<PAGE>
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
---
of 1934
For the quarterly period ended September 30, 1996 or
------------------
____ 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
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2782065
- - --------------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (603) 431-1780
-----------------------------
- - --------------------------------------------------------------------------------
(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.
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<PAGE>
ENVIRONMENTAL POWER CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements:
<S> <C>
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
</TABLE>
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<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
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
------------ ------------
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
------------ ------------
$ 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)
------------ ------------
4,906,751 3,799,736
------------ ------------
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)
------------ ------------
3,689,324 2,797,309
------------ ------------
$ 50,148,668 $ 45,226,424
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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)
============ ============ ============== ============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1996 1995
----------------- -----------------
<S> <C> <C>
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
----------------- -----------------
Cash provided by operating activities 1,603,740 2,936,559
----------------- -----------------
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
----------------- -----------------
Cash provided by (used in) investing activities 98,582 (1,542,109)
----------------- -----------------
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
----------------- -----------------
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
================= =================
</TABLE>
See Note D for supplemental disclosure of noncash investing and financing
activities.
See notes to condensed consolidated financial statements.
-5-
<PAGE>
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
- - ----------------------------------
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
- - --------------------------------------
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-
<PAGE>
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
- - ----------------------------------------
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.
-7-
<PAGE>
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-
<PAGE>
FINANCIAL CONDITION (CONTINUED)
- - -------------------------------
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-
<PAGE>
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
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
PART II
-------
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.
-14-
<PAGE>
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.
-15-
<PAGE>
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
-16-
<PAGE>
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)
-17-
<PAGE>
EXHIBIT 10.1
[EXECUTION COPY]
JOINT DEVELOPMENT AGREEMENT
AMONG
U.S. GENERATING COMPANY
MILESBURG ENERGY, INC.
AND
ENVIRONMENTAL POWER CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- - ------- ----
<C> <S> <C>
1. Purpose.............................................................................................................. 1
2. Term................................................................................................................. 2
3. Mutual Responsibilities.............................................................................................. 2
4. MEI Responsibilities................................................................................................. 2
5. USGen Responsibilities............................................................................................... 2
6. Project Company...................................................................................................... 3
7. Engineering, Procurement and Construction Contract................................................................... 3
8. Operations and Maintenance Contract and Management Service Agreement................................................. 3
9. MEI's Previous Development Costs..................................................................................... 3
10. Accounting During Development Period................................................................................. 4
11. Costs Sharing During Development Period.............................................................................. 4
12. Reimbursement of Development Costs Upon Closing...................................................................... 5
13. EPC Acquisition Fee.................................................................................................. 5
14. Priority of Payments to the Parties.................................................................................. 5
15. Withdrawal and Termination........................................................................................... 6
16. Representations and Warranties of EPC and MEI........................................................................ 6
17. Representations and Warranties of USGen.............................................................................. 9
18. Management of Development Period Activities.......................................................................... 10
19. Indemnities.......................................................................................................... 11
20. Confidentiality...................................................................................................... 12
</TABLE>
<PAGE>
JOINT DEVELOPMENT AGREEMENT
This Joint Development Agreement ("Agreement") for the development of an
approximately 43 megawatt ("Mw") electric generating facility known as the
Milesburg project (the "Project") is entered into as of the 30th day of July,
1996 by and among U.S. GENERATING COMPANY ("USGen"), ENVIRONMENTAL POWER
CORPORATION ("EPC") and MILESBURG ENERGY, INC. ("MEI"). USGen, MEI and EPC may
be referred to individually as a Party or collectively as the Parties in this
Agreement.
R E C I T A L S
WHEREAS, EPC and MEI and the owners of USGen had previously contemplated
developing the Project as set forth in a Memorandum of Understanding dated March
8, 1989 (the "MOU"), which subsequently expired;
WHEREAS, the Parties have reviewed the status of the Project on a periodic
basis since the expiration of the MOU;
WHEREAS, litigation and other proceedings against the Project have been
resolved to the point that the Parties believe final development of the Project
can now proceed; and
WHEREAS, MEI and USGen desire to complete final development of the Project;
NOW, THEREFORE, in consideration of the mutual promises and undertakings
set forth in this Agreement, the Parties, intend to be legally bound, agree as
follows:
1. Purpose. The Parties by this Agreement shall seek to accomplish or provide
-------
for implementation of the following:
(a) Complete development of the Project as an independent power project
under a structure that, unless otherwise mutually agreed to by the Parties, will
prevent the regulation of EPC, MEI and USGen, or any of their affiliates, as an
electric utility or an electric utility holding company under the Public Utility
Holding Company Act of 1935 ("PUHCA").
(b) Structure the Project so as to maximize returns, obtain federal
income tax benefits for the participants and ensure limits of liability that are
acceptable to each of the Parties.
(c) Establish the terms and conditions of a Project partnership or other
appropriate entity (the "Project Company") to develop, own and operate the
Project.
(d) Develop a financing structure for the Project which will be
consistent with the requirements of financial institutions and the Parties and
will provide non-recourse financing for construction and operation of the
Project.
<PAGE>
(e) Negotiate and execute all definitive Project documents acceptable to
each of the Parties that are needed to achieve a financial closing of the
Project.
2. Term. This Agreement shall be in effect from the date of this Agreement to
----
December 31, 1998, unless sooner terminated in accordance with the provisions
hereof. If, the financing for the construction of the Project has not occurred
on or before June 1, 1998, USGen and MEI shall each have the option to purchase
all or a part of the Project assets, as described in this Agreement, at their
then-current fair market value. If both USGen and MEI seek to exercise their
options, they shall cooperate in selling the Project assets to a third party.
The proceeds of such a third-party sale shall be paid to USGen and MEI in
proportion to the amounts paid by each of them with respect to the development
of the Project, provided such amounts either were paid as provided in this
Agreement (other than as provided in Section 19), or are Previous Development
Costs (as hereinafter defined).
3. Mutual Responsibilities. In order to achieve the purposes of this
-----------------------
Agreement, each Party agrees to:
(a) Identify and resolve Project issues;
(b) Negotiate a mutually agreeable capital structure and obtain Project
financing; and
(c) Keep the other Party informed as to its activities regarding the
Project, and, subject to Section 20, supply the other Party with such
information as they may reasonably request.
4. MEI Responsibilities. MEI shall perform such tasks and shall assume such
--------------------
responsibilities with respect to the development of the Project as shall be
assigned to it by USGen, including without limitation, (a) completing the
negotiation with West Penn Power of the Power Purchase Agreement ("PPA"), (b)
diligently endeavoring to reduce its payment obligations to any others with any
rights, title or interests in the Project, (c) assisting USGen in any permitting
efforts at the local and state agencies, and (d) to the extent of the
expenditures required by Section 11, (i) maintain its right, title and interest
in the proposed site for the Project located in Milesburg, Pennsylvania (the
"Proposed Project Site"), and (ii) pay all Proposed Project Site Costs (as
hereinafter defined).
5. USGen Responsibilities. USGen shall (a) lead and manage the activities of
----------------------
the Parties with respect to the development of the Project, (b) provide Project
development funds and personnel as provided for in this Agreement, (c) use
reasonable efforts to obtain all environmental and other permits, licenses and
approvals needed to construct and operate the Project, (d) subject to MEI's
approval as provided in Section 18(b), negotiate, on behalf of the Project
Company, the engineering, procurement and construction contract with Bechtel
Power Corporation ("BPC"), the operations and maintenance contract with U.S.
Operating Services Company ("USOSC") and the Management Service Agreement with
USGen described in Sections 7 and 8, respectively, (e) negotiate on behalf of
the Project Company contracts for the procurement of fuel for the Project and
the disposal of ash generated by the
2
<PAGE>
Project, (f) take the lead in the financial structuring of the Project,
including a lease structure or such other structure as is appropriate, (g)
provide equity for the Project, and (h) negotiate with lenders towards achieving
a financial closing on terms acceptable to both Parties.
6. Project Company. By the Project Closing Date (as hereafter defined), an
---------------
agreement (the "Project Company Agreement") shall be executed that will replace
and supersede this Joint Development Agreement and establish the Project
Company. MEI shall not transfer any right, title or interest in the Proposed
Project Site (as hereinafter defined) to the Project Company or USGen without
the prior written consent of USGen, which consent may be withheld in its sole
discretion.
7. Engineering, Procurement and Construction Contract. Subject to MEI's
--------------------------------------------------
approval as provided in Section 18(b), the Project Company shall enter into an
engineering, procurement and construction contract with BPC, pursuant to which
BPC shall perform the engineering procurement, construction, precommissioning
and start-up of the Project facilities. The terms and conditions of said
contract shall, subject to Project lender approval, be those agreed upon by the
Project Company and BPC.
8. Operations and Maintenance Contract and Management Service Agreement
--------------------------------------------------------------------
(a) Subject to MEI's approval as provided in Section 18(b), the Project
Company shall enter into an operations and maintenance contract with USOSC,
pursuant to which USOSC shall operate and maintain the Project facilities. The
terms and conditions of said contract shall, subject to Project lender approval,
be those agreed upon by the Project Company and USOSC.
(b) Subject to MEI's approval as provided in Section 18(b), the Project
Company shall enter into a management services contract with USGen, pursuant to
which USGen will manage the Project Company and the Project. The terms and
conditions of said contract shall, subject to Project lender approval, be those
agreed upon by the Project Company and USGen.
9. MEI's Previous Development Costs.
--------------------------------
(a) "Previous Development Costs" means the legal, consulting,
contractor, financing and other costs and fees incurred by MEI in the
development of the Project prior to the date of this Agreement, which are set
forth on Exhibit A.
(b) Previous Development Costs are subject to recovery at financial
closing as provided for in Section 12 or from a termination of the PPA by West
Penn Power as provided for in Section 15(b). Neither USGen nor its affiliates
will have any obligation to reimburse MEI or EPC for any of the Previous
Development Costs or for any other indebtedness, claims, liabilities or
obligations incurred by EPC in connection with the Project prior to the date of
this Agreement.
3
<PAGE>
10. Accounting During Development Period. Each of the Parties shall track and
------------------------------------
keep records of the following costs incurred by it in performing its
responsibilities hereunder from the date of this Agreement through the Project
Closing Date (the "Development Period"):
(a) Personnel Costs. The actual wages and salaries paid by MEI, EPC and
---------------
USGen to employees of themselves or their affiliates for work on the Project,
multiplied by [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED] to cover
payroll additives and overhead ("Personnel Costs").
(b) Budgeted Third Party Costs. Third party legal, consulting,
--------------------------
subcontractor, financing and other approved third party costs incurred by USGen,
MEI and EPC in accordance with the Project development budget to be mutually
agreed upon by the Parties ("Budgeted Third Party Costs").
(c) Other Development Costs. Travel expenses, application fees, site
-----------------------
option payments and other miscellaneous costs incurred by USGen, MEI and EPC.
(d) Proposed Project Site Costs. Costs incurred by EPC or MEI in
---------------------------
connection with the Proposed Project Site, including, without limitation, costs
associated with maintaining the Project Site, real estate taxes, insurance,
costs required to secure or defend title, and environmental clean-up or
remediation ("Proposed Project Site Costs"). Any such costs shall be mutually
agreed upon by the Parties.
MEI, EPC and USGen each shall make its records of such costs available
to the other Party upon reasonable request.
For purposes of this Agreement, "Project Closing Date" shall be the day on
which funds are first advanced under the construction financing for the Project.
11. Costs Sharing During Development Period. MEI shall pay all Proposed
---------------------------------------
Project Site Costs; provided, however, MEI shall not be required to pay in
excess of [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED] for Proposed
Project Site Costs under this Agreement. USGen shall pay all approved Budgeted
Third Party Costs on a current basis. MEI, EPC and USGen each shall bear the
Personnel Costs and Other Development Costs incurred by it or at its direction.
USGen, EPC and MEI shall have no obligation to pay any costs arising out of or
in connection with the Project, except as expressly provided in this Section 11.
Without limiting the foregoing, USGen shall have no obligation (a) to pay any
amount paid or incurred by MEI or EPC on or after the date of this Agreement
other than such approved Budgeted Third Party Costs, if any, as are properly
incurred by MEI or EPC pursuant to Section 10, or (b) any costs associated with
the remediation or environmental clean-up of the Proposed Project Site. Such
costs may be recovered by USGen, EPC and MEI at financial closing as provided
for in Section 12 or from a termination of the PPA by West Penn Power as
provided for in Section 15(b).
4
<PAGE>
12. Reimbursement of Development Costs Upon Closing.
-----------------------------------------------
(a) Upon the Project Closing Date, MEI, EPC and USGen shall be reimbursed
from the proceeds of the construction financing for the Project their Previous
Development Costs, Personnel Costs, Budgeted Third Party Costs, Proposed Project
Site Costs and Other Development Costs pursuant to Section 14.
(b) If this Agreement is terminated for any reason by any Party, and
the other Party continues to develop the Project, either alone or with others,
but without the participation of the other Party, then, upon the first release
of construction funds for the Project, the non-participating Party shall be paid
from Project funds an amount equal to that described in Section 12(a).
13. EPC Acquisition Fee. Upon the Project Closing Date, EPC shall be paid a
-------------------
fee of [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED] (the "Acquisition
Fee") out of the proceeds of the construction financing for the Project. The
Acquisition Fee shall be paid to EPC, without interest, in equal monthly
installments over the period of construction of the Project as established as of
the Project Closing Date.
14. Priority of Payments to the Parties.
-----------------------------------
(a) The payments to the Parties described in Sections 12 and 13 shall
be made in the following order of priority:
(i) First, funds sufficient to pay EPC its Acquisition Fee
pursuant to Section 13 shall be reserved;
(ii) Second, prorata to MEI, EPC and USGen, their Previous
Development Costs, Proposed Project Site Costs and Budgeted Third Party Costs;
(iii) Third, prorata to USGen, MEI and EPC, their Personnel Costs
and Other Development Costs; provided that such payments do not adversely affect
the terms and conditions of the financing.
(b) If the funds available from the proceeds of the construction
financing are insufficient to pay any portion of the foregoing amounts, or the
Project lender does not approve the payment of any portion of the foregoing
amounts, or the amount described in Section 14(a)(iii), is not payable as a
result of the proviso in such section, then such amount shall be paid on a
deferred or subordinated basis, or otherwise adjusted, pursuant to such
reasonable terms as the Parties shall agree to.
15. Withdrawal and Termination.
--------------------------
(a) Withdrawal.
----------
5
<PAGE>
(i) Any Party may withdraw from this Agreement upon (1) providing
thirty (30) days prior written notice to the other Party, together with a duly
executed Withdrawing Party Assignment and (2) payment in full of such Party's
share of all Budgeted Third Party Costs incurred through the day immediately
preceding the date of termination. For purposes of this Agreement, "Withdrawing
Party Assignment" shall mean an assignment by the Party withdrawing from this
Agreement pursuant to this Section 15(a) in favor of the remaining Party of all
of the withdrawing Party's right, title and interest in all agreements, entered
into by any Party with respect to the Project, together with all permits,
licenses, variances or other governmental authorizations and all assets and
rights in the Project, subject to obtaining any necessary consents. If USGen so
elects in its sole discretion the Withdrawing Party Assignment provided by MEI
shall also transfer all of MEI's right, title and interest in the Proposed
Project Site. The withdrawing Party shall use its best efforts to obtain any
necessary consents to such assignment.
(ii) Notwithstanding any other provision in this Section 15(a),
because there is no adequate remedy at law for failure to effect the Withdrawing
Party Assignment, such failure shall entitle the Party or Parties to which such
assignment is required to be made to the remedy of specific performance.
(b) Termination Due To Termination of the Power Purchase Agreement. In
--------------------------------------------------------------
the event that the PPA is terminated as a result of a settlement or other
agreement with West Penn Power, this Agreement shall terminate and the proceeds
of such settlement or other agreement shall be distributed as follows:
(i) [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED]
(ii) [INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED]
16. Representations and Warranties of EPC and MEI. EPC and MEI hereby
---------------------------------------------
represent and warrant to USGen that the following statements are true and
correct as of the date hereof and, except as otherwise expressly contemplated or
permitted by this Agreement, shall be true and correct on and as of the Project
Closing Date. Except as otherwise expressly provided, the following
representations and warranties apply solely to MEI:
(a) Organization and Good Standing. EPC is a corporation duly organized,
validly existing and in good standing under the laws of the state of Delaware.
MEI is a corporation duly organized, validly existing and in good standing under
the laws of the Commonwealth of Pennsylvania. MEI is duly qualified to do
business and is in good standing in all jurisdictions in which such
qualification is necessary under applicable law. The copies of the articles and
bylaws of MEI heretofore delivered to USGen are complete and correct copies
thereof as amended to date. There are
6
<PAGE>
no dissolution, liquidation, winding-up, bankruptcy, insolvency, reorganization,
receivership or any similar proceedings pending or, to the knowledge of MEI or
EPC, threatened against MEI or EPC.
(b) Compliance with Instruments and Statutes. The execution and delivery
----------------------------------------
of this Agreement, compliance with the terms and conditions hereof, and
consummation of the transactions contemplated hereby, do not and shall not:
(i) conflict with or violate the provisions of the articles or bylaws of MEI;
(ii) conflict with, violate the provisions of, constitute a default (or an event
which with notice or lapse of time or both would become a default) or result in
the creation of a lien or encumbrance on any of the property or assets of MEI
under any mortgage, indenture, agreement or other instrument to which MEI is a
party or by which any properties of MEI are bound or affected; (iii) conflict
with, violate or require a filing or waiting period under any statute, rule or
regulation of any applicable jurisdiction, or any judgment, order or decree of
any court or any governmental department, commission or instrumentality
applicable to MEI; or (iv) require the consent or approval of any governmental
authority.
(c) Authority Relative to Agreements. EPC and MEI each have full right,
--------------------------------
capacity, power and authority to execute and deliver this Agreement, to perform
their respective obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
consummation of the transactions contemplated hereby have been duly authorized
by all necessary action on the part of EPC and MEI and the shareholders of EPC
and MEI, and no further acts or proceedings on the part of EPC and MEI's
shareholders are necessary in connection therewith. This Agreement has been duly
executed and delivered by EPC and MEI and, assuming due authorization, execution
and delivery by USGen, constitutes the legal, valid and binding obligation of
EPC and MEI enforceable in accordance with its terms and conditions, except as
such enforcement may be limited by any applicable bankruptcy, insolvency,
reorganization or other laws of general application affecting creditors' rights
generally or by general principles of equity.
(d) Financial Statements. EPC has delivered to USGen copies of its 1995
--------------------
10-K and its 10-Q for the first quarter of 1996. All such financial statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods covered, and fairly present
the financial position and results of operations of EPC, all items of income and
expense and all of its assets, liabilities and accruals at the dates and for the
periods indicated.
(e) Legal Proceedings. Except as referred to in Schedule A, there is no
-----------------
suit, action or legal, administrative, arbitration or other proceeding pending
or, to the best of MEI's knowledge, threatened against or affecting MEI or its
business or assets, or any investigation of MEI or its business or properties
being conducted or, to the best of MEI's knowledge, threatened by any
governmental authority or agency, and MEI has no knowledge of any facts which
might result in such proceedings.
(f) Title to Assets. MEI legally and beneficially owns good and valid
---------------
title to the Project assets described on Schedule C attached, subject only to
those liens, claims, charges, pledges, mortgages, encumbrances, security
interests, and other restrictions of any nature whatsoever described
7
<PAGE>
on Schedule C. Such assets are not subject to any agreement, order or other
restriction which prohibits their sale or exchange, except as described on
Schedule C. To the best of MEI's knowledge, all real property and tangible
personal property complies in all material respects with all applicable
ordinances, regulations or zoning, building, health or other laws or regulations
applicable to such property, except as may be related to the presence of
significant quantities of asbestos at the Proposed Project Site.
(g) Material Contracts. Schedule B to this Agreement is a correct and
------------------
complete list of all material contracts concerning, related to or arising out of
the Project or its development to which either EPC or MEI is a party or by which
either EPC or MEI or any of its properties is bound or affected. For purposes of
this Section, a contract includes any written or oral agreement or arrangement
and a material contract includes any: (i) contract for the purchase or sale of
materials, supplies, equipment or other personal property or services where the
amount payable may exceed $1,000; (ii) contract not made in the ordinary and
usual course of business; (iii) employment, representation, management,
consulting, distribution, sales agency, or advertising contract not terminable
without penalty upon notice of 31 days or less; (iv) contract with any labor
union or other labor organization; (v) bonus, pension, profit-sharing,
retirement, stock option, stock purchase, hospitalization, life, accident, or
medical insurance, or other written plan or agreement providing employee
benefits of any kind for employees, officers or agents of MEI; (vi) loan
agreement, indenture, mortgage, deed of trust, security agreement, or other
agreement relating to the borrowing of money; (vii) guarantee of any
indebtedness or other obligation, take-out agreement, or similar agreement
pursuant to which MEI could become liable for the debts or obligations of
another or by which MEI could be obligated to purchase the right to receive
payments or performance from another; (viii) lease of an item of personal
property which has an annual rental rate of at least $1,000 and which has a
term, including renewal options exercisable by any party thereto, other than
MEI, ending after June 30, 1996, (ix) contract for the purchase, sale or lease
of any real property or any interest in real property; and (x) any other
contract which is material to the Project or its development. Assuming due
authorization, execution and delivery by the other parties thereto, all such
contracts, except as set forth in Schedule B, are legal, valid, binding and
enforceable in accordance with their respective terms (except as limited by
bankruptcy, insolvency, reorganization or other laws of general application
affecting creditors' rights generally, or by general principles of equity), and
neither MEI nor, to the knowledge of MEI, any other party to any of such
contracts, is in default under any of such contracts or has performed any act
which with notice or lapse of time, or both, shall become a default thereunder.
(h) Permits, Licenses, Applicable Law. Schedule D to this Agreement lists
---------------------------------
all permits, licenses, variances or other governmental authorizations held by
MEI concerning, related to or arising out of the Project or its development. No
action is pending or, to the best of MEI's knowledge, threatened to cancel or
modify any of such authorizations, and MEI has no knowledge of any facts which
might result in such an action. No portion of the business of MEI concerning,
related to or arising out of the Project is being or has been conducted in
violation of or contrary to the provisions of any applicable governmental law,
regulation, order, writ, injunction or decree.
8
<PAGE>
(i) Undisclosed Liabilities, Contingencies. Except as and to the extent
--------------------------------------
disclosed and reflected in the financial statements delivered pursuant to
Section 16(d) above and as set forth or referred to herein or in the Schedules,
or which arose in the ordinary course of business since the date of the most
recent financial statements, or which are intercompany transactions eliminated
in consolidation, EPC and MEI do not have any liability or obligation, whether
accrued, absolute, contingent, liquidated or unliquidated, and whether due or to
become due, including without limitation guarantees, which is not adequately
reflected and reserved against on such financial statements. There is no
contingent liability of MEI or, to MEI's knowledge, the basis for any unasserted
claim against MEI.
(j) No Omission or Misrepresentation. The information with respect to MEI
--------------------------------
and the Project furnished to USGen by MEI or EPC in connection with the
transactions contemplated by this Agreement is true and correct in all material
respects and does not omit any material information required to make the
information so furnished not misleading in any material respect.
(k) Environmental Claims. There are no past, pending or, to the best
--------------------
knowledge of MEI, threatened environmental claims against MEI or any of its
officers, directors, employees, and agents or, to the best knowledge of MEI, any
of its lessees, affiliates, partners, joint venturers, assignees or other
persons or entities occupying, using, or conducting operations on or about the
Proposed Project Site. While no claims are known to have been made or
threatened, MEI is aware of the presence of significant quantities of asbestos
at the Proposed Project Site.
17. Representations and Warranties of USGen. USGen hereby represents and
---------------------------------------
warrants to EPC and MEI that the following statements are true and correct as of
the date hereof and shall be true and correct on and as of the Project Closing
Date.
(a) Organization and Good Standing. USGen is a general partnership duly
------------------------------
organized under the laws of the state of California. There are no dissolution,
liquidation, winding-up, bankruptcy, insolvency, reorganization, receivership or
any similar proceedings pending or, to the knowledge of USGen, threatened
against it.
(b) Compliance with Instruments and Statutes. The execution and delivery
----------------------------------------
of this Agreement, compliance with the terms and conditions hereof and
consummation of the transactions contemplated hereby do not and shall not: (i)
conflict with or violate the provisions of the partnership agreement of USGen;
(ii) conflict with, violate the provisions of, constitute a default (or an event
which with notice or lapse of time or both would become a default) or result in
the creation of a lien or encumbrance on any of the property or assets of USGen
under any mortgage, indenture, agreement or other instrument to which USGen is a
party or by which USGen or any of its properties is bound or affected; (iii)
conflict with, violate or require a filing or waiting period under any statute,
rule or regulation of any applicable jurisdiction, or any judgment, order or
decree of any court or any
9
<PAGE>
governmental department, commission or instrumentality applicable to USGen; or
(iv) with respect to USGen, require the consent or approval of any governmental
authority.
(c) Authority Relative to Agreements. USGen has full right, capacity,
--------------------------------
power and authority to execute and deliver this Agreement, to perform its
respective obligations hereunder and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action on the part of USGen, and no further acts or proceedings on the part of
USGen are necessary in connection therewith. This Agreement has been duly
executed and delivered by USGen and, assuming due authorization, execution and
delivery by MEI and EPC, constitutes the legal, valid and binding obligation of
USGen enforceable in accordance with its terms and conditions, except as such
enforcement may be limited by any applicable bankruptcy, insolvency,
reorganization or other laws of general application affecting creditors' rights
generally or by general principles of equity.
(d) Legal Proceedings. There is no material suit, action or legal,
-----------------
administrative, arbitration or other proceeding pending or, to the best of
USGen's knowledge, threatened against or affecting USGen or its business or
assets, or any material investigation of USGen or its business or properties
being conducted or, to the best of USGen's knowledge, threatened by any
governmental authority or agency, and USGen has no knowledge of any facts which
might result in such proceedings.
(e) No Omission or Misrepresentation. The information with respect to
--------------------------------
USGen furnished to EPC and/or MEI by USGen in connection with the transactions
contemplated by this Agreement is true and correct in all material respects and
does not omit any material information required to make the information so
furnished not misleading in any material respect.
18. Management of Development Period Activities.
-------------------------------------------
(a) Except as provided in Section 18(b), the management and control of
all Development Period activities shall be exercised by USGen, and USGen shall
endeavor to direct and coordinate the activities of the Parties under this
Agreement. USGen, subject to the consent of MEI, which consent shall not be
unreasonably withheld, shall appoint a Project development manager (the "Project
Manager") who shall direct the day-to-day Development Period activities. USGen
may remove the Project Manager at any time upon written notice to EPC. Without
limitation on the authority of USGen to direct Development Period activities,
MEI and EPC shall not take any of the following actions without the prior
written approval of the Project Manager:
(i) the sale, lease, pledge, license, exchange or other transfer
or encumbrance of all or any material portion of any of the Project assets;
(ii) making (A) any expenditure or commitment of Budgeted Third
Party Costs, except as expressly provided otherwise in the agreed upon Project
development budget, (B) any expenditure or commitment in excess of $5,000,
except for the expenditure or commitment of MEI's
10
<PAGE>
and EPC's Personnel Costs, or (C) any expenditure or commitment to be paid out
of Project funds in the event of closing or other contingency; or
(iii) entering into, amending, modifying, assigning or terminating,
or making any agreement regarding the execution, amendment, modification,
assignment or termination of, any of the contracts, permits, licenses or
approvals concerning, related to or arising out of the Project or its
development.
(b) The terms and conditions of the engineering, procurement and
construction contract described in Section 7 and of the operations and
maintenance contract and management services agreement described in Section 8
shall be subject to the approval of MEI, which approval shall not be
unreasonably withheld.
19. Indemnities.
-----------
(a) EPC and MEI agree to defend, indemnify and hold harmless USGen, the
related and affiliated entities of USGen and the directors, officers, employees
and agents of each of USGen and of such related and affiliated entities, from
and against any and all losses, damages, liabilities, reasonable costs,
reasonable expenses (including, without limitation, reasonable fees and
disbursements of counsel and other professional advisers), claims, demands,
investigations, proceedings, actions, judgments, liens or other obligations of
any nature whatsoever ("Losses") suffered, incurred or paid by USGen or such
affiliated entities:
(i) resulting from, related to or arising out of the activities of
EPC or MEI prior to the date of this Agreement;
(ii) resulting from all environmental claims (including third party
liabilities), costs and expenses (including, without limitation, removal and
clean-up costs and reasonable attorneys' and consultants' fees and
disbursements) which arise, or are alleged to arise, from or in connection with
the Proposed Project Site, unless otherwise agreed to in the Project Company
Agreement.
(iii) resulting from or arising out of the inaccuracy of any
representation or the breach of any warranty, covenant or other agreement of MEI
contained in this Agreement or resulting or arising by reason of any action,
proceeding or investigation being instituted by any person based on an
allegation or assertion which, if true or proven, would constitute such an
inaccuracy or breach.
(b) USGen agrees to defend, indemnify and hold harmless EPC and MEI, the
related and affiliated entities of EPC and MEI and the directors, officers,
employees and agents of each of EPC and MEI and of such related and affiliated
entities, from and against any and all Losses suffered, incurred or paid by EPC,
MEI or such affiliated entities resulting from or arising out of the inaccuracy
of any representation or the breach of any warranty, covenant or other agreement
of USGen contained in this Agreement or resulting or arising by reason of any
action, proceeding or investigation being instituted
11
<PAGE>
by any person based on an allegation or assertion which, if true or proven,
would constitute such an inaccuracy or breach.
20. Confidentiality. All the parties shall exercise, until five (5) years from
---------------
the date hereof, reasonable efforts to maintain the confidentiality of
information identified in writing by another Party as confidential. This duty
shall not apply to information which is already known to a Party, in the public
domain, or received from a third party.
21. Entire Agreement. Pending the execution of the Project Company Agreement,
----------------
this Agreement shall constitute the entire agreement between the Parties
concerning the Project and shall supersede all prior agreements and
understandings.
22. No Partnership. This Agreement shall not constitute or create an
--------------
association, trust, joint venture, partnership or other similar arrangement
among the Parties, or impose a trust or partnership duty, obligation or
liability on or with regard to either Party, and the Parties shall not be
authorized to act as agents of one another.
23. Liability Limits.
----------------
(a) Except for amounts to be paid by a Party pursuant Section 19, in no
event shall the total aggregate liability of any Party to the other Party for
losses or damages caused by breach of this Agreement, activities performed under
this Agreement, the failure to pay Proposed Project Site Costs, the failure to
reach agreement on a Project Company Agreement, the failure to obtain necessary
permits, the failure to obtain construction financing or the failure to complete
the Project, exceed the sum of the unpaid Budgeted Third Party Costs or Proposed
Project Site Costs allocable to the breaching Party under this Agreement.
(b) In no event shall a Party have any liability hereunder for any
special, indirect, exemplary, punitive or consequential damages of any kind.
(c) The limitations of liability and indemnity and hold harmless
obligations expressed throughout this Agreement shall apply even in the event of
the fault, tort (including negligence, in whole or in part and whether active or
passive), strict liability, breach of contract, or otherwise of the party whose
liability is limited, indemnified, or held harmless, and shall extend to such
Party's related or affiliated entities and its and their directors, officers,
employees and agents; provided, however, such limitation of liability shall not
extend to any affiliated entity utility that provides goods or service to the
Project under a separate vendor contract.
24. Public Statements. No Party may issue any public statement concerning this
-----------------
Agreement or the transactions described in it unless it first obtains the
written consent of the other Party to the form and content of such statement,
which consent shall not be unreasonably withheld; provided that any Party
12
<PAGE>
may issue a statement to the public or to a governmental agency without such
consent to the extent its counsel opines that such a statement is required to
comply with applicable laws or regulations.
25. Provisions Surviving Termination. The rights and obligations of the Parties
--------------------------------
as described in Sections 12, 14, 15, 16, 19, 20, 21, 22, 23 and 26 shall survive
the termination of this Agreement and shall continue in full force and effect in
accordance with the provisions of such sections.
26. No Third Party Beneficiaries. No provision of this Agreement is intended or
----------------------------
shall be construed to confer upon any person, other than the Parties hereto and
their respective successors or permitted assigns, any rights or remedies under
or by reason of this Agreement.
27. No Representations Concerning Financing. Neither USGen, EPC nor MEI, have
---------------------------------------
made any representation, or given any assurance, to the other Party that debt
financing can be obtained with respect to the Project, either on terms
consistent with the provisions of this Agreement, or on any terms.
28. Successors and Assigns.
----------------------
(a) Except as provided in Section 28(b) below, any assignment or other
transfer by any party of this Agreement of any of the rights, interests or
obligations hereunder, without the prior written consent of the other parties,
shall be void, but such consent shall not be unreasonably withheld; provided,
that USGen may assign its rights and obligations under this agreement to an
affiliate or affiliates.
(b) This Agreement shall bind and inure to the benefit of the respective
successors and permitted assigns of the Parties.
29. Notices. Any notice or communication required or permitted to be given by
-------
this Agreement shall be in writing and be delivered personally or by telecopy,
telex, nationally recognized courier service or first class mail, postage
prepaid, to the address for the receiving Party set forth below or to such other
address as the receiving Party shall have specified by written notice given in
accordance with this Section. Any mailed communication shall be deemed to have
been given on the third business day after the date of mailing and any
communication sent by telecopy, telex or courier service shall be deemed to have
been given at the time receipt.
If to USGen, to: U.S. Generating Company
7500 Old Georgetown Road
Suite 1300
Bethesda, MD 20814-6161
Attn: General Counsel
Fax: (301) 718-6913
13
<PAGE>
MEI or EPC
If to MEI or EPC, to: c/o Environmental Power Corporation
500 Market Street
Suite 1E
Portsmouth, NH 03801
Attn: President
Fax: (603) 431-2650
30. Miscellaneous. This Agreement (i) shall be governed by Pennsylvania law,
-------------
(ii) may be amended only by a writing signed by all Parties, and (iii) may be
executed in separately signed counterparts.
31. Dispute Resolution.
------------------
(a) The parties agree to make a diligent, good faith attempt to resolve
all disputes arising under this Agreement. If a dispute arises under this
Agreement, then the aggrieved party shall promptly notify the other party to
this Agreement of the existence and nature of the dispute. If the Parties shall
fail to resolve the dispute within ten (10) days after delivery of such notice,
either party may submit the dispute for settlement by arbitration in Pittsburgh,
Pennsylvania or at any other place or under any other form of arbitration
mutually acceptable to the parties) in accordance with the provisions of this
Paragraph 31. The dispute in question shall be settled by two independent
arbitrators, one chosen by USGen and one chosen by MEI or EPC. USGen, MEI or
EPC, as the case may be, shall deliver a notice to the other appointing its
arbitrator within fifteen (15) days after receipt from the other of a notice
appointing its arbitrator. If, within thirty (30) days after appointment of the
two arbitrators, they are unable to agree upon the determination in question, a
third independent arbitrator shall be chosen within ten (10) days thereafter by
mutual consent of the first two arbitrators or, if the first two arbitrators
fail to agree upon the appointment of a third arbitrator, such appointment shall
be made in accordance with the rules of the American Arbitration Association, or
any organization successor thereto, from a panel of qualified arbitrators. The
decision of the arbitrators so appointed and chosen shall be given within thirty
(30) days after selection of the third arbitrator. In the case of a monetary
dispute, if three arbitrators shall be appointed and the determination of one
arbitrator is disparate from the middle determination by more than twice the
amount by which the other determination is disparate from the middle
determination, then the determination of such arbitrator shall be excluded, the
remaining two determinations shall be averaged and such average shall be binding
and conclusive on the Parties; otherwise the average of all three determinations
shall be binding and conclusive on the Parties. Each Party shall bear its own
costs and expenses of arbitration unless otherwise provided for herein or
directed by the arbitrators. The Parties shall each abide by and perform any
resulting arbitration award. The arbitration award, when issued, shall be final
and shall be enforceable in any court of competent jurisdiction.
(b) While any dispute under this Agreement is unresolved, the parties
shall continue to perform their obligations hereunder to the extent possible
notwithstanding such dispute.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Joint Development
Agreement as of the date set forth in the preamble hereof.
U.S. GENERATING COMPANY
By: /s/ Christopher R. Sauer
---------------------------------------------------
Name: Christopher R. Sauer
-------------------------------------------------
Title: Vice President, Marketing & Product Development
-----------------------------------------------
MILESBURG ENERGY, INC.
By: /s/ Donald A. Livingston
----------------------------------------------------
Name: Donald A. Livingston
--------------------------------------------------
Title: Vice President
-------------------------------------------------
ENVIRONMENTAL POWER CORPORATION
(for the limited purposes specifically
set forth in this Agreement)
By: /s/ Donald A. Livingston
------------------------------------------------------
Name: Donald A. Livingston
----------------------------------------------------
Title: President
---------------------------------------------------
15
<PAGE>
EXHIBIT A
MEI STATEMENT OF PREVIOUS DEVELOPMENT COSTS
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
INVESTMENT IN MILESBURG DEVELOPMENT RIGHTS *
ACQUISITION COSTS *
ENGINEERING FEES *
LEGAL FEES *
CAPITALIZED SALARIES *
CAPITALIZED OVERHEAD *
TRAVEL *
INTEREST *
MISCELLANEOUS EXPENSES *
-------------
TOTAL DEVELOPMENT COSTS 8,116,612
=============
</TABLE>
* - INFORMATION OMITTED-CONFIDENTIAL TREATMENT REQUESTED
16
<PAGE>
EXHIBIT 11
Environmental Power Corporation
Computation of Earnings Per Share
September 30, 1996
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996:
- - ----------------------------------------------
Weighted average number of shares outstanding 11,176,211
===========
Net Income $ 900,837
===========
Earnings per share - primary and fully diluted $ .08
===========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996:
- - ---------------------------------------------
Weighted average number of shares outstanding 11,288,493
===========
Net Income $ 2,027,734
===========
Earnings per share - primary and fully diluted $ .18
===========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AT SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,098,154<F1>
<SECURITIES> 0
<RECEIVABLES> 9,457,764<F2>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,582,380
<PP&E> 7,105,379
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,148,668
<CURRENT-LIABILITIES> 8,144,364
<BONDS> 8,596,580
0
0
<COMMON> 121,954
<OTHER-SE> 3,567,370
<TOTAL-LIABILITY-AND-EQUITY> 50,148,668
<SALES> 35,602,294
<TOTAL-REVENUES> 35,602,294
<CGS> 13,065,918
<TOTAL-COSTS> 13,065,918
<OTHER-EXPENSES> 18,467,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 116,748
<INCOME-PRETAX> 3,481,734
<INCOME-TAX> 1,454,000
<INCOME-CONTINUING> 2,027,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,027,734
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<FN>
<F1>CASH INCLUDES $1,639,671 WHICH IS RESTRICTED AS TO USE.
<F2>RECEIVABLES INCLUDE NOTES RECEIVABLE OF $1,844,494 WHICH ARE NONCURRENT.
</FN>
</TABLE>
