EarthFirst's CEO Chambers resigns, Trypka named CRO
2008-11-14 04:51 ET - News Release
Mr. Derren Newell reports
EARTHFIRST CANADA INC. PROVIDES A CORPORATE UPDATE; STRATEGIC REVIEW PROCESS AND DOKIE CONSTRUCTION CONTINUE
EarthFirst Canada Inc. today is providing a corporate update. During the third quarter, EarthFirst continued to work on its strategic review process and constructing its 144-megawatt Dokie I wind energy project, located in the Peace River area of northeast British Columbia.
On Aug. 21, 2008, the board of directors of EarthFirst announced in Stockwatch that it had decided to commence a formal review of the company's alternatives in order to maximize shareholder value. The board of directors appointed a special committee of the board to oversee the strategic review process, and engaged Blair Franklin Capital Partners Inc. of Toronto, Ont., together with GMP Securities Ltd., to provide independent strategic advice to the special committee. Independent legal counsel was also retained to provide independent legal advice to the special committee. The special committee and its advisors undertook a review of all the company's alternatives and on Sept. 22, 2008, the board of directors decided to proceed with the sale of EarthFirst and actively solicit interest from third party purchasers. Following this decision, the assets and liabilities of the corporation were classified as held for sale. The net assets of the corporation must also be written down to their net realizable value.
On Nov. 4, 2008, the corporation made an application to the Court of Queen's Bench of Alberta, Judicial Centre of Calgary and obtained an order for creditor protection under the Companies' Creditors Arrangement Act (Canada) (CCAA). EarthFirst's efforts to pursue strategic alternatives have been severely hindered by the unprecedented crisis in the global financial markets which has impacted EarthFirst's ability to raise financing or to complete a sale of the company. As a result of EarthFirst's current financial resources and the inability of the corporation to complete a fulsome sale process in sufficient time to address its financial condition, EarthFirst's board of directors determined that seeking CCAA protection would be in the best interests of the corporation and its stakeholders. While under CCAA protection, the corporation will continue with its day-to-day operations and its efforts to pursue strategic alternatives. EarthFirst further expects CCAA protection will allow parties currently engaged in the sale process additional time for due diligence.
EarthFirst has sought protection under the CCAA as its cash in hand would not allow it to meet its current obligations and its obligations with respect to the continuing construction of its 144-megawatt Dokie I project in British Columbia. CCAA protection stays creditors and others from enforcing rights against the corporation and affords it the opportunity to restructure its financial affairs. The court has granted CCAA protection for an initial period of 30 days, expiring Dec. 4, 2008, to be extended thereafter as the court deems appropriate. If by Dec. 4, 2008, the corporation has not filed a plan of arrangement, or obtained an extension of the CCAA protection, creditors and others will no longer be stayed from enforcing their rights.
While under CCAA protection, the corporation's board of directors maintains its usual role and its management remains responsible for the day-to-day operations of the corporation, under the supervision of Ernst & Young Inc., which is the court-appointed monitor, and which will be responsible for reviewing the corporation's continuing operations, assisting with the development and filing of the plan, liaising with creditors and other stakeholders and reporting to the court. The board of directors and management of the corporation will be primarily responsible for formulating the plan for restructuring EarthFirst's affairs. The corporation will continue with its efforts to find a buyer for the company or its assets while under CCAA protection.
Although CCAA protection enables EarthFirst to continue with its day-to-day operations until its CCAA status changes, the implications for EarthFirst's shareholders are less clear. EarthFirst continues to explore a number of alternatives, including a sale of EarthFirst and the repayment of all creditors in full. However, the plan must be approved by the requisite number and value of the affected creditors, as required by law, as well as by the court. At the end of the restructuring process, the value of what is left for shareholders will depend upon the terms of the plan approved by the affected stakeholders. If the plan is not so approved, it is possible that EarthFirst would be placed into receivership or bankruptcy.
On Nov. 3, 2008, EarthFirst received a notice of intention to enforce security from WestLB AG, a secured creditor of EarthFirst, notifying the corporation that it intends to enforce its security over the project assets comprising the Dokie I project pursuant to a turbine supply loan agreement dated May 14, 2008, between EarthFirst and WestLB. The total amount of indebtedness secured is $131-million. Pursuant to the notice, WestLB will not have the right to enforce its security until after the expiry of 10 days following the sending of the notice. Prior to receiving CCAA protection, EarthFirst and WestLB entered into a forbearance agreement in respect of the indebtedness owed to WestLB by EarthFirst agreeing, among other things, that WestLB would be exempted from the stay in the CCAA initial order but would forbear from enforcing its claim under the negotiated terms of the agreement until Jan. 4, 2009, and to other matters relating to the conduct of EarthFirst during the period of CCAA protection.
Operational update
During the third quarter, construction activities at the Dokie I project progressed to building foundations and erecting turbines. In the third quarter, 11 foundations were completed and an additional five were excavated and then winterized in order to conserve cash and reduce the exposure to winter construction. Construction of the substation also began during the third quarter. The first eight turbines and their blades along with 32 tower sections were received on site as planned. At present, four turbines have been completely erected and four towers have been partially erected. Over all, the construction work is on schedule.
The expected capital costs for the Dokie I project remain at $360-million. The $35-million increase announced in the second quarter was due to higher labour and commodity costs related to competitive pressures from increased natural gas exploration and other economic activities in the area ($22-million), combined with an increase in the contingency allocation for the project by the lenders' independent engineer ($13-million). In the second quarter, Garrad Hassan, the corporation's independent wind consultant, changed the wind energy estimation methodology it is applying to North American wind projects. With this change, Mr. Hassan decreased its P50 annual energy estimate by 2.3 per cent to 341.5 gigawatt hours per year, which, in turn, lowered the anticipated cash flows from the project and therefore the amount of leverage that can be used to finance the project.
To date, EarthFirst has not earned revenues from windpower production and is considered to be in the development stage. It is currently anticipated by management that there will be no revenue from windpower production until early in 2009. EarthFirst incurred general and administrative, restructuring and strategic review expenses for the third quarter and the first nine months of 2008 of $1.06-million and $3.54-million, respectively. The largest component of these 2008 expenses is general and administrative costs of $900,000 and $3.35-million for the three and nine months ended Sept. 30, 2008, respectively. Stock-based compensation costs of $90,000 and $340,000 are included in the compensation costs for the three and nine months ended Sept. 30, 2008. Restructuring costs for the first nine months of 2008 were $20,000, although none were incurred in the third quarter of 2008. During the third quarter, the company did incur $160,000 in costs relating to the strategic review process now under way.
The recovery of development costs associated with windpower projects is dependent upon the successful completion of those windpower projects. EarthFirst reviews the recoverability of these costs when changes in circumstances indicate they may be impaired. On Sept. 22, 2008, when EarthFirst's board of directors decided to proceed with the sale of the corporation and actively solicit interest from third party purchasers, the assets and liabilities of the corporation were reclassified as held for sale and were grouped with windpower prospect development costs for valuation purposes. There are different methods for calculating the fair value of the corporation's net assets including share price, indicative bid values and analyses of the net present value of the future cash flows expected from operations. The corporation has reviewed its net asset value under each of these methods and acknowledges that a writedown of some significance is required. However, given the large variance in fair market value produced under each of the methods, EarthFirst believes that the true net asset value is not reasonably determinable at this time. Once the strategic review process has been completed and this value can be determined with more reliability, EarthFirst will recognize the impairment and take the related charge to operations.
During the first three quarters of 2008, the focus of the work at the Nuttby Mountain project in Nova Scotia, which was acquired earlier in the year, was to obtain the required environmental assessment and related permits. In July, the Nuttby project received its provincial environmental assessment. Work continues on obtaining its federal environmental assessment and other related permits. Negotiations to secure turbines for this project continued during the quarter but were curtailed when EarthFirst entered CCAA. Detailed engineering and design work on the project commenced during the quarter.
EarthFirst continues to work on advancing the permitting requirements for its 30 megawatts of projects near Grand Valley, Ont. In the first quarter of 2008, the local municipality passed a bylaw allowing for construction and operation of wind turbines. EarthFirst determined that some of the provisions of this bylaw would place undue restrictions on the placement and operation of wind turbines at this project, and thus filed a procedural appeal to the Ontario municipal board. In the meantime, EarthFirst continues to work with the local municipality to structure mutually acceptable bylaws which allow for wind turbine construction and operation. The projects have submitted their final environmental screening report (ESR) for the first six turbines of the 30-megawatt group of projects to the Ontario Ministry of Environment. The second ESR for the balance of turbines required for this group of projects was filed in October, 2008.
Liquidity
In its second quarter report, the company reported that as a result of the second quarter capital cost increase, lower debt levels supported by the project and additional financing-related costs, the company had a financing shortfall of approximately $50-million and that the company was actively working on financing this shortfall through a combination of subordinated debt and equity. In the third quarter, the company initiated the syndication of its previously planned senior project finance debt facility of approximately $200-million to finance the remaining cost to complete the Dokie I project. Due the unprecedented deterioration in global credit markets experienced by the company over this period, the company has not been successful in completing any of these financing initiatives to date. As a result, the company's financing requirements now exceed its available cash by $250-million.
The corporation is actively trying to complete its strategic review process. However, there can be no assurance that this will occur. The corporation also continues to try to raise the senior project finance debt in an effort to support the strategic review process. The ability of the corporation to continue as a going concern is dependent on obtaining additional financing to finance its Dokie I project.
A $135-million turbine financing facility was entered into in May, 2008. This turbine financing facility is being provided by WestLB, and is providing interim financing that allowed EarthFirst to meet its May 15, 2008, requirement from Vestas to post a letter of credit for the unpaid portion of the turbines. This facility was intended to provide interim financing until a senior secured project finance credit facility could be completed. At Sept. 30, 2008, EarthFirst has drawn $13.2-million under the turbine financing facility and the rest of the facility is supporting the letter of credit with Vestas. Under the terms of this facility, EarthFirst was originally required to make a $22.5-million payment in October, 2008. However, under the terms of a forbearance agreement dated Nov. 4, 2008, and described above, WestLB and EarthFirst have mutually agreed to delay this payment until Jan. 4, 2009. Furthermore, the $22.5-million payment has been reduced by $4.2-million to reflect September payments made to Vestas under the turbine supply agreement, thereby reducing the related letter of credit held by WestLB. The balance of payments on the first eight turbines is anticipated to occur in late 2008.
At Sept. 30, 2008, the corporation had cash and cash held in escrow of $41.06-million compared with $65.13-million at June 30, 2008, and $73.82-million at Dec. 31, 2007. The decrease in cash compared with both June 30, 2008, and Dec. 31, 2007, relates to the funds expended on construction and development activities during 2008. Cash was also used to finance the continuing administrative costs of the corporation. Cash received during the first nine months of 2008 included the net proceeds of $3.76-million received from the intial public offering underwriters exercising their overallotment option, interest on cash balances and incidental logging sales. Under the terms of the turbine supply agreement, the corporation is anticipated to have additional interim payments of $4.2-million prior to the end of December, 2008.
On Nov. 4, 2008, immediately prior to the CCAA filing, EarthFirst had an available cash balance of $32.9-million and current liabilities totalling approximately $21-million which have now been stayed under the CCAA process.
CONTRACTUAL OBLIGATIONS AS AT SEPT. 30, 2008 (in thousands) Due Due two Due four Due after less than to three to five five Total one year years years yearsTurbines $117,685 $110,122 $ 7,563 $ - $ -Turbine warranties 27,517 1,860 12,907 12,750 -Turbine supply loan 13,210 13,210 - - -Other constructioncontracts 47,159 46,328 831 - -Leases (land andoffice) 1,128 267 549 312 - --------- --------- --------- --------- --------- $206,699 $171,787 $ 21,850 $ 13,062 $ -
In support of the EPA with B.C. Hydro, the corporation was required to and did post a $10.8-million letter of credit with B.C. Hydro in August, 2006. As collateral, the corporation placed the equivalent amount of cash on deposit with a chartered bank.
The corporation has entered into lease agreements with respect to the site for the Dokie I project. The term and the rent payable under the lease agreements are based on the size of the location, capacity and duration. The lease agreements are for five years at $100,000 per year. Under the terms of these lease agreements, the corporation was required to put in place letters of credit of $900,000 during August, 2007, which are recorded under performance deposits in the balance sheet.
In December, 2007, the corporation leased the office space for the Calgary office expiring January, 2013. The total outstanding obligation on the lease at Sept. 30, 2008, was $740,000.
The corporation entered into a turbine supply agreement (TSA) service agreement and warranty agreement, and other fixed balance-of-plant contractual commitments for the Dokie I project. The service agreement commitment is subject to increase annually by the percentage change in consumer price index (CPI). As part of the TSA requirements, a payment performance letter of credit was posted for $121.8-million. This letter of credit is supported by the turbine supply loan facility. Under the terms of the TSA, the corporation made interim payments of approximately $4.2-million prior to the end of September, 2008, which commensurately reduces the letter of credit, with an additional interim payment of $4.2-million expected prior to the end of December, 2008. The balance of payments under this contract is anticipated to occur in 2009.
CRCE renouncements
As at Sept. 30, 2008, the corporation has spent $99.6-million in CRCE eligible expenditures based on the initial test phase plan. These expenditures are largely attributed to various CRCE eligible predevelopment, preconstruction and site preparation costs ($36.6-million). The company has also incurred construction costs on the CRCE turbines and related infrastructure of $63-million. For preinitial public offering flow-through-share investors, qualified CRCE expenditures have been made in excess of the amounts renounced to those investors. For IPO flow-through share investors, while CRCE eligible expenditures in excess of the renounced amount have been made, the corporation needs to begin testing the level of electrical energy produced by at least one wind turbine prior to the end of the year. The corporation is currently endeavouring to meet this requirement.
Management and board of directors changes
During the third quarter, Paul Bradley resigned as a director of EarthFirst due to changed employment. The corporation does not anticipate appointing a replacement for Mr. Bradley at this time. The board of directors of EarthFirst wishes to thank Mr. Bradley for his contributions to the corporation.
In June, EarthFirst announced the appointment of Linda Chambers to the position of president and chief executive officer, effective July 2, 2008. Ms. Chambers was appointed to the board of directors at its Aug. 12, 2008, meeting. Ms. Chambers joined EarthFirst with the mandate to lead the company's growth plans as a leading independent developer of renewable energy projects in Canada. With the unexpected difficulties experienced by the company in raising the necessary financing to complete the Dokie I project, principally due to the unprecedented deterioration in capital market conditions, the company's ability to pursue these growth plans is now limited. On Nov. 10, 2008, Ms. Chambers resigned her positions with EarthFirst. The board of directors of EarthFirst wishes to thank Ms. Chambers for her contributions to the corporation.
In Ms. Chambers' place, the board of directors has appointed Brian Trypka as chief restructuring officer.
We seek Safe Harbor.