Environmental Power Corp.: Second Quarter Results
Environmental Power Announces 2009 Second Quarter Results and Provides Business Update
TARRYTOWN, N.Y., Aug 10, 2009 / -- Environmental Power Corporation ("we", "us", "EPC", or the "Company") today announced results for the second quarter ended June 30, 2009 and is providing the following business update.
During the last quarter, the Company continued in its efforts relating to a number of initiatives in its transformation from a development based company to a sustainable operating company. These initiatives and accomplishments included the following, which will be further described later in this press release:
-- Huckabay Ridge operations are performing at or exceeding targeted
reliability levels and producing RNG(R) in accordance with expectations.
-- We entered into an on-site energy services agreement to allow for
increased RNG(R) sales at Huckabay Ridge of 147,000 MMBtus per year
resulting in improved operating margins.
-- Based on the third generation of our RNG(R) process design which
incorporates the lessons learned from Huckabay Ridge, we have increased
the expected RNG(R) sales volume for each of our development projects.
We are also assessing other alternative means to maximize our RNG sales,
including third party energy services agreements.
-- Marathon Capital, LLC, is actively working to obtain final financing
proposals from prospective investors in support of our announced project
pipeline and for discussions with the California bondholders.
-- In light of the current capital raising activities, we extended from
June 30, 2009 until September 15, 2009 the bondholders option period to
redeem the California tax-exempt bonds in order to facilitate further
discussions with them as to financing options.
-- We are aggressively pursuing the availability of funds under the federal
stimulus package and other federal programs.
-- We continue to gain support for legislation to create tax credits for
the production of renewable natural gas from waste products.
-- We continue to evaluate options to reduce our project capital costs and
operating expenses to improve project returns.
-- We reduced G&A costs by 25%, and expect to maintain these reductions
-- We entered into a new technology agreement with Xergi/DBT, better
reflecting EPC's build/own/operate business model.
-- Xergi acquired $3 million of EPG's 14% convertible notes. Our
financing plans include the possibility of future financings on similar
terms with other parties
We believe the success of these initiatives will ensure that we maintain our leadership position in the RNG(R) market.
We continue to experience very positive market conditions for our RNG(R) product as a source of carbon neutral gas for utility and industrial companies and we anticipate that federal renewable energy incentives, a national Renewable Electricity Standard, and a mandatory cap-and-trade program will increase the demand and value of our RNG(R) product and associated greenhouse gas offset credits.
Because our RNG(R) product can be used as a fuel in existing plant assets, it is available 24/7, does not require new electric transmission capacity and does not impact food related crops, demand for our RNG(R) product remains high. While "brown" natural gas prices remain low, we believe that our principal competition is not this form of gas but rather the cost of other renewables such as wind and solar on an equivalent energy basis. As shown by a recent analysis by the California PUC, biogas at our green premium pricing is still more competitive than other forms of renewable energy. It is to this standard that we price our RNG(R) product as reflected in the existing long term RNG Sales agreements with PG&E and Xcel, both of which received their respective PUC approvals. We are also seeing utilities getting more proactive in pursuit of renewable options as they prepare for a new carbon constrained world and the requirement of a national Renewable Electricity Standard ("RES"). We expect demand for our RNG(R) product to remain high and even increase as both utilities and industrial organizations strive to improve environmental stewardship and address the new regulatory regime related to renewables and carbon.
We believe the market for our unique product which addresses the environmental needs of the agricultural 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.
The Company had a net loss applicable to common shareholders of $2.6 million, or loss per common share of $0.17, for the quarter ended June 30, 2009, as compared to a net loss applicable to common shareholders of $5.3 million, or loss per common share of $0.34 for the quarter ended June 30, 2008. The reduction in net loss for 2009 of $2.7 million is primarily due to a reduction in general and administrative expenses in 2009 as a result of management's cost reduction program and reduced operating expenses at the Company's Huckabay Ridge facility.
Revenues. Revenues for the three months ended June 30, 2009 were essentially unchanged, increasing to $1.2 million during the second quarter of 2009 as compared to $1.1 million during the second quarter of 2008.
Operations and maintenance expenses. These expenses declined by $1.0 million in the second quarter of 2009 to $0.9 million, as compared to $1.9 million for the second quarter of 2008. The reduction in expenses principally reflects lower operating expenses at Huckabay Ridge. At Huckabay Ridge in the second quarter of 2009 start-up and non-recurring expenses were reduced from 2008 levels. Insurance proceeds received in the second quarter of 2009 and the reversal of certain reserves established in 2008 for the costs of disposal of substrate also resulted in lower operations and maintenance costs in the second quarter of 2009.
General and administrative expenses. General and administrative expenses were $1.5 million for the three months ended June 30, 2009, as compared to $3.6 million for the three months ended June 30, 2008, a reduction of $2.1 million. This reduction reflects lower salary expenses as a result of the Company's cost reduction program, lower non-cash compensation expenses in 2009 and reduced development expenses in 2009 as we slowed development efforts to conserve cash pending our fundraising initiatives. Excluding the decline in non-cash compensation expenses, general and administrative expenses declined to $1.4 million in the second quarter of 2009 as compared to $2.5 million for the second quarter of 2008, a decline of $1.1 million.
Depreciation and amortization expenses. Depreciation and amortization expense was $0.4 million for the second quarters of both 2009 and 2008.
Operating loss. As a result of the factors described above, the operating loss from continuing operations during the second quarter of 2009 was $1.6 million, as compared to an operating loss of $4.8 million for the second quarter of 2008.
Interest income. Interest income declined to $0.01 million in the second quarter of 2009, as compared to $0.1 million in the second quarter of 2008. Interest income declined due both to lower invested cash balances and lower interest rates on such balances.
Interest expense. Interest expense increased by $0.3 million to $0.6 million for the second three months of 2009, as compared to $0.3 million for the second three months of 2008. The increase in interest expense was due principally to the fact we accrued $0.3 million in interest expense on $8.0 million original principal amount of our 14% convertible notes which were issued in March and May 2009. Interest expense in the second quarter of 2009 also increased because we expensed $0.1 million related to our Swift facility in Grand Island, Nebraska in connection with our temporary suspension of construction as of April 1, 2009, whereas we had capitalized these costs in the second quarter of 2008.
A complete presentation of the Company's financial results for the three months ended June 30, 2009, and management's discussion and analysis thereof, is included in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, which was filed with the Securities and Exchange Commission on August 10, 2009 and is available on the Company's web site.
Caturano & Company, P.C., our independent registered public accounting firm, reported that the Company's audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 contain 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.
As of June 30, 2009, the Company's unrestricted cash and cash equivalents amounted to $1.8 million. The Company continues to aggressively pursue capital from a number of sources, and hopes to obtain the financing it requires during the third quarter of 2009. The level of funds the Company is able to raise will determine the level of development and construction activity that it can pursue.
The company had previously announced its intention to issue convertible notes 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 $4.5 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. Furthermore, in May 2009, the Company issued $3.0 million of convertible notes on the same terms to Xergi's subsidiary Danish Biogas Technology, our technology rights provider, as payment of project licensing fees. Our financing plans include the possibility of future financings on similar terms.
As previously announced, the Company and its advisor, Marathon Capital, are working to finalize financing proposals from prospective investors. Efforts are on-going related to due diligence and potential financing structures as we seek to secure committed financing for the Company and its project equity requirements.
Project Capacity Update
As a result of our experienced gained at Huckabay Ridge and the plan to utilize other gas conditioning technologies in our future projects, our parasitic use of our RNG(R) product is expected to decrease, resulting in increased RNG(R) product sales volumes as described below.
Project Cnossen Mission Rio Leche Hanford Riverdale Bar 20
Previous MMBtu Sales 635,000 635,000 635,000 732,000 621,000 601,000
Current MMBtu Sales 670,000 670,000 670,000 780,000 639,000 629,000
Percent Increase 6% 6% 6% 7% 3% 5%
The increased revenue from increased RNG(R) product sales will be partially offset by increased parasitic electricity costs.
We are actively assessing the benefits of producing or purchasing lower cost energy for our parasitic requirements at all our development projects, either by utilizing a similar CHP process as at Huckabay Ridge or other means which would result in an additional increase in RNG sales volume, offset by the net cost of energy procured.
As previously reported, comprehensive upgrades to process-instrumentation and controls, the gas conditioning system, and the gas-collection system continue to deliver improved online reliability. Indeed, for both the months of June and July 2009, we were producing product 93% of the time versus a targeted level of 90%. We achieved this level of performance while exceeding pipeline-quality standards for the removal of CO2, H2S and H2O and managing through extreme ambient conditions. These results confirm our confidence in our operating model and give us added confidence in our ability to manage the biogas-generation process as we look forward to our next generation of operating units.
Digester biogas production continues to be at or above calculated levels as the performance and health of the digesters have never been better. Key indicators are tracking with small variations and the predictability of biogas generation and actual results are consistent with our theoretical operating model.
Expected biogas production and RNG(R) production continues to be attainable as a result of successfully managing the array of substrate supply challenges, all driven by a sagging economy. As previously discussed, due to the recession, the quantity and quality of substrate material affected our biogas production rates in the first quarter. We established a substrate sourcing plan to address our needs, executed on the plan and have met or exceeded the biogas production levels anticipated by the plan's phase-in while reducing our related costs. In addition, we are witnessing improvements both in the quantity of materials and their quality beyond that contemplated in our substrate sourcing plan and are encouraged by early indications that these improvements are sustainable. We remain confident in our efforts to manage to our sourcing plan and in the prospect of improved production as the quality of substrate feedstock improves.
A positive result of expanding our reach of suppliers based on this sourcing plan is to improve the pool of suppliers for Huckabay Ridge as well as building our pool of suppliers for our other Texas projects. In addition, when the biodiesel industry turns around we are prepared to take delivery of glycerin, an excellent form of substrate, as project economic conditions dictate.
We are also pursuing an expanded environmental licensing capability at Huckabay Ridge to accept a broader scope of substrate materials. Specifically, we have had discussions with the Texas ECQ and we should be able to modify our existing permit to broaden the type of organic materials we may utilize in our process which will expand the universe of suppliers for our substrate. In addition, we are also working on material handling designs and capacities that can accept varying substrate consistencies, and working to develop additional strategic relationships with larger and potentially long-term substrate providers that will assist us at Huckabay Ridge and our other Texas facilities. We believe that all of these efforts will not only address current unprecedented market conditions but will also allow us greater operating flexibility in the future.
While we believe that the reduced availability of highly concentrated substrates is directly related to recessionary forces, and we fully expect their availability to improve along with an improved economy, designs at all future facilities now take into account the ability to handle lower concentrations of substrate materials. Therefore, we believe that, should we experience these same market conditions, RNG(R) output from our facilities will not be effected. On the other hand, should substrate quality return to the higher volatile solids concentrations as previously experienced, we expect that the resulting output of RNG(R) will be higher than previously targeted levels.
As part of our continuing efforts to optimize RNG(R) sales, we entered into an energy services agreement with Alcor Energy Solutions who will install a combined heat and power (CHP) plant at our Huckabay Ridge project to provide efficient thermal and electrical energy under a long term agreement. This arrangement will allow us to reduce our internal RNG(R) parasitic loads, which had increased due to modifications required by the gas conditioning process, freeing up more gas for sale in the market. The net effect will be an increase in revenue as we now anticipate producing an annual sales volume of 782,000 MMBtus per year, an increase of 147,000 MMBtus per year of RNG(R) sales above the previously announced target. This enhanced revenue stream will be partially offset by increased thermal costs but at a lower value than our RNG(R) product sales under the long term PG&E contract and enhanced due to reduced electric costs for the facility, thereby increasing overall operating margins. The CHP facility is expected to be in operation during the first quarter of 2010.
As previously noted, we are actively assessing the benefits of producing or purchasing lower cost energy for our parasitic requirements at all our development projects, either by utilizing a similar CHP process as at Huckabay Ridge or other means which would result in an additional increase in RNG sales volume, offset by the net cost of energy procured.
Other Texas Facilities
The Rio Leche and Cnossen projects are slated to resume site construction activities in the third 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. Engineering work is being completed for these projects and we are in the process of preparing RFPs for the procurement of long lead-time equipment packages. We currently expect the facilities to be operational during the second half of 2010.
California - Hanford and Riverdale
In September 2008, Microgy Holdings 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 fourth quarter of 2009, with commercial operations commencement targeted for the end of 2010, pending the results of our discussions with the California bondholders and our general financing initiatives. Under an agreement executed on July 31, 2009 between EPC and the bondholders, the parties agreed to extend until September 15, 2009, the date until which the bondholders may exercise their redemption option. The Company and the California bondholders have decided that it is in their respective best interests to extend the period of time during which the option may be exercised, in light of current capital raising activities by Microgy Holdings, Inc. and the Company.
California - Bar 20
We have been investigating various financing alternatives for Bar 20, the third announced facility in California, for which we have all the necessary permits to begin construction. Although the Company returned its tax-exempt volume cap allocation for Bar 20 from last year, we have the option to reapply for a new volume cap allocation once tax-exempt market conditions improve in accordance with California Debt Limit Allocation Committee ("CDLAC") policy. Our intention is to obtain the most favorable financing rates for Bar 20 that allow construction to begin at the earliest date possible, thus minimizing any potential delay waiting for the financial markets to improve.
Construction at Microgy's Grand Island biogas facility progressed through the first quarter of 2009, with major equipment procurement nearly complete. We temporarily suspended construction on this facility effective April 1, 2009, pending the results of our financing initiatives. Operations are expected to commence in 2010, pending the Company securing the equity funds necessary for the completion of this project. The plant is expected to produce 235,000 MMBtu per year of biogas that will be purchased by Swift under a fifteen year gas purchase agreement to offset natural gas consumption at Swift Grand Island. Swift will be providing all the necessary feedstock material, both manure and substrate, required by our process.
Xergi - Our Technology Partner
On April 23, 2009, the Company entered into a Cooperation Agreement with Danish Biogas Technology, A.S. ("DBT") and its parent, Xergi, A.S. ("Xergi"). The new technology agreement better reflects the Company's build / own / operate business model. Xergi acquired, in a private placement transaction, $3.0 million of EPG's 14% convertible notes on the same terms as the $5.0 million of our convertible notes issued in March 2009. Xergi's $3.0 million payment obligation for the notes was netted against Microgy's $3.0 million payment obligation for technology rights for certain upcoming projects, and the agreement replaces all other agreements previously in place between Microgy and DBT. The closing of the issuance of the notes to DBT under this agreement was completed in May 2009.
Under the terms of the new agreement, the Company and its wholly owned subsidiary, Microgy, Inc., continue to have exclusive licensing rights for Xergi's anaerobic digester technology in North America, while reducing the license fees on Microgy's current and future projects. In addition, the Company and Xergi will continue to collaborate on development and use of other technologies and techniques such as the use of micro-organisms and enzymes, which enhance the production of biogas from manure and other organic substrates.
Federal Initiatives Update
We continue our aggressive pursuit of the array of grants, credits, loans and loan-guarantees being made available through the United States Department of Energy, the Department of Treasury, and key State Energy Offices under the American Recovery and Reinvestment Act of 2009, as well as funding opportunities being administered by the US Department of Agriculture under the 2008 Farm Bill. In addition, we continue to pursue a number of initiatives at the federal legislative level in order to secure parity with other biofuel and renewable electricity producers. Specifically, we are pursuing a renewable gas production tax credit that would provide parity as well as promote technologies that reduce carbon emissions and increase the production of renewable energy -- a major focus of the administration. Two bills have been introduced in Congress, Senate Bill S306 and House Bill HR 1158, which would provide a 10-year, $4.27 per MMBtu tax credit for renewable gas, manure based projects such as ours. We are encouraged by the bipartisan support for the bills in the House and Senate and also by the acceptance of biogas as a qualified renewable in the current House and Senate versions of the Renewable Electricity Standard pending in Congress. We extend our continuing thanks to Gas Technology Institute and PG&E Corporation for their leadership in securing the important legislative milestones that have been reached to date at the federal level.
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. We believe that our RNG(R) product continues to be one of the most reliable, cost effective renewable sources of energy that can be used in existing electric production facilities. The uniqueness of our Company, the shovel-ready nature of our projects, and our leadership present a unique opportunity for others to participate in our projects. We like to thank all the investors who have supported our organization, especially during these challenging economic times.
Management Conference Call
Richard Kessel, President and CEO and Micky Thomas, Chief Financial Officer will host the call.
Conference Call Details
When: 10:00am Eastern Time; August 11, 2009
Dial-in: U.S. Toll Free: 888-299-4099
Canadian Toll Free: 866-682-1172
International Toll: 302-709-8337
Verbal Passcode: VK45402
Replay Access #: U.S. 800-355-2355 Code 45402#
Int. & Canadian Toll: 402-220-2946 Code 45402#
The call will be available for 3 days by accessing the number above.
ABOUT ENVIRONMENTAL POWER CORPORATION
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.
Scott Tetenman, Manager of Project Financing and Treasury
Environmental Power Corporation
(914) 631-1435 x42
Public Relations Contact
Ricochet Public Relations
(212) 679-3300 x121
SOURCE Environmental Power Corporation