[Financial Restructuring Issues] The EnCal Corporation is a small, West Coastbased power company specializing in power generation methods that use clean-burning fuels and renewable natural resources. However, due to a complex and confusing power-pricing structure, EnCal is reeling from the aftereffects of the state governments attempt at power deregulation. EnCal has been unable to pass its operating costs on to its consumers. To make matters worse, EnCal has recently completed construction of several power production centers in efforts to double its capacity and to help diminish the frequency of power outages that are wreaking havoc on local commerce. As a result, it has accumulated a massive debt load to help finance these facilities and is on the verge of default. However, raising the prices of the power it supplies to its consumers involves a slow and laborious bureaucratic process and regulatory approval. EnCal is forced to reorganize its financing. EnCals partial income statements and balance sheets for the 2015 and 2016 fiscal years follow. An incomplete income statement for 2017 is also provided.

A financial restructuring that would reduce EnCals debt burden has been proposed. The proposal is to reduce the interest rate on its bank loan to 6 percent and loan principal to $100 million, to reduce the interest rate on its mortgage loans to 8 percent, and to replace all of its subordinated loan balance with a 50 percent equity stake in the company.

A. Assuming a 25 percent increase in revenue with no additional capital investment, what will EnCals new income statement and balance sheet look like in the business as usual and financial restructuring scenarios?

B. Will EnCal be able to service its debt under either scenario?

C. Would EnCal be a likely candidate for Chapter 7 bankruptcy?

2015 $240 -168 72 2016 $360 -288 72 2017 ? INCOME STATEMENTS (S MILLIONS) Revenue COGS (70% in 2015. 80% in 2016/2017) Gross profit SG&A EBITDA Depreciation EBIT Interest Earnings before taxes Taxes (40%) Net income lolo $ 10 20 10 510 $550 S 10 30 15 1,080 $1,135 BALANCE SHEETS (S MILLIONS) Assets Cash Accounts receivable Inventories Fixed assets, net Total assets Liabilities and Equity Accounts payable Notes payable (8% bank loan) Accrued liabilities (wages and taxes) Long-term mortgage loans (10%) Long-term subordinated loans (12%) Common stock Retained earnings Total liabilities and equity $ 14 50 4 180 0 300 2 $550 $ 24 140 4 460 290 300 -83 $1,135 2015 $240 -168 72 2016 $360 -288 72 2017 ? INCOME STATEMENTS (S MILLIONS) Revenue COGS (70% in 2015. 80% in 2016/2017) Gross profit SG&A EBITDA Depreciation EBIT Interest Earnings before taxes Taxes (40%) Net income lolo $ 10 20 10 510 $550 S 10 30 15 1,080 $1,135 BALANCE SHEETS (S MILLIONS) Assets Cash Accounts receivable Inventories Fixed assets, net Total assets Liabilities and Equity Accounts payable Notes payable (8% bank loan) Accrued liabilities (wages and taxes) Long-term mortgage loans (10%) Long-term subordinated loans (12%) Common stock Retained earnings Total liabilities and equity $ 14 50 4 180 0 300 2 $550 $ 24 140 4 460 290 300 -83 $1,135