Form 10-Q for EVERGREEN ENERGY INC
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18-Aug-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, the terms "Evergreen Energy," "we," "our," and "us" to refer to Evergreen Energy Inc. and its subsidiaries. All references to K-Fuel, K-Fuel?, K-Fuel process, K-Fuel refined coal, K-Fuel refineries, K-Direct?, K-Fuel Plants, K-Fuel facilities, K-Direct facilities and K-Direct plants refer to our patented process and technology.
Forward-Looking Information May Prove Inaccurate
Some of the information presented in this Quarterly Report on Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that include terms such as "may," "will," "intend," "anticipate," "estimate," "expect," "continue," "believe," "plan," or the like, as well as all statements that are not historical facts. Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from current expectations. Although we believe our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from expectations.
For additional factors that could affect the validity of our forward-looking statements, you should read the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007 and the Consolidated Financial Statements contained therein. The forward-looking statements included in this quarterly report are subject to additional risks and uncertainties not disclosed in this quarterly report, some of which are not known or capable of being known by us. The information contained in this quarterly report is subject to change without notice. Readers should review future reports that we file with the Securities and Exchange Commission. In light of these and other risks, uncertainties and assumptions, actual events or results may be very different from those expressed or implied in the forward-looking statements in this quarterly report or may not occur. We have no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Overview
We were founded in 1984 as a clean coal company focused on developing our K-Fuel process. Our goal is to leverage a vertically integrated, coal-based platform to deliver clean, efficient and affordable energy. We intend to meet the specific needs of public utility, industrial and international market customers by providing economical solutions to environmental emission standards compared to other emission standard alternatives. Our proprietary K-Fuel process uses heat and pressure to physically and chemically transform high moisture, low-Btu coals, such as sub-bituminous coal and lignite, into a more energy efficient, lower-emission fuel.
On March 19, 2008, we suspended operations at our Fort Union plant and mine site. This enabled us to focus on future K-Fuel or K-Direct plants by redirecting constrained resources, both capital and human, to focus on the commercialization of our process. Bechtel Power Corporation (Bechtel), completed the enhanced standard processing tower design based upon the results of our testing completed at the Fort Union plant. Additionally, suspending production at this site further enabled us to reduce our cash expenditures. To date, we have de-commissioned the Fort Union boiler, processing towers and other equipment at the site. We are safeguarding the assets and maintaining the plant in a non-operational mode. While we would be able to resume operations at the Fort Union plant to demonstrate the technology or to provide K-Fuel refined coal for test burns at utilities or other industrial sites, we would be required to re-commission the equipment, which could take several months. As time passes and we further de-commission the Fort Union plant, the time and costs to convert it to an operational status will increase. We continue to evaluate redeploying some of the equipment to a future K-Fuel facility site.
In July 2007, we completed a convertible debt offering that provided us with approximately $72 million, net of amounts held in escrow and offering costs. At that time we believed that those proceeds would last approximately 18 months. With our current operating costs and the flexibility to adjust capital spending and the increasing production and profitability from Buckeye, we believe we can continue to meet our obligations for the foreseeable future. As we identify opportunities to construct K-Fuel or K-Direct facilities, further expand Buckeye's production volumes, or accelerate our C-Lock operations, we will also need to obtain additional funding. We plan to seek additional capital from time to time as needed principally through: (1) equity offerings or the exercise of outstanding options and warrants; (2) debt or debt offerings;
(3) partnering with third parties in the construction and operation for some of our large-scale commercial plants through the formation of joint ventures; and
(4) sales of certain assets, including the boiler, which we have classified as "Held For Sale." While we
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believe we will obtain additional capital through one or more of the alternatives described, we can provide no assurance that any of the alternatives will be available to us or be on terms acceptable to us.
We believe because of our decision to suspend operations at our Fort Union plant and mine site, along with the anticipated cash flows from our Buckeye operations, our current cash level is sufficient to support our corporate and other operations for the foreseeable future. Over the last year, we have dramatically reduced our cash utilization principally by suspending operations at our Fort Union plant and mine site, reducing professional fees and other general and administrative costs. A portion of these savings have been offset by further investment in our C-Lock business. We continue to evaluate our cash position and cash utilization and may make additional adjustments to capital or certain operating expenditures.
We are evaluating several projects both domestically and internationally for potential K-Fuel facilities, focusing on terminal facilities, or K-Direct plants, which would be wholly owned or owned through joint ventures. We are evaluating sites primarily in the Mid-West of the United States and are currently negotiating agreements to locate a K-Fuel plant at a terminal site. We believe that a terminal facility offers many benefits, including the following:
? A strategic location with access to rail, barge and trucking transportation options to many potential customers.
? Ability to handle multiple types of coal, from multiple locations as a feedstock to the K-Fuel process.
? Ability to blend K-Fuel refined coal with other coals to meet customer specifications, which we believe provides greater flexibility to potential customers by allowing them to target specifications like heat value or post-combustion characteristics like ash content or mercury, sulfur dioxide, chlorine, nitrogen oxide or other emission criteria.
? Opportunity to leverage any available, existing coal handling, coal blending or other equipment that may already be located on or near the plant site.
On January 8, 2008, following successful test results for product performance and stability, we, our subsidiary Evergreen Energy Asia Pacific Corp., and Sumitomo Corporation agreed with a major Indonesian mining group to proceed with development of engineering specifications, economic evaluation, marketability analysis and further coal tests for a 1.5 million ton per year K-Fuel plant on the Indonesian island of Kalimantan and we anticipate finalizing the scope of the joint Phase III study in the near future, which will include detailed engineering, financial, and marketing studies.
Operations at our Buckeye subsidiary continue to improve as coal production and coal sales prices increase. Our average sales price realization per ton has increased over 35% between the quarters ended June 30, 2008 and 2007. We believe these strong pricing levels will be sustainable for at least the next 24 months. However, we have not captured all the benefits from the coal price increases during the last few months due to longer-termed coal contracts entered into in the past. The coal prices for these contracts are set in the first quarter of that calendar year, based on certain indexes and not adjusted until the first quarter of the following calendar year. We anticipate, based on current coal prices that we will see significant increases in revenue and cash flows from these longer-termed contracts beginning in early 2009. As anticipated increases in production occur, we expect to capture the upside of these increases in pricing and will continue to benefit from higher prices during the remainder of 2008 and future periods. We anticipate a 33% increase in production to levels of more than 800,000 tons sold in 2008 as compared to 600,000 tons in 2007. With additional capital expenditures and continuing enhancements to our underground mine in the later part of 2009, we anticipate more than 1 million tons can be sold in 2009, with another 30% increase possible in 2010. Based on these projections, we believe that the cash flows from Buckeye will be sufficient to fund all consolidated general and administrative and other operational costs for the foreseeable future. If Buckeye experiences unexpected declines in production for any reason, including but not limited to, heavy rains or flooding, slow-downs or suspension of operations for geologic or any other unanticipated reason, it could adversely impact our cash flow from operations.
Our C-Lock subsidiary is enhancing its patented C-Lock technology, a science based approach for massive data collection, correlation and mathematical models to measure and quantify carbon credits and greenhouse gases. The technology uses a web-based solution to measure, document and audit green house gases, for environmental performance, including carbon offsets. A software technology, GreenCert?, provides automated processes for quantifying changes in environmental impact and specifically, greenhouse gas emission reductions and enables:
? Quantification
? Verification
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? Analysis of uncertainty; and
? Audit and compliance reporting for greenhouse gas risks and remediation measures.
C-Lock along with IBM laboratories and research centers have in place the software framework with the above characteristics. This framework is generally applicable to all industries and is then customized for client and industry specifics. We have completed the initial development of The Agricultural Land Carbon Solution and The Utility-Power Generation Carbon Solution for coal fired power plants. We have identified potential customers and are actively marketing both products.
C-Lock continues to identify potential future strategic partners, in addition to IBM Corp. and Enterprise Information Management Corp, to assist in the development, testing and roll-out of it products. Potential partners include companies offering services such as: energy engineering consulting; power generation performance optimization; or environmental consulting; or that offer products relating to sensor systems and devices; data collection devices, or other products that support energy or power plant operations.
We continue to have discussions with several potential buyers for the sale of our boiler, which is classified as "Assets Held For Sale", and anticipate the consummation of this sale in the future. We anticipate that we will utilize these additional proceeds to fund corporate operations and potential future projects. In the future, if we determine that we are unable to sell this boiler, we will evaluate utilizing it in a future K-Fuel plant.
Significant Trends
For the last several years, our operations have been focused on developing our technology and the construction of the Fort Union plant. As a result, we have limited revenues from K-Fuel refined coal and, historically most of our costs are related to general and administrative expenses. With the addition of Buckeye, we have begun to generate revenue and incur more substantial mining costs. In the future, we plan to build, own and operate K-Fuel and K-Direct refineries domestically and internationally, both wholly-owned and through joint ventures. Through C-Lock Technology we expect to generate further revenues from our first-of-its-kind web-based system along with our patented technology that accurately measures greenhouse gases and certifies these environmental improvements as carbon credits. Our plant costs have significantly decreased due to our decision to idle our Fort Union plant in the first quarter of 2008. As our operations expand, we expect our revenue and cost structure will also increase. See our Annual Report on Form 10-K for the year ended December 31, 2007 for further discussion related to our anticipated revenue and expense trends. The following discussion and analysis is focused on the events and trends that we believe have or will in the future have the most significant impact on our business.
RESULTS OF OPERATIONS
During the quarter ended September 30, 2007, we re-evaluated our segments and have expanded our segment presentation to four segments to better reflect how our results of operations are now evaluated and allocations of capital resources are determined. The Plant segment primarily represents revenue and costs related to our Fort Union plant and our mine site in Gillette, Wyoming. The Mining segment primarily represents our mining operations at our Buckeye location and includes certain marketing personnel, the ash disposal facility and the blending facility. The C-Lock segment reflects the operations related to our worldwide sub-license of a technology to standardize the measurement of carbon emissions in energy, agricultural and other business sectors. The Technology segment is comprised of all other operations that use, apply, own or otherwise advance our proprietary, patented K-Fuel process, including our headquarters and related operations, activities of Evergreen Energy Asia Pacific and KFx Technology, LLC, which holds the licenses to our technology. Our operations are principally conducted in the United States. We will continue to evaluate how we manage our business and, as necessary, adjust our segment reporting accordingly.
Revenue
Revenues for the second quarter of 2008 and 2007 were $16.1 million and $12.1 million, respectively.
Revenues in our Mining segment for the second quarter of 2008 and 2007 were $16.0 million and $11.8 million respectively, as follows:
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? Coal revenue includes mined raw and prepared coal sales within our Buckeye operations. Coal revenues were $13.8 million and $9.8 million for the second quarter of 2008 and 2007, respectively. Coal sales for the second quarter ended 2008 were 210,364 tons at $65.54 sales realization per ton sold compared to 204,137 tons at $48.01 sales realization per ton sold, for the second quarter 2007. The increase in the sales realization per ton in the second quarter 2008 was due to higher coal sales prices when compared to the same quarter ended 2007.
? Brokered coal sales, net are derived from revenues less the costs associated with the purchase of coal from other coal producers, which we ship directly to customers. Brokered coal sales, net were $11,000 for the second quarter of 2008 compared to $162,000 for the second quarter of 2007.
? Ash disposal revenue includes revenue generated from the disposal of coal combustion bi-products at our ash pit in Ohio. Ash disposal revenues were $2.1 million for the second quarter of 2008 compared to $1.7 million for the second quarter of 2007. The increase for the second quarter 2008 was due to increased disposal volume for one of our large customers.
K-Fuel refined coal revenue is comprised of sales of our K-Fuel product to third parties. Blended K-Fuel refined coal revenue represents the proportionate revenue related to K-Fuel that has been blended with other raw or prepared coal from our Buckeye operations and sold to third parties. The remaining revenue related to the raw or prepared coal is reflected in Mining revenues. K-Fuel refined coal and blended K-Fuel refined coal sales were $138,000 for the second quarter 2008, and $164,000 for the second quarter 2007 and are included in our Plant segment. We anticipate little to no revenue for the remainder of 2008, due to our decision to idle our Fort Union plant in March 2008.
Revenues in our Mining segment for the six months ended June 30, 2008 and 2007 were $27.7 million and $22.8 million, respectively, as follows:
? Coal sales for the six months ended June 30, 2008 were 372,815 tons at $62.67 sales realization per ton sold compared to 394,448 tons at $47.92 sales realization per ton sold, for the six months ended June 30, 2007.
? Brokered coal sales, net were $67,000 for the six months ended June 30, 2008 compared to $353,000 for the same period ended 2007.
? Ash disposal revenues were $4.2 million for the six months ended June 30, 2008 compared to $3.2 million for the same period ended 2007. The increase for the six months ended June 30, 2008 was due to increased disposal volume for one of our large customers.
K-Fuel refined coal and blended K-Fuel refined coal sales were $429,000 for the six months ended June 30, 2008 compared to $264,000 for the same period ended 2007.
Coal Mining Operating Costs
Our coal mining operating expenses primarily include all costs associated with the mining of coal and costs relating to our coal ash disposal facility at Buckeye, which principally comprises our Mining segment.
Coal mining operating expenses
Coal mining operating expenses include employee-related costs, outside contracted mining costs for our underground mines, internal and external coal transportation costs, blasting, drilling, heavy equipment costs, purchased coal and other mining-related costs. Coal mining operating expenses were $11.8 million and $9.8 million for the second quarters ended 2008 and 2007, respectively. Coal mining operating cost for the six months ended June 30, 2008 and 2007 were $20.5 million and $18.7 million, respectively. The increase during the three months and six months ended June 30, 2008, results primarily from a rise in price of fuel used to mine and transport coal.
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Ash disposal
Ash disposal expenses include employee-related costs, consulting costs, costs of repairs and maintaining culverts and drainage ponds, transportation, and heavy equipment costs and other costs associated with the ash disposal facility. Ash disposal expenses were $1.4 million and $1.1 million for the quarters ended June 30, 2008 and 2007, respectively. Ash disposal expenses for the six months ended June 30, 2008 and 2007 were $2.8 million and $2.2 million, respectively. The increase in the second quarter 2008 and the six months ended June 30, 2008 is in direct correlation with the increase in revenue when compared to the same periods ended 2007.
Plant costs
Plant costs primarily include purchased raw materials, coal transportation, outsourced engineering and technical support, fluid processing, by-products and water disposal, and employee-related costs, which are reflected in our Plant segment.
Plant costs were $2.9 million and $9.4 million for the three months ended June 30, 2008 and 2007, respectively. Plant costs were $14.1 million and $17.3 million for the six months ended June 30, 2008 and 2007, respectively. Plant costs decreased for the three and six months ended June 30, 2008 primarily due to the idling of our Fort Union plant in late March 2008. While we anticipate further plant costs reductions, we will continue to incur various costs related to maintaining the site in a non-operating mode.
General and Administrative
The following table summarizes our general and administrative costs for the
three and six months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(in thousands)
Non-cash, share-based compensation $ 1,484 $ 12,025 $ 3,572 $ 14,748
Employee-related costs 3,143 2,732 6,615 4,907
Professional fees 761 1,022 1,960 2,074
Office and travel costs 1,423 1,583 2,553 2,626
Insurance and other 854 656 1,991 1,393
Total general and administrative $ 7,665 $ 18,018 $ 16,691 $ 25,748
Non-cash, share-based compensation expenses were $1.5 million and $12.0 million for the three months ended June 30, 2008 and 2007, respectively, substantially all of which related to our Technology segment. Non-cash compensation expenses were $3.6 million and $14.6 million for the six months ended June 30, 2008 and 2007, respectively, substantially all of which relate to our Technology segment. The decrease for the three and six months ended June 30, 2008 was due to a one-time $9.8 million charge, for the three and six months ended June 30, 2007, as a result of the termination without cause of a former executive officer and the acceleration of his restricted stock grant pursuant to his employment agreement.
Employee-related costs primarily include salaries and wages, bonuses, benefits, employer payroll taxes and education and training. The following table summarizes our employee-related costs in each of our segments for the three and six months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(in thousands)
Technology $ 1,706 $ 1,533 $ 3,103 $ 1,912
Plant 349 602 1,341 1,651
Mining 638 542 1,265 1,289
C-Lock 450 55 906 55
Total employee-related $ 3,143 $ 2,732 $ 6,615 $ 4,907
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Employee-related costs were $3.1 million and $2.7 million for the three months ended June 30, 2008 and 2007, respectively. Employee-related costs were $6.6 million and $4.9 million for the six months ended June 30, 2008 and 2007, respectively. The increases for the three and six months ended June 30, 2008 in comparison to the same periods in 2007 were primarily due to adding personnel to our C-Lock segment, as well as adding engineering and other personnel in our Technology segment, recruiting fees and an overall increase in our health insurance. Offsetting this increase was a decrease in employee-related costs in our Plant segment as a result of idling our Fort Union plant. We anticipate that due to the expansion of our engineering staff, we will see savings in our out-sourced engineering costs.
Professional fees include legal, audit and accounting, public relations, governmental relations and similar costs. The following table summarizes our professional fees related to each of our segments for the three and six months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(in thousands)
Technology $ 437 $ 721 $ 1,272 $ 1,594
Plant 61 74 256 190
Mining 90 111 156 174
C-Lock 173 116 276 116
Total professional fees $ 761 $ 1,022 $ 1,960 $ 2,074
Professional fees were $761,000 and $1.0 million for the three months ended June 30, 2008 and 2007, respectively. Professional fees were $2.0 million and $2.1 million for the six months ended June 30, 2008 and 2007, respectively. The decrease for the three and six months ended June 30, 2008 compared to the same periods ended June 30, 2007 was due to less outsourced engineering work as a result of increasing our corporate engineering staff in our Technology segment. Offsetting these decreases were increases in professional fees in our C-Lock segment to advance our patented proprietary carbon measuring system.
Office and travel costs include airfare, lodging, meals, office rent, marketing, office supplies, phone, publications, subscriptions and utilities. The following table summarizes our office and travel costs related to each of our segments for the three and six months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(in thousands)
Technology $ 1,007 $ 1,081 $ 1,695 $ 1,820
Plant 85 242 335 377
Mining 65 134 118 244
C-Lock 266 126 405 185
Total office and travel $ 1,423 $ 1,583 $ 2,553 $ 2,626
Insurance and other costs primarily include costs related to our property and commercial liability, other insurance and all costs that cannot be categorized elsewhere and include, among other costs, various business and franchise taxes, licensing fees, repair and maintenance and director expenses. The following table summarizes our insurance and other costs related to each of our segments for the three and six months ended June 30, 2008 and 2007.
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
(in thousands)
Technology $ 391 $ 247 $ 917 $ 633
Plant 105 47 341 199
Mining 195 177 361 327
C-Lock 163 185 372 234
Total insurance and other $ 854 $ 656 $ 1,991 $ 1,393
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Other Income Expense
Interest income
Interest income for the second quarter 2008 was $287,000 compared to $674,000 for the same period ended 2007. Interest income for the six months ended June 30, 2008 was $952,000 compared to $1.7 million for the same period ended . . .
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