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, 1995 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.)
31 Raynes Avenue, 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 _____
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Number of shares of Common Stock outstanding
at November 6, 1995 - 10,662,179
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The Exhibit Index appears on Page 10.
Total number of pages is 11.
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ENVIRONMENTAL POWER CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1995 (unaudited) and December 31, 1994...... 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three and Nine Months Ended
September 30, 1995 and September 30, 1994................. 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the Nine
Months Ended September 30, 1995 and September 30, 1994.... 5
Notes to Condensed Consolidated Financial
Statements................................................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................... 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K................. 10
Signatures................................................ 11
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL INFORMATION
SEPTEMBER 30 DECEMBER 31
1995 1994
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ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 2,148,475 $ 356,527
Receivable from utility 4,487,460 5,370,098
Receivable from sale of affiliate 276,424 4,165,900
Other current assets 1,929,744 2,093,051
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TOTAL CURRENT ASSETS 8,842,103 11,985,576
PROPERTY, PLANT AND EQUIPMENT, NET 7,055,054 7,026,804
DEFERRED INCOME TAX ASSET 7,184,244 4,995,245
LEASE RIGHTS, NET 3,092,778 3,204,531
NOTES RECEIVABLE 3,255,269 3,263,164
ACCRUED POWER GENERATION REVENUE 8,488,362 5,311,324
OTHER ASSETS 175,000 175,000
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$ 38,092,810 $ 35,961,644
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued $ 10,782,470 $ 6,969,386
expenses
Other current liabilities 2,113,963 3,559,851
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TOTAL CURRENT LIABILITIES 12,896,433 10,529,237
DEFERRED GAIN, NET 6,399,522 6,630,830
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 6,358,768 5,971,270
ACCRUED LEASE EXPENSE 8,488,362 5,311,324
DEFERRED REVENUE 3,000,016 2,825,972
MAINTENANCE RESERVE 502,005 250,000
SHAREHOLDERS' EQUITY
Preferred Stock ($.01 par value; 981,260 shares authorized;
18,740 shares issued at December 31, 1994) --- 187
Common Stock ($.01 par value; 20,000,000 shares authorized;
10,762,179 shares issued; 10,662,179 shares and
10,582,179 shares outstanding at September 30, 1995
and December 31, 1994, respectively) 107,622 106,822
Additional paid-in capital 13,082,520 13,963,993
Unearned compensation (87,026) (147,281)
Accumulated deficit (12,178,536) (8,112,974)
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924,580 5,810,747
Less : 100,000 common shares held in Treasury, at cost (75,000) (75,000)
18,740 preferred shares, at cost --- (890,860)
Notes receivable from officers (401,876) (401,876)
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447,704 4,443,011
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$ 38,092,810 $ 35,961,644
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Note : The balance sheet at December 31, 1994 has been derived from the
audited financial statements at that date.
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
1995 1994 1995 1994
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POWER GENERATION REVENUES $ 8,257,123 $ 13,931,700 $ 25,327,705 $ 22,434,354
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Costs and expenses:
Operating expenses 4,622,543 7,526,420 14,958,968 11,759,092
Lease expense 5,217,767 5,711,715 15,716,770 5,711,715
General and administrative expenses 747,194 906,133 2,504,165 1,428,314
Depreciation and amortization 42,181 960,425 125,613 2,799,834
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10,629,685 15,104,693 33,305,516 21,698,955
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OPERATING INCOME [LOSS] (2,372,562) (1,172,993) (7,977,811) 735,399
Other Income (Expense):
Interest income 122,797 153,117 351,219 673,156
Interest expense (68,731) (3,106,170) (119,523) (8,770,387)
Minority interest --- 636,443 --- 1,222,283
Other income 729,421 77,103 1,491,552 77,103
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783,487 (2,239,507) 1,723,248 (6,797,845)
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LOSS BEFORE INCOME TAXES (1,589,075) (3,412,500) (6,254,563) (6,062,446)
INCOME TAX BENEFIT -- Note B 556,000 1,194,375 2,189,000 2,121,856
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NET LOSS $ (1,033,075) $ (2,218,125) $ (4,065,563) $ (3,940,590)
============== ============== ============== =============
NET LOSS PER SHARE -- Note C $ (0.10) $ (0.21) $ (0.38) $ (0.37)
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No dividends were paid or declared during the periods presented.
See notes to condensed consolidated financial statements.
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
1995 1994
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CASH FLOW FROM OPERATING ACTIVITIES :
Net loss $ (4,065,563) $ (3,940,590)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 125,613 2,799,834
Deferred income taxes (2,189,000) (1,911,680)
Amortization of deferred gain (231,308) (77,103)
Minority interest --- (1,222,283)
Amortization of unearned compensation 60,255 60,255
Accrued power generation revenue (3,177,038) 2,655,662
Accrued lease expense 3,177,038 (2,655,662)
Changes in operating assets and liabilities:
(Increase) decrease in receivable from utility 882,638 (4,493,674)
Decrease in receivable from sale of affiliate 3,889,476 ---
(Increase) decrease in other current assets 171,202 (3,040,961)
Increase in accounts payable and
accrued expenses 3,813,084 8,155,596
Increase in deferred revenue 174,044 1,469,203
Increase (decrease) in other current liabilities (1,445,888) 4,665,781
Increase in maintenance reserve 252,005 125,001
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Cash provided by operating activities 1,436,558 2,589,379
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CASH FLOW FROM INVESTING ACTIVITIES :
Purchases of office equipment --- (8,563)
Proceeds from sale equipment 1,000 ---
Lease rights expenditures --- 225,981
Restricted deposits and other assets --- 714,651
Property, plant & equipment expenditures 2,960 (9,082,439)
Capitalized facility under development expenditures (46,068) (157,254)
Reduction in cash due to Sunnyside conversion to
equity method of accounting --- (5,872,438)
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Cash used in investing activities (42,108) (14,180,062)
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CASH FLOW FROM FINANCING ACTIVITIES :
Proceeds from tax exempt borrowings and equity
bridge loans --- 4,066,481
Payment of secured promissory notes payable
and other borrowings 387,498 (885,650)
Proceeds from sale of common stock 10,000 ---
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Cash provided by financing activities 397,498 3,180,831
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,791,948 (8,409,852)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 356,527 9,065,413
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,148,475 $ 655,561
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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 three and nine months ended September 30, 1995 are not necessarily
indicative of results to be expected for the full fiscal year. 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, 1994.
NOTE B--PROVISION FOR INCOME TAXES
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 is 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-- LOSS PER SHARE
The Company computes its earnings per common share using the modified treasury
stock method ("modified method") in accordance with Accounting Principles Board
Opinion No. 15. The modified method is used when the number of shares
obtainable upon exercise of outstanding options, warrants and their equivalents
exceeds 20% of the Company's outstanding common stock. 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 and the remainder invested in U.S. government
securities. If the combined effect of the assumed exercise is dilutive, all
options, warrants and their equivalents are included in the computation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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FINANCIAL CONDITION
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On September 30, 1995, the Company had cash and cash equivalents of
$2,148,475 as compared to $356,527 at December 31, 1994. The increase is
primarily due to the receipt in 1995 of a portion of the proceeds from the sale
on December 31, 1994 of the Company's remaining interest in the Sunnyside
project together with the receipt of sales tax refunds related to the Sunnyside
project construction period.
On September 30, 1995, the Company had a deficit in working capital of
$4,054,330 as compared to working capital of $1,456,339 at December 31, 1994.
The decrease is primarily the result of an increase in current liabilities
arising from 1995 operating losses of approximately $6.8 million related to the
Scrubgrass project. The Company itself is not obligated to pay such liabilities
and its subsidiary, Buzzard Power Corporation, the lessee of the Scrubgrass
project, is only obligated to pay such liabilities out of future operations or
project refinancing. Excluding the Scrubgrass project the Company had working
capital on September 30, 1995 of $1,946,270 as compared to $1,339,894 at
December 31, 1994. The increase is primarily related to the receipt of sales tax
refunds related to the Sunnyside project construction period. The Company has
included for accounting purposes, certain obligations in current liabilities
aggregating approximately $.2 million at September 30, 1995 and $.5 million at
December 31, 1994, which either are in dispute or are expected to be paid from
funds provided from noncurrent assets rather than from current assets.
Receivable from utility relates to the Scrubgrass project and was
$4,487,460 at September 30, 1995 as compared to $5,370,098 at December 31, 1994.
Receivable from sale of affiliate relates to the Sunnyside project as
mentioned above and was $276,424 and $4,165,900 at September 30, 1995 and
December 31, 1994, respectively. Through September 30, 1995 the Company has
received approximately $3.8 million in cash representing a portion of its
proceeds from the sale.
Other current assets were $1,929,744 at September 30, 1995 as compared to
$2,093,051 at December 31, 1994. The net decrease is primarily due to the
reimbursement of $667,000 of overhead expenses related to the Scrubgrass project
which is primarily offset by increases in prepaid expenses, fuel inventory and
interest receivable.
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Deferred income tax asset at September 30, 1995 was $7,184,244 as compared
to $4,995,245 as of December 31, 1994. The increase is due to the federal
income tax benefit recorded for 1995.
Accrued power generation revenue increased to $8,488,362 at September 30,
1995 as compared to $5,311,324 at December 31, 1994. This relates to the
Scrubgrass project and represents the receivable recorded as a result of the
straight-line accounting treatment of certain revenues under the power purchase
agreement.
Accounts payable and accrued expenses were $10,782,470 at September 30,
1995 which included $10,194,585 related to the Scrubgrass project as described
above. Accounts payable and accrued expenses at December 31, 1994 were
$6,969,386 and included $4,871,950 related to the Scrubgrass project. Accounts
payable and accrued expenses not related to the Scrubgrass project declined by
approximately $1.5 million since December 31, 1994 as a result of payments
aggregating approximately $1 million together with the non-current
reclassification of a $500,000 liability.
Other current liabilities decreased to $2,113,963 at September 30, 1995
from $3,559,851 at December 31, 1994. The decrease is primarily due to the
settlement payment in full during the first quarter of approximately $1.5
million to the DBL Liquidating Trust.
Secured promissory notes payable and other borrowings increased to
$6,358,768 at September 30, 1995 from $5,971,270 at December 31, 1994 as a
result of the net reclassification of current liabilities.
Accrued lease expense was $8,488,362 at September 30, 1995 as compared to
$5,311,324 at December 31, 1994. This relates to the Scrubgrass project and
represents accrued lease expense recorded as a result of the straight-line
accounting treatment of the lease expense over the 22 year lease term.
Maintenance reserve is related to the Scrubgrass project and increased to
$502,005 at September 30, 1995 from $250,000 at December 31, 1994.
RESULTS OF OPERATIONS
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REVENUES & EXPENSES
Power generation revenues for the three and nine months ended September 30,
1995 were $8,257,123 and $25,327,705, respectively and represent power
generation at the Scrubgrass project. Power generation revenues for the three
and nine months ended September 30, 1994 were $13,931,700 and $22,434,354,
respectively and represent power generation at the Scrubgrass project, which the
Company began leasing on June 30, 1994 together with power generation at the
Sunnyside project in which the Company sold its remaining interest on December
31, 1994.
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Operating expenses for the three and nine months ended September 30, 1995
relate to the Scrubgrass project and were $4,622,543 and $14,958,968,
respectively. Operating expenses for the three and nine months ended September
30, 1994 relate to the Scrubgrass project as mentioned above and to the
Sunnyside project and were $7,526,420 and $11,759,092, respectively.
Lease expense relates to the Scrubgrass project as mentioned above and was
$5,217,767 and $15,716,770 for the three and nine months ended September 30,
1995 as compared to $5,711,715 for the three and nine months ended September 30,
1994.
General and administrative expenses for the three and nine months ended
September 30, 1995 were $747,194 and $2,504,165, respectively as compared to
$906,133 and $1,428,314, respectively for the three and nine months ended
September 30, 1994. The increase is primarily due to third-party management
expenses related to the operation of the Scrubgrass project, which the Company
began leasing on June 30, 1994. These are significantly greater than general and
administrative expenses related to the Company's management of the Sunnyside
project, which the Company sold on December 31, 1994. The increase is also due
to a significant decrease in capitalized general and administrative expenses,
which is partially offset by a decline in the Company's general corporate
overhead.
Depreciation and amortization expenses for the three and nine months ended
September 30, 1995 were $42,181 and $125,613, respectively as compared to
$960,425 and $2,799,834 for the three and nine months ended June 30, 1994. The
decrease is primarily due to the sale in 1994 of the Sunnyside project as
mentioned above.
Interest income for the three and nine months ended September 30, 1995 was
$122,797 and $351,219, respectively and is primarily related to notes receivable
in connection with the 1994 sale of the Sunnyside project together with income
from short-term investments. Interest income for the three and nine months
ended September 30, 1994 was $153,117 and $673,156, respectively and is
primarily due to investment earnings on assets held by trustee and reserves
related to the Sunnyside project.
Interest expense for the three and nine months ended September 30, 1995 was
$68,731 and $119,523, respectively as compared to $3,106,170 and $8,770,387 for
the three and nine months ended September 30, 1994. The decline is primarily as
a result of the 1994 sale of the Sunnyside project as mentioned above.
Minority interest relates to the Sunnyside project and for the three and
nine months ended September 30, 1994 was $636,443 and $1,222,283 as compared to
the absence of such expense during 1995.
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Other income for the three and nine months ended September 30, 1995 was
$729,421 and $1,491,552, respectively as compared to $77,103 for the three and
nine months ended September 30, 1994. In 1995, other income consists primarily
of sales tax refunds aggregating approximately $1.1 million related to the
Sunnyside project construction period together with amortization of the deferred
gain arising from the original sale of the Scrubgrass project in 1990. In 1994,
other income consists of the amortization of the aforementioned deferred gain.
The deferred gain of $6,785,035 is being amortized on a straight-line basis over
the 22 year minimum lease term, which commenced on June 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
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The Company's principal sources of cash to continue its general corporate
activities in 1995 will be from current cash balances, additional proceeds
received pursuant to the 1994 sale of the Sunnyside project, interest income on
short-term investments and from cash flows which may become available from the
Scrubgrass project. Various contractual obligations or potential obligations may
require that any cash flows from the Scrubgrass project be used to increase
certain reserve accounts and/or be used to fund contractual obligations of the
project, and, therefore, may not be available to the Company. Since the first
quarter of 1995, management has undertaken a cost reduction program to
significantly reduce general corporate overhead. The Company is not directly
able to control such costs attributable to operation of the Scrubgrass project
under the terms of its contractual relationship with the lessors and lenders for
that project.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 - Computation of earnings per share
(b) 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 9, 1995 By:/s/ Bayard R. Kraft III
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Bayard R. Kraft III
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
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