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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 June 30, 1997
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-15472
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Environmental Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-2782065
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
(Address of principal executive offices)
(Zip code)
(603) 431-1780
Registrant's telephone number, including area code
- ------------------------------------------------------------------------------
(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 August 13, 1997 11,076,783 shares
The Exhibit Index appears on Page 22.
Total number of pages is 23.
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ENVIRONMENTAL POWER CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as
of June 30, 1997 (unaudited) and December 31, 1996........... 2
Condensed Consolidated Statements of Operations (unaudited)
for the three and six months ended June 30, 1997
and June 30, 1996............................................ 3
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1997 and June 30, 1996..... 4
Notes to Condensed Consolidated Financial Statements......... 5-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 21
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 22
Item 6. Exhibits and Reports on Form 8-K.................. 22
Signatures .................................................. 23
1
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 372,914 $ 1,178,524
Restricted cash 887,546 1,864,899
Receivable from utility 4,548,497 5,892,879
Notes receivable 37,599 36,129
Other current assets 914,118 911,473
------------ ------------
TOTAL CURRENT ASSETS 6,760,674 9,883,904
PROPERTY, PLANT AND EQUIPMENT, NET 7,950,955 7,312,299
DEFERRED INCOME TAX ASSET 4,823,105 3,840,105
LEASE RIGHTS, NET 2,832,021 2,906,523
RECEIVABLE FROM SALE OF AFFILIATE 644,236 497,762
NOTES RECEIVABLE 3,003,516 3,022,690
ACCRUED POWER GENERATION REVENUES 28,907,449 24,456,478
OTHER ASSETS 698,880 583,383
------------ ------------
$ 55,620,836 $ 52,503,144
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,777,075 $ 6,033,675
Other current liabilities 3,532,341 2,696,143
------------ ------------
TOTAL CURRENT LIABILITIES 10,309,416 8,729,818
DEFERRED INTEREST REVENUE 73,236 --
DEFERRED GAIN, NET 5,859,803 6,014,008
SECURED PROMISSORY NOTES PAYABLE
AND OTHER BORROWINGS 7,874,928 9,089,195
ACCRUED LEASE EXPENSES 28,907,449 24,456,478
MAINTENANCE RESERVE 1,997,029 1,533,829
------------ ------------
TOTAL LIABILITIES 55,021,861 49,823,328
SHAREHOLDERS' EQUITY
Preferred Stock ($.01 par value; 1,000,000 shares authorized; no shares
issued at June 30, 1997 and December 31, 1996, respectively) -- --
Preferred Stock (no par value, 10 shares authorized; 10 shares
issued at June 30, 1997 and December 31, 1996, respectively) 100 100
Common Stock ($.01 par value; 20,000,000 shares authorized;
12,195,423 shares issued at June 30, 1997 and December 31, 1996,
respectively; 11,076,783 shares outstanding at June 30, 1997 and
December 31, 1996, respectively) 121,954 121,954
Additional paid-in capital 10,366,460 11,057,495
Accumulated deficit (8,672,112) (7,282,306)
------------ ------------
1,816,402 3,897,243
Treasury stock (1,118,640 common shares, at cost, as of
June 30, 1997 and December 31, 1996, respectively) (456,271) (456,271)
Notes receivable from officers (761,156) (761,156)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 598,975 2,679,816
------------ ------------
$ 55,620,836 $ 52,503,144
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
POWER GENERATION REVENUES $ 8,032,094 $ 13,078,617 $ 19,305,394 $ 23,844,132
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Operating expenses 4,668,847 4,621,050 9,065,573 8,900,643
Lease expenses 5,773,271 7,325,667 11,479,545 12,495,095
General and administrative expenses 479,981 674,699 1,171,820 1,657,676
Depreciation and amortization 50,186 60,407 99,988 102,277
------------ ------------ ------------ ------------
10,972,285 12,681,823 21,816,926 23,155,691
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (2,940,191) 396,794 (2,511,532) 688,441
OTHER INCOME (EXPENSE):
Other income -- 113 -- 42,194
Interest income 26,328 125,281 144,473 219,179
Interest expense (56,476) (37,611) (142,952) (75,122)
Amortization of deferred gain 77,103 77,103 154,205 154,205
Warranty income -- -- -- 900,000
------------ ------------ ------------ ------------
46,955 164,886 155,726 1,240,456
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (2,893,236) 561,680 (2,355,806) 1,928,897
INCOME TAX BENEFIT (EXPENSE) 1,192,000 (227,000) 966,000 (802,000)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (1,701,236) $ 334,680 $ (1,389,806) $ 1,126,897
============ ============ ============ ============
PRIMARY AND FULLY-DILUTED (LOSS)
EARNINGS PER COMMON SHARE $ (0.15) $ 0.03 $ (0.12) $ 0.10
============ ============ ============ ============
DIVIDENDS PAID:
COMMON SHARES $ 332,303 $ 332,303 $ 664,607 $ 663,108
PREFERRED SHARES 26,428 -- 26,428 --
------------ ------------ ------------ ------------
$ 358,731 $ 332,303 $ 691,035 $ 663,108
============ ============ ============ ============
DIVIDENDS PAID PER COMMON SHARE $ 0.03 $ 0.03 $ 0.06 $ 0.06
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30
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1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,389,806) $ 1,126,897
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 99,988 102,277
Deferred income taxes (983,000) 801,300
Amortization of deferred gain (154,205) (154,205)
Amortization of unearned compensation --- 40,170
Accrued power generation revenues (4,450,971) (4,551,573)
Accrued lease expenses 4,450,971 4,551,573
Changes in operating assets and liabilities:
Decrease in receivable from utility 1,344,382 1,147,827
(Increase) decrease in other current assets (2,645) 117,940
(Increase) decrease in receivable from sale of affiliate (146,474) 61,476
Increase (decrease) in accounts payable and
accrued expenses 743,400 (965,452)
Increase (decrease) in deferred revenue 73,236 (1,604,270)
Decrease in other current liabilities --- (300,000)
Increase in long-term liabilities 5,733 5,764
Increase in maintenance reserve 463,200 191,966
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Net cash provided by operating activities 53,809 571,690
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the collection of notes receivable 17,704 465,668
Increase in restricted cash (242,647) (376,202)
(Increase) decrease in other assets (133,317) 38,810
Property, plant and equipment expenditures (646,322) (26,069)
------------------- -------------------
Net cash (used in) provided by investing activities (1,004,582) 102,207
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend payments (691,035) (663,108)
Net borrowings under working capital loan 447,043 399,556
Borrowings under long-term credit facility 389,155 ---
Repayment of secured promissory notes payable and
other borrowings --- (114,517)
Purchase of treasury stock --- (260,376)
Proceeds from the issuance of common stock --- 14,437
Proceeds from the collection of notes receivable from officers --- 72,876
Proceeds from other borrowings --- 52,813
------------------- -------------------
Net cash provided by (used in) financing activities 145,163 (498,319)
------------------- -------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (805,610) 175,578
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,178,524 1,011,822
------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 372,914 $ 1,187,400
=================== ===================
</TABLE>
See notes to condensed consolidated financial statements.
See Note E to condensed consolidated financial statements for noncash financing
and investing activities.
4
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ENVIRONMENTAL POWER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
- -------------------------------
The accompanying unaudited condensed consolidated financial statements of
Environmental Power Corporation ("EPC") and its subsidiaries (the "Company")
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for annual financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of results
to be expected for the year ending December 31, 1997. 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, 1996.
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 -- EARNINGS (LOSS) PER COMMON 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. For purposes of calculating
primary earnings per share, the Company considers its shares issuable in
connection with stock options to be dilutive common stock equivalents when the
exercise price is less than the average market price of the Company's common
stock for the period. The weighted average number of shares of common stock and
dilutive common stock equivalents for the calculation of primary earnings per
share was 11,187,934 and 11,193,415 for the three months ended June 30, 1997 and
1996, respectively and 11,206,990 and 11,344,632 for the six months ended June
30, 1997 and 1996, respectively. For purposes of calculating fully diluted
earnings per share, the Company considers its shares issuable in connection with
stock options to be dilutive common stock equivalents when the
5
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NOTE C -- EARNINGS (LOSS) PER COMMON SHARE (CONTINUED)
- ------------------------------------------------------
exercise price is less than the higher of the market price of the Company's
common stock at the end of the period or the average price of the Company's
common stock for the period. The weighted average number of shares of common
stock and dilutive common stock equivalents for the calculation of fully diluted
earnings per share was 11,195,182 and 11,193,415 for the three months ended June
30, 1997 and 1996, respectively and 11,206,990 and 11,344,632 for the six months
ended June 30, 1997 and 1996, respectively.
NOTE D -- NEW ACCOUNTING STANDARDS
- ----------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, Earnings Per Share, which establishes
new standards for computing and presenting earnings per share. The Statement is
effective for periods ending after December 15, 1997. Accordingly, the Company
will adopt the standard beginning with its fourth quarter of 1997. For the first
and second quarters of 1997 and 1996, respectively, the proforma basic and
diluted earnings per share amounts would not have been materially different from
the earnings per share amounts shown for the periods presented in the
accompanying condensed consolidated statements of operations.
NOTE E -- NON CASH INVESTING AND FINANCING ACTIVITY
- ---------------------------------------------------
During the second quarter of 1997, the Lessor of the Scrubgrass Project
assumed primary responsibilility for the disbursement of funds and repayment of
debt related to the capital improvements fund of the Scrubgrass Project.
Accordingly, restricted cash and secured borrowings in the amount of $1,220,000
were transferred from the financial statements of the Company to the financial
statements of the Lessor.
NOTE F -- RECLASSIFICATIONS
- ---------------------------
The Company has made certain reclassifications in the presentation of its
financial statements as of December 31, 1996 and for the three and six months
ended June 30, 1996 in order to conform to the presentation of its financial
statements as of June 30, 1997 and for the three and six months ended June 30,
1997.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview of the Company
The Company owns a 22 year leasehold interest in an approximately 83 Mw
(net) waste coal-fired electric generating facility (the "Scrubgrass Project")
located in Pennsylvania, the lease for which commenced on June 30, 1994. Until
December 31, 1994 the Company also held varying ownership interests (100% to
approximately 40%) in and oversaw the operation of an approximately 51 Mw (net)
waste coal-fired electric generating facility (the "Sunnyside Project") located
in Utah. The Company has one additional project (the "Milesburg Project") in
the development stage, but believes that it has limited opportunities for
additional similar project development in the United States for the foreseeable
future. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations compares the Company's results of operations
for the three and six months ended June 30, 1997 ("1997") with its results of
operations for the three and six months ended June 30, 1996 ("1996") and
discusses certain changes in the Company's financial condition since its Annual
Report on Form 10-K for the year ended December 31, 1996.
Cautionary Statement
This Quarterly Report on Form 10-Q contains "forward-looking statements",
as defined by the Private Securities Litigation Reform Act of 1995, in order to
provide investors with prospective information about the Company. For this
purpose, any statements which are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors which could cause the Company's actual results to differ
materially from those indicated by the forward looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results".
Scrubgrass Maintenance Outage
During the second quarter of 1997, the Company had its annual maintenance
outage for the Scrubgrass plant. As discussed in previous filings, the Company
had to perform significant repairs to the Scrubgrass generator during this
maintenance outage which necessitated that the Scrubgrass plant be inoperative
for a period of 37 days. Originally, without knowledge of the necessary
generator repair, the Company had planned that the Scrubgrass plant would be
inoperative for only 12 days to perform normal maintenance during the outage.
While the Company is pleased to report that the extended outage was completed
approximately 10 days ahead of the 47 day schedule, the Company's 1997 second
quarter results were nevertheless significantly impacted by this outage. As a
result of the extended outage, the Company estimates that it lost approximately
$2,480,000 in revenues, incurred $660,000 to have the manufacturer repair the
generator, incurred approximately $700,000 in additional maintenance expenses
which were not originally scheduled during this outage, saved approximately
$496,000 in fuel costs by not operating during the outage and incurred
approximately $300,000 in related costs such as legal fees, management
7
<PAGE>
costs, bank fees, etc.. As such, the Company believes that the financial impact
of this outage aggregated approximately $3.7 million. See "Results of
Operations-Outlook for the Remainder of 1997" for a discussion of the effect of
the outage on 1997 operating results and "Liquidity and Capital Resources-
Outlook" for a discussion of the cash flow implications resulting from the
outage.
Results of Operations
Power generation revenues for the three and six months ended June 30,
1997 amounted to $8,032,094 and $19,305,394, respectively, as compared to
$13,078,617 and $23,844,132 for the three and six months ended June 30, 1996,
respectively. The overall decrease in power generation revenues during 1997 is
primarily attributable to the extended maintenance outage to repair the
generator. During the first quarter of 1997, the Scrubgrass plant was
inoperative for approximately 6 days to consider generator matters. During the
second quarter of 1997, the Scrubgrass annual outage extended approximately 31
days longer than the 6 day outage in May 1996 due primarily to the generator
repair. At an average of $80,000 of net revenues per day, this accounts for an
approximate reduction in 1997 power generation revenues of $3 million by
comparison to 1996. Further, the Company recognized certain revenues of
$1,604,270 during the six months ended June 30, 1996 which were previously
deferred under the Scrubgrass power purchase agreement. There were no revenues
recognized in 1997 which were previously deferred under the Scrubgrass power
purchase agreement. In addition, second quarter power generation revenues were
lower in 1997 by comparison to 1996 because of a decrease in power generation
revenues recorded as a result of the straight-line accounting treatment of
certain revenues recorded under the Scrubgrass power purchase agreement which
amounted to $2,222,514 for the three months ended June 30, 1997 as compared to
$3,825,338 for the three months ended June 30, 1996. All power generation
revenues earned by the Company in 1997 and 1996 related to the Scrubgrass
Project.
Operating expenses for the three and six months ended June 30, 1997
amounted to $4,668,847 and $9,065,573, respectively, as compared to $4,621,050
and $8,900,643 for the three and six months ended June 30, 1996, respectively.
The overall increase in 1997 is primarily attributable to higher maintenance
costs incurred during the extended maintenance outage at the Scrubgrass plant.
However, the overall increase was substantially offset by lower fuel costs
because the Scrubgrass plant operated approximately 37 days less in 1997 by
comparison to 1996 and lower operator fees for the Scrubgrass Project because
the Company is not expecting to pay a year end bonus to the operator in 1997 in
light of the effect of the extended outage on performance targets. The largest
effect from these factors occurred during the second quarter of 1997.
Lease expense for the three and six months ended June 30, 1997 amounted
to $5,773,271 and $11,479,545, respectively, as compared to $7,325,667 and
$12,495,095 for the three and six months ended June 30, 1996, respectively. The
overall decrease in lease expense during 1997 occurred primarily for two
reasons. First, lower interest rates incurred in 1997 reduced the Lessor's loan
costs that were passed through to the Company in its facility lease expenses.
Second, as a result of having less cash available from the operations of the
Scrubgrass Project during 1997, the Company's equity rent to the Lessor was
substantially reduced through June 1997. However, the overall reduction in lease
expense was offset in part by higher principal payments in 1997 on the Lessor's
senior debt which
8
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were passed through to the Company in its facility lease expenses. In addition,
second quarter lease expenses were lower in 1997 by comparison to 1996 because
of a decrease in the lease expense recorded as a result of the straight-line
accounting treatment of certain lease expenses under the Scrubgrass lease which
amounted to $2,222,514 for the three months ended June 30, 1997 as compared to
$3,825,338 for the three months ended June 30, 1996.
General and administrative expenses for the three and six months ended
June 30, 1997 amounted to $479,981 and $1,171,820, respectively as compared to
$674,699 and $1,657,676 for the three and six months ended June 30, 1996,
respectively. The overall decrease in general and administrative expenses during
1997 is primarily due to the Company's efforts to reduce its corporate overhead
expenses. The Company's major steps to reduce its corporate overhead included a
consolidation of its Vermont and New Hampshire offices into one office in New
Hampshire (completed by May 1996), a reduction in its executive officer
compensation and a reduction in its employee headcount by an equivalent of two
full-time employees. In addition, the Company took steps in 1997 to reduce its
Scrubgrass Project insurance costs and has realized a savings of approximately
$100,000 through June 1997 by comparision to the same period in 1996. The
Company continues to incur substantial management and professional fees to
negotiate certain contractual matters and defend its position in certain legal
matters. Accordingly, the full effect of the Company's efforts to reduce its
corporate overhead expenses still has not yet been shown in its recent operating
results.
Interest income for the three and six months ended June 30, 1997 amounted
to $26,328 and $144,473, respectively as compared to $125,281 and $219,179 for
the three and six months ended June 30, 1996, respectively. The decrease in
1997 is primarily attributable to lower investments in cash and cash equivalents
and less interest recognized on the Company's notes receivable related to the
sale of its interest in the Sunnyside Project. Beginning in April 1997, the
Company has deferred the interest income on the notes receivable related to the
sale of its interest in the the Sunnyside Project until the litigation with the
purchasers is resolved (See "Part II - Item 1. Legal Proceedings"). While the
Company believes its position in this litigation is meritorius, the Company also
believes it may take an extended period of time to enforce its rights and
collect on these notes receivable. Now that the Sunnyside notes receivable have
been in arrears for more than one year and are expected to remain in arrears for
the foreseeable future, the Company believes it is in the best interest of its
investors to classify these notes receivable, along with the related contingent
liabilities, as long-term and defer future interest income so that the Company's
financial position and ongoing results of operations are presented
conservatively.
Interest expense for the three and six months ended June 30, 1997
amounted to $56,476 and $142,952, respectively as compared to $37,611 and
$75,122 for the three and six months ended June 30, 1996, respectively. The
increase in interest expense during 1997 is primarily attributable to higher
average balances on the Lessee Working Capital Loan described under "Liquidity
and Capital Resources-Financing Activities" below. The overall increase was
offset in part by the transfer of debt associated with the capital improvements
fund from the financial statements of the Company to the financial statements of
the Lessor in 1997. In the future, the interest expense from debt associated
with the capital improvements fund will be a lease expense for the Company.
9
<PAGE>
Warranty income for the six months ended June 30, 1996 amounted to
$900,000 and resulted from a settlement with an engineering and construction
contractor for the Scrubgrass plant which was received in March 1996.
Income tax benefit for the three and six months ended June 30, 1997
amounted to $1,192,000 and $966,000, respectively as compared to income tax
expense of $227,000 and $802,000 for the three and six months ended June 30,
1996, respectively. The Company incurred a net loss for the six months ended
June 30, 1997 of $1,389,806 as compared to net income of $1,126,897 for the six
months ended June 30, 1996. As such, the Company recorded an income tax benefit
in 1997 to account for the recorded tax benefits of additional net operating
loss carryforwards. The entire income tax benefit in 1997, which offset income
tax expense of $226,000 for the three months ended March 31, 1997, was recorded
during the second quarter when the Company realized a net loss primarily from
the extended annual outage at the Scrubgrass plant.
Net loss for the three and six months ended June 30, 1997 amounted to
$1,701,236 and $1,389,806, respectively as compared to net income of $334,680
and $1,126,897 for the three and six months ended June 30, 1996, respectively.
The overall decrease in 1997 is largely attributable to the absence in 1997 of
certain revenues of $1,604,270 which were previously deferred under the
Scrubgrass power purchase agreement, the absence in 1997 of warranty income
amounting to $900,000 and the lost net revenues and additional expenses from an
extended maintenance shutdown at the Scrubgrass plant. The overall decrease was
offset in part by the lower general and administrative expenses, operator fees,
fuel costs and lease expenses. The changes in the components of the net income
or loss for each period were discussed more fully in the previous narrative
under "Results of Operations".
Outlook for the Remainder of 1997
Absent the effects of the extended Scrubgrass outage, the Company
believes that it would have been profitable for the year ended 1997. However,
the Company believes it would have been less profitable in 1997 than in 1996. In
1996, the Company enjoyed the benefit of certain non-recurring revenues
including the recognition of $3,064,965 of revenues which were previously
deferred under the Scrubgrass power purchase agreement, the settlement of a
warranty issue related to the Scrubgrass Project for $900,000 and the settlement
of a legal proceeding for approximately $340,000, net of legal fees. In
addition, the Company expects to incur additional lease expense in 1997 of
approximately $790,000 as a result of additional principal payments due on one
of the Lessor's term loans. However, the Company expects that the absence of the
1996 non-recurring revenues and the impact of the additional 1997 lease expense
would be partially offset by some factors with a favorable impact on its results
of operations in 1997. These factors include an increase in certain power
generation revenues resulting from an approximate 5% increase in the contracted
rates charged for energy produced by the Scrubgrass Project, a reduction in
lease expense from anticipated lower equity rents and bank fees, and a reduction
of general and administrative expenses largely because approximately $800,000 of
such expenses incurred in 1996 are not expected to recur in 1997. However, as
discussed under the caption "Scrubgrass Maintenance Outage", the Company
incurred a net charge to operations of approximately $3.7 million as a result of
the extended maintenance outage at the Scrubgrass plant, for which
10
<PAGE>
approximately $3.1 million and $600,000 were charged to operations during 1997
and 1996, respectively. As such, absent the effects of the extended maintenance
outage at the Scrubgrass plant, the Company would have realized a net profit
before taxes of approximately $700,000 for the six months ended June 30, 1997.
Furthermore, in light of the favorable performance of the Scrubgrass Project
which is expected to continue now that the necessary generator repairs have been
completed, the Company expects that it will offset a portion of its net loss for
the six months ended June 30, 1997 with profits during the remainder of 1997.
Recently Issued Accounting Standards
See Note D to the Condensed Consolidated Financial Statements for
recently issued accounting standards which the Company will be required to adopt
in 1997.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities amounted to $53,809 during the six
months ended June 30, 1997 as compared to $571,690 during the six months ended
June 30, 1996. During the six months ended June 30, 1997 and 1996, the Company
primarily generated cash from operating activities from the operating profits of
the Scrubgrass Project and from investment earnings. The following changes in
operating assets and liabilities most notably impacted cash provided by
operating activities during the six months ended June 30, 1997:
Receivable from utility - The Company's receivable from utility relates to
the Scrubgrass Project and amounted to $4,548,497 as of June 30, 1997 as
compared to $5,892,879 as of December 31, 1996. The reduction in receivable
from utility as of June 30, 1997 is primarily due to lower revenues during
May 1997 as a result of the Scrubgrass maintenance outage which was
completed on May 18, 1997 (See "Scrubgrass Maintenance Outage" above for a
further discussion).
Other current assets - The Company's other current assets amounted to
$914,118 as of June 30, 1997 as compared to $911,473 as of December 31,
1996. The overall increase is largely attributable to insurance premiums
which were paid in advance when the insurance policies were renewed in
April 1997. The increase in prepaid insurance was substantially offset by a
reduction in fuel inventory levels which were higher than usual at December
31, 1996 because the Company had advance purchased certain inventory during
1996 to obtain favorable pricing.
Deferred income tax asset - The Company's deferred income tax asset
amounted to $4,823,105 as of June 30, 1997 as compared to $3,840,105 as of
December 31, 1996. The increase of $983,000 is largely attributable to the
recorded tax benefit of additional net operating loss carryforwards which
were derived from the Company's net loss during the six months ended June
30, 1997.
Current liabilities - The Company's current liabilities amounted to
$10,309,416 as of June 30, 1997 as compared to $8,729,818 as of December
31, 1996. As discussed under the caption
11
<PAGE>
"Scrubgrass Maintenance Outage" above, the Company has incurred estimated
lost net revenues and additional expenses of approximately $3.7 million as
a result of the extended maintenance outage of the Scrubgrass plant. The
increase in current liabilities reflects an increase in accounts payable,
accrued liabilities and short-term borrowings to cover interim cash flow
deficiencies as a result of the extended maintenance outage of the
Scrubgrass plant. See "Financing Activities -Outlook" for a further
discussion of the long-term financing implications of these additional
liabilities.
Deferred gain, net - The Company's deferred gain, net amounted to
$5,859,803 as of June 30, 1997 as compared to $6,014,008 as of December 31,
1996. 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.
Maintenance reserve - The Company records the expense of major equipment
overhauls related to the Scrubgrass Project to a maintenance reserve on a
straight-line basis using management's best estimate of when the Company
will incur future cash outlays for the major equipment overhauls. When the
Company incurs cash outlays for major equipment overhauls, they are funded
substantially from scheduled deposits to a restricted major maintenance
fund which have been set aside to ensure that the funds are available for
these maintenance procedures (see further discussion under the caption
"Investing Activities-Resticted Cash"). The maintenance reserve increased
to $1,997,029 as of June 30, 1997 from $1,533,829 as of December 31, 1996
primarily due to scheduled reserves provided for the ongoing maintenance of
the plant.
Investing Activities
The Company used $1,004,582 for investing activities during the six
months ended June 30, 1997 and received $102,207 from investing activities
during the six months ended June 30, 1996. The Company's investing activities
are concentrated primarily in the following areas:
Notes receivable - The Company presently has notes receivable related to
the 1994 sale of the Sunnyside Project and related to fees earned in 1995
for the Scrubgrass Project. The Company collected $17,704 and $465,668 from
notes receivable related to the Scrubgrass Project during the six months
ended June 30, 1997 and 1996, respectively. The notes receivable related to
the Sunnyside Project, with a principal balance of $2,937,500 and accrued
interest balance of $367,792 as of June 30, 1997, are the subject of a
legal proceeding. See "Certain Factors That May Impact Future Results" and
"Part II - Item 1. Legal Proceedings" for further information.
Restricted cash - The Company is presently required to make scheduled
deposits to a restricted major maintenance fund to ensure that funds are
available in the future for scheduled major equipment overhauls. The
Company's deposits to the restricted major maintenance fund and
12
<PAGE>
interest thereon exceeded its payments for major equipment overhauls by
$242,647 and $376,202 during the six months ended June 30, 1997 and 1996,
respectively.
Property plant and equipment - The Company invested $646,322 and $26,069 in
property, plant and equipment expenditures during the six months ended June
30, 1997 and 1996, respectively. The expenditures primarily relate to
development activities for the Company's Milesburg Project for which
development efforts have increased in 1997. During 1997, the Company also
made leasehold improvements to the Scrubgrass facility in the amount of
$125,000.
Financing Activities
The Company received $145,163 from financing activities during the six
months ended June 30, 1997 and utilized $498,319 in financing activities during
the six months ended June 30, 1996. The Company's financing activities are
concentrated primarily in the following areas:
Working Capital Loan - The Company may borrow up to $4 million under a Lessee
Working Capital Loan Agreement with the Lessor for ongoing working capital
requirements of the Scrubgrass Project. The outstanding borrowings under the
Lessee Working Capital Loan Agreement increased to $3,143,186 as of June 30,
1997 from $2,696,143 as of December 31, 1996 primarily to cover cash flow
deficiencies resulting from the extended annual outage of the Scrubgrass
Project.
Term Credit Facility - In June 1997, the Lessor entered into a credit
facility with the lenders of the Scrubgrass Project to make additional funds
available to the Scrubgrass Project over a three year period to cover an
expected cash deficiency which would result from the extended annual outage
of the Scrubgrass Project and associated costs and expenses. The maximum
allowable borrowings under this credit facility are $3,000,000 through July
1, 1998. Beginning on July 1, 1998, the maximum allowable borrowings under
this credit facility will reduce in $600,000 increments every six months
through July 3, 2000 when the credit facility will be payable in full. As of
June 30, 1997, the outstanding borrowings under this credit facility, which
were advanced to the Company by the Lessor, amounted to $389,155.
Dividends - Beginning in 1996, the Company initiated a quarterly dividend
policy which is subject to review and consideration by the Board of Directors
each quarter. In respect of this dividend policy, the Company declared and
paid dividends of $664,607 and $663,108 during the six months ended June 30,
1997 and 1996, respectively. During 1997, the Company also paid dividends to
its subsidiary's preferred stockholder in the amount of $26,428. The
preferred stockholder, entitled to cumulative dividends of $5,000 per year
since December 1991, was paid its dividends up to date during the second
quarter of 1997.
Treasury Stock - The Company from time to time makes purchases of its own
common stock. During March 1996, the Company purchased 520,540 shares of
common stock from a resigning executive officer for $287,876 representing all
of the officer's holdings in the Company. The Company's note receivable from
the officer in the amount of $72,876 was collected by reducing the proceeds
paid to the officer for the common stock. As of June 30,
13
<PAGE>
1996, the Company still owed the resigning executive officer $27,500 for this
stock purchase. The Company has not made any treasury stock purchases during
1997.
Notes payable - The Company presently has long-term obligations related to
its Milesburg Project, Sunnyside Project and Scrubgrass Project in the
amounts of $5,858,767, $748,348 and $1,267,813, respectively. The Company
also had short-term installment obligations related to its Sunnyside Project
and Milesburg Project which were fully satisfied during 1996, for which
$114,517 was paid during the six months ended June 30, 1996. The Milesburg
Project long-term obligations are noninterest-bearing and payable only under
certain conditions, the most significant of which relates to the closing of
construction financing and commencement of construction for the Milesburg
Project. The Sunnyside Project long-term obligations are payable based on a
schedule which relates directly to the amount of proceeds received from the
collection of the outstanding notes receivable from the sale of the Company's
interest in the Sunnyside Project. The next installment for the Scrubgrass
Project long-term obligation is not due until 1998.
Outlook
During 1997, the Company expects that its principal sources of cash to fund
its business activities will be from available cash balances, investment
earnings and cash which may become available from the Scrubgrass Project. As
discussed more fully in the Company's 1996 Annual Report on Form 10-K, the
Company is not able to receive cash from the Scrubgrass Project until all
operating expenses, base lease payments (which include the Lessor's debt
service), certain maintenance reserve payments and other subordinated payments
of the Scrubgrass Project are first satisfied. Furthermore, as described in
this Item under "Scrubgrass Maintenance Outage", the Company made significant
repairs to the generator of the Scrubgrass Project during its 1997 annual plant
outage which began on April 11, 1997 and ended on May 18, 1997, and which
resulted in estimated lost profits of approximately $3.1 million and $600,000
during 1997 and 1996, respectively. As a result of these lost profits, the
Company would have experienced a significant cash shortfall beginning in July
1997 when many of its current liabilities were due. However, in June 1997, the
Lessor entered into a credit facility with the lenders of the Scrubgrass Project
to make additional funds available to the Scrubgrass Project over a three year
period to cover the expected cash deficiencies resulting from the extended
annual outage of the Scrubgrass Project. Under the terms of this credit
facility, the Company can borrow up to $3,000,000 through July 1, 1998.
Beginning on July 1, 1998, the maximum allowable borrowings under this credit
facility will reduce in $600,000 increments every six months through July 3,
2000 when the credit facility will be payable in full. In addition, the Company
has received extended terms from the Scrubgrass generator manufacturer which
allow the Company to pay the $660,000 cost of the generator repair in six annual
installments of $110,000, without interest, beginning in May 1997. As a result
of these additional borrowings, the Company will be able to satisfy the current
liabilities of the Scrubgrass Project within their terms with long-term debt
payable over periods ranging from three to five years. Furthermore, in light of
the favorable performance of the Scrubgrass Project which is expected to resume
now that the necessary generator repairs have been made, the Company expects
that the Scrubgrass Project will be capable of supporting the increases in the
debt service requirements without compromising any of its existing debt
covenants. As such, the Company expects that it will
14
<PAGE>
receive sufficient cash from the Scrubgrass Project, which when combined with
its available cash balances and investment earnings, would be sufficient to
sustain its business activities on a long-term basis. See "Certain Factors That
May Affect Future Results" below.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q.
Ownership of Single Operating Asset
The Company owns a 22 year leasehold interest in the Scrubgrass Project, an
approximate 83 Mw (net) waste-coal fired electric generating facility located in
Pennsylvania, the lease for which commenced on June 30, 1994. Presently, all
the Company's operating revenues are attributable to power generation from the
Scrubgrass Project. Accordingly, the Company's operations are largely dependent
upon the successful and continued operation of the Scrubgrass Project. In
particular, if the Scrubgrass Project experiences unscheduled shutdowns of
significant duration, the Company's results of operations will be materially
adversely affected.
Dependence Upon Key Employees
The success of the Company is largely dependent upon a staff of four
employees, including three executive officers. The loss of any of these
employees could adversely affect the Company's operations.
Third Party Project Management
The Company has entered into a management services agreement with U.S.
Generating Company ("U.S. Gen") to manage the Scrubgrass Project and a 15-year
operations and maintenance agreement with US Operating Services Company to
operate the facility. Under the terms of these agreements, there are provisions
which limit the Company's participation in the management and operation of the
Scrubgrass Project, and provisions which provide for recourse against the
manager and operator for unsatisfactory performance. However, the Company does
not exercise control over the operation or management of the Scrubgrass Project.
As such, decisions may be made affecting the Scrubgrass Project, notwithstanding
the Company's opposition, which may have an adverse affect on the Company.
Scheduled and Unscheduled Shutdowns
The Scrubgrass Project from time to time experiences both scheduled and
unscheduled shutdowns. Periodically, the Scrubgrass Project incurs scheduled
shutdowns in order to perform maintenance procedures to equipment that cannot be
performed while the equipment is operating. Occasionally, the Scrubgrass Project
may also incur unscheduled shutdowns or may be required to operate at reduced
capacity levels following the detection of equipment malfunctions, or
15
<PAGE>
following minimum generation orders received by the utility. During periods when
the Scrubgrass Project is shutdown or operating at reduced capacity levels, the
Company may incur losses due to the loss of its operating revenues and/or due to
additional costs which may be required to complete any maintenance procedures.
It is not possible for the Company to predict the frequency of future
unscheduled shutdowns or to predict the extent of maintenance which may be
required during shutdowns related to equipment maintenance.
Legal Proceedings
As discussed in "Part II-Item 1. Legal Proceedings", the Company is
involved in a legal proceeding with the purchasers of the Company's interest in
the Sunnyside Project which was sold in 1994. Pending the resolution of the
legal proceeding, the purchasers have withheld scheduled payments of principal
and interest due on the promissory notes since June 1996, which amounted to
$1,187,500 and $367,792, respectively as of June 30, 1997. In addition, the
Company recorded in 1994 a receivable related to a purchase price adjustment, as
provided for in the Purchase and Sale Agreement, of approximately $1.1 million,
of which $708,000 was received in April 1995. The balance of purchase price
adjustment is being disputed in the legal proceeding with the purchasers who
also seek rescission of the purchase and sale agreement and unspecified damages.
Although the Company's available cash and cash provided by operating activities
has been sufficient to fund the Company's investing and financing activities,
the withholding of scheduled principal and interest payments has adversely
affected the Company's cash flow. At this time, while management believes the
Company's position in this litigation is meritorious, the Company cannot predict
whether it will prevail in the litigation and to what extent it will incur
professional fees to defend its position in the litigation. An unfavorable
resolution and/or extensive professional fees to defend the litigation could
adversely affect the Company's results of operations.
Financial Results
To date the Company has incurred substantial losses, primarily due to its
development activities, which have resulted in an accumulated deficit of
$8,672,112 as of June 30, 1997. In addition, except during 1996 when the
Scrubgrass Project became profitable, the Company has incurred losses in recent
years. Financial results can be affected by numerous factors, including without
limitation general economic conditions, general industry conditions, the amount
and rate of growth of expenses, transportation and quality of raw materials,
inflation, levels of energy rates, uncertainties relating to government and
regulatory policies, the legal environment and volatile and unpredictable
developments. The Company believes it is well positioned to handle such matters
as they may arise during the course of its future business activities. However,
there can be no assurance that the Company will be profitable in the future.
Development Uncertainties
The Company is currently pursuing efforts towards either the development of
the Milesburg Project or the negotiation of a buy-out of the Milesburg Project's
power purchase agreement with West Penn Power Company. However, there can be no
assurance that the Milesburg Project will be
16
<PAGE>
successfully developed, that the Company will reach agreement on a buy-out
proposal, or that the Company will realize any value from the Milesburg Project.
In the event the Company and its joint development partner, U.S. Gen, seek to
continue development efforts, there can be no assurance that the Company will be
able to obtain all of the necessary site agreements, fuel supply contracts,
design/build agreements, power sales contracts, licenses, environmental and
other permits, local government approvals or financing commitments required for
the successful completion of this project. To date, the Company's efforts to
develop the Milesburg Project have been proceeding on schedule. However, the
failure to accomplish any of the aforementioned steps could materially increase
the cost or prevent the successful completion of the Milesburg Project, or cause
the Company to abandon the Milesburg Project and incur the loss of its
investment to date, which could materially impact the Company's business and
results of operations.
Project Financing
The successful development of the Milesburg Project would require
substantial financing. Presently, the Company believes the Milesburg Project
could be financed. However, there can be no assurance that such financing can
be successfully arranged. Any such financing is likely to be collateralized by
the assets of the Milesburg Project, with repayment to be from the revenues
attributable to the Milesburg Project. The Company may also be required to give
up significant equity interests in the Milesburg Project or make other
concessions in order to arrange the financing.
Potential Liability, Damages and Insurance
The Company's power generation activities involve significant risks to the
Company for environmental damage, equipment damage and failures, personal injury
and fines and costs imposed by regulatory agencies. In the event a liability
claim is made against the Company, or if there is an extended outage or
equipment failure or damage at the Company's power plant for which it is
inadequately insured or subject to a coverage exclusion, and the Company is
unable to defend such claim successfully or obtain indemnification or warranty
recoveries, there may be a material adverse effect on the Company.
Circulating Fluidized Bed Technology
The Company's Scrubgrass Project employs circulating fluidized bed
technology to produce electricity. Certain aspects of this technology, as well
as the conversion of waste products into electricity, are relatively new areas
being explored by the alternative energy market in the last ten years.
Accordingly, this technology carries greater risk than more established methods
of power generation such as hydropower. As such, the long-term costs and
implications of maintaining this technology have not been established by
historical industry data.
Customer Concentration
The Company's power generation revenues are earned under a long-term power
purchase agreement with one customer, Pennsylvania Electric Company. The
Company expects that the concentration of its revenues with this customer will
continue for the foreseeable future.
17
<PAGE>
Although, the Company's Milesburg Project is in the development stage and
presents an opportunity in the future for the Company to expand its revenue
sources and lessen its revenue concentration. However, there can be no assurance
that the Milesburg Project will be successfully developed.
Interest Rates
The Company's subsidiary, as a lease cost of the Scrubgrass facility, is
required to fund the Lessor's debt service which primarily consists of $135.6
million of variable rate tax-exempt bonds maturing in 2012, a $20.8 million term
loan maturing in 2005, a $10.7 million variable rate term loan maturing in 2004
and $.9 million in remaining junior subordinated debt obligations which mature
through 2004. The Company's subsidiary is also required to fund a variable rate
working capital loan, a $1.3 million variable rate term loan maturing in 2004
and any advances from the Lessor under the variable rate credit agreement
executed in June 1997. The Lessor entered into interest rate swaps which had
the effect of fixing the interest rate on the tax-exempt bonds until May 18,
1996 at approximately 3.72% and fixing the interest rate over the life of the
$20.8 million term loan at 6.42%. After May 18, 1996, the Company's specified
base rent was incurred based on floating rates on the Lessor's tax-exempt bonds.
As such, except for the Lessor's $20.8 million term loan and $.9 million
remaining junior subordinated debt obligations, the Company will be required to
fund debt service consisting of rates which will vary with market conditions.
Presently, the Company is not able to predict how future interest rates will
affect its lease expense or debt service. Should market interest rates rise
significantly, the Company's operating results may be significantly impacted.
However, the Scrubgrass Project's financing agreements have terms which limit
interest rate increases by requiring the Lessor to enter into interest rate
protection agreements if interest rates exceed certain levels as defined in such
financing agreements. Notwithstanding, the Company believes the Lessor has good
relationships with the project lenders who would continue to support lending
terms which would not have a material adverse affect on the operating results of
the Scrubgrass Project. However, there can be no assurance that the Lessor
could renegotiate its credit facilities under terms which would ensure
continuing profitable operating results of the Scrubgrass Project.
Fuel Quality
The Company obtains coal tailings primarily from coal mining companies on a
long-term basis because coal tailings are plentiful and generally create
environmental hazards, such as acid drainage, when not disposed of properly.
The coal tailings are burned in the Scrubgrass facility using a circulating
fluidized bed combustion system. During the circulating fluidized bed
combustion process, the coal tailings are treated with other substances such as
limestone. Depending on the quality of the coal tailings, the facility operator
may need to add additional coal tailings or other substances to create the
appropriate balance of substances which would result in the best fuel or sorbent
consistency for power generation and compliance with air quality standards.
Therefore, the cost of generating power is directly impacted by the quality of
the coal tailings which supply the Scrubgrass power generation facility. The
facility operator maintains certain controls over obtaining higher quality coal
tailings. However certain conditions, such as poor weather, can create
situations where the facility operator has less control over the quality of
18
<PAGE>
the coal tailings. The Company cannot predict the extent to which poor fuel
quality may impact its future operating results.
Competition
The Company generates electricity using alternative energy sources which is
sold on a wholesale basis to utilities under contracted rates established in
power purchase agreements. There are a large number of suppliers in the
wholesale market and a surplus of capacity which has led to intense competition
in this market. The principal sources of competition in this market include
traditional utilities who have excess capacity, energy traders and brokers,
contractors, equipment suppliers and other independent power producers who have
entered, or are attempting to enter the energy market. Competition in this
industry is substantially based on price with competitors discovering lower cost
alternatives to providing electricity. Presently, the Company does not believe
it will be significantly impacted by competition in the wholesale energy market
since its revenues are subject to contracted rates which are substantially fixed
for several years. However, the contracted rates in the later years of the
Scrubgrass Project power purchase agreement switch to rates which vary more
closely with existing market conditions. Should ensuing competition in the
later years of the Company's Scrubgrass power purchase agreement create downward
pressure on wholesale energy rates, the Company's profitability could be
impacted.
The Company also competes in the market to develop power generation
facilities. The primary bases of competition in this market are quality of
development plans, ability (including financial ability) of the developer to
complete the project and the price to be paid for the development opportunity.
In certain cases, competitive bidding for a development opportunity is required.
Competition for attractive development opportunities is expected to be intense
as there are a number of competitors in the industry interested in the limited
number of such opportunities. Many of the companies competing in this market
have substantially greater resources than the Company. The Company believes its
project development experience and its experience in creating strategic
alignments with other development firms with greater financial and technical
resources could enable it to continue to compete effectively in the development
market as development opportunities arise. However, the Company believes it has
limited opportunities for additional project development in the United States
for the foreseeable future.
Regulation
The Company's projects benefit from regulation under federal and state
energy laws and regulations which require electric utilities to purchase energy
produced by qualifying facilities. The Company also benefits from and must
comply with certain regulations enacted pursuant to the Public Utility
Regulatory Policies Act of 1978 ("PURPA") exempting certain qualifying
facilities from certain provisions of the Federal Power Act of 1920, the Public
Utility Holding Company Act of 1935, and, except under certain limited
circumstances, state laws regulating the wholesale rates charged by electric
utilities. The Company cannot predict the affect on its business if these laws
or regulations are amended or repealed.
19
<PAGE>
The Company's projects must also comply with applicable federal, state and
local laws relating to the protection of the environment, primarily in the areas
of water and air pollution. As regulations are enacted or adopted the Company
cannot predict the effect of compliance therewith on its business. Failure to
comply with all applicable requirements could result in required modifications
to facilities including the inability to operate during periods of non-
compliances. The Company is responsible to ensure compliance of its facilities
with all applicable requirements and, accordingly, attempts to minimize these
risks by dealing with reputable contractors.
The Commonwealth of Pennsylvania has recently passed legislation which
significantly restructures the electric industry, primarily in the retail
market, beginning in 1997. Presently, none of this recently passed legislation
directly impacts the Company. However, the Company cannot predict whether its
operating or development activities will be indirectly impacted by any such
legislation in the future.
20
<PAGE>
PART II. OTHER INFORMATION
---------------------------
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 in this Item 1 "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
$367,792, respectively at June 30, 1997. 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. 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 in the discovery stage.
21
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders, held on Monday June 30, 1997,
the following actions were submitted to a vote of security holders:
1. The Company elected a Board of Directors to serve for the ensuing year until
their respective successors have been duly elected and qualified. The results
of the voting were as follows:
<TABLE>
<CAPTION>
Number of Shares
---------------------
Withheld
Elected Director For Authority
- --------------------------- ---------- ---------
<S> <C> <C>
Joseph E. Cresci 10,645,542 53,112
Donald A. Livingston 10,632,442 66,212
Peter J. Blampied 10,647,342 51,312
Edward B. Koehler 10,646,942 51,712
Robert I. Weisberg 10,646,942 51,712
</TABLE>
2. The Company ratified the selection of the firm Deloitte and Touche LLP as
auditors for the Company for the fiscal year ending December 31, 1997. The
results of the voting were as follows:
<TABLE>
<CAPTION>
Result Number of Shares
- -------------- ----------------
<S> <C>
For 10,681,391
Against 2,763
Abstain 14,500
</TABLE>
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibit 10.72 - Amendment No. 1 to the Amended and Restated Participation
Agreement
(b) Exhibit 10.85 - Amendment No. 1 to the Amended and Restated Disbursement
Agreement
(c) Exhibit 10.86 - Debt Service (Tranche A) Loan Note to Credit Lyonnais, New
York Branch
(d) Exhibit 10.87 - Debt Service (Tranche B) Loan Note to Credit Lyonnais, New
York Branch
(e) Exhibit 10.88 - Debt Service (Tranche B) Loan Note to National Westminster
Bank
(f) Exhibit 11 - Computation of Earnings Per Share
(g) Reports on Form 8-K - None
22
<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
August 13, 1997 /s/ William D. Linehan
-------------------------------
William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
23
<PAGE>
EXHIBIT 10.72
AMENDMENT NO. 1, dated as of May 22, 1997, among Scrubgrass
Generating Company, L.P., a limited partnership duly organized and validly
existing under the laws of the State of Delaware, as Lessor (the "Lessor"),
------
Buzzard Power Corporation, a Delaware corporation, as Lessee (the
"Lessee"), Bankers Trust Company, a New York banking corporation, as
------
Disbursement Agent (in such capacity, the "Disbursement Agent"), Bankers
------------------
Trust Company, as Bond Trustee (in such capacity, the "Bond Trustee"),
Credit Lyonnais, New York Branch ("Credit Lyonnais"), in its capacity as
agent for the Banks and the LOC Issuer (in such capacity, as described more
specifically in the Amended and Restated Reimbursement Agreement referred
to below, the "Agent") and Environmental Power Corporation, a Delaware
-----
corporation ("EPC"). (All capitalized terms used herein shall, unless the
context otherwise requires or unless they are otherwise defined herein,
have the meanings assigned to such terms in the Amended and Restated
Participation Agreement, as hereinafter defined).
WHEREAS, the Borrower, the Banks, the Agent, National Westminster
Bank Plc, acting through its New York Branch, ("NatWest") in its capacity
as the Bond LOC Issuer (as defined in the Amended and Restated
Reimbursement Agreement referred to below) and Landesbank Hessen-Thuringen
Girozentrale, New York Branch, in its capacity as the Contract LOC Issuer
(as so defined) , are parties to an Amended and Restated Reimbursement and
Loan Agreement dated December 22, 1995 (as heretofore modified and
supplemented and in effect on the date hereof, the "Amended and Restated
--------------------
Reimbursement Agreement");
------------------------
WHEREAS, the Lessor, the Lessee, the Disbursement Agent and the
Agent have entered into an Amended and Restated Disbursement and Security
Agreement, dated as of December 22, 1995 (as amended and supplemented and
in effect on the date hereof, the "Amended and Restated Disbursement
Agreement");
WHEREAS, the Borrower has requested that the Banks agree to amend
the terms and conditions of the Debt Service Loans, and the Banks are
willing to do so as set forth in Amendment No. 2 dated as of May 22, 1997
to the Amended and Restated Reimbursement
1
<PAGE>
Agreement ("Amendment No. 2");
WHEREAS, simultaneously herewith, the Lessor, the Lessee, the
Agent and the Disbursement Agent are entering into Amendment No. 1 to the
Amended and Restated Disbursement Agreement in order to reflect the amended
terms and conditions of the Debt Service Loans;
WHEREAS, the Lessor, the Lessee, the Agent, the Disbursement
Agent, the Bond Trustee and EPC have entered into an Amended and Restated
Participation Agreement dated as of December 22, 1995 (as amended and
supplemented and in effect on the date hereof, the "Amended and Restated
Participation Agreement"); and
WHEREAS, the Lessor, the Lessee, the Agent, the Disbursement
Agent, the Bond Trustee and EPC desire to amend the Amended and Restated
Participation Agreement in order to reflect the amended terms and
conditions of the Debt Service Loans.
NOW, THEREFORE, in consideration of the premises and of the
agreements contained herein, the parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used herein shall,
-----------
unless the context otherwise requires or they are otherwise defined herein,
have the meanings set forth in the Amended and Restated Participation
Agreement, as amended by this Amendment No. 1.
In addition, the following term shall have the following meaning
when used in this Amendment No. 1:
"Effective Date" shall mean the date upon which each of the
--------------
conditions precedent set forth in Section 4 of Amendment No. 2. shall have
been satisfied.
Section 2. Amendments. Effective on and as of the Effective
----------
Date, Appendix I to the Amended and Restated Participation Agreement is
amended as follows:
(a) All terms defined in Appendix I by cross-reference to defined
terms in the Amended and Restated Reimbursement Agreement shall mean such
defined
2
<PAGE>
terms, including incorporation of any new defined terms, all as set forth
in Amendment No. 2.
(b) The following new terms shall have the following meanings:
"Debt Service (Tranche A) Loans" shall have the meaning ascribed
------------------------------
thereto in Section 5.07(a) of the Amended and Restated Reimbursement
Agreement.
"Debt Service (Tranche A) Loan Suspension Period" shall mean any
-----------------------------------------------
period beginning on the second of two consecutive Calculation Dates for
which the average of the Debt Service Coverage Ratios for each such
Calculation Date and the Calculation Date immediately preceding each such
Calculation Date are less than 1.30:1 and ending upon the earlier of: (a)
the second of two consecutive Calculation Dates for which the average of
the Debt Service Coverage Ratios for each such Calculation Date and the
Calculation Date immediately preceding each such Calculation Date are
greater than or equal to 1.40:1 and (b) July 3, 2000.
"Debt Service (Tranche B) Loans" shall have the meaning ascribed
------------------------------
thereto in Section 5.07(b) of the Amended and Restated Reimbursement
Agreement.
"Maximum Debt Service (Tranche A) Loan Amount" shall mean, for
--------------------------------------------
any Payment Date, the amount set forth for such Payment Date on Schedule
5.02A; provided, that each such amount shall be reduced (but not below
--------
zero) by an amount equal to the amount (if any) of proceeds of insurance or
claims against GEC Alsthom relating to the generator bars.
"Required Maximum Debt Service (Tranche A) Loan Amount" shall
-----------------------------------------------------
mean (a) zero (0) (i) during a Debt Service (Tranche A) Loan Suspension
Period, (ii) following the occurrence of the Debt Service (Tranche A) Loan
Commitment Expiration Date pursuant to clause (a) of the definition thereof
or (iii) in the event that the outstanding amount of Debt Service (Tranche
A) Loans have not been reduced to the then applicable Maximum Debt Service
(Tranche A) Loan Amount by the third Payment Date for which such Maximum
Debt Service (Tranche A) Loan Amount is in effect, and (b) the applicable
Maximum Debt Service
(Tranche A) Loan Amount during all other periods.
3
<PAGE>
Section 3. Reference to and Effect on the Transaction Documents.
----------------------------------------------------
(a) Upon the effectiveness of this Amendment No. 1, each reference in the
Amended and Restated Participation Agreement to "this Agreement",
"hereunder", "hereof", "herein", or words of like import, and each
reference in the Transaction Documents to the Amended and Restated
Participation Agreement, shall mean and be a reference to the Amended and
Restated Participation Agreement as amended hereby and as the same may be
further amended, supplemented and otherwise modified and in effect from
time to time.
(b) Except as expressly provided herein, the Amended and
Restated Participation Agreement shall remain unchanged and in full force
and effect.
(c) The execution, delivery and effectiveness of this Amendment
No. 1 shall not, except as expressly provided herein, operate as a waiver
of any right, power or remedy of any Bank or the Agent under any of the
Loan Documents or the Transaction Documents nor constitute a waiver of any
provision of any of the Loan Documents or the Transaction Documents.
Section 4. Execution in Counterparts. This Amendment No. 1 may
-------------------------
be executed in any number of counterparts and by different parties hereto
in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute one and the same instrument.
Section 5. Expenses. Without limiting its obligations under
--------
Article XV of the Amended and Restated Reimbursement Agreement, the
Borrower agrees to pay, on demand, all reasonable out-of-pocket costs and
expenses of the Agent and the Banks (including, without limitation, the
reasonable fees and disbursements of Skadden, Arps, Slate, Meagher & Flom
LLP, special counsel to the Agent and the LOC Issuers) incurred in
connection with the negotiation, preparation, execution and delivery of
this Amendment No. 1.
Section 6. Headings. Section headings in this Amendment No. 1
--------
are included herein for convenience of reference only and shall not
constitute a part of this Amendment No. 1 for any other purpose.
4
<PAGE>
Section 7. Binding Effect. This Amendment No. 1 shall be
--------------
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
Section 8. GOVERNING LAW. THIS AMENDMENT NO.1 SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
(WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO THE CONFLICTS
OF LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND
ANY SUCCESSOR STATUTE THERETO).
The next page is the signature page.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be executed by their respective duly authorized officers as
of the date first above written.
LESSOR
------
SCRUBGRASS GENERATING
COMPANY, L.P.
By: /s/ Donald C. Sturmer
---------------------
Name: Donald C. Sturmer
Title: Vice President
AGENT
-----
CREDIT LYONNAIS, NEW YORK BRANCH, as Agent and as a
Bank
By: /s/ Robert G. Colvin
--------------------
Name: Robert G. Colvin
Title: Vice President
DISBURSEMENT AGENT
------------------
BANKERS TRUST COMPANY
By: /s/ K. W. Kumer
---------------
Name: K. Wendy Kumer
Title: Assistent Vice President
BOND TRUSTEE
------------
BANKERS TRUST COMPANY
By: /s/ K. W. Kumer
---------------
Name: K. Wendy Kumer
Title: Assistent Vice President
6
<PAGE>
LESSEE
------
BUZZARD POWER CORPORATION
By: /s/William D. Linehan
----------------------
Name: William D. Linehan
Title: Chief Financial Officer
EPC
---
ENVIRONMENTAL POWER CORPORATION
By: /s/William D. Linehan
----------------------
Name: William D. Linehan
Title: Chief Financial Officer
7
<PAGE>
Exhibit 10.85
AMENDMENT NO. 1, dated as of May 22, 1997, among Scrubgrass
Generating Company, L.P., a limited partnership duly organized and validly
existing under the laws of the State of Delaware, as Lessor (the "Lessor"),
------
Buzzard Power Corporation, a Delaware corporation as Lessee (the "Lessee"),
------
Bankers Trust Company, a New York banking corporation, as Disbursement Agent
(the "Disbursement Agent"), and Credit Lyonnais, New York Branch ("Credit
------------------
Lyonnais"), in its capacity as agent for the Banks and the LOC Issuer (in such
capacity, as described more specifically in the Amended and Restated
Reimbursement Agreement referred to below, the "Agent"). (All capitalized terms
-----
used herein shall, unless the context otherwise requires or unless they are
otherwise defined herein, have the meanings assigned to such terms in the
Amended and Restated Disbursement Agreement, as hereinafter defined).
WHEREAS, the Borrower, the Banks, the Agent, National Westminster
Bank Plc, acting through its New York Branch, ("NatWest") in its capacity as the
Bond LOC Issuer (as defined in the Amended and Restated Reimbursement Agreement
referred to below) and Landesbank Hessen-Thuringen Girozentrale, New York
Branch, in its capacity as the Contract LOC Issuer (as so defined), are parties
to an Amended and Restated Reimbursement and Loan Agreement dated December 22,
1995 (as heretofore modified and supplemented and in effect on the date hereof,
the "Amended and Restated Reimbursement Agreement");
--------------------------------------------
WHEREAS, the Lessor, the Lessee, the Disbursement Agent and the Agent
have entered into an Amended and Restated Disbursement and Security Agreement,
dated as of December 22, 1995 (as amended and supplemented and in effect on the
date hereof, the "Amended and Restated Disbursement Agreement");
WHEREAS, the Borrower has requested that the Banks agree to amend the
terms and conditions of the Debt Service Loans, and the Banks are willing to do
so as set forth in Amendment No. 2 dated as of May 22, 1997 to the Amended and
Restated Reimbursement Agreement ("Amendment No. 2");
1
<PAGE>
WHEREAS, the Lessor, the Lessee, the Agent and the Disbursement Agent
desire to amend the Amended and Restated Disbursement Agreement in order to
reflect the amended terms and conditions of the Debt Service Loans;
WHEREAS, the Lessor, the Lessee, the Agent, the Disbursement Agent,
Bankers Trust Company, as Bond Trustee (in such capacity, the "Bond Trustee")
and Environmental Power Corporation, a Delaware corporation ("EPC") have entered
into an Amended and Restated Participation Agreement dated as of December 22,
1995 (as amended and supplemented and in effect on the date hereof, the "Amended
and Restated Participation Agreement"); and
WHEREAS, simultaneously herewith the Lessor, the Lessee, the Agent,
the Disbursement Agent, the Bond Trustee and EPC are entering into Amendment No.
1 to the Amended and Restated Participation Agreement in order to reflect the
amended terms and conditions of the Debt Service Loans.
NOW, THEREFORE, in consideration of the premises and of the
agreements contained herein, the parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used herein shall, unless
-----------
the context otherwise requires or they are otherwise defined herein, have the
meanings set forth in the Amended and Restated Participation Agreement, as
amended by Amendment No. 1 thereto.
In addition, the following term shall have the following meaning when
used in this Amendment No. 1:
"Effective Date" shall mean the date upon which each of the
--------------
conditions precedent set forth in Section 4 of Amendment No. 2. shall have been
satisfied.
Section 2. Amendments. Effective on and as of the Effective Date:
----------
a) Section 5.01 of the Amended and Restated Disbursement Agreement is
hereby amended by replacing the word "and" before the "(iii)" in the first
sentence with a comma and adding the following to the end of the first sentence:
2
<PAGE>
"and (iv) all amounts received by Borrower or Lessee in respect of any
proceeds of insurance or claims against GEC Alsthom relating to the
generator bars."
(b) Clause Eighth of Section 5.02 (a) (x) of the Amended and
------
Restated Disbursement Agreement is amended to read in its entirety as follows:
"Eighth, an amount selected by the Borrower to repay principal of
------
Working Capital Loans and/or subject to Section 5.07(f) of the Amended
and Restated Reimbursement Agreement, Debt Service Loans."
(c) Clause Seventh of Section 5.02 (a) (Y) of the Amended and Restated
-------
Disbursement Agreement is amended to read in its entirety as follows:
"Seventh, (a) to the payment of any Debt Service (Tranche A) Loan, if
-------
necessary, to reduce such loan balance to the Required Maximum Debt
Service (Tranche A) Loan Amount for such Payment Date, and (b) then
to the payment of any outstanding Debt Service (Tranche B) Loan,
provided, however, that in the event that the Required Maximum Debt
-----------------
Service (Tranche A) Loan Amount has been reduced to zero (0) under
clauses (a) (ii) or (a) (iii) of the definition thereof, then amounts
under this clause Seventh shall be applied to the payment of
-------
outstanding Debt Service (Tranche A) Loans and outstanding Debt
Service (Tranche B) Loans, pro rata based on the principal amount of
Debt Service (Tranche A) Loans and principal amount of Debt Service
(Tranche B) Loans, respectively, bears to the aggregate outstanding
principal amount of Debt Service (Tranche A) Loans and Debt Service
(Tranche B) Loans."
3
<PAGE>
(d) A new Schedule IIA in the form of Exhibit A hereto is
hereby added to the Amended and Restated Disbursement Agreement.
Section 3. Reference to and Effect on the Loan Documents.
---------------------------------------------
(a) Upon the effectiveness of this Amendment No. 1, each reference in
the Amended and Restated Disbursement Agreement to "this Agreement",
"hereunder", "hereof", "herein", or words of like import, and each
reference in the Notes and the other Loan Documents to the Amended and
Restated Disbursement Agreement, shall mean and be a reference to the
Amended and Restated Disbursement Agreement as amended hereby and as
the same may be further amended, supplemented and otherwise modified
and in effect from time to time.
(b) Except as expressly provided herein, the Amended and
Restated Disbursement Agreement shall remain unchanged and in full
force and effect.
(c) The execution, delivery and effectiveness of this
Amendment No. 1 shall not, except as expressly provided herein,
operate as a waiver of any right, power or remedy of any Bank or the
Agent under any of the Loan Documents nor constitute a waiver of any
provision of any of the Loan Documents.
Section 4. Execution in Counterparts. This Amendment No. 1
-------------------------
may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument.
Section 5. Expenses. Without limiting its obligations
--------
under Article XV of the Amended and Restated Reimbursement Agreement,
the Borrower agrees to pay, on demand, all reasonable out-of-pocket
costs and expenses of the Agent and the Banks (including, without
limitation, the reasonable fees and disbursements of Skadden, Arps,
Slate, Meagher & Flom LLP, special counsel to the Agent and the LOC
Issuers) incurred in connection with the negotiation, preparation,
execution and delivery of this Amendment No. 1.
Section 6. Headings. Section headings in this Amendment No. 1 are
--------
included herein for convenience of reference only and shall not
constitute a part
4
<PAGE>
of this Amendment No. 1 for any other purpose.
Section 7. Binding Effect. This Amendment No. 1 shall be
--------------
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
Section 8. GOVERNING LAW. THIS AMENDMENT NO. 1 SHALL BE
-------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
(WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO THE CONFLICTS OF
LAW EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND ANY
SUCCESSOR STATUTE THERETO)
The next page is the signature page.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be executed by their respective duly authorized
officers as of the date first above written.
LESSOR
------
SCRUBGRASS GENERATING
COMPANY, L.P.
By: /s/ Donald C. Sturmer
---------------------------
Name: Donald C. Sturmer
Title: Vice President
AGENT
-----
CREDIT LYONNAIS, NEW YORK
BRANCH, as Agent and as a Bank
By: /s/ Robert G. Colvin
---------------------------
Name: Robert G. Colvin
Title: Vice President
DISBURSEMENT AGENT
------------------
BANKERS TRUST COMPANY
By: /s/ K. Wendy Kumer
---------------------------
Name: K. Wendy Kumer
Title: Assistant Vice President
LESSEE
------
BUZZARD POWER CORPORATION
By: /s/ William D. Linehan
---------------------------
Name: William D. Linehan
Title: Chief Financial Officer
6
<PAGE>
Exhibit A
Schedule IIA
[insert same as Schedule 5.02A to RLA]
7
<PAGE>
SCHEDULE 5.02A to Amended and Restated Reimbursement Agreement
<TABLE>
<CAPTION>
*= Calculation Date
(1) Maximum Debt Service
Payment (Tranche A) Loan
Date Amount
- -----------------------------------------------------------
<S> <C> <C>
18 June 3, 1997 3,000,000
19* July 2, 1997 3,000,000
20 August 1, 1997 3,000,000
21 September 3, 1997 3,000,000
22* October 2, 1997 3,000,000
23 October 31, 1997 3,000,000
24 December 4, 1997 3,000,000
25* January 2, 1998 3,000,000
26 February 3, 1998 3,000,000
27 March 4, 1998 3,000,000
28* April 1, 1998 3,000,000
29 May l, 1998 3,000,000
30 June 3, 1998 3,000,000
31* July 1, 1998 2,400,000
32 July 31, 1998 2,400,000
33 September 2, 1998 2,400,000
34* October 2, 1998 2,400,000
35 November 2, 1998 2,400,000
38 December 3, 1998 2,400,000
37* January 4, 1999 1,800,000
38 February 3, 1999 1,800,000
39 March 3, 1999 1,800,000
40* March 31, 1999 1,800,000
41 May 3, 1999 1,800,000
42 June 3, 1999 1,800,000
43* July 1, 1999 1,200,000
44 August 2, 1999 1,200,000
45 September l, 1999 1,200,000
46* October 4, 1999 1,200,000
47 November 2, 1999 1,200,000
48 December 2, 1999 1,200,000
49* December 31, 1999 600,000
50 February 2, 2000 600,000
51 March 2, 2000 600,000
52* March 31, 2000 600,000
53 May 3, 2000 600,000
54 June 1, 2000 600,000
55 July 3, 2000 0
Thereafter
</TABLE>
(1) Corresponds to Payment Dates on Schedule 5.02 to Amended and Restated
Reimbursement Agreement
8
<PAGE>
Exhibit 10.86
DEBT SERVICE (TRANCHE A) LOAN NOTE
New York, New York
$3,000,000.00 June 3, 1997
SCRUBGRASS GENERATING COMPANY, L.P., a Delaware limited
partnership (the "Borrower"), FOR VALUE RECEIVED, hereby promises to
---------
pay to the order of CREDIT LYONNAIS, ACTING THROUGH ITS NEW YORK
BRANCH, (the "Bank"), at its offices located at Credit Lyonnais
----
Building, 1301 Avenue of the Americas, New York, New York 10019, the
principal sum of THREE MILLION DOLLARS AND xx/oo ($3,000,000.00) (or
such lesser amount as shall equal the aggregate unpaid principal
amount of the Debt Service (Tranche A) Loans made by the Bank to the
Borrower under the Amended and Restated Reimbursement Agreement
referred to below) in lawful money of the United States of America and
in immediately available funds, at the times and in the principal
amounts provided in such Amended and Restated Reimbursement Agreement.
The Borrower also promises to pay interest on the unpaid
principal amount of such Debt Service (Tranche A) Loans in like money
and funds at said office until paid in full at the rates per annum
which shall be determined in accordance with the provisions of Article
V of the Amended and Restated Reimbursement and Loan Agreement, dated
December 22, 1995 (as amended, restated, modified, supplemented and in
effect from time to time, the "Amended and Restated Reimbursement
----------------------------------
Agreement") among the Borrower, National Westminster Bank Plc, acting
----------
through its New York Branch, as Contract LOC Issuer and as Bond LOC
Issuer (as each such term is defined therein; and collectively the
"LOC Issuers), the banks that are or may be from time to time be
-------------
listed on Schedule I thereto (the "Banks") and Credit Lyonnais, acting
-----
through its New York Branch, as agent for the LOC Issuers and the
Banks (the "Agent"), said interest to be payable at the times provided
-----
for in the Amended and Restated Reimbursement Agreement. All
capitalized terms used herein and not otherwise defined herein shall
have the meanings specified in the Amended and Restated Reimbursement
Agreement.
1
<PAGE>
This note is one of the Debt Service (Tranche A) Loan Notes
referred to in the Amended and Restated Reimbursement Agreement and is
entitled to the benefits thereof and of the other Loan Documents
referred to therein. The Amended and Restated Reimbursement Agreement
amends and restates a certain Reimbursement and Loan Agreement, dated
as of December 15, 1990 (as amended, supplemented and otherwise
modified and in effect to but excluding the date hereof, the "Original
--------
Reimbursement Agreement"), among the Borrower, National Westminster
-------------------------
Bank Plc, ("NatWest"), acting through its New York Branch, as the
issuer of the Bond Letter of Credit and the Contract Letter of Credit
(as each such term is defined in the Original Reimbursement Agreement)
(in such capacity, the "Original LOC Issuer") and NatWest, as agent
--------------------
(the "Original Agent") for the Original LOC Issuer and the banks
---------------
listed on Schedule I thereto.
As provided in the Amended and Restated Reimbursement
Agreement, this Debt Service (Tranche A) Loan Note is subject to
prepayment, in whole or in part. In case an Event of Default shall
occur and be continuing, the principal of and accrued interest on this
Debt Service (Tranche A) Loan Note may be declared to be due and
payable in the manner and with the effect provided in the Amended and
Restated Reimbursement Agreement.
The date, amount, Type, interest rate and duration of any
Interest Period (if applicable) of each Debt Service (Tranche A) Loan
made by the Bank to the Borrower, each payment and prepayment made on
account of the principal thereof, and all Conversions of such Debt
Service Loan shall be recorded by the Bank on its books and, prior to
any transfer of this Debt Service (Tranche A) Loan Note, endorsed by
the Bank on Schedule I attached hereto or any continuation thereof;
provided, that the failure of the Bank to make any such recordation or
--------
endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Amended and Restated
Reimbursement Agreement or hereunder in respect of the Debt Service
(Tranche A) Loans made by the Bank.
The Borrower hereby waives presentment, demand, protest or
notice of any kind in connection with this Debt Service (Tranche A)
Loan Note.
2
<PAGE>
Anything herein to the contrary notwithstanding, the
obligations of the Borrower under this Debt Service (Tranche A) Loan
Note are special obligations of the Borrower and do not constitute a
debt or obligation of (and no recourse shall be had with respect
thereto against) any Partner or Affiliate of the Borrower, or any
shareholder, partner, officer or director of any such Partner or any
such Affiliate; no action shall be brought against any Partner or any
Affiliate thereof or any shareholder, partner, officer or director of
any thereof as such, and any judicial proceedings the Bank may
institute against the Borrower shall be limited to seeking the
preservation, enforcement, foreclosure or other sale or disposition of
the Liens and security interests now or at any time hereafter securing
the repayment of the Debt Service Loans and performance by the
Borrower of its other covenants and obligations hereunder and under
the other Loan Documents to which it is a party; no judgment for any
deficiency upon the obligations hereunder or under the other Loan
Documents shall be obtainable by the Bank against the Borrower or any
Partner or Affiliate of the Borrower or any shareholder, partner,
officer or director of any thereof; provided, that nothing in this
--------
Debt Service (Tranche A) Loan Note shall be construed to limit in any
respect the validity and enforceability against any Partner of any of
the its obligations under the security Documents to which it is a
party as an obligor (and not merely as signatory for another Person)
or any of the rights of the Bank against the Lessee or Lessee Parent
under any other Transaction Document.
The next page is the signature page.
3
<PAGE>
THIS DEBT SERVICE (TRANCHE A) LOAN NOTE SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK
SCRUBGRASS GENERATING COMPANY,
L.P., a Delaware limited partnership
By: /s/ Donald C. Sturmer
-----------------------
Name: Donald C. Sturmer
Title: Vice President
4
<PAGE>
Exhibit 10.87
DEBT SERVICE (TRANCHE B) LOAN NOTE
New York, New York
$3,000,000.00 June 3, 1997
SCRUBGRASS GENERATING COMPANY, L.P., a Delaware limited
partnership (the "Borrower"), FOR VALUE RECEIVED, hereby promises to
--------
pay to the order of CREDIT LYONNAIS, ACTING THROUGH ITS NEW YORK
BRANCH, (the "Bank"), at its offices located at Credit Lyonnais
----
Building, 1301 Avenue of the Americas, New York, New York 10019, the
principal sum of THREE MILLION AND xx/oo DOLLARS ($3,000,000.00) (or
such lesser amount as shall equal the aggregate unpaid principal
amount of the Debt Service (Tranche B) Loans made by the Bank to the
Borrower under the Amended and Restated Reimbursement Agreement
referred to below) in lawful money of the United States of America and
in immediately available funds, at the times and in the principal
amounts provided in such Amended and Restated Reimbursement Agreement.
The Borrower also promises to pay interest on the unpaid
principal amount of such Debt Service (Tranche B) Loans in like money
and funds at said office until paid in full at the rates per annum
which shall be determined in accordance with the provisions of Article
V of the Amended and Restated Reimbursement and Loan Agreement, dated
December 22, 1995 (as amended, restated, modified, supplemented and in
effect from time to time, the "Amended and Restated Reimbursement
----------------------------------
Agreement") among the Borrower, National Westminster Bank Plc, acting
---------
through its New York Branch, as Contract LOC Issuer and as Bond LOC
Issuer (as each such term is defined therein; and collectively the
"LOC Issuers"), the banks that are or may be from time to time be
-----------
listed on Schedule I thereto (the "Banks") and Credit Lyonnais, acting
-----
through its New York Branch, as agent for the LOC Issuers and the
Banks (the "Agent"), said interest to be payable at the times
-----
provided for in the Amended and Restated Reimbursement Agreement. All
capitalized terms used herein and not otherwise defined herein shall
have the meanings specified in the Amended and Restated Reimbursement
Agreement.
1
<PAGE>
This note is one of the Debt Service (Tranche B) Loan Notes
referred to in the Amended and Restated Reimbursement Agreement and is
entitled to the benefits thereof and of the other Loan Documents
referred to therein. The Amended and Restated Reimbursement Agreement
amends and restates a certain Reimbursement and Loan Agreement, dated
as of December 15, 1990 (as amended, supplemented and otherwise
modified and in effect to but excluding the date hereof, the "Original
--------
Reimbursement Agreement"), among the Borrower, National Westminster
-----------------------
Bank Plc, ("NatWest"), acting through its New York Branch, as the
issuer of the Bond Letter of Credit and the Contract Letter of Credit
(as each such term is defined in the Original Reimbursement Agreement)
(in such capacity, the "Original LOC Issuer") and NatWest, as agent
-------------------
(the "Original Agent") for the Original LOC Issuer and the banks
--------------
listed on Schedule I thereto.
As provided in the Amended and Restated Reimbursement
Agreement, this Debt Service (Tranche B) Loan Note is subject to
prepayment, in whole or in part. In case an Event of Default shall
occur and be continuing, the principal of and accrued interest on this
Debt Service (Tranche B) Loan Note may be declared to be due and
payable in the manner and with the effect provided in the Amended and
Restated Reimbursement Agreement.
The date, amount, Type, interest rate and duration of any
Interest Period (if applicable) of each Debt Service (Tranche B) Loan
made by the Bank to the Borrower, each payment and prepayment made on
account of the principal thereof, and all Conversions of such Debt
Service Loan shall be recorded by the Bank on its books and, prior to
any transfer of this Debt Service (Tranche B) Loan Note, endorsed by
the Bank on Schedule I attached hereto or any continuation thereof;
provided, that the failure of the Bank to make any such recordation or
--------
endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Amended and Restated
Reimbursement Agreement or hereunder in respect of the Debt Service
(Tranche B) Loans made by the Bank.
The Borrower hereby waives presentment, demand, protest or
notice of any kind in connection with this Debt Service (Tranche B)
Loan Note.
2
<PAGE>
Anything herein to the contrary notwithstanding, the
obligations of the Borrower under this Debt Service (Tranche B) Loan
Note are special obligations of the Borrower and do not constitute a
debt or obligation of (and no recourse shall be had with respect
thereto against) any Partner or Affiliate of the Borrower, or any
shareholder, partner, officer or director of any such Partner or any
such Affiliate; no action shall be brought against any Partner or any
Affiliate thereof or any shareholder, partner, officer or director of
any thereof as such, and any judicial proceedings the Bank may
institute against the Borrower shall be limited to seeking the
preservation, enforcement, foreclosure or other sale or disposition of
the Liens and security interests now or at any time hereafter securing
the repayment of the Debt Service Loans and performance by the
Borrower of its other covenants and obligations hereunder and under
the other Loan Documents to which it is a party; no judgment for any
deficiency upon the obligations hereunder or under the other Loan
Documents shall be obtainable by the Bank against the Borrower or any
Partner or Affiliate of the Borrower or any shareholder, partner,
officer or director of any thereof; provided, that nothing in this
--------
Debt Service (Tranche B) Loan Note shall be construed to limit in any
respect the validity and enforceability against any Partner of any of
the its obligations under the Security Documents to which it is a
party as an obligor (and not merely as signatory for another Person)
or any of the rights of the Bank against the Lessee or Lessee Parent
under any other Transaction Document.
The next page is the signature page.
3
<PAGE>
THIS DEBT SERVICE (TRANCHE B) LOAN NOTE SHALL BE CONSTRUED IN ACCORDANCE
WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SCRUBGRASS GENERATING COMPANY, L.P.,
a Delaware limited partnership
By:
-----------------------
Name: Donald C. Stormer
Title: Vice President
4
<PAGE>
DEBT SERVICE (TRANCHE B) LOAN NOTE
New York, New York
June 3, 1997
$3,000,000.00
SCRUBGRASS GENERATING COMPANY, L.P., a Delaware limited
partnership (the "Borrower"), FOR VALUE RECEIVED, hereby promises to
pay to the order of NATIONAL WESTMINSTER BANK PLC, ACTING THROUGH ITS
NEW YORK BRANCH, (the "Bank"), at its offices located at 175 Water
Street, New York, New York 10038, the principal sum of THREE MILLION
AND XX/00 DOLLARS ($3,000,000.00) (or such lesser amount as shall
equal the aggregate unpaid principal amount of the Debt Service
(Tranche B) Loans made by the Bank to the Borrower under the Amended
and Restated Reimbursement Agreement referred to below) in lawful
money of the United States of America and in immediately available
funds, at the times and in the principal amounts provided in such
Amended and Restated Reimbursement Agreement.
The Borrower also promises to pay interest on the unpaid
principal amount of such Debt Service (Tranche B) Loans in like money
and funds at said office until paid in full at the rates per annum
which shall be determined in accordance with the provisions of Article
V of the Amended and Restated Reimbursement and Loan Agreement, dated
December 22, 1995 (as amended, restated, modified, supplemented and in
effect from time to time, the "Amended and Restated Reimbursement
----------------------------------
Agreement"), among the Borrower, National Westminster Bank Plc, acting
---------
through its New York Branch, as Contract LOC Issuer and as Bond LOC
Issuer (as each such term is defined therein; and collectively the
"LOC Issuers"), the banks that are or may be from time to time be
------------
listed on Schedule I thereto (the "Banks") and Credit Lyonnais, acting
-----
through its New York Branch, as agent for the LOC Issuers and the
Banks (the "Agent"), said interest to be payable at the times provided
-----
for in the Amended and Restated Reimbursement Agreement. All
capitalized terms used herein and not otherwise defined herein shall
have the meanings specified in the Amended and Restated Reimbursement
Agreement.
1
<PAGE>
This note is one of the Debt Service (Tranche B) Loan Notes
referred to in the Amended and Restated Reimbursement Agreement and is
entitled to the benefits thereof and of the other Loan Documents
referred to therein. The Amended and Restated Reimbursement Agreement
amends and restates a certain Reimbursement and Loan Agreement, dated
as of December 15, 1990 (as amended, supplemented and otherwise
modified and in effect to but excluding the date hereof, the "Original
--------
Reimbursement Agreement"), among the Borrower, National Westminster
-----------------------
Bank Plc, ("Natwest"), acting through its New York Branch, as the
-------
issuer of the Bond Letter of Credit and the Contract Letter of Credit
(as each such term is defined in the Original Reimbursement Agreement)
(in such capacity, the "Original LOC Issuer") and NatWest, as agent
-------------------
(the "Original Agent") for the Original LOC Issuer and the banks
--------------
listed on Schedule I thereto.
As provided in the Amended and Restated Reimbursement
Agreement, this Debt Service (Tranche B) Loan Note is subject to
prepayment, in whole or in part. In case an Event of Default shall
occur and be continuing, the principal of and accrued interest on this
Debt Service (Tranche B) Loan Note may be declared to be due and
payable in the manner and with the effect provided in the Amended and
Restated Reimbursement Agreement.
The date, amount, Type, interest rate and duration of any
Interest Period (if applicable) of each Debt Service (Tranche B) Loan
made by the Bank to the Borrower, each payment and prepayment made on
account of the principal thereof, and all Conversions of such Debt
Service Loan shall be recorded by the Bank on its books and, prior to
any transfer of this Debt Service (Tranche B) Loan Note, endorsed by
the Bank on Schedule I attached hereto or any continuation thereof;
provided, that the failure of the Bank to make any such recordation or
--------
endorsement shall not affect the obligations of the Borrower to make a
payment when due of any amount owing under the Amended and Restated
Reimbursement Agreement or hereunder in respect of the Debt Service
(Tranche B) Loans made by the Bank.
The Borrower hereby waives presentment, demand, protest or
notice of any kind in connection with this Debt Service (Tranche B)
Loan Note.
2
<PAGE>
Anything herein to the contrary notwithstanding, the
obligations of the Borrower under this Debt Service (Tranche B) Loan
Note are special obligations of the Borrower and do not constitute a
debt or obligation of (and no recourse shall be had with respect
thereto against) any Partner or Affiliate of the Borrower, or any
shareholder, partner, officer or director of any such Partner or any
such Affiliate; no action shall be brought against any Partner or any
Affiliate thereof or any shareholder, partner, officer or director of
any thereof as such, and any judicial proceedings the Bank may
institute against the Borrower shall be limited to seeking the
preservation, enforcement, foreclosure or other sale or disposition of
the Liens and security interests now or at any time hereafter securing
the repayment of the Debt Service Loans and performance by the
Borrower of its other covenants and obligations hereunder and under
the other Loan Documents to which it is a party; no judgment for any
deficiency upon the obligations hereunder or under the other Loan
Documents shall be obtainable by the Bank against the Borrower or any
Partner or Affiliate of the Borrower or any shareholder, partner,
officer or director of any thereof; provided, that nothing in this
--------
Debt Service (Tranche B) Loan Note shall be construed to limit in any
respect the validity and enforceability against any Partner of any of
the its obligations under the Security Documents to which it is a
party as an obligor (and not merely as signatory for another Person)
or any of the rights of the Bank against the Lessee or Lessee Parent
under any other Transaction Document.
The next page is the signature page.
3
<PAGE>
THIS DEBT SERVICE (TRANCHE B) LOAN NOTE SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SCRUBGRASS GENERATING COMPANY, L.P.,
a Delaware limited partnership
By: _______________________
Name: Donald C. Stormer
Title: Vice President
4
<PAGE>
EXHIBIT 11
Environmental Power Corporation
Computation of Earnings Per Share
June 30, 1997
<TABLE>
<CAPTION>
For the three months ended June 30, 1997:
- ----------------------------------------
<S> <C>
Weighted average number of shares
outstanding 11,195,182
------------
Net loss $ (1,701,236)
------------
Loss per share - primary and fully
diluted $ (.15)
------------
<CAPTION>
For the six months ended June 30, 1997:
- ----------------------------------------
<S> <C>
Weighted average number of shares
outstanding 11,206,990
------------
Net loss $ (1,389,806)
------------
Loss per share - primary and fully
diluted $ (.12)
------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AS OF JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,260,460<F1>
<SECURITIES> 0
<RECEIVABLES> 8,233,848<F2><F3>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,760,674
<PP&E> 7,950,955
<DEPRECIATION> 86,279
<TOTAL-ASSETS> 55,620,836
<CURRENT-LIABILITIES> 10,309,416
<BONDS> 7,874,928
0
100
<COMMON> 121,954
<OTHER-SE> 476,921
<TOTAL-LIABILITY-AND-EQUITY> 55,620,836
<SALES> 19,305,394
<TOTAL-REVENUES> 19,305,394
<CGS> 9,065,573
<TOTAL-COSTS> 9,065,573
<OTHER-EXPENSES> 11,479,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142,952
<INCOME-PRETAX> (2,355,806)
<INCOME-TAX> (966,000)
<INCOME-CONTINUING> (1,389,806)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,389,806)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
<FN>
<F1>Cash includes $887,546 which is restricted in use.
<F2>Receivables includes $3,647,752 which are noncurrent.
<F3>Noncurrent receivables of $3,581,736 are subject to a legal proceeding.
</FN>
</TABLE>
