Notes
Environmental Power Corporation (EPG), through its subsidiaries, engages in the development, ownership, and operation of renewable energy production facilities in the United States. The company constructs, owns, and operates facilities that utilize animal and food industry wastes to produce biogas and pipeline-grade methane. The biogas is used to produce pipeline-grade methane or marketable biogas, liquefied natural gas, renewable electrical energy or thermal energy, as well as other by-products.EPG stands to benefit from environmental legislation, although such legislation is hard to predict:
"We believe that tax credits, renewable energy credits, pollution offset credits and other such incentives may be available to Microgy_ facilities, and such incentives would serve to enhance the economics of our facilities. In addition, the energy output from Microgy_ facilities may carry a premium price in some areas, as numerous environmentally responsible entities are seeking renewable energy sources. Further, several states have either passed or are considering legislation requiring utilities to obtain a certain percentage of their power from renewable sources.
"In addition to the value generated from the production and sale of renewable gas, we believe that our facilities can generate additional environmental benefits with significant economic and social value by providing a valuable waste management solution for farms and other producers of organic wastes, such as those in the food industry. Federal and state agencies have either passed or are considering regulations that require concentrated animal feeding operations, referred to as CAFOs, to implement changes to their current waste management practices. We believe that these increasingly stringent environmental regulations will be another significant factor creating opportunities for the deployment of our systems.
1APR08
From the annual report (March 17, 2008)"Microgy continues to focus on its strategy of developing large-scale facilities utilizing an ownership model, pursuant to which Microgy will construct, own and operate the facility, either on its own or with one or more financial or operational partners, and seek to profit from the ongoing sale of pipeline-grade methane or biogas produced by the facility.
"Microgy efforts have resulted, most recently, in the start of commercial operations at the Huckabay Ridge facility in Stephenville, Texas, which began commercial operations in the first quarter of 2008. Huckabay Ridge consists of eight 916,000-gallon digesters which operate together to process the manure from approximately 10,000 cows. The gas is treated and compressed to produce pipeline-grade methane that is sold as a commodity and delivered directly into nearby natural gas pipelines. Huckabay Ridge is expected to produce approximately 635,000 million British Thermal Units, or MMBtus, of pipeline-grade methane per year. Output from Huckabay Ridge is currently being sold to the Lower Colorado River Authority and, commencing October 2008, will be sold to Pacific Gas & Electric Company, referred to as PG&E, under a long-term agreement. This arrangement allows Microgy to capture a premium for selling RNG into the California market.
"Other projects under development have a total expected Expected gas production of 5 million MMBtu / year at full operation.
"Furthermore, we believe that the greenhouse gas offset credits that Microgy facilities are expected to produce will be marketable and will further enhance the potential profitability of the facilities. The market for greenhouse gas offsets has increased significantly in the last year in response to emerging regulatory requirements associated with state obligations under the Regional Greenhouse Gas Initiative and the ongoing implementation of Assembly Bill 32 in California, as well as robust demand from companies, municipalities and individuals who are reducing their greenhouse gas impacts on a voluntary basis. Importantly, digester projects that reduce methane emissions compared to baseline conditions produce offsets that qualify under many mandatory and voluntary programs in place today, however, the specific methodologies for calculation and monitoring vary widely.
"While in many cases we are required to share the benefits of such credits with our business partners and investors, we nevertheless expect such offsets to enhance the economics of our facilities. We believe that the market for greenhouse gas offset credits will add value and enhance the financial viability of our facilities.
"We have experienced losses to date, and we anticipate that we will continue to experience losses through at least 2008.
"We expect revenues from sales of greenhouse gas offset credits and other environmental attributes, but the market for such attributes is nascent and may not develop in a manner that allows us to profit from the sales of such credits to the level projected, or at all.
"Because we have not filed patents to protect Microgy intellectual property, we might not be able to prevent others from using Microgy technology; conversely, others who have filed for patent or other protection might be able to prevent Microgy from using its technology.
--
No meaningful valuation numbers...
"Revenues from continuing operations decreased by 47% for the year ended December 31, 2007, compared to the year ended December 31, 2006. This decrease in revenue is due mainly to the change in business model from a model where we sell facilities to third parties, to the current ownership model, where we build, own, and operate facilities for our own account.
The company hasn't turned a profit since it launched its biogas venture. The balance sheet looks somewhat OK until the preferred shares are considered.
Total Debt/Equity (mrq): 1.4
Current Ratio: 3.8
The preferred shares are really nasty for the common shareholders....
"We have numerous outstanding shares of restricted common stock, as well as options, warrants and shares of preferred stock exercisable or convertible into a substantial number of shares of our common stock.
"We will require and are actively seeking significant additional financing, which may result in our issuing a significant number of shares of our common stock or preferred stock, which in turn may dilute the value of your shares.
"Our shares of series A preferred stock have rights and preferences which are superior to those of our common stock, including:
* an accruing dividend of 9% on the stated value of each outstanding share of series A preferred stock, payable before the payment of any dividends on our common stock;
* a preference upon liquidation, dissolution or winding up of Environmental Power equal to two times the stated value of each share of preferred stock, plus any accrued but unpaid dividends;
* the right to consent to certain changes to our certificate Of incorporation and bylaws, and certain other significant corporate actions;
* the right to a payment equal to 150% of the stated value of each outstanding share of Series A Preferred Stock upon certain change-in-control events
.
"Our series A preferred stock may also have a material adverse effect on our financial condition and results of operations. We have agreed not to issue securities senior to or on a par with the series A preferred stock and to limit our ability to incur additional indebtedness while such preferred stock is outstanding, which could materially and adversely affect our ability to raise funds necessary to continue our business. In addition, the series A preferred stock provides for various triggering events, such as our common stock not being listed for trading on the American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market or New York Stock Exchange, the failure to deliver shares of our common stock upon conversion and specified change of control transactions. Several other triggering events are described in the certificate of designations, preferences and rights of the series A preferred stock. If one of these triggering events occurs, we may be required to redeem all or part of the outstanding shares of series A preferred stock at 120% of their stated value (150% in the case of certain change in control transactions), including payment of accrued dividends and penalties. Some of the triggering events include matters over which we may have some, little, or no control. Any such redemption could leave us with little or no working capital for our business. Furthermore, by virtue of their voting power and other rights and preferences, the outstanding series A preferred stock could have the effect of blocking or discouraging certain acquisitions of the company or reducing the proceeds available to common stockholders as a result of any such acquisitions.
"Dividend payments obligations e paid dividends of $872,000 to preferred stockholders during the year ended December 31, 2007 in respect of dividends accrued for a portion of 2006 and the first half of 2007.
In other words, the common shareholder has no chance of recovering anything if the company has serious problems.
Significant insider buying in the $4-$5 range, in December 2007.
Thoughts: Great idea, horrible balance sheet. The company will need to raise money at a time nobody wants to lend it to speculative microcaps, particularly with such restrictive perferred shares outstanding. On the other hand, natural gas is underpriced relative to oil, and renewable natural gas has many atractive qualities, including the potential for carbon offset credits. EPG is a good pick for the speculative portion of a portfolio.
top of page
