Environmental Power: 2008 Annual Results and Business Update

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Environmental Power Corporation announced results for the year ended December 31, 2008 and provided a business update.

Business Commentary

During the last quarter, the Company undertook a number of initiatives in its transformation from a development based company to a sustainable operating company. These initiatives include the following, which will be further described later in this press release:

    --  Confirm Huckabay Ridge Operating Performance - Completed system
        modifications to Huckabay Ridge, and are presently in the performance
        test period set forth in the California bond draw conditions, as we have
        achieved targeted RNG(R) production levels.
    --  Enhanced Capital Structure - Pursued a parallel strategy to raise the
        necessary funds for our equity commitments related to our announced
        projects, specifically:
        --  Closed on the sale of $5.0 million of our convertible notes, and are
            seeking further corporate-level financing.
        --  Hired an investment bank, Marathon Capital, LLC, to assist us in
            identifying and managing discussions with entities interested in
            investing in our projects.
        --  Evaluating the availability of funds under the federal stimulus
            package and other federal programs for our shovel-ready projects.
    --  Seek Parity with Other Renewables and Biofuels - Supporting recently
        introduced legislation creating tradable tax-credits for the production
        of renewable natural gas from waste products.
    --  Project Costs - Taking advantage of the decrease in the cost of
        commodities to reduce our project capital costs and therefore improve
        project returns.
    --  Reduce G&A Costs - Reduced G&A costs by 25% and maintain
        reductions for 2009.

These initiatives formed the framework for our decision making and focused the organization at the inflection point in its growth cycle, as we transform our Company into a sustainable operating entity and maintain its leadership position in the RNG(R) sector.

Market Update

We continue to experience very positive market conditions for our RNG(R) product as a source of carbon neutral gas for utilities and industrials, and we also expect that the new administration with its focus on increasing renewable energy production and addressing the nation's carbon footprint through a mandatory cap and trade program will enhance our business prospects. We anticipate federal renewable energy incentives, increased demand for our RNG(R) product with the establishment of a national Renewable Electricity Standard, and a further enhancement of the value of our greenhouse gas offset credits due to the anticipated mandatory cap and trade program.

Our recent announcement of the Xcel RNG(R) sales agreement further reinforces the value of our carbon neutral gas as a long term solution for utilities to meet their renewable goals at appropriate renewable energy prices even during times of low natural gas prices. The increased desire to improve environmental stewardship by a broad range of industries, which have chosen to voluntarily reduce their carbon footprint, has also increased the demand for our RNG(R) product. While focusing on greenhouse gas offset credits in the past, the availability of our RNG(R) product has also generated a new market potential for their use of our RNG(R) as their energy source to lower their carbon footprint.

We believe the market for our unique product which addresses the environmental needs of the agriculture and food processing sectors while creating a versatile and renewable energy product with greenhouse gas offset credits will be a key component in addressing the future energy and environmental needs of the US.

Business Update

Financial Results

The Company had a net loss applicable to common shareholders of $17.3 million, or loss per common share of $1.11, for the year ended December 31, 2008, as compared to a net loss applicable to common shareholders of $18.9 million, or loss per common share of $1.66, for the year ended December 31, 2007. The net loss in 2008 includes income of $7.0 million on discontinued operations in 2008, as compared to a loss from discontinued operations of $6.2 million in 2007. The net income from discontinued operations in 2008 is due to an $8.0 million gain, substantially non-cash in nature, from the disposal of discontinued operations in February 2008. This gain was partially offset by a loss from discontinued operations of $1.0 million in 2008.

The Company's net loss from continuing operations was $23.0 million for the year ended December 31, 2008, as compared to a net loss from continuing operations of $11.2 million for the year ended December 31, 2007. The net loss for 2008 includes a non-recurring, non-cash charge for impairment of goodwill of $4.9 million. Previously, the market price of the Company's common stock and, consequently, its market capitalization were relatively high compared to the book value per share of its common stock. However, this year the Company's market value is substantially below its book value, due principally to the current market price of its common stock. As a result, accounting requirements require the Company to determine whether there is enough market value after covering other net assets on a book basis to cover any of its goodwill. The Company determined that market value was insufficient to cover goodwill, and determined that the write-off was required. The write-off of goodwill is not a reflection on the economics of the Company's projects, which the Company continues to stand behind, but is simply the result of the application of accounting requirements associated with goodwill impairment.

Other factors that affected our operating results from continuing operations in 2008 include:

    --  An increase in revenues from $1.2 million for the year ended December
        31, 2007 to $2.9 million in the year ended December 31, 2008.  The
        increase in revenues reflects revenues from the Company's Huckabay
        Ridge facility which began operations in February 2008 and had revenues
        of $1.7 million for 2008, during which it was in service from February
        2008 to August 2008, when it was taken out of service for repairs and
        equipment upgrades.  Huckabay resumed commercial operations in December
    --  Operations and maintenance expenses increased from $0.9 million for the
        year ended December 31, 2007 to $7.1 million in 2008.  The increase was
        due to activity at Huckabay Ridge and included a substantial amount of
        non-recurring expenses and start up costs relating principally to the
        repairs and upgrades mentioned above.
    --  General and administrative expenses declined to $12.0 million in 2008
        from $12.4 million in 2007.  The reduction was due primarily to
        reductions in payroll expenses and non-cash compensation expense from
        the issuance of stock options and stock appreciation rights.
    --  Depreciation and amortization expense increased to $1.4 million for the
        year ended December 31, 2008 from $0.3 million for the year ended
        December 31, 2007, reflecting principally eleven months of depreciation
        expense for 2008 on the Huckabay Ridge facility, which we began
        depreciating following its completion in February 2008.

Other income and expense declined from income of $1.4 million in 2007 to expense of $0.5 million in 2008. The components of the change include:

    --  Decline in interest income in 2008 of $0.3 million from $0.8 million in
        2007 to $0.5 million in 2008 due to lower investment earnings rates.
    --  Interest expense increased to $1.0 million in 2008 from $0.01 million in
        2007 because, beginning in February 2008, the Company began to expense
        the interest costs related to the construction of Huckabay Ridge, when
        this facility began commercial operations.
    --  The results for 2007 include a one time income amount of $0.6 million
        from the expiration of the statute of limitations on a contingent

On February 29, 2008, Buzzard Power Corporation, a wholly owned subsidiary of Environmental Power Corporation, completed an agreement with Scrubgrass Generating Company, L.P., to terminate Buzzard's leasehold interest in the Scrubgrass waste coal facility. The company recognized a gain of $8.0 million for accounting purposes, of which all but $375,000 was non-cash.

The Company is pleased to report that the Company's Annual Report on Form 10-K for the year ended December 31, 2008 will include disclosure that the Company's internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2008. In 2007, the Company had reported several material weaknesses related to internal control over financial reporting. These weaknesses were remediated during 2008. The Company's conclusion that internal controls were effective as of December 31, 2008 is attested to by the report of the Company's Independent Registered Accounting Firm of Vitale Caturano & Company, P.C.

The Company's unrestricted cash and cash equivalents amounted to $3,157,938 as of December 31, 2008. However, as indicated previously in the risk factors included in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, the Company will need to raise substantial outside capital in the near future to avoid curtailing or ending our business operations. As a result of this, the report of Vitale Caturano & Company, P.C., our independent registered public accounting firm, on the Company's audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 contains a paragraph that indicates that, while the Company's financial statements have been prepared on a going concern basis, there is substantial doubt about its ability to continue as a going concern, and that no adjustments have been made to the financial statements that might result from the outcome of this uncertainty. The Company is aggressively pursuing capital from a number of sources, and hopes to obtain the financing it requires by the end of the first half of 2009. Nevertheless, the Company cannot assure you that all of the necessary additional financing will be available on reasonable terms or in a timely fashion, particularly in the current economic environment, in which capital raising activities are especially challenging. The level of funds the Company is able to raise will determine the level of development and construction activity that it can pursue and whether it will be able to continue as a going concern.

A complete presentation of the Company's financial results for the year ended December 31, 2008, and management's discussion and analysis thereof, is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission on March 16, 2009 and is available on the Company's web site.

Corporate Expenses

The Company has undertaken a prioritization of its activities to focus on the build-out of its announced projects, while maintaining oversight of the other projects in its development pipeline. Specifically, our previously announced plan to reduce cash G&A by 25% has been implemented.

Financing Initiatives

Convertible Note Closing

The company had previously announced its intention to issue convertible bonds as a source of capital. On March 13, 2009, the Company completed an offering of $5.0 million of its 14% Convertible Notes due January 1, 2014, resulting in net proceeds of approximately $4.4 million. The conversion price schedule of the bonds starts at an initial conversion price of $5.40 which increases to $11.00 by the maturity of the bonds. Our financing plans include the possibility of future financings on similar terms.

Project Level Investment

In addition, we have been discussing investment at the project level with potential financial and strategic investors. To that end, the Company recently hired Marathon Capital, LLC to act as our investment advisor to assist us in managing this process and evaluating various potential investments. Capital raised through these initiatives will be applied toward the Company's required equity contribution for each of our projects. As highlighted in previous announcements, the company has five projects in Texas and California that are fully permitted, debt financed, and ready to begin construction upon our securing additional financing and meeting draw conditions.

Project Status

Huckabay Ridge

As previously announced, our Huckabay Ridge facility in Stephenville, Texas resumed the sale of RNG(R) to Pacific Gas & Electric on December 22, 2008 as we began to ramp up the digesters and the modified gas conditioning equipment. During the last week, Huckabay's digesters have been operating at targeted levels, the gas conditioning system has been adjusted for variations in biogas production levels and we are in the performance test period as required by the bondholders as one of the conditions for release of proceeds from the sale of bonds for the Hanford and Riverdale projects in California.

We are extremely satisfied that the efforts made by our team to bring Huckabay Ridge to the level we have always believed could be achieved has been realized. The dedication of our staff and the support and patience that we have received from our shareholders is greatly appreciated.

We, as an organization, have learned many things from this experience that will make us a better and stronger company going forward. This experience also better prepares us for the roll-out of our next generation of projects based on an improved design. We believe that our experience at this level of biogas production will differentiate us from all other participants in the market.

Other Texas Facilities

The previously announced Rio Leche and Cnossen projects are slated to begin construction in the second quarter of 2009, pending the timing of the financing initiatives presently underway. Both facilities are fully permitted and have undergone partial site preparation and other precursor-steps to construction. The tax-exempt bond financing for these projects has already been completed, and the Company is in the process of securing the remaining equity required by the Company to supplement that which the Company has already invested. We expect the facilities to be operational at the end of the second quarter/beginning of third quarter of 2010.

We expect to benefit from the decreases in raw material prices, as commodities such as steel and copper are a significant component of our facilities. In addition, we are presently analyzing the most appropriate contracting philosophy and timing of orders as we prepare for our extensive construction program.


In September of last year, Microgy Holdings, our subsidiary, completed a $62.4 million dollar tax-exempt bond financing in support of the new Riverdale and Hanford facilities in California. All permits are in place for these projects, and final engineering specifications are being completed. Construction is anticipated to begin in the third quarter of 2009, with commercial operations commencing during the fourth quarter of 2010 pending the achievement of performance and funding obligations at Huckabay Ridge.

Bar 20, the third announced facility in California, has received its tax-exempt bond allocation from the California Debt Limit Allocation Committee. We expect to pursue this financing as we have done with the prior projects once there is adequate improvement in the tax-exempt bond market and pending our other financing initiatives.


Our new facility at the JBS Swift meat processing plant in Grand Island, Nebraska, is expected to begin commercial operations during the third quarter of this year. Pending future capital raising results and improvement in seasonal weather conditions, the company expects to resume construction shortly.

Development Opportunity


On March 3, 2009, the Company, through its subsidiary Microgy, announced a long-term RNG(R) supply agreement to Xcel Energy (NYSE: XEL). The 10-year contract, which is renewable for an additional 10 years, is fixed-price at a premium to the current market for conventional natural gas.

RNG(R) to satisfy the agreement will come from Microgy's first Colorado facility, which is expected to begin construction during the first half of 2010. Microgy estimates that all permits, design and funding for the project will have been completed by the end of the first quarter 2010. The project is expected to produce 915,000 MMBtu of RNG(R) per year, enough to generate 125,000 megawatt-hours of electricity, or the equivalent power use of 17,000 homes in Colorado on an annual basis.

Xcel Energy will use the RNG(R) to generate carbon-neutral electricity at the company's Fort St. Vrain Generating Station near Platteville, Colo. The agreement will help Xcel Energy continue to meet its mandates under the state's Renewable Energy Standard (RES) and support the company's efforts to reduce carbon dioxide emissions.

Federal Initiatives Update

As we have previously mentioned, we are pursuing a number of initiatives at the federal level in order to secure parity with other biofuel producers. Initiatives include the introduction of a renewable gas production tax credit as well as seeking to secure stimulus funds or other federal funding related to our shovel ready projects.

In addition, pressure has greatly increased at the federal level to promote technologies that reduce carbon emissions. We anticipate that there will be numerous efforts to pass legislation to promote renewable energy and we continue to have dialogue with policymakers about the opportunity to include biogas production more broadly in new policy initiatives. As a reminder, we do not rely on such subsidies in our project economics but will pursue them where possible.

Two bills have been introduced in Congress, Senate Bill S306 and House Bill HR1158, which provide for tax credits for renewable gas, manure based projects such as ours, landfill projects and woody biomass based projects. The production tax credit for manure based projects is proposed to be the $4.27 per MMbtu tax credit that we previously discussed. A broad coalition has been formed including such firms as Gas Technology Institute, American Gas Association, Waste Management and utilities such as PG&E and Sempra to support this initiative. Meetings with Congressional staff have been on-going.

In addition, we are seeking access to the funds available from the stimulus package or other federal funding. The process is evolving as to how these funds will be deployed on behalf of our new industry but we are excited about the prospect of working with new partners and new applications of our product to address the need for versatile renewable energy.

The other federal initiative that would accelerate our business model is the national Renewable Electricity Standard which has been introduced in the Senate. Our RNG(R) continues to be one of the most cost effective renewable sources of energy, as it is available 24/7, it utilizes the existing gas pipeline infrastructure, and it can be used as a fuel source in existing electric production facilities.

Closing Statement

The organization has been focused and committed to transforming itself from a late stage development company to a sustainable operating entity and leader in its field. In spite of these turbulent times, the uniqueness of our Company, having projects that are shovel ready with the necessary permits and debt financing in place, the commitment of our staff and our predominance in the RNG(R) sector, form the foundation for the interest of others to participate and invest in our projects. We have sought and will always seek to maximize shareholder value and we thank all the shareholders who have supported our organization, especially during these turbulent economic times.


Environmental Power Corporation is a developer, owner, and operator of renewable energy production facilities. Our principal operating subsidiary, Microgy, Inc., develops and operates proven large scale, commercial anaerobic digestion based projects which produce a versatile methane-rich biogas from livestock waste and other organic sources. For more information visit the Company's web site at http://www.environmentalpower.com.


The Private Securities Litigation Reform Act of 1995, referred to as the PSLRA, provides a "safe harbor" for forward-looking statements. Certain statements contained in this press release, such as statements concerning financing, our planned manure-to-energy systems, our sales pipeline, our backlog, our projected sales and financial performance, statements containing the words "may," "assumes," "forecasts," "positions," "predicts," "strategy," "will," "expects," "estimates," "anticipates," "believes," "projects," "intends," "plans," "budgets," "potential," "continue," "targets" "proposed," and variations thereof, and other statements contained in this press release regarding matters that are not historical facts are forward-looking statements as such term is defined in the PSLRA. 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: uncertainties involving development-stage companies; uncertainties regarding corporate and project financing and our ability to continue as a going concern, the lack of binding commitments and/or the need to negotiate and execute definitive agreements for the construction and financing of projects, the sale of project output, the supply of substrate and other requirements and for other matters; financing and cash flow requirements and uncertainties; inexperience with the development of multi-digester projects; risks relating to fluctuations in the price of commodity fuels like natural gas, and our inexperience with managing such risks; difficulties involved in developing and executing a business plan; difficulties and uncertainties regarding acquisitions; technological uncertainties; including those relating to competing products and technologies; risks relating to managing and integrating acquired businesses; unpredictable developments; including plant outages and repair requirements; the difficulty of estimating construction, development, repair and maintenance costs and timeframes; the uncertainties involved in estimating insurance and implied warranty recoveries, if any; the inability to predict the course or outcome of any negotiations with parties involved with our projects; uncertainties relating to general economic and industry conditions, and the amount and rate of growth in expenses; uncertainties relating to government and regulatory policies and the legal environment; uncertainties relating to the availability of tax credits, deductions, rebates and similar incentives; intellectual property issues; the competitive environment in which Environmental Power Corporation and its subsidiaries operate and other factors, including those described in our most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, well as in other filings we make with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

    Company Contact
    Scott Tetenman, Manager of Project Financing and Treasury
    Environmental Power Corporation
    914 631-1435 x42

    John Abrashkin
    Public Relations Contact
    Ricochet Public Relations
    (212) 679-3300 x121

SOURCE: Environmental Power Corporation
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