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Environmental Power Announces 2009 First Quarter Results and Provides Business Update

Posted on: Friday, 8 May 2009, 07:30 CDT

TARRYTOWN, N.Y., May 8 /PRNewswire-FirstCall/ -- Environmental Power Corporation (Nasdaq: EPG) ("we", "us", or the "Company") today announced results for the first quarter ended March 31, 2009 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:

• Huckabay Ridge improvements complete and facility is reliably producing our RNG(R) product.
• Closed on $5.0 million of convertible notes, and are seeking additional financing.
• Hired Marathon Capital, LLC, to assist us in identifying and managing discussions with entities interested in investing in our projects.
• Aggressively pursued the availability of funds under the federal stimulus package and other federal programs.
• Actively seeking legislation to create tax-credits for the production of renewable natural gas from waste products.
• Evaluating options to reduce our project capital costs and improve project returns.
• Reduced G&A costs by 25% and maintain reductions for 2009.
• Signed 10 year RNG sales agreement with Xcel Energy in Colorado for 915,000 MMBtus/yr at a price reflecting the green attributes of our RNG product.
• Entered into a new technology agreement with Xergi/DBT better reflecting EPG's build/own/operate business model.
• Upon closing of Xergi agreement, Xergi will acquire $3 million of EPG's 14% convertible notes.

We believe these initiatives will ensure that EPC maintains its leadership position in the RNG(R) market.

Market Update

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 product and associated greenhouse gas offset credits.

The announcement of the Xcel RNG(R) sales agreement continues to reinforce the value of our carbon neutral gas as a long term, cost effective solution for utilities and industries to meet their renewable goals. 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 Xcel agreement which has just received Colorado PUC approval. 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 voluntarily reduce their carbon footprint.

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.

Financial Results

The Company had a net loss applicable to common shareholders of $3.3 million, or loss per common share of $0.21, for the quarter ended March 31, 2009, as compared to a net income applicable to common shareholders of $2.8 million, or basic income per common share of $0.18 for the quarter ended March 31, 2008.

The results for the three months ended March 31, 2008 include net income of $7.0 million from discontinued operations which were disposed of during this period. For comparative purposes an analysis from continuing operations is discussed below.

The net loss from continuing operations was $2.9 million for the three months ended March 31, 2009 as compared to a loss of $3.8 million for the three months ended March 31, 2008. The reduction in net loss for 2009 of $.9 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 March 31, 2009 declined to $.7 million from $.9 million in the first three months of 2008. The primary reason for the decline in revenues was a reduction in the amount of greenhouse gas sequestration credits in the first quarter of 2009 when compared to first quarter of 2008. In the first quarter of 2008 the Company received cash payment for vintage years 2005 through 2007 but in the first quarter of 2009 only recognized sales associated with a six month period in 2008. Though the Company continues to generate carbon credits through its normal operations, it only recognizes carbon credit sales revenue when the cash is received.

Operations and maintenance expenses. These expenses declined by $0.3 million in the first quarter of 2009 to $1.0 million from $1.3 million for the first quarter of 2008. The reduction in expenses principally reflects lower operating expenses at Huckabay Ridge.

General and administrative expenses. General and administrative expenses were $2.1 million for the three months ended March 31, 2009, as compared to $3.3 million for the three months ended March 31, 2008, a reduction of $1.2 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 $2.0 million in the first quarter of 2009 as compared to $3.0 million for the first quarter of 2008, a decline of $1.0 million.

Depreciation and amortization expenses. For the first three months of 2009 depreciation and amortization expense was $.4 million as compared to $.3 million for the first three months of 2008. The increase in depreciation is due to the fact that in the 2009 period there was a full quarter of depreciation expense for the Huckabay Ridge facility, as compared to the first quarter of 2008, in which we started recognizing such expense after the Huckabay Ridge facility was put into commercial service in February 2008.

Operating loss. As a result of the factors described above the operating loss from continuing operations during the first quarter of 2009 was $2.8 million as compared to an operating loss of $3.9 million for the first quarter of 2008.

Interest income. Interest income declined to $.02 million in the first three months of 2009, as compared to $.2 million in the first three months 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 $.1 million to $0.3 million for the first three months of 2009, as compared to $0.2 million for the first three months of 2008. The increase in interest expense is due to the fact that in the 2009 period there was a full quarter of interest expense recognized in respect of the Huckabay Ridge facility, as compared to the first quarter of 2008, in which we started recognizing such expense after the Huckabay Ridge facility was put into commercial service in February 2008. Prior to that time, the Company was capitalizing interest expense associated with the facility.

Other income (loss). Other income for the three months ended March 31, 2009 consists of income of $130,000 to reflect a decline in the fair value of certain outstanding warrants due to the adoption of EITF 07-05 as of January 1, 2009.

Going Concern

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 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.

In March 2009, the Company issued $5,000,000 in 14% convertible notes to support project and other company related expenses. As of March 31, 2009, the Company's unrestricted cash and cash equivalents amounted to $4.8 million. The Company continues to aggressively pursue 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 three months ended March 31, 2009, and management's discussion and analysis thereof, is included in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, which was filed with the Securities and Exchange Commission on May 8, 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 general and administrative expenses 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 $4.5 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. 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. 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. Marathon has established an organized process for investors to propose a financial structure, amount, and other terms in the Company or its subsidiaries in a manner which minimizes shareholder dilution. 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. The Company expects to consider any such financing proposals during the second quarter.

Project Status

Huckabay Ridge

At Huckabay Ridge, we have completed comprehensive upgrades to process-instrumentation and controls, the gas conditioning system, and the gas-collection system. These upgrades bring the facility into conformity with the third-generation project design that we are utilizing on our next round of facilities, and we are pleased with the results to date of those upgrades as Huckabay Ridge is currently operating reliably and we expect that it will continue to maintain a high availability factor.

Huckabay Ridge produced salable gas 89% of the time during the month of April and 99% of the time for the first 5 days of May. Production levels have been trending upward as a result of improved operational processes designed to maximize RNG(R) output.

Attributes of improved operations include consistency in meeting specifications for removal of CO2, H2S and H2O, the convergence of production as predicted by our operating model and actual results, and, importantly, the ability of the systems to manage fluctuations in biogas-generation as well as varying ambient conditions.

With enhanced system stability, we have turned our attention to managing other key aspects of this facility to maximize plant RNG(R) product output and profitability. While we are achieving expected biogas production based on substrate concentration being received, we have witnessed a decline in the level of volatile solids contained in our suppliers' substrate materials. Volatile solids in substrates contribute directly to overall biogas production, and hence lower volatile solid concentrations negatively impact production volumes of our pipeline-grade finished product. We believe that the decline in the level of volatile solids is directly related to recessionary forces, as, for example, facilities from which we have been receiving highly concentrated glycerin have temporarily suspended or curtailed operations due to economic forces in their industry and we are receiving reduced shipments of grease trap waste from suppliers as restaurant patronage has declined.

Our current facility design at Huckabay Ridge accommodates a certain volume of substrate, so that if there is a decrease in the level of volatile solids beyond a threshold limit, aggregate gas production also declines.

We are, therefore, undertaking a number of measures at Huckabay Ridge to address substrate quality. Obviously, in cooperation both with existing vendors and with potential new suppliers, we have expanded our reach for higher-grade materials. In addition, we are pursuing an expanded environmental licensing capability to accept a broader scope of substrate materials, 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 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, should we experience these same type of market conditions, RNG(R) output from our facilities will not be affected. On the other hand, should substrate quality return to the higher volatile solids concentrations as previously experienced, the resulting output of RNG(R) will be higher than previously targeted levels.

We expect to meet with the bondholders of our Texas and California tax-exempt debt over the coming weeks to discuss our progress toward confirmation that the Huckabay Ridge facility is capable of achieving its intended performance levels.

Other Texas Facilities

The previously announced Rio Leche and Cnossen projects are slated to resume site 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 currently 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.

California

In September 2008, 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 release of bond proceeds, which remains subject to the achievement of performance milestones at Huckabay Ridge and corporate and subsidiary funding milestones.

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.

Nebraska

Construction at Microgy's Grand Island biogas facility has progressed with major equipment procurement nearly complete. Operations are expected to commence in 2009. Microgy's Grand Island biogas facility will consist of two 1.2 million gallon digesters that will process wastes generated by the Swift Grand Island processing facility. Swift will be providing all the necessary feedstock material, both manure and substrate, required by our process. 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.

Development Opportunity

Colorado

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 reflecting the value of our green RNG versus other renewable alternatives. Since the Company's announcement of the contract last month, the Colorado PUC has approved the agreement.

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.

Xergi

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. In addition, Xergi has agreed to acquire, in a private placement transaction, $3 million of EPG's 14% convertible notes on the same terms as the $5 million of our convertible notes issued in March 2009. Upon closing, Xergi's $3,000,000 payment obligation for the notes will be netted against Microgy's $3,000,000 payment obligation for technology rights for certain upcoming projects, and the agreement will replace all other agreements previously in place between Microgy and DBT.

Under the terms of the new agreement, the Company and its wholly owned subsidiary, Microgy, Inc., will 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

The Company continues to pursue a number of initiatives at the federal level in order to secure parity with other biofuel and renewable electricity producers. Specifically, we are pursuing a renewable gas production tax credit and seeking stimulus funds and other federal funding related to our shovel ready projects.

Pressure has greatly increased at the federal level to promote technologies that reduce carbon emissions and increase the production of renewable electricity. We anticipate an increase in efforts to pass legislation that promotes renewable energy such as the national Renewable Electricity Standard which has been introduced in the Senate. 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 ten year production tax credit for manure based projects is proposed to be the $4.27 per MMbtu tax credit as 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.

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, 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 turbulent economic times.

Management Conference Call

Mr. Richard Kessel, President and CEO, and Mr. Michael Thomas, Senior Vice President and CFO, will comment on these and related items in the conference call scheduled for Friday, May 8, 2009, at 10:00 a.m. EST. Conference Call details:

Conference Call Details When: 10:00am Eastern Time; May 8, 2009 Dial-in: U.S. Toll Free: 888-299-4099 Canadian Toll Free: 866-682-1172 International Toll: 302-709-8337 Verbal Passcode: VK10652 Replay Access #: U.S. 800-355-2355 Code 10652# Int. & Canadian Toll: 402-220-2946 Code 10652# 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.

CAUTIONARY STATEMENT

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.

CONTACT: Company Contact Public Relations Contact Scott Tetenman, John Abrashkin Manager of Project Financing and Treasury Ricochet Public Relations Environmental Power Corporation (212) 679-3300 x121 914 631-1435 x42 stetenman@environmentalpower.com

SOURCE Environmental Power Corporation

Source: PR Newswire

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