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 March 31, 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
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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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301 West Warner Road, Suite 132
Tempe, Arizona 85284-2961
(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
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Accelerated filer
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Non-accelerated filer
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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
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No
þ
As of May 9, 2008 there were outstanding 6,207,812 shares of the issuers common stock, par
value $0.001, which is the only class of common stock outstanding.
RENEGY HOLDINGS, INC.
FORM 10-Q
March 31, 2008
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENEGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months
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Three Months
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Ended
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Ended
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March 31,
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March 31,
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2008
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2007
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(Successor)
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(Predecessor)
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Revenues
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$
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347
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$
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496
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Costs and expenses:
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Cost of wood product operations
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1,610
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961
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General, administrative and development
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3,385
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257
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Loss (gain) on sale or disposal of assets
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(160
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)
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1
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Total costs and expenses
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4,835
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1,219
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Operating loss
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(4,488
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)
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(723
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)
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Other income (expense):
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Interest income
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105
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316
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Other income
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19
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Interest expense
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(23
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)
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(280
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)
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Other expense
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(139
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)
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(37
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)
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Debt commitment fees
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(261
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(265
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)
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Change in fair value of derivative instruments
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(186
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)
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(75
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Net loss
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$
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(4,973
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)
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$
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(1,064
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Net loss per common share:
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Basic and diluted
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$
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(0.80
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)
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$
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(0.28
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)
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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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See accompanying notes.
3
RENEGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)(Unaudited)
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March 31,
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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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11,101
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$
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9,769
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Restricted cash
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68
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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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211
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864
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Inventories
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5,047
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5,128
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Prepaid expenses and other assets
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744
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362
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Total current assets
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17,171
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24,525
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Property and equipment:
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Leasehold improvements
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376
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265
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Machinery and equipment
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6,277
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5,387
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Construction in progress, biomass facility
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62,558
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54,626
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Construction in progress, other
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229
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981
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Less accumulated depreciation and amortization
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(1,836
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(1,760
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Total property and equipment
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67,604
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59,499
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Deferred financing costs, net
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2,593
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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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349
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111
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Total assets
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$
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89,092
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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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2,424
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$
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2,967
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Accrued payroll and benefits
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1,228
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789
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Accrued liabilities and other
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2,119
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2,103
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Current portion of long-term debt
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1,543
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776
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Current portion of fair value of derivative instruments
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867
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389
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Total current liabilities
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8,181
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7,024
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Fair value of derivative instruments, net of current portion
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3,920
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4,213
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Long-term debt, net of current portion
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50,702
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50,942
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Total liabilities
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62,803
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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, $0.001 par value; 43,000 shares authorized; 6,208 and 6,429
issued and outstanding, respectively
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6
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6
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Additional paid-in capital
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54,883
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49,606
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Accumulated deficit
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(28,600
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)
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(23,627
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Accumulated other comprehensive income
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3
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Total stockholders equity
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26,289
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25,988
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Total liabilities and stockholders equity
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$
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89,092
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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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Three Months Ended
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March 31, 2008
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March 31, 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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(4,973
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$
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(1,064
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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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256
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215
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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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139
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40
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Change in fair value of derivative instruments
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186
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75
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Stock based compensation
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278
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Loss (gain) on sale or disposal of assets
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8
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(1
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Changes in operating assets and liabilities:
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Receivables
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653
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(62
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Inventories
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81
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(652
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Prepaid expenses and other current assets
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(382
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(662
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Accounts payable
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942
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42
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Accrued payroll and benefits
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439
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Accrued liabilities and other
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(199
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168
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Net cash used in operating activities
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(2,463
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)
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(1,901
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Cash flows from investing activities:
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Maturities of available-for-sale investments
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5,988
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Proceeds from sale of restricted cash investments
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6,802
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Net change in restricted cash investments
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2,343
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Sale of property and equipment
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4
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Additions to property and equipment
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(9,525
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)
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(7,337
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Change in other assets
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(238
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)
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Net cash used in investing activities
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(1,428
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)
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(535
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)
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See accompanying notes.
5
RENEGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS continued
(In thousands) (Unaudited)
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Three Months Ended
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March 31, 2008
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March 31, 2007
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(Successor)
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(Predecessor)
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Cash flows from financing activities:
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Proceeds from issuance of notes payable
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320
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910
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Repayments of notes and leases payable
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(97
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)
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(23
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Contribution from majority shareholder
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5,000
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Contributions from member
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1,720
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Net cash provided by financing activities
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5,223
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2,607
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Net increase in cash and cash equivalents
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1,332
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171
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Cash and cash equivalents at beginning of period
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9,769
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31
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Cash and cash equivalents at end of period
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$
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11,101
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$
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202
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Supplemental disclosures of noncash investing and financing activities
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Additions of property, plant and equipment financed with payables
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$
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1,769
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$
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1,804
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Additions of property, plant and equipment financed with capital leases
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$
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304
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$
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178
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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
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Renegy Holdings, Inc. (Renegy, the Company,
we, our, or us) 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 months
ended March 31, 2008 (Successor) and the comparative results of the Snowflake entities for the
three months ended March 31, 2007 (Predecessor). All references to the three months ended March
31, 2008 refer to results of the Company. All references to the three months ended March 31, 2007
refer to the Predecessors results.
Description of Business
.
Renegy is a renewable energy company focused on acquiring,
developing and operating a growing portfolio of biomass power generation facilities to address an
increasing demand for economical power relying on alternative energy sources. The Company seeks to
rapidly grow its portfolio of renewable energy assets within a five-year period 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 our power plants, and which sell logs, lumber, shaved wood products and other
high value wood by-products to provide additional value to our primary business operations.
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 months ended March 31, 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.
7
Principles of Consolidation
.
Predecessor
The combined financial statements include the accounts of the Snowflake entities. All material
inter-company accounts and transactions have been eliminated in combination. All material
inter-company 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 that are not recognized or disclosed at fair value in the financial statements on a
recurring basis, 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, and 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 is effective for
fiscal years beginning after December 15, 2008 and is to be applied prospectively. The Company is
currently assessing the impact, if any; the adoption of SFAS 141R will have on its consolidated
financial statements.
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.
8
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 its consolidated financial statements.
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 SCR-Tech, and cash infusions from its majority shareholder.
During the first quarter of 2008, the Company secured an additional $6.2 million line of
credit and obtained a cash infusion of $5 million from Worsley to cover certain cost overruns at
the Snowflake plant. The Company believes that these funds, and cash infusions by Worsley to cover
additional Snowflake plant cost overruns, along with its cash, cash equivalents, and restricted
cash balances at March 31, 2008, will be sufficient to satisfy the Companys liquidity requirements
through 2008, excluding investments necessary to refurbish the Susanville plant and the funding of
acquisitions associated with the Companys growth strategy. The Company is currently seeking
additional debt and equity financing. No assurance can be given that additional financing will be
available on acceptable terms or at all.
The Snowflake plant has synchronized to the electrical grid and is currently generating and
selling test power in advance of commencing full commercial operations, which is expected to occur
by June 30, 2008. If certain milestones, including the commencement of operations of the Snowflake
plant, are not reached by June 30, 2008, the entire principal amount of the Companys outstanding
borrowings with CoBank will not convert into term loans and instead will 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 on the terms of such debt, seek to
refinance such debt or seek alternative debt or equity financing. In addition, the Company must
complete construction of the Snowflake plant, achieve commercial operation and successfully deliver
power to APS by September 1, 2008 and to SRP by October 1, 2008, in accordance with the terms of
the power purchase agreements (PPAs) with these parties; or the parties may terminate their
respective PPA and seek damages. A default under the PPAs would also result in a default under our
financing arrangements.
Once it reaches commercial operations, the Snowflake plant is expected to generate revenues
and positive cash flow. However, these cash flows will not fully offset our corporate overhead and
debt payment requirements. Failure to achieve timely commercial operation of the Snowflake plant
or the inability to maintain such operation, or the inability of the fuel aggregation and wood
products business to timely achieve positive cash flows, would likely have a material adverse
impact on the Companys consolidated financial position, results of operations and cash flows.
There is no assurance the Company will be successful in achieving timely commercial operation of
the Snowflake plant or achieve positive cash flow from operations.
If the Company is not successful in achieving timely commercial operation of the Snowflake
plant or positive cash flow from operations, if the Company is out of compliance with its loan
agreements, including but not limited to, a determination that there is a material adverse change
under our financing arrangements, or if we are unable to raise capital in 2008 to fund our
operations for 2009 and beyond, management will not be able to continue its business as currently
anticipated and will be required to take significant actions which may include, but are not limited
to, restructuring of the Companys indebtedness; drastically reducing corporate overhead; or
selling the Snowflake plant, Susanville plant, wood products business, or the Company in its
entirety.
9
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,
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,973
|
)
|
|
$
|
(1,064
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
available-for-sale securities
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(4,976
|
)
|
|
$
|
(1,064
|
)
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008, all of the Companys available-for-sale
securities matured and the proceeds were invested in cash equivalents. At March 31, 2008,
the balance of accumulated other comprehensive income (loss) was zero.
Balance Sheets Supplemental Information
Inventories
The following is a summary of inventories, substantially consisting of raw materials (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Biomass
|
|
$
|
4,161
|
|
|
$
|
4,153
|
|
Logs
|
|
|
813
|
|
|
|
964
|
|
Other
|
|
|
73
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
$
|
5,047
|
|
|
$
|
5,128
|
|
|
|
|
|
|
|
|
Abnormal amounts of expense resulting from inefficiencies incurred in inventory procurement,
aggregation, and processing are recognized as current period charges in cost of wood
products operations and were approximately zero and $0.4 million during the three months
ended March 31, 2008 and 2007, respectively. The three months ended March 31, 2008 reflect
no abnormal expense due to inclement weather which prohibited access into the forests,
resulting in minimal inventory aggregation during the period.
10
Idle Property and Equipment
Idle property and equipment consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Susanville biomass plant
|
|
$
|
1,300
|
|
|
$
|
1,300
|
|
Saw-mill 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
late 2008 or early 2009. Saw-mill 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.
Long-Term Debt
The Companys long-term debt and capital lease obligations balances are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
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 June 30, 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)
|
|
|
9,302
|
|
|
|
9,302
|
|
Renegy Term Facility construction loan to bank, converts to term loan no
later than June 30, 2008, principal payments through maturity in January
2013,
quarterly payments of interest at 7.2% per annum through maturity
|
|
|
1,492
|
|
|
|
1,471
|
|
Chase Lease equipment loan to bank, monthly payments of interest at
prime
less 1% until conversion to lease payable upon completion of equipment
manufacture
|
|
|
1,675
|
|
|
|
1,372
|
|
Other
|
|
|
526
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
52,245
|
|
|
|
51,718
|
|
Less current maturities
|
|
|
(1,543
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
50,702
|
|
|
$
|
50,942
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
ID Bonds and SWMP Construction Loan are subject to a floating to fixed interest rate swap at
closing through maturity (see Note 11).
|
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 months ended March 31, 2008, the weighted average number of shares outstanding is based on
the actual number of shares outstanding for the period. For the three months ended March 31, 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.
As the potentially dilutive securities were anti-dilutive because net losses were incurred for the
three months ended March 31, 2008 and 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. Total options outstanding as of March 31, 2008 and 2007 were 728,408 and zero,
respectively. Total warrants outstanding as of March 31, 2008 and 2007 were 2,533,023 and zero,
respectively.
11
Note 5. Stock Based Compensation
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 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
.
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,
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
244
|
|
|
$
|
|
|
Warrants
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
278
|
|
|
$
|
|
|
|
|
|
|
|
|
|
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 saw-mill and began leasing the saw-mill 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 saw-mill 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 saw-mill 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 in the accompanying financial statements for
the three months ended March 31, 2008.
12
Note 7. Major Customers and Suppliers
Two customers accounted for approximately 92% of the Companys revenues for the three months
ended March 31, 2008. Five customers accounted for approximately 91% of the Predecessors revenues
for the three months ended March 31, 2007. Two customers accounted for 92% of the Companys trade
accounts receivable at March 31, 2008. Two customers accounted for 94% of the Companys trade
accounts receivable at December 31, 2007.
The Company expects to receive the majority of its revenues for the foreseeable future from
the sale of electrical power from its Snowflake plant in connection with PPAs secured with SRP and
APS. Revenues generated from these agreements are expected to begin in the second quarter of 2008
when the Snowflake plant is scheduled to commence commercial operations.
The Company received a substantial portion of its supplies, materials and third party services
used in construction of the Snowflake plant from four and ten vendors during the three months ended
March 31, 2008 and 2007, respectively, totaling approximately $5.4 million and $5.5 million,
respectively.
Note 8. Cash Infusion and Line of Credit
Pursuant to a sponsor guaranty and a letter agreement, which are described in Note 13, the
Worsleys guaranteed the payment of all project costs 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.
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 March 31, 2008, the
Company has not drawn on this line.
Note 9. Capitalized Interest
The Company capitalizes 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 capitalizes 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 income associated with
tax-exempt borrowings approximated $6,000 for the three months ended March 31, 2008. Interest
income of the Predecessor associated with tax-exempt borrowings approximated $274,000 for the
three months ended March 31, 2007. Interest rates on loans entered into in association with the
financing of the construction of the Snowflake plant are 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 three months ended March 31, 2008 and 2007. The following table summarizes project
interest costs incurred and capitalized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
Project interest costs incurred
|
|
$
|
643
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project interest costs capitalized
|
|
$
|
637
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
13
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
As of
|
|
|
Assets or
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
March 31,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments (2)
|
|
$
|
4,787
|
|
|
$
|
|
|
|
$
|
4,787
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,787
|
|
|
$
|
|
|
|
$
|
4,787
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
As of
|
|
|
Assets or
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Liabilities
|
|
|
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
quoted prices. During the three months ended March 31, 2008, all of the Companys
available-for-sale securities matured 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,
Accounting for Derivative Instruments and Hedging Activities,
and its amendments in SFAS
Nos. 137, 139, and 149, and per the guidance set forth in SFAS 157 as discussed in Note 10. The
Company is required to measure all derivative instruments at fair value and to recognize all
derivative instruments in its statement of financial position as either assets or liabilities
depending on the rights or obligations under the contracts. The statement requires that changes in
the fair value of derivative instruments be recognized currently in earnings unless specific hedge
accounting criteria are met. The effective portion of a gain or loss on a derivative instrument
designated and qualifying as a cash flow hedging instrument is reported as a component of other
comprehensive income. Ineffective portions of cash flow hedges and changes in fair value resulting
in a gain or loss on a derivative instrument not designated as a hedging instrument are recognized
currently in earnings.
As of March 31, 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 No. 133; therefore, any changes in
their fair values are recognized in current earnings.
15
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 $4,787,000 and $4,602,000 as of March 31, 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 March 31, 2008
|
|
$39,250,000
|
|
$9,001,000
|
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 March 31, 2008
|
|
$4,407,000
|
|
$380,000
|
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 developing, owning and
operating biomass to electricity power generation facilities. As such, no additional segment
disclosures are presented related to revenues, profit or loss, or total assets for the three months
ended March 31, 2008.
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
Kawasaki and Eaton sale representations and warranties
In connection with the sale of Catalyticas gas turbine technology and associated assets to
Kawasaki in September 2006, Catalytica agreed to indemnify Kawasaki, through September 2008, for
any breaches of various representations and warranties made by Catalytica to Kawasaki in connection
with the sale. These indemnities are generally limited to the purchase price of $2.1 million. In
addition, Catalytica has agreed to maintain an amount of not less than $2.0 million in immediately
available funds until September 30, 2007 and $1.9 million in immediately available funds from
October 1, 2007 until September 30, 2008 to satisfy any indemnification claims from Kawasaki.
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.
16
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 generally subject to a deductible of $192,000 and a cap of
$1,920,000, or $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. In addition, Renegy guarantees payment of any of Catalyticas indemnification
obligations under the Stock Purchase Agreement.
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 $2,500 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 operation of the Snowflake
plant, 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.
17
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 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 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.
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) between
Renegy and the Worsleys, 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.
Pursuant to the Letter Agreement, the Company entered into a Revolving Credit Agreement with
the Worsleys pursuant to which the Worsleys agreed to lend Renegy up to $6.0 million, which could
be drawn on by the Company beginning March 31, 2008 for general working capital purposes, including
the payment of capital costs the Company agreed to pay as described above. On March 28, 2008, the
Company entered into a credit agreement with Comerica, guaranteed by the Worsleys and the Worsley
Trust, providing for a non-revolving credit facility of up to $6.2 million, resulting in the
termination of the Worsley line of credit.
18
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 per month 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.
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
months ended March 31, 2008 is based on the unaudited financial statements of the Company (as
defined herein). Information presented for the three months ended March 31, 2007 is based on the
unaudited financial statements of the Snowflake entities (as defined herein).
19
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 rapidly grow our portfolio of
renewable energy assets within a five-year period 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, lumber, shaved wood products and other high
value wood by-products to provide additional value to our primary business operations.
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 which is currently under construction
near Snowflake, Arizona (the Snowflake plant). This biomass facility, which has synchronized to
the electrical grid and is currently generating and selling test power in advance of commencing
full commercial operations by June 30, 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 biomass plant in Susanville, California. We currently
estimate operations for this 13 MW plant could be restarted by early 2009, subject to the prospects
and timing associated with securing 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. However, if we
are unsuccessful in our efforts to reinstate existing air permits and
are required to secure new air permits for the plant, commissioning
will likely be delayed until late 2009.
We seek to become a leading biomass to electricity independent power producer (IPP) in North
America utilizing wood waste as a primary fuel source. We plan to continue seeking strategic
growth opportunities, including the acquisitions of additional biomass to electricity power
generating facilities and related businesses, and the construction of new biomass power plants. We
also plan to continually explore opportunities to expand our fuel aggregation business to support
future biomass power facilities. We have already identified and begun to explore multiple
additional biomass to electricity project opportunities totaling more than one gigawatt of power
output as well as strategic business acquisition opportunities that complement our current business
activities, build upon our core competencies, and strengthen our market position.
20
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-K. No material changes to our critical accounting policies and estimates have
occurred subsequent to December 31, 2007.
Results of Operations
The following table presents the results of operations for the three months ended March 31,
2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Revenues
|
|
$
|
347
|
|
|
$
|
496
|
|
|
$
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of wood product operations
|
|
|
1,610
|
|
|
|
961
|
|
|
|
649
|
|
General, administrative and development
|
|
|
3,385
|
|
|
|
257
|
|
|
|
3,128
|
|
Loss (gain) on sale or disposal of assets
|
|
|
(160
|
)
|
|
|
1
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
4,835
|
|
|
|
1,219
|
|
|
|
3,616
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,488
|
)
|
|
|
(723
|
)
|
|
|
(3,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
105
|
|
|
|
316
|
|
|
|
(211
|
)
|
Other income
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Interest expense
|
|
|
(23
|
)
|
|
|
(280
|
)
|
|
|
257
|
|
Other expense
|
|
|
(139
|
)
|
|
|
(37
|
)
|
|
|
(102
|
)
|
Debt commitment fees
|
|
|
(261
|
)
|
|
|
(265
|
)
|
|
|
4
|
|
Change in fair value of derivative instruments
|
|
|
(186
|
)
|
|
|
(75
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,973
|
)
|
|
$
|
(1,064
|
)
|
|
$
|
(3,909
|
)
|
|
|
|
|
|
|
|
|
|
|
Comparison of the three month periods ended March 31, 2008 and 2007
Revenues.
Revenues primarily resulted from the sale of wood related products and from forest
thinning services. The Snowflake plant will not generate revenues until it commences operations,
which is anticipated to occur in the second quarter of 2008.
21
Total revenues decreased by $149,000, or 30%, to $347,000 for the three months ended March 31,
2008, as compared to $496,000 for the three months ended March 31, 2007. This decrease was
primarily attributable to declines in lumber sales and forest thinning services, partially offset
by an increase in wood shavings sales. Lumber sales decreased by $234,000 due to the cessation of
lumber production at our saw-mill in early 2007. Lumber sales of approximately $238,000 during the
first quarter of 2007 resulted from sales of existing inventory; lumber sales of approximately
$4,000 during the first quarter of 2008 are reflective of a nearly depleted lumber inventory. The
decision to stop lumber production was made based on negative market conditions and increasing
production costs relating to subcontractors operating the saw-mill. Revenues derived from forest
thinning services decreased by $185,000, due to our inability to gain access to the forests due to
weather conditions during the first quarter of 2008. Sales of pine shavings materials increased by
$276,000 as our wood shavings operations did not begin until late November 2007.
During the three months ended March 31, 2008, two customers accounted for 92% of our revenues.
During the three months ended March 31, 2007, five customers accounted for 91% of our revenues.
We believe the substantial majority of our 2008 revenues will be derived from the delivery of
electric power pursuant to power purchase agreements with APS and SRP once the Snowflake plant
becomes operational, which is anticipated to occur in the second quarter of 2008. To date, we have
not recognized revenue or produced or sold electricity under these
agreements. We believe 2008 total revenues will range between $10.0 million and $12.0
million, including $2.0 million to $3.0 million of revenues from our wood product operations,
driven primarily by our wood shavings business. However, our expectations are subject to
significant uncertainty, as they are heavily dependent upon commencement and ongoing commercial
operations of our Snowflake plant.
Cost of Wood Product Operations.
Costs of our fuel aggregation and wood product operations
consists principally of purchased wood chips, direct labor, management wages, fringe benefits,
outsourced labor, insurance, fuel, repairs and maintenance, and depreciation. These costs
primarily relate to expenses incurred in the aggregation of inventories (biomass fuel) that will be
burned in the power generation process and also include the costs related to wood products
revenues.
Cost of wood product operations increased by $649,000, or 68%, to $1,610,000 for the three
months ended March 31, 2008 as compared to $961,000 for the three months ended March 31, 2007.
This increase was primarily due to increases in cost of shavings materials sold, impairment charges
related to saw-mill equipment, and the level of expenses capitalized in inventory, partially offset
by decreases in wood chips purchased, outsourced labor, and fuel. Costs related to sales of wood
shavings increased by $176,000 due to startup of wood shavings operations in late November 2007.
During the first quarter of 2008, the lease of our saw-mill operations and equipment was cancelled.
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
,
the Company continually considers events or changes in circumstances that indicate the carrying
amount of a long-term asset may not be recoverable. Based on our estimate of undiscounted cash
flows expected to be generated from the saw-mill long-term assets as compared to the carrying value
of those assets, we determined the assets were impaired. The fair market value of those assets
was then determined and an impairment charge, equal to the excess of the carrying value over fair
value, was recorded totaling $109,000 during the first quarter of 2008. Direct and indirect costs
capitalized in inventory decreased by $602,000, resulting in a corresponding increase in cost of
wood product operations recognized during the first quarter of 2008, due to reduced efforts to
accumulate biomass fuel as required reserves were reduced to decrease the risk of fire. Purchases
of wood chips decreased by $263,000; also due to reduced efforts to accumulate biomass fuel
reserves. Outsourced labor related to our saw-mill operations decreased by $106,000 due to
cessation of lumber production in early 2007; no outsourced saw-mill labor was incurred during the
first quarter of 2008. Fuel usage decreased by $112,000, due to decreased forest thinning
activities resulting from poor weather conditions during the first quarter of 2008.
We believe 2008 cost of wood product operations will be higher than 2007, as these costs
generally vary directly in relation to revenues, which we anticipate will be significantly higher
in 2008.
Loss (Gain) on Sale or Disposal of Assets.
Gain on sale or disposal of assets increased by
$161,000. 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. Insurance reimbursements related to the wood chips were recorded when received
during the third quarter of 2007. During the first quarter of 2008, we received a $160,000
insurance reimbursement related to the equipment and recorded a gain on sale or disposal of assets.
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.
22
General, Administrative and Development (GA&D) Expenses.
GA&D includes wages and related
benefits, stock compensation, facilities and equipment rent, utilities, insurance, depreciation,
consulting and professional services, marketing, legal, travel, supplies, and accounting and
auditing services. For the first quarter of 2007, GA&D included expenses incurred by the Snowflake
entities. For the first quarter of 2008, GA&D reflects the combined expenses incurred by the
Snowflake entities and Catalytica resulting from the consummation of the Merger Transaction.
GA&D increased by $3,128,000 to $3,385,000 for the three months ended March 31, 2008 as
compared to $257,000 for the three months ended March 31, 2007. The increase was in part due to
increases in various expenses resulting from the combination of the Snowflake entities and
Catalytica, reflecting incremental corporate administrative and management expenses; those
increases summarized as follows: (i) salaries $583,000, (ii) incentive bonus accruals -
$272,000, (iii) board fees $105,000, (iv) change of control retention bonus $169,000, and (v)
audit and tax services $202,000. The remainder of the increase was primarily due to increases in
stock compensation, relocation and recruiting, consulting and outside contractors, rent, and legal
expenses. Stock compensation increased by $278,000 due to issuance of annual incentive plan option
grants and warrants to an outside consultant. Relocation and recruiting increased by $224,000
primarily due to expenses associated with the employment of our chief operating officer in March
2008. Consulting and outside contractors increased by $451,000 due to expenses incurred with
investment banking and investor relations firms and other consultants assisting us with evaluating
prospects for our growth strategy, in addition to fuel studies conducted jointly with a local
university. Rent expense increased by $92,000 due to the Susanville land lease entered into in
February 2008 and corporate
office space assumed in the merger. Legal expenses increased by $509,000 related to work
performed in various contract negotiations, corporate compliance, plant construction cost overrun
issues related to the Merger Transaction, and preparation of documents related to our line of
credit with Comerica.
We expect GA&D for the remainder of 2008 to average approximately $2.0 million per quarter,
reflecting significant public company expenses and a high level of development expenses in pursuing
our renewable energy growth strategy.
Interest and Other Income.
Interest income is generated from money market and short-term
investments. Other income consists of other non-operating gains and losses, for which amounts are
not material for separate presentation.
Interest income decreased by $211,000 during the three months ended March 31, 2008 as compared
to the three months ended March 31, 2007. This decrease was primarily due to declining cash and
investment balances resulting from the funding of our operations and plant construction.
Interest and Other Expense.
Interest expense reflects amounts incurred under long-term debt
and capital lease obligations. Other expense reflects other non-operating expenses, primarily
related to amortization of deferred financing costs capitalized in connection with issuance of
project debt financing associated with our Snowflake plant.
Interest expense decreased by $257,000 during the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007. 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. As a
result, as interest income declines, interest expense associated with construction of our Snowflake
plant decreases on a net basis due to increased capitalization.
We expect interest expense to significantly increase upon commencement of commercial
operations of the Snowflake plant, as once the plant is operational we will no longer capitalize
interest expense as part of plant construction. We anticipate interest expense to range between
$0.5 and $0.7 million per quarter beginning in the third quarter of 2008.
Debt Commitment Fees.
We incur significant debt commitment fees, primarily related to fees
paid to maintain letters of credit securing our Solid Waste Disposal Revenue Bonds (ID Bonds).
Debt commitment fees incurred between comparative periods were not materially different.
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 other long-term debt. These interest rate swaps do not qualify
for accounting treatment as cash flow hedges; therefore, changes in their fair values are
recognized in other income (expense).
23
The change in fair value of derivative instruments resulted in a charge of $186,000 during the
first quarter of 2008 and $75,000 during the first quarter of 2007 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 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 months ended March 31, 2007. Subsequent to consummation of the Merger
Transaction, the Company is taxed as a corporation; however, no benefit from income taxes was
recorded on the losses incurred during the three months ended March 31, 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.
Liquidity and Capital Resources
Our total cash and cash equivalents was approximately $11.1 million at March 31, 2008.
Additionally, we had approximately $0.1 million of remaining restricted cash for construction of
the Snowflake plant 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 March 31, 2008.
Our total cash, cash equivalents, restricted cash and short-term investments decreased by $7.0
million during the quarter ended March 31, 2008. This decrease was primarily driven by cash used
in operating activities of $2.5 million and capital expenditures of $9.5 million, partially offset
by an equity infusion of $5.0 million from Worsley 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 Renegy LLC, Renegy Trucking, Snowflake
and CoBank ACB. 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) between us and
the Worsleys, under which we 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 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 on March 4, 2008. We currently believe that our total Project Costs for the Snowflake
Plant will exceed the Project Cap by approximately $16.0 million. As such, Worsley will be
responsible to infuse funds into the Company to comply with the Overrun Guaranty and Letter
Agreement. We believe Worsley will make such payments when required.
On March 28, 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 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 March 31, 2008, we have not
drawn on this line.
24
Capital expenditures during the three months ended March 31, 2008 were primarily attributable
to the construction of the Snowflake plant. It is anticipated that we need to spend a remaining
$6.5 million in project costs, as defined in the CoBank financing agreements, to complete the
Snowflake plant and begin commercial operations. We anticipate funding this amount from our
general corporate funds and infusions from Worsley related to the Letter Agreement described above.
We anticipate incurring significant losses and negative cash flow until commencement of
operations of the Snowflake plant. Upon commencement of operations of the Snowflake plant, which
is anticipated to occur by June 30, 2008, we will begin to generate revenue from such plant. 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. 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 debt and lease principal
payments for the next twelve months total approximately $1.5 million. In addition, we anticipate
we will incur approximately $3.5 million in interest and other financing costs related to those
credit facilities. Thus, 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 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 anticipate that our capital requirements beyond the Snowflake power plant will be
significant over the next several years. Our business objective is to become a leading independent
power producer of biomass electricity in North America to address a growing demand for green,
renewable and economical power. We seek to rapidly grow our portfolio of renewable
energy assets within a five-year period through the acquisition and operation of existing and
idle biomass to electrical facilities, in addition to the development, construction and operation
of new facilities. We will need significant additional debt and equity financing to pursue our
expanded vision and rapid growth strategy. The nature and amount of such capital requirements
cannot be definitively determined at this time. However, our objective is to leverage project debt
financing on individual projects when available.
We believe our available cash and cash equivalents at March 31, 2008, our debt capacity, and
our restricted cash balances, along with additional cash infusions by Worsley relating to our
Snowflake power plant and its cost overrun, will provide sufficient capital to complete
construction of the Snowflake biomass plant and to fund our operations as currently conducted until
December 31, 2008, excluding investments necessary to refurbish the Susanville plant and the
funding of acquisitions associated with our growth strategy. However, if commercial operations of
the Snowflake plant are delayed beyond the anticipated start date, the plant generates less revenue
or incurs more expenses than anticipated, our fuel aggregation and wood products business does not
generate positive cash flow, we are unable to comply with the terms of our loan agreements, or
other unanticipated costs or development expenses arise, we likely will not have sufficient funds
to continue our operations until December 31, 2008. Moreover, even if our funds are sufficient to
continue our operations as presently conducted until December 31, 2008, we cannot become cash flow
positive without the acquisition and/or development of additional power plants, and we do not
currently have the funds to acquire or develop any such plants. For this reason, and because we
intend to pursue a strategy of growing our business through the acquisition, development and
operation of existing and idle power plant facilities, we will need significant additional capital.
We have entered into letters of intent to acquire one operating and one idle biomass facility
during 2008. However, we do not have the funds to acquire either of such facilities, or to restart
the idled facility even if acquired, and we will be unable to purchase such facilities without
equity and/or debt financing. Beyond December 31, 2008, our cash requirements will depend on many
factors, including but not limited to, the success of the Snowflake biomass plant, our ability to
manage our fuel aggregation and wood products business, and our ability to acquire and operate
existing and idle biomass facilities and to construct and operate new facilities. Further, if we
are unable to raise capital in 2008 to fund our operations for 2009 and beyond, we will not be able
to continue our business as currently anticipated and will be required to take significant actions
which may include, but are not limited to, restructuring of the Companys indebtedness; drastically
reducing corporate overhead; or selling the Snowflake plant, Susanville plant, wood products
business, or the Company in its entirety.
25
In addition, we continue to actively pursue acquisitions and other business opportunities,
including but not limited to, mergers or other strategic arrangements (collectively referred to as
Strategic Opportunities). Such Strategic Opportunities likely would require the use of
additional funds, reducing our available capital prior to December 31, 2008, and require additional
equity or debt financing.
The nature and amount of any financing or the use of any capital to fund our growth strategy
cannot be predicted and will depend on the terms and conditions of any particular transaction. The
capital we seek may take the form of equity or debt financing, including the issuance of common
stock, convertible debt, warrants and project-specific financing. We cannot anticipate the terms of
any such financing. Any such financing, however, likely will be dilutive to existing stockholders
and may have unfavorable terms, including providing common stock or securities convertible into
common stock at a significant discount to the then current market price of our common stock.
Further, such financing may not be available on any terms, in which case we will be unable to
pursue our business strategy and if we cannot acquire or develop sufficient power plants to cover
our corporate overhead, we ultimately will not have sufficient funds to continue our operations.
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 March 31, 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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26
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 three months ended March
31, 2008.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
27
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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2.1
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(1)
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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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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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(5)
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Amended and Restated Certificate of Incorporation of the Registrant.
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3.2
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(3)
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Amended and Restated Bylaws of the Registrant.
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4.1
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(5)
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Stock Specimen of the Registrant.
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4.2
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(4)
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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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(4)
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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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10.1
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(5)*
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2007 Equity Incentive Plan.
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10.2
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(5)*
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Form of Stock Option Agreement.
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10.3
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(6)
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Office Lease between Renegy Holdings, Inc. and Hayden Ferry
Lakeside, LLC, dated January 17, 2008.
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10.4
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(7)
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Lease between Renegy Susanville, LLC and Sierra Pacific Industries
dated January 31, 2008.
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10.5
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(7)
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Option Agreement between Renegy Susanville, LLC and Sierra Pacific
Industries dated January 31, 2008.
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10.6
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(7)
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Letter Agreement, dated February 12, 2008, by and between the
Registrant and Robert M. Worsley, Christi M. Worsley and the Robert
M. Worsley and Christi M. Worsley Revocable Trust.
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10.7
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(7)
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Revolving Credit Agreement, dated February 12, 2008, by and among
the Registrant, Robert M. Worsley, Christi M. Worsley and the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
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10.8
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(7)
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SCR-Tech Sale and Share Ownership Reconciliation Agreement, dated
February 12, 2008, between the Company and the Robert M. Worsley
and Christi M. Worsley Revocable Trust.
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10.9
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(8)
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Continuing Guarantee of the Registrant, dated March 17, 2008.
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10.10
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(9)
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Credit Agreement dated as of March 28, 2008, between the Registrant
and Comerica Bank.
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10.11
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(9)
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Non-Revolving Line of Credit Promissory Note Payable by the
Registrant to Comerica Bank dated as of March 28, 2008.
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28
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Exhibit
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Number
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Notes
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Description
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10.12
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(9)
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Cash Collateral Account Agreement dated as of March 28, 2008,
between the Registrant and Comerica Bank.
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10.13
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(9)
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Fourth 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 March 28,
2008.
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10.14
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(9)
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Extension Letter dated March 11, 2008 under Amended Restated
Transaction Confirmation by and between Snowflake White Mountain
Power, LLC and Arizona Public Service Company.
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10.15
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(9)
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First Amendment to Second Amended and Restated Renewable Energy
Purchase and Sale Agreement, by and between Snowflake White
Mountain Power, LLC and Salt River Project Agricultural Improvement
and Power District, dated as of March 27, 2008.
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10.16
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(10)
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Fifth Amendment to Credit Agreement and Consent by and among
Snowflake White Mountain Power, LLC, Renegy, LLC, Renegy Truck, LLC
and CoBank, ACB, as Administrative Agent and Lender, dated as of
April 10, 2008.
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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.
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32.1
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**
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Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.
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32.2
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**
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Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.
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+
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Confidential treatment has been granted for portions of these agreements.
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*
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Represents management contracts or compensatory plans for executive officers and
directors.
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**
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Filed herewith.
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(1)
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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.
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(2)
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Incorporated by reference to exhibits filed with our Form 8-K, filed
on September 21, 2007.
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(3)
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Incorporated by reference to Annex D to Amendment No. 2 to
Registrants Registration Statement on Form S-4 (file No. 333-144110)
filed on August 31, 2007.
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(4)
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Incorporated by reference to exhibits filed with our Form 8-K, filed
on October 1, 2007.
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(5)
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Incorporated by reference to exhibits filed with our Form 10QSB,
filed on November 14, 2007.
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(6)
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Incorporated by reference to exhibits filed with our Form 8-K, filed
on January 23, 2008.
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(7)
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Incorporated by reference to exhibits filed with our Form 8-K, filed
on February 13, 2008.
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(8)
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Incorporated by reference to exhibits filed with our Form 8-K, filed
on March 20, 2008.
|
|
(9)
|
|
Incorporated by reference to exhibits filed with our Form 10-KSB,
filed on March 31, 2008.
|
|
(10)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed
on April 15, 2008.
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29
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: May 15, 2008
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|
|
|
|
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RENEGY HOLDINGS, INC.
(Registrant)
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|
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By:
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/s/ Robert W. Zack
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|
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Robert W. Zack
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|
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Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
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|
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30
EXHIBIT INDEX
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|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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31.1
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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.
|
|
|
|
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.
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31