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| EPG > SEC Filings for EPG > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
You should read the following discussion together with our financial statements and accompanying notes included in this quarterly report and our audited financial statements included in our annual report on Form 10-K for the year ended December 31, 2008 which is on file with the Securities and Exchange Commission. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth in Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q and other filings we make with the Securities and Exchange Commission.
Overview
Environmental Power is a developer, owner and operator of renewable energy production facilities. Our goal is to produce energy that is Beyond Renewable™, which we define as energy that not only is derived from waste materials instead of precious resources, but energy that is also clean, reliable and cost-effective. Environmental Power and its subsidiaries develop and own facilities that, unlike many renewable energy facilities, are intended to be profitable without the need for subsidies or other governmental assistance. Any such government assistance would, however, benefit our facilities by increasing their potential for profitability, while at the same time expanding opportunities for the profitable deployment of such facilities. We believe that a number of factors, including volatile energy prices, greater desire for renewable energy sources, more stringent environmental and waste management requirements imposed on farmers and food industry waste producers, and greater revenue opportunities from carbon sequestration credits will continue to provide favorable market conditions for its business.
In the past, we have operated in two major segments, through Microgy, Inc., as a developer of renewable energy facilities for the production and commercial application of methane-rich biogas from agricultural and food industry wastes, and through EPC Corporation and its subsidiary, Buzzard Power Corporation, referred to as Buzzard, which was the holder of a leasehold interest in a waste-coal fired generating facility in Pennsylvania known as the Scrubgrass facility. On May 31, 2007, our board of directors authorized management to enter into negotiations regarding the disposition of the leasehold interest in the Scrubgrass facility. On February 29, 2008, we completed the disposition of the leasehold interest. As a result, for financial reporting purposes, we are now consolidating all segments of continuing operations and reporting the results of Buzzard as "discontinued operations". We thus now operate only in Microgy's segment.
Microgy is a developer of renewable energy facilities for the production and commercial application of methane-rich biogas produced from animal and food industry wastes. The biogas can be sold to end-users or used to produce pipeline-grade methane, which Microgy refers to as renewable natural gas, or our RNG® product, liquefied natural gas, or LNG, compressed natural gas, or CNG, renewable electrical energy or thermal energy, as well as other useful by-products. Microgy's systems utilize a proven European biogas production technology that Microgy believes is superior to other such technologies. Microgy owns the perpetual, exclusive North American license to this technology. In addition, Microgy has developed significant engineering, construction and process knowledge regarding these systems.
Due to the increased focus on renewable energy, Microgy believes its RNG ® offerings will be positively received by numerous environmentally responsible entities seeking renewable energy sources. While we do not have subsidies, rebates, grants or other credits available as to this renewable source of energy, Microgy believes that tax credits, renewable energy credits, pollution offset credits, carbon sequestration credits and other such incentives may be available now or in the future to Microgy's facilities, and such incentives would serve to enhance the addressable market and potential profitability of its facilities. Many states have either passed or are considering legislation requiring utilities to obtain or generate a certain percentage of their power from renewable sources.
In addition to the value generated from the production and sale of renewable gas, we believe that our facilities can generate additional environmental benefits with significant economic and social value by providing a valuable waste management solution for farms and other producers of organic wastes, such as those in the food industry. Federal and state agencies have either passed or are considering regulations that require concentrated animal feeding operations, referred to as CAFOs, to implement changes to their current waste management practices. We believe that these increasingly stringent environmental regulations will be another significant factor creating opportunities for the deployment of our systems.
Microgy intends to continue to focus on its strategy of developing large-scale, standardized facilities utilizing an ownership model, pursuant to which Microgy will construct, own and operate facilities and profit from the ongoing sale of biogas or RNG ® produced by such facilities as well as sales of carbon sequestration credits or other marketable environmental benefits. This strategy encompasses the construction and operation of stand-alone plants like the Huckabay Ridge facility described below, as well as facilities dedicated to the needs of a single customer at one or more customer locations, such as the Grand Island facility described below. By pursuing this strategy, Microgy intends to accumulate gas production and carbon sequestration capacity over time. In addition, Microgy continues to standardize and streamline both its system design and its approach to the marketplace in order to allow for rapid and cost-effective scale-up of its business.
Having constructed both the multi- and single-tank system in four currently operating installations, Microgy intends to own the digester systems it develops. Our multi-digester facilities will primarily produce pipeline-quality renewable natural gas, although we will also consider opportunities to produce and sell conditioned biogas, electricity, CNG or LNG from our facilities. Microgy's development efforts are focused on applications of its technology that are resource efficient. Development of smaller scale and single-digester facilities will be targeted toward customers that have multiple sites and opportunities that have shorter development cycles. Microgy's goal with all projects is to maximize the profitability of every project by implementing the right technology and most profitable off-take arrangements.
Microgy's efforts have resulted, most recently, in the start of commercial operations at the Huckabay Ridge facility in Stephenville, Texas, which began commercial operations in the first quarter of 2008. Huckabay Ridge consists of eight 916,000-gallon digesters which operate together to process the manure from approximately 10,000 cows. The gas is treated and compressed to produce pipeline-grade methane that is sold and delivered directly into nearby natural gas pipelines. Huckabay Ridge is expected to produce approximately 635,000 million British Thermal Units, or MMBtus, of pipeline-grade methane per year.
We have announced three other multi-digester facilities in development in Texas having the same expected output as the Huckabay Ridge facility. We have also announced three proposed multi-digester RNG® facilities in California that are in advanced stages of development. We completed $60 million in tax-exempt bond financing in November 2006 relating to the construction and operation of the four RNG® facilities in Texas. Furthermore, we completed $62.425 million in tax-exempt bond financing in September 2008 to finance a portion of the construction costs of two of our three proposed California facilities, and we currently anticipate pursuing a further $26.02 million in such financing for the third proposed California facility once financial market conditions improve.
Construction at Microgy's Swift Grand Island biogas facility has progressed with major equipment procurement nearly complete. Operations are expected to commence in 2009. Microgy's Grand Island biogas facility will consist of two 1.2 million gallon digesters that will process wastes generated by the Swift Grand Island processing facility. The plant is expected to produce 235,000 MMBtu per year of biogas that will be purchased by Swift under a fifteen year gas purchase agreement to offset natural gas consumption at Swift Grand Island. Swift is providing all the necessary feedstock material, both manure and substrate required by our process. We completed $7.0 million in tax-exempt bond financing in Nebraska in July 2008 to finance a portion of the construction costs of the Swift Grand Island facility.
In October 2006, we entered into a business development agreement, referred to as the BDA, with Cargill, Incorporated, referred to as Cargill. We are leveraging our relationship with Cargill to accelerate our identification and development of both facilities for the production of our RNG ® product and smaller-scale, multi-digester facilities dedicated to a single customer.
Microgy is also operating three single digester facilities in Wisconsin. Microgy sold these projects to the farms on which they are located, and developed them in conjunction with Dairyland Power Cooperative, an electric cooperative utility, referred to as Dairyland. The biogas from these projects is used by Dairyland to generate electricity.
Discontinued Operations
The disposition of Buzzard's leasehold interest in the Scrubgrass facility was completed on February 29, 2008. Buzzard leased its generating facility from Scrubgrass Generating Company, L.P. The Scrubgrass plant, referred to as Scrubgrass, located on a 600-acre site in Venango County, Pennsylvania, is an approximate 83 megawatt waste coal-fired electric generating station. We decided to seek the disposition of Buzzard's leasehold interest in the Scrubgrass facility to allow management to focus its attention and resources on the development and growth of Microgy. As a result of Buzzard's disposition of its leasehold interest, we are now consolidating all segments of continuing operations for financial reporting purposes and reporting the results of Buzzard as "discontinued operations".
We no longer have a continuing involvement with the Buzzard business since we disposed of the leasehold interest in the Scrubgrass facility and do not continue any revenue or cost-generating activities related to Buzzard. The accompanying consolidated statements of operations prior to disposition of Buzzard reports the operations of Buzzard as discontinued.
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations compares the results of operations for the three month periods ended March 31, 2009 with the results of operations for the three month periods ended March 31, 2008. Historical results and trends that might be discussed below should not be taken as indicative of the results for the full year or for future operations generally.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Overview. For the three months ended March 31, 2009, we had a net loss applicable to common shareholders of $3,268,000 or a loss per share of $0.21, compared to net income applicable to common shareholders of $2,840,000 or income per share of $0.18 for the three months ended March 31, 2008. The decline in results is primarily due to the fact that we had net income from discontinued operations of $6,989,000 recorded in the first quarter of 2008 because we disposed of our interest in the Scrubgrass facility during that quarter and recorded a gain on disposal of $8,000,000. This gain was partially offset during the three months ended March 31, 2008 by a loss from discontinued operations of $1,011,000.
Results from continuing operations improved in the first quarter of 2009. The net loss from continuing operations was $2,935,000 for the three months ended March 31, 2009 as compared to a net loss from continuing operations of $3,811,000 for the three months ended March 31, 2008. The reduction in the net loss from continuing operations was primarily due to a decline in general and administrative expenses of $1,143,000 and a decrease in operating losses before depreciation at our Huckabay Ridge facility during the first quarter of 2009 of $214,000.
Revenues. Revenue for the three months ended March 31, 2009 decreased to $742,000 from $971,000 for the three months ended March 31, 2008. The decrease in revenues of $229,000 is primarily attributable to a reduction in sales of greenhouse gas sequestration credits in the first quarter of 2009 at our Wisconsin facilities. During the first quarter of 2009 we recorded $18,000 in revenues from sales of such credits, as opposed to $171,000 in such revenues for the prior year. In 2008 we received revenues from the sale of credits for vintage years 2005 to 2007 but for the first three months of 2009 we only received revenues for the first six months of 2008. We currently expect revenues to increase in future periods as our Grand Island facility is completed and becomes operational later this year.
Operations and maintenance expenses. Operations and maintenance expense was $1,014,000 for the three months ended March 31, 2009 as compared to $1,317,000 for the same period in 2008, a decrease of $303,000. The decrease was primarily due to a reduction in operations and maintenance expense at Huckabay Ridge of $358,000 as start up and non-recurring costs were reduced, although the three months ended March 31, 2009 included three months of operating expenses and the three months ended March 31, 2008 included two months of operating expenses at Huckabay Ridge. We currently expect non-recurring and start up costs at Huckabay Ridge to decrease as operations at this facility become more reliable now that the improvements to the biogas collection and conditioning areas have been completed. We expect an overall increase in operations and maintenance expenses in future periods when the Grand Island facility is completed.
General and administrative expenses. General and administrative expenses from continuing operations declined by $1,143,000 to $2,118,000 for the three months ended March 31, 2009, as compared to $3,261,000 for the same period in 2008. The decline is attributable primarily to lower salary expenses in 2009, reflecting the reductions in staffing, lower non-cash compensation expense in the 2009 period due to reduced expense from stock options and stock appreciation rights and reductions in development expense in the 2009 period as we slowed development efforts to conserve cash pending our fundraising initiatives. Without the inclusion of non-cash compensation expense, general and administrative expenses would have been $1,974,000 and $2,971,000 for the three months ended March 31, 2009 and 2008, respectively.
Depreciation and amortization expenses. The increase in depreciation and amortization expense was principally due to the fact that the first quarter of 2009 included three months of depreciation at the Huckabay Ridge facility and the first quarter of 2008 included two months depreciation for Huckabay Ridge because the facility began commercial operations in February 2008 which is when we began to recognize depreciation expense for this facility.
Operating loss. As a result of the changes described above, our operating loss from continuing operations decreased to $2,785,000 in the first quarter of 2009 from $3,868,000 in the same period in 2008.
Interest income. Interest income on unrestricted cash for the three months ended March 31, 2009 was $17,000 as compared to $247,000 for the three months ended March 31, 2008. Interest income decreased due both to lower invested cash balances and lower interest rates on such balances.
Interest expense. Interest expense increased to $297,000 for the three months ended March 31, 2009, as compared to $177,000 for the three months ended March 31, 2008. This increase was due principally to the fact that we ceased the capitalization of interest expense related to the Huckabay Ridge facility when it began commercial operations in February 2008. The interest expense related to the portion of the bonds allocated to finance the Huckabay Ridge facility is now recorded as interest expense. Therefore we had three full months of interest expense relating to the Huckabay Ridge facility in the first quarter of 2009, whereas we had only two months of such interest expense related to Huckabay Ridge in the first quarter of 2008. In the first quarter of 2009, we also accrued $37,000 in interest expense on $5,000,000 original principal amount of our 14% convertible notes which were issued in March 2009.
Other income (expense). We had other income of $130,000 for the three months ended March 31, 2009, as compared to other expense of $13,000 for the three months ended March 31, 2008. The other income for the three months ended March 31, 2009 reflects a reduction in the market value of certain outstanding warrants. The other expense in the first quarter of 2008 was the result of the disposal of assets associated with the relocation of our corporate headquarters from Portsmouth, New Hampshire to Tarrytown, New York.
Income tax expense (benefit). Because we are not assured of realizing the benefits of operating losses for tax purposes, we did not record an income tax benefit for losses incurred for the three months ended March 31, 2009 or 2008.
Income from discontinued operations, net of taxes. The results for the three months ended March 31, 2009 do not include the results of discontinued operations because these operations were disposed of in February 2008. The loss from discontinued operations of $1,011,000 in 2008 reflects the operations of Buzzard for the first two months of 2008 before it was disposed of. On February 29, 2008 we disposed of Buzzards interest in the Scrubgrass facility and recognized a one time gain of $8,000,000. With the exception of a cash payment of $375,000 the gain was non-cash and consisted primarily of recognition of a previously deferred gain in the amount of $2,570,000, forgiveness of indebtedness in the amount of $3,456,000 and elimination of other obligations of $1,630,000. There was no tax provision provided on the disposition because we believe that we have sufficient net operating loss carry-forwards at the federal and state levels to offset any potential tax liability with respect to the gain on disposition. Therefore the net result of income from discontinued operations for the three months ended March 31, 2008 was income of $6,989,000.
Liquidity and Capital Resources
Going Concern
Our consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. As a predominately development oriented company, we have experienced substantial losses since the year ended December 31, 2002. For the three months ended March 31, 2009 we incurred a net loss applicable to common shareholders of $3,268,000. For the year ended December 31, 2008, we incurred a net loss applicable to common shareholders of $17,333,000 and used cash of $13,100,000 in operating activities. We anticipate incurring losses at least through 2010 as we continue the construction of our portfolio of announced projects which we anticipate completing at varying times in 2010, subject to the availability of funding and completion of construction and then operation of our Grand Island facility during 2009. As of March 31, 2009, we had an accumulated deficit of $70,943,000, and our unrestricted cash and cash equivalents amounted to $4,760,000. Our facility at Huckabay Ridge, Texas, which is nearing full production, will not generate sufficient positive cash flow, by itself, to meet our short-term and long-term corporate and project-related capital requirements.
In the past, we have been able to obtain outside financing to fund our losses and meet our capital requirements with the anticipation that once our portfolio of projects are complete and operational, they would contribute to future liquidity needs. While we have implemented steps to reduce our general and administrative expenses, we will need to raise substantial funds during the first half of 2009 in order to fund ongoing general and administrative expenses as well as interest and dividend requirements. We are currently actively seeking additional sources of capital to meet these financing needs. To that end, on March 13, 2009 we closed on a sale of $5.0 million original principal amount of our 14% convertible notes due January 1, 2014 for net proceeds of approximately $4.5 million, and we continue to work with our financial advisors to identify and explore various opportunities to raise the capital we require. However, we cannot assure you that we will be able to raise sufficient capital on acceptable terms, or at all. The level of funds we are able to raise, if any, will determine the level of development and construction activity that we can pursue and whether we will be able to continue to meet our corporate and subsidiary debt and other obligations and continue as a going concern.
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. The uncertainties described in the preceding paragraph raise substantial concern at March 31, 2009 about our ability to continue as a going concern without additional financing. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of the carrying amount of recorded assets or to the amount and classification of liabilities that might result should we be unable to continue as a going concern.
Certain Balance Sheet Items
Cash. The increase in our cash position is primarily due to the issuance of $5,000,000 original principal amount of our 14% convertible notes due January 1, 2014 during March 2009 for net proceeds of approximately $4.5 million.
Restricted Cash. The decrease in the restricted cash balance is the result primarily of draws related to construction expenditures at our Grand Island, Nebraska facility.
Property, plant and equipment, net and construction in progress. The property plant and equipment balances were $25,983,000 and $23,932,000 as of March 31, 2009 and December 31, 2008, respectively. The increase in property, plant and equipment is principally due to completion of capital additions at the Huckabay Ridge facility and the reclassification of the completed construction costs to property plant and equipment from construction in progress at December 31, 2008. The total additions to the Huckabay Ridge facility, added to property plant and equipment during the first quarter of 2009, were $2,418,000, of which $2,283,000 was included in construction in progress at December 31, 2008. In the construction in progress account, this reclassification of costs associated with the Huckabay Ridge facility of $2,283,000 was offset by additions of $3,045,000, resulting in net increase to the construction in progress account of $762 000. Of total capital additions to the construction in progress account in the first quarter of 2009, $2,259,000 reflects capitalized interest on our Texas, California and Nebraska projects and $622,000 reflects construction expenditures at our Grand Island facility.
Operating Activities
Our net cash used by operating activities was $2,147,000 for the three months ended March 31, 2009, compared to cash used in operating activities of $2,045,000 for the same period in 2008. We reported a net loss of $2,935,000 for the three months ended March 31, 2009. The following adjustments need to be considered in order to reconcile our net loss in the three months ended March 31, 2009 to our net cash used in operating activities:
Depreciation and amortization. During the three months ended March 31, 2009, we recognized depreciation of property plant and equipment of $335,000 amortization expense for licensed technology rights of $46,000 and amortization of deferred financing costs of $15,000.
Stock-based compensation. Accounting for options, restricted stock and stock appreciation rights issued to employees resulted in non-cash compensation expenses of $144,000 for the three months ended March 31, 2009, as compared to $290,000 in such expenses for the same period in 2008.
Investing Activities
Our cash used for investing activities was $7,000 for the three months ended March 31, 2009, as compared to $2,481,000 in the same period in 2008. Our investing activities were concentrated primarily in the following areas:
Restricted cash. The decrease in restricted cash for the three months ended March 31, 2009 of $964,000 reflects principally the draws for costs of construction for the Grand Island, Nebraska facility.
Construction of projects. For the three months ended March 31, 2009 we incurred expenditures of $744,000 related to the construction of projects excluding capitalized interest on our Texas, California and Nebraska projects of $2,259,000. Of total capital expenditures $622,000 was for construction expenditures on our Swift project at Grand Island, Nebraska.
Property, plant and equipment. Property, plant and equipment expenditures reflect principally capital expenditures at Huckabay.
Other Assets: The use of funds in the first quarter of 2009 is principally due to deposits the Company made in conjunction with long term contracts to sell our RNG® product.
Financing Activities
Our cash provided by financing activities was $3,756,000 for the three months ended March 31, 2009, compared to cash used for financing activities of $692,000 in the three months ended March 31, 2008. We offer the following information concerning the financing activities for our business:
Dividends on preferred stock. Our Series A cumulative convertible preferred stock has a 9% dividend payable semi-annually. We paid $667,000 in such dividends on January 1, 2009.
Payment of financing costs. The $558,000 used for financing costs for the first three months of 2009 resulted primarily from the costs of issuance of our 14% convertible notes due January 1, 2014.
Proceeds from long-term debt. EPC issued $5,000,000 original principal amount of our 14% convertible notes due January 1, 2014 for net proceeds of approximately $4.5 million in March 2009.
2009 Outlook
Operations
The following forward-looking information concerning our anticipated results of operations for the full year 2009 is being compared to our historical results of operations for 2008.
We expect increased revenues during 2009 from increased sales of our RNG® product produced by our Huckabay Ridge facility in Texas due to higher capacity factors than we experienced in 2008. Our revenues related to the Dairyland sites are expected to be approximately even with revenues from such facilities in 2008. Also, we expect our Grand Island facility to generate revenues when it is . . .
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