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 March 31, 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
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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
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Number of shares of Common Stock outstanding
at May 15, 1996 - 11,026,783
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The Exhibit Index appears on Page 11.
Total number of pages is 12.
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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
March 31, 1996 (unaudited) and December 31, 1995...... 3
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months Ended
March 31, 1996 and March 31, 1995..................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) for the Three
Months Ended March 31, 1996 and March 31, 1995........ 5
Notes to Condensed Consolidated Financial
Statements............................................ 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................ 7-10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................ 11
Item 6. Exhibits and reports on Form 8-K.............. 11
Signatures............................................ 12
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
MARCH 31 DECEMBER 31
1996 1995
----------------- ----------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 1,113,827 $ 1,011,822
Restricted cash 2,306,930 1,250,338
Receivable from utility 5,955,776 6,536,506
Notes receivable 1,221,532 1,673,091
Receivable from sale of affiliate 276,444 276,444
Other current assets 980,840 1,112,152
----------------- ----------------
TOTAL CURRENT ASSETS 11,855,349 11,860,353
PROPERTY, PLANT AND EQUIPMENT, NET 7,077,262 7,075,907
DEFERRED INCOME TAX ASSET 4,983,229 5,543,229
LEASE RIGHTS, NET 3,018,276 3,055,526
NOTES RECEIVABLE 1,862,555 1,868,409
ACCRUED POWER GENERATION REVENUE 16,816,924 15,161,689
OTHER ASSETS 625,414 661,311
----------------- ----------------
$ 46,239,009 $ 45,226,424
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 5,795,173 $ 6,338,160
Other current liabilities 2,674,937 2,298,686
----------------- ----------------
TOTAL CURRENT LIABILITIES 8,470,110 8,636,846
DEFERRED GAIN, NET 6,245,316 6,322,419
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 8,596,580 8,543,767
ACCRUED LEASE EXPENSE 16,816,924 15,161,689
DEFERRED REVENUE 2,234,494 3,064,965
MAINTENANCE RESERVE 811,779 699,429
SHAREHOLDERS' EQUITY
Common Stock ($.01 par value; 20,000,000 shares authorized;
12,145,423 shares issued; 11,026,783 shares and
11,547,323 shares outstanding at March 31, 1996
and December 31, 1995, respectively) 121,454 121,454
Additional paid-in capital 12,262,003 12,592,808
Unearned compensation (46,856) (66,941)
Accumulated deficit (8,055,368) (8,847,585)
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4,281,233 3,799,736
Less : 1,118,640 and 598,100 common shares held in Treasury, at
cost, at March 31, 1996 and December 31, 1995, respectively. (456,272) (168,395)
Notes receivable from officers (761,155) (834,032)
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3,063,806 2,797,309
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$ 46,239,009 $ 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
March 31
1996 1995
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POWER GENERATION REVENUES $ 10,765,515 $ 7,943,959
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Costs and expenses:
Operating expenses 4,279,593 5,620,642
Lease expense 5,169,428 5,375,173
General and administrative expenses 982,977 811,313
Depreciation and amortization 41,870 41,680
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10,473,868 11,848,808
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OPERATING INCOME (LOSS) 291,647 (3,904,849)
Other Income (Expense):
Interest income 93,898 108,698
Interest expense (37,511) (27,497)
Warranty income 900,000 ---
Other income 119,183 77,103
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1,075,570 158,304
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INCOME (LOSS) BEFORE INCOME TAXES 1,367,217 (3,746,545)
INCOME TAX (EXPENSE) BENEFIT -- Note B (575,000) 1,498,000
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NET INCOME (LOSS) $ 792,217 $ (2,248,545)
============== ===============
NET INCOME (LOSS) PER SHARE -- Note C $ 0.07 $ (0.21)
============== ===============
Dividends of $330,805 were declared and paid during the three months ended March
31, 1996. No dividends were declared or paid during the three months ended March
31, 1995.
See notes to condensed consolidated financial statements.
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES: --------------- --------------
Net income (loss) $ 792,217 $ (2,248,545)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 41,870 41,680
Deferred income taxes 560,000 (1,498,000)
Amortization of deferred gain (77,103) (77,103)
Amortization of unearned compensation 20,085 20,085
Accrued power generation revenue (1,655,235) (1,068,104)
Accrued lease expense 1,655,235 1,068,104
Changes in operating assets and liabilities:
Increase in restricted cash (1,056,592) ---
Decrease in receivable from utility 580,730 4,261,787
Decrease in receivable from sale of affiliate --- 2,712,176
Decrease in other current assets 131,312 712,629
Decrease in accounts payable and accrued
expenses (542,987) (998,188)
Increase (decrease) in other current liabilities 321,251 (2,421,189)
(Decrease) increase in deferred revenue (830,471) 52,674
Increase in maintenance reserve 112,350 125,000
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Cash provided by operating activities 52,662 683,006
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the collection of notes receivable 457,413 7,320
Decrease in other assets 35,897 ---
Property, plant & equipment expenditures (1,997) ---
Capitalized facility under development expenditures (3,978) (28,111)
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Cash provided by (used in) investing activities 487,335 (20,791)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments (330,805) ---
Purchase of treasury stock (160,000) (37,499)
Proceeds from other borrowings 52,813 10,000
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Cash used in financing activities (437,992) (27,499)
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INCREASE IN CASH AND CASH EQUIVALENTS 102,005 634,716
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,011,822 356,527
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,113,827 $ 991,243
=============== ==============
Supplemental disclosure of noncash investing and financing activities:
In March 1996, the Company purchased 520,540 shares of its common stock
from a former officer for $287,876. The Company's note receivable of
$72,876 from the former 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 maturing in September
1996.
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
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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 quarter ended March 31, 1996 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, 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 INCOME (LOSS) PER SHARE
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The Company computes its earnings 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.
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ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
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On March 31, 1996, the Company had cash and cash equivalents of $1,113,827
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.
On March 31, 1996, the Company had working capital of $3,385,239 as
compared to working capital of $3,223,507 at December 31, 1995. The increase is
primarily the result of favorable operating results from the Scrubgrass project
including other revenue of approximately $954,000 from the settlement of certain
startup and warranty issues. The increase was offset in part by an increase in
the Scrubgrass working capital loan which was utilized to fund certain
nonrecurring Scrubgrass lease expenses which were expensed during 1995, but
payable during the quarter ended March 31, 1996. Due to the timing of the
receipt of operating cash from the utility, the Company funded such expenses by
borrowing from its working capital loan and subsequently paid down the working
capital loan in April 1996, when it collected its receivable from the utility.
Receivable from utility relates to the Scrubgrass project and was
$5,955,776 at March 31, 1996 as compared to $6,536,506 at December 31, 1995.
The decrease is primarily attributable to a nonrecurring settlement receivable
amounting to $545,000 at December 31, 1995. The settlement primarily pertained
to the utility's payment of contracted rates for energy produced by the
Scrubgrass plant in excess of 80MW in any hour.
The current portion of notes receivable was $1,221,532 as of March 31, 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 March 31, 1996, are the subject of a legal proceeding. See "Part II - Item
1. Legal Proceedings".
Deferred income tax asset at March 31, 1996 was $4,983,229 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 three months
ended March 31, 1996.
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Accrued power generation revenue increased to $16,816,924 at March 31, 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 power purchase
agreement.
Accounts payable and accrued expenses decreased to $5,795,173 at March 31,
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.
Other current liabilities were $2,674,937 at March 31, 1996 as compared to
$2,298,686 at December 31, 1995. The increase is primarily due to the
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.
Deferred gain, net decreased to $6,245,316 at March 31, 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 March 31, 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.
Accrued lease expense was $16,816,924 at March 31, 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 $2,234,494 at March 31, 1996 as compared
to $3,064,965 at December 31, 1995. The decrease is attributable to power
generation revenues which were earned during the three months ended March 31,
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
$811,779 at March 31, 1996 from $699,429 at December 31, 1995 due to scheduled
reserves provided for the ongoing maintenance of the plant.
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Results of Operations
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Revenues and Expenses
Power generation revenues for the quarters ended March 31, 1996 and March
31, 1995 amounted to $10,765,515 and $7,943,959, respectively, and were earned
from power generation at the Scrubgrass project. The 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. In addition, power generation revenue for the quarter ended March
31, 1995 was lower by comparison due to the annual plant outage which occurred
in March 1995.
Operating expenses for the quarters ended March 31, 1996 and March 31, 1995
amounted to $4,279,593 and $5,620,642, respectively, and relate to the
Scrubgrass project. The decrease in 1996 operating expenses is primarily
attributable to three factors. First, during the quarter ended March 31, 1995,
the Company incurred greater than expected maintenance expenses during its
annual plant outage. The Company did not incur annual outage expenses during
the corresponding quarter in 1996 since the 1996 annual outage is not taking
place until May. Secondly, due to maintenance modifications and additional
operating experience, the Scrubgrass project has been less costly and more
efficient during the first quarter of 1996. Finally, as a result of a
refinancing transaction which occurred in December 1995, certain operating
expenses were reclassified as lease expenses which will be expensed over a
longer period of time. Accordingly, the operating expenses for the quarter
ended March 31, 1996 were lower.
Lease expense for the quarters ended March 31, 1996 and March 31, 1995
amounted to $5,169,428 and $5,375,173, respectively, and relate to the
Scrubgrass project. The decrease in lease expense during 1996 is primarily due
to the lowering of interest rates which reduced the lessor's loan costs which
were passed through to the Company in its facility lease expenses.
General and administrative expenses for the quarters ended March 31, 1996
and March 31, 1995 amounted to $982,977 and $811,313, respectively. The
increase in 1996 general and administrative expenses is primarily attributable
to an increase in management and professional fees to settle certain financial
matters with the utility and reclassifications of certain operating expenses to
general and administrative expenses which stem from the December 1995
refinancing transaction.
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Interest income for the quarters ended March 31, 1996 and March 31, 1995
amounted to $93,898 and $108,698, respectively. The decrease is primarily
attributable to lower aggregate principal balances resulting from the maturity
of the current portion of notes receivable related to the Sunnyside project and
the maturity of a note receivable related to Scrubgrass project.
Warranty income for the quarter ended March 31, 1996 amounted to $900,000
and resulted from a legal settlement with an engineering and construction
contractor for the Scrubgrass plant.
Other income for the quarters ended March 31, 1996 and March 31, 1995
amounted to $119,183 and $77,103, respectively. For both the quarters ended
March 31, 1996 and March 31, 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 quarter ended March 31, 1996, the remainder
of other income consisted of a sales tax refund associated with the Sunnyside
project.
Liquidity and Capital Resources
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The Company's principal sources of cash to continue its general corporate
activities in 1996 will consist of current cash balances, principal and interest
proceeds received pursuant to the 1994 sale of the Sunnyside project, interest
income on cash equivalents and cash flows which may become available from the
Scrubgrass 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 damages in excess of $3,500,000, and the right to offset a portion of
those damages against the aggregate outstanding principal balances due to the
Company by such obligors. Any reduction in the amounts receivable under such
notes and/or additional damages awarded to such obligors would have an adverse
effect on the Company's liquidity and capital resources. See "Part II - Item 1.
Legal Proceedings". During the quarter ended March 31, 1996, the Company
received $562,075 in cash which became available from the Scrubgrass project.
However, various Scrubgrass contractual obligations may require that any future
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, there is no assurance that future cash flows from the Scrubgrass
project will be available to the Company. As of March 31, 1996, there were no
such deficiencies. The Company's management continues to implement a cost
reduction program in an effort to significantly reduce general corporate
overhead.
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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 against the Company and three of its wholly-owned subsidiaries in
Seventh District Court for Carbon County, State of Utah. The complaint asserts
that the Company breached a purchase and sales agreement by failing to; (1)
disclose that parties to certain material contracts that were assigned to the
plaintiffs were in default of those contracts at the time of the purchase and
sale transaction; and (2) bear the cost of providing an acceptable commitment
for the issuance of a title insurance policy, including the cost of surveys
satisfactory to the title company and the premium for a nonimputation
endorsement. The plaintiffs also assert that they suffered damages in excess of
$3,500,000 as a result of the breaches of contract. In consideration of this
matter, the plaintiffs seek remedies which include damages in excess of
$3,500,000, and the right to offset a portion of those damages against the
aggregate outstanding principal balances due to the Company by B & W Sunnyside
L.P. and NRG Sunnyside, Inc. under notes receivable associated with the sale of
the Sunnyside project in the amount of $2,937,500. The Company plans to
vigorously defend against the matter.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibit 11 - Computation of earnings per share
(b) Reports on Form 8-K
On January 31, 1996, the Company filed an 8-K disclosing that the Lessor of
the Scrubgrass project refinanced certain debt obligations associated with
this project on December 22, 1995, and that the refinancing would improve
the Company's consolidated financial position as of December 31, 1995. The
Company also disclosed in the 8-K that it expected to be in compliance with
NASDAQ's $2,000,000 minimum shareholder's equity requirement for small
capitalization companies with a bid price less than $1.00 per share, after
adjustment for the effects of the refinancing transaction, as of December
31, 1995.
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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
May 15, 1996 by: /s/ William D. Linehan
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William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
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