UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
X Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
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of 1934
For the quarterly period ended September 30, 1996 or
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____ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to _____________________
Commission file number 0-15472
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Environmental Power Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-2782065
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (603) 431-1780
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(Former name, former address and former fiscal year,
if changed since last report)
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 X No
---- ----
Number of shares of Common Stock outstanding
at November 8, 1996 - 11,076,783
-----------------------------
The Exhibit Index appears on Page 16.
Total number of pages is 17.
-1-
ENVIRONMENTAL POWER CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of
September 30, 1996 (unaudited) and December 31, 1995........ 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Nine Months Ended
September 30, 1996 and September 30, 1995................... 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended
September 30, 1996 and September 30, 1995................... 5
Notes to Condensed Consolidated Financial
Statements..................................................6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................................8-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................... 14-15
Item 5. Other Information............................... 15
Item 6. Exhibits and reports on Form 8-K................ 16
Signatures............................................... 17
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,458,483 $ 1,011,822
Restricted cash 1,639,671 1,250,338
Receivable from utility 6,113,910 6,536,506
Notes receivable 1,222,916 1,673,091
Receivable from sale of affiliate 276,444 276,444
Other current assets 870,956 1,112,152
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TOTAL CURRENT ASSETS 11,582,380 11,860,353
PROPERTY, PLANT AND EQUIPMENT, NET 7,105,379 7,075,907
DEFERRED INCOME TAX ASSET 4,106,929 5,543,229
LEASE RIGHTS, NET 2,943,774 3,055,526
NOTES RECEIVABLE 1,844,494 1,868,409
ACCRUED POWER GENERATION REVENUE 21,989,049 15,161,689
OTHER ASSETS 576,663 661,311
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$ 50,148,668 $ 45,226,424
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,306,352 $ 6,338,160
Other current liabilities 2,838,012 2,298,686
------------ ------------
TOTAL CURRENT LIABILITIES 8,144,364 8,636,846
DEFERRED GAIN, NET 6,091,111 6,322,419
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 8,596,580 8,543,767
ACCRUED LEASE EXPENSE 21,989,049 15,161,689
DEFERRED REVENUE 670,761 3,064,965
MAINTENANCE RESERVE 967,479 699,429
SHAREHOLDERS' EQUITY
Common Stock ($.01 par value; 20,000,000 shares authorized;
12,195,423 shares and 12,145,423 shares issued at
September 30, 1996 and December 31, 1995, respectively;
11,076,783 shares and 11,547,323 shares outstanding at
September 30, 1996 and December 31, 1995, respectively.) 121,954 121,454
Additional paid-in capital 11,611,334 12,592,808
Unearned compensation (6,686) (66,941)
Accumulated deficit (6,819,851) (8,847,585)
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4,906,751 3,799,736
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Less: 1,118,640 and 598,100 common shares held in Treasury, at
cost, at September 30, 1996 and December 31, 1995, respectively (456,272) (168,395)
Notes receivable from officers (761,155) (834,032)
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3,689,324 2,797,309
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$ 50,148,668 $ 45,226,424
============ ============
See notes to condensed consolidated financial statements.
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
POWER GENERATION REVENUES $ 11,758,162 $ 8,257,123 $ 35,602,294 $ 25,327,705
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Operating expenses 4,165,275 3,122,542 13,065,918 13,458,967
Lease expense 5,972,189 5,217,767 18,467,284 15,716,770
General and administrative
expenses 719,833 747,194 2,377,509 2,504,165
Depreciation and amortization 51,426 42,181 153,703 125,613
------------ ------------ ------------ ------------
10,908,723 9,129,684 34,064,414 31,805,515
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 849,439 (872,561) 1,537,880 (6,477,810)
Other Income (Expense):
Interest income 125,821 122,797 345,000 351,219
Interest expense (41,626) (68,731) (116,748) (119,523)
Warranty income -- -- 900,000 --
Other income 619,203 729,421 815,602 1,491,552
------------ ------------ ------------ ------------
703,398 783,487 1,943,854 1,723,248
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,552,837 (89,074) 3,481,734 (4,754,562)
INCOME TAX (EXPENSE) BENEFIT --
Note B (652,000) 31,000 (1,454,000) 1,664,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 900,837 $ (58,074) $ 2,027,734 $ (3,090,562)
============ ============ ============ ============
PRIMARY AND FULLY DILUTIVE
EARNINGS (LOSS) PER
COMMON SHARE -- Note C $ 0.08 $ (0.01) $ 0.18 $ (0.29)
============ ============ ============== ============
See notes to condensed consolidated financial statements.
-4-
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
1996 1995
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,027,734 $ (3,090,562)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 153,103 125,613
Deferred income taxes 1,436,300 (1,664,000)
Amortization of deferred gain (231,308) (231,308)
Amortization of unearned compensation 60,255 60,255
Accrued power generation revenue (6,827,360) (3,177,038)
Accrued lease expense 6,827,360 3,177,038
Changes in operating assets and liabilities:
Decrease in receivable from utility 422,596 882,638
Decrease in receivable from sale of affiliate --- 3,889,476
Decrease in other current assets 241,196 171,202
(Decrease) increase in accounts payable and
accrued expenses (1,031,808) 3,813,084
(Decrease) increase in deferred revenue (2,394,204) 174,044
Increase (decrease) in other current liabilities 651,826 (1,445,888)
Increase in maintenance reserve 268,050 252,005
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Cash provided by operating activities 1,603,740 2,936,559
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the collection of notes receivable 474,090 ---
Increase in restricted cash (389,333) ---
Decrease in other assets 58,487 ---
Capitalized facility under development expenditures (29,964) (46,068)
Property, plant and equipment expenditures (14,698) (1,497,041)
Proceeds from the sale of office equipment --- 1,000
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Cash provided by (used in) investing activities 98,582 (1,542,109)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments (995,411) ---
Repayment of other borrowings (167,500) (112,500)
Purchase of treasury stock (160,000) ---
Increase in other borrowings 52,813 499,998
Proceeds from the issuance of common stock 14,437 10,000
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Cash (used in) provided by financing activities (1,255,661) 397,498
----------------- -----------------
INCREASE IN CASH AND CASH EQUIVALENTS 446,661 1,791,948
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,011,822 356,527
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,458,483 $ 2,148,475
================= =================
See Note D for supplemental disclosure of noncash investing and financing
activities.
See notes to condensed consolidated financial statements.
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ENVIRONMENTAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
- - -----------------------------
The accompanying unaudited condensed consolidated financial statements of
Environmental Power Corporation ("EPC") and its subsidiaries (the "Company")
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of operations
for the nine months ended September 30, 1996 are not necessarily indicative of
results to be expected for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
NOTE B--PROVISION FOR INCOME TAXES
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The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This standard
requires, among other things, recognition of future tax benefits, measured by
enacted tax rates, attributable to deductible temporary differences between
financial bases of assets and liabilities, and net operating loss carryforwards
to the extent that realization of such benefits are more likely than not.
Deferred income taxes are recognized for temporary differences between financial
statement and income tax bases of assets and liabilities and net operating loss
carryforwards for which the Company expects income tax benefits will be realized
in future years.
NOTE C-- NET EARNINGS (LOSS) PER SHARE
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The Company computes its earnings (loss) per common share using the treasury
stock method in accordance with Accounting Principles Board Opinion No. 15.
Under this method, all options, warrants and their equivalents are assumed
exercised (whether dilutive or antidilutive) with aggregate proceeds used to
purchase up to 20% of the Company's outstanding common stock. If the combined
effect of the assumed exercise is dilutive, all options, warrants and their
equivalents are included in the computation.
-6-
ENVIRONMENTAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C-- NET EARNINGS (LOSS) PER SHARE (CONTINUED)
- - --------------------------------------------------
The Company computed its primary and fully dilutive earnings (loss) per common
share using the weighted average number of shares of common stock and dilutive
common stock equivalents outstanding which amounted to 11,176,211 and 11,288,493
for the three and nine months ended September 30, 1996, respectively, and
10,662,179 and 10,653,095 for the three and nine months ended September 30,
1995, respectively.
NOTE D-- CHANGES IN SHAREHOLDERS' EQUITY
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During the nine months ended September 30, 1996, other than net income of
$2,027,734, the Company reported the following changes to its shareholders'
equity:
Dividends - The Company declared and paid dividends of $330,805, $332,303 and
---------
$332,303 during the three months ended March 31, 1996, June 30, 1996 and
September 30, 1996, respectively.
Unearned Compensation - The Company amortized unearned compensation of
---------------------
$20,085 during each of the quarters ended March 31, 1996, June 30, 1996 and
September 30, 1996, respectively. The unearned compensation is associated
with 594,356 shares of restricted stock issued in 1993 to executive officers
whereby the ownership is subject to a vesting period.
Issuance of Common Stock - The Company received proceeds of $14,437 from the
------------------------
issuance of 50,000 shares of its common stock during the three months ended
June 30, 1996. The shares were issued upon the exercise of stock options at
prices ranging from $.14 to $.4375 per share.
Treasury Stock - In March 1996, the Company purchased 520,540 shares of its
--------------
common stock from a resigning executive officer for $287,876. The Company's
note receivable of $72,876 from the officer was deducted from the purchase
price. The $215,000 balance of the purchase price was paid by the delivery
of $160,000 in cash and the Company's $55,000 installment note which matured
in September 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- - -------------------
On September 30, 1996, the Company had cash and cash equivalents of
$1,458,483 as compared to $1,011,822 at December 31, 1995. The increase is
primarily due to the cash generated from the operations of the Scrubgrass
project and the collection of notes receivable related to the Scrubgrass
project. The increase was offset in part by cash used for the purchase of
treasury stock and the payment of a $.03 per share dividend to stockholders in
each of March 1996, June 1996 and September 1996.
On September 30, 1996 the Company had working capital of $3,438,016 as
compared to working capital of $3,223,507 at December 31, 1995. The increase in
working capital from December 31, 1995 to September 30, 1996 is primarily
attributable to cash generated from the favorable operating performance of the
Scrubgrass project, proceeds from the settlement of a legal proceeding and
warranty income related to the Scrubgrass project. The increase is offset in
part by the reduction of certain prepaid expenses of the Scrubgrass project, the
increase in the working capital loan for the Scrubgrass project to cover certain
non-recurring expenses during the first quarter in 1996 and the payment of
dividends.
Restricted cash amounted to $1,639,671 at September 30, 1996 as compared to
$1,250,338 at December 31, 1995 and primarily consists of funds which are
restricted to use for approved capital improvements or scheduled maintenance
procedures for the Scrubgrass project. The increase in restricted cash relates
principally to scheduled deposits which are required to ensure that funds are
available in the future for scheduled maintenance procedures.
Receivable from utility relates to the Scrubgrass project and was
$6,113,910 at September 30, 1996 as compared to $6,536,506 at December 31, 1995.
The decrease is attributable to a nonrecurring receivable amounting to $545,000
at December 31, 1995 which primarily pertained to the utility's payment of a
portion of the contracted rates for energy produced by the Scrubgrass plant in
excess of 80MW in any hour. The decrease was offset in part by higher than
average revenues during the months of August 1996 and September 1996.
The current portion of notes receivable was $1,222,916 as of September 30,
1996 as compared to $1,673,091 as of December 31, 1995. The decrease is
primarily due to the collection of current maturities of notes receivable
related to the Scrubgrass project. Certain of such notes, with a current portion
of $1,187,500 at September 30, 1996, are the subject of a legal proceeding. See
"Part II - Item 1. Legal Proceedings".
-8-
FINANCIAL CONDITION (CONTINUED)
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Other current assets at September 30, 1996 was $870,956 as compared to
$1,112,152 as of December 31, 1995. The decrease is largely attributable to the
reduction of certain prepaid expenses of the Scrubgrass project.
Deferred income tax asset at September 30, 1996 was $4,106,929 as compared
to $5,543,229 as of December 31, 1995. The decrease is largely attributable to
the utilization of net operating loss carryforwards recorded for the nine months
ended September 30, 1996.
Accrued power generation revenue increased to $21,989,049 at September 30,
1996 as compared to $15,161,689 at December 31, 1995. This asset relates to the
Scrubgrass project and represents a receivable recorded as a result of the
straight-line accounting treatment of certain revenues under the Scrubgrass
power purchase agreement.
Accounts payable and accrued expenses decreased to $5,306,352 at September
30, 1996 from $6,338,160 at December 31, 1995. The decrease is primarily due to
the timing of incurring and paying expenses related to the Scrubgrass project.
As of December 31, 1995, accounts payable and accrued expenses were higher than
usual due to the accrual of certain nonrecurring expenses associated with the
December 1995 refinancing of the Scrubgrass project.
Other current liabilities were $2,838,012 at September 30, 1996 as compared
to $2,298,686 at December 31, 1995. The increase is primarily due to additional
borrowings from the working capital loan to pay certain nonrecurring Scrubgrass
lease expenses. The increase was offset in part by the repayment of a $300,000
demand obligation and the repayment of short-term installment obligations in the
amount of $167,500.
Deferred gain, net decreased to $6,091,111 at September 30, 1996 from
$6,322,419 at December 31, 1995. The decline is due to the amortization of the
deferred gain related to the Scrubgrass project, which is being amortized on a
straight-line basis over 22 years.
Secured promissory notes payable and other borrowings increased to
$8,596,580 at September 30, 1996 from $8,543,767 at December 31, 1995 as a
result of additional borrowings from the lessor of the Scrubgrass project who
paid certain Scrubgrass project expenses on behalf of the Company.
-9-
FINANCIAL CONDITION (CONTINUED)
- - -------------------------------
Accrued lease expense was $21,989,049 at September 30, 1996 as compared to
$15,161,689 at December 31, 1995. This liability relates to the Scrubgrass
project and represents an accrued expense recorded as a result of the straight-
line accounting treatment of the lease expense over the initial 22 year lease
term.
Deferred revenue, which represents power generation revenues of the
Scrubgrass project which were deferred pursuant to conditions set forth in the
power purchase agreement, amounted to $670,761 at September 30, 1996 as compared
to $3,064,965 at December 31, 1995. The decrease is attributable to power
generation revenues which were earned during the nine months ended September 30,
1996. The balance of the deferred revenue continues to be deferred until
earned, which is expected to occur primarily during 1996.
Maintenance reserve is related to the Scrubgrass project and increased to
$967,479 at September 30, 1996 from $699,429 at December 31, 1995 due to
scheduled reserves provided for the ongoing maintenance of the plant.
RESULTS OF OPERATIONS
- - ---------------------
REVENUES AND EXPENSES
Power generation revenues for the three and nine months ended September 30,
1996 amounted to $11,758,162 and $35,602,294, respectively, as compared to power
generation revenues for the three and nine months ended September 30, 1995 of
$8,257,123 and $25,327,705, respectively. The overall increase in power
generation revenues during 1996 is primarily attributable to the recognition of
certain revenues which were previously deferred under the power purchase
agreement, an increase in the power generation and contracted rates billed to
the utility, and an increase in the revenue recorded as a result of the
straight-line accounting treatment of certain revenues under the power purchase
agreement. All power generation revenues earned by the Company in 1996 and 1995
related to the Scrubgrass project.
Operating expenses for the three and nine months ended September 30, 1996
amounted to $4,165,275 and $13,065,918, respectively, as compared to operating
expenses for the three and nine months ended September 30, 1995 of $3,122,542
and $13,458,967, respectively. All operating expenses in 1996 and 1995 related
to the Scrubgrass project. The overall decrease in operating expenses for the
nine months ended September 30, 1996 is primarily attributable to three factors.
First, Scrubgrass incurred maintenance expenses during its 1995 annual plant
outage which were
-10-
RESULTS OF OPERATIONS (CONTINUED)
- - ---------------------------------
significantly greater by comparison to expenses incurred during the 1996 annual
plant outage. Secondly, due to maintenance modifications and additional
operating experience, the Scrubgrass project has been less costly and more
efficient to operate during 1996. Finally, as a result of a refinancing
transaction which occurred in December 1995, certain operating expenses were
reclassified as lease expenses. Accordingly, the operating expenses for the nine
months ended September 30, 1996 were lower by comparison to the nine months
ended September 30, 1995. The increase in operating expenses for the three
months ended September 30, 1996 by comparison to the three months ended
September 30, 1995 is largely attributable to the reclassification of 1995
operating expenses to capitalized leasehold improvements during the three months
ended September 30, 1995 which were subsequently reclassified as lease expenses
to be more consistent with the terms of the December 1995 Scrubgrass project
refinancing.
Lease expense for the three and nine months ended September 30, 1996
amounted to $5,972,189 and $18,467,284, respectively, as compared to lease
expense for the three and nine months ended September 30, 1995 of $5,217,767 and
$15,716,770, respectively. The overall increase in lease expense during 1996 is
primarily due to an increase in equity rents paid to the lessor based on the
favorable performance of the Scrubgrass plant in 1996 and an increase in the
lease expense recorded as a result of the straight-line accounting treatment of
such expenses. The increase is partially offset by the lowering of interest
rates incurred in 1996 which reduced the lessor's loan costs that were passed
through to the Company in its facility lease expenses.
General and administrative expenses for the three and nine months ended
September 30, 1996 amounted to $719,833 and $2,377,509, respectively, as
compared to general and administrative expenses for the three and nine months
ended September 30, 1995 of $747,194 and $2,504,165, respectively. The overall
decrease in general and administrative expenses during 1996 is primarily due to
the Company's efforts to reduce its corporate overhead expenses. However, during
the nine months ended September 30, 1996, the Company continued to incur
substantial management and professional fees to negotiate certain contractual
matters and address certain legal matters, and made reclassifications of certain
1996 operating expenses to general and administrative expenses which stem from
the December 1995 refinancing of Scrubgrass. Accordingly, the full effect of the
Company's efforts to reduce corporate overhead expenses has not yet been shown
in its 1996 operating results.
-11-
RESULTS OF OPERATIONS (CONTINUED)
- - ---------------------------------
Warranty income for the nine months ended September 30, 1996 amounted to
$900,000 and resulted from a legal settlement with an engineering and
construction contractor for the Scrubgrass plant which occurred during the three
months ended March 31, 1996.
Other income for the three and nine months ended September 30, 1996
amounted to $619,203 and $815,602, respectively, as compared to other income for
the three and nine months ended September 30, 1995 of $729,421 and $1,491,552,
respectively. For the nine months ended September 30, 1996 and September 30,
1995, other income included the current period amortization of the deferred gain
resulting from the original sale of the Scrubgrass project in 1990. For the nine
months ended September 30, 1996, the remainder of other income primarily
consisted of proceeds from a legal settlement and a sales tax refund pertaining
to the Sunnyside project. For the nine months ended September 30, 1995, the
remainder of other income primarily consisted of sales tax refunds pertaining to
the Sunnyside project.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company's principal sources of cash to continue its general corporate
activities in 1996 will consist of current cash and cash equivalent balances,
interest income on cash equivalents, cash flows which may become available from
the Scrubgrass project, and principal and interest proceeds which may be
received pursuant to certain notes related to the 1994 sale of the Sunnyside
project.
The obligors on the notes received by the Company in connection with the
sale of the Sunnyside project are among the plaintiffs who have commenced a
legal proceeding against the Company and seek remedies which include an
unspecified amount of damages and rescission of the Sunnyside purchase and sale
contract. Furthermore, beginning in June 1996, the obligors on the
aforementioned notes began withholding interest payments currently due under the
terms of such notes which as of September 30, 1996 have accumulated to $147,278.
As of September 30, 1996, there were no principal payments in arrears. An
unfavorable outcome of this litigation or the continued withholding of payments
currently due under the notes would have an adverse effect on the Company's
liquidity and capital resources. See "Part II - Item 1. Legal Proceedings".
During the nine months ended September 30, 1996, the Company received
$1,722,771 in cash which became available from the Scrubgrass project. However,
various Scrubgrass contractual obligations may require that future cash flows
from the Scrubgrass project first be used to increase certain reserve accounts
and/or
-12-
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- - -------------------------------------------
fund contractual obligations of the project and, therefore, there is no
assurance that future cash flows from the Scrubgrass project will be available
to the Company. As of September 30, 1996, there were no deficiencies in funding
reserve accounts or contractual obligations which would impact the future
availability of cash from the Scrubgrass project.
In August 1996, the Company received net settlement proceeds of
approximately $418,000 from the favorable settlement of a legal proceeding which
had a favorable impact on the Company's current liquidity position and
contributed to the Company's results of operations during the third quarter in
1996.
Presently, other than the potential development of the Milesburg project,
the Company's management sees no investment opportunities within its industry
for which it would expect to utilize its available resources. Accordingly,
until it is determined whether the Milesburg project will be developed, the
Company plans to maintain its present focus on seeking to control costs and to
enhance the return which can be offered to its shareholders. In this regard,
during the nine months ended September 30, 1996, the Company declared and paid
quarterly dividends aggregating $995,411. While the Company's Board of Directors
intends to evaluate the payment of any future dividends based on the Company's
then current and projected operating performance and capital requirements, the
Company currently seeks to continue regular dividends to shareholders which are
supported by the Company's operating performance. When the Company determines
whether the Milesburg project will be developed, or should the Company identify
other investment opportunities, the Company's Board of Directors will evaluate
the continuation of any dividend payments then being made in light of the cash
requirements therefor.
-13-
PART II
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ITEM 1. LEGAL PROCEEDINGS
On May 3, 1996, B&W Sunnyside L.P., NRG Sunnyside Inc., NRG Energy Inc.,
and Sunnyside Cogeneration Associates (collectively the "plaintiffs") filed a
complaint, which was amended on June 27, 1996, against the Company and three of
its wholly-owned subsidiaries (collectively hereafter "the Company") in Seventh
District Court for Carbon County, State of Utah. The amended complaint alleges
that the Company breached the purchase and sale agreement by which the Company
transferred all of its interest in Sunnyside Cogeneration Associates, a joint
venture which owned and operated a nominal 51 megawatt waste coal fired facility
located in Carbon County, Utah. The amended complaint also alleges that the
Company made certain misrepresentations in connection with the purchase and sale
agreement. As a result of the alleged breaches of contract and
misrepresentations, the plaintiffs allege that they suffered damages in an
unspecified amount that exceed the aggregate outstanding principal and interest
balances due to the Company by B&W Sunnyside L.P. and NRG Sunnyside, Inc. under
certain notes receivable, which amounted to $2,937,500 and $147,278,
respectively at September 30, 1996 (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources"). In addition to alleging unspecified damages, the plaintiffs also
request rescission of the purchase and sale agreement.
On July 30, 1996, in response to the plaintiffs' amended complaint, the
Company filed an answer and counterclaim. In the answer to the amended
complaint, the Company denied all material allegations of the amended complaint
and asserted numerous affirmative defenses. In the counterclaim, the Company
alleges numerous causes of action against the plaintiffs which include breach of
contract, breach of the promissory notes, intentional, malicious and willful
breach of contract, intentional tort, interference and misrepresentation.
Through the counterclaim, the Company seeks remedies which include: (1)
compensatory, consequential and punitive damages; (2) acceleration and immediate
payment in full of the promissory notes; and (3) injunctions which require the
plaintiffs to continue making payments under the promissory notes during the
pendency of this action and until the promissory notes are paid in full and
which enjoin the plaintiffs from continuing certain malicious and intentional
actions that are alleged in the counterclaim, together with interest, reasonable
attorney's fees, costs and other such relief as the court deems proper.
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ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
On August 30, 1996, the plaintiffs filed a reply to the Company's
counterclaim in which they denied all material allegations of the counterclaim
and asserted numerous affirmative defenses.
The Company plans to vigorously defend against the amended complaint and
vigorously pursue the causes of action stated in the counterclaim. The matter
is currently proceeding to the discovery stage.
ITEM 5. OTHER INFORMATION
On July 30, 1996, the Company entered into a joint development agreement
with U.S. Generating Company concerning the Milesburg project. U.S. Generating
Company is jointly owned by a subsidiary of PG&E Enterprises and a subsidiary of
Bechtel Enterprises, Inc., and has considerable experience as one of America's
largest independent power companies. In addition, the Company and U.S.
Generating Company have a history of working together in the co-development and
ongoing operation of the Scrubgrass plant which has now been operating
profitably for the last four successive quarters. As a result of the joint
development agreement, the Company has greater financial and technical resources
available to pursue the development of the Milesburg project. Since the signing
of the development agreement, the Company and U.S. Generating Company have been
pursuing various development activities and are continuing ongoing discussions
with West Penn Power Company concerning a possible buy-out of the power purchase
contract. The Company plans to continue efforts towards both the development of
the Milesburg project and the negotiation of a buy-out of the power purchase
agreement until it becomes apparent which alternative will be in the best
interest of the Company and its shareholders. Based on the progress made in
recent development activities and buy-out negotiations, management believes that
the Company is likely to realize value from the Milesburg project. However,
there can be no assurance that the Milesburg project will be successfully
developed, that the Company will receive a buy-out proposal, or that the Company
will realize any value from the Milesburg project.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 - Material contracts - Joint Development Agreement among
Milesburg Energy, Inc., U.S. Generating Company and Environmental Power
Corporation (a written request for confidential treatment of certain
proprietary information in this agreement has been filed with the United
States Securities and Exchange Commission)
(b) Exhibit 11 - Computation of earnings per share
(c) Exhibit 27 - Financial data schedule
(d) Reports on Form 8-K - None
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SIGNATURES
Pursuant to 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.
ENVIRONMENTAL POWER CORPORATION
November 8, 1996 by: /s/ William D. Linehan
-------------------------------
William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
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