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 June 30, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from
to
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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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60 E. Rio Salado Parkway, Suite 1012
Tempe, Arizona 85281-9501
(Address of principal executive offices)
(480) 556-5555
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
As of August 9, 2008 there were outstanding 6,207,812 shares of the issuers common stock, par
value $0.001, which is the only class of common stock outstanding.
RENEGY HOLDINGS, INC.
FORM 10-Q
June 30, 2008
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENEGY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended June 30,
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Six Months Ended June 30,
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2008
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2007
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2008
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2007
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(Successor)
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(Predecessor)
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(Successor)
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(Predecessor)
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Revenues
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Power generation
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$
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921
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$
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$
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921
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$
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Wood product and other
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188
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284
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536
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780
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Total revenues
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1,109
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284
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1,457
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780
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Costs and expenses:
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Plant operating expenses
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1,753
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1,799
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Cost of wood product operations
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255
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4,335
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1,819
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5,295
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General, administrative and development
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2,525
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219
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5,911
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477
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Loss (gain) on sale or disposal of assets
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3
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88
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(157
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)
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88
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Total costs and expenses
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4,536
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4,642
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9,372
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5,860
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Operating loss
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(3,427
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)
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(4,358
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)
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(7,915
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)
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(5,080
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)
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Other income (expense):
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Interest income
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39
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213
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145
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529
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Other income
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19
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Interest expense
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(28
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)
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(227
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)
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(51
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(508
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)
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Other expense
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(62
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)
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(37
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)
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(201
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(73
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Debt commitment fees
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(265
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(306
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)
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(526
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(571
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Change in fair value of derivative
instruments
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1,206
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1,864
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1,019
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1,788
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Net loss
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$
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(2,537
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$
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(2,851
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$
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(7,510
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$
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(3,915
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Net loss per common share:
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Basic and diluted
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$
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(0.41
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$
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(0.76
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$
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(1.21
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$
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(1.04
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Weighted average shares:
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Basic and diluted
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6,208
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3,774
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6,208
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3,774
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See accompanying notes.
3
RENEGY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)(Unaudited)
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June 30,
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December 31,
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2008
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2007
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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3,560
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$
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9,769
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Restricted cash
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767
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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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723
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864
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Biomass fuel and inventories
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5,702
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5,128
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Prepaid expenses and other assets
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1,028
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362
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Total current assets
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11,780
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24,525
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Property and equipment:
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Leasehold improvements
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781
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265
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Machinery and equipment
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9,971
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5,387
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Biomass plant
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63,747
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Construction in progress, biomass plant
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54,626
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Construction in progress, other
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301
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981
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Less accumulated depreciation and amortization
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(2,352
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(1,760
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Total property and equipment
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72,448
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59,499
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Deferred financing costs, net
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2,531
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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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318
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111
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Total assets
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$
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88,452
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$
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88,167
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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1,914
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$
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2,967
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Accrued payroll and benefits
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453
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789
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Accrued liabilities and other
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3,166
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2,103
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Non-revolving line of credit
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2,000
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Advance to related party
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600
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Current portion of long-term debt
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2,076
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776
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Current portion of fair value of derivative instruments
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1,119
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389
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Total current liabilities
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11,328
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7,024
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Fair value of derivative instruments, net of current portion
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2,464
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4,213
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Long-term debt, net of current portion
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50,581
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50,942
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Other long-term liabilities
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222
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Total liabilities
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64,595
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62,179
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Stockholders equity:
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Preferred stock, $0.001 par value; 1,500 shares authorized, none issued
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Common stock, $0.001 par value; 43,000 shares authorized; 6,208 and 6,208
issued and outstanding, respectively
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6
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6
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Additional paid-in capital
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54,988
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49,606
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Accumulated deficit
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(31,137
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)
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(23,627
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Accumulated other comprehensive income
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3
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Total stockholders equity
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23,857
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25,988
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Total liabilities and stockholders equity
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$
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88,452
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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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Six Months Ended
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June 30, 2008
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June 30, 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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(7,510
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)
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$
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(3,915
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)
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Adjustments to reconcile net loss from continuing operations to net
cash used in operating activities:
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Depreciation of property and equipment
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776
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411
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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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201
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76
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Change in fair value of derivative instruments
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(1,020
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)
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(1,788
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)
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Provision for uncollectible accounts
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6
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Stock based compensation
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383
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Inventory and equipment losses related to fire
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3,318
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Loss (gain) on sale or disposal of assets
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11
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(10
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Changes in operating assets and liabilities:
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Receivables
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135
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50
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Biomass fuel and inventories
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(731
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(1,413
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)
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Prepaid expenses and other current assets
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(479
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)
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(1,154
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)
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Accounts payable
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1,622
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(414
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)
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Accrued payroll and benefits
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(336
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)
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11
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Accrued liabilities and other
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141
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756
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Net cash used in operating activities
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(6,692
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)
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(4,072
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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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12,767
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Net change in restricted cash investments
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1,644
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Sale of property and equipment
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4
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13
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Additions to property and equipment
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(15,151
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)
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(14,535
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)
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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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(7,753
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)
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(1,755
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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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Six Months Ended
|
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June 30, 2008
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June 30, 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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2,879
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3,474
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Repayments of notes and leases payable
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(243
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)
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(52
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)
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Advances
from related party
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600
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Contributions from majority shareholder
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5,000
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Contributions from member
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2,564
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|
|
|
|
|
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|
Net cash provided by financing activities
|
|
|
8,236
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|
|
|
5,986
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|
|
|
|
|
|
|
|
|
|
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|
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Net increase (decrease) in cash and cash equivalents
|
|
|
(6,209
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)
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|
|
159
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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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3,560
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|
$
|
190
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|
|
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|
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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
|
|
$
|
1,237
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|
$
|
2,881
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|
|
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|
|
|
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|
Additions of property, plant and equipment financed with capital
leases
|
|
$
|
304
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|
$
|
788
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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
.
Renegy Holdings, Inc. (Renegy, or the Company,)
was incorporated on May 1, 2007 as a wholly-owned subsidiary of Catalytica Energy Systems, Inc.
(Catalytica), a Delaware corporation, for purposes of completing the transaction contemplated by
the Contribution and Merger Agreement (the Contribution and Merger Agreement) dated as of May 8,
2007, as amended, by and among (i) the Company, (ii) Catalytica, (iii) Snowflake Acquisition
Corporation (Merger Sub), a Delaware corporation and wholly-owned subsidiary of the Company,
(iv) Renegy, LLC (Renegy LLC), an Arizona limited liability company, (v) Renegy Trucking, LLC
(Renegy Trucking), an Arizona limited liability company, (vi) Snowflake White Mountain Power,
LLC, an Arizona limited liability company (Snowflake and, together with Renegy LLC and Renegy
Trucking, the Snowflake entities), (vii) Robert M. Worsley (R. Worsley or Mr. Worsley),
(viii) Christi M. Worsley (C. Worsley and together with R. Worsley, the Worsleys) and (ix) the
Robert M. Worsley and Christi M. Worsley Revocable Trust (the Worsley Trust and, together with R.
Worsley and C. Worsley, Worsley).
On October 1, 2007, the parties to the Contribution and Merger Agreement completed the
transaction pursuant to the terms of the Contribution and Merger Agreement. In the transaction,
Catalytica and the Snowflake entities combined their businesses through the merger of Merger Sub
with and into Catalytica, with Catalytica surviving the merger, and the concurrent contribution to
Renegy by the Worsley Trust, the beneficial owners of the Snowflake entities, of all of the
outstanding equity interests of the Snowflake entities (the Merger Transaction). As a result of
the Merger Transaction, Catalytica and the Snowflake entities became wholly-owned subsidiaries of
Renegy.
In accordance with SFAS No. 141,
Business Combinations,
the Snowflake entities were
considered to have acquired Catalytica. Accordingly, the purchase price was allocated among the
fair values of the assets acquired and liabilities assumed of Catalytica, and the historical
results of the Snowflake entities became the basis of comparative historical information of the
combined company. Although the Company continued as the surviving legal entity after the Merger
Transaction, the accompanying information presents the results of the Company for the three and six
months ended June 30, 2008 (Successor) and the comparative results of the Snowflake entities for
the three and six months ended June 30, 2007 (Predecessor). All references to the three or six
months ended June 30, 2008 refer to results of the Company. All references to the three or six
months ended June 30, 2007 refer to the Predecessors results.
Prior to consummation of the Merger Transaction, Mr. Worsley operated the Snowflake entities
as single member Arizona limited liability corporations. In connection with consummation of the
Merger Transaction, Worsley became the majority stockholder of the Company. As of June 30, 2008,
Worsley held approximately 57.2% of the Companys outstanding shares.
Description of Business
.
Renegy is a renewable energy company focused on acquiring,
developing and operating a 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 the Companys power plants, and which sell logs, lumber, shaved wood products
and other high value wood by-products to provide additional value to the Companys primary business
operations.
The Companys current biomass power generating assets include a 24 megawatt (MW) facility
near Snowflake, Arizona (the Snowflake plant), which has synchronized to the electrical grid and
began generating and selling commercial power during the second quarter of 2008, and an idle 13 MW
biomass plant in Susanville, California (the Susanville plant), which the Company intends to
refurbish and restart by early 2010. Renegy has also signed Letters of Intent for the acquisition
of two additional biomass facilities; one related to an operating 20 MW facility in Loyalton,
California and another related to an idle 18 MW facility in Ione, California. Both of these
opportunities under Letters of Intent have the potential to reach financial close during the fourth
quarter of 2008, subject to Renegys completion of final due diligence, entering into definitive
purchase agreements for the plants, securing necessary financing, and certain other closing
conditions.
7
The Company seeks to become a leading biomass to electricity independent power producer
(IPP) in North America utilizing wood waste as a primary fuel source. The Company plans 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. The Company also plans to continually explore opportunities to expand its
fuel aggregation business to support future biomass power facilities. The Company has already
identified and begun to explore multiple additional biomass project opportunities totaling more
than 1,000 MW of power output as well as strategic business acquisition opportunities that
complement its current business activities, build upon its core competencies, and strengthen its
market position.
Unaudited Interim Financial Information.
The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles for interim financial
information generally accepted in the United States (GAAP) and with the instructions to Form 10-Q
and Articles 8 and 10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. The balance sheet data for
December 31, 2007 was derived from audited financial statements, but does not include all
disclosures required by GAAP. This Form 10-Q report should be read in conjunction with Renegys
Annual Report on Form 10-KSB for the year ended December 31, 2007. Certain amounts reported in
previous periods have been reclassified to conform to the current period presentation. Operating
results for the three and six months ended June 30, 2008 are not necessarily indicative of the
results that may be expected for any other interim period or for the full fiscal year.
The preparation of financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
Principles of Consolidation
.
Predecessor
The combined financial statements include the accounts of the Snowflake entities. All
material intercompany accounts and transactions have been eliminated in combination. All
material intercompany transactions were conducted at arms length in the opinion of
management of the Snowflake entities. The combined financial statements are presented as a
pooling of interests in accordance with AICPA Practice Bulletin 14,
Accounting and
Reporting by Limited Liability Companies and Limited Liability Partnerships
.
Successor
The consolidated financial statements include the accounts of Renegy and its wholly owned
subsidiaries. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Recent Accounting Pronouncements
.
In September 2006, the FASB issued SFAS No. 157 (SFAS
157),
Fair Value Measurements,
which addresses the measurement of fair value by companies when
they are required to use a fair value measure for recognition or disclosure purposes under GAAP,
and expands disclosures about fair value measurements. SFAS 157 provides a common definition of
fair value to be used throughout GAAP which is intended to make the measurement of fair value more
consistent and comparable and improve disclosures about those measures. SFAS 157 is effective for
all financial assets and liabilities that are recognized or disclosed at fair value on a recurring
basis in an entitys financial statements issued for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position 157-2 (FSP 157-2),
Effective Date
of FASB Statement No. 157
, which delays the effective date of SFAS 157 for all nonfinancial assets
and liabilities 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.
8
In February 2007, the FASB issued SFAS No. 159 (SFAS 159),
The Fair Value Option for
Financial Assets and Financial Liabilities.
SFAS 159 allows an entity the irrevocable option to
elect fair value for the initial and subsequent measurement of certain financial assets and
liabilities on an instrument-by-instrument basis. Subsequent changes in fair value of these
financial assets and liabilities are recognized in earnings when they occur. SFAS 159 is effective
for an entitys financial statements issued for fiscal years beginning after November 15, 2007. The
Company adopted the provisions of SFAS 159 on January 1, 2008. The Company did not elect to
measure financial instruments and other items at fair value and therefore, the adoption did not
have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141R),
Business Combinations
,
which amends SFAS No. 141, and provides revised guidance for recognizing and measuring identifiable
assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the
acquiree. It also provides disclosure requirements to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS 141R 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.
In March 2008, the FASB issued SFAS No. 161 (SFAS 161),
Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133
, which requires enhanced
disclosures about an entitys derivative and hedging activities. SFAS 161 requires enhanced
disclosures about how and why an entity uses derivative instruments; how derivative instruments and
related hedged items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities
, and its related interpretations; and how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows.
SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption
encouraged. SFAS 161 encourages, but does not require, comparative disclosures for earlier periods
at initial adoption. The Company is currently assessing the impact, if any; the adoption of SFAS
161 will have on the disclosures included in the consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162 (SFAS 162),
Hierarchy of Generally Accepted
Accounting Principles.
SFAS 162 identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial statements. SFAS 162 is effective
60 days following the SECs approval of the Public Company Accounting Oversight Board amendments to
AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles
. The adoption of SFAS 162 will not have an impact on our consolidated financial
position, results of operations or liquidity, as this new standard codifies existing GAAP, rather
than modifying GAAP.
Note 2. Operations and Financing
The Company and its Predecessor have incurred significant losses and negative cash flows since
inception. The Company has financed its operations and the construction of the Snowflake plant
primarily through the issuance of bonds, borrowings under construction and term loans with a bank,
cash and short-term investments obtained in the acquisition of Catalytica, proceeds from the sale
of Catalyticas SCR-Tech subsidiary, an equity infusion from
Worsley, an advance from Worsley, and borrowings under a line of credit.
During
the first half of 2008, the Company secured a $6.2 million line
of credit, obtained an equity infusion of $5.0 million from Worsley to cover certain cost overruns at the Snowflake plant,
and received a $0.6 million advance from Worsley. In July 2008, the Company received an additional $0.4 million
advance from Worsley. In August 2008, such advances were converted to
a convertible note, which is described more fully in Note 15.
The Company believes that these funds, along with the
funding by Worsley of the debt service reserve (as defined in the
CoBank debt agreements) pursuant to a second letter agreement (see Note 15),
cash generated by its Snowflake operations, and its cash, cash equivalents, and restricted
cash balances at June 30, 2008, will be sufficient to satisfy the Companys liquidity requirements
through September 2008.
9
Pursuant
to a second letter agreement (see Note 15), Worsley has committed to
use commercially reasonable efforts to personally provide the Company
up to an additional $4.0 million, if necessary, under the same
terms as the convertible note as
described in Note 15, to fund operations for the remainder of 2008.
The Snowflake plant was synchronized to the electrical grid and is currently generating and
selling commercial power to Arizona Public Service Co. (APS) and Salt River Project (SRP) in
accordance with the terms of power purchase agreements (PPAs) with those parties. However, the
Snowflake Plant has not yet achieved term conversion as defined in its credit agreement with
CoBank, which is expected to occur on or before August 31, 2008. If certain milestones are not
reached by August 31, 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 of the terms of such debt, seek to refinance
such debt or seek alternative debt or equity financing. No assurance can be given that such
financing will be available on acceptable terms, or at all.
The Snowflake plant is expected to generate positive cash flows once fully operational.
However, these cash flows will not fully offset our corporate overhead and debt payment
requirements. Failure to achieve positive cash flows from the Snowflake plant would likely have a
material adverse impact on the Companys consolidated financial position, results of operations and
cash flows. 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. The Company is actively seeking third party debt and equity
financing. Additionally, the Company is exploring a transaction to
monetize production tax credits and other tax attributes of its
Snowflake plant. No assurance can be given that additional financing
will be available on acceptable terms, or at all.
Further, 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 the Company is unable to raise additional capital or secure additional
financing from Worsley or third parties for the remainder of 2008 and beyond; the Company 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, fuel
aggregation and wood products business, or the Company in its entirety. The aforementioned
conditions raise substantial doubt about the Companys ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or liabilities that may
result from the outcome of this uncertainty.
Note 3. Other Financial Data
Statements of Operations Supplemental Information
Comprehensive Loss
The components of comprehensive loss are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
Six Months Ended,
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,537
|
)
|
|
$
|
(2,851
|
)
|
|
$
|
(7,510
|
)
|
|
$
|
(3,915
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(2,537
|
)
|
|
$
|
(2,851
|
)
|
|
$
|
(7,513
|
)
|
|
$
|
(3,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
During the three months ended March 31, 2008, all of the Companys available-for-sale
securities matured or were liquidated and the proceeds were invested in cash equivalents.
At June 30, 2008, the balance of accumulated other comprehensive income (loss) was zero.
Balance Sheets Supplemental Information
Biomass Fuel and Inventories
Biomass fuel represents organic materials consisting principally of wood chips, forest
slash, woody waste, and logs. After commencement of operations of the
Snowflake plant during the second quarter of 2008, the majority of biomass fuel will be processed and burned in
the power generation process in the Companys Snowflake plant. The costs of aggregating and
preparing those organic materials for use are capitalized as incurred. Such costs include
direct and indirect expenses of the fuel aggregation operations. Varying quantities of wood
chips are purchased from external sources and are capitalized at cost. Materials used in
the power generation process are relieved at weighted-average cost.
Prior to commencement of operations of the Snowflake plant, biomass fuel was classified as
inventories and accounted for in accordance with SFAS No. 151,
Inventory Costs
. Certain
lumber and mulch inventory was held for sale to retailers. Inventories were stated at the
lower of cost or market based on the first-in, first-out method. Abnormal costs related to
inefficiencies incurred in inventory procurement and aggregation, freight, and handling
costs were recognized as current period charges in cost of wood products operations and were
approximately $0.6 and $1.0 million during the three and six months ended June 30, 2007,
respectively.
During April and June 2007, the wood chip piles located adjacent to the Snowflake plant site
caught fire, resulting in a loss of approximately $3.3 million in the second quarter of
2007.
Idle Property and Equipment
Idle property and equipment consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Susanville biomass plant
|
|
$
|
1,300
|
|
|
$
|
1,300
|
|
Sawmill equipment
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,375
|
|
|
$
|
1,300
|
|
|
|
|
|
|
|
|
In November 2007, the Company acquired an idle biomass plant in Susanville, California. The
property and equipment acquired in that purchase is classified as idle property and
equipment until efforts to refurbish the plant to operational status begin, anticipated for
early 2010. Sawmill equipment, which was written down to fair value during the three months
ended March 31, 2008 as described in Note 6, is classified as idle property and equipment
until a decision is made to sell the equipment or resume operations.
11
Long-Term Debt
The Companys long-term debt and capital lease obligations balances are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
ID Bonds Solid Waste Disposal Revenue Bonds, due 2037, principal
repayments required January 2014 through January 2026 per related letter
of credit, quarterly payments of interest at a variable rate determined by
the bond underwriter (1)
|
|
$
|
39,250
|
|
|
$
|
39,250
|
|
SWMP Construction Loan construction loan to bank, converts to term
loan no later than August 31, 2008, principal payments through maturity in
January 2014, quarterly payments of interest at LIBOR plus 1.5% through
March 2013, then LIBOR plus 1.8% through maturity in January 2014 (1)
|
|
|
9,302
|
|
|
|
9,302
|
|
Renegy Term Facility construction loan to bank, converts to term loan no
later than August 31, 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 note payable in May 2008; monthly
payments of principal and interest at 6.6% per annum from June 2008
through May 2013
|
|
|
1,652
|
|
|
|
1,372
|
|
Other
|
|
|
961
|
|
|
|
323
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
52,657
|
|
|
|
51,718
|
|
Less current maturities
|
|
|
(2,076
|
)
|
|
|
(776
|
)
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
50,581
|
|
|
$
|
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 and six months ended June 30, 2008, the weighted average number of shares outstanding is
based on the actual number of shares outstanding for the period. For the three and six months
ended June 30, 2007 of the Predecessor, the weighted average number of shares outstanding is based
on the number of shares of Renegy common stock issued to the Worsley Trust in the Merger
Transaction. Diluted EPS includes the effect of dilutive securities assumed to be exercised using
the treasury stock method. As the potentially dilutive securities were anti-dilutive because net
operating losses were incurred for the three and six months ended June 30, 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 June 30, 2008 and
2007 were 711,566 and zero, respectively. Total warrants outstanding as of June 30, 2008 and 2007
were 2,533,023 and zero, respectively.
Note 5. Stock Based Compensation
Stock based compensation is calculated by estimating the fair value of stock based awards at
the measurement date, in accordance with SFAS No. 123(R),
Share-Based Payment,
and is recognized
over the requisite service period, which typically equals the vesting period. The fair value of
grants with immediate vesting is immediately expensed. The measurement date for stock based awards
issued to nonemployees is determined in accordance with Emerging Issues Task Force 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services
.
12
In January 2008, the Company granted 235,600 stock options to certain employees. In March
2008, the Company granted 100,000 stock options in connection with the employment of its chief
operating officer. Both sets of option grants have four year vesting periods and ten year
contractual terms.
In March 2008, the Company granted 81,300 stock options to members of Renegys board of
directors. These options vested immediately and have ten year contractual terms.
In January 2008, the Company issued warrants to purchase 60,000 shares of Renegys common
stock to a consultant. These warrants vest equally over twelve months, with the initial 5,000
shares vesting on February 1, 2008, and the warrants expire on January 1, 2015. Stock based
compensation related to these warrants is calculated by estimating the fair value of each tranche
as it vests.
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,
|
|
|
Six Months Ended,
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Stock options
|
|
$
|
63
|
|
|
$
|
|
|
|
$
|
307
|
|
|
$
|
|
|
Warrants
|
|
|
42
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
105
|
|
|
$
|
|
|
|
$
|
383
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Impairment of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets
, the Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be fully recoverable. If
such a review indicates the carrying value of assets will not be recoverable, as measured based on
estimated undiscounted cash flows over their remaining life, the carrying amount would be adjusted
to fair value. The cash flow estimates contain managements best estimates, using appropriate and
customary assumptions and projections at the time.
During 2007, due to declines in lumber prices and increased operating costs, the Predecessor
ceased operating its sawmill and began leasing the sawmill facility and equipment to an independent
operator. In early 2008, this lease was cancelled. As this event represented a significant
adverse change in the extent or manner in which the sawmill asset group was being used, the Company
ceased depreciation of the asset group and performed an impairment test in which it determined the
carrying value of the sawmill asset group would not be recoverable. Accordingly, the Company
adjusted the carrying amount to fair value and recorded a $109,000 impairment charge in cost of
wood product operations in the accompanying financial statements for the three months ended March
31, 2008.
Note 7. Major Customers and Suppliers
Three customers accounted for approximately 90% of the Companys revenues for the three months
ended June 30, 2008. Four customers accounted for approximately 91% of the Companys revenues for
the six months ended June 30, 2008. Three customers accounted for approximately 83% of the
Predecessors revenues for the three months ended June 30, 2007. Six customers accounted for
approximately 88% of the Predecessors revenues for the six months ended June 30, 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 APS and
SRP.
Four customers accounted for 93% of the Companys trade accounts receivable at June 30, 2008.
Two customers accounted for 94% of the Companys trade accounts receivable at December 31, 2007.
13
The Company received a substantial portion of its supplies, materials and third party services
used in construction of the Snowflake plant from four and six vendors during the three and six
months ended June 30, 2008, respectively, totaling approximately $1.9 million and $7.3 million,
respectively; and from sixteen vendors during the six months ended June 30, 2007, totaling
approximately $13.3 million.
Note 8. Equity Infusion, Advance from Related Party, 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 associated with the construction and
completion of the Snowflake plant in excess of the project cost budget of approximately $67.3
million (the Project Cap) plus $8.0 million of project costs in excess of the Project Cap agreed
to be paid by the Company per the sponsor guaranty and letter agreement. Pursuant to those
agreements, Worsley deposited $5.0 million cash in the Companys general operating bank account in
March 2008.
In June and July 2008, Worsley deposited $0.6 million and $0.4 million cash, respectively, in
the Companys general operating bank account to address the possibility of additional project costs
in excess of the Project Cap prior to commencement of commercial operations of the Companys
Snowflake plant. Pursuant to a second letter agreement, which is described in Note 15, such funds
were determined to exceed those required to cover such overrun
amounts. As a result, the Company and Worsley agreed to convert such
advances to a convertible note in August 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 June 30, 2008, the
Company had drawn $2.0 million on this line.
14
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 capitalized interest expense
associated with the construction of the Snowflake plant, net of the associated interest income
associated with tax-exempt borrowings under the ID Bonds. Interest income associated with
tax-exempt borrowings approximated zero and $6,000 for the three and six months ended June 30,
2008, respectively. Interest income of the Predecessor associated with tax-exempt borrowings
approximated $284,000 and $510,000 for the three and six months ended June 30, 2007, respectively.
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 and six months ended June 30, 2008 and
approximately 4.6% during the three and six months ended June 30, 2007. The following table
summarizes project interest costs incurred and capitalized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
(Successor)
|
|
|
(Predecessor)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project interest costs incurred
|
|
$
|
642
|
|
|
$
|
500
|
|
|
$
|
1,285
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Project interest costs
capitalized
|
|
$
|
642
|
|
|
$
|
284
|
|
|
$
|
1,279
|
|
|
$
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of interest expense in connection with the construction of the Snowflake plant
ceased upon commencement of commercial operations under PPAs with APS and SRP near the end of the
second quarter of 2008.
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.
15
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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
at Reporting Date Using
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
|
As of
|
|
|
Assets or
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
June 30,
|
|
|
Liabilities
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments(2)
|
|
$
|
3,583
|
|
|
$
|
|
|
|
$
|
3,583
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,583
|
|
|
$
|
|
|
|
$
|
3,583
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
broker-dealer quotations. During the three months ended March 31, 2008, all of the
Companys available-for-sale securities matured or were liquidated and the proceeds
were invested in cash equivalents.
|
|
(2)
|
|
The fair values of the Companys derivative instruments are based on the
discounted expected future cash flows of the interest rate swaps based on LIBOR yield
curves at the reporting date.
|
16
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 June 30, 2008, the Company has two interest rate swaps to assist in management of the
cost of debt, which are described more fully below. These interest rate swaps do not qualify for
accounting treatment as cash flow hedges in accordance with SFAS No. 133; therefore, any changes in
their fair values are recognized in current earnings.
On September 8, 2006, the Predecessor entered into two floating to fixed interest rate swap
agreements related to construction project debt associated with the Snowflake plant that
economically fixes the interest rate on its ID Bonds and a portion of the SWMP Construction Loan.
The fair value of the Companys interest rate swap agreements is the estimated amount the Company
would receive or pay to terminate the agreement based on the net present value of the future cash
flows as defined in the swap agreements. The Companys liability, measured at fair value, related
to these swap agreements was $3,583,000 and $4,602,000 as of June 30, 2008 and December 31, 2007,
respectively. These swap agreements are summarized as follows:
|
|
|
|
|
|
|
SWAP 1
|
|
SWAP 2
|
|
|
(ID Bonds)
|
|
(SWMP Construction Loan)
|
|
Notional amount at June 30, 2008
|
|
$39,250,000
|
|
$8,669,000
|
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 June 30, 2008
|
|
$3,366,000
|
|
$217,000
|
Fair value of liability at December 31,
2007
|
|
$4,297,000
|
|
$305,000
|
Note 12. Segment Disclosures and Related Information
SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information,
requires
disclosures of certain information about operating segments in interim reporting periods. The
method for determining what information to report under SFAS No. 131 is based upon the management
approach, or the way that management organizes the operating segments within the Company, for
which separate financial information is available that is evaluated regularly by the Chief
Operating Decision Maker (CODM) in deciding how to allocate resources and in assessing
performance. Our CODM is our Chief Executive Officer.
The Company currently operates in only one primary segment focused on acquiring, developing,
and operating biomass power generation facilities. As such, no additional segment disclosures are
presented related to revenues, profit or loss, or total assets for the three and six months ended
June 30, 2008.
17
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 $1.9 million in immediately
available funds 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.
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 commercial operations of the
Snowflake plant, as defined, the Company must maintain a 2
1
/
2
year availability of fuel, other than
paper sludge, either on the plant site or available from counterparties under contract, provided
that at least a one year stockpile of such availability of fuel, other than paper sludge, is on the
plant site at all times.
The Company is subject to various legal proceedings and claims, either asserted or unasserted,
which arise in the ordinary course of business. While the outcome of these claims cannot be
predicted with certainty, management does not believe the outcome of any of these matters will have
a material adverse effect on the Companys financial position, results of operations or cash flows.
18
Post-merger Renegy-related
Merger Transaction representations and warranties
In connection with the Contribution and Merger Agreement, Worsley has agreed to indemnify
Catalytica and Renegy and Renegys respective affiliates, directors, officers and employees from
and against any and all damages arising out of, resulting from or in any way related to a breach
of, or the failure to perform or satisfy any of the representations, warranties, covenants and
agreements made by any of the Snowflake entities and/or Worsley in the Contribution and Merger
Agreement. Renegy and Catalytica have agreed to indemnify Worsley from and against any and all
damages arising out of, resulting from or in any way related to (i) a breach of, or the failure to
perform or satisfy any of the representations, warranties, covenants and agreements made by
Catalytica in the Contribution and Merger Agreement, and (ii) the construction cost guarantee of
Worsley to CoBank up to $2.0 million. The respective obligations of the parties to indemnify for
any breaches of their respective representations and warranties will survive until April 1, 2009,
except for any indemnification claim resulting from fraud or intentional misrepresentation. No
indemnification is required until the aggregate liability for a party exceeds $250,000, and the
indemnity obligations of each party are subject to a $10.0 million cap, except in the case of fraud
or intentional misrepresentation. The indemnification obligations of Worsley may be satisfied in
cash or shares of the Companys common stock based on a value of $12.25 per share, rounded up to
the nearest whole share. Renegys obligation to indemnify Worsley may be satisfied by paying cash
or shares of Renegy common stock, grossed up to reflect Worsleys anticipated 58.5% ownership of
Renegys outstanding common stock, which percentage was projected at the time of execution of the
Contribution and Merger Agreement to exist at consummation of the Contribution and Merger Agreement
using the treasury stock method. Specifically, Renegy may pay cash to Worsley in an amount equal
to (i) the quotient obtained by dividing (a) the amount of the damages for which indemnification is
being made by (b) 0.415, less (ii) the amount of such damages (the adjusted damages) or issue to
the Worsley Trust such number of Renegy shares equal to the quotient obtained by dividing (i) the
adjusted damages by (ii) $12.25, rounded up to the nearest whole share.
In addition, in connection with the Contribution and Merger Agreement, the Company has agreed
to indemnify the Worsleys for any claims arising under their guarantee to Salt River Project
relating to the payment of all sums owed by Snowflake to Salt River Project under its power
purchase agreement with Snowflake and for maintaining a net worth of at least $35 million.
Overrun Guaranty
Pursuant to a sponsor guaranty, dated September 1, 2006 between R. Worsley and C. Worsley and
CoBank ACB, R. Worsley and C. Worsley guaranteed the payment of all project costs in excess of the
project cost budget of approximately $67.3 million (the Project Cap), as defined in the credit
agreement dated September 1, 2006, as amended, by and among Renegy LLC, Renegy Trucking, Snowflake
and CoBank ACB. Pursuant to the Contribution and Merger Agreement, the Company agreed to pay up to
$2.0 million of project costs in excess of the Project Cap. Further, pursuant to an Overrun
Guaranty dated May 8, 2007 (the Overrun Guaranty), the Worsleys agreed to pay to Renegy the
amount by which project costs exceed the sum of the Project Cap and $2.0 million in sufficient time
for the Company to be able to pay such excess project costs. A committee of independent directors
(the Special Committee), acting on behalf of the Company, has the authority to enforce the
Worsleys obligations under the Overrun Guaranty.
In February 2008, the Company entered into a Letter Agreement (the Letter Agreement) with
Worsley, under which the Company will be responsible for the payment of an additional $6.0
million of capital costs beyond the Project Cap and the $2.0 million already payable by the Company
as described above. The Letter Agreement provides the Company will have no obligation to pay for
any project costs beyond the $2.0 million previously agreed to and the $6.0 million described in
this paragraph. In connection with the Letter Agreement, Worsley deposited $5.0 million cash in
the Companys general operating bank account on March 4, 2008.
In August 2008, the Company entered into a second letter agreement
with
Worsley, which is described more fully in Note 15.
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.
19
Susanville Land Lease and Option to Purchase
In connection with a lease agreement entered into in February 2008, the Company is leasing
approximately 40 acres of land on which an idle biomass plant owned by the Company is located.
This lease provides for monthly lease payments of $30,000 commencing January 31, 2008 and
terminating no later than January 30, 2013. Simultaneously with entering in the lease, for
consideration of $100,000, the Company entered into an Option Agreement (the Option Agreement)
which provides the option to acquire the land for a purchase price of $80,000 per acre. The Option
Agreement provides that the initial $100,000 payment shall be credited against the purchase price
upon exercise of the purchase option. In addition, the lease provides that 100% of the first 24
months of lease payments made shall apply to the purchase price if exercised during the first 24
months, or 50% of all lease payments made shall apply to the purchase price if exercised anytime on
or after the first day following the 24
th
month of the lease term.
Note 14. Warrants
In connection with the Merger Transaction, the Company issued 2,473,023 common stock purchase
warrants to the Worsley Trust. Each warrant entitles the Worsley Trust the right to purchase one
share of the Companys common stock at an exercise price of $16.38 per share, vesting in three
tranches conditioned upon the Companys achievement of certain renewable energy-related milestones
and expiring at specified times no later than six years following the closing of the Merger
Transaction.
The first tranche provides for vesting if the Companys Snowflake biomass plant achieved
commercial operation by no later than July 1, 2008. As the Company achieved commercial operations
under its PPAs with APS and SRP on June 10, 2008, the first tranche of 824,341 warrants vested and
became exercisable on that date.
Note 15. Subsequent Event
On August 13, 2008, we entered into a Second Letter Agreement (the Second Letter Agreement)
with Worsley, to finalize all amounts owed under the Overrun Guaranty, as the Snowflake Plant
had commenced commercial operations as of June 10, 2008 as such term is defined in the Overrun
Guaranty. The Special Committee and Worsley agreed that Worsleys obligation to pay for the remaining project cost
overruns incurred prior to the commencement of commercial operations would be satisfied by the $5.0 million deposited by
Worsley to the Company in March 2008 and funding by Worsley of the debt service reserve (as defined
in the CoBank debt agreements, the DSR) requirements in the amount of approximately $2.8 million
prior to the CoBank term conversion date, which is expected to occur on or before August 31, 2008,
through the direct deposit of funds or a letter of credit.
In addition, in light of potential overrun expenditures resulting in improvements to the
operation of the Snowflake plant, the parties agreed that Worsley would be released from his
obligation with respect to the DSR to the extent the Snowflake plant operates in excess of certain
output parameters. Specifically, Worsleys obligation to fund the DSR would be reduced monthly in
an amount equal to 70% of the revenue on daily output in excess of 576 megawatt-hours (MWh). In
addition, the parties agreed pursuant to the Second Letter Agreement that the $0.6 million and $0.4 million deposited by Worsley to the Company
in June and July 2008, respectively, to address the possibility of additional overruns prior to
commencement of commercial operations, would be converted to a
convertible note issued to Worsley, since these funds
were determined to exceed those required to cover such overrun
amounts. The convertible note, which is subordinated to
all other Company secured debt and accrues interest at 10% per annum, will automatically convert
if, prior to December 31, 2009 (the Maturity Date),
the Company obtains at least $5.0 million of
equity financing pursuant to the issuance of equity securities of the Company pursuant to a private
placement to one or more bona fide third party investors (an Equity Funding Event). Upon
completion of the Equity Funding Event, the entire principal amount of the convertible debt,
together with accrued interest thereon, will be converted as part of such financing into the same
type of equity securities issued in the Equity Funding Event and at the same purchase price for
such equity securities in the Equity Funding Event. In the event that the Company
does not complete an Equity Funding Event prior to December 31,
2008, then Worsley will have the right, at his
option, to convert the outstanding principal and accrued interest
under the convertible note, in whole but
not in part, into the Companys common stock, at a per share
conversion price equal to the closing price of the Companys
common stock as quoted on the Nasdaq Capital market on the date prior
to the date of such notice of conversion.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following section provides information which management believes is relevant to an
assessment and understanding of our financial condition and results of operations. This
information should be read in conjunction with the Consolidated Financial Statements and related
notes thereto and our 2007 Annual Report on Form 10-KSB.
Forward-Looking Statements
This Managements Discussion and Analysis and other parts of this Report on
Form 10-Q
and our
2007 Annual Report on
Form 10-KSB
contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that involve risks and uncertainties. The words anticipates, believes,
estimates, expects, intends, plans, will and similar expressions identify forward-looking
statements, which are based on information available to us on the date hereof. We assume no
obligation to publicly update or revise any such forward-looking statements.
You should not place undue reliance on forward-looking statements. They are subject to known
and unknown risks, uncertainties, and other factors that may cause our actual results to be
materially different from any future results expressed or implied by the forward-looking
statements.
Should the underlying assumptions associated with these forward-looking statements, or should
one or more of the risks or uncertainties described in the section titled Risk Factors located
within Part I, Item 1 of our 2007 Annual Report on
Form 10-KSB
and elsewhere in our 2007 Annual
Report on
Form 10-KSB
, as well as in this
Form 10-Q
occur, our actual results could differ
materially from those anticipated in these forward-looking statements.
Basis of Presentation
The following discussion and analysis of financial condition and results of operations covers
periods prior to the consummation of the Merger Transaction (as defined herein) and periods
subsequent to the consummation of the Merger Transaction. Information presented for the three and
six months ended June 30, 2008 is based on the unaudited financial statements of the Company (as
defined herein). Information presented for the three and six months ended June 30, 2007 is based
on the unaudited financial statements of the Snowflake entities (as defined herein).
Introduction
Renegy is a renewable energy company focused on acquiring, developing and operating a growing
portfolio of biomass to electricity power generation facilities to address an increasing demand for
economical power relying on alternative energy sources. We seek to 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.
21
History
Renegy was incorporated on May 1, 2007, as a wholly-owned subsidiary of Catalytica Energy
Systems, Inc. (Catalytica), a Delaware corporation, for purposes of completing the transaction
contemplated by the Contribution and Merger Agreement (the Contribution and Merger Agreement)
dated as of May 8, 2007, as amended, by and among (i) the Company, (ii) Catalytica, (iii)
Snowflake Acquisition Corporation (Merger Sub), a Delaware corporation and wholly-owned
subsidiary of the Company, (iv) Renegy, LLC (Renegy LLC), an Arizona limited liability company,
(v) Renegy Trucking, LLC (Renegy Trucking), an Arizona limited liability company, (vi) Snowflake
White Mountain Power, LLC, an Arizona limited liability company (Snowflake and, together with
Renegy LLC and Renegy Trucking, the Snowflake entities), (vii) Robert M. Worsley (R. Worsley or
Mr. Worsley), (viii) Christi M. Worsley (C. Worsley) and (ix) the Robert M. Worsley and Christi
M. Worsley Revocable Trust (the Worsley Trust and, together with R. Worsley and C. Worsley,
Worsley).
On October 1, 2007, the parties to the Contribution and Merger Agreement completed the
transaction pursuant to the terms of the Contribution and Merger Agreement. In the transaction,
Catalytica and the Snowflake entities combined their businesses through the merger of Merger Sub
with and into Catalytica, with Catalytica surviving the merger, and the concurrent contribution to
Renegy by the Worsley Trust, the beneficial owners of the Snowflake entities, of all of the
outstanding equity interests of the Snowflake entities (the Merger Transaction). As a result of
the Merger Transaction, Catalytica and the Snowflake entities became wholly-owned subsidiaries of
Renegy.
The Snowflake entities were formed as single member Arizona limited liability companies in
September 2004. Each of the Snowflake entities was organized to run in perpetuity or until
terminated by the Board of Managers.
Overview
Our first project is a 24 megawatt (MW) biomass plant near Snowflake, Arizona (the
Snowflake plant). This biomass facility, which has synchronized to the electrical grid and began
generating and selling commercial power during the second quarter of 2008, has 15- and 20-year
power purchase agreements (PPAs) in place with Arizona Public Service Co. (APS) and Salt River
Project (SRP), respectively, Arizonas two largest electric utility companies. The PPAs provide
that all of the power generated over the respective term is pre-sold for the length of each
respective PPA.
In November 2007, we acquired an idle 13 MW biomass plant in Susanville, California that we
plan to refurbish and restart. Because we will be required to apply for new air permits for the
plant, we currently estimate operations for this plant likely will not be restarted until early
2010. This timing continues to be 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.
We have also signed Letters of Intent for the acquisition of two additional biomass
facilities; one related to an operating 20 MW facility in Loyalton, California and another related
to an idle 18 MW facility in Ione, California. Both of these opportunities have the potential to
reach financial close during the fourth quarter of 2008, subject to Renegys completion of final
due diligence, entering into definitive purchase agreements for the plants, securing necessary
financing, and certain other closing conditions.
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 1,000 MW 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.
22
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an
on-going basis, we evaluate our estimates and judgments based on historical experience and various
other factors we believe to be reasonable under the circumstances, the results of which form the
basis of our judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results would differ from these estimates under different
assumptions or conditions.
Our critical accounting policies and estimates are disclosed in our December 31, 2007 Annual
Report on Form 10-KSB.
Results of Operations
The following table presents the results of operations for the three and six months ended June
30, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power generation
|
|
$
|
921
|
|
|
$
|
|
|
|
$
|
921
|
|
|
$
|
921
|
|
|
$
|
|
|
|
$
|
921
|
|
Wood product and other
|
|
|
188
|
|
|
|
284
|
|
|
|
(96
|
)
|
|
|
536
|
|
|
|
780
|
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,109
|
|
|
|
284
|
|
|
|
825
|
|
|
|
1,457
|
|
|
|
780
|
|
|
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
1,753
|
|
|
|
|
|
|
|
1,753
|
|
|
|
1,799
|
|
|
|
|
|
|
|
1,799
|
|
Cost of wood product operations
|
|
|
255
|
|
|
|
4,335
|
|
|
|
(4,080
|
)
|
|
|
1,819
|
|
|
|
5,295
|
|
|
|
(3,476
|
)
|
General, administrative and development
|
|
|
2,525
|
|
|
|
219
|
|
|
|
2,306
|
|
|
|
5,911
|
|
|
|
477
|
|
|
|
5,434
|
|
Loss (gain) on sale or disposal of assets
|
|
|
3
|
|
|
|
88
|
|
|
|
(85
|
)
|
|
|
(157
|
)
|
|
|
88
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
4,536
|
|
|
|
4,642
|
|
|
|
(106
|
)
|
|
|
9,372
|
|
|
|
5,860
|
|
|
|
3,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,427
|
)
|
|
|
(4,358
|
)
|
|
|
931
|
|
|
|
(7,915
|
)
|
|
|
(5,080
|
)
|
|
|
(2,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
39
|
|
|
|
213
|
|
|
|
(174
|
)
|
|
|
145
|
|
|
|
529
|
|
|
|
(384
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Interest expense
|
|
|
(28
|
)
|
|
|
(227
|
)
|
|
|
199
|
|
|
|
(51
|
)
|
|
|
(508
|
)
|
|
|
457
|
|
Other expense
|
|
|
(62
|
)
|
|
|
(37
|
)
|
|
|
(25
|
)
|
|
|
(201
|
)
|
|
|
(73
|
)
|
|
|
(128
|
)
|
Debt commitment fees
|
|
|
(265
|
)
|
|
|
(306
|
)
|
|
|
41
|
|
|
|
(526
|
)
|
|
|
(571
|
)
|
|
|
45
|
|
Change in fair value of derivative
instruments
|
|
|
1,206
|
|
|
|
1,864
|
|
|
|
(658
|
)
|
|
|
1,019
|
|
|
|
1,788
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,537
|
)
|
|
$
|
(2,851
|
)
|
|
$
|
314
|
|
|
$
|
(7,510
|
)
|
|
$
|
(3,915
|
)
|
|
$
|
(3,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the three and six month periods ended June 30, 2008 and 2007
Revenues.
The Snowflake plant began generating revenues related to the production of test
power in April 2008, then, in June 2008, commenced commercial operations in connection with our APS
and SRP power purchase agreements. Wood product and other revenues primarily resulted from the
sale of wood related products and from forest thinning services.
23
Total revenues increased by $825,000, or 290%, to $1,109,000 for the three months ended June
30, 2008, as compared to $284,000 for the three months ended June 30, 2007. This increase was
primarily attributable to power generation revenues and wood shavings sales, partially offset by a
decrease in forest thinning services. Power generation revenues, which began in connection with
commencement of operations at the Snowflake plant during the second quarter of 2008, resulted in
the recognition of $921,000 from the generation of test and commercial power. Sales of pine
shavings materials increased by $90,000 as our wood shavings operations did not begin until late
November 2007. Revenues derived from forest thinning services decreased by $147,000, due to a
decline in subsidized versus non-subsidized thinning projects and a reduction in biomass fuel
aggregation efforts in 2008.
During the three months ended June 30, 2008, three customers accounted for 90% of our
revenues. During the three months ended June 30, 2007, three customers accounted for 83% of our
revenues.
Total revenues increased by $677,000, or 87%, to $1,457,000 for the six months ended June 30,
2008, as compared to $780,000 for the six months ended June 30, 2007. This increase was primarily
attributable to power generation revenues and wood shavings sales, partially offset by declines in
lumber sales and forest thinning services. Power generation revenues, which began in connection
with commencement of operations at the Snowflake plant during the second quarter of 2008, resulted
in the recognition of $921,000 from the generation of test and commercial power. Sales of pine
shavings materials increased by $366,000 as our wood shavings operations did not begin until late
November 2007. Lumber sales decreased by $254,000 due to the cessation of lumber production at our
saw-mill in early 2007. Lumber sales of approximately $261,000 during the first half of 2007
resulted from sales of existing inventory; lumber sales of approximately $7,000 during the first
half of 2008 are reflective of a nearly depleted lumber inventory. Revenues derived from forest
thinning services decreased by $332,000, due to our inability to gain access to the forests due to
weather conditions during the first quarter of 2008, a decline in subsidized versus non-subsidized
thinning projects, and a reduction in biomass fuel aggregation efforts in 2008.
During the six months ended June 30, 2008, four customers accounted for 91% of our revenues.
During the six months ended June 30, 2007, six customers accounted for 88% of our revenues.
We believe the substantial majority of our 2008 revenues will be derived from the delivery of
electric power from our Snowflake plant pursuant to power purchase agreements with APS and SRP. We
believe 2008 total revenues will range between $9.0 million and
$10.0 million, including $1.0
million to $1.5 million of revenues from our wood product operations, driven primarily by our wood
shavings business. However, our revenue expectations are subject to significant uncertainty, as
they are heavily dependent upon the ongoing commercial operations of our Snowflake plant.
Plant Operating Expenses.
Plant operating expenses relate to expenses incurred in the power
generation process at our Snowflake plant and principally consist of biomass fuel burned in the
power generation process, direct labor, management wages, fringe benefits, outsourced labor and
services, insurance, depreciation, and utilities including electricity transmission fees, natural
gas, and electricity.
Plant operating expenses increased by $1,753,000 for the three months ended June 30, 2008 as
compared to the three months ended June 30, 2007. The Snowflake plant began delivering test and
commercial power during the second quarter of 2008. Accordingly, all costs incurred represent an
increase as compared to the second quarter of 2007. Consistent with the commencement of commercial
operations under our power purchase agreements with APS and SRP in June 2008, depreciation expense
reflects only one months expense. Expenses other than depreciation reflect costs incurred for the
entire second quarter, as directly related to revenues generated during the quarter.
Plant operating expenses increased by $1,799,000 for the six months ended June 30, 2008 as
compared to the six months ended June 30, 2007. Expenses incurred during the first quarter of 2008
were not material and were classified as cost of wood product operations in the first quarter
presentation.
Plant operating expenses reported for the six months ended June 30, 2008 are not indicative of
expenses projected for the second half of 2008, as those expenses reflect costs incurred for only
one quarter, or a portion thereof. In addition, certain plant operating costs incurred during the
second quarter may not be indicative of a normal quarter due to the nature of power plant start-up
inefficiencies.
We anticipate that we will incur additional operating costs during the third quarter of 2008
to finalize our start-up activities associated with the Snowflake plant.
24
Cost of Wood Product Operations.
Cost of wood product operations includes costs related to
wood products revenues and principally consists of the cost of wood shavings sold. In addition,
those costs include labor and fringe benefits, utilities, supplies, repairs and maintenance, and
depreciation which are expensed in periods in which there is no shavings production.
Cost of wood product operations decreased by $4,080,000, or 94%, to $255,000 for the three
months ended June 30, 2008 as compared to $4,335,000 for the three months ended June 30, 2007.
This decrease was primarily due to decreases in fire losses and non-capitalized biomass fuel
aggregation expenses, partially offset by increases in the cost of shavings materials sold. During
the second quarter of 2007, the wood chip piles located adjacent to the Snowflake plant site caught
fire, resulting in a loss of approximately $3.3 million (of which approximately $3.0 million was
recovered through insurance in the third quarter of 2007). No such fire losses occurred during
2008. Non-capitalized fuel aggregation expenses decreased by $981,000. During 2007, we accounted
for biomass fuel as inventories, and in accordance with SFAS No. 151,
Inventory Costs
, abnormal
costs related to inefficiencies in inventory procurement and aggregation were recognized as current
period charges. Beginning in the second quarter of 2008, all biomass fuel aggregation expenses
were capitalized as biomass fuel and are no longer classified as inventories. Accordingly, no
biomass fuel aggregation expenses were recognized as current period charges in the second quarter
of 2008. Costs related to sales of wood shavings increased by $124,000 due to the startup of wood
shavings operations in late November 2007.
Cost of wood product operations decreased by $3,476,000, or 66%, to $1,819,000 for the six
months ended June 30, 2008 as compared to $5,295,000 for the six months ended June 30, 2007. This
decrease was primarily due to decreases in fire losses and non-capitalized biomass fuel aggregation
expenses, partially offset by increases in cost of shavings materials sold. Expenses related to
fire losses decreased by $3,335,000 and non-capitalized fuel aggregation expenses decreased by
$648,000, for the same reasons as noted above in the comparison of the three months ended June 30,
2008 to the same period in 2007. Costs related to sales of wood shavings increased by $470,000 due
to the startup of wood shavings operations in late November 2007.
We believe 2008 cost of wood product operations will be lower than 2007, primarily due to the
capitalization of all biomass fuel aggregation costs for the majority of 2008.
General, Administrative and Development (GA&D) Expenses.
GA&D includes wages and related
benefits, stock compensation, facilities and equipment rent, utilities, insurance, consulting and
professional services, legal, and accounting and auditing services. For the first half of 2007,
GA&D included expenses incurred by the Snowflake entities. For the first half 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 $2,306,000 to $2,525,000 for the three months ended June 30, 2008 as
compared to $219,000 for the three months ended June 30, 2007. The increase was largely due to a
$2,176,000 increase in various expenses resulting from the combination of the Snowflake entities
and Catalytica, reflecting incremental corporate administrative and management expenses and
increases in professional services and legal expenses. Increases in professional services and
legal were primarily attributable to expenses associated with investment banking and investor
relations firms and other consultants assisting us with exploring financing opportunities and
evaluating prospects for our growth strategy, in addition to work performed in various contract
negotiations, corporate compliance, and Snowflake plant construction cost overrun issues related to
the Merger Transaction. In addition, rent expense increased by $90,000 related to the Susanville
land lease entered into during February 2008. Severance expense also increased by $180,000 related
to the termination of an employee during the second quarter.
GA&D increased by $5,434,000 to $5,911,000 for the six months ended June 30, 2008 as compared
to $477,000 for the six months ended June 30, 2007. The increase was largely due to a $4,681,000
increase in various expenses resulting from the combination of the Snowflake entities and
Catalytica, reflecting incremental corporate administrative and management expenses and increases
in professional services and legal expenses. Increases in professional services and legal were
primarily attributable to expenses incurred with investment banking and investor relations firms
and other consultants assisting us with exploring financing opportunities and evaluating prospects
for our growth strategy and fuel studies conducted jointly with a local university; in addition to
work performed in various contract negotiations, corporate compliance, and plant construction cost
overrun issues related to the Merger Transaction; and preparation of documents related to our line
of credit with Comerica. In addition, rent expense increased by $150,000 related to the Susanville
land lease entered into in February 2008. Severance expense also increased by $182,000; primarily
due to the termination of an employee during the second quarter. Stock compensation expense
increased by $383,000 due to the issuance of annual incentive plan option grants and warrants to an
outside consultant. Relocation and recruiting increased by $234,000 primarily due to expenses
associated with the employment of our chief operating officer in March 2008.
25
We expect GA&D for the remainder of 2008 to average approximately $2.5 million per quarter,
reflecting significant public company expenses and a high level of development expenses associated
with the pursuit of our renewable energy growth strategy.
Loss (Gain) on Sale or Disposal of Assets.
Loss on sale or disposal of assets decreased by
$85,000 for the three months ended June 30, 2008 as compared to the three months ended June 30,
2007. During the second quarter of 2007, certain assets were disposed at a loss of $88,000;
minimal asset sale or disposal activity occurred during the second quarter of 2008.
Loss on sale or disposal of assets increased by $245,000 for the six months ended June 20,
2008 as compared to the six months ended June 30, 2007. During the second quarter of 2007, the
wood chip piles adjacent to the Snowflake plant site caught fire resulting in a significant loss of
our wood fuel supply and causing damage to certain equipment. During the first quarter of 2008, we
received a $160,000 insurance reimbursement related to equipment losses incurred and recorded a
gain on sale or disposal of assets. During the second quarter of 2007, certain unrelated assets
were disposed at a loss of $88,000.
We do not anticipate any significant sales or disposals of assets that might result in a gain
or loss during the remainder of fiscal 2008.
Interest and Other Income.
Interest income is generated from money market and short-term
investments. Other income consists of other non-operating income which is not material for
separate presentation.
Interest income decreased by $174,000 to $39,000 during the three months ended June 30, 2008
as compared to $213,000 for the three months ended June 30, 2007, primarily due to declining cash
and investment balances resulting from the funding of our operations and plant construction.
Interest income decreased by $384,000 to $145,000 during the six months ended June 30, 2008 as
compared to $529,000 for the six months ended June 30, 2007, primarily due to declining cash and
investment balances resulting from the funding of our operations and plant construction. During
the first quarter of 2008, all of our short-term investments matured or were liquidated and the
proceeds were invested in cash equivalents.
Interest and Other Expense.
Interest expense reflects amounts incurred under long-term debt
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 $199,000 to $28,000 during the three months ended June 30, 2008
as compared to $227,000 for the three months ended June 30, 2007. Interest expense decreased by
$457,000 to $51,000 during the six months ended June 30, 2008 as compared to $508,000 for the three
months ended June 30, 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 increase significantly beginning in the third quarter of 2008,
because we will cease capitalizing interest expense in connection with the Snowflake plant
construction. We anticipate interest expense to range between $0.5 and $0.7 million per quarter
beginning in the third quarter of 2008.
Change in Fair Value of Derivative Instruments.
We have two floating to fixed interest rate
swap agreements related to construction project debt that economically fixes the interest rate on
our ID Bonds and a portion of our 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).
The change in fair value of derivative instruments resulted in charges of $1,206,000 and
$1,019,000 for the three and six months ended June 30, 2008, respectively, and charges of
$1,864,000 and $1,788,000 for the three and six months ended June 30, 2007, respectively, due to
changes in market interest rates and the related impact on the fair value of the swap agreements.
26
Income Taxes.
Prior to consummation of the Merger Transaction, the Snowflake entities were
limited liability companies each with a single owner, and as such, each entity was disregarded for
federal and state income tax purposes. Accordingly, no federal or state income tax benefit was
recorded for the three and six months ended June 30, 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 and six months ended June 30, 2008 because the
expected benefit, computed by applying statutory tax rates to the net loss, was offset by an
increase in the valuation allowance for deferred tax assets due to the uncertainty of future
taxable income that would allow us to realize deferred tax assets generated from such losses. We
do not believe we will incur any material income taxes in the foreseeable future.
Liquidity and Capital Resources
Our total cash and cash equivalents was approximately $3.6 million at June 30, 2008.
Additionally, we had approximately $0.3 million of remaining restricted cash for construction of
the Snowflake plant, in addition to approximately $0.5 million of restricted cash designated as an
interest reserve account in connection with our Comerica line of credit, as of such date. Other
balance sheet accounts, such as those included in working capital, i.e. accounts receivable,
inventories, trade payables and accrued liabilities, are not considered significant in evaluating
our liquidity and capital resources at June 30, 2008.
Our total cash, cash equivalents, restricted cash and short-term investments decreased by $6.8
million during the quarter ended June 30, 2008. This decrease was primarily driven by cash used in
operating activities of $4.2 million and capital expenditures of
$5.6 million primarily related to
Snowflake plant construction; partially offset by $0.6 million proceeds from equipment financing,
$2.0 million drawn on our line of credit, and proceeds from the issuance of $0.6 million
convertible debt to Worsley pursuant to the second letter agreement as described below.
Pursuant to a sponsor guaranty, dated September 1, 2006 between R. Worsley and C. Worsley and
CoBank ACB, R. Worsley and C. Worsley guaranteed the payment of all project costs in excess of the
project cost budget of approximately $67.3 million (the Project Cap), as defined in the credit
agreement dated September 1, 2006, as amended, by and among 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) with Worsley, 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 in March 2008.
On August 13, 2008, we entered into a Second Letter Agreement (the Second Letter Agreement)
with Worsley, to finalize all amounts owed under the Overrun Guaranty, as the Snowflake Plant
had commenced commercial operations as of June 10, 2008 as such term is defined in the Overrun
Guaranty. The Special Committee and Worsley agreed that
Worsleys obligation to pay for the remaining project cost
overruns incurred prior
to the commencement of commercial operations would be satisfied by the $5.0 million deposited by
Worsley to the Company in March 2008 and funding by Worsley of the debt service reserve (as defined
in the CoBank debt agreements, the DSR) requirements in the amount of approximately $2.8 million
prior to the CoBank term conversion date, which is expected to occur on or before August 31, 2008,
through the direct deposit of funds or a letter of credit.
In addition, in light of potential overrun expenditures resulting in improvements to the
operation of the Snowflake plant, the parties agreed that Worsley would be released from his
obligation with respect to the DSR to the extent the Snowflake plant operates in excess of certain
output parameters. Specifically, Worsleys obligation to fund the DSR would be reduced monthly in
an amount equal to 70% of the revenue on daily output in excess of 576 megawatt-hours (MWh). In
addition, the parties agreed pursuant to the Second Letter Agreement
that the $0.6 million and $0.4 million deposited by Worsley to the Company
in June and July 2008, respectively, to address the possibility
of additional overruns incurred prior to
commencement of commercial operations, would be converted to a
convertible note issued to Worsley, since these funds
were determined to exceed those required to cover such overrun
amounts. The convertible note, which is subordinated to
all other Company secured debt and accrues interest at 10% per annum, will automatically convert
if, prior to December 31, 2009 (the Maturity Date),
the Company obtains at least $5.0 million of
equity financing pursuant to the issuance of equity securities of the Company pursuant to a private
placement to one or more bona fide third party investors (an Equity Funding Event). Upon
completion of the Equity Funding Event, the entire principal amount of the convertible debt,
together with accrued interest thereon, will be converted as part of such financing into the same
type of equity securities issued in the Equity Funding Event and at the same purchase price for
such equity securities in the Equity Funding Event. In the event that the Company
does not complete an Equity Funding Event prior to December 31, 2008,
then Worsley will have the right, at his
option, to convert the outstanding principal and accrued interest
under the convertible note, in whole but not
in part, into the Companys common stock, at a per share
conversion price equal to the closing price of the Companys
common stock as quoted on the Nasdaq Capital Market on the date prior
to the date of such notice of conversion.
27
Further, Worsley has committed to use commercially reasonable efforts to provide the Company
up to $4.0 million, if necessary, under the same terms as the convertible debt, to fund operations
for the remainder of 2008.
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 classified as restricted cash) and a pledge of all of our assets, other than those assets
pledged to CoBank, and by a guarantee from Worsley. The Comerica Credit Agreement also requires
that we maintain minimum liquidity of $1.0 million, excluding the $450,000 security deposit, either
in cash or in the form of readily marketable securities, tested monthly. All outstanding principal
and interest under the Comerica Credit Agreement must be repaid by March 31, 2009. As of June 30,
2008, we have drawn $2.0 million on this line.
We began generating test and commercial power from our Snowflake plant during the second
quarter of 2008 and generated approximately $0.9 million in revenues from related electricity sales
during the second quarter. We anticipate generating positive cash flow from the operation of the
Snowflake plant, in the range of $2 million to $3 million during the first full year of operation,
excluding costs to stabilize such operations. However, such cash flow will not be sufficient to
cover our corporate overhead, including the business development costs of seeking to acquire and/or
develop additional power plants, and other operating expenses, including our fuel aggregation and
wood products business and various lease and financing obligations for property, plant and
equipment (collectively, our corporate overhead). Our minimum long-term debt and lease principal
payments for the next twelve months are expected to total approximately $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 or costs to
stabilize operations are higher than anticipated, or if power production from the plant is lower
than anticipated, we will have reduced cash flow from the operation of the plant. It is possible
that the plant could generate negative cash flow during various periods, in which case we would be
required to fund such negative cash flow.
We 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.
28
We believe our available cash and cash equivalents at June 30, 2008, our debt capacity, our
restricted cash balances, the funding by Worsley of the DSR pursuant to the Second Letter
Agreement, and cash generated by its Snowflake operations, will provide sufficient capital to fund
our operations as currently conducted until September 30, 2008. Even if our funds are sufficient
to continue our operations as presently conducted beyond September 30, 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. Further, we
do not have the funds to restart the idled facility even if acquired or to restart our Susanville
plant. Beyond September 30, 2008, our cash requirements will depend on many factors, including but
not limited to, the success of the Snowflake plant, our ability to manage our fuel aggregation and
wood products business, our ability to manage our corporate overhead and other operating expenses,
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 additional capital or secure additional
financing from Worsley or third parties for the remainder of 2008 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, fuel aggregation and
wood products business, or the Company in its entirety.
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 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
Company is exploring a transaction where it will monetize production tax credits and other tax
attributes of its Snowflake plant. Further, we are seeking capital which may take the form of
equity or debt financing, including the issuance of common stock, preferred 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 June 30, 2008 to ensure that information we are
required to disclose in reports that we file or submit under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
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(b)
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Changes in internal control over financial reporting.
There was no change in our
internal control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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29
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 six months ended June 30,
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
Letter Agreement
On August 13, 2008, the Company entered into a letter agreement (the Second Letter
Agreement) with Robert M. Worsley, Christi M. Worsley and the Robert M. Worsley and Christi M.
Worsley Revocable Trust (collectively, Worsley) to finalize all amounts owed by Worsley under
that certain Overrun Guaranty, dated October 1, 2007 (the Overrun Guaranty), between the Company
and Worsley, as modified by that certain letter agreement, dated February 12, 2008, between the
Company and Worsley (the Original Letter Agreement), for project costs (Project Costs)
necessary to achieve commercial operation of the Companys
biomass power plant in Snowflake, Arizona (the Plant). The Plant has commenced commercial
operations as of June 10, 2008 as such term is defined in the Overrun Guaranty. A committee of
independent directors (the Special Committee), acting on behalf of the Company, agreed pursuant
to the Second Letter Agreement that Worsleys obligations to pay for unpaid Project Cost overruns
incurred prior to the commencement of commercial operations of the Plant would be satisfied by the
$5.0 million cash deposit previously made by Worsley to the Company and funding by Worsley, through
the direct deposit of funds or a letter of credit, of the debt service reserve (as defined in the
Companys credit agreement with its project lender for the Plant, CoBank, ACB, the DSR) of
approximately $2.8 million at or prior to the term conversion of the Companys loans with CoBank,
which is expected to occur on or before August 31, 2008. The Second Letter Agreement provides that
Worsley will be released from his obligation with respect to the DSR to the extent the Plant
operates in excess of certain output parameters. Specifically, Worsleys obligation to fund the
DSR will be reduced monthly in an amount equal to 70% of the revenue on a daily output in excess
of 576 megawatt-hours. In addition, the parties agreed that previous deposits by Worsley with the
Company in the aggregate amount of $1.0 million for purposes of paying potential Project Cost
overruns will be treated as loan proceeds in exchange for the issuance of $1.0 million in
convertible debt to Worsley, as evidenced by a Convertible Subordinated Promissory Note issued by
the Company to Worsley on August 13, 2008 (the Note), which Note is described in more detail
below. The Second Letter Agreement also requires Worsley to use commercially reasonable
efforts to loan the Company up to $4.0 million, if necessary, under the same terms as the
convertible debt represented by the Note (as described below), to fund the Companys operations for
the remainder of 2008. Pursuant to the Second Letter Agreement, the
Special Committee also agreed that 824,341 (representing 5,770,386 as adjusted pursuant to the terms of the Warrant) of
the common stock Warrants issued to Worsley on October 1, 2007 in connection with the merger
transaction consummated pursuant to the Merger Agreement (as defined below) have vested as of June
10, 2008 as a result of the achievement of commercial operation of the Plant as described above.
The Letter Agreement constitutes an amendment to the Original Letter Agreement, the Overrun
Guaranty and the Contribution and Merger Agreement, dated May 8, 2007, between Worsley, the Company
and certain affiliated parties of the Company (the Merger Agreement).
The foregoing summary of the Second Letter Agreement does not purport to be complete and is
qualified in its entirety by reference to the Second Letter Agreement which is attached hereto as
Exhibit 10.3 and which is incorporated herein by reference in its entirety.
Convertible Subordinated Promissory Note
On August 13, 2008, the Company issued a Convertible Subordinated
Promissory Note (the Note) to Worsley in the principal
amount of $1.0 million in exchange for cash advances made by Worsley
to the Company in the amounts of $600,000 and $400,000 on June 30,
2008 and July 7, 2008, respectively. The Note is subordinate to all other
Company secured debt and accrues interest at a rate of 10% per annum.
The principal and accrued interest under the Note are due and payable
by the Company on December 31, 2009. The Note will automatically convert if, prior to
December 31, 2009, the Company obtains at least $5,000,000 of equity
financing pursuant to the issuance of equity securities of the Company pursuant to a private
placement to one or more bona fide third party investors (an Equity Funding Event). Upon
completion of the Equity Funding Event, the entire principal amount of the convertible debt
represented by the Note, together with accrued interest thereon, will be converted as part of such
financing into the same type of equity securities issued in the Equity Funding Event and at the
same purchase price for such equity securities in the Equity Funding Event. Commencing December
31, 2008, Worsley will have the right, at his option, to convert the outstanding principal and
accrued interest under the Note, in whole but not in part, into the Companys common stock, at a
per share conversion price equal to the closing price of the Companys common stock as quoted on
the Nasdaq Capital Market (or such other national securities exchange or other quotation medium
that publishes quotes of the common stock) on the date prior to the date of Worsleys notice of
conversion to the Company. The Note provides that any conversion of the Note would be subject at
all times to the applicable Marketplace Rules of the Nasdaq Stock Market, LLC regarding stockholder
approval (for so long as the Companys securities are subject to such rules). Upon prior written
notice to Worsley, the Company may at any time prepay in whole or in part the principal of the
Note, plus interest accrued to the date of such payment.
The foregoing summary of the Note does not purport to be complete and is qualified in its
entirety by reference to the Note which is attached hereto as Exhibit 4.4 and which is incorporated
herein by reference in its entirety.
Employment Agreement
On August 14, 2008, the Company and Hugh W. Smith, the Companys Executive Vice President and Chief Operating
Officer, entered into an employment agreement (the Employment Agreement) regarding the employment of Mr. Smith for a
period of three (3) years commencing March 3, 2008. The Employment Agreement provides that Mr. Smith shall receive:
(i) a base salary equal to $350,000 per annum; (ii) a target bonus equal to 125% of his base salary, which may be paid
in a combination of cash and equity compensation, provided that at least 50% of the target bonus must be paid in cash;
(iii) a grant of 100,000 stock options under the Companys 2007 Equity Incentive Plan, which will vest ratably over a
48-month period commencing as of his employment with the Company; (iv) fifteen months of mortgage payment reimbursement
beginning in March 2008 and continuing until Mr. Smiths home is sold, but not to exceed $45,000; and (v) a $100,000
signing bonus (paid $10,000 per month during the first ten months of employment).
In addition, among other things, the Employment Agreement provides that:
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1.
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If Mr. Smith is involuntarily terminated other than for cause at any time prior to an announcement of a
change of control or on or after the date that is twenty-four (24) months following a change of control or the
announcement of a change of control whichever comes later, then Mr. Smith will be entitled to receive the
following severance and non-competition benefits: (i) a cash payment equal to one year of his annual
compensation; (ii) subsidized COBRA premiums for up to a maximum of 18 months; and (iii) a pro-rated portion
of the amount of current year bonus award which Mr. Smith would earn for the fiscal year in which the
termination occurs.
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2.
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If Mr. Smith is involuntarily terminated other than for cause at any time after an announcement of a
change of control and prior to twenty-four (24) months following a change of control or the announcement of a
change of control, whichever comes later, then Mr. Smith will be entitled to receive the following severance
and non-competition benefits: (i) a cash payment equal to two hundred percent (200%) of his annual
compensation plus the maximum amount of the current year bonus award which Mr. Smith could earn for the fiscal
year in which the termination date occurs; and (ii) full acceleration of the vesting of the unvested portion
of any stock option held by Mr. Smith.
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The foregoing summary of the Employment Agreement does not purport to be complete and is qualified in its entirety
by reference to the Employment Agreement which is attached hereto as Exhibit 10.4 and which is incorporated herein by
reference in its entirety.
30
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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)
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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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)
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Amendment No. 1 dated as of August 9, 2007 to Contribution and
Merger Agreement, dated as of May 8, 2007 among the Registrant,
Catalytica Energy Systems, Inc., Snowflake Acquisition Corporation,
Renegy, LLC, Renegy Trucking, LLC, Snowflake White Mountain Power,
LLC, Robert M. Worsley, Christi M. Worsley and the Robert M.
Worsley and Christi M. Worsley Revocable Trust.
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2.3
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(2
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)
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Amendment No. 2 dated as of September 20, 2007 to Contribution and
Merger Agreement, dated as of May 8, 2007, as amended, among the
Registrant, Catalytica Energy Systems, Inc., Snowflake Acquisition
Corporation, Renegy, LLC, Renegy Trucking, LLC, Snowflake White
Mountain Power, LLC, Robert M. Worsley, Christi M. Worsley and the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
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3.1
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(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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)
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Common Stock Purchased Warrant issued October 1, 2007 to the Robert
M. Worsley and Christi M. Worsley Revocable Trust.
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4.4
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**
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Convertible
Subordinated Promissory Note issued August 13, 2008 to the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
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10.1
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(6
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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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10.2
|
|
|
|
(7
|
)
|
|
Sixth 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 June 30, 2008.
|
|
10.3
|
|
|
|
**
|
|
|
Second
Letter Agreement, dated August 13, 2008, by and between the
Registrant, Robert M. Worsley, Christi M. Worsley and the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
|
|
10.4
|
|
|
|
*
**
|
|
|
Employment
Agreement dated as of August 14, 2008 between the Registrant and
Hugh W. Smith.
|
|
31.1
|
|
|
|
**
|
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
/ 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
31.2
|
|
|
|
**
|
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
/ 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
32.1
|
|
|
|
**
|
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.
|
|
32.2
|
|
|
|
**
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.
|
31
|
|
|
+
|
|
Confidential treatment has been granted for portions of these agreements.
|
|
*
|
|
Represents management contracts or compensatory plans for executive officers and
directors.
|
|
**
|
|
Filed herewith.
|
|
(1)
|
|
Incorporated by reference to Annex A to Amendment No. 2 to Registrants Registration
Statement on Form S-4 (file No. 333-144110) filed on August 31, 2007.
|
|
(2)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on September
21, 2007.
|
|
(3)
|
|
Incorporated by reference to Annex D to Amendment No. 2 to Registrants Registration
Statement on Form S-4 (file No. 333-144110) filed on August 31, 2007.
|
|
(4)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on October 1,
2007.
|
|
(5)
|
|
Incorporated by reference to exhibits filed with our Form 10QSB, filed on November
14, 2007.
|
|
(6)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on April 15,
2008.
|
|
(7)
|
|
Incorporated by reference to exhibits filed with our Form 8-K, filed on July 3, 2008.
|
32
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: August 14, 2008
|
|
|
|
|
|
RENEGY HOLDINGS, INC.
(Registrant)
|
|
|
By:
|
/s/ Robert W. Zack
|
|
|
|
Robert W. Zack
|
|
|
|
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
|
|
33
RENEGY HOLDINGS, INC.
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
|
|
|
4.4
|
|
|
Convertible
Subordinated Promissory Note issued August 13, 2008 to the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
|
|
|
|
|
|
|
10.3
|
|
|
Second
Letter Agreement, dated August 13, 2008, by and between the
Registrant, Robert M. Worsley, Christi M. Worsley and the
Robert M. Worsley and Christi M. Worsley Revocable Trust.
|
|
|
|
|
|
|
10.4
|
|
|
Employment
Agreement dated as of August 14, 2008 between the Registrant and
Hugh W. Smith.
|
|
|
|
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
/ 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
/ 15d-14(a) of the Securities Exchange Act of 1934, as amended.
|
|
|
|
|
|
|
32.1
|
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350.
|
|
|
|
|
|
|
32.2
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350.
|
34