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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of earliest event reported): December 5, 1997
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Environmental Power Corporation
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(Exact name of registrant as specified in its charter)
Delaware 0-15472 04-2782065
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(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801
(Address of principal executive offices)
(603) 431-1780
(Registrant's telephone number, including area code)
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Item 2. Acquisition or Disposition of Assets
On December 5, 1997, the Registrant's subsidiary, Milesburg Energy, Inc.
("Milesburg"), received aggregate proceeds of $15,328,768 from West Penn Power
Company ("West Penn") as consideration under a Buy-Out Agreement between
Milesburg and West Penn dated August 26, 1997. Pursuant to the Buy-Out
Agreement, West Penn purchased Milesburg's rights to an Electric Energy Purchase
Agreement between the parties dated February 25, 1987 for the sum of $15 million
plus 8% interest from the date the Buy-Out Agreement was filed for Pennsylvania
Public Utility Commission approval, aggregating $15,328,767. Furthermore, West
Penn also assumed ownership of and responsibility for the Milesburg Project
facility, which consisted of land along with a decommissioned oil-fired
electric-generating facility erected thereon, for a stated consideration of $1.
The purchase price was determined through arm's length negotiations between
Milesburg and West Penn. There is no material relationship between West Penn
and the Registrant or any of its affiliates, any directors or officers of the
Registrant, or associate of any such director or officer.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(b) Proforma Financial Information
A description of the asset disposition transaction and the entities involved are
set forth in Item 2 above. The Registrant currently estimates that the
aforementioned asset disposition will have the following effect on its 1997
consolidated net income:
<TABLE>
<S> <C>
Proceeds from the disposal of Milesburg project assets $15,000,001
Interest income 328,767
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Increase in other income 15,328,768
Development costs 6,205,706
Fee paid to co-developer 1,405,746
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Increase in other expense 7,611,452
Net increase in income before taxes 7,717,316
Increase in income tax expense (estimated effective rate of 48%) 3,704,312
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Net increase in net income $ 4,013,004
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</TABLE>
For purposes of making the above estimates, the Registrant has assumed that its
effective income tax rate for the year ending December 31, 1997 will be 48%.
However, the actual effective income tax rate cannot be calculated until the
Registrant determines its year end tax position and the allocation of income
between its state taxing jurisdictions.
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At the time of the asset disposition, the Registrant had Milesburg project
development costs included in its property plant and equipment of $9,705,706 and
Milesburg project borrowings included in its secured promissory notes and other
borrowings of $5,858,767. Shortly before the asset disposition, the Registrant
entered into settlements pertaining to certain Milesburg project contingent
obligations. As a result of such settlements, the Registrant's Milesburg
project development costs and Milesburg project borrowings were reduced to
$6,205,706 and $2,358,767, respectively. The asset disposition is expected to
have the following effect on the Registrant's financial position:
<TABLE>
<S> <C>
Proceeds and interest thereon from the asset disposition $15,328,768
Expense of development costs previously capitalized in property plant
and equipment (6,205,706)
Development fee paid to co-developer (1,405,746)
Reduction in deferred tax asset from the use of Federal net
operating loss carryforwards or an increase in current state taxes
payable (3,704,312)
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Net increase in financial position $ 4,013,004
Items not effecting cash at the time of the asset disposition:
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Reduction in deferred tax asset from the use of Federal net
operating loss carryforwards or an increase in current state taxes
payable 3,704,312
Expense of development costs previously capitalized in property plant
and equipment which are being reimbursed to the Registrant from its
subsidiary 2,621,273
Remaining contingent liabilities 621,531
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Net increase in cash and cash equivalents before settlement of
remaining contingent liabilities and payment of state taxes $10,960,120
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The Registrant currently estimates that after the payment of the state taxes,
and after the payment of any remaining contingent liabilities which may be
determined to be payable, the Registrant would have available in excess of $10
million from the Milesburg proceeds. In light of this projected availability of
cash, the Registrant's Board of Directors on December 10, 1997 declared a
dividend on the issued and outstanding shares of Common Stock of the Registrant
in the amount of 90 cents per share payable on January 7, 1998 to Stockholders
of record on December 30, 1997. The dividend consists of a 3 cent per share
dividend for the fourth quarter of 1997 and an 87 cent per share special
dividend declared by the Board of Directors out of the proceeds received from
the Registrant's recent sale of its Milesburg project assets.
Through the date of the asset disposition, the Registrant had capitalized
Milesburg development costs of $1,481,358 during 1997, of which $327,583
represented capitalized salaries and overhead related to the Registrant's
corporate office which are expected to be redirected to
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operating activities in 1998. In addition, during the quarter ended September
30, 1997, the Registrant reversed its provision for the nonrecovery of its
Milesburg project development costs which resulted in an increase to earnings
before taxes of $940,144. Other than the aforementioned items, prior to the date
of the asset disposition, there were no other transactions related to the
Milesburg project which effected either the Registrant's financial position or
results of operations during 1997.
(c) Exhibits
10.01 Buy-Out Agreement dated August 26, 1997 between West Penn
Power Company and Milesburg Energy, Inc. (incorporated by
reference to Exhibit 10.1 of Form 8-K dated September 8,
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1997).
10.02 Joint Development Agreement among Milesburg Energy, Inc.,
U.S. Generating Company and Environmental Power Corporation
(a written request for confidential treatment of certain
proprietary information in this agreement has been filed
with the United States Securities and Exchange Commission)
(incorporated by reference to Exhibit 10.1 of Form 10-Q
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dated November 8, 1996).
10.03 Letter Agreement among Environmental Power Corporation,
Richard Mase, Sylvia B. Mase, Neil W. Hedrick and Antrim
Mining dated August 26, 1997.
Cautionary Statement
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements. Certain statements contained in
this Report, and in any other written or oral statements made by or on behalf of
the Registrant, such as statements concerning the estimated increase in net
earnings, the estimated net increase in financial position and the estimated
increase in cash and cash equivalents resulting from the Buy-Out Agreement and
other statements regarding matters that are not historical facts, are forward
looking statements as such term is defined in the Act. Because such statements
involve risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to, the
inability to predict the course or outcome of any contract or other
negotiations, uncertainties relating to government and regulatory policies and
approvals, volatile and unpredictable developments (including plant outages and
repair requirements), the difficulty of estimating repair and maintenance costs
and timeframes, the uncertainties involved in estimating insurance and implied
warranty recoveries, if any, the uncertainties relating to general economic
conditions and cyclical industry conditions, the amount and rate of growth in
expenses, the legal environment, and the competitive environment in which the
Registrant operates. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Registrant
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENVIRONMENTAL POWER CORPORATION
December 19, 1997 /s/ William D. Linehan
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William D. Linehan
Treasurer and
Chief Financial Officer
(principal accounting officer
and authorized officer)
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Exhibit 10.03
Mr. Richard Mase
Antrim Mining, Inc.
P.O. Box 38
Blossburg, PA 16912
Dear Rich,
This letter will confirm the agreement reached in recent telephone conversations
in which you represented your own interest, as well as that of Antrim Mining,
Neil Hedrick and Sylvia Mase.
In the event of a "buy out" of our power purchase contract or our project
development rights, regardless of the form of such transaction, (referred to as
the "Settlement") we have agreed as follows:
1) Milesburg Energy, Inc. or Environmental Power Corporation will pay the
following sums in full and final payment of all outstanding
obligations under the Purchase and Sale Agreement dated April 30, 1987
between Neil W. Hedrick, Richard Mase and Sylvia B. Mase and
Environmental Power Corporation, the Pledge Agreement dated April 30,
1987 between Environmental Power Corporation and Neil W. Hedrick, Richard
Mase and Sylvia B. Mase and the Notes listed below:
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<CAPTION>
Description of Note Obligation Final Settlement Price
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a) Non-Recourse Secured Note II dated April 30,
1987 in the amount of $4,900,000 from $ 1,620,000.00
Environmental Power Corporation to Neil W.
Hedrick, Richard Mase and Sylvia B. Mase
b) Demand Note dated April 30, 1987 in the amount
of $139,000.00 from Milesburg Energy, Inc. to $ 139,000.00
Richard Mase and Sylvia B. Mase
c) Demand Note dated April 30, 1987 in the amount
of $41,000 from Milesburg Energy, Inc. to Antrim $ 41,000.00
Mining, Inc.
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2) All payments will be made directly from West Penn Power Company or its
parent, unless otherwise agreed to by Richard Mase. Payment for #1 a.
shall be made $162,000 to Neil W. Hedrick and $1,458,000 to Richard Mase
and Sylvia B. Mase.
3) Payments for #1 above will be made on the same schedule and proportionate
to the receipt of payments pursuant to the Settlement arrangement. As
such, you would be paid your pro rata portion of any interest which is
paid to Milesburg Energy, Inc. or Environmental Power Corporation on
payments which are extended into the future.
4) If the amount paid as part of the Settlement is in excess of $15.5
million, Hedrick, Mase and Antrim Mining, Inc., collectively, will
receive an additional amount equal to 12% of the excess over $15.5
million, such amount to be paid in accordance with paragraph 3.
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Mr. Richard Mase
August 26, 1997
Page 2 of 2
5) The Milesburg site will be returned to West Penn Power Company, or its
affiliate.
6) Subject to full receipt of the payment for #1 and #4 (if applicable)
above, all parties agree to release each other from the Purchase and Sale
Agreement dated April 30, 1987 between Neil W. Hedrick, Richard Mase and
Sylvia B. Mase and Environmental Power Corporation, the Pledge Agreement
dated April 30, 1987 between Environmental Power Corporation and Neil W.
Hedrick, Richard Mase and Sylvia B. Mase, the Notes described under #1
above, and the Non-Recourse Secured Note I dated April 30, 1987 in the
amount of $220,000 from Environmental Power Corporation to Neil W.
Hedrick, Richard Mase and Sylvia B. Mase.
7) All parties agree to execute any legal documents which may be required to
consummate the transactions contemplated by this letter agreement.
8) If the Settlement is not entered by December 31, 1997, then this
Agreement may be terminated at any time by Hedrick, Mase and Antrim
Mining. Inc. If any party to the Settlement exercises any right to
terminate the Settlement after it has been entered, then this Agreement
may be terminated at any time by Hedrick, Mase and Antrim Mining. Inc.
I believe the terms and conditions described above are in accordance with the
those reached in our recent telephone conversations. Please confirm the terms
of our Agreement by signing below and do not hesitate to contact me if you have
any questions.
Cordially,
Environmental Power Corporation and
Milesburg Energy, Inc.
By:
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Donald A. Livingston
Vice President
Agreed on__________________________________, 1997 collectively by the following
parties provided a final and binding settlement with West Penn Power Company is
reached not later than December 31, 1997:
ANTRIM MINING, INC.
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Richard Mase
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Sylvia B. Mase ----------------------------
Title:
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Neil W. Hedrick
