2008. Two customers accounted for 94% of the Companys trade accounts receivable at December 31,
2007.
Note 8. Equity Infusion, Convertible Note, and Line of Credit
Equity Infusion
Pursuant to a sponsor guaranty and a letter agreement, which are described in Note 13, the
Worsleys guaranteed the payment of all project costs associated with the construction and
completion of the Snowflake plant in excess of the project cost budget of approximately $67.3
million (the Project Cap) plus $8.0 million of project costs in excess of the Project Cap agreed
to be paid by the Company per the sponsor guaranty and letter agreement. Pursuant to those
agreements, Worsley deposited $5.0 million cash in the Companys general operating bank account in
March 2008.
Convertible Note
In June and July 2008, Worsley deposited $0.6 million and $0.4 million cash, respectively, in
the Companys general operating bank account to address the possibility of additional project costs
in excess of the Project Cap prior to commencement of commercial operations of the Companys
Snowflake plant. Pursuant to a second letter agreement, which is described in Note 13, such funds
were determined to exceed those required to cover such overrun amounts. As a result, the Company
and Worsley agreed to convert such advances into a convertible note in August 2008. The
convertible note, which is subordinated to all other Company secured debt and accrues interest at
10% per annum, will automatically convert if, prior to December 31, 2009 (the Maturity Date), the
Company obtains at least $5.0 million from the issuance of equity securities of the Company
pursuant to a private placement to one or more bona fide third party investors (an Equity Funding
Event). Upon completion of an Equity Funding Event, the entire principal amount of the
convertible debt, together with accrued interest thereon, will be converted as part of such
financing into the same type of equity securities issued in the Equity Funding Event and at the
same purchase price for such equity securities in the Equity Funding Event. In the event that the
Company does not complete an Equity Funding Event prior to December 31, 2008, Worsley will have the
right, through the Maturity Date and at his option, to convert the outstanding principal and
accrued interest under the convertible note, in whole but not in part, into the Companys common
stock, at a per share conversion price equal to the closing price of the Companys common stock as
quoted on the Nasdaq Capital Market on the date prior to the date of such notice of conversion.
14
Line of Credit
On March 28, 2008, the Company entered into a credit agreement with Comerica Bank (Comerica)
providing for a non-revolving credit facility of up to $6.2 million from Comerica (the Comerica
Credit Agreement). Interest on borrowings under the Comerica Credit Agreement will bear interest
at the Prime Rate as publicly announced by Comerica, plus one percentage point, or at our election,
at the London Inter-Bank Offered Rate (LIBOR), plus 3.75 percentage points. The Comerica Credit
Agreement is secured by a deposit of $450,000 (funded during the second quarter of 2008) and a
pledge of all of the Companys assets, other than those assets pledged to CoBank, and by a
guarantee from Worsley. The Comerica Credit Agreement also requires that the Company maintain
minimum liquidity of $1.0 million, excluding the $450,000 security deposit, either in cash or in
the form of readily marketable securities, tested monthly. All outstanding principal and interest
under the Comerica Credit Agreement must be repaid by March 31, 2009. As of September 30, 2008,
the Company has drawn the full $6.2 million on this line.
On November 14, 2008, the Company entered into a modification agreement of the Comerica Credit
Agreement providing for the following: (i) interest on borrowings under the Comerica Credit
Agreement will bear interest at the one-month LIBOR, adjusted daily, plus 4.25 percentage points,
(ii) the minimum liquidity requirement of $1.0 million shall be suspended for the period beginning
September 30, 2008 and ending on December 31, 2008, (iii) the Company can utilize up to a maximum
of $300,000 of its security deposit for the sole purpose of meeting its payroll obligations, and
(iv) the net proceeds of a tax equity transaction must first be used to prepay all outstanding
principal and interest on the non-revolving credit facility.
Note 9. Capitalized Interest
Prior to commencement of commercial operations of the Companys Snowflake plant on June 10,
2008, the Company capitalized interest expense in accordance with SFAS No. 34,
Capitalization of
Interest Cost
, and SFAS No. 62,
Capitalization of Interest Cost in Situations Involving Certain
Tax-Exempt Borrowings and Certain Gifts and Grants
. The Company capitalized interest expense
associated with the construction of the Snowflake plant, net of the associated interest income
associated with tax-exempt borrowings under the ID Bonds. Interest rates on loans entered into in
association with the financing of the construction of the Snowflake plant were used as the basis
for the weighted average interest rate for capitalization of interest expense. The Companys
approximately $39.3 million ID Bonds, approximately $9.3 million construction loan, and
approximately $1.5 million term loan carry interest rates of 4.5%, 5.2%, and 7.2%, respectively (ID
Bonds and construction loan reflect the floating to fixed interest rate swaps as described in Note
11). The resulting weighted average interest rate used in calculating capitalized interest was
approximately 4.7% during the periods subject to capitalization in 2008 and approximately 4.7%
during the three and nine months ended September 30, 2007.
Interest income associated with tax-exempt borrowings was approximately $6,000 for the nine
months ended September 30, 2008. Interest income of the Predecessor associated with tax-exempt
borrowings was approximately $417,000 and $927,000 for the three and nine months ended September
30, 2007, respectively.
15
The following table summarizes project interest costs incurred and capitalized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project interest costs incurred
|
|
$
|
644
|
|
|
$
|
558
|
|
|
$
|
1,929
|
|
|
$
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project interest costs capitalized
|
|
$
|
|
|
|
$
|
417
|
|
|
$
|
1,132
|
|
|
$
|
927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Fair Value Measurements
The Company adopted the provisions of SFAS 157 as of January 1, 2008, with the exception of
the application of the statement to nonrecurring, nonfinancial assets and liabilities. SFAS 157
defines fair value as an exit price representing the expected amount we would receive to sell an
asset or pay to transfer a liability in an orderly transaction between market participants at the
measurement date. SFAS 157 established a fair value hierarchy, which prioritizes the inputs used
in measuring fair value into three broad levels as follows:
Level 1 Valuation is based upon quoted prices in active markets for identical assets or
liabilities.
Level 2 Valuation is based upon quoted prices for similar assets and liabilities in
active markets, or other inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
Level 3 Valuation is based upon other unobservable inputs that are significant to the
fair value measurement.
The classification of fair value measurements within the hierarchy is based upon the lowest
level of input that is significant to the measurement.
The following tables present the assets and liabilities measured at fair value on a recurring
basis categorized by the level of inputs in the valuation of each asset and liability (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
As of
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities (1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (2)
|
|
$
|
3,477
|
|
|
$
|
|
|
|
$
|
3,477
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,477
|
|
|
$
|
|
|
|
$
|
3,477
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
As of
|
|
|
Active
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2007
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities (1)
|
|
$
|
5,991
|
|
|
$
|
|
|
|
$
|
5,991
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,991
|
|
|
$
|
|
|
|
$
|
5,991
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (2)
|
|
$
|
4,602
|
|
|
$
|
|
|
|
$
|
4,602
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,602
|
|
|
$
|
|
|
|
$
|
4,602
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair values of the Companys available-for-sale securities are based on
broker-dealer quotations. During the three months ended March 31, 2008, all of the
Companys available-for-sale securities matured or were liquidated and the proceeds
were invested in cash equivalents.
|
|
(2)
|
|
The fair values of the Companys derivative instruments are based on the
discounted expected future cash flows of the interest rate swaps based on LIBOR yield
curves at the reporting date.
|
Note 11. Derivative Financial Instruments
The Company records derivative financial instruments at fair value in accordance with SFAS No.
133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities,
and its
amendments in SFAS Nos. 137 and 149, and per the guidance set forth in SFAS 157 as discussed in
Note 10. SFAS 133 requires entities to recognize all derivatives as either assets or liabilities
in the statement of financial position and to measure those instruments at fair value. In
addition, an entity may elect to apply special hedge accounting if certain conditions are met. The
effective portion of changes in the fair value of a derivative instrument designated and qualifying
as a cash flow hedging instrument (a cash flow hedge) is reported as a component of other
comprehensive income. The ineffective portion of changes in the fair value of cash flow hedges is
recognized currently in earnings.
As of September 30, 2008, the Company has two interest rate swaps to assist in management of
the cost of debt, which are described more fully below. These interest rate swaps do not qualify
for accounting treatment as cash flow hedges in accordance with SFAS 133; therefore, any changes in
their fair values are recognized in current earnings.
17
On September 8, 2006, the Predecessor entered into two floating to fixed interest rate swap
agreements related to construction project debt associated with the Snowflake plant that
economically fixes the interest rate on its ID Bonds and a portion of the SWMP Construction Loan.
The fair value of the Companys interest rate swap agreements is the estimated amount the Company
would receive or pay to terminate the agreement based on the net present value of the future cash
flows as defined in the swap agreements. The Companys liability, measured at fair value, related
to these swap agreements was $3,477,000 and $4,602,000 as of September 30, 2008 and December 31,
2007, respectively. These swap agreements are summarized as follows:
|
|
|
|
|
|
|
SWAP 1
|
|
SWAP 2
|
|
|
(ID Bonds)
|
|
(SWMP Construction Loan)
|
|
|
|
|
|
Notional amount at September 30, 2008
|
|
$39,250,000
|
|
$8,333,000
|
Notional amount at December 31, 2007
|
|
$39,250,000
|
|
$6,289,000
|
Trade date
|
|
9/8/2006
|
|
9/8/2006
|
Termination date
|
|
1/2/2026
|
|
1/2/2014
|
Benchmark rate hedged
|
|
Muni Bond Index Rate (BMA)
|
|
3 Month LIBOR
|
Item description
|
|
Designated Bond
|
|
Designated Loan
|
Fixed rate
|
|
4.5%
|
|
5.2%
|
Fair value of liability at September 30, 2008
|
|
$3,274,000
|
|
$203,000
|
Fair value of liability at December 31, 2007
|
|
$4,297,000
|
|
$305,000
|
Note 12. Segment Disclosures and Related Information
SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information,
requires
disclosures of certain information about operating segments in interim reporting periods. The
method for determining what information to report under SFAS No. 131 is based upon the management
approach, or the way that management organizes the operating segments within the Company, for
which separate financial information is available that is evaluated regularly by the Chief
Operating
Decision Maker (CODM) in deciding how to allocate resources and in assessing performance.
Our CODM is our Chief Executive Officer.
The Company currently operates in only one primary segment focused on acquiring, developing,
and operating biomass power generation facilities. As such, no additional segment disclosures are
presented related to revenues, profit or loss, or total assets for the three and nine months ended
September 30, 2008 and 2007.
Note 13. Commitments and Contingencies
In the discussion which follows, the existing commitments and contingencies are categorized
according to their origin (Catalytica, Snowflake Entities, post-merger Renegy). Regardless of
origin, all such commitments and contingencies described represent commitments and contingencies of
Renegy (Successor).
Catalytica-related
Eaton sale representations and warranties
In connection with the sale of its diesel fuel processing technology and associated assets to
Eaton in October 2006, Catalytica agreed to indemnify Eaton, through October 2008, for any breaches
of various representations and warranties made by Catalytica to Eaton in connection with the sale.
These indemnities are generally limited to the purchase price of $2.4 million.
SCR-Tech sale representations and warranties
In connection with the sale of Catalyticas SCR-Tech subsidiary to CoaLogix Inc. (CoaLogix)
in November, 2007, Catalytica is subject to customary representations, warranties, covenants, and
indemnification provisions whereby Catalytica agrees to indemnify CoaLogix for breaches of the
representations, warranties, and covenants as set forth in the Stock Purchase Agreement.
Indemnification obligations are limited to $9,600,000 in connection with losses relating to the
breach by Catalytica of certain specified indemnity items or to certain liabilities of Catalytica
as set forth in the Stock Purchase Agreement and are generally subject to a deductible of $192,000
and a cap of $1,920,000. The representations and warranties survive through February 7, 2009,
except for representations and warranties related to environmental laws, which survive through
November 7, 2010. In addition, Renegy guarantees payment of any of Catalyticas indemnification
obligations under the Stock Purchase Agreement.
18
The Company has not recorded any liabilities related to possible breaches of
Catalytica-related representations, warranties, covenants or agreements, as the Company believes
the likelihood of claim for each to be remote.
Snowflake Entities-related
The Company has a ten-year commitment beginning September 1, 2006, with annual renewal
options, to operate the Heber, Arizona, Green Waste site. The Company receives approximately
$2,600 per month to operate the site and is able to utilize wood waste materials (at no charge) to
produce wood chips that will be burned in the power generation process.
The Company is obligated, pursuant to several contracts primarily with the U.S. Forest Service
(the Forest Service), to purchase, cut, and remove timber from various forests. Certain
contracts require the payment by the Forest Service of a stumpage fee for the right to remove
organic materials, to be paid per each one hundred cubic feet. Other contracts stipulate a subsidy
to be paid per acre or per ton by the Forest Service for the removal and thinning of Forest Service
lands and have definitive commitments as to the timing of services to be rendered.
Pursuant to the CoBank credit agreements, upon commencement of commercial operations of the
Snowflake plant, as defined, the Company must maintain a 2
1
/
2
year availability of fuel, other than
paper sludge, either on the plant site or available from counterparties under contract, provided
that at least a one year stockpile of such availability of fuel, other than paper sludge, is on the
plant site at all times.
The Company is subject to various legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, management does not believe the
outcome of any of these matters will have a material adverse effect on the Companys financial
position, results of operations or cash flows.
Post-merger Renegy-related
Merger Transaction representations and warranties
In connection with the Contribution and Merger Agreement, Worsley has agreed to indemnify
Catalytica and Renegy and Renegys respective affiliates, directors, officers and employees from
and against any and all damages arising out of, resulting from or in any way related to a breach
of, or the failure to perform or satisfy any of the representations, warranties, covenants and
agreements made by any of the Snowflake entities and/or Worsley in the Contribution and Merger
Agreement. Renegy and Catalytica have agreed to indemnify Worsley from and against any and all
damages arising out of, resulting from or in any way related to (i) a breach of, or the failure to
perform or satisfy any of the representations, warranties, covenants and agreements made by
Catalytica in the Contribution and Merger Agreement, and (ii) the construction cost guarantee of
Worsley to CoBank up to $2.0 million. The respective obligations of the parties to indemnify for
any breaches of their respective representations and warranties will survive until April 1, 2009,
except for any indemnification claim resulting from fraud or intentional misrepresentation. No
indemnification is required until the aggregate liability for a party exceeds $250,000, and the
indemnity obligations of each party are subject to a $10.0 million cap, except in the case of fraud
or intentional misrepresentation. The indemnification obligations of Worsley may be satisfied in
cash or shares of the Companys common stock based on a value of $12.25 per share, rounded up to
the nearest whole share. Renegys obligation to indemnify Worsley may be satisfied by paying cash
or shares of Renegy common stock, grossed up to reflect Worsleys anticipated 58.5% ownership of
Renegys outstanding common stock, which percentage was projected at the time of execution of the
Contribution and Merger Agreement to exist at consummation of the Contribution and Merger Agreement
using the treasury stock method. Specifically, Renegy may pay cash to Worsley in an amount equal
to (i) the quotient obtained by dividing (a) the amount of the damages for which indemnification is
being made by (b) 0.415, less (ii) the amount of such damages (the adjusted damages) or issue to
the Worsley Trust such number of Renegy shares equal to the quotient obtained by dividing (i) the
adjusted damages by (ii) $12.25, rounded up to the nearest whole share.
In addition, in connection with the Contribution and Merger Agreement, the Company has agreed
to indemnify the Worsleys for any claims arising under their guarantee to Salt River Project
relating to the payment of all sums owed by Snowflake to Salt River Project under its power
purchase agreement with Snowflake and for maintaining a net worth of at least $35 million.
19
Overrun Guaranty
Pursuant to a sponsor guaranty, dated September 1, 2006 between R. Worsley and C. Worsley and
CoBank ACB, R. Worsley and C. Worsley guaranteed the payment of all project costs in excess of the
project cost budget of approximately $67.3 million (the Project Cap), as defined in the credit
agreement dated September 1, 2006, as amended, by and among Renegy LLC, Renegy Trucking, Snowflake
and CoBank ACB. Pursuant to the Contribution and Merger Agreement, the Company agreed to pay up to
$2.0 million of project costs in excess of the Project Cap. Further, pursuant to an Overrun
Guaranty dated May 8, 2007 (the Overrun Guaranty), the Worsleys agreed to pay to Renegy the
amount by which project costs exceed the sum of the Project Cap and $2.0 million in sufficient time
for the Company to be able to pay such excess project costs. A committee of independent directors
(the Special Committee), acting on behalf of the Company, has the authority to enforce the
Worsleys obligations under the Overrun Guaranty.
In February 2008, the Company entered into a Letter Agreement (the Letter Agreement) with
Worsley, under which the Company will be responsible for the payment of an additional $6.0 million
of capital costs beyond the Project Cap and the $2.0 million already payable by the Company as
described above. The Letter Agreement provides the Company will have no obligation to pay for any
project costs beyond the $2.0 million previously agreed to and the $6.0 million described in this
paragraph. In connection with the Letter Agreement, Worsley deposited $5.0 million cash in the
Companys general operating bank account on March 4, 2008.
On August 13, 2008, the Company entered into a Second Letter Agreement (the Second Letter
Agreement) with Worsley to finalize all amounts owed under the Overrun Guaranty, as the Snowflake
Plant had commenced commercial operations as of June 10, 2008 as such term is defined in the
Overrun Guaranty. The Special Committee and Worsley agreed that Worsleys obligation to pay for
the remaining project cost overruns incurred prior to the commencement of commercial operations
would be satisfied by the $5.0 million deposited by Worsley to the Company in March 2008 and
funding by
Worsley of the debt service reserve (as defined in the CoBank debt agreements, the DSR)
requirements in the amount of approximately $2.8 million prior to the CoBank term conversion date,
which is expected to occur on or before December 31, 2008, through the direct deposit of funds or a
letter of credit. In addition, the parties agreed that Worsley would be released from his
obligation with respect to the DSR to the extent the Snowflake plant operates in excess of certain
output parameters. Specifically, Worsleys obligation to fund the DSR would be reduced monthly in
an amount equal to 70% of the revenue on daily output in excess of 576 megawatt-hours (MWh).
Registration Rights Agreement
The Company entered into a Registration Rights Agreement with the Worsley Trust pursuant to
which Renegy has agreed, at its expense, to prepare and file a registration statement pursuant to
Rule 415 under the Securities Act of 1933, as amended covering the resale from time to time of all
of the shares of our common stock issued to the Worsley Trust in connection with the Merger
Transaction as well as all shares of common stock issuable upon exercise of the warrants issued to
the Worsley Trust. Renegy must prepare and file such registration statement upon the request of
the Worsley Trust at any time from and after July 1, 2008, provided that the Company may delay any
requested registration for up to 60 consecutive days in any calendar year (or 120 days in the
aggregate in any calendar year) if and for so long as certain conditions exist.
Susanville Land Lease and Option to Purchase
In connection with a lease agreement entered into in February 2008, the Company is leasing
approximately 40 acres of land on which an idle biomass plant owned by the Company is located.
This lease provides for monthly lease payments of $30,000 commencing January 31, 2008 and
terminating no later than January 30, 2013. Simultaneously with entering in the lease, for
consideration of $100,000, the Company entered into an Option Agreement (the Option Agreement)
which provides the option to acquire the land for a purchase price of $80,000 per acre. The Option
Agreement provides that the initial $100,000 payment shall be credited against the purchase price
upon exercise of the purchase option. In addition, the lease provides that 100% of the first 24
months of lease payments made shall apply to the purchase price if exercised during the first 24
months, or 50% of all lease payments made shall apply to the purchase price if exercised anytime on
or after the first day following the 24
th
month of the lease term.
20
Catalyst Paper Dispute
The Company has contracted the services of Catalyst Paper (Catalyst), the successor entity
to Abitibi Consolidated, to operate its Snowflake plant whereby Catalyst provides certain
personnel, operates and maintains the power plant, and performs certain other functions as defined
in the contract. From May through September, 2008, Catalyst submitted invoices to the Company,
portions of which the Company believes are outside the terms of the contract. In October 2008, the
Company submitted a formal letter of dispute to Catalyst which described the nature of the disputed
items and reasons why the Company believes them to be outside the terms of the contract. The total
amount of the items being disputed is approximately $321,000. Per SFAS No. 5,
Accounting for
Contingencies
, an estimated loss from a loss contingency shall be accrued by a charge to income if
(i) it is probable a liability had been incurred, and (ii) the loss can be reasonably estimated.
As the Company does not believe it is probable a liability had been incurred, no charge was accrued
for the three and nine months ended September 30, 2008. The Company anticipates resolution of this
matter with Catalyst during the fourth quarter of 2008.
Note 14. Warrants
In connection with the Merger Transaction, the Company issued 2,473,023 common stock purchase
warrants to the Worsley Trust. Each warrant entitles the Worsley Trust the right to purchase one
share of the Companys common stock at an exercise price of $16.38 per share, vesting in three
tranches conditioned upon the Companys achievement of certain renewable energy-related milestones
and expiring at specified times no later than six years following the closing of the Merger
Transaction.
The first tranche provides for vesting if the Companys Snowflake biomass plant achieved
commercial operation by no later than July 1, 2008. As the Company achieved commercial operations
under its PPAs with APS and SRP on June 10, 2008, the first tranche of 824,341 warrants vested and
became exercisable on that date.
Note 15. Subsequent Events
In a meeting of the Board of Directors held on October 1, 2008, the members of the Board
agreed to accept payment for third quarter board retainer and committee fees in the form of
restricted stock in lieu of cash payment. Payment for third quarter services is to be based on the
closing market price of the Companys common stock on October 1, 2008 ($2.00 per share), vesting in
full on December 31, 2008, subject to each respective members continued service on the Board
through that date. In addition, the members agreed to payment for fourth quarter retainer and
committee fees in the form of restricted stock in the following amounts: (i) fourth quarter
retainer 3,750 shares per member, (ii) 5,000 additional shares for Lead Director services, (iii)
1,250 shares for the chairperson of each committee meeting held, and (iv) 750 shares for each
non-chairperson member in attendance at each committee meeting. Any restricted stock issued in the
fourth quarter will vest in full on December 31, 2008, subject to the recipients continued service
on the Board through that date.
On October 1, 2008, the Company and Mr. Worsley entered into a Letter Agreement which provides
that 50% of Mr. Worsleys base salary to be earned for the fourth quarter will be payable in
restricted stock instead of cash. Accordingly, Mr. Worsleys base salary, which is currently
$400,000 on an annual basis, will be payable as follows for the fourth quarter: (i) $50,000 will be
payable in cash in accordance with normal payroll practices, and (ii) $50,000 will be payable in
the form of 25,000 shares of the Companys restricted stock (based on the $2.00 closing price of
the Companys common shares on October 1, 2008), vesting in full on December 31, 2008, subject to
Mr. Worsleys continued employment with the Company.
On November 14, 2008, the Company entered into a modification agreement of the Comerica Credit
Agreement providing for the following: (i) interest on borrowings under the Comerica Credit
Agreement will bear interest at the one-month LIBOR, adjusted daily, plus 4.25 percentage points,
(ii) the minimum liquidity requirement of $1.0 million shall be suspended for the period beginning
September 30, 2008 and ending on December 31, 2008, (iii) the Company can utilize up to a maximum
of $300,000 of its security deposit for the sole purpose of meeting its payroll obligations, and
(iv) the net proceeds of a tax equity transaction must first be used to prepay all outstanding
principal and interest on the non-revolving credit facility.
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following section provides information which management believes is relevant to an
assessment and understanding of our financial condition and results of operations. This
information should be read in conjunction with the Consolidated Financial Statements and related
notes thereto and our 2007 Annual Report on Form 10-KSB.
Forward-Looking Statements
This Managements Discussion and Analysis and other parts of this Report on
Form 10-Q
and our
2007 Annual Report on
Form 10-KSB
contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that involve risks and uncertainties. The words anticipates, believes,
estimates, expects, intends, plans, will and similar expressions identify forward-looking
statements, which are based on information available to us on the date hereof. We assume no
obligation to publicly update or revise any such forward-looking statements.
You should not place undue reliance on forward-looking statements. They are subject to known
and unknown risks, uncertainties, and other factors that may cause our actual results to be
materially different from any future results expressed or implied by the forward-looking
statements.
Should the underlying assumptions associated with these forward-looking statements, or should
one or more of the risks or uncertainties described in the section titled Risk Factors located
within Part I, Item 1 of our 2007 Annual Report on
Form 10-KSB
and elsewhere in our 2007 Annual
Report on
Form 10-KSB
, as well as in this
Form 10-Q
occur, our actual results could differ
materially from those anticipated in these forward-looking statements.
Basis of Presentation
The following discussion and analysis of financial condition and results of operations covers
periods prior to the consummation of the Merger Transaction (as defined herein) and periods
subsequent to the consummation of the Merger Transaction. Information presented for the three and
nine months ended September 30, 2008 is based on the unaudited
financial statements of the Company (as defined herein). Information presented for the three
and nine months ended September 30, 2007 is based on the unaudited financial statements of the
Snowflake entities (as defined herein).
Introduction
Renegy is a renewable energy company focused on acquiring, developing and operating a growing
portfolio of biomass to electricity power generation facilities to address an increasing demand for
economical power relying on alternative energy sources. We seek to grow our portfolio of renewable
energy assets through the acquisition of existing biomass to electricity facilities (both operating
and idle), in addition to the development, construction and operation of new biomass facilities.
Other business activities include an established fuel aggregation and wood products business, which
harvests, collects and transports forest thinning and woody waste biomass fuel to our power plants,
and which sells logs, shaved wood products and other high value wood by-products to provide
additional value to our primary business operations.
22
History
Renegy was incorporated on May 1, 2007, as a wholly-owned subsidiary of Catalytica Energy
Systems, Inc. (Catalytica), a Delaware corporation, for purposes of completing the transaction
contemplated by the Contribution and Merger Agreement (the Contribution and Merger Agreement)
dated as of May 8, 2007, as amended, by and among (i) the Company, (ii) Catalytica, (iii)
Snowflake Acquisition Corporation (Merger Sub), a Delaware corporation and wholly-owned
subsidiary of the Company, (iv) Renegy, LLC (Renegy LLC), an Arizona limited liability company,
(v) Renegy Trucking, LLC (Renegy Trucking), an Arizona limited liability company, (vi) Snowflake
White Mountain Power, LLC, an Arizona limited liability company (Snowflake and, together with
Renegy LLC and Renegy Trucking, the Snowflake entities), (vii) Robert M. Worsley (R. Worsley or
Mr. Worsley), (viii) Christi M. Worsley (C. Worsley) and (ix) the Robert M. Worsley and Christi
M. Worsley Revocable Trust (the Worsley Trust and, together with R. Worsley and C. Worsley,
Worsley).
On October 1, 2007, the parties to the Contribution and Merger Agreement completed the
transaction pursuant to the terms of the Contribution and Merger Agreement. In the transaction,
Catalytica and the Snowflake entities combined their businesses through the merger of Merger Sub
with and into Catalytica, with Catalytica surviving the merger, and the concurrent contribution to
Renegy by the Worsley Trust, the beneficial owners of the Snowflake entities, of all of the
outstanding equity interests of the Snowflake entities (the Merger Transaction). As a result of
the Merger Transaction, Catalytica and the Snowflake entities became wholly-owned subsidiaries of
Renegy.
The Snowflake entities were formed as single member Arizona limited liability companies in
September 2004. Each of the Snowflake entities was organized to run in perpetuity or until
terminated by the Board of Managers.
Overview
Our first project is a 24 megawatt (MW) biomass plant near Snowflake, Arizona (the
Snowflake plant). This biomass facility, which began generating and selling commercial power
during the second quarter of 2008, has 15- and 20-year power purchase agreements (PPAs) in place
with Arizona Public Service Co. (APS) and Salt River Project (SRP), respectively, Arizonas two
largest electric utility companies. The PPAs provide that all of the power generated over the
respective term is pre-sold for the length of each respective PPA.
In November 2007, we acquired an idle 13 MW biomass plant in Susanville, California with the
intention of refurbishing and restarting it. Because we will be required to apply for new air
permits for the plant, we may not refurbish and restart the plant until early 2010. This timing
continues to be subject to the prospects and timing associated with securing the financing
necessary to refurbish the plant, obtaining any required construction, operation and environmental
permits, identifying and securing necessary fuel sources at a cost-effective rate, entering into a
PPA for the power output of the plant, and other activities necessary to restart and operate the
plant.
We have signed letters of intent for the acquisition of two additional biomass facilities; one
related to an operating 20 MW facility in Loyalton, California and another related to an idle 18 MW
facility in Ione, California. Although the formal letter of intent related to the Ione opportunity
has expired, we remain engaged in negotiations to acquire both biomass facilities, subject to
Renegys completion of final due diligence, entering into definitive purchase agreements for the
plants, securing necessary financing, and certain other closing conditions.
As of the date of this filing, we believe our available cash and cash equivalents, our
restricted cash balances, the funding by Worsley of the DSR pursuant to the Second Letter
Agreement, and cash generated by our Snowflake operations are not sufficient to complete the
Susanville plant or either acquisition or to fund our operations as currently conducted. We are
aggressively seeking third party debt and equity financing and are negotiating a potential sale of
the Company. Additionally, we are negotiating a potential transaction to monetize production tax
credits and other tax attributes of our Snowflake plant. If we are unable to secure additional
financing from Worsley or third parties in the very near future, or otherwise extend the Companys
cash resources, we would be forced
to cease operations. See Liquidity and Capital Resources for further discussion.
23
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an
on-going basis, we evaluate our estimates and judgments based on historical experience and various
other factors we believe to be reasonable under the circumstances, the results of which form the
basis of our judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results would differ from these estimates under different
assumptions or conditions.
Our critical accounting policies and estimates are disclosed in our December 31, 2007 Annual
Report on Form 10-KSB. There have not been any material changes to the critical accounting
policies and estimates disclosed in the aforementioned Form 10-KSB during the nine months ended
September 30, 2008, except as follows:
Impairment of Long-Lived Assets
. In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of such assets may
not be fully recoverable. The Companys Snowflake plant began generating test and commercial power
during the second quarter of 2008. As anticipated during this startup phase, the plant experienced
intermittent outages during the second and third quarters. The Companys ability to recover its
investment in the Snowflake plant is dependent on materialization of future cash flows generated
from operation of the plant. If unplanned outages were to occur in the future, the Company may
need to revise future cash flow estimates regarding the plant operations, which could lead to an
impairment charge if the projected cash flows are less than the carrying value of the plant. As of
September 30, 2008, the Company does not believe an impairment has occurred, has not performed an
impairment test, nor has it established an impairment reserve.
24
Results of Operations
The following table presents the results of operations for the three and nine months ended
September 30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power generation
|
|
$
|
3,179
|
|
|
$
|
|
|
|
$
|
3,179
|
|
|
$
|
4,100
|
|
|
$
|
|
|
|
$
|
4,100
|
|
Wood product and other
|
|
|
140
|
|
|
|
217
|
|
|
|
(77
|
)
|
|
|
676
|
|
|
|
997
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
3,319
|
|
|
|
217
|
|
|
|
3,102
|
|
|
|
4,776
|
|
|
|
997
|
|
|
|
3,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
3,917
|
|
|
|
|
|
|
|
3,917
|
|
|
|
5,716
|
|
|
|
|
|
|
|
5,716
|
|
Cost of wood product operations
|
|
|
244
|
|
|
|
(1,984
|
)
|
|
|
2,228
|
|
|
|
2,064
|
|
|
|
3,311
|
|
|
|
(1,247
|
)
|
General, administrative and development
|
|
|
2,787
|
|
|
|
337
|
|
|
|
2,450
|
|
|
|
8,698
|
|
|
|
814
|
|
|
|
7,884
|
|
Loss (gain) on sale or disposal of assets
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
(157
|
)
|
|
|
87
|
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
6,948
|
|
|
|
(1,649
|
)
|
|
|
8,597
|
|
|
|
16,321
|
|
|
|
4,212
|
|
|
|
12,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss )
|
|
|
(3,629
|
)
|
|
|
1,866
|
|
|
|
(5,495
|
)
|
|
|
(11,545
|
)
|
|
|
(3,215
|
)
|
|
|
(8,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17
|
|
|
|
141
|
|
|
|
(124
|
)
|
|
|
162
|
|
|
|
670
|
|
|
|
(508
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Interest expense
|
|
|
(898
|
)
|
|
|
(155
|
)
|
|
|
(743
|
)
|
|
|
(948
|
)
|
|
|
(662
|
)
|
|
|
(286
|
)
|
Other expense
|
|
|
(63
|
)
|
|
|
(36
|
)
|
|
|
(27
|
)
|
|
|
(264
|
)
|
|
|
(110
|
)
|
|
|
(154
|
)
|
Debt commitment fees
|
|
|
(265
|
)
|
|
|
(319
|
)
|
|
|
54
|
|
|
|
(791
|
)
|
|
|
(890
|
)
|
|
|
99
|
|
Change in fair value of derivative instruments
|
|
|
106
|
|
|
|
(1,201
|
)
|
|
|
1,307
|
|
|
|
1,125
|
|
|
|
588
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,732
|
)
|
|
$
|
296
|
|
|
$
|
(5,028
|
)
|
|
$
|
(12,242
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)
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$
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(3,619
|
)
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|
$
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(8,623
|
)
|
|
|
|
|
|
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Comparison of the three and nine month periods ended September 30, 2008 and 2007
Revenues.
The Snowflake plant began generating revenues related to the production of test
power in April 2008, then, in June 2008, commenced commercial operations in connection with our APS
and SRP power purchase agreements. Wood product and other revenues primarily resulted from the
sale of wood related products and from forest thinning services.
Total revenues increased by $3,102,000 to $3,319,000 for the three months ended September 30,
2008, as compared to $217,000 for the three months ended September 30, 2007. This increase was
primarily attributable to power generation revenues and wood shavings sales, partially offset by a
decrease in sales of lumber and mulch. Power generation revenues, which began in connection with
commencement of operations at the Snowflake plant during the second quarter of 2008, resulted in
the recognition of $3,179,000 from the generation of commercial power. Sales of pine shavings
materials increased by $90,000 as our wood shavings operations did not begin until late November
2007. Lumber sales decreased by $62,000 due to closure of our sawmill operations. Mulch sales
declined by $109,000 due to redirection of resources toward preparation and delivery of fuel for
operation of our Snowflake plant.
During the three months ended September 30, 2008, two customers accounted for 96% of our
revenues. During the three months ended September 30, 2007, two customers accounted for 65% of our
revenues.
25
Total revenues increased by $3,779,000, or 379%, to $4,776,000 for the nine months ended
September 30, 2008, as compared to $997,000 for the nine months ended September 30, 2007. This
increase was primarily attributable to power generation revenues and wood shavings sales, partially
offset by declines in lumber and mulch sales and forest thinning services. Power generation
revenues, which began in connection with commencement of operations at the Snowflake plant during
the second quarter of 2008, resulted in the recognition of $4,100,000 from the generation of test
and commercial power. Sales of pine shavings materials increased by $456,000 as our wood shavings
operations did not begin until late November 2007. Lumber sales decreased by $316,000 due to the
cessation of lumber production at our saw-mill in early 2007. Lumber sales of approximately
$323,000 during the first nine months of 2007 resulted from sales of existing inventory. Lumber
sales of approximately $7,000 during the first nine months of 2008 are reflective of a nearly
depleted lumber inventory. Revenues derived from forest thinning services decreased by $324,000,
due to our inability to gain access to the forests due to weather conditions during the first
quarter of 2008, a decline in subsidized versus non-subsidized thinning projects, and a reduction
in biomass fuel aggregation efforts in 2008. Mulch sales decreased by $132,000 due to redirection
of resources toward preparation and delivery of fuel for operation of our Snowflake plant.
During the nine months ended September 30, 2008, four customers accounted for 91% of our
revenues. During the nine months ended September 30, 2007, six customers accounted for 83% of our
revenues.
We believe the substantial majority of our 2008 revenues will be derived from the delivery of
electric power from our Snowflake plant pursuant to power purchase agreements with APS and SRP. We
believe 2008 total revenues will range between $8.0 million and $9.0 million, including
approximately $1.0 million of revenues from our wood product operations, driven primarily by our
wood shavings business. However, our revenue expectations are subject to significant uncertainty,
as they are heavily dependent upon the ongoing commercial operations of our Snowflake plant.
Plant Operating Expenses.
Plant operating expenses relate to expenses incurred in the power
generation process at our Snowflake plant and principally consist of biomass fuel burned in the
power generation process, direct labor, management wages, fringe benefits, outsourced labor and
services, insurance, depreciation, and utilities including electricity transmission fees, natural
gas, and electricity.
Plant operating expenses increased by $3,917,000 and $5,716,000 for the three and nine months
ended September 30, 2008 as compared to the three and nine months ended September 30, 2007,
respectively. The Snowflake plant began delivering test and commercial power during the second
quarter of 2008. Accordingly, all costs incurred during 2008 represent an increase as compared to
2007. Expenses incurred during the first quarter of 2008 were not material and were classified as
cost of wood product operations in the first quarter presentation.
Plant operating expenses reported for the nine months ended September 30, 2008 are not
necessarily indicative of expenses projected for the full year, as those expenses reflect costs
incurred for only two quarters, or a portion thereof. In addition, certain plant operating costs
incurred during the second and third quarters may not be indicative of normal quarters due to the
nature of power plant start-up inefficiencies.
Cost of Wood Product Operations.
Cost of wood product operations includes costs related to
wood products revenues and principally consists of the cost of wood shavings sold. In addition,
those costs include labor and fringe benefits, utilities, supplies, repairs and maintenance, and
depreciation which are expensed as period charges in periods for which there is no shavings
production.
Cost of wood product operations increased by $2,228,000 to $244,000 for the three months ended
September 30, 2008 as compared to a negative $1,984,000 for the three months ended September 30,
2007. The credit for the three months ended September 30, 2007 is primarily due to an insurance
reimbursement received during the third quarter of 2007 related to a fire loss claim. During the
second quarter of 2007, the wood chip piles located adjacent to the Snowflake plant site caught
fire, resulting in a loss of approximately $3.3 million. During the third quarter of 2007, an
approximately $3.0 million insurance reimbursement was recorded as a reduction of cost of wood
product operations. No such fire losses or insurance reimbursements occurred during 2008.
Non-capitalized fuel aggregation expenses decreased by $946,000. During 2007, we accounted for
biomass fuel as inventories, and in accordance with SFAS No. 151,
Inventory Costs
, abnormal costs
related to inefficiencies in inventory procurement and aggregation were recognized as current
period charges. Beginning in the second quarter of 2008, biomass fuel aggregation expenses are
capitalized as biomass fuel and are no longer classified as inventories. Accordingly, no biomass
fuel aggregation expenses were recognized as current period charges in the third quarter of 2008.
Costs related to sales of wood shavings increased by $182,000 due to the startup of wood shavings
operations in late November 2007.
26
Cost of wood product operations decreased by $1,247,000, or 38%, to $2,064,000 for the nine
months ended September 30, 2008 as compared to $3,311,000 for the nine months ended September 30,
2007. This decrease was primarily due to decreases in non-capitalized biomass fuel aggregation
expenses and the net fire losses incurred, partially offset by increases in cost of shavings
materials sold. Non-capitalized fuel aggregation expenses decreased by $1,594,000, for the same
reasons as noted above in the comparison of the three months ended September 30, 2008 to the same
period in 2007. Expenses related to fire losses, net of insurance reimbursement, decreased by
$368,000. Costs related to sales of wood shavings increased by $652,000 due to the startup of wood
shavings operations in late November 2007.
We believe 2008 cost of wood product operations will be lower than 2007, primarily due to the
capitalization of biomass fuel aggregation costs for the majority of 2008.
General, Administrative and Development (GA&D) Expenses.
GA&D includes wages and related
benefits, stock compensation, facilities and equipment rent, utilities, insurance, consulting and
professional services, legal, and accounting and auditing services. For the first nine months of
2007, GA&D included expenses incurred by the Snowflake entities. For the first nine months of
2008, GA&D reflects the combined expenses incurred by the Snowflake entities and Catalytica
following consummation of the Merger Transaction.
GA&D increased by $2,450,000 to $2,787,000 for the three months ended September 30, 2008 as
compared to $337,000 for the three months ended September 30, 2007. The increase was primarily due
to a $2,043,000 increase in various expenses resulting from the combination of the Snowflake
entities and Catalytica, reflecting incremental corporate administrative and management expenses,
including $498,000 in professional services and $360,000 in legal expenses associated with
investment banking and investor relations activities and other consultants assisting us with
exploring financing opportunities and evaluating prospects for our growth strategy, in addition to
work performed in various contract negotiations, corporate compliance, and Snowflake plant
construction cost overrun issues related to the Merger Transaction. Stock compensation expense
increased by $76,000 due to the issuance of incentive plan options and warrants to an outside
consultant. We also incurred a $250,000 charge resulting from the write-off of deposits made in
connection with our letter of intent to purchase the Ione, California biomass facility as the
exclusivity provisions related to the letter of intent expired during the third quarter of 2008.
In addition, rent expense increased by $90,000 related to the Susanville land lease entered into
during February 2008.
GA&D increased by $7,884,000 to $8,698,000 for the nine months ended September 30, 2008 as
compared to $814,000 for the nine months ended September 30, 2007. The increase was primarily due
to a $6,473,000 increase in various expenses resulting from the combination of the Snowflake
entities and Catalytica, reflecting incremental corporate administrative and management expenses,
including $1,094,000 in professional services, $1,223,000 in legal expenses, and $339,000 in
accounting and audit fees attributable to expenses incurred for investment banking and investor
relations activities and other consultants assisting us with exploring financing opportunities and
evaluating prospects for our growth strategy and fuel studies conducted jointly with a local
university; in addition to work performed in various contract negotiations, corporate compliance,
and plant construction cost overrun issues related to the Merger Transaction. Additionally, we
incurred $281,000 in payroll-related expenses during the nine months ended September 30, 2008in
connection with change of control retention provisions of the Merger Transaction. . Stock
compensation expense increased by $459,000 due to the issuance of incentive plan options and
warrants to an outside consultant. We also incurred a $250,000 charge resulting from the write-off
of deposits made in connection with our letter of intent to purchase the Ione, California biomass
facility as the exclusivity provisions related to the letter of intent expired during the third
quarter of 2008. Severance expense increased by $182,000 in connection with the termination of an
employee during the second quarter. Relocation and recruiting increased by $243,000 primarily due
to expenses associated with the employment of our chief operating officer in March 2008. In
addition, rent expense increased by $240,000 related to the Susanville land lease entered into in
February 2008.
We anticipate we will incur approximately $2.5 million GA&D for the fourth quarter of 2008,
excluding any potential restructuring expenses, reflecting significant public company expenses and
a high level of development expenses associated with the pursuit of our renewable energy growth
strategy.
Loss (Gain) on Sale or Disposal of Assets.
Gain on sale or disposal of assets increased by
$244,000 for the nine months ended September 20, 2008 as compared to the nine months ended
September 30, 2007. During the second quarter of 2007, the wood chip piles adjacent to the
Snowflake plant site caught fire resulting in a significant loss of our wood fuel supply and
causing damage to certain equipment. During the first quarter of 2008, we received a $160,000
insurance reimbursement related to equipment losses incurred and recorded a gain on sale or
disposal of assets. During the nine months ended September 30 2007, certain unrelated assets were
disposed at a loss of $87,000.
27
We do not anticipate any significant sales or disposals of assets that might result in a gain
or loss during the remainder of fiscal 2008.
Interest and Other Income.
Interest income is generated from money market and short-term
investments. Other income consists of other non-operating income which is not material for
separate presentation.
Interest income decreased by $124,000 and $508,000 during the three and nine months ended
September 30, 2008 as compared to the three and nine months ended September 30, 2007, respectively,
primarily due to declining cash and investment balances resulting from the funding of our
operations and plant construction.
During the first quarter of 2008, all of our short-term investments matured or were liquidated
and the proceeds were invested in cash equivalents.
Interest and Other Expense.
Interest expense reflects amounts incurred under long-term debt,
capital lease, line of credit, and convertible note obligations. Other expense reflects other
non-operating expenses, primarily related to amortization of capitalized deferred financing costs
incurred in connection with the issuance of project debt financing associated with our Snowflake
plant.
Interest expense increased by $743,000 and $286,000 during the three and nine months ended
September 30, 2008 as compared to the three and nine months ended September 30, 2007, respectively.
These increases were due to the following factors: (i) per FAS No. 62,
Capitalization of Interest
Cost in Situations Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants
, interest
earned on our restricted cash reduces the amount of interest capitalized. Interest income on cash
balances restricted for use in construction of our Snowflake plant declined between periods and, as
a result, interest expense associated with construction of our Snowflake plant decreased on a net
basis due to increased capitalization, (ii) upon commencement of commercial operations at our
Snowflake plant near the end of the second quarter of 2008, capitalization of interest expense
incurred in connection with the Snowflake plant construction ceased, (iii) interest expense
associated with our Comerica line of credit began near the end of the second quarter of 2008, and
(iv) interest expense related to the Worsley convertible note began in the third quarter of 2008.
Effective beginning in the third quarter of 2008, all interest incurred under long-term debt,
capital leases and our other credit facilities is expensed in full. We anticipate interest expense
to range between $0.7 and $0.9 million for the fourth quarter of 2008.
Change in Fair Value of Derivative Instruments.
We have two floating to fixed interest rate
swap agreements related to construction project debt that economically fixes the interest rate on
our ID Bonds and a portion of our construction loan. These interest rate swaps do not qualify for
accounting treatment as cash flow hedges; therefore, changes in their fair values are recognized
currently in earnings as a component of other income (expense).
The change in fair value of derivative instruments resulted in charges of $106,000 and
$1,125,000 for the three and nine months ended September 30, 2008, respectively, a credit of
$1,201,000 for the three months ended September 30, 2007, and a charge of $588,000 for the nine
months ended September 30, 2007, respectively, due to changes in market interest rates and the
related impact on the fair value of the swap agreements.
Income Taxes.
Prior to consummation of the Merger Transaction, the Snowflake entities were
limited liability companies each with a single owner, and as such, each entity was disregarded for
federal and state income tax purposes. Accordingly, no federal or state income tax benefit was
recorded for the three and nine months ended September 30, 2007. Subsequent to consummation of the
Merger Transaction, the Company is taxed as a corporation; however, no federal or state income tax
benefit was recorded for the three and nine months ended September 30, 2008 because the expected
benefit, computed by applying statutory tax rates to the net loss, was offset by an increase in the
valuation allowance for deferred tax assets due to the uncertainty of future taxable income that
would allow us to realize deferred tax assets generated from such losses. We do not believe we
will incur any material income taxes in the foreseeable future.
28
Liquidity and Capital Resources
Our total cash and cash equivalents was approximately $1.9 million at September 30, 2008.
Additionally, we had approximately $1.3 million of restricted cash reserved for final payments
related to Snowflake plant construction and debt
service related to the Snowflake plant, in addition to approximately $0.5 million of
restricted cash designated as an interest reserve account in connection with our Comerica line of
credit, as of such date. Other balance sheet accounts, such as those included in working capital
(i.e. accounts receivable, inventories, trade payables and accrued liabilities), are not considered
significant in evaluating our liquidity and capital resources at September 30, 2008.
Our total cash, cash equivalents, restricted cash and short-term investments decreased by $0.7
million during the quarter ended September 30, 2008. This decrease was primarily driven by cash
used in operating activities of $4.1 million, capital expenditures of $1.0 million primarily
related to Snowflake plant construction, $0.2 million repayments of notes and leases payable;
partially offset by $4.2 million drawn on our line of credit, and proceeds from the issuance of
$0.4 million convertible debt to Worsley pursuant to the second letter agreement as described
below.
Pursuant to a sponsor guaranty, dated September 1, 2006 between R. Worsley and C. Worsley and
CoBank ACB, R. Worsley and C. Worsley guaranteed the payment of all project costs in excess of the
project cost budget of approximately $67.3 million (the Project Cap), as defined in the credit
agreement dated September 1, 2006, as amended, by and among the Snowflake entities and CoBank ACB
(CoBank). Pursuant to the Contribution and Merger Agreement, we agreed to pay up to $2.0 million
of project costs in excess of the Project Cap. Further, pursuant to an Overrun Guaranty dated May
8, 2007 (the Overrun Guaranty), the Worsleys agreed to pay to us the amount by which project
costs exceed the sum of the Project Cap and $2.0 million in sufficient time for us to be able to
pay such excess project costs. A committee of independent directors (the Special Committee),
acting on behalf of us, has the authority to enforce the Worsleys obligations under the Overrun
Guaranty.
In February 2008, we entered into a Letter Agreement (the Letter Agreement) with Worsley,
under which we will be responsible for the payment of an additional $6.0 million of project costs
beyond the Project Cap and the $2.0 million already payable by us as described above. The Letter
Agreement provides we will have no obligation to pay for any project costs beyond the $2.0 million
previously agreed to and the $6.0 million described in this paragraph. In connection with the
Letter Agreement, Worsley deposited $5.0 million cash in our general operating bank account in
March 2008.
In March 2008, we entered into a credit agreement with Comerica Bank (Comerica) providing
for a non-revolving credit facility of up to $6.2 million from Comerica (the Comerica Credit
Agreement). Interest on borrowings under the Comerica Credit Agreement will bear interest at the
Prime Rate as publicly announced by Comerica, plus one percentage point, or at our election, at the
applicable London Inter-Bank Offered Rate (LIBOR), plus 3.75 percentage points. The Comerica
Credit Agreement is secured by a deposit of $450,000 (funded during the second quarter of 2008 and
classified as restricted cash) and a pledge of all of our assets, other than those assets pledged
to CoBank, and by a guarantee from Worsley. The Comerica Credit Agreement also requires that we
maintain minimum liquidity of $1.0 million, excluding the $450,000 security deposit, either in cash
or in the form of readily marketable securities, tested monthly. All outstanding principal and
interest under the Comerica Credit Agreement must be repaid by March 31, 2009. As of September 30,
2008, we have drawn $6.2 million on this line.
On November 14, 2008, the Company entered into a modification agreement of the Comerica Credit
Agreement providing for the following: (i) interest on borrowings under the Comerica Credit
Agreement will bear interest at the one-month LIBOR, adjusted daily, plus 4.25 percentage points,
(ii) the minimum liquidity requirement of $1.0 million shall be suspended for the period beginning
September 30, 2008 and ending on December 31, 2008, (iii) the Company can utilize up to a maximum
of $300,000 of its security deposit for the sole purpose of meeting its payroll obligations, and
(iv) the net proceeds of a tax equity transaction must first be used to prepay all outstanding
principal and interest on the non-revolving credit facility.
In August 2008, we entered into a Second Letter Agreement (the Second Letter Agreement) with
Worsley, to finalize all amounts owed under the Overrun Guaranty, as the Snowflake Plant had
commenced commercial operations as of June 10, 2008 as such term is defined in the Overrun
Guaranty. The Special Committee and Worsley agreed that Worsleys obligation to pay for the
remaining project cost overruns incurred prior to the commencement of commercial operations would
be satisfied by the $5.0 million deposited by Worsley to the Company in March 2008 and funding by
Worsley of the debt service reserve (as defined in the CoBank debt agreements, the DSR)
requirements in the amount of approximately $2.8 million prior to the CoBank term conversion date,
which is expected to occur on or before December 31, 2008.
29
In addition, in light of potential overrun expenditures resulting in improvements to the
operation of the Snowflake plant, the parties agreed that Worsley would be released from his
obligation with respect to the DSR to the extent the Snowflake plant operates in excess of certain
output parameters. Specifically, Worsleys obligation to fund the DSR would be reduced monthly in
an amount equal to 70% of the revenue on daily output in excess of 576 megawatt-hours (MWh). In
addition, the parties
agreed pursuant to the Second Letter Agreement that the $0.6 million and $0.4 million
deposited by Worsley to the Company in June and July 2008, respectively, to address the possibility
of additional overruns incurred prior to commencement of commercial operations, would be converted
to a convertible note issued to Worsley, since these funds were determined to exceed those required
to cover such overrun amounts. The convertible note, which is subordinated to all other Company
secured debt and accrues interest at 10% per annum, will automatically convert if, prior to
December 31, 2009 (the Maturity Date), the Company obtains at least $5.0 million of equity
financing pursuant to the issuance of equity securities of the Company pursuant to a private
placement to one or more bona fide third party investors (an Equity Funding Event). Upon
completion of the Equity Funding Event, the entire principal amount of the convertible debt,
together with accrued interest thereon, will be converted as part of such financing into the same
type of equity securities issued in the Equity Funding Event and at the same purchase price for
such equity securities in the Equity Funding Event. In the event that the Company does complete an
Equity Funding Event prior to December 31, 2008, Worsley will then have the right, at his option
through the Maturity Date, to convert the outstanding principal and accrued interest under the
convertible note, in whole but not in part, into the Companys common stock, at a per share
conversion price equal to the closing price of the Companys common stock as quoted on the Nasdaq
Capital Market on the date prior to the date of such notice of conversion.
Pursuant to the Second Letter Agreement, Worsley committed to use commercially reasonable
efforts to provide the Company up to $4.0 million under the same terms as the convertible debt
described above to fund operations for the remainder of 2008. Disruptions in the capital and
credit markets experienced during 2008 have adversely affected our ability to raise equity capital
or borrow money from banks or other potential lenders, as well as Mr. Worsleys ability to borrow
money from banks to support his efforts to fund the Companys liquidity requirements. Based in
significant part on Worsleys guarantee and his personal credit, on November 14, 2008, Comerica
agreed to suspend our $1.0 million liquidity covenant through December 31, 2008 and allow the
Company to utilize up to a maximum of $300,000 of its security deposit under its line of credit for
the sole purpose of meeting payroll obligations (see above for further details). However, even
with commercially reasonable efforts, there can be no assurance that any additional funding from
Worsley or any further credit accommodations from Comerica will be forthcoming.
We began generating test and commercial power from our Snowflake plant during the second
quarter of 2008 and generated approximately $0.9 million and $3.2 million in revenues from related
electricity sales during the second and third quarters, respectively. We anticipate generating
positive cash flow from the operation of the Snowflake plant, in the range of $2 million to $3
million during the first full year of operation, excluding costs to stabilize such operations.
However, such cash flow will not be sufficient to cover our corporate overhead, including the
business development costs of seeking to acquire and/or develop additional power plants, and other
operating expenses, including our fuel aggregation and wood products business and various lease and
financing obligations for property, plant and equipment (collectively, our corporate overhead).
Our minimum long-term debt and lease principal payments for the next twelve months are expected to
total approximately $2.1 million. We anticipate we will incur approximately $3.6 million in
interest and other financing costs related to those credit facilities during the next twelve
months. In addition, $6.2 million borrowed under our Comerica line of credit is due for repayment
on March 31, 2009, and $1.0 million convertible debt due to Worsley is payable on December 31,
2009. We will not generate positive cash flow on a consolidated basis until we acquire or develop
additional power plants to allow us to cover our corporate overhead costs. Further, if the costs
to operate the Snowflake plant or costs to stabilize operations are higher than anticipated, or if
power production from the plant is lower than anticipated, we will have reduced cash flow from the
operation of the plant. It is possible that the plant could generate negative cash flow during
various periods, in which case we would be required to fund such negative cash flow.
We believe our available cash and cash equivalents at September 30, 2008, our restricted cash
balances, the funding by Worsley of the DSR pursuant to the Second Letter Agreement, and cash
generated by our Snowflake operations are not sufficient to fund our operations as currently
conducted. We are aggressively seeking third party debt and equity financing and are negotiating a
potential sale of the Company. Additionally, we are negotiating a potential transaction to
monetize production tax credits and other tax attributes of our Snowflake plant. The nature and
amount of any financing or the use of any capital to fund our current operating requirements and
future growth strategy cannot be predicted and will depend on the terms and conditions of any
particular transaction. We cannot anticipate the terms of any such financing or sale transaction.
Furthermore, no assurance can be given that we will be able to secure additional financing on
acceptable terms, or at all, or that a sale of the Company will occur. If we are unable to secure
additional financing from Worsley or third parties in the very near future, or otherwise extend
the Companys cash resources, we
would be forced to cease operations.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Renegy is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not
required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
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(a)
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Evaluation of disclosure controls and procedures
. Our management evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective as of September 30, 2008 to ensure that information
we are required to disclose in reports that we file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
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(b)
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Changes in internal control over financial reporting.
There was no change in our
internal control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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31
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Although we may be subject to routine litigation that is incidental to our business from time
to time in the ordinary course of our business, we are not currently a party to any material legal
proceeding.
Item 1A. RISK FACTORS
Renegy is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not
required to provide the information required under this item. Nonetheless, in addition to the
other information set forth in this report, you should carefully consider the risk factors set
forth within Part 1, Item 1. Description of Business in our Annual Report on Form 10-KSB for the
year ended December 31, 2007, which could materially and adversely affect the value of our
business, financial condition or future operating results. These risk factors may not be
exhaustive, and new risks emerge from time to time. There have not been any material changes to
the risk factors disclosed in the above-mentioned Form 10-KSB during the nine months ended
September 30, 2008, except as follows:
We may not be able to raise the additional capital we need on favorable terms, or at all.
Renegy has gone through tremendous efforts to raise capital through debt or equity financing
since consummation of the Merger Transaction. To-date, we have been unsuccessful in raising the
capital necessary to execute our growth strategy. Cash flows from the operation of the Snowflake
plant are not sufficient to cover our corporate overhead, including the business development costs
of seeking to acquire and/or develop additional power plants, and other operating expenses. We
will not generate positive cash flow on a consolidated basis until we acquire or develop additional
power plants to allow us to cover those expenses. If we are unable to secure additional financing
from Worsley or third parties in the very near future, or otherwise extend the Companys cash resources, we would be forced to cease
operations.
We may be unable to complete our assessment of the effectiveness of our internal controls over
financial reporting in a timely manner.
Effective internal controls are necessary for us to provide reliable financial reports and to
effectively detect and prevent fraud. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
under currently published SEC rules, beginning with our fiscal year ended December 31, 2008, we
will be required to perform an assessment of the effectiveness of our internal control over
financial reporting and publicly disclose the assessment in our Annual Report on Form 10-K. We may
be unable to complete our evaluation, enhancement and assessment of internal control over financial
reporting, comply with all of our reporting obligations and successfully complete the procedures
and certification requirements of Section 404 by the time that we are required to file our Annual
Report on Form 10-K. In such event, we may not then be current in our SEC filings.
We may reverse-split and/or deregister our common stock which could negatively impact the market
price of our common stock, availability of public information regarding our Company, and the
ability to trade our common stock.
In light of internal control and other public company requirements, as well as public company
costs, we may consider taking action to deregister our common stock under the Securities Exchange
Act of 1934. We may consider this alternative in order to enhance our operating resources by
reducing public company costs, such as the costs of maintaining internal controls and procedures
and complying with the provisions of Section 404. In order to deregister our common stock, we
would need to reduce our total number of stockholders to less than 300. To accomplish this, we
would likely need to perform a reverse stock-split. Further, we would need to utilize cash to
purchase partial shares resulting from the reverse stock-split. If we reverse-split and/or
deregister our common stock, there may be an adverse effect on the market price of our common stock
and there will likely be less information about us available to shareholders than is currently
contained in the periodic reports that we file pursuant to the Exchange Act. The deregistration of
our common stock would result in our common stock no longer being eligible for quotation on the
Nasdaq Capital Market, although we expect our common stock would continue to be traded over the
counter and quoted on the Pink Sheets quotation service.
32
If the national and worldwide financial crisis intensifies, potential disruptions in the capital
and credit markets may adversely affect our businesses, including the availability and cost of
short-term funds for liquidity requirements, our ability to meet long-term commitments; each of
which could adversely affect our results of operations, cash flows, and financial condition.
Our growth strategy depends upon the capital markets to meet our capital requirements to
expand our operations, and our business operations rely in part on the capital markets to meet our
financial commitments and short-term liquidity requirements if funds are not available from our
operations. Disruptions in the capital and credit markets, as have been experienced during 2008,
could adversely affect our ability to borrow money from banks or other potential lenders. Our
access to funds under any potential credit facility will depend on the ability of financial
institutions or other lenders to commit to lend funds to us. In the event we enter into credit
facilities with financial institutions or other lenders, those parties may not be able to meet
their funding commitments to us if they experience shortages of capital and liquidity, or if they
experience excessive volumes of borrowing requests from us and other borrowers within a short
period of time.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In June and July 2008, Robert M. Worsley, the Companys Chief Executive Officer, deposited
$0.6 million and $0.4 million cash, respectively, in the Companys general operating bank account
to pay for potential project costs overruns related to the Snowflake power plant that he had
guaranteed pursuant to certain agreements with the Company. Such funds were subsequently
determined to exceed those required to cover such overrun amounts. As a result, the Company and
Mr. Worsley agreed to convert such advances into a convertible note issued to Mr. Worsley on August
13, 2008. The convertible note, which is subordinated to all other Company secured debt and
accrues interest at 10% per annum, will automatically convert if, prior to December 31, 2009 (the
Maturity Date), the Company obtains at least $5.0 million from the issuance of equity securities
of the Company pursuant to a private placement to one or more bona fide third party investors (an
Equity Funding Event). Upon completion of an Equity Funding Event, the entire principal amount
of the convertible debt, together with accrued interest thereon, will be converted as part of such
financing into the same type of equity securities issued in the Equity Funding Event and at the
same purchase price for such equity securities in the Equity Funding Event. In the event that the
Company does not complete an Equity Funding Event prior to December 31, 2008, Worsley will have the
right, through the Maturity Date and at his option, to convert the outstanding principal and
accrued interest under the convertible note, in whole but not in part, into the Companys common
stock at a per share conversion price equal to the closing price of the Companys common stock as
quoted on the Nasdaq Capital Market on the date prior to the date of such notice of conversion.
The issuance of the convertible note to Mr. Worsley was exempt from registration based on
Section 4(2) of the Securities Act of 1933, as amended. The issuance involved only Mr. Worsley, who
has significant knowledge of the Company and acquired the security without a view toward public
distribution thereof.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 25, 2008, at the Companys 2008 Annual Meeting of Stockholders, a quorum of
stockholders of the Company approved the following proposals: (1) the election of one Class I
Director to serve a three-year term, and (2) to approve the amended and restated 2007 Equity
Incentive Plan.
The Companys Board of Directors currently consists of seven directorships, of which two are
currently vacant. In accordance with the Companys Certificate of Incorporation, the Board is
divided into three classes, with each director serving a three-year term, or until his or her
successor has been duly appointed or elected and qualified, and with one class being elected at
each years Annual Meeting. There is currently one vacancy in each of the Class I and Class II
classes.
The Class I directors consists of two directors. Richard A. Abdoo was elected during this
years Annual Meeting. The other Class I directorship is currently vacant. The Directors whose
terms of office continued after the meeting were William B. Ellis, Ricardo B. Levy, Susan F.
Tierney, and Robert M. Worsley.
33
The proposals described above were voted on at the Annual Meeting, and the number of votes
cast with respect to each proposal is summarized as follows:
Proposal No. 1 Election of Director
|
|
|
|
|
|
|
|
|
Nominee
|
|
For
|
|
|
Withheld
|
|
|
|
|
|
|
|
|
|
|
Richard A. Abdoo
|
|
|
5,390,555
|
|
|
|
50,891
|
|
Proposal No. 2 Approval of Amended and Restated 2007 Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker
|
For
|
|
Against
|
|
Abstain
|
|
Non-Votes
|
|
|
|
|
|
|
|
4,640,178
|
|
273,021
|
|
37,386
|
|
490,861
|
Item 5. OTHER INFORMATION
First Modification to Credit Agreement
On November 14, 2008, the Company entered into a first modification to its credit agreement
(the First Modification) with Comerica Bank (Comerica), Robert M. Worsley, Christi M. Worsley,
the Robert M. and Christ M. Worsley Revocable Trust, NZ Legacy, LLC (NZ Legacy), and New Mexico &
Arizona Land Company (NMAL), LLC to modify certain terms and conditions of the Companys credit
agreement with Comerica entered into March 28, 2008 (the Credit Agreement). Among other things,
the First Modification includes the following changes to the original terms and conditions of the
Credit Agreement: (i) interest on borrowings under the Credit Agreement will bear interest at the
one-month LIBOR, adjusted daily, plus 4.25 percentage points, (ii) the minimum liquidity
requirement of $1.0 million shall be suspended for the period beginning September 30, 2008 and
ending on December 31, 2008, (iii) the Company can utilize up to a maximum of $300,000 of its
security deposit for the sole purpose of meeting its payroll obligations, (iv) the net proceeds of
a tax equity transaction must first be used to prepay all outstanding principal and interest on the
non-revolving credit facility, (v) delivery to Comerica of secured guaranties from NMAL and NZ
Legacy, and (vi) delivery of $5,000 to Comerica in consideration for suspension of the minimum
liquidity requirement.
The foregoing summary of the First Modification does not purport to be complete and is
qualified in its entirety by reference to the First Modification which is attached hereto as
Exhibit 10.11 and which is incorporated herein by reference in its entirety.
34
Item 6. EXHIBITS
(a) Exhibits
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Exhibit
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Number
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|
Notes
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Description
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|
|
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2.1
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(1
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)
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|
Contribution and Merger Agreement, dated as of May 8, 2007 among the Registrant, Catalytica
Energy Systems, Inc., Snowflake Acquisition Corporation, Renegy, LLC, Renegy Trucking, LLC,
Snowflake White Mountain Power, LLC, Robert M. Worsley, Christi M. Worsley and the Robert M.
Worsley and Christi M. Worsley Revocable Trust.
|
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2.2
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(1
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)
|
|
Amendment No. 1 dated as of August 9, 2007 to Contribution and Merger Agreement, dated as of
May 8, 2007 among the Registrant, Catalytica Energy Systems, Inc., Snowflake Acquisition
Corporation, Renegy, LLC, Renegy Trucking, LLC, Snowflake White Mountain Power, LLC, Robert
M. Worsley, Christi M. Worsley and the Robert M. Worsley and Christi M. Worsley Revocable
Trust.
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2.3
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(2
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)
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Amendment No. 2 dated as of September 20, 2007 to Contribution and Merger Agreement, dated
as of May 8, 2007, as amended, among the Registrant, Catalytica Energy Systems, Inc.,
Snowflake Acquisition Corporation, Renegy, LLC, Renegy Trucking, LLC, Snowflake White
Mountain Power, LLC, Robert M. Worsley, Christi M. Worsley and the Robert M. Worsley and
Christi M. Worsley Revocable Trust.
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3.1
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(4
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)
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Amended and Restated Certificate of Incorporation of the Registrant.
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3.2
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(9
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)
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Amended and Restated Bylaws of the Registrant, as of October 1, 2008.
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4.1
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(4
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)
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Stock Specimen of the Registrant.
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4.2
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(3
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)
|
|
Registration Rights Agreement dated as of October 1, 2007 between the Registrant and the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
|
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4.3
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(3
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)
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|
Common Stock Purchased Warrant issued October 1, 2007 to the Robert M. Worsley and Christi
M. Worsley Revocable Trust.
|
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4.4
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|
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(5
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)
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|
Convertible Subordinated Promissory Note issued August 13, 2008 to the Robert M. Worsley and
Christi M. Worsley Revocable Trust.
|
|
10.1
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|
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(5
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)
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|
Second Letter Agreement, dated August 13, 2008, by and between the Registrant, Robert M.
Worsley, Christi M. Worsley and the Robert M. Worsley and Christi M. Worsley Revocable
Trust.
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|
10.2
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*
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(5)
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|
Employment Agreement dated as of August 14, 2008 between the Registrant and Hugh W. Smith.
|
|
10.3
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|
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(6
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)
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|
Seventh Amendment to Credit Agreement by and among Snowflake White Mountain Power, LLC,
Renegy, LLC, Renegy Trucking, LLC and CoBank, ACB, as Administrative Agent and Lender, dated
as of August 29, 2008.
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10.4
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(8
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)
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|
Eighth Amendment to Credit Agreement by and among Snowflake White Mountain Power, LLC,
Renegy, LLC, Renegy Trucking, LLC and CoBank, ACB, as Administrative Agent and Lender, dated
as of September 30, 2008.
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10.5
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*
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(7)
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|
Amended and Restated 2007 Equity Incentive Plan.
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10.6
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*
**
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Amended and Restated Form of Stock Option Agreement.
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|
10.7
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*
**
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Amended and Restated Form of Restricted Stock Unit Agreement.
|
|
10.8
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|
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|
*
**
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|
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Amended and Restated Form of Restricted Stock Agreement.
|
35
|
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|
|
|
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|
|
Exhibit
|
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|
|
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Number
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|
Notes
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
10.9
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|
|
|
*
|
(9)
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|
Letter Agreement, dated October 1, 2008, by and between the Registrant and Hugh W. Smith.
|
|
10.10
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|
|
|
*
|
(9)
|
|
Letter Agreement, dated October 1, 2008, by and between the Registrant and Robert M. Worsley.
|
|
10.11
|
|
|
|
**
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|
|
First Modification to Credit Agreement, dated November 14, 2008, by and between the
Registrant, Robert M. Worsley, Christi M. Worsley, the Robert M. Worsley and Christi M.
Worsley Revocable Trust, NZ Legacy, LLC, New Mexico & Arizona Land Company, LLC, and
Comerica Bank.
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|
31.1
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|
|
**
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|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
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31.2
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|
**
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|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15d-14(a) of the
Securities Exchange Act of 1934, as amended.
|
|
32.1
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**
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Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.
|
|
32.2
|
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|
|
**
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.
|
|
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+
|
|
Confidential treatment has been granted for portions of these agreements.
|
|
*
|
|
Represents management contracts or compensatory plans for executive officers and
directors.
|
|
**
|
|
Filed herewith.
|
|
(1)
|
|
Incorporated by reference to Annex A to Amendment No. 2 to Registrants Registration
Statement on Form S-4 (file No. 333-144110) filed on August 31, 2007.
|
|
(2)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on September 21, 2007.
|
|
(3)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on October 1, 2007.
|
|
(4)
|
|
Incorporated by reference to exhibits filed with our Form 10QSB, filed on November 14, 2007.
|
|
(5)
|
|
Incorporated by reference to exhibits filed with our Form 10-Q, filed on August 14, 2008.
|
|
(6)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on August 29, 2008.
|
|
(7)
|
|
Incorporated by reference to Appendix A to Registrants Definitive Proxy Statement on
Schedule 14A, filed on September 2, 2008.
|
|
(8)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on October 2, 2008.
|
|
(9)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on October 3, 2008.
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36
RENEGY HOLDINGS, INC.
SIGNATURES
In accordance with 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 14, 2008
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|
|
|
|
|
RENEGY HOLDINGS, INC.
(Registrant)
|
|
|
By:
|
/s/ Robert W. Zack
|
|
|
|
Robert W. Zack
|
|
|
|
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
|
|
37
RENEGY HOLDINGS, INC.
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Notes
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
|
*
**
|
|
Amended and Restated Form of Stock Option Agreement.
|
|
10.7
|
|
|
*
**
|
|
Amended and Restated Form of Restricted Stock Unit Agreement.
|
|
10.8
|
|
|
*
**
|
|
Amended and Restated Form of Restricted Stock Agreement.
|
|
10.11
|
|
|
**
|
|
First Modification to Credit Agreement, dated November 14, 2008, by
and between the Registrant, Robert M. Worsley, Christi M. Worsley,
the Robert M. Worsley and Christi M. Worsley Revocable Trust, NZ
Legacy, LLC, New Mexico & Arizona Land Company, LLC, and Comerica
Bank.
|
|
31.1
|
|
|
**
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
/ 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
31.2
|
|
|
**
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
/ 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
32.1
|
|
|
**
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.
|
|
32.2
|
|
|
**
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.
|
|
|
|
*
|
|
Represents management contracts or compensatory plans for executive officers and
directors.
|
|
**
|
|
Filed herewith.
|
38
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