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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549



                                    FORM 10-K

(Mark one)



   [X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

          EXCHANGE ACT OF 1934



   For the fiscal year ended     December 31, 2000

                            ---------------------------



                                       OR



   [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES

          EXCHANGE OF 1934



          For the transition period from                to

                                        ---------------    ---------------



          Commission File Number        0-15472

                                -----------------------



                         Environmental Power Corporation

             ------------------------------------------------------

             (Exact name of registrant as specified in its charter)



            Delaware                                      04-2782065

 -------------------------------               ---------------------------------

 (State or other jurisdiction of               (IRS Employer Identification No.)

  incorporation or organization)



          500 Market Street, Suite 1-E, Portsmouth, New Hampshire 03801

          -------------------------------------------------------------

                    (Address of principal executive offices)

                                   (Zip code)



                                 (603) 431-1780

               --------------------------------------------------

               Registrant's telephone number, including area code





           Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.01 PAR VALUE



Indicate by check mark whether the registrant (1) has filed all reports required

to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during

the preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing

requirements for the past 90 days.



YES [X]  NO [ ]



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405

of Regulation S-K is not contained herein, and will not be contained, to the

best of registrant's knowledge, in definitive proxy or information statements

incorporated by reference in Part III of this Form 10-K or any amendment to the

Form 10-K. [X]



State the aggregate market value for the voting stock held by non-affiliates of

the registrant: The aggregate market value, computed by reference to the closing

price of such stock on March 22, 2001, was $2,019,698.



Indicate the number of shares outstanding of each of the registrant's classes of

common stock, as of the last practicable date: On March 22, 2001 there were

11,406,783 outstanding shares of Common Stock, $.01 par value, of the

registrant.



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                       DOCUMENTS INCORPORATED BY REFERENCE





Portions of the definitive Proxy Statement to be filed with the Securities and

Exchange Commission and delivered to shareholders in connection with the Annual

Meeting of Shareholders to be held on June 26, 2001 are incorporated by

reference into Part III of this Annual Report filed on Form 10-K. The portions

of the Proxy Statement under the headings "Audit Committee Report", "Report of

the Compensation Committee" and the "Stock Performance Graph" are not

incorporated by reference and are not a part of this Form 10-K Report.



                                TABLE OF CONTENTS



DESCRIPTION OF CONTENTS                                                   PAGE #



PART I:

Item 1.     Business                                                         3

Item 2.     Properties                                                      12

Item 3.     Legal Proceedings                                               12

Item 4.     Submission of Matters to a Vote of Security Holders             12



PART II:

Item 5.     Market for Registrant's Common Equity and Related

            Shareholder Matters                                             13

Item 6.     Selected Financial Data                                         16

Item 7.     Management's Discussion and Analysis of Financial

            Condition and Results of Operations                             17

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      33

Item 8.     Financial Statements and Supplementary Data                     34

Item 9.     Disagreements on Accounting and Financial Disclosure            34



PART III:

Item 10.   Directors and Executive Officers                                 35

Item 11.   Executive Compensation                                           36

Item 12.   Security Ownership of Certain Beneficial Owners and Management   36

Item 13.   Certain Relationships and Related Transactions                   36



PART IV:

Item 14.    Index to Financial Statements, Exhibits, and Reports

            on Form 8-K                                                     37

            Signature Page                                                  42





                              CAUTIONARY STATEMENT



This Annual Report on Form 10K contains "forward-looking statements", as defined

by the Private Securities Litigation Reform Act of 1995, in order to provide

investors with prospective information about the Company. For this purpose, any

statements which are not statements of historical fact may be deemed to be

forward-looking statements. Without limiting the foregoing, the words

"believes", "anticipates", "plans", "expects" and similar expressions are

intended to identify forward-looking statements. There are a number of important

factors which could cause the Company's actual results to differ materially from

those indicated by the forward looking statements. These factors include,

without limitation, those set forth below under the caption "Item 7. - Certain

Factors That May Affect Future Results".



                                       2
<PAGE>

                                     PART I



ITEM 1.  BUSINESS



Environmental Power Corporation (individually "EPC" or consolidated "the

Company") is primarily engaged in leasing an electric generating facility fueled

by waste coal. In recent years, the Company was also engaged in the development

and ownership of electric generating facilities fueled by waste coal. The

Company's business plan has been driven by the identification and evaluation of

attractive independent power projects in various stages of development. During

its project development activities, the Company, either acting alone or in

conjunction with others, has selected and arranged for the acquisition of sites,

obtained control over a portion of the waste coal fuel sources, negotiated

contracts for the design and construction of the facilities and the sale of

output to the utilities purchasing the power, arranged for financing, and

negotiated contracts for the operation and maintenance of the projects.



The Company owns a 22 year leasehold interest in an approximately 83 Mw (net)

waste coal-fired electric generating facility (the "Scrubgrass Project") located

in Pennsylvania, the lease for which commenced on June 30, 1994. Previously, the

Company held varying ownership interests (100% to 40%) in an approximately 51 Mw

(net) waste coal-fired electric generating facility (the "Sunnyside Project")

located in Utah and owned the development rights to an existing decommissioned

43 Mw (net) coal-fired electric generating facility (the "Milesburg Project")

located in Pennsylvania. The Company sold its remaining interest in the

Sunnyside Project on December 31, 1994 and is presently involved in litigation

with the Purchasers to collect the balance of the Purchasers' obligations for

the sale. The Company sold its development rights for the Milesburg Project on

December 5, 1997 to the utility which had contracted to purchase electricity

from such project. The Company's projects are discussed further in the following

sections.



    Scrubgrass



The Scrubgrass Project, located on a 600 acre site in Venango County,

Pennsylvania, is a waste coal-fired electric generating station (the "Facility")

which was constructed by Bechtel Power Corporation. The construction contract

provided for a guaranteed net electrical output of 82.85 MW and final completion

was achieved in June 1994.



On June 30, 1994, Buzzard Power Corporation ("Buzzard"), a subsidiary of EPC,

entered into an agreement to lease the Facility from Scrubgrass Generating

Company, L.P. (the "Lessor"), a joint venture of certain wholly owned indirect

subsidiaries of PG&E Corporation and Bechtel Generating Company, Inc. On October

20, 1998, Bechtel Generating Company, Inc. transferred its interest in the

Lessor to a wholly owned subsidiary of Cogentrix Energy, Inc. The lease provides

for an initial term of 22 years with a renewal option for up to 3 years.

Pursuant to the lease, the Lessor assigned to Buzzard all principal project

agreements and its rights and obligations thereunder including, but not limited

to, the power purchase agreement, operations and maintenance agreement,

limestone supply agreements, ground lease agreements, fuel agreements and

transportation and materials handling agreements. EPC has pledged Buzzard's

common stock to the Lessor as security for Buzzard's performance of its

obligations as lessee. PG&E National Energy Group ("NEG"), a wholly owned

indirect subsidiary of NEG, Inc., which in turn is a wholly owned indirect

subsidiary of PG&E Corporation, manages the Scrubgrass Project.



PG&E Operating Services Company (the "Operator"), a wholly owned indirect

subsidiary of NEG, Inc., operates the Facility pursuant to a 15-year Operating

and Maintenance Agreement (the "O&M"). The Operator prepares a budget for all

operating expenses, including a fixed management fee, and certain targeted

output performance levels, which is approved annually. Under the terms of the

O&M, the Operator can incur a liability not to exceed its management fee if the

Operator does not achieve certain targeted output performance levels.



Buzzard maintains a long-term supply agreement with Quality Aggregates, Inc. to

supply the Scrubgrass Project with limestone which, in September 1999, was

extended through the year 2008 and which may be extended up to 10 additional

years. Buzzard also maintains a 15-year agreement with Savage Industries, Inc.

for the transportation of fuel, ash and limestone which expires in 2005. The

costs established under these agreements will escalate at partially fixed and

partially indexed rates.



                                       3
<PAGE>

Buzzard sells electric output to Pennsylvania Electric Company ("PENELEC"),

pursuant to a twenty-five year Power Sales Agreement ("PSA") which commenced in

June 1993, at fixed rates initially averaging 4.68 cents per kwh and which

escalate at five percent per year through calendar year 1999. For the years 2000

through 2012, the PSA provides for a rate equal to the greater of a scheduled

rate or a rate based on the PJM Billing Rate (the monthly average of the hourly

rates for purchases by the General Public Utilities Group ("GPU") from, or sale

by GPU to, the Pennsylvania-New Jersey-Maryland Interconnection). For the years

2013 through 2015 and 2016 through 2018, if the renewal term option is

exercised, the PSA provides for a rate equal to the lower of the average monthly

PJM Billing Rate or the rate paid for the calendar year 2012 adjusted annually

by the percentage change in the Gross National Product Deflator less one

percent. The Facility achieved commercial operation on June 8, 1993.



Since October 1995, the Company had been involved in a legal proceeding with

PENELEC whereby, among other complaints, the Company alleged that PENELEC failed

to pay the Lessor and Buzzard contract rates for power in excess of 80 MW

produced by the Facility. On August 3, 1999, the Lessor and Buzzard (the

"Plaintiffs") jointly entered into a settlement agreement with PENELEC to

terminate the ongoing litigation. The settlement agreement did not become

effective until the date PENELEC obtained a final non-appealable Order of the

Pennsylvania Public Utility Commission ("PAPUC") approving the settlement

agreement in form and substance acceptable to PENELEC (the "Effective Date").

Under the terms of the settlement agreement, in full settlement of all alleged

claims, PENELEC agreed to pay the Plaintiffs for all previous net deliveries of

electric energy from the Scrubgrass facility in excess of 80 MW at rates set

forth in the PSA, minus the total payments PENELEC previously made at 90% of a

market based rate, plus interest at the legal rate of 6%. PENELEC also agreed in

the settlement agreement to pay for future net deliveries of electric energy at

the rates set forth in the PSA subject to, among other conditions, certain

annual and hourly limits, with energy purchased in excess of such limits paid

for at a market based rate. On January 27, 2000, the PAPUC issued an Order

adopting the settlement agreement. After a 30 day period without any appeals,

the Order became final and non-appealable on February 27, 2000, the Effective

Date. On March 24, 2000, PENELEC remitted the outstanding balances due under the

settlement agreement for previous net deliveries of electric energy and interest

which amounted to approximately $3,687,000 and $608,000, respectively. The

Company reported these revenues in its Consolidated Statement of Operations for

2000.



Buzzard deposits all revenues earned under the PSA into an account administered

by a disbursement agent. Before Buzzard can receive cash generated by the

Scrubgrass Project, all operating expenses, base lease payments (which are

described below), certain maintenance reserve and other subordinated payments

must be satisfied. Buzzard, as lessee, is required to pay the Lessor, in

addition to a specified base rent, which consists of all of the Lessor's debt

service, equity repayment, base return on equity and related expenses, an

additional rent of 50 percent of the net cash flows Buzzard receives from the

Scrubgrass Project's operations. Buzzard is not required to fund operating

losses, or otherwise invest further, from sources outside of the Scrubgrass

Project.



On December 22, 1995, the Lessor restructured certain of the Scrubgrass

Project's debt, the primary effect of which was to extend the term of its demand

debt through 2004 and extend a portion of its junior subordinated debt through

1999. In connection with the Lessor's debt restructuring, Buzzard was able to

refinance a portion of its own current liabilities with a variable rate term

obligation which matures through 2004. Since the Lessor's debt restructuring,

Buzzard has continued to fund the Lessor's debt service obligations as a base

lease payment and its own term obligation which are described in the following

table:



                                       4
<PAGE>

<TABLE>

<CAPTION>



                                         BALANCE AT      BALANCE AT                              MATURES

    DESCRIPTION OF THE OBLIGATION         12/31/00        12/31/99           INTEREST RATE       THROUGH

-----------------------------------------------------------------------------------------------------------

<S>                                    <C>              <C>             <C>                        <C>

Lessor's term debt obligations:

   Variable rate tax-exempt bonds      $135,600,000     $135,600,000    Quoted Bond Rates          2012

   Swap rate term loan                   12,541,087       14,412,000    Swapped LIBOR + 1.250%     2005

   Variable rate term loan               10,061,427       10,061,427    LIBOR + 1.250%             2004



Buzzard's term debt obligation:

   Variable rate term loan                1,188,573        1,188,573    LIBOR + 1.250%             2004

</TABLE>



The Lessor's debt obligations and Buzzard's debt obligation incur interest at

either quoted rates or variable rates which are based on the London Interbank

Offering Rate ("LIBOR"). On December 22, 1995, the Lessor entered into an

interest rate swap arrangement which fixed the LIBOR component for the life of

its swap rate term loan at 6.4225%. As a result, the interest rate for the swap

rate term loan was fixed at 7.5475% (LIBOR + 1.125%) through December 31, 2000

and 7.6725% (LIBOR + 1.25%) for the remaining term of the obligation. The

Lessor's tax-exempt bonds incurred interest at floating rates ranging from 3.35%

to 6.15% and 2.8% to 4.2% during 2000 and 1999, respectively. Under the terms of

the Lessor's loan agreements, the Company is subject to various customary

financial and operating covenants. As of December 31, 2000 and 1999, NEG

believes the Company was in compliance with all such covenants.



During 1997, the Company's planned maintenance outage was significantly extended

because the Company needed to perform a complete rewind on the Facility's

generator. The Facility's extended outage created an extensive cash flow

deficiency because of the loss of revenues plus associated costs and expenses.

The Company addressed this cash deficiency by securing additional debt

financing, negotiating agreements with the generator manufacturer, and utilizing

available restricted cash which are each discussed as follows:



      Term Credit Facility - In June 1997, the Lessor entered into a three-year

      credit facility with the lenders of the Scrubgrass Project to provide up

      to $3 million to fund general debt service expenses. The maximum allowable

      borrowings under this credit facility were $3 million through July 1,

      1998. On July 1, 1998, the maximum allowable borrowings began reducing in

      $600,000 increments every six months through July 3, 2000, at which time

      the credit facility expired. As of December 31, 2000 and 1999, the

      outstanding borrowings under this credit facility, which were advanced to

      the Company by the Lessor, amounted to $-0- and $600,000, respectively.



      Agreements with Generator Manufacturer - Prior to the 1997 outage, the

      Company negotiated extended financing terms with GEC Alsthom ("GEC"), the

      manufacturer of the Facility's generator, which allowed the Company to pay

      the $660,000 cost of the generator repair in six annual installments of

      $110,000, without interest, beginning in May 1997. On April 15, 1998, the

      Company reached an agreement with GEC which modified the terms of its

      original financing contract. Under the terms of the original contract, the

      Company had yet to pay five installments of $110,000 and had also agreed

      to pay an additional $75,000 bonus to GEC for completing its work ahead of

      a pre-established schedule. Furthermore, the Company engaged GEC to

      perform certain maintenance procedures to the generator during the 1998

      scheduled outage at the Facility. Under the terms of the revised agreement

      with GEC, as payment in full for the work performed during the 1998 outage

      and for the five remaining installments of $110,000 and $75,000 bonus owed

      under the original contract, the Company agreed to pay GEC a total of

      $450,000 over a four-year period. The revised agreement provides that

      $50,000 was payable upon the completion of the work during the scheduled

      1998 plant outage and that $100,000 is payable upon each of the first four

      anniversaries of the first payment thereof. As of December 31, 2000 and

      1999, the Company has recorded on its balance sheet the next installment

      of $100,000 in its other current liabilities and the present value of the

      remaining installments, discounted at the Facility's incremental borrowing

      rate (6.75%), which amounted to $90,446 and $176,948, respectively, in its

      other borrowings. The Company is recognizing the balance of the remaining

      installments under the revised agreement, which



                                       5
<PAGE>

      amounted to $9,554 and $23,052 as of December 31, 2000 and 1999,

      respectively, as interest expense over the remaining term of the financing

      contract with GEC. During 1998, the Company recognized, through a

      reduction of its operating expenses, the reduction of the present value of

      the future installments due to GEC, which amounted to $169,045. The

      Company also recognized interest expense of $13,498, $20,328 and $26,661

      during 2000, 1999 and 1998, respectively, under the agreements with GEC.



      Utilization of Restricted Cash - The Company utilized its restricted cash

      reserves to finance most of its additional maintenance expenditures

      incurred during the 1997 outage since substantially all of such

      expenditures were deemed to be major overhauls. Under the terms of its

      project agreements, the Company began replenishing these restricted funds

      over a seven-year period beginning in 1998.



The Environmental Protection Agency and the Pennsylvania Department of

Environmental Protection (the "Regional Authorities") grant Nitrogen Oxide Ozone

Transport Region Budget Allowances ("NOx Credits") to the Company based on

numerous factors which primarily pertain to the design and operation of the

Facility. The Company is required annually to maintain sufficient NOx Credits

which equal or exceed the quantity of its nitrogen oxide emissions during a

specified seasonal period (the "ozone season"). If the Company's nitrogen oxide

emissions exceed its available NOx Credits, the Company would be subject to

fines by the Regional Authorities. During 1999, the Company installed machinery,

with a cost of $811,568, which is expected to significantly reduce its nitrogen

oxide emissions. As such, the Company anticipates that it may not require a

portion of its future NOx Credits to maintain its compliance with the applicable

regulations. Because NOx Credits are transferable and marketable, the Company

may sell its available NOx Credits or purchase additional NOx credits that are

necessary to meet the applicable regulations.



During 1998, the Company expected to receive an aggregate of 1,549 NOx Credits

during 1999 and 2000, which would be available for use during the 1999, 2000,

2001 and 2002 ozone seasons. Therefore, during December 1998 and January 1999,

the Company entered into commitments to sell an aggregate of 839 NOx Credits,

which the Company projected would not be needed to comply with the applicable

regulations during those ozone seasons. However, the Company was informed in

1999 that 111 projected available NOx Credits would not be received and,

accordingly, the Company terminated the sales commitment for that portion of the

NOx Credits. During 2000, the Company received an aggregate of 1,077 NOx Credits

for the ozone seasons in 2000, 2001 and 2002, of which 546 NOx Credits were

subject to existing sales commitments and sold for $1,161,888. During 1999, the

Company received 361 NOx Credits for the 1999 ozone season, of which 182 NOx

Credits were subject to existing sales commitments and sold for $629,720. The

Company also purchased 15 NOx Credits in 2000 for $5,550 and 36 NOx Credits in

1999 for $22,760 which were required to comply with the applicable regulations

during those ozone seasons. The Company has included the net proceeds from sales

of NOx Credits of $1,156,338 and $606,960 for 2000 and 1999, respectively, in

other income on the accompanying financial statements. As of December 31, 2000,

the Company has 180 NOx Credits available for the 2001 and 2002 ozone seasons.



    Sunnyside



The Sunnyside Project is an approximately 51 Mw (net) waste coal-fired facility

at a site located adjacent to the Sunnyside Coal Mine in Carbon County, Utah

which was constructed by Parsons Main, Inc., ("PMI"). The facility reached

commercial operation on November 19, 1993. The Sunnyside Project is owned by

Sunnyside Cogeneration Associates ("SCA"), a joint venture in which the Company

owned varying majority interests from 100% to approximately 70% until September

28, 1994 and thereafter an approximate 40% interest until December 31, 1994 at

which time the Company sold its remaining interest in SCA to B&W Sunnyside, Inc.

and NRG Sunnyside, Inc. (collectively, "the Purchasers").



In connection with the sale, the Company received total consideration of

$6,042,294 which included cash of $2,792,294 received on January 5, 1995 and

promissory notes aggregating $3,250,000, bearing interest at 10% per annum,

received on December 31, 1994. In addition, after audits were performed to

verify certain financial information for SCA, the Purchasers were required to

pay a purchase price closing adjustment of $1,061,107 in 1995. Under the terms

of the promissory notes, interest is payable quarterly to the Company and

aggregate



                                       6
<PAGE>

principal payments of $312,500, $1,187,500 and $1,750,000 were due on September

30, 1995, December 31, 1996 and December 31, 1997, respectively. To date, the

Purchasers have made principal payments aggregating $312,500 and quarterly

interest payments through March 31, 1996 pursuant to the promissory notes. The

Purchasers have also made aggregate payments of $708,000 toward the purchase

price closing adjustment. However, as more fully described in Item 3. - Legal

Proceedings, the Purchasers commenced a legal proceeding with the Company on May

3, 1996. Pending the resolution of the legal proceeding, the Purchasers have

withheld all payments of principal and interest due on the promissory notes

since June 1996. The Purchasers are also disputing the balance of the purchase

price closing adjustment in the legal proceeding. As of December 31, 2000 and

1999, the Company had aggregate uncollected balances for principal, interest and

the purchase price closing adjustment due from the Purchasers of $4,686,925 and

$4,393,175, respectively, which are not recognized on the Company's Consolidated

Balance Sheets. (the "Purchasers' Obligations"). The Company was entitled to

interest income from the Purchasers of $293,750 during each of 2000, 1999 and

1998. However, in light of the Company's interest income reporting policy, the

Company did not recognize interest income from the Purchasers during these

periods.



Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114, as

amended by SFAS No. 118, the Company is required to recognize impairment losses

on loans whenever changes in circumstances indicate that the carrying amounts of

the loans exceed their fair market values. In the case of the Purchasers'

Obligations, because there were no quoted market values, the best indication of

fair market value was the present value of the expected future cash flows from

the Purchasers' Obligations. As of December 31, 1998, given the uncertainty

surrounding the timing of collecting the Purchasers' Obligations, the Company

could not reasonably estimate a fair market value for such obligations. As such,

the Company opted to take a conservative position and write-off the Purchasers'

Obligations in its 1998 Consolidated Financial Statements. The write-off was

reported as a charge to other expense for $3,508,498 in the accompanying 1998

Consolidated Statement of Operations. The charge represents the aggregate

balance before the write-off for the notes receivable of $2,937,500 and the

receivable from sale of affiliate of $570,998. Recently, the Company has been in

discussions with the Purchasers to settle the litigation. In the event of a

settlement, the Company would report any financial recoveries as additional

income in the year of receipt. See "Item 3. - Legal Proceedings" for further

information about the litigation.



    Milesburg



On April 30, 1987, the Company purchased all of the outstanding capital stock of

Milesburg Energy, Inc. ("MEI"), which owned a 30 year power purchase agreement

with West Penn Power Company ("West Penn") and development rights for a retired

43 Mw (net) coal-fired facility (collectively the "Milesburg Project"). MEI's

efforts to develop the Milesburg Project were delayed by litigation with West

Penn and various industrial intervenors for approximately ten years. On August

26, 1997, the litigation was terminated when MEI and West Penn reached a Buy-Out

Agreement concerning the Milesburg Project. Pursuant to the Buy-Out Agreement,

West Penn purchased Milesburg's rights to the 30 year power purchase agreement

for the sum of $15 million plus 8% interest from the date the Buy-Out Agreement

was filed for Pennsylvania Public Utility Commission approval. Furthermore, West

Penn also assumed ownership of and responsibility for the Milesburg Project

facility, which consisted of land along with a decommissioned coal-fired

electric-generating facility erected thereon, for a stated consideration of $1.

On December 5, 1997, the date of the asset disposition, MEI received aggregate

proceeds of $15,328,768 from West Penn pursuant to the Buy-Out Agreement. After

MEI's payment of its remaining liabilities, the Company had available in excess

of $10 million from the Milesburg proceeds. In light of this projected

availability of cash, the Company's Board of Directors on December 10, 1997

declared a special dividend of 87 cents per common share payable out of the

proceeds received from the sale of the Milesburg project assets. The dividend

was payable on January 7, 1998 to stockholders of record on December 30, 1997.



On December 31, 1997, because MEI did not expect to carry on further business

activities after the sale of the Milesburg Project, EPC adopted a Plan of

Liquidation to dissolve MEI. Under the Plan of Liquidation, MEI ceased to carry

on business activities except to the extent necessary to liquidate its assets,

pay its liabilities and distribute its assets remaining after the payment of its

liabilities to EPC. During 1998, MEI's assets remaining after the payment of its

liabilities were distributed to EPC.



                                       7
<PAGE>

ENERGY MARKETS



Historically in the United States, regulated and government-owned utilities had

been the only significant producers of electricity for sale to third parties.

The energy crisis of the 1970's led to the enactment of the Federal Public

Utility Regulatory Policies Act of 1978 ("PURPA"), which encouraged companies

other than utilities to enter the electric energy business by reducing

regulatory constraints. In addition, PURPA requires utilities to purchase

electricity produced by facilities using alternative fuels or from cogeneration

facilities which meet the Federal Energy Regulatory Commission's ("FERC")

requirements for certification as qualifying facilities ("QFs"). See "Energy

Regulation" below. This obligation upon utilities to purchase the output from

QFs created a significant market for electricity produced by independent power

producers, including the Company. In 1992, Congress enacted the Energy Policy

Act of 1992 ("Energy Act"), which amended the Public Utility Holding Company Act

of 1935 ("PUHCA"), to create new exemptions from PUHCA for independent power

producers selling electric energy on a wholesale basis, to increase electricity

transmission access for independent power producers and to reduce the burdens of

complying with PUHCA's restrictions on corporate structures for owning or

operating generating or transmission facilities in the United States or abroad.

The Energy Act has enhanced the development of independent power projects and

has further accelerated the changes in the electric utility industry that were

initiated by PURPA. The implementation of federal and state policies which have

increased the availability of transmission access for wholesale and retail

transactions have created additional markets and competition for electric energy

sales. As a result, the electric utility industry is moving away from a

traditional rate regulated environment based on cost recovery to some

combination of a competitive marketplace and modified regulation. Presently, the

Company is not involved in international energy markets and has no immediate

plans to become involved in those markets.



COMPETITION



The Company, through its subsidiary, generates electricity using waste coal, an

alternative energy source, all of which electricity is sold at rates established

under a long-term power purchase agreement with PENELEC, a division of General

Public Utilities Company ("GPU"). This power purchase agreement has been

approved by the Pennsylvania Public Utility Commission. Other than the risk that

PENELEC would assert a position and achieve judicial determination that it has a

right to renegotiate the terms of the power purchase agreement (see "Energy

Regulation"), the sale of power from our existing facility is not subject to

competition during the term of the power purchase agreement. However, since the

Company's contracted rates in the later years of the agreement are determined

with reference to then existing market conditions, the rate at which such power

is sold is influenced by competitive power rates in the region. Therefore, low

wholesale energy rates during the later years of the power purchase agreement

would negatively impact the Company's profitability and could affect its

financial position.



Further, expansion of our business through acquisition and/or development of

additional facilities would be affected by competition from various sources. The

principal sources of competition in this market include traditional regulated

utilities who have excess capacity, unregulated subsidiaries of regulated

utilities, energy brokers and traders, energy service companies in the

development and operation of energy-producing projects as well as the marketers

of electric energy, equipment suppliers and other non-utility generators like

the Company. The electric industry is also characterized by rapid changes in

regulations which the Company expects could continue to increase competition.

For instance, as discussed under "Energy Markets", the electric industry has

been previously affected by legislation such as PURPA and the Energy Act which

have encouraged companies other than utilities to enter the electric power

business by reducing regulatory constraints and increasing access to markets.

More recently, as discussed under "Energy Regulation", there has been

legislation in numerous states deregulating aspects of the electric business and

encouraging a highly competitive rate environment. Furthermore, initiatives to

repeal or modify existing regulations could further reduce regulatory

restrictions placed on electricity producers and encourage them to create new

sources of electric power. Any of these regulatory matters, among others, could

increase competition.



                                       8
<PAGE>

The Company's present operations, as well as any possible future expansion in

the industry, are also affected by requirements for compliance with various

local, state and federal environmental laws and regulations. (See "Environmental

Regulation"). As such, the Company's operating costs are subject to increases

resulting from expanded environmental regulations. Such increases could

negatively impact profitability from current operations and could affect the

Company's competitive position in pursing further expansion through acquisition

and/or development.



Presently, competition in this industry is substantially based on price, with

competitors striving for lower cost alternatives for providing electricity. The

cost of producing electricity is in large measure influenced by the capital

costs of generating and transmitting facilities as well as the operating costs,

including fuel costs, of such facilities. As natural gas prices have risen and

supplies have tightened during 2000, the overall cost advantage of that fuel

source has diminished and consideration is again being given to other

conventional and non-conventional fuel sources. In addition, electricity

shortages in certain major markets, as well as a general increase in demand,

have tightened overall availability of generating capacity which may exert

upward pressure on rates.



In previous years, the Company competed in the market to develop power

generation facilities. The primary bases of competition in this market are

price, the ability of the developer to generate high quality opportunities and

to select and acquire environmentally permittable sites in favorable locations

as well as to create attractive and efficient development plans which can be

financed and cost effectively constructed. In most cases, competitive bidding

for a development opportunity is required. In recent years, the Company believed

there were limited opportunities for additional project development in the

United States for projects similar to those previously developed by the Company.

Since there were many companies with substantially greater resources than the

Company competing for these limited development opportunities, the Company

believed it was not in a favorable competitive position. Therefore, the Company

has not been actively pursuing development opportunities in recent years.

However, the Company now believes that current market conditions may be more

favorable for smaller developers. As such, the Company is presently evaluating

development opportunities and whether its re-emergence into this market could

enhance shareholder value.



Presently, there is also significant merger and consolidation activity in the

electric industry. During 2000, the Company engaged an investment consultant to

consider sale or merger proposals that may present an opportunity to enhance

shareholder value. To date, the Company has evaluated several preliminary

proposals; however, none of these preliminary proposals has offered sufficient

value to shareholders or likelihood of consummation to warrant further

consideration. The Company continues to evaluate proposals from time to time and

still believes this strategy could present an opportunity to maximize

shareholder value in the future. Should the Company decide to expand its

business activities, it would consider the possible acquisition of existing

facilities as well as the development of new projects.



ENERGY REGULATION



The Company's facility is subject to certain regulation under federal and state

laws and regulations, and is certified as a QF by the FERC. Pursuant to PURPA,

FERC has promulgated regulations which exempt certain QFs from the Federal Power

Act of 1935, PUHCA, and, except under certain limited circumstances, state laws

regulating the rates charged by electric utilities. In order to be QFs under

PURPA, any facilities which the Company might acquire or develop will be

required to meet certain size, fuel and ownership requirements and/or

co-generate. In addition to the regulation of QFs, PURPA requires that electric

utilities purchase electric energy produced by QFs at negotiated rates or at a

price equal to the incremental or avoided cost that would have been incurred by

the utility if it were to generate the power itself or purchase it from another

source. The Company is not presently subject to regulation under PUHCA and does

not presently intend to engage in any activities that would cause it to be so

regulated.



The nature and impact of potential future changes of laws or regulations on the

Company's projects is unknown at this time. Presently, there are numerous

pending legislative proposals which suggest a comprehensive restructuring of the

electric utility industry. These proposals advocate, among other things, retail

choice for all utility customers, the opportunity for utilities to recover their

prudently incurred stranded costs in varying degrees, and the repeal of both

PURPA and PUHCA. If PURPA is amended or repealed, the statutory requirement that

electric utilities



                                       9
<PAGE>

purchase electricity from QFs at full avoided cost could be repealed or

modified. While existing contracts are expected to be honored, the repeal or

modification of these statutory purchase requirements under PURPA in the future

could increase pressure from electric utilities to renegotiate existing

contracts. Should there be changes in statutory purchase requirements under

PURPA, and should these changes result in amendments to the Company's current

power purchase agreement which reduce the contracted rates, the Company's

results of operations and financial position could be negatively impacted.



State public utility commissions, pursuant to state legislative authority, may

have jurisdiction over how any new federal initiatives are implemented in each

state. The actual scope of jurisdiction over independent power projects by state

public utility regulatory commissions varies from state to state. Presently,

through its power purchase agreement with PENELEC, the Scrubgrass Project is

indirectly affected by state legislation in the Commonwealth of Pennsylvania.



On December 3, 1996, in response to changes in the electric industry, the

Commonwealth of Pennsylvania passed legislation known as the Electricity

Generation Customer Choice and Competition Act (Customer Choice Act) which

became effective on January 1, 1997. The Customer Choice Act provides for the

deregulation of the generation portion of electric business by permitting all

Pennsylvania retail electric customers to choose their electric generation

supplier over a phase-in period which expired December 31, 2000. The Customer

Choice Act required that all electric utilities file restructuring plans with

the PUC. PENELEC filed its proposed restructuring plan during 1997, which was

subsequently litigated by numerous parties, and later settled by an agreement

which was approved by the PUC on October 20, 1998. The settlement agreement set

forth a comprehensive plan for restructuring PENELEC's service and for ensuring

there would be competition for electric generation for all of PENELEC's

customers beginning on January 1, 1999. Most pertinently, the restructuring

plan, as approved by the PUC, provided for PENELEC to maintain a separate

non-utility generator cost recovery mechanism for accounting purposes.

Therefore, the restructuring plan is designed, in pertinent part, to enable

PENELEC to recover all of its costs from non-utility generators such as the

Scrubgrass plant and should serve to decrease the pressure on PENELEC to

renegotiate existing power contracts with non-utility generators.



On November 21, 2000, the shareholders of GPU and FirstEnergy Corp. approved a

merger of these two companies. FirstEnergy and GPU have applied for approval of

their merger to Federal Energy Regulatory Commission, New Jersey Board of Public

Utilities, Pennsylvania Public Utility Commission, Nuclear Regulatory

Commission, Federal Communications Commission, Securities and Exchange

Commission, and the Department of Justice under the Hart-Scott-Rodino Act. The

Company has been monitoring these merger activities to determine whether such

activities would have an unfavorable impact on the Scrubgrass Project.



Presently, except as discussed above, neither the Customer Choice Act nor

PENELEC's restructuring plan directly impacts the Company, since the legislation

and restructuring plan pertain to the retail market or new contracts in the

wholesale market. Nevertheless, the Company continues to monitor regulatory

developments in order to evaluate any impact on the Scrubgrass Project and

possible new business opportunities.



ENVIRONMENTAL REGULATION



The Company's projects are subject to various federal, state and local

regulations pertaining to the protection of the environment, primarily in the

areas of water and air pollution. In many cases, these regulations require a

lengthy and complex process of obtaining and maintaining licenses, permits and

approvals from federal, state and local agencies. The Company also has

significant administrative responsibilities to monitor its compliance with the

regulations. As regulations are enacted or adopted in any of these

jurisdictions, the Company cannot predict the effect of compliance therewith on

its business. The Company's failure to comply with all the applicable

requirements could require modifications to operating facilities. During periods

of non-compliance, the Company's operating facilities may be forced to shutdown

until the compliance issues are resolved. The Company is responsible for

ensuring the compliance of its facilities with all the applicable requirements

and, accordingly, attempts to minimize these risks by dealing with reputable

contractors and using appropriate technology to measure compliance with the

applicable standards. The Company believes the Scrubgrass Project, its only

operating project, is currently in compliance with



                                       10
<PAGE>

all material applicable environmental regulations. The Scrubgrass Project most

notably has been affected by the following environmental regulations:



      Air Quality - The Scrubgrass Project is subject to air quality regulations

      under the Federal Clean Air Act of 1970 (CAA). CAA Title I established

      National Ambient Air Quality Standards (NAAQS) for certain pollutants

      including ozone, sulfur dioxide, nitrogen dioxide, particulate matter,

      carbon monoxide and lead. In particular, CAA Title I established the

      Northeast Ozone Transport Region, which includes 12 northeast states and

      the District of Columbia, to address the transport of these pollutants

      which may lead to the non-attainment of the ozone NAAQS in the Northeast.

      Ozone control is facilitated by the control of pollutant precursors, which

      are nitrogen oxides (NOx) and volatile organic compounds. Electric

      generating facilities that use fossil fuels, including the Scrubgrass

      facility, are considered major sources of NOx emissions. In recent years,

      the Pennsylvania Department of Environmental Protection (PaDEP)

      established regulations that required companies with stationary sources of

      NOx emissions to establish plans to reduce their NOx emissions. To

      administer these regulations, the PaDEP began allocating Nitrogen Oxide

      Ozone Transport Region Budget Allowances ("NOx Credits") to facilities

      based on numerous factors including the design and operation of each

      facility. A market-based trading system was established to allow companies

      with excess NOx Credits to trade with companies that required additional

      NOx Credits to meet the stricter requirements. More recently, an Ozone

      Transport Commission (OTC) established certain inner and outer zones with

      seasonal NOx emission reductions that required the Scrubgrass Project to

      achieve certain targeted NOx emission levels beginning on May 1, 1999.

      Under the OTC's requirements, the Scrubgrass Project will also be required

      to achieve reduced emission standards by May 2003. Due to the efficient

      design of the Scrubgrass facility, the Scrubgrass Project met the new 1999

      requirements without any modifications to the facility. However, the

      Company made capital improvements of $811,568 in 1999 to the Scrubgrass

      facility, which are expected to enable the Scrubgrass facility to meet the

      stricter standards in 2003. The Company expects to meet the NAAQS for

      sulfur dioxide, nitrogen dioxide, particulate matter, carbon monoxide and

      lead for the foreseeable future without any additional material

      modifications to the Scrubgrass facility.



      Waste Disposal - The Scrubgrass Project must also comply with various

      environmental regulations pertaining to the handling and disposal of

      hazardous and non-hazardous wastes. The PaDEP establishes classifications

      for wastes and requires companies to follow certain handling and disposal

      procedures for each waste classification. Currently, the Scrubgrass

      Project employs special handling procedures for the transportation of its

      fuel, which is classified as a waste, from the waste sites to the

      Scrubgrass facility. The fuel is burned in the Scrubgrass facility where

      it is treated with various substances such as limestone during the

      electric generation process. Ash, which is a byproduct of the electric

      generation process, is removed from the Scrubgrass facility and returned

      to the original waste site which is reclaimed in part by deposit of the

      ash along with the soil. Under existing regulations, ash is not classified

      as a hazardous waste. However, various environmental organizations have

      recently been lobbying for changes to the applicable regulations for the

      classification of ash. If there are changes to the waste classification of

      ash, the Company's ash disposal costs may significantly increase which

      could have material adverse affect on the Company's results of operations

      and financial position.



EMPLOYEES



As of December 31, 2000, and at the time of making this filing, the Company had

four employees consisting of three full-time executive officers and one

full-time office administrator. The loss of any of its executive officers could

have a material adverse effect on the Company. None of the Company's employees

is represented by a collective bargaining agreement. The Company considers

relations with its employees to be good.



                                       11
<PAGE>

ITEM 2.  PROPERTIES



The Company, through a subsidiary, leases the Scrubgrass waste coal-fired

electric generating facility located on approximately 600 acres in Venango

County, Pennsylvania. Until February 16, 1999, the Company, owned through a

subsidiary, approximately 80 acres in Fayette County, Pennsylvania for which it

had abandoned efforts to develop electric generating facilities utilizing coal

mine-fire technology. The land was sold pursuant to a written contract executed

on December 31, 1998.



Since February 1996, the Company has been a tenant pursuant to a lease at its

corporate headquarters in Portsmouth, New Hampshire. The lease, which was

renewed in January 1999 for three additional years, currently requires monthly

payments of $1,560.



ITEM 3.  LEGAL PROCEEDINGS



On May 3, 1996, Sunnyside II L.P. (f/k/a B&W Sunnyside L.P.), Babcock & Wilcox

Investment Company, Sunnyside I, Inc. (f/k/a NRG Sunnyside Inc.), NRG Energy

Inc., and Sunnyside Cogeneration Associates (collectively the "Plaintiffs")

filed a complaint, which was amended on September 27, 1996, December 21, 1998,

and March 17, 1999, against EPC and three of its wholly owned subsidiaries

(collectively hereafter "the Company") in Seventh District Court for Carbon

County, State of Utah (the "Court"). The third amended complaint alleges that

the Company breached the purchase and sale agreement by which the Company

transferred all of its interest in Sunnyside Cogeneration Associates ("SCA"), a

joint venture which owned and operated a nominal 51 megawatt waste coal-fired

facility located in Carbon County, Utah. The third amended complaint also

alleges that the Company made certain misrepresentations in connection with the

purchase and sale agreement. As a result of the alleged breaches of contract and

misrepresentations, the Plaintiffs allege that they suffered damages in an

unspecified amount that exceed the aggregate outstanding principal and interest

balances due to the Company by Sunnyside II L.P. and Sunnyside I, Inc. under

certain notes receivable. On April 9, 1999, in response to the Plaintiffs' third

amended complaint, the Company filed an answer and restatement of its earlier

restated counterclaim dated January 21, 1999. In the answer to the third amended

complaint, the Company denied all material allegations and asserted numerous

affirmative defenses. In the restated counterclaim, the Company alleges numerous

causes of action against the Plaintiffs which include breach of contract, breach

of the promissory notes, intentional, malicious and willful breach of contract,

intentional tort, interference and misrepresentation. Through the restated

counterclaim, the Company seeks remedies which include: (1) compensatory,

consequential and punitive damages; (2) acceleration and immediate payment in

full of the promissory notes; and (3) injunctions to require the Plaintiffs to

continue making payments under the promissory notes during the pendency of this

action and until the promissory notes are paid in full and which enjoin the

Plaintiffs from continuing certain malicious and intentional actions that are

alleged in the counterclaim, together with interest, reasonable attorney's fees,

costs and other such relief as the court deems proper. On May 17, 1999, the

Plaintiffs responded to the restated counterclaim whereby they denied all

material allegations of the restated counterclaim and asserted numerous

affirmative defenses.



As discussed in previous filings, the Company has been vigorously defending

against the third amended complaint and vigorously pursuing the causes of action

in the restated counterclaim for the last several years. In December 2000, the

Company and the Plaintiffs (collectively the "Parties") held a non-binding

mediation and settlement conference to determine whether they could resolve

their differences and settle this litigation. During this settlement conference,

the Parties deliberated their differences and ultimately reached a verbal

settlement proposal. Since the settlement conference, the Parties have been

negotiating a written binding settlement agreement to end the litigation. In

March 2001, the Parties prepared a written settlement agreement which, by its

terms, must be executed by the Parties no later than April 16, 2001. At the time

of this filing, the Parties have yet to execute the settlement agreement.





ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS



         None



                                       12
<PAGE>

                                     PART II



ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED

         SHAREHOLDER MATTERS



STOCK MARKET TRADING:



On March 15, 1999, the Company's Common Stock began trading on the NASD OTC

Bulletin Board ("OTC-BB") under the symbol POWR. Prior to that date, the

Company's Common Stock traded on the Nasdaq Stock Market ("Nasdaq") under the

symbol POWR. The Company had been designated as a SmallCap issuer on Nasdaq. As

of March 22, 2001 there were approximately 231 record holders and approximately

955 beneficial holders of the Company's Common Stock.



The following table shows the quarterly high and low sales prices during 1999

and 2000 as reported to the Company by the OTC-BB or Nasdaq:



          YEAR               PERIOD                          HIGH          LOW



          1999          First Quarter                        15/16         5/8

                        Second Quarter                       25/32         7/16

                        Third Quarter                        25/32        19/32

                        Fourth Quarter                       27/32         7/16



          2000          First Quarter                        15/16         7/16

                        Second Quarter                        7/8          1/2

                        Third Quarter                        29/32         9/16

                        Fourth Quarter                       26/32         7/16



On August 22, 1997, the Securities Exchange Commission approved new listing

standards for companies who are designated as SmallCap issuers on Nasdaq. These

changes, which became effective on February 23, 1998, strengthened the

quantitative threshold criteria necessary to qualify for initial entry and

continued listing on Nasdaq. In addition, the corporate governance requirements

previously applicable only to companies designated as National Market issuers on

Nasdaq now extend to SmallCap issuers on Nasdaq. Prior to February 23, 1998,

SmallCap issuers whose securities traded below a $1 minimum bid price (such as

the Company) could remain listed if they met an alternative test based on the

market value of public float and capital and surplus. However, this alternative

to the $1 minimum bid price standard was eliminated under the new listing

standards. As such, SmallCap issuers whose securities trade below a $1 minimum

bid price for a period of 30 consecutive trading days are now subject to

delisting from Nasdaq. However, SmallCap issuers who fail to meet this $1

minimum bid price standard are given a grace period of 90 calendar days in which

to regain compliance by reporting a minimum bid price of $1 for greater than 10

consecutive trading days during this 90 day grace period.



On October 27, 1998, the Company's stock began consistently trading below a $1

minimum bid price. As a result, on December 11, 1998, the Company was notified

by Nasdaq that its stock would be subject to delisting from Nasdaq unless the

Company's stock would resume trading with a minimum bid price of $1 for greater

than 10 consecutive trading days during a 90 day grace period which expired on

March 11, 1999. On March 12, 1999, because the Company's stock failed to regain

compliance during the 90 day grace period, the Company's stock was delisted from

Nasdaq. After delisting from Nasdaq, the Company's Common Stock began trading on

the OTC-BB under the symbol POWR.



DIVIDENDS:



The Company has a quarterly dividend program which is subject to review and

consideration by the Board of Directors each quarter. In respect of this

dividend program, the Company declared dividends in each quarter during 1998,

1999 and 2000 as follows:



                                       13
<PAGE>

                                                                  DIVIDENDS

                                                    DIVIDENDS     DECLARED

            YEAR            PERIOD                  DECLARED      PER SHARE

            ----           --------                ----------     ----------



            1998        First Quarter              $  342,203     $     .030

                        Second Quarter                342,204           .030

                        Third Quarter                 171,102           .015

                        Fourth Quarter                171,102           .015

                                                   ----------     ----------

                                                   $1,026,611     $     .090

                                                   ==========     ==========



            1999        First Quarter              $  171,102     $     .015

                        Second Quarter                171,102           .015

                        Third Quarter                 171,102           .015

                        Fourth Quarter                171,102           .015

                                                   ----------     ----------

                                                   $  684,408     $     .060

                                                   ==========     ==========



            2000        First Quarter              $  171,102     $     .015

                        Second Quarter                171,102           .015

                        Third Quarter                 171,102           .015

                        Fourth Quarter                171,102           .015

                                                   ----------     ----------

                                                   $  684,408     $     .060

                                                   ==========     ==========



During the third quarter of 1998, the Company reduced its dividend to 1.5 cents

per share to preserve its cash resources to address certain changes in its

financial position and cash requirements. This reduction in the quarterly

dividend amount reflects the Company's existing policy of seeking to distribute

the maximum funds available each quarter to shareholders. The maximum funds

available for distribution is determined by the Board each quarter and

represents the amount the Company does not expect it will need for ongoing

operations and any planned projects assuming expected operating results are

achieved. In addition, the Board considers the level of reserves and determines

what is reasonable as a buffer against surprises, variations from expectations

and reasonable contingencies in the upcoming periods. Behind all of these

considerations is the philosophy that the Company should not be holding reserves

that it does not expect are reasonably needed for continuing operations, planned

projects and contingencies. The downside of this approach is the risk that

dividends need to be reduced when cash flows are reduced and/or projected

expenses and contingencies are increased. Historically, the Company has not

operated using a philosophy of holding reserves for future dividends since such

a philosophy would represent the Company's investment of its shareholders' money

in non-generating assets which would be distributed later if the Company was not

generating sufficient cash at that time to continue the dividend. The Company

believes that shareholders would expect the Company to focus its management and

resources on activities within the electric generating industry.



As discussed in "Item 1. Business - Competition", the Company is simultaneously

evaluating several options for the future of its business to enhance shareholder

value. These options include a possible sale of EPC or its assets, merger with

another entity, or re-emergence into the development market. As one or more of

these options become more apparent, the Board is likely to give additional

consideration to them in its determination of dividends. The Board may decide to

preserve the Company's available cash resources to pursue one or more of these

alternatives or, in the case of a possible sale, delay distributions to obtain a

more favorable capital gain treatment at the time of the sale. The Board's

decision to preserve the Company's cash resources could reduce or eliminate

future dividends.



As of December 31, 1997, the Company had dividends payable of $10,266,105 (90

cents per share) which were declared on December 10, 1997 and paid on January 7,

1998. Distributions are taxed to shareholders when they are received as ordinary

dividends to the extent that the distributing corporation has earnings and

profits during the tax year in which the dividend is paid. The portion of the

distribution which is in excess of the distributing corporation's earnings and

profits is treated as a tax-free return of capital and reduces the shareholder's

basis in the stock. Once the shareholder's basis in the distributing

corporation's stock is reduced to zero, any remaining excess distribution is

treated as a payment for the stock or capital gain if the stock is a capital

asset in the shareholder's hand. Due to the substantial earnings and profits

incurred during 1997 primarily from the sale of the Milesburg project, the

Company deferred the payment of its dividend declared on December 10, 1997 to

1998 so that the



                                       14
<PAGE>

dividend would receive a more favorable tax treatment. By deferring the payment

of the dividend declared on December 10, 1997 to 1998, distributions of

$11,166,752 paid in 1998 were characterized as a return of capital.



Under the laws of its state of incorporation, EPC may pay dividends out of its

surplus, as defined by statute, on an unconsolidated basis. As of December 31,

2000, although the Company's consolidated capital position reflected a deficit

of $3,969,586, EPC maintained a surplus on an unconsolidated basis. As discussed

under the caption "Item 1. Business - Scrubgrass", after satisfying certain

reserves required by Scrubgrass Project agreements, Buzzard retains 50 percent

of the net cash flows from the operations of the Scrubgrass Project and is not

required to reinvest such proceeds to finance operating losses of the project.

Buzzard has realized cumulative cash distributions of $10,641,561 through

December 31, 2000 from the Scrubgrass Project which have all been distributed as

dividends to EPC. Furthermore, as discussed under the caption "Item 1. Business

- Milesburg", the Company sold the Milesburg project at a substantial gain and

adopted a Plan of Liquidation of MEI which resulted in significant liquidating

distributions to EPC. As a result of the distributions received from Buzzard and

the liquidating distributions received from MEI, EPC's surplus determined on an

unconsolidated basis has been sufficient to support the dividends declared and

paid to date.



                                       15
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA



The following selected financial data for the five years ended December 31, 2000

is derived from the audited Consolidated Financial Statements of the Company.

The data should be read in conjunction with the Consolidated Financial

Statements and other financial information included elsewhere herein.

<TABLE>

<CAPTION>



                                                                       YEAR ENDED DECEMBER 31

                                                     -------------------------------------------------------

                                                       2000        1999        1998        1997        1996

                                                     --------    --------    --------    --------    --------

<S>                                                  <C>         <C>         <C>         <C>         <C>

Results of Operations Data:



Power generation revenues                            $ 54,303    $ 48,268    $ 45,721    $ 43,763    $ 47,854

                                                     --------    --------    --------    --------    --------



Costs and expenses:

     Operating expenses                                22,291      21,931      19,215      17,756      18,190

     Lease expenses                                    26,416      23,111      22,971      24,488      24,793

     General and administrative expenses                3,603       2,455       2,197       1,995       3,062

     Reversal of provision for nonrecovery of

           project development costs                       --          --          --        (940)         --

     Depreciation and amortization                        415         363         285         258         205

                                                     --------    --------    --------    --------    --------

                                                       52,725      47,860      44,668      43,557      46,250

                                                     --------    --------    --------    --------    --------



Operating income                                        1,578         408       1,053         206       1,604



Other income (expense):

     Other income                                          --          --           8         622         484

     Interest income                                      737         111         156         581         499

     Interest expense                                    (320)       (375)       (461)       (424)       (336)

     Sale of NOx emission credits                       1,156         607          --          --          --

     Amortization of deferred gain                        308         308         308         308         308

     Warranty income                                       --          --          --          --         900

     Write-off of receivables in litigation                --          --      (3,508)         --          --

     Gain on sale of project                               --          --          --       7,424          --

                                                     --------    --------    --------    --------    --------

                                                        1,881         651      (3,497)      8,511       1,855

                                                     --------    --------    --------    --------    --------



Income (loss) before income taxes                       3,459       1,059      (2,444)      8,717       3,459



Income tax (expense) benefit                           (1,632)       (470)        795      (4,103)     (1,894)

                                                     --------    --------    --------    --------    --------



Income (loss) before cumulative effect of a

    change in accounting principle                      1,827         589      (1,649)      4,614       1,565



Cumulative effect of a change in accounting

     principle (2)                                         --       1,189          --          --          --

                                                     --------    --------    --------    --------    --------



Net income (loss)                                    $  1,827    $  1,778    $ (1,649)   $  4,614    $  1,565

                                                     ========    ========    ========    ========    ========



Basic and diluted earnings (loss) per common share   $   0.16    $   0.16    $  (0.14)   $   0.41    $   0.14



Dividends paid or payable per common share           $   0.06    $   0.06    $   0.09    $   0.99    $   0.14



Weighted average number of shares outstanding          11,407      11,407      11,424      11,260      11,286



Balance Sheet Data:



Total assets                                         $ 69,284    $ 58,782    $ 55,163    $ 61,362    $ 52,503

Working capital                                        (1,176)     (2,662)     (1,190)        536       1,406

Long-term obligations (2)                              58,304      51,546      46,511      40,032      35,331

Deferred gain (1)                                       4,780       5,089       5,397       5,706       6,014

Shareholders' (deficit) equity                         (3,970)     (5,471)     (6,559)     (3,878)      2,680

</TABLE>



------------------

(1)   See Note B of the Consolidated Financial Statements.

(2)   See Note O of the Consolidated Financial Statements and the Consolidated

      Statements of Operations for further disclosures pertaining to a change in

      accounting principle.



                                       16
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

         OF OPERATIONS



OVERVIEW OF THE COMPANY



The Company owns a 22 year leasehold interest in an approximately 83 Mw (net)

waste coal-fired electric generating facility (the "Scrubgrass Project") located

in Pennsylvania, the lease for which commenced on June 30, 1994. In recent

years, the Company also held varying ownership interests (100% to 40%) in an

approximately 51 Mw (net) waste coal-fired electric generating facility (the

"Sunnyside Project") located in Utah and owned the development rights to an

existing 43 Mw (net) coal-fired electric generating facility (the "Milesburg

Project") located in Pennsylvania which was retired from service in 1984. The

Company sold its remaining interest in the Sunnyside Project on December 31,

1994 and is presently involved in a litigation with the Purchasers to collect

the balance of the Purchaser's obligations for the sale. The Company sold its

development rights for the Milesburg Project on December 5, 1997 to the utility

which had contracted to purchase electricity from such project. The Company's

projects are discussed further in "Item 1. Business". The following Management's

Discussion and Analysis of Financial Condition and Results of Operations

compares the Company's results of operations for the years ending December 31,

2000, 1999 and 1998 and should be read in conjunction with the Consolidated

Financial Statements and notes thereto, and the comparative summary of selected

financial data appearing elsewhere in this report. Historical results and trends

which might appear should not be taken as indicative of future operations.



CAUTIONARY STATEMENT



This Annual Report on Form 10-K contains "forward-looking statements", as

defined by the Private Securities Litigation Reform Act of 1995, in order to

provide investors with prospective information about the Company. For this

purpose, any statements which are not statements of historical fact may be

deemed to be forward-looking statements. Without limiting the foregoing, the

words "believes", "anticipates", "plans", "expects" and similar expressions are

intended to identify forward-looking statements. There are a number of important

factors which could cause the Company's actual results and events to differ

materially from those indicated by the forward looking statements. These factors

include, without limitation, those set forth below under the caption "Certain

Factors That May Affect Future Results".



RESULTS OF OPERATIONS



    Year ended December 31, 2000 ("2000") compared with the year ended December

    31, 1999 ("1999")



Net income amounted to $1,826,808 (16 cents per share) for 2000 as compared to

net income of $1,777,562 (16 cents per share) for 1999. The improvements in the

net results during 2000 are primarily attributable to increases in power

generation revenues, interest income and income from sales of NOx emission

credits. Such increases were offset in part by increases in operating expenses,

lease expenses, general and administrative expenses, depreciation and

amortization, and related changes in the income tax expense. The reasons for the

changes in the Company's net results are discussed in more detail in the

following paragraphs.



Power generation revenues for 2000 amounted to $54,303,222 as compared to

$48,268,311 for 1999 and all pertained to the Scrubgrass Project. The increase

in power generation revenues during 2000 is primarily attributable to additional

revenues of approximately $3,687,000 from the settlement agreement with PENELEC,

improvements in the capacity rate for the Scrubgrass facility, a 5% increase in

certain rates billed to the utility under the terms of the PSA, and an increase

in the rates charged for power generation in excess of 80mw pursuant to the

terms of the settlement agreement with PENELEC. These increases were offset in

part by a decrease in the revenue recorded as a result of the straight-line

accounting treatment of certain revenues under the power purchase agreement

which amounted to $7,036,012 and $7,765,631 for the years ended December 31,

2000 and 1999, respectively. The Scrubgrass Project operated at 90.2% of its

capacity for the year ended December 31, 2000 as compared to 89.5% for the year

ended December 31, 1999. The improvements in the capacity rate occurred

primarily for the following reasons. First, the Scrubgrass project had planned

maintenance outages during the second quarters in both 2000 and 1999 and a

shorter



                                       17
<PAGE>

planned maintenance outage in November 2000. During the 2000 and 1999 planned

maintenance outages, the Scrubgrass plant was inoperative for approximately 19

days and 20 days, respectively, to perform scheduled maintenance procedures.

Second, the Scrubgrass Project incurred unscheduled shutdowns to respond to

equipment malfunctions and utility curtailments which necessitated that the

Scrubgrass plant be inoperative for an aggregate of approximately 16 days and 19

days outside of the scheduled outage timeframes during the years ended December

31, 2000 and 1999, respectively.



Operating expenses for 2000 amounted to $22,291,069 as compared to $21,931,318

for 1999 and all pertained to the Scrubgrass Project. The increase in operating

expenses for 2000 is primarily attributable to the following reasons. First, the

Company incurred higher fuel costs primarily from cost escalations in certain

fuel supply agreements, improvements in the capacity rate, and increases in

diesel fuel costs. Second, pursuant to the terms of the O&M, the Operator passed

along increases in its labor and related costs, operator fees and operator

bonuses to the Company. These increases were offset in part by lower maintenance

expenses and the absence of expenses related to Year 2000 compliance during

2000. Maintenance expenses decreased during 2000 primarily because of

differences in the scope of procedures performed during the 1999 and 2000 annual

maintenance outages and fewer unplanned maintenance shutdowns.



Lease expenses for 2000 amounted to $26,415,897 as compared to $23,110,677 for

1999 and all pertained to the Scrubgrass Project. The increase in lease expenses

during 2000 is primarily attributable to the following reasons. First, the

Lessor's loan costs, which are passed along to the Company as a lease expense,

increased due to higher average interest rates on the tax exempt bonds and term

loans and loan origination costs from the replacement letter of credit. Second,

the Company incurred scheduled increases in base equity rents. Third, due to

increases in available cash flows from the Scrubgrass Project, which included

revenues and interest income from the settlement agreement with PENELEC and

income from sales of NOx emission credits, the Company incurred an increase in

additional rent paid to the Lessor, which amounts to 50 percent of the net

available cash flows from the Scrubgrass Project. The Company's overall increase

in lease expenses during 2000 was offset in part by decreases in the following

two items. First, the Lessor's junior debt obligations were fully satisfied

during 1999. As such, the Company's lease expense did not include principal and

interest on these obligations in 2000. Second, the Company had a decrease in

lease expense recorded as a result of the straight-line accounting treatment of

certain lease expenses under the Scrubgrass lease which amounted to $7,036,012

and $7,765,631 for the years ended December 31, 2000 and 1999, respectively.



General and administrative expenses for 2000 amounted to $3,602,960 as compared

to $2,455,095 for 1999. The increase in general and administrative expenses

during 2000 is primarily attributable to the following reasons. First, pursuant

to the terms of the MSA, the Manager passed along increases in its labor and

related costs to the Company. The Manager's expenses were higher during 2000

largely due to increased costs related to refinancing matters, salary raises and

the potential sale of the Scrubgrass Project. Second, professional fees

increased during 2000 because the Company engaged several consultants to

consider various sale and restructuring alternatives. Third, the Company paid

bonuses aggregating $710,000 to its executive officers during 2000 which will be

discussed further in "Item 11. - Executive Compensation". Fourth, the Scrubgrass

Project had increases in its insurance premiums during 2000. The aforementioned

increases were offset in part by a decrease in legal fees during 2000.



Depreciation and amortization amounted to $415,230 and $363,234 in 2000 and

1999, respectively. Depreciation and amortization increased in 2000 primarily

because the Company's 1999 capital expenditures, which were substantially made

during the third quarter, were depreciated for the entire year in 2000.



Interest income amounted to $736,867 and $110,975 for 2000 and 1999,

respectively. The 2000 increase is primary attributable to approximately

$608,000 of interest income from the settlement agreement with PENELEC and

higher average interest rates on short-term investments.



Interest expense amounted to $320,641 and $375,176 for 2000 and 1999,

respectively. The decrease in interest expense is primarily attributable to

reductions in the outstanding borrowings under the Scrubgrass Project term

credit facility which reduced in $600,000 increments every six months through

July 2000. This decrease was offset in part by increases in average interest

rates on borrowings.



                                       18
<PAGE>

Sale of NOx emission credits amounted to $1,156,338 and $606,960 during the

years ended December 31, 2000 and 1999, respectively. Sales of NOx emission

credits are discussed further under "Item 1. Business--Scrubgrass".



Income tax expense was $1,632,233 in 2000 as compared to $470,552 in 1999. The

increase in income tax expense for 2000 is largely due to an increase in

earnings before income taxes and an increase in the effective tax rate which

amounted to 47.2% and 44.4% in 2000 and 1999, respectively. During 2000, the

Company had significant earnings from the Scrubgrass Project which are taxed in

Pennsylvania and have the highest effective tax rate. Due to the high

concentration of taxable earnings in Pennsylvania, the Company had a material

increase in its effective tax rate for 2000.



Cumulative effect of a change in accounting principle amounted to $1,188,989 for

1999 and pertained to the Company's change in its method of accounting for major

equipment overhauls. The cumulative effect of a change in accounting principle

did not affect 2000 operating results and is discussed below in the comparison

of 1999 and 1998 results.



    Year ended December 31, 1999 ("1999") compared with the year ended December

    31, 1998 ("1998")



Net income amounted to $1,777,562 ( 16 cents per share) for 1999 as compared to

a net loss of $1,649,186 (14 cents per share) for 1998. The overall increase in

the 1999 net results is largely attributable to an increase in power generation

revenues, a decrease in interest expense, the absence in 1999 of the write-off

of receivables in litigation, sales of NOx emission credits and income from the

effect of a change in accounting principle. Such factors were offset in part by

increases in operating expenses, lease expenses, general and administrative

expenses, depreciation and amortization, and income tax expense and a decrease

in interest income. The primary reasons for the changes in these components of

the net results are discussed in the following sections.



Power generation revenues for 1999 amounted to $48,268,311 as compared to

$45,721,473 for 1998 and all pertained to the Scrubgrass Project. The overall

increase in power generation revenues during 1999 is primarily attributable to

an increase in the capacity rate for the Scrubgrass Project which operated at

89.5% of its capacity for 1999 as compared to 87.9% for 1998 and a 5% increase

in certain rates billed to the utility under the terms of the power purchase

agreement. This increase was offset in part by a decrease in the revenue

recorded as a result of the straight-line accounting treatment of certain

revenues under the power purchase agreement which amounted to $7,765,631 and

$8,024,111 for 1999 and 1998, respectively. The following factors contributed

principally to the differences in the Scrubgrass Project's capacity rates billed

for 1999 and 1998. The Scrubgrass project had its planned annual maintenance

outages during the second quarters in both 1999 and 1998. During the 1999 and

1998 planned annual maintenance outages, the Scrubgrass plant was inoperative

for approximately 20 days and 14 days, respectively, to perform scheduled

maintenance procedures. In addition, the Scrubgrass Project incurred unscheduled

shutdowns and power generation reductions to respond to equipment malfunctions

or utility curtailments which necessitated that the Scrubgrass plant be

inoperative for an aggregate of approximately 19 days and 26 days outside of the

scheduled outage timeframes during 1999 and 1998, respectively.



Operating expenses for 1999 amounted to $21,931,318 as compared to $19,215,459

for 1998 and all pertained to the Scrubgrass Project. The overall increase

during 1999 is primarily attributable to the following reasons. First, the

Company incurred higher fuel costs as a result of cost escalations in certain

fuel supply agreements, poorer fuel quality and an increase in fuel consumption

billed to the utility. Second, pursuant to the terms of the O&M, the Operator

passed along certain increases in its labor and related costs to the Company.

Third, due to certain machinery and equipment modifications made in 1999 to

reduce NOx emissions from the Scrubgrass facility, the Company incurred higher

chemical expenses. Fourth, the Company entered into modifications to the

financing contract with the manufacturer of the Scrubgrass generator which

reduced certain operating expenses during 1998 by comparison to 1999. Fifth, the

Company incurred higher Operator fees due to fixed cost escalations pursuant to

the O&M and increases in bonuses which are based on capacity rates. Sixth, the

Company incurred significant increases in maintenance expenses which are

discussed further in the following paragraph.



                                       19
<PAGE>

Maintenance expenses, including expensed modifications, amounted to $4,380,381

and $3,048,217 during 1999 and 1998, respectively. The increase in 1999

maintenance expenses is largely due to equipment modifications related to Year

2000 compliance and differences in the nature of work performed during the 1999

and 1998 planned maintenance outages. The Company spent $2,468,682 and $884,634

for planned maintenance outage expenses during 1999 and 1998, respectively.

Planned maintenance outage expenses are performed on a schedule which differs

from year to year. The selection of equipment for service and/or replacement

each year depends on factors such as expected wear and tear and recommendations

made by the equipment manufacturer. During 1999, the Company spent $2,159,436 to

perform significant scheduled work on the steam generator which was the primary

expenditure in 1999. However, the 1999 increase was offset in part by higher

maintenance expenses in 1998 of $379,615 to increase the Company's maintenance

reserves. Due to a change in its method of accounting for major equipment

overhauls, the Company did not make additional maintenance reserves in 1999. See

Note O to the accompanying Consolidated Financial Statements for a further

discussion of the change in accounting method.



Lease expenses for 1999 amounted to $23,110,677 as compared to $22,971,201 for

1998 and all pertained to the Scrubgrass Project. The overall increase in lease

expenses during 1999 is primarily attributable to the following reasons. First,

the Company incurred scheduled increases in the base rent paid to the Lessor.

Second, due to increases in distributable cash flows, the Company had an

increase in the additional rent paid to the Lessor. Third, the Lessor's

scheduled principal payments for its term loans, which are passed through to the

Company in its lease expense, increased in 1999. The aforementioned increases in

lease expense were substantially offset by the following decreases in lease

expense during 1999. First, the Lessor's interest costs, which are passed

through to the Company in its lease expense, decreased primarily due to

favorable interest rates on the tax-exempt bonds. Second, the Company realized a

decrease in lease expense recorded as a result of the straight-line accounting

treatment of certain lease expenses under the Scrubgrass lease which amounted to

$7,765,631 and $8,024,111 for 1999 and 1998, respectively.



General and administrative expenses for 1999 amounted to $2,455,095 as compared

to $2,196,929 for 1998. The overall increase in 1999 is primarily attributable

to the following reasons. First, the management fees for the Scrubgrass Project

increased primarily because the project manager passed along increases in its

labor and related costs to the Company and because certain contract matters,

such as negotiations with PENELEC, required more management attention during

1999. Second, the Company had a significant increase in legal fees due to

accelerated efforts on the Sunnyside litigation. Third, the Company had an

increase in its executive salaries. However, as a result of changes in the

insurance program at the Scrubgrass Project, the aforementioned increases in

general and administrative expenses were offset in part by a reduction in

insurance expense during 1999.



Depreciation and amortization amounted to $363,234 and $285,471 in 1999 and

1998, respectively. Depreciation and amortization increased in 1999 primarily

because the Company's 1999 capital expenditures of $829,117 were depreciated for

a portion of 1999.



Interest income amounted to $110,975 and $156,546 for 1999 and 1998,

respectively. Interest income decreased in 1999 primarily because of lower

investments of cash and cash equivalents. As of December 31, 1997, the Company

had cash and cash equivalents of $12,092,273 which consisted primarily of

short-term investments of proceeds from the Milesburg settlement. These

investments, which existed until the Company paid its special dividend and

certain Milesburg project obligations, generated interest income during 1998.



Interest expense amounted to $375,176 and $460,812 for 1999 and 1998,

respectively. The decrease in interest expense is primarily attributable to

reductions in the outstanding borrowings under the Scrubgrass Project term

credit facility which are reducing in $600,000 increments every six months

through July 2000.



Sale of NOx emission credits amounted to $606,960 in 1999. The sale of NOx

emission credits is discussed further under "Item 1. Business--Scrubgrass".



Write-off of receivables in litigation amounted to $3,508,498 in 1998 and

represented the aggregate balances as of December 31, 1998 of the notes

receivable of $2,937,500 and the receivable from sale of affiliate of $570,998

related to the 1994 sale of SCA. This write-off was discussed further in "Item

1. Business - Sunnyside".



                                       20
<PAGE>

Income tax expense was $470,552 in 1999 as compared to an income tax benefit of

$794,945 in 1998. The effective tax rates were 44% and 33% in 1999 and 1998,

respectively. During 1998, the Company's loss before income taxes was incurred

in states which did not have available deferred tax benefits. As such, despite

the loss before income taxes in 1998, the Company paid state taxes to certain

jurisdictions which reduced its effective tax benefit to 33%.



Cumulative effect of a change in accounting principle amounted to $1,188,989 for

1999 and pertained to the Company's change in its method of accounting for major

equipment overhauls. Before 1999, the Company recorded the expense of major

equipment overhauls on a straight-line basis to a major maintenance reserve in

anticipation of future outlays for the major overhauls. Effective January 1,

1999, the Company began recording the expense of major equipment overhauls when

incurred. The newly adopted method of accounting for major equipment overhauls

is consistent with the viewpoints recently expressed by the Securities and

Exchange Commission. The increase in net earnings of $1,188,989 represents the

effect of this change on years prior to 1999 and consists of an elimination of

the Company's major maintenance reserve, which had a balance of $2,001,429 at

December 31, 1998, and the reversal of $812,440 in deferred income tax benefits.



      2001 Outlook



The Company offers the following prospective information concerning its results

of operations for 2001 which are being compared to the historical results of

operations for 2000:



      Power generation revenues - Power generation revenues are expected to

      decrease in 2001 primarily due to the absence of revenues from the PENELEC

      settlement. This decrease would be offset in part by a 5% increase in

      certain contracted rates under the Scrubgrass power purchase agreement.



      Operating expenses - Operating expenses are expected to increase in 2001

      from a 4% average escalation in rates for fuel supply agreements, a 5%

      escalation in rates for Operator fees, changes in the scope of planned

      maintenance procedures, and anticipated increases in the Operator's labor

      and related costs. These increases are expected to be offset in part by

      improvements in diesel fuel prices and fuel quality.



      Lease expenses - Lease expenses are expected to decrease in 2001 for the

      following reasons. First, the Company expects that lower interest rates on

      the Lessor's tax-exempt bonds and term loans will decrease the Lessor's

      loan costs that are expected to be passed through to the Company in its

      facility lease expenses. Second, the Company expects to have scheduled

      decreases in base equity rents during 2001. Third, due to projected

      decreases in cash from Scrubgrass Project operations, which included

      significant non-recurring revenues and interest income during 2000, the

      Company expects its additional rent paid to the Lessor, which amounts to

      50 percent of the net cash flows from the Scrubgrass Project, would

      decrease in 2001. These decreases are expected to be offset in part by

      increases in the Lessor's letter of credit fees and term loan payments

      which would be passed through to the Company in its facility lease

      expenses.



      General and administrative expenses - General and administrative expenses

      are expected to decrease during 2001 for the following reasons. First, the

      Company paid significant bonuses to its executive officers during 2000

      which are expected to occur to a lesser extent during 2001. Second, the

      Company incurred significant professional fees, travel expenses and

      Scrubgrass Project management expenses during 2000 to address certain

      non-recurring business matters. The Company presently expects these

      matters would require less attention during 2001. Third, the Company

      expects to settle its Sunnyside Project litigation during 2001 and realize

      a reduction in legal fees. The Company's legal fees, professional fees and

      Scrubgrass Project management costs are subject to considerable variation

      each year due to the demands of legal proceedings, contractual matters and

      new business developments. As such, the Company cannot predict the full

      extent of changes to general and administrative expenses.



      Other income - Other income is expected to materially decrease in 2001

      primarily due to the absence of interest income from the PENELEC

      settlement and the absence of income from sales of NOx Credits.



                                       21
<PAGE>

      Income tax expense - Income tax expense is expected to significantly

      decrease in light of anticipated decreases in income before income taxes.

      The Company expects its effective income tax rates for 2001 would be

      comparable to the actual rates experienced in 2000.



      Litigation recoveries -The Company is seeking financial recoveries from

      the Purchasers of SCA in a legal proceeding. Recently, the Company and the

      Purchasers prepared a written settlement agreement for the legal

      proceeding which is awaiting final approval and execution by all the

      parties. If approved and executed, the Company would report any future

      recoveries from the legal proceeding as additional income in its

      Consolidated Statement of Operations. See "Item 1. Business - Sunnyside"

      and "Item 3. Legal Proceedings".



LIQUIDITY AND CAPITAL RESOURCES



    Operating Activities



The Company had cash provided by operating activities of $469,770, $2,752,441

and $635,735 in 2000, 1999 and 1998, respectively. During all of these periods,

the Company's only sources of cash from operating activities were operating

profits from the Scrubgrass Project and investment earnings. During 2000 and

1999, cash provided by operating activities was significantly effected by

unusual timing differences in collecting the receivable from utility and paying

accounts payable and accrued expenses. These timing differences are discussed

below under the sections "Receivable from Utility" and "Accounts Payable and

Accrued Expenses".



The Company reported net earnings of $1,826,808 during 2000 which contributed

significantly to the cash provided by operating activities. The following

adjustments, which did not impact the Company's cash flows, need to be

considered in order to reconcile the Company's 2000 net income to its net cash

provided by operating activities:



      Depreciation and amortization - During 2000, the Company recognized

      depreciation and amortization for its lease rights of $149,004, deferred

      financing costs of $42,354, machinery and equipment modifications of

      $214,365 and equipment and furniture of $9,507.



      Deferred income tax asset - The Company's deferred income tax asset

      amounted to $755,193 at December 31, 2000 as compared to $876,305 at

      December 31, 1999. The deferred tax asset decreased in 2000 primarily from

      the tax effects of the following two items. First, the Company previously

      reported a net gain on the original sale of the Scrubgrass Project for tax

      reporting purposes which is being amortized into earnings for financial

      reporting purposes over the life of the lease. Second, the Company is

      entitled to make tax-deductible contributions to its pension plan for 2000

      which will be deducted for financial reporting purposes in future years.



      Deferred gain, net - The Company's deferred gain, net amounted to

      $4,780,365 as of December 31, 2000 as compared to $5,088,776 as of

      December 31, 1999. The decline is due to the amortization of the deferred

      gain related to the Scrubgrass Project, which is being amortized on a

      straight-line basis over 22 years.



The Company also offers the following information to discuss changes in its

operating assets and liabilities which most notably impacted its cash position

during 2000:



      Receivable from utility - The Company's receivable from utility amounted

      to $7,336,408 as of December 31, 2000 as compared to $3,703,922 as of

      December 31, 1999. The Scrubgrass Project collects its receivable from

      utility on a monthly basis 23 business days after the month of power

      generation. Typically, the Company's balance sheet at the end of each

      period reflects two months of outstanding receivables from the utility.

      However, because December had 23 business days in 1999, the Company

      collected its revenues for power generation in November 1999 on December

      30, 1999. As such, the Company's receivable from utility as of December

      31, 2000, which included power generation revenues for November and

      December 2000, was higher by comparison to the balance as December 31,

      1999, which only included power generation revenues for December 1999. The

      receivable from utility balance as of December 31, 2000 also increased by

      comparison to December 31, 1999 because of the increases in 2000 revenues

      discussed above under "Results of Operations".



                                       22
<PAGE>

      Other current assets - The Company's other current assets amounted to

      $760,980 as of December 31, 2000 as compared to $645,852 as of December

      31, 1999. The increase in 2000 is largely attributable to increases in

      fuel inventory and prepaid insurance. These increases were offset in part

      by the collection of an insurance refund which was receivable as of

      December 31, 1999.



      Accounts payable and accrued expenses - The Company's accounts payable and

      accrued expenses amounted to $6,952,054 as of December 31, 2000 as

      compared to $4,751,906 as of December 31, 1999. The increase in 2000 is

      primarily attributable to the following reasons. First, due to the

      requirements of certain operating agreements, the Scrubgrass Project must

      pay certain accounts payable and accrued expenses on the same day it

      collects the receivable from utility. As such, the Company's accounts

      payable and accrued expenses had a comparable increase to the increase in

      receivable from utility (see "Receivable from utility" above). Second, the

      Company had an increase in corporate taxes payable which amounted to

      $743,208 and $539,780 as of December 31, 2000 and 1999, respectively. The

      increase in corporate taxes payable was mostly attributable to the related

      increase in income tax expense. However, due to the availability of safe

      harbor provisions, the Company was able to defer most of its 1999

      corporate tax payments to 2000 without penalty. Because similar safe

      harbor provisions were not available in 2000, cash provided by operating

      activities for 2000 was disproportionately affected by corporate tax

      payments for both years. Third, as discussed under "Results of

      Operations", the Company incurred increases in numerous expenses during

      2000 which led to corresponding increases in accounts payable and accrued

      expenses. These increases in accounts payable and accrued expenses were

      offset in part by a decrease in accrued bond interest which amounted to

      $517,196 and $1,096,460 as of December 31, 2000 and 1999, respectively.

      Due to the replacement of the letter of credit, the tax-exempt bonds were

      all redeemed and reissued in November 2000. As such, the outstanding

      interest payable to bondholders was reduced as of December 31, 2000.



      Long-term debt to supplier - The Company financed the 1997 rewind of the

      Scrubgrass generator with an installment note from the generator

      manufacturer which had outstanding balances of $190,446 and $276,948 as of

      December 31, 2000 and December 31, 1999, respectively. The decrease in

      2000 is due to a scheduled installment payment made during the second

      quarter of 2000. The Company's next installment of $100,000 is due in May

      2001 and is included in other current liabilities on the accompanying

      balance sheet as of December 31, 2000.



    Investing Activities



The Company used $291,009, $284,623 and $277,331 in investing activities during

2000, 1999 and 1998, respectively. The Company's investing activities are

concentrated primarily in the following areas:



      Notes receivable - The Company presently has notes receivable related to

      the 1994 sale of the Sunnyside Project and had notes receivable related to

      fees earned in 1995 for the Scrubgrass Project. The Company collected

      $46,062 and $39,128 from notes receivable related to the Scrubgrass

      Project in 1999 and 1998, respectively. The notes receivable related to

      the Sunnyside Project are the subject of a legal proceeding. See "Item 1.

      Business - Sunnyside" and "Item 3. Legal Proceedings" for further

      information about the Sunnyside Project and this litigation.



      Restricted cash - The Company is contractually required to make scheduled

      deposits to a restricted maintenance fund for the Scrubgrass Project to

      ensure that funds are available in the future for scheduled major

      equipment overhauls. The Company is allowed to use restricted cash for

      major equipment overhauls subject to certain restrictions. During 2000,

      1999 and 1998, the Company made scheduled deposits to the restricted major

      maintenance fund of $678,524, $739,128 and $682,275, respectively. During

      2000, 1999 and 1998, the Company's payments for major equipment overhauls

      amounted to $418,670, $1,271,141 and $384,057, respectively. The remaining

      changes to restricted cash primarily pertain to investment earnings on

      available cash balances. Major equipment overhauls are subject to

      certification by an independent engineer and are performed on a schedule

      which can differ widely from year to year. The selection of equipment for

      service and/or replacement each year depends on factors such as the

      condition of the equipment, expected wear and tear, and recommendations

      made by equipment manufacturers.



                                       23
<PAGE>

      Property, plant and equipment - The Company invested $3,023, $829,117 and

      $5,196 in property, plant and equipment expenditures during 2000, 1999 and

      1998, respectively. During 1999, the Company made machinery and equipment

      modifications of $811,568 to improve the air quality emission systems at

      the Scrubgrass facility. The balance of capital expenditures in each

      period were purchases of office equipment for the Company's corporate

      headquarters.



    Financing Activities



The Company used $177,283, $2,524,046 and $12,088,261 in financing activities

during the years ended December 31, 2000, 1999 and 1998, respectively. The

Company's financing activities are concentrated primarily in the following

areas:



      Dividends - The Company has a quarterly dividend program which is subject

      to review and consideration by the Board of Directors each quarter. In

      respect of this dividend program, the Company declared dividends on its

      common stock of $684,408 (6 cents per share), $684,408 (6 cents per

      share), and $1,026,611 (9 cents per share) during 2000, 1999 and 1998,

      respectively. The Company also paid dividends of $5,000 per year to its

      subsidiary's preferred stockholder during 2000, 1999 and 1998. Due to the

      timing of declaring and paying dividends on its common stock, the Company

      declared dividends of $171,102, $171,102, and $10,266,105 during 2000,

      1999, and 1997, respectively, which were paid in the following years. As

      such, the Company paid dividends of $689,408, $518,306 and $11,297,716

      during 2000, 1999 and 1998, respectively.



      Working Capital Loan - The Company may borrow from the Lessor up to $4

      million under a Lessee Working Capital Loan Agreement for the ongoing

      working capital requirements of the Scrubgrass Project. The Company had

      outstanding borrowings under the Lessee Working Capital Loan Agreement of

      $2,742,961 and $1,994,619 as of December 31, 2000 and 1999, respectively.

      As discussed under "Receivable from utility" above, the Company collected

      additional revenues from PENELEC during 1999 by comparison to 2000. As a

      result, the outstanding borrowings under the Lessee Working Capital Loan

      Agreement were unusually low as of December 31, 1999. On January 4, 2001,

      the Company collected its power generation revenues from November 2000 and

      reduced the outstanding borrowings under the Lessee Working Capital Loan

      Agreement to $2,031,283, which balance is more comparable to the balance

      as of December 31, 1999.



      Term Credit Facility - In June 1997, the Lessor entered into a three year

      credit facility with the lenders of the Scrubgrass Project which made $3

      million available to the Scrubgrass Project to cover the cash deficiency

      which resulted from the extended annual outage of the Scrubgrass Project

      and associated costs and expenses. On July 1, 1998, the maximum allowable

      borrowings under this credit facility began reducing in $600,000

      increments every six months through July 3, 2000 when the credit facility

      expired. The Company made payments of $600,000, $1,550,000 and $850,000

      for this obligation during 2000, 1999 and 1998, respectively.



      Notes payable - In addition to the term credit facility described

      previously, the Company has other long-term obligations related to its

      Sunnyside Project and Scrubgrass Project in the amounts of $1,040,116 and

      $1,188,573, respectively as of December 31, 2000. The Sunnyside Project

      long-term obligations are payable based on a schedule which relates

      directly to the amount of proceeds received from the collection of the

      outstanding notes receivable from the sale of the Company's interest in

      the Sunnyside Project, which are the subject of a litigation described in

      "Item 3. Legal Proceedings". The Scrubgrass Project obligation has

      scheduled annual maturities which began in 1998 and continue through 2004.

      The Company made its scheduled payments for the Scrubgrass Project

      obligation of $60,695 and $18,543 during 1999 and 1998, respectively.

      There was no scheduled payment for the Scrubgrass Project obligation due

      in 2000.



      Notes receivable- The Company has outstanding notes receivable from its

      officers and directors for shares purchased in connection with certain

      stock option plans which amounted to $445,948 and $809,731 as of December

      31, 2000 and 1999, respectively. The Company collected $363,783 from its

      officers and directors on these notes during 2000.



                                       24
<PAGE>

    Cash Flow Outlook



During 2001, the Company expects the principal sources of cash to fund its

business activities will be from available cash balances, investment earnings

and cash which may become available from the Scrubgrass Project. As discussed in

"Item 1. Business - Scrubgrass", the Company is not able to receive

distributions from the Scrubgrass Project until all operating expenses, base

lease payments, certain restricted cash deposits and other subordinated payments

of the Scrubgrass Project are satisfied. Nevertheless, the Scrubgrass Project's

cash flows in 2001 are expected to be sufficient to satisfy all of these

restrictions and provide the Company with continuing distributions for the

foreseeable future. According to certain agreements, the Scrubgrass Project is

scheduled to make payments in 2001 of $302,826 for debt and $808,936 for

deposits to restricted cash.



As discussed under the caption "Certain Factors That May Affect Future

Results--Environmental Regulation", the Scrubgrass Project needed to achieve

certain seasonal NOx emission levels beginning on May 1, 1999, and will also be

required to achieve reduced emission standards by May 2003. Due to the efficient

design of the Scrubgrass facility, the Scrubgrass Project met the new Fiscal

1999 requirements without any modifications to the Facility. However, the

Company made capital improvements of $811,568 during 1999 to the Facility, which

are expected to enable the Facility to meet the stricter standards in 2003. By

making improvements to the Facility before 2003, the Company anticipated that it

would not require a portion of its future NOx Credits to maintain its compliance

with the applicable regulations. Consequently, the Company sold its anticipated

excess NOx Credits and used the proceeds to finance the capital improvements and

generate additional working capital. The Company expects to comply with all

material environmental regulations for the foreseeable future without any

additional material modifications to the Scrubgrass facility.



Recently, NEG has been in long-term refinancing discussions with the lending

agent for the Scrubgrass Project. Through these discussions, NEG has addressed

the following financing requirements for the Scrubgrass Project:



1)  the Lessor's tax-exempt bond letter of credit expired in December 2000 and

    needed to be replaced or extended.



2)  Buzzard is required to pay the balance of its Lessee Working Capital Loan to

    zero for a minimum of 20 days during 2001 and 2002.



3)  Buzzard's Lessee Working Capital Loan commitment expires in December 2002.



4)  PENELEC's contracted payment terms will be extended by 20 days beginning in

    July 2003, which is expected to create the need for additional working

    capital.



In November 2000, NEG replaced the expiring letter of credit with a new letter

of credit expiring on December 31, 2006. Under the terms of the replacement

letter of credit, the Lessor paid an origination fee of $105,000 in 2000 and

agreed to pay additional fees of approximately $417,000 per year beginning in

2001. Buzzard is required to reimburse the Lessor for these fees under the terms

of the Scrubgrass Project lease.



NEG continues to address the remaining three financing matters with the lending

agent of the Scrubgrass Project. Recently, NEG reached a provisional agreement

with the lending agent which is expected to address all of the remaining

financing matters. Under the terms of this provisional agreement, the available

working capital facility would be increased from $4 million to $10 million

through 2005 with annual paydown requirements of $2.5 million in 2001 and 2002,

and $8 million in 2003 through 2005. After 2005, the available working capital

facility and annual paydown requirements would reduce incrementally until the

expiration of the proposed working capital facility in 2008. Due to its credit

constraints, the lending agent is expected to transfer a portion of its existing

Scrubgrass Project loan commitments to another financial institution in order to

provide the proposed working capital facility. At this time, the Company has no

reason to believe that the provisional agreement would not eventually be

finalized. However, present uncertainties in the energy market could cause

delays in locating a suitable financial institution for the lending agent's

transferable loan commitments (See "Certain Factors That May Affect Future

Results - Third Party Project Management"). Should there be delays in finalizing

the working capital facility, the Company's distributions from the Scrubgrass

Project may be delayed or reduced. As time passes, there can also be no

assurance that the terms of the provisional agreement would not be amended to

reflect changes in market conditions.



                                       25
<PAGE>

As discussed further in "Item 1. Business - Sunnyside" and "Item 3. Legal

Proceedings, the Company is seeking financial recoveries from the Purchasers of

SCA in a legal proceeding. Recently, the Company and the Purchasers prepared a

written settlement agreement for the legal proceeding which is awaiting final

approval and execution by all the parties. At this time, the Company expects the

settlement agreement would be approved and that the Company would receive a

financial recovery during 2001.



The Company's corporate structure is very complicated and involves multiple

entities resulting in several layers of tax for the Company and its

shareholders. Prior to 1998, the Company was not adversely affected by this

corporate structure because of the existence of significant net operating loss

carryforwards. However, since utilizing its remaining net operating loss

carryforwards in 1997, the Company's cash position has been materially affected

by ongoing corporate tax payments. Furthermore, due to timing differences

between earnings recognition and cash flow availability at the Scrubgrass

Project, the Company may be taxed on earnings prior to the receipt of

distributions from the Scrubgrass Project. As a result, the Company faces

considerable challenges to predict its available cash resources at any point in

time. To date, the Company has considered numerous tax and restructuring

proposals to reduce the extent of its corporate taxation. The Company has also

implemented some of these proposals and realized some modest reductions in it

overall tax burden. However, due to various limitations, such as restrictive

covenants in project financing arrangements, the Company has not been able to

pursue any of the larger tax savings proposals considered to date. While the

Company remains diligent in its pursuit of tax saving strategies, the Company's

cash flows are expected to be affected by substantial corporate tax payments for

the foreseeable future.



The Company believes that the Scrubgrass Project would continue to achieve

earnings and cash flows from its operations on an annual basis for the

foreseeable future. The PSA has contracted rate escalations which, assuming the

Scrubgrass Project meets its targeted capacity rates, would ensure a material

increase in revenues each year over a long-term period. Furthermore, as

discussed above, the Company could receive a financial recovery from the

Sunnyside litigation which would also enhance its cash position in 2001.

Notwithstanding, the Company will continue to be affected by its obligations for

corporate taxes, restricted cash deposits and working capital. Nevertheless, the

Company believes that the cash flows which may become available from the

Scrubgrass Project, together with existing cash reserves, would be sufficient to

fund the Company's business activities on a long-term basis. However, the

payment of any future dividends will depend on the Board of Directors'

evaluation, made on a quarterly basis, based on its dividend policy and the

Company's then current and projected operating performance and capital

requirements. See the further discussions under "Item 5. Market for Registrant's

Common Equity and Related Shareholder Matters--Dividends" and "--Certain Factors

That May Affect Future Results" below.



CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS



The following important factors, among others, could cause actual results to

differ materially from those indicated by forward-looking statements made in

this Annual Report on Form 10-K.



    Ownership of Single Operating Asset



The Company owns a 22 year leasehold interest in the Scrubgrass Project, an

approximate 83 Mw (net) waste coal-fired electric generating facility located in

Pennsylvania, the lease for which commenced on June 30, 1994. Presently, all the

Company's operating revenues are attributable to power generation from the

Scrubgrass Project. Accordingly, the Company's operations are largely dependent

upon the successful and continued operation of the Scrubgrass Project. In

particular, if the Scrubgrass Project experiences unscheduled shutdowns of

significant duration, the Company's results of operations will be materially

adversely affected.



Dependence Upon Key Employees



The success of the Company is largely dependent upon a staff of three full-time

executive officers and a full-time office administrator. The loss of any of the

Company's executive officers could adversely effect the Company's operations.



                                       26
<PAGE>

    Third Party Project Management



The Company has a management services agreement with NEG to manage the

Scrubgrass Project and a 15-year operations and maintenance agreement with PG&E

Operating Services to operate the facility. Under the terms of these agreements,

there are provisions which limit the Company's participation in the management

and operation of the Scrubgrass Project, and provisions which provide for

recourse against NEG and the Operator for unsatisfactory performance. However,

the Company does not exercise control over the operation or management of the

Scrubgrass Project. As such, decisions may be made affecting the Scrubgrass

Project, notwithstanding the Company's opposition, which may have an adverse

effect on the Company.



As discussed in "Item 1: Business-Scrubgrass", NEG, PG&E Operating Services, and

certain partners of the Lessor are indirectly owned, through subsidiaries, by

PG&E Corporation. As a result of an energy crisis in California, PG&E

Corporation has been experiencing financial difficulties which are primarily

related to the regulated business activities of its subsidiary, Pacific Gas and

Electric Company. The Manager has advised the Company that NEG, PG&E Operating

Services, and the partners of the Lessor are separate businesses which are

legally protected from the creditors of PG&E Corporation. Furthermore, the

Scrubgrass Project is financed with secured debt obligations which are also

legally protected from the creditors of PG&E Corporation. As such, the Company

does not expect that it should be directly impacted by the financial

difficulties of PG&E Corporation. Notwithstanding the foregoing, the Company

cannot predict whether the uncertainty related to these recent events would

affect the perceived creditworthiness of the Scrubgrass Project.



    Scheduled and Unscheduled Shutdowns



The Scrubgrass Project from time to time experiences both scheduled and

unscheduled shutdowns. Periodically, the Scrubgrass Project incurs scheduled

shutdowns in order to perform maintenance procedures to equipment that cannot be

performed while the equipment is operating. Occasionally, the Scrubgrass Project

may also incur unscheduled shutdowns or may be required to operate at reduced

capacity levels following the detection of equipment malfunctions, or following

minimum generation orders received by the utility. During periods when the

Scrubgrass Project is shutdown or operating at reduced capacity levels, the

Company may incur losses due to the loss of its operating revenues and/or due to

additional costs which may be required to complete any maintenance procedures.



    Legal Proceedings



As discussed in "Item 1. Business - Sunnyside" and "Item 3. Legal Proceedings",

the Company is involved in a legal proceeding with the Purchasers of the

Company's interest in the Sunnyside Project. Recently, the Company and the

Purchasers prepared a written settlement agreement for the legal proceeding

which is awaiting final approval and execution by all the parties. At this time,

the Company expects the settlement agreement would be approved and that the

Company would receive a financial recovery during 2001. However, until the

settlement agreement is finalized, there can be no assurance that the litigation

would not continue in the future. Should the litigation continue, an unfavorable

resolution and/or extensive professional fees to defend the litigation could

adversely affect the Company's results of operations and financial position.



    Development Uncertainties



The Company is presently evaluating development opportunities and whether its

re-emergence into the development market could enhance shareholder value. Should

the Company re-enter the development market, there can be no assurance that the

Company would be able to obtain all of the necessary site agreements, fuel

supply contracts, design/build agreements, power sales contracts, licenses,

environmental and other permits, local government approvals or financing

commitments required for the successful completion of development projects. The

Company's failure to accomplish any of these steps could materially increase the

cost or prevent the successful completion of development projects, or cause the

Company to abandon a development project and incur the loss of its investment to

date, which could materially impact the Company's business and results of

operations.



                                       27
<PAGE>

    Financial Results



To date the Company has incurred substantial losses, primarily due to its

development activities, which have resulted in an accumulated deficit of

$3,192,721 as of December 31, 2000. While the Company was profitable from

operating activities for the last three years, the Company incurred a net loss

from the operation of the Scrubgrass Project during 1997 due to an unforeseen

repair to the generator at the Scrubgrass facility. The Company also had an

overall net loss during 1998 largely due to the write-off of the Sunnyside

project receivables. Financial results can be affected by numerous factors,

including without limitation general economic conditions, cyclic industry

conditions, the amount and rate of growth of expenses, transportation and

quality of raw materials, inflation, levels of energy rates, uncertainties

relating to government and regulatory policies, the legal environment and

volatile and unpredictable developments like the generator repair. The Company

believes it is well positioned to handle such matters as they may arise during

the course of its future business activities. However, there can be no assurance

that the Company will be profitable in the future.



    Potential Liability, Damages and Insurance



The Company's power generation activities involve significant risks to the

Company for environmental damage, equipment damage and failures, personal injury

and fines and costs imposed by regulatory agencies. In the event a liability

claim is made against the Company, or if there is an extended outage or

equipment failure or damage at the Company's power plant for which it is

inadequately insured or subject to a coverage exclusion, and the Company is

unable to defend such claim successfully or obtain indemnification or warranty

recoveries, there may be a material adverse effect on the Company.



    Circulating Fluidized Bed Technology



The Company's Scrubgrass Project employs circulating fluidized bed technology to

produce electricity. Certain aspects of this technology, as well as the

conversion of waste products into electricity, are relatively new areas being

explored by the alternative energy market in the last 20 years. Accordingly,

this technology carries greater risk than more established methods of power

generation such as hydropower. As such, the long-term costs and implications of

maintaining this technology have not been established by historical industry

data.



    Customer Concentration



The Company's power generation revenues are earned under a long-term power

purchase agreement with one customer, Pennsylvania Electric Company. The Company

expects that the concentration of its revenues with this customer will continue

for the foreseeable future.



    Interest Rates



The Company's subsidiary, as a lease cost of the Scrubgrass facility, is

required to fund the Lessor's debt service which consists of variable rate and

fixed rate debt obligations. The Company's subsidiary also has a variable rate

working capital loan and a variable rate term loan all of which were advanced

from the Lessor under various Scrubgrass Project agreements. The Company offers

the following information about these debt obligations:



                                       28
<PAGE>

<TABLE>

<CAPTION>



                                            BALANCE AT                                 MATURES

     DESCRIPTION OF THE OBLIGATION           12/31/00           INTEREST RATE          THROUGH

--------------------------------------------------------------------------------------------------

<S>                                        <C>               <C>                         <C>

Lessor's term debt obligations:

   Variable rate tax-exempt bonds          $135,600,000      Quoted Bond Rates           2012

   Swap rate term loan                       12,541,087      Swapped LIBOR + 1.250%      2005

   Variable rate term loan                   10,061,427      LIBOR + 1.250%              2004



Buzzard's term debt obligation:

   Variable rate working capital loan         2,742,961      LIBOR + 1.1250%             2002

   Variable rate term loan                    1,188,573      LIBOR + 1.250%              2004

</TABLE>



The Lessor's debt obligations and Buzzard's debt obligation incur interest at

either quoted rates or variable rates which are based on the London Interbank

Offering Rate ("LIBOR"). On December 22, 1995, the Lessor entered into an

interest rate swap arrangement which fixed the LIBOR component for the life of

its swap rate term loan at 6.4225%. As a result, the interest rate for the swap

rate term loan was fixed at 7.5475% (LIBOR + 1.125%) through December 31, 2000

and 7.6725% (LIBOR + 1.25%) for the remaining term of the obligation. As such,

except for the Lessor's swap rate term loan, the Company will be required to

fund debt service consisting of rates which will vary with market conditions.

Presently, the Company is not able to predict how future interest rates will

affect its debt or lease obligations. Should market interest rates rise

significantly, the Company's operating results may be significantly impacted.

Notwithstanding, the Company believes the Lessor has good relationships with the

project lenders who would continue to support lending terms which would not have

a material adverse affect on the operating results of the Scrubgrass Project.

However, there can be no assurance that the Lessor could renegotiate its credit

facilities under terms which would ensure continuing profitable operating

results of the Scrubgrass Project. See Notes H, I and L of the accompanying

Consolidated Financial Statements for further information about the Company's

debt and lease obligations.



    Fuel Quality



The Company obtains waste coal primarily from coal mining companies on a

long-term basis because waste coal is plentiful and generally creates

environmental hazards, such as acid drainage, when not disposed of properly. The

waste coal is burned in the Scrubgrass facility using a circulating fluidized

bed combustion system. During the circulating fluidized bed combustion process,

the waste coal is treated with other substances such as limestone. Depending on

the quality of the waste coal, the facility operator may need to add additional

waste coal or other substances to create the appropriate balance of substances

which would result in the best fuel or sorbent consistency for power generation

and compliance with air quality standards. Therefore, the cost of generating

power is directly impacted by the quality of the waste coal which supplies the

Scrubgrass power generation facility. The facility operator maintains certain

controls over obtaining higher quality waste coal. However certain conditions,

such as poor weather, can create situations where the facility operator has less

control over the quality of the waste coal. The Company cannot predict the

extent to which poor fuel quality may impact its future operating results.



    Competition



The Company, through its subsidiary, generates electricity using waste coal, an

alternative energy source, all of which electricity is sold at rates established

under a long-term power purchase agreement with PENELEC, a division of GPU. This

power purchase agreement has been approved by the Pennsylvania Public Utility

Commission. Other than the risk that PENELEC would assert a position and achieve

judicial determination that it has a right to renegotiate the terms of the power

purchase agreement (see "Energy Regulation"), the sale of power from our

existing facility is not subject to competition during the term of the power

purchase agreement. However, since the Company's contracted rates in the later

years of the agreement are determined with reference to then existing market

conditions, the rate at which such power is sold is influenced by competitive

power rates in the



                                       29
<PAGE>

region. Therefore, low wholesale energy rates during the later years of the

power purchase agreement would negatively impact the Company's profitability and

could affect its financial position.



Further, expansion of our business through acquisition and/or development of

additional facilities would be affected by competition from various sources. The

principal sources of competition in this market include traditional regulated

utilities who have excess capacity, unregulated subsidiaries of regulated

utilities, energy brokers and traders, energy service companies in the

development and operation of energy-producing projects as well as the marketers

of electric energy, equipment suppliers and other non-utility generators like

the Company. The electric industry is also characterized by rapid changes in

regulations which the Company expects could continue to increase competition.

For instance, as discussed under "Energy Markets", the electric industry has

been previously affected by legislation such as PURPA and the Energy Act which

have encouraged companies other than utilities to enter the electric power

business by reducing regulatory constraints and increasing access to markets.

More recently, as discussed under "Energy Regulation", there has been

legislation in numerous states deregulating aspects of the electric business and

encouraging a highly competitive rate environment. Furthermore, initiatives to

repeal or modify existing regulations could further reduce regulatory

restrictions placed on electricity producers and encourage them to create new

sources of electric power. Any of these regulatory matters, among others, could

increase competition.



The Company's present operations, as well as any possible future expansion in

the industry, are also affected by requirements for compliance with various

local, state and federal environmental laws and regulations. (See "Environmental

Regulation"). As such, the Company's operating costs are subject to increases

resulting from expanded environmental regulations. Such increases could

negatively impact profitability from current operations and could affect the

Company's competitive position in pursing further expansion through acquisition

and/or development.



Presently, competition in this industry is substantially based on price, with

competitors striving for lower cost alternatives for providing electricity. The

cost of producing electricity is in large measure influenced by the capital

costs of generating and transmitting facilities as well as the operating costs,

including fuel costs, of such facilities. As natural gas prices have risen and

supplies have tightened during 2000, the overall cost advantage of that fuel

source has diminished and consideration is again being given to other

conventional and non-conventional fuel sources. In addition, electricity

shortages in certain major markets, as well as a general increase in demand,

have tightened overall availability of generating capacity which may exert

upward pressure on rates.



In previous years, the Company competed in the market to develop power

generation facilities. The primary bases of competition in this market are

price, the ability of the developer to generate high quality opportunities and

to select and acquire environmentally permittable sites in favorable locations

as well as to create attractive and efficient development plans which can be

financed and cost effectively constructed. In most cases, competitive bidding

for a development opportunity is required. In recent years, the Company believed

there were limited opportunities for additional project development in the

United States for projects similar to those previously developed by the Company.

Since there were many companies with substantially greater resources than the

Company competing for these limited development opportunities, the Company

believed it was not in a favorable competitive position. Therefore, the Company

has not been actively pursuing development opportunities in recent years.

However, the Company now believes that current market conditions may be more

favorable for smaller developers. As such, the Company is presently evaluating

development opportunities and whether its re-emergence into this market could

enhance shareholder value.



Presently, there is also significant merger and consolidation activity in the

electric industry. During 2000, the Company engaged an investment consultant to

consider sale or merger proposals that may present an opportunity to enhance

shareholder value. To date, the Company has evaluated several preliminary

proposals; however, none of these preliminary proposals has offered sufficient

value to shareholders or likelihood of consummation to warrant further

consideration. The Company continues to evaluate proposals from time to time and

still believes this strategy could present an opportunity to maximize

shareholder value in the future. Should the Company decide to expand its

business activities, it would consider the possible acquisition of existing

facilities as well as the development of new projects.



                                       30
<PAGE>

Energy Regulation



The Company's facility is subject to certain regulation under federal and state

laws and regulations, and is certified as a QF by the FERC. Pursuant to PURPA,

FERC has promulgated regulations which exempt certain QFs from the Federal Power

Act of 1935, PUHCA, and, except under certain limited circumstances, state laws

regulating the rates charged by electric utilities. In order to be QFs under

PURPA, any facilities which the Company might acquire or develop will be

required to meet certain size, fuel and ownership requirements and/or

co-generate. In addition to the regulation of QFs, PURPA requires that electric

utilities purchase electric energy produced by QFs at negotiated rates or at a

price equal to the incremental or avoided cost that would have been incurred by

the utility if it were to generate the power itself or purchase it from another

source. The Company is not presently subject to regulation under PUHCA and does

not presently intend to engage in any activities that would cause it to be so

regulated.



The nature and impact of potential future changes of laws or regulations on the

Company's projects is unknown at this time. Presently, there are numerous

pending legislative proposals which suggest a comprehensive restructuring of the

electric utility industry. These proposals advocate, among other things, retail

choice for all utility customers, the opportunity for utilities to recover their

prudently incurred stranded costs in varying degrees, and the repeal of both

PURPA and PUHCA. If PURPA is amended or repealed, the statutory requirement that

electric utilities purchase electricity from QFs at full avoided cost could be

repealed or modified. While existing contracts are expected to be honored, the

repeal or modification of these statutory purchase requirements under PURPA in

the future could increase pressure from electric utilities to renegotiate

existing contracts. Should there be changes in statutory purchase requirements

under PURPA, and should these changes result in amendments to the Company's

current power purchase agreement which reduce the contracted rates, the

Company's results of operations and financial position could be negatively

impacted.



State public utility commissions, pursuant to state legislative authority, may

have jurisdiction over how any new federal initiatives are implemented in each

state. The actual scope of jurisdiction over independent power projects by state

public utility regulatory commissions varies from state to state. Presently,

through its power purchase agreement with PENELEC, the Scrubgrass Project is

indirectly affected by state legislation in the Commonwealth of Pennsylvania.



On December 3, 1996, in response to changes in the electric industry, the

Commonwealth of Pennsylvania passed legislation known as the Electricity

Generation Customer Choice and Competition Act (Customer Choice Act) which

became effective on January 1, 1997. The Customer Choice Act provides for the

deregulation of the generation portion of electric business by permitting all

Pennsylvania retail electric customers to choose their electric generation

supplier over a phase-in period which expired December 31, 2000. The Customer

Choice Act required that all electric utilities file restructuring plans with

the PUC. PENELEC filed its proposed restructuring plan during 1997, which was

subsequently litigated by numerous parties, and later settled by an agreement

which was approved by the PUC on October 20, 1998. The settlement agreement set

forth a comprehensive plan for restructuring PENELEC's service and for ensuring

there would be competition for electric generation for all of PENELEC's

customers beginning on January 1, 1999. Most pertinently, the restructuring

plan, as approved by the PUC, provided for PENELEC to maintain a separate

non-utility generator cost recovery mechanism for accounting purposes.

Therefore, the restructuring plan is designed, in pertinent part, to enable

PENELEC to recover all of its costs from non-utility generators such as the

Scrubgrass plant and should serve to decrease the pressure on PENELEC to

renegotiate existing power contracts with non-utility generators.



On November 21, 2000, the shareholders of GPU and FirstEnergy Corp. approved a

merger of these two companies. FirstEnergy and GPU have applied for approval of

their merger to Federal Energy Regulatory Commission, New Jersey Board of Public

Utilities, Pennsylvania Public Utility Commission, Nuclear Regulatory

Commission, Federal Communications Commission, Securities and Exchange

Commission, and the Department of Justice under the Hart-Scott-Rodino Act. The

Company has been monitoring these merger activities to determine whether such

activities would have an unfavorable impact on the Scrubgrass Project.



                                       31
<PAGE>

Presently, except as discussed above, neither the Customer Choice Act nor

PENELEC's restructuring plan directly impacts the Company, since the legislation

and restructuring plan pertain to the retail market or new contracts in the

wholesale market. Nevertheless, the Company continues to monitor regulatory

developments in order to evaluate any impact on the Scrubgrass Project and

possible new business opportunities.



    Environmental Regulation



The Company's projects are subject to various federal, state and local

regulations pertaining to the protection of the environment, primarily in the

areas of water and air pollution. In many cases, these regulations require a

lengthy and complex process of obtaining and maintaining licenses, permits and

approvals from federal, state and local agencies. The Company also has

significant administrative responsibilities to monitor its compliance with the

regulations. As regulations are enacted or adopted in any of these

jurisdictions, the Company cannot predict the effect of compliance therewith on

its business. The Company's failure to comply with all the applicable

requirements could require modifications to operating facilities. During periods

of non-compliance, the Company's operating facilities may be forced to shutdown

until the compliance issues are resolved. The Company is responsible for

ensuring the compliance of its facilities with all the applicable requirements

and, accordingly, attempts to minimize these risks by dealing with reputable

contractors and using appropriate technology to measure compliance with the

applicable standards. The Company believes the Scrubgrass Project, its only

operating project, is currently in compliance with all material applicable

environmental regulations. The Scrubgrass Project most notably has been affected

by the following environmental regulations:



      Air Quality - The Scrubgrass Project is subject to air quality regulations

      under the Federal Clean Air Act of 1970 (CAA). CAA Title I established

      National Ambient Air Quality Standards (NAAQS) for certain pollutants

      including ozone, sulfur dioxide, nitrogen dioxide, particulate matter,

      carbon monoxide and lead. In particular, CAA Title I established the

      Northeast Ozone Transport Region, which includes 12 northeast states and

      the District of Columbia, to address the transport of these pollutants

      which may lead to the non-attainment of the ozone NAAQS in the Northeast.

      Ozone control is facilitated by the control of pollutant precursors, which

      are nitrogen oxides (NOx) and volatile organic compounds. Electric

      generating facilities that use fossil fuels, including the Scrubgrass

      facility, are considered major sources of NOx emissions. In recent years,

      the Pennsylvania Department of Environmental Protection (PaDEP)

      established regulations that required companies with stationary sources of

      NOx emissions to establish plans to reduce their NOx emissions. To

      administer these regulations, the PaDEP began allocating Nitrogen Oxide

      Ozone Transport Region Budget Allowances ("NOx Credits") to facilities

      based on numerous factors including the design and operation of each

      facility. A market-based trading system was established to allow companies

      with excess NOx Credits to trade with companies that required additional

      NOx Credits to meet the stricter requirements. More recently, an Ozone

      Transport Commission (OTC) established certain inner and outer zones with

      seasonal NOx emission reductions that required the Scrubgrass Project to

      achieve certain targeted NOx emission levels beginning on May 1, 1999.

      Under the OTC's requirements, the Scrubgrass Project will also be required

      to achieve reduced emission standards by May 2003. Due to the efficient

      design of the Scrubgrass facility, the Scrubgrass Project met the new 1999

      requirements without any modifications to the facility. However, the

      Company made capital improvements of $811,568 in 1999 to the Scrubgrass

      facility, which are expected to enable the Scrubgrass facility to meet the

      stricter standards in 2003. The Company expects to meet the NAAQS for

      sulfur dioxide, nitrogen dioxide, particulate matter, carbon monoxide and

      lead for the foreseeable future without any additional material

      modifications to the Scrubgrass facility.



      Waste Disposal - The Scrubgrass Project must also comply with various

      environmental regulations pertaining to the handling and disposal of

      hazardous and non-hazardous wastes. The PaDEP establishes classifications

      for wastes and requires companies to follow certain handling and disposal

      procedures for each waste classification. Currently, the Scrubgrass

      Project employs special handling procedures for the transportation of its

      fuel, which is classified as a waste, from the waste sites to the

      Scrubgrass facility. The fuel is burned in the Scrubgrass facility where

      it is treated with various substances such as limestone during the

      electric generation process. Ash, which is a byproduct of the electric

      generation process, is removed from the Scrubgrass facility and returned

      to the original waste site which is reclaimed in part by deposit of the

      ash along with the soil.



                                       32
<PAGE>

      Under existing regulations, ash is not classified as a hazardous waste.

      However, various environmental organizations have recently been lobbying

      for changes to the applicable regulations for the classification of ash.

      If there are changes to the waste classification of ash, the Company's ash

      disposal costs may significantly increase which could have material

      adverse affect on the Company's results of operations and financial

      position.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Company's most significant market risk exposure is changing interest rates

which may affect its short-term investments, its debt and certain of its lease

expenses. The Company offers the following information about these market risks:



      Short-term investments - The Company invests cash balances which are in

      excess of its normal operating requirements in short term investments

      generally with maturities of 3 months of less. Because of the short

      duration of these investments, the Company does not believe its short-term

      investments are subject to material market risk.



      Debt - The Company has borrowings which bear interest at variable rates

      which are based on the London Interbank Offering Rate (LIBOR). The Company

      monitors market conditions for interest rates and, from time to time,

      enters into interest rate swaps to manage its interest payments. The

      interest rate swaps have the effect of converting the variable rate

      borrowings to fixed rate borrowings for specified time periods. For

      further information on the Company's interest rate risk, refer to "Item 7.

      Management's Discussion and Analysis of Financial Condition and Results of

      Operations - Certain Factors That May Impact Future Results -- Interest

      Rates".



      Lease Expense - The Company, as a lease cost of the Scrubgrass facility,

      is required to fund the Lessor's debt service which consists of fixed rate

      borrowings and borrowings which bear interest at variable rates based on

      either quoted bond rates or the London Interbank Offering Rate (LIBOR).

      NEG monitors market conditions for interest rates and, from time to time,

      enters into interest rate swaps to manage the interest payments for the

      Scrubgrass facility. The interest rate swaps have the effect of converting

      the variable rate borrowings to fixed rate borrowings for specified time

      periods. For further information on the Company's interest rate risk,

      refer to "Item 7. Management's Discussion and Analysis of Financial

      Condition and Results of Operations - Certain Factors That May Impact

      Future Results -- Interest Rates".



                                       33
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The financial statements listed in the following Index to Financial Statements

are filed as a part of this annual report under Item 14 - Exhibits, Index to

Financial Statements, and Reports on Form 8-K.



                          INDEX TO FINANCIAL STATEMENTS



                                                                            PAGE



ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES



Independent Auditors' Report                                                F-1



Consolidated Balance Sheets as of December 31, 2000 and 1999                F-2



Consolidated Statements of Operations for the Years Ended December 31,

2000, 1999 and 1998                                                         F-3



Consolidated Statements of Shareholders' Deficit for the Years Ended

December 31, 2000, 1999 and 1998                                            F-4



Consolidated Statements of Cash Flows for the Years Ended December 31,

2000, 1999 and 1998                                                         F-5



Notes to Consolidated Financial Statements                                  F-6



ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



                  None



                                       34
<PAGE>

                                    PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS



Information with respect to the directors of the Company may be found in the

section captioned "Occupations of Directors" appearing in the definitive Proxy

Statement to be delivered to shareholders in connection with the Annual Meeting

of Shareholders to be held on June 26, 2001. Such information is incorporated

herein by reference.



The Company's executive officers, which are elected annually by the Board of

Directors and serve at the discretion of the Board, are as follows:



      NAME               AGE                    POSITION



Joseph E. Cresci          58        Chairman and Chief Executive Officer



Donald A. Livingston      58        President and Chief Operating Officer



William D. Linehan        35        Treasurer, Secretary and Chief Financial

                                    Officer



Joseph E. Cresci, a founder of the Company, has served as Chairman and Chief

Executive Officer since the Company's inception in 1982, as Treasurer of the

Company from its inception until September 1987 and as President from inception

until September 1991. From 1976 to 1982, Mr. Cresci was President and Chief

Executive Officer of G.E. Stimpson Co., Inc. and Stimpson Systems, Inc., a

distributor of office and printing products. From 1972 to 1975, Mr. Cresci was

President of Ogden Recreation, Inc., a subsidiary of Ogden Corp. (NYSE) where he

was responsible for the operation of racing facilities, a hotel/resort, a

parking company and a promotions company providing services to large crowd

facilities. Mr. Cresci was Executive Vice President and Chief Operating Officer

of Garden State Racing Association from 1969 to 1972. From 1967 to 1969, he was

an associate lawyer with the Philadelphia law firm of Townsend, Elliott and

Munson. Mr. Cresci holds a B.A. degree from Princeton University and a law

degree from Cornell Law School and is a member of the Pennsylvania and

Massachusetts Bar Associations.



Donald A. Livingston, a founder of the Company, has served as President and

Chief Operating Officer since September 1991, and as Executive Vice President

from the Company's inception until September 1991. From 1974 to 1982, Mr.

Livingston was President and Chief Executive Officer of Green Mountain

Outfitters, Inc., a manufacturer and distributor of large plastic parts. During

the three previous years, he was a partner in the financial services firm of

Capital Resources, Inc., where he was involved in obtaining debt and equity

funds, and negotiating mergers and acquisitions. Mr. Livingston was a registered

representative in the retail stock brokerage business with Baxter, Blyden and

Selheimer from 1967 to 1971 and Bellamah, Neuhauser & Barrett from 1965 to 1967.



William D. Linehan has served as Treasurer, Secretary and Chief Financial

Officer of the Company since March 29, 1996. Prior to his employment with the

Company, Mr. Linehan was most recently employed since 1993 as manager in the

audit and consulting practice of Moody, Cavanaugh and Company, where he

specialized in providing audit, tax advisory and business consulting services to

closely-held corporations. From 1991 to 1993, Mr. Linehan was the Controller of

Technology Procurement, Inc. and later the Secretary and Treasurer of Computer

Finance and Rental, Inc., a corporation formed in 1993 after a corporate

reorganization of Technology Procurement, Inc., where he was responsible for

managing the accounting and financial activities of these corporations, which

both were distributors and lessors of computer equipment and related peripheral

products. From 1987 to 1991, Mr. Linehan was employed in the middle market audit

and consulting practice of KPMG Peat Marwick, where he advanced to the position

of supervisor and specialized in providing audit and management advisory

services to publicly-traded and privately-held growth companies. Mr. Linehan,

who received a Bachelor of Science Degree in Accountancy from Bentley College in

1987, is a Certified Public Accountant in the Commonwealth of Massachusetts and

a member of the American Institute of Certified Public Accountants.



ITEM 11. EXECUTIVE COMPENSATION



                                       35
<PAGE>

Information with respect to this item may be found in the section captioned

"Compensation and Other Information Concerning Directors and Officers" appearing

in the definitive Proxy Statement to be delivered to shareholders in connection

with the Annual Meeting of Shareholders to be held on June 26, 2001. Such

information is incorporated herein by reference.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



Information with respect to this item may be found in the sections captioned

"Principal Holders of Voting Securities" and "Election of Directors" appearing

in the definitive Proxy Statement to be delivered to shareholders in connection

with the Annual Meeting of Shareholders to be held on June 26, 2001. Such

information is incorporated herein by reference.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Information with respect to this item may be found in the section captioned

"Compensation and Other Information Concerning Directors and Officers" appearing

in the definitive Proxy Statement to be delivered to shareholders in connection

with the Annual Meeting of Shareholders to be held on June 26, 2001. Such

information is incorporated herein by reference.



                                       36
<PAGE>

                                     PART IV



ITEM 14. INDEX TO FINANCIAL STATEMENTS, EXHIBITS, AND REPORTS ON FORM 8-K



The following documents are filed as part of this annual report:



         (a) 1.    CONSOLIDATED FINANCIAL STATEMENTS





                ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

                                                                            PAGE



Independent Auditors' Report                                                F-1



Consolidated Balance Sheets as of December 31, 2000 and 1999                F-2



Consolidated Statements of Operations for the Years Ended December 31,

2000, 1999 and 1998                                                         F-3



Consolidated Statements of Shareholders' Deficit for the Years Ended

December 31, 2000, 1999 and 1998                                            F-4



Consolidated Statements of Cash Flows for the Years Ended December 31,

2000, 1999 and 1998                                                         F-5



Notes to Consolidated Financial Statements                                  F-6



         (a) 2.   FINANCIAL STATEMENT SCHEDULES



The Company is not required to file any financial statement schedules which are

outlined in Article 5 of the Securities and Exchange Commission regulations.



         (a) 3.   EXHIBITS



The following Exhibits are included in this report:



          EXHIBIT                                                  INCORPORATION

          NUMBER        DESCRIPTION                                  REFERENCE



           3.01       Certificate of Incorporation, as amended.          A



           4.02       Bylaws of the Registrant, as amended.              L



           10.01      Joint Development Agreement among Milesburg        E

                      Energy, Inc., U.S. Gen and Environmental

                      Power Corporation dated July 30, 1996 (a

                      written request for confidential treatment

                      of certain proprietary information in this

                      agreement has been filed with the United

                      States Securities and Exchange Commission)



           10.12      Stock Purchase Agreement for 20,000 shares         F

                      of common stock of Milesburg Energy, Inc.,

                      between Environmental Power Corporation and

                      Neil W. Hedrick, Richard Mase and Sylvia B.

                      Mase, dated April 30, 1987.



           10.13      Non-resource Secured Note of Environmental         F

                      Power Corporation to Neil W. Hedrick,

                      Richard Mase and Sylvia B. Mase for

                      $220,000, dated April 30, 1987.



           10.14      Non-resource Secured Note of Environmental         F

                      Power Corporation to Neil W. Hedrick,

                      Richard Mase and Sylvia B. Mase for

                      $4,900,000, dated April 30, 1987.



           10.15      Note of Milesburg Energy, Inc., to Antrim          F

                      Mining, Inc., for $41,000, dated April 30,

                      1987.



                               37
<PAGE>

           10.16      Note of Milesburg Energy, Inc., to Richard         F

                      Mase and Sylvia B. Mase for $139,000, dated

                      April 30, 1987.



           10.17      Electric Energy Purchase Agreement between         F

                      West Penn Power Company and Milesburg

                      Energy, dated February 25, 1987.



           10.18      Agreement for the Sale of Electric Energy          F

                      from the Scrubgrass Generating F Plant by

                      and between Pennsylvania Electric Company

                      and Scrubgrass Power Corporation dated

                      August 7, 1987 which was assigned by

                      Scrubgrass Power Corporation to Scrubgrass

                      Generating Company, L.P. on December 15,

                      1990 and assigned by Scrubgrass Generating

                      Company, L.P. to Buzzard Power Corporation

                      on June 17, 1994.



           10.19      Supplemental Agreement for the Sale of             F

                      Electric Energy from the Scrubgrass

                      Generating Plant by and between

                      Pennsylvania Electric Company and

                      Scrubgrass Power Corporation dated February

                      22, 1989, as amended by letter agreement

                      dated March 28, 1989, which was assigned by

                      Scrubgrass Power Corporation to Scrubgrass

                      Generating Company, L.P. on December 15,

                      1990 and assigned by Scrubgrass Generating

                      Company, L.P. to Buzzard Power Corporation

                      on June 17, 1994.



           10.20      Second Supplemental Agreement for the Sale         F

                      of Electric Energy from the Scrubgrass

                      Generating Plant by and between

                      Pennsylvania Electric Company and

                      Scrubgrass Power Corporation dated

                      September 27, 1989 which was assigned by

                      Scrubgrass Power Corporation to Scrubgrass

                      Generating Company, L.P. on December 15,

                      1990 and assigned by Scrubgrass Generating

                      Company, L.P. to Buzzard Power Corporation

                      on June 17, 1994.



           10.21      Third Supplemental Agreement for the Sale          F

                      of Electric Energy from the Scrubgrass

                      Generating Plant by and between

                      Pennsylvania Electric Company and

                      Scrubgrass Power Corporation dated August

                      13, 1990 which was assigned by Scrubgrass

                      Power Corporation to Scrubgrass Generating

                      Company, L.P. on December 15, 1990 and

                      assigned by Scrubgrass Generating Company,

                      L.P. to Buzzard Power Corporation on June

                      17, 1994.



           10.22      Amendment to the Third Supplemental                F

                      Agreement for the Sale of Electric Energy

                      from the Scrubgrass Generating Plant by and

                      between Pennsylvania Electric Company and

                      Scrubgrass Power Corporation dated November

                      27, 1990 which was assigned by Scrubgrass

                      Power Corporation to Scrubgrass Generating

                      Company, L.P. on December 15, 1990 and

                      assigned by Scrubgrass Generating Company,

                      L.P. to Buzzard Power Corporation on June

                      17, 1994.



           10.23      Letter Agreement dated December 20, 1990           F

                      amending the Agreement for the Sale of

                      Electric Energy from the Scrubgrass

                      Generating Plant by and between

                      Pennsylvania Electric Company and

                      Scrubgrass Power Corporation dated August

                      7, 1987, as amended and supplemented from

                      time to time through November 27, 1990,

                      which was assigned by Scrubgrass Power

                      Corporation to Scrubgrass Generating

                      Company, L.P. on December 15, 1990 and

                      assigned by Scrubgrass Generating Company,

                      L.P. to Buzzard Power Corporation on June

                      17, 1994.



           10.57      1990 Stock Plan with forms of Incentive            F

                      Stock Option Agreement and Non-Qualified

                      Stock Option Agreement.



                               38
<PAGE>

           10.60      Management Services Agreement by and               F

                      between Scrubgrass Generating Company, L.P.

                      and PG&E-Bechtel Generating Company dated

                      December 15, 1990 which was assigned by

                      Scrubgrass Generating Company, L.P. to

                      Buzzard Power Corporation on June 17, 1994.

                      PG&E-Bechtel Generating Company has

                      assigned its rights to this agreement

                      ultimately to U.S. Gen. Exhibit A to this

                      agreement was omitted because it was

                      previously filed as Exhibit 10.67.



           10.61      Agreement for Operation and Maintenance of         F

                      the Scrubgrass Cogeneration Plant between

                      Scrubgrass Generating Company, L.P. and

                      Bechtel Power Corporation dated December

                      21, 1990 which was assigned by Scrubgrass

                      Generating Company, L.P. to Buzzard Power

                      Corporation on June 17, 1994. Bechtel Power

                      Corporation has assigned its rights to this

                      agreement ultimately to U.S. Operating

                      Services Company.



           10.62      First Amendment to the Agreement for               F

                      Operation and Maintenance of the Scrubgrass

                      Cogeneration Plant between Buzzard Power

                      Corporation and U.S. Operating Services

                      Company dated December 22, 1995.



           10.67      Appendix I to the Amended and Restated

                      Participation Agreement, dated as of

                      December 22, 1995, among Buzzard Power

                      Corporation, Scrubgrass Generating Company,

                      L.P., Environmental Power Corporation,

                      Bankers Trust Company and Credit Lyonnais,

                      which Appendix defines terms used and not

                      otherwise defined in other contracts.



           10.70      Stock Pledge Agreement, dated December 19,         J

                      1991, between Environmental Power

                      Corporation and Scrubgrass Generating

                      Company, L.P.



           10.71      Amended and Restated Participation

                      Agreement, dated as of December 22, 1995,

                      among Buzzard Power Corporation, Scrubgrass

                      Generating Company, L.P., Environmental

                      Power Corporation, Bankers Trust Company

                      and Credit Lyonnais.



           10.72      Amendment No. 1, dated as of May 22, 1997,         G

                      to the Amended and Restated Participation

                      Agreement, dated as of December 22, 1995,

                      among Buzzard Power Corporation, Scrubgrass

                      Generating Company, L.P., Environmental

                      Power Corporation, Bankers Trust Company

                      and Credit Lyonnais.



           10.73      Director Option Plan.                              L



           10.80      Amended and Restated Lease Agreement               F

                      between Scrubgrass Generating Company,

                      L.P., a Delaware limited partnership, as

                      Lessor, and Buzzard Power Corporation, a

                      Delaware corporation, as Lessee, dated as

                      of December 22, 1995. Schedules and similar

                      attachments listed in the Lease have been

                      omitted and the Company agrees to furnish

                      supplementally a copy of any omitted

                      schedule or attachment to the Securities

                      and Exchange Commission upon request.



           10.82      Lease between Meadow Holdings Corporation          F

                      and Environmental Power Corporation, dated

                      February 20, 1996.



           10.83      Amended and Restated Disbursement and              F

                      Security Agreement between Scrubgrass

                      Generating Company, L.P., as Lessor,

                      Buzzard Power Corporation, as Lessee,

                      Bankers Trust Company as Disbursement Agent

                      and Credit Lyonnais acting through its New

                      York Branch as Agent, dated as of December

                      22, 1995. Schedules and similar attachments

                      listed in this agreement have been omitted

                      and the Company agrees to furnish

                      supplementally a copy of any omitted

                      schedule or attachment to the Securities

                      and Exchange Commission upon request.



                               39
<PAGE>

           10.84      Amended and Restated Lessee Working Capital        F

                      Loan Agreement between Scrubgrass

                      Generating Company, L.P., as Lender, and

                      Buzzard Power Corporation, as Lessee, dated

                      as of December 22, 1995.



           10.85      Amendment No. 1, dated as of May 22, 1997,         G

                      to the Amended and Restated Disbursement

                      and Security Agreement between Scrubgrass

                      Generating Company, L.P., as Lessor,

                      Buzzard Power Corporation, as Lessee,

                      Bankers Trust Company as Disbursement Agent

                      and Credit Lyonnais acting through its New

                      York Branch as Agent, dated as of December

                      22, 1995.



           10.86      Debt Service (Tranche A) Loan Note, dated          G

                      June 3, 1997, to Credit Lyonnais acting

                      through its New York Branch, as Bank, from

                      Scrubgrass Generating Company, L.P., as

                      Borrower.



           10.87      Debt Service (Tranche B) Loan Note, dated          G

                      June 3, 1997, to Credit Lyonnais acting

                      through its New York Branch, as Bank, from

                      Scrubgrass Generating Company, L.P., as

                      Borrower.



           10.88      Debt Service (Tranche B) Loan Note, dated          G

                      June 3, 1997, to National Westminster Bank

                      acting through its New York Branch, as

                      Bank, from Scrubgrass Generating Company,

                      L.P., as Borrower.



           10.89      Buy-Out Agreement, dated as of August 26,          H

                      1997, between West Penn Power Company and

                      Milesburg Energy, Inc.



           10.90      Letter Agreement, dated as of August 26,           I

                      1997, among Environmental Power

                      Corporation, Richard Mase, Sylvia B. Mase,

                      Neil W. Hedrick and Antrim Mining, Inc.



           10.91      Amendment No. 2, dated as of September 2,          K

                      1998, to the Amended and Restated

                      Participation Agreement, dated as of

                      December 22, 1995, among Buzzard Power

                      Corporation, Scrubgrass Generating Company,

                      L.P., Environmental Power Corporation,

                      Bankers Trust Company and Credit Lyonnais.



           10.92      Amendment No. 1, updated as of October 9,          K

                      1998, to the Amended and Restated

                      Disbursement and Security Agreement between

                      Scrubgrass Generating Company, L.P., as

                      Lessor, Buzzard Power Corporation, as

                      Lessee, Bankers Trust Company as

                      Disbursement Agent and Credit Lyonnais

                      acting through its New York Branch as

                      Agent, dated as of December 22, 1995.



           10.93      Amendment No. 1, dated as of June 1, 1996,         K

                      but not executed until July 24, 1998, to

                      the Amended and Restated Lease Agreement

                      between Scrubgrass Generating Company,

                      L.P., a Delaware limited partnership, as

                      Lessor, and Buzzard Power Corporation, a

                      Delaware corporation, as Lessee, dated as

                      of December 22, 1995.



           10.94      Lease between Adams Realty Trust and               K

                      Environmental Power Corporation, dated

                      January 26, 1999.



           10.95      Settlement Agreement and Release between           K

                      GEC Alsthom International, Inc. and Buzzard

                      Power Corporation dated May 28, 1998.



           10.96      Purchase and Sale Agreements, dated as of          K

                      December 16, 1998, January 4, 1999 and

                      January 8, 1999, between PG&E Energy

                      Trading - Power, L.P. and Buzzard Power

                      Corporation pertaining to Nitrogen Oxide

                      Ozone Transport Region (NOx) Budget

                      Allowances



           10.97      Environmental Power Corporation Medical            K

                      Expense Reimbursement Plan effective as of

                      September 1, 1998 and dated as of December

                      18, 1998



                               40
<PAGE>

           10.98      Environmental Power Corporation Defined            K

                      Benefit Pension Plan effective as of

                      January 1, 1998 and dated as of December

                      23, 1998



           10.99      Settlement Agreement, dated August 3, 1999         L

                      and effective February 27, 2000, among

                      Buzzard Power Corporation, Scrubgrass

                      Generating Company L.P. and Pennsylvania

                      Electric Company.



           11         Computation of Earnings per Share



           21         Subsidiaries of the Registrant



           23.1       Consent of Deloitte & Touche LLP



           99.01      Order of Pennsylvania Public Utility               F

                      Commission in connection with Milesburg

                      Energy, Inc., adopted September 21, 1989.



         INCORPORATION REFERENCES:



           A          Previously filed as part of Registration Statement No.

                      33-9808 (the "Registration Statement"), filed with the

                      Securities and Exchange Commission on October 28, 1986.



           E          Previously filed as part of the Company's Report on Form

                      10-Q for the period ended September 30, 1996.



           F          Previously filed as part of the Company's Report on Form

                      10-K for the year ended December 31, 1996.



           G          Previously filed as part of the Company's Report on Form

                      10-Q for the period ended June 30, 1997.



           H          Previously filed as part of the Company's Report on Form

                      8-K dated as of September 8, 1997.



           I          Previously filed as part of the Company's Report on Form

                      8-K dated as of December 19, 1997.



           J          Previously filed as part of the Company's Report on Form

                      10-K for the year ended December 31, 1997.



           K          Previously filed as part of the Company's Report on Form

                      10-K for the year ended December 31, 1998.



           L          Previously filed as part of the Company's Report on Form

                      10-K for the year ended December 31, 1999.



         (b)  REPORTS ON FORM 8-K



                  None



                                       41
<PAGE>

                                   SIGNATURES



Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange

Act of 1934, the registrant has duly caused this report to be signed on its

behalf by the undersigned, thereunto duly authorized.



DATED:                              ENVIRONMENTAL POWER CORPORATION



March 29, 2001                      By /s/ JOSEPH E. CRESCI

                                       -------------------------------------

                                       Joseph E. Cresci, Chairman

                                       and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act 1934, this report

has been signed below by the following persons on behalf of registrant and in

the capacities and on the dates indicated.



         SIGNATURE                     TITLE                           DATE





/s/ JOSEPH E. CRESCI              Chairman, Chief                 March 29, 2001

---------------------------       Executive Officer,

    Joseph E. Cresci              & Director (Principal

                                  Executive Officer)





/s/ DONALD A. LIVINGSTON          President & Chief               March 29, 2001

---------------------------       Operating Officer

    Donald A. Livingston





/s/  WILLIAM D. LINEHAN           Treasurer, Chief                March 29, 2001

---------------------------       Financial Officer

     William D. Linehan           & Secretary (Principal

                                  Financial Officer)





/s/ PETER J. BLAMPIED             Director                        March 29, 2001

---------------------------

     Peter J. Blampied





/s/ EDWARD B. KOEHLER             Director                        March 29, 2001

---------------------------

    Edward B. Koehler





/s/ ROBERT I. WEISBERG            Director                        March 29, 2001

---------------------------

    Robert I. Weisberg



                                       42
<PAGE>

                          INDEPENDENT AUDITORS' REPORT





Board of Directors and Shareholders of

      Environmental Power Corporation





We have audited the accompanying consolidated balance sheets of Environmental

Power Corporation (the "Corporation") and subsidiaries as of December 31, 2000

and 1999 and the related consolidated statements of operations, shareholders'

deficit, and cash flows for each of the three years in the period ended December

31, 2000. These consolidated financial statements are the responsibility of the

Corporation's management. Our responsibility is to express an opinion on the

consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted

in the United States of America. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes examining, on a

test basis, evidence supporting the amounts and disclosures in the financial

statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall

financial statement presentation. We believe that our audits provide a

reasonable basis for our opinion.



In our opinion, such consolidated financial statements present fairly, in all

material respects, the financial position of Environmental Power Corporation and

subsidiaries as of December 31, 2000 and 1999, and the results of their

operations and their cash flows for each of the three years in the period ended

December 31, 2000 in conformity with accounting principles generally accepted in

the United States of America.



As discussed in Notes B and O to the consolidated financial statements, the

Corporation changed its method of accounting for major equipment overhauls in

1999.



/s/ DELOITTE & TOUCHE LLP

-------------------------------

Deloitte & Touche LLP



Boston, Massachusetts

March 16, 2001



                                      F-1
<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

<TABLE>

<CAPTION>



                                                                              December 31     December 31

                                                                                 2000             1999

                                                                              ------------    ------------

<S>                                                                           <C>             <C>

ASSETS



CURRENT ASSETS:

    Cash and cash equivalents                                                 $    307,666    $    306,188

    Restricted cash                                                                587,476         299,490

    Receivable from utility                                                      7,336,408       3,703,922

    Other current assets                                                           760,980         645,852

                                                                              ------------    ------------

                      TOTAL CURRENT ASSETS                                       8,992,530       4,955,452



PROPERTY, PLANT AND EQUIPMENT, NET                                                 558,015         778,864



DEFERRED INCOME TAX ASSET                                                          755,193         876,305



LEASE RIGHTS, NET                                                                2,310,507       2,459,511



ACCRUED POWER GENERATION REVENUES                                               56,188,143      49,152,131



OTHER ASSETS                                                                       479,786         559,739

                                                                              ------------    ------------



                     TOTAL ASSETS                                             $ 69,284,174    $ 58,782,002

                                                                              ============    ============



LIABILITIES AND SHAREHOLDERS' DEFICIT



CURRENT LIABILITIES:

    Accounts payable and accrued expenses                                     $  6,952,054    $  4,751,906

    Dividends payable on common stock                                              171,102         171,102

    Other current liabilities                                                    3,045,787       2,694,619

                                                                              ------------    ------------

                    TOTAL CURRENT LIABILITIES                                   10,168,943       7,617,627



DEFERRED GAIN, NET                                                               4,780,365       5,088,776



SECURED PROMISSORY NOTES PAYABLE

    AND OTHER BORROWINGS                                                         2,116,309       2,394,237



ACCRUED LEASE EXPENSES                                                          56,188,143      49,152,131

                                                                              ------------    ------------

                   TOTAL LIABILITIES                                            73,253,760      64,252,771

                                                                              ------------    ------------



SHAREHOLDERS' DEFICIT:

    Preferred Stock ($.01 par value; 1,000,000 shares authorized;

         no shares issued)                                                              --              --

    Preferred Stock (no par value, 10 shares authorized; 10 shares

         issued at December 31, 2000 and 1999, respectively)                           100             100

    Common Stock ($.01 par value; 20,000,000 shares authorized;

         12,525,423 shares issued at December 31, 2000 and 1999,

         respectively; 11,406,783 shares outstanding at December 31,

         2000 and 1999, respectively)                                              125,254         125,254

    Accumulated deficit                                                         (3,192,721)     (4,330,121)

                                                                              ------------    ------------

                                                                                (3,067,367)     (4,204,767)



    Treasury stock (1,118,640 common shares, at cost, as of

         December 31, 2000 and 1999, respectively)                                (456,271)       (456,271)

    Notes receivable from officers and board members                              (445,948)       (809,731)

                                                                              ------------    ------------

                    TOTAL SHAREHOLDERS' DEFICIT                                 (3,969,586)     (5,470,769)

                                                                              ------------    ------------



                    TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT               $ 69,284,174    $ 58,782,002

                                                                              ============    ============

</TABLE>



See Notes to Consolidated Financial Statements.



                                      F-2
<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>

<CAPTION>



                                                                            YEAR ENDED DECEMBER 31

                                                                --------------------------------------------

                                                                    2000            1999            1998

                                                                ------------    ------------    ------------

<S>                                                             <C>             <C>             <C>

POWER GENERATION REVENUES                                       $ 54,303,222    $ 48,268,311    $ 45,721,473



COSTS AND EXPENSES:

     Operating expenses                                           22,291,069      21,931,318      19,215,459

     Lease expenses                                               26,415,897      23,110,677      22,971,201

     General and administrative expenses                           3,602,960       2,455,095       2,196,929

     Depreciation and amortization                                   415,230         363,234         285,471

                                                                ------------    ------------    ------------

                                                                  52,725,156      47,860,324      44,669,060

                                                                ------------    ------------    ------------

OPERATING INCOME                                                   1,578,066         407,987       1,052,413

                                                                ------------    ------------    ------------



OTHER INCOME (EXPENSE):

     Interest income                                                 736,867         110,975         156,546

     Interest expense                                               (320,641)       (375,176)       (460,812)

     Amortization of deferred gain                                   308,411         308,411         308,411

     Sale of NOx emission credits                                  1,156,338         606,960              --

     Write-off of receivables in litigation                               --              --      (3,508,498)

     Other income                                                         --             (32)          7,809

                                                                ------------    ------------    ------------

                                                                   1,880,975         651,138      (3,496,544)

                                                                ------------    ------------    ------------



INCOME (LOSS) BEFORE INCOME TAXES                                  3,459,041       1,059,125      (2,444,131)



INCOME TAX (EXPENSE) BENEFIT                                      (1,632,233)       (470,552)        794,945

                                                                ------------    ------------    ------------



INCOME (LOSS) BEFORE CUMULATIVE EFFECT

    OF A CHANGE IN ACCOUNTING PRINCIPLE                            1,826,808         588,573      (1,649,186)



CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING

   PRINCIPLE, NET OF $812,440 IN INCOME TAXES                             --       1,188,989              --

                                                                ------------    ------------    ------------



NET INCOME (LOSS)                                               $  1,826,808    $  1,777,562    $ (1,649,186)

                                                                ============    ============    ============



DIVIDENDS PAID OR PAYABLE:

     Common shares                                              $    684,408    $    684,408    $  1,026,611

     Preferred shares                                                  5,000           5,000           5,000

                                                                ------------    ------------    ------------

                                                                $    689,408    $    689,408    $  1,031,611

                                                                ============    ============    ============



DIVIDENDS PAID OR PAYABLE PER COMMON SHARE                      $       0.06    $       0.06    $       0.09

                                                                ============    ============    ============



BASIC AND DILUTED EARNINGS (LOSS) PER

    COMMON SHARE:

          Income (loss) before cumulative effect of a

             change in accounting principle                     $       0.16    $       0.05    $      (0.14)

          Cumulative effect of a change in accounting

             principle                                                    --            0.11              --

                                                                ------------    ------------    ------------

          Net income (loss)                                     $       0.16    $       0.16    $      (0.14)

                                                                ============    ============    ============



PRO FORMA AMOUNTS ASSUMING THE CHANGE IN

      ACCOUNTING WAS APPLIED RETROACTIVELY:



           Net income (loss)                                                    $    588,573    $ (1,429,609)



           Basic and diluted earnings (loss) per common share                   $       0.05    $      (0.12)



See Notes to Consolidated Financial Statements.

</TABLE>



                                      F-3
<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

<TABLE>

<CAPTION>



                                     PREFERRED      PREFERRED       COMMON

                                       STOCK          STOCK         STOCK

                                     ($.01 PAR       (NO PAR      ($.01 PAR      ACCUMULATED

                                       VALUE)         VALUE)        VALUE)         DEFICIT

                                    -----------    -----------    -----------    -----------

<S>                                 <C>            <C>            <C>            <C>

BALANCE AT JANUARY 1, 1998          $         0    $       100    $   125,254    $(2,737,478)



      Net loss                                                                    (1,649,186)

      Dividends paid                                                              (1,031,611)

                                    -----------    -----------    -----------    -----------

BALANCE AT DECEMBER 31, 1998                  0            100        125,254     (5,418,275)



      Net income                                                                   1,777,562

      Dividends paid                                                                (689,408)

                                    -----------    -----------    -----------    -----------

BALANCE AT DECEMBER 31, 1999                  0            100        125,254     (4,330,121)



      Net income                                                                   1,826,808

      Notes receivable repayments

      Dividends paid                                                                (689,408)

                                    -----------    -----------    -----------    -----------

BALANCE AT DECEMBER 31, 2000        $         0    $       100    $   125,254    $(3,192,721)

                                    ===========    ===========    ===========    ===========



                                                   RECEIVABLE

                                                  FROM OFFICERS                     TOTAL

                                      TREASURY      AND BOARD                    SHAREHOLDERS'

                                       STOCK         MEMBERS                       DEFICIT

                                    -----------    -----------                   -----------



BALANCE AT JANUARY 1, 1998          $  (456,271)   $  (809,731)                  $(3,878,126)



      Net loss                                                                    (1,649,186)

      Dividends paid                                                              (1,031,611)

                                    -----------    -----------                   -----------

BALANCE AT DECEMBER 31, 1998           (456,271)      (809,731)                   (6,558,923)



      Net income                                                                   1,777,562

      Dividends paid                                                                (689,408)

                                    -----------    -----------                   -----------

BALANCE AT DECEMBER 31, 1999           (456,271)      (809,731)                   (5,470,769)



      Net income                                                                   1,826,808

      Notes receivable repayments                      363,783                       363,783

      Dividends paid                                                                (689,408)

                                    -----------    -----------                   -----------

BALANCE AT DECEMBER 31, 2000        $  (456,271)   $  (445,948)                  $(3,969,586)

                                    ===========    ===========                   ===========

</TABLE>



See Notes to Consolidated Financial Statements.



                                      F-4
<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>

<CAPTION>



                                                                                Year Ended December 31

                                                                  --------------------------------------------

                                                                       2000            1999            1998

                                                                  ------------    ------------    ------------

<S>                                                               <C>             <C>             <C>

CASH FLOWS FROM OPERATING ACTIVITIES:

    Net income (loss)                                             $  1,826,808    $  1,777,562    $ (1,649,186)

    Adjustments to reconcile net income (loss) to net cash

       provided by operating activities:

          Depreciation and amortization                                415,230         363,234         285,471

          Deferred income taxes                                        121,112         137,816      (1,008,806)

          Cumulative effect of a change in accounting principle             --      (1,188,989)             --

          Amortization of deferred gain                               (308,411)       (308,411)       (308,411)

          Write-off of receivables in litigation                            --              --       3,508,498

          Accrued power generation revenues                         (7,036,012)     (7,765,631)     (8,024,111)

          Accrued lease expenses                                     7,036,012       7,765,631       8,024,111

          Changes in operating assets and liabilities:

               (Increase) decrease in receivable from utility       (3,632,486)      2,894,942         (60,219)

               (Increase) decrease in other current assets            (115,128)        175,610          60,476

               Decrease (increase) in other assets                      37,599          (9,268)        (14,346)

               Increase (decrease) in accounts payable and

                   accrued expenses                                  2,200,148      (1,021,783)       (376,373)

               Increase in long-term liabilities                        11,400          11,400          11,400

               Decrease in long-term debt to supplier                  (86,502)        (79,672)       (192,384)

               Increase in maintenance reserve                              --              --         379,615

                                                                  ------------    ------------    ------------

                     Net cash provided by operating activities         469,770       2,752,441         635,735

                                                                  ------------    ------------    ------------



CASH FLOWS FROM INVESTING ACTIVITIES:

    Proceeds from the collection of notes receivable                        --          46,062          39,128

    (Increase) decrease in restricted cash                            (287,986)        498,432        (311,263)

    Property, plant and equipment expenditures                          (3,023)       (829,117)         (5,196)

                                                                  ------------    ------------    ------------

                   Net cash used in investing activities              (291,009)       (284,623)       (277,331)

                                                                  ------------    ------------    ------------



CASH FLOWS FROM FINANCING ACTIVITIES:

    Dividend payments                                                 (689,408)       (518,306)    (11,297,716)

    Net borrowings (repayments) under working capital loan             748,342        (395,045)         77,998

    Repayment of secured promissory notes payable and

         other borrowings                                             (600,000)     (1,610,695)       (868,543)

    Proceeds from the collection of officer notes receivable           363,783              --              --

                                                                  ------------    ------------    ------------

                  Net cash used in financing activities               (177,283)     (2,524,046)    (12,088,261)

                                                                  ------------    ------------    ------------



INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         1,478         (56,228)    (11,729,857)



CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                         306,188         362,416      12,092,273

                                                                  ------------    ------------    ------------



CASH AND CASH EQUIVALENTS, END OF PERIOD                          $    307,666    $    306,188    $    362,416

                                                                  ============    ============    ============

</TABLE>



See Notes to Consolidated Financial Statements.



                                      F-5
<PAGE>

ENVIRONMENTAL POWER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A--BUSINESS AND ORGANIZATION



Environmental Power Corporation (individually "EPC" or consolidated "the

Company") is primarily engaged in leasing an electric generating facility fueled

by waste coal. In recent years, the Company was also engaged in the development

and ownership of electric generating facilities fueled by waste coal. The

Company's business plan has been driven by the identification and evaluation of

attractive independent power projects in various stages of development. During

its project development activities, the Company, either acting alone or in

conjunction with others, has selected and arranged for the acquisition of sites,

obtained control over a portion of the waste coal fuel sources, negotiated

contracts for the design and construction of the facilities and the sale of

output to the utilities purchasing the power, arranged for financing, and

negotiated contracts for the operation and maintenance of the projects.



The Company owns a 22 year leasehold interest in an approximately 83 Mw (net)

waste coal-fired electric generating facility (the "Scrubgrass Project") located

in Pennsylvania, the lease for which commenced on June 30, 1994. Previously, the

Company held varying ownership interests (100% to 40%) in an approximately 51 Mw

(net) waste coal-fired electric generating facility (the "Sunnyside Project")

located in Utah and owned the development rights to an existing decommissioned

43 Mw (net) coal-fired electric generating facility (the "Milesburg Project")

located in Pennsylvania. The Company sold its remaining interest in the

Sunnyside Project on December 31, 1994 and is presently involved in litigation

with the Purchasers to collect the balance of the Purchasers' obligations for

the sale. The Company sold its development rights for the Milesburg Project on

December 5, 1997 to the utility which had contracted to purchase electricity

from such project. The Company's projects are discussed further in the following

sections.



    Scrubgrass



The Scrubgrass Project, located on a 600 acre site in Venango County,

Pennsylvania, is a waste coal-fired electric generating station (the "Facility")

which was constructed by Bechtel Power Corporation. The construction contract

provided for a guaranteed net electrical output of 82.85 MW and final completion

was achieved in June 1994.



On June 30, 1994, Buzzard Power Corporation ("Buzzard"), a subsidiary of EPC,

entered into an agreement to lease the Facility from Scrubgrass Generating

Company, L.P. (the "Lessor"), a joint venture of certain wholly owned indirect

subsidiaries of PG&E Corporation and Bechtel Generating Company, Inc. On October

20, 1998, Bechtel Generating Company, Inc. transferred its interest in the

Lessor to a wholly owned subsidiary of Cogentrix Energy, Inc. The lease provides

for an initial term of 22 years with a renewal option for up to 3 years.

Pursuant to the lease, the Lessor assigned to Buzzard all principal project

agreements and its rights and obligations thereunder including, but not limited

to, the power purchase agreement, operations and maintenance agreement,

limestone supply agreements, ground lease agreements, fuel agreements and

transportation and materials handling agreements. EPC has pledged Buzzard's

common stock to the Lessor as security for Buzzard's performance of its

obligations as lessee. PG&E National Energy Group ("NEG"), a wholly owned

indirect subsidiary of NEG, Inc., which in turn is a wholly owned indirect

subsidiary of PG&E Corporation, manages the Scrubgrass Project.



PG&E Operating Services Company (the "Operator"), a wholly owned indirect

subsidiary of NEG, Inc., operates the Facility pursuant to a 15-year Operating

and Maintenance Agreement (the "O&M"). The Operator prepares a budget for all

operating expenses, including a fixed management fee, and certain targeted

output performance levels, which is approved annually. Under the terms of the

O&M, the Operator can incur a liability not to exceed its management fee if the

Operator does not achieve certain targeted output performance levels.



Buzzard maintains a long-term supply agreement with Quality Aggregates, Inc. to

supply the Scrubgrass Project with limestone which, in September 1999, was

extended through the year 2008 and which may be extended up to 10 additional

years. Buzzard also maintains a 15-year agreement with Savage Industries, Inc.

for the transportation of



                                      F-6
<PAGE>

fuel, ash and limestone which expires in 2005. The costs established under these

agreements will escalate at partially fixed and partially indexed rates.



Buzzard sells electric output to Pennsylvania Electric Company ("PENELEC"),

pursuant to a twenty-five year Power Sales Agreement ("PSA") which commenced in

June 1993, at fixed rates initially averaging 4.68 cents per kwh and which

escalate at five percent per year through calendar year 1999. For the years 2000

through 2012, the PSA provides for a rate equal to the greater of a scheduled

rate or a rate based on the PJM Billing Rate (the monthly average of the hourly

rates for purchases by the General Public Utilities Group ("GPU") from, or sale

by GPU to, the Pennsylvania-New Jersey-Maryland Interconnection). For the years

2013 through 2015 and 2016 through 2018, if the renewal term option is

exercised, the PSA provides for a rate equal to the lower of the average monthly

PJM Billing Rate or the rate paid for the calendar year 2012 adjusted annually

by the percentage change in the Gross National Product Deflator less one

percent. The Facility achieved commercial operation on June 8, 1993.



Since October 1995, the Company had been involved in a legal proceeding with

PENELEC whereby, among other complaints, the Company alleged that PENELEC failed

to pay the Lessor and Buzzard contract rates for power in excess of 80 MW

produced by the Facility. On August 3, 1999, the Lessor and Buzzard jointly

entered into a settlement agreement with PENELEC to terminate the ongoing

litigation. The settlement agreement did not become effective until the date

PENELEC obtained a final non-appealable Order of the Pennsylvania Public Utility

Commission ("PAPUC") approving the settlement agreement in form and substance

acceptable to PENELEC (the "Effective Date"). Under the terms of the settlement

agreement, in full settlement of all alleged claims, PENELEC agreed to pay the

Plaintiffs for all previous net deliveries of electric energy from the

Scrubgrass facility in excess of 80 MW at rates set forth in the PSA, minus the

total payments PENELEC previously made at 90% of a market based rate, plus

interest at the legal rate of 6%. PENELEC also agreed in the settlement

agreement to pay for future net deliveries of electric energy at the rates set

forth in the PSA subject to, among other conditions, certain annual and hourly

limits, with energy purchased in excess of such limits paid for at a market

based rate. On January 27, 2000, the PAPUC issued an Order adopting the

settlement agreement. After a 30 day period without any appeals, the Order

became final and non-appealable on February 27, 2000, the Effective Date. On

March 24, 2000, PENELEC remitted the outstanding balances due under the

settlement agreement for previous net deliveries of electric energy and interest

which amounted to approximately $3,687,000 and $608,000, respectively. The

Company reported these revenues in its Consolidated Statement of Operations for

2000.



Buzzard deposits all revenues earned under the PSA into an account administered

by a disbursement agent. Before Buzzard can receive cash generated by the

Scrubgrass Project, all operating expenses, base lease payments (which are

described below), certain maintenance reserve and other subordinated payments

must be satisfied. Buzzard, as lessee, is required to pay the Lessor, in

addition to a specified base rent, which consists of all of the Lessor's debt

service, equity repayment, base return on equity and related expenses, an

additional rent of 50 percent of the net cash flows Buzzard receives from the

Scrubgrass Project's operations. Buzzard is not required to fund operating

losses, or otherwise invest further, from sources outside of the Scrubgrass

Project.



On December 22, 1995, the Lessor restructured certain of the Scrubgrass

Project's debt, the primary effect of which was to extend the term of its demand

debt through 2004 and extend a portion of its junior subordinated debt through

1999. In connection with the Lessor's debt restructuring, Buzzard was able to

refinance a portion of its own current liabilities with a variable rate term

obligation which matures through 2004. Since the Lessor's debt restructuring,

Buzzard has continued to fund the Lessor's debt service obligations as a base

lease payment and its own term obligation which are described in the following

table:



                                      F-7
<PAGE>

<TABLE>

<CAPTION>



                                         BALANCE AT      BALANCE AT                               MATURES

    DESCRIPTION OF THE OBLIGATION         12/31/00        12/31/99         INTEREST RATE          THROUGH

------------------------------------------------------------------------------------------------------------




<S>                                     <C>             <C>              <C>                        <C>
Lessor's term debt obligations:

   Variable rate tax-exempt bonds       $135,600,000    $135,600,000     Quoted Bond Rates          2012

   Swap rate term loan                    12,541,087      14,412,000     Swapped LIBOR + 1.250%     2005

   Variable rate term loan                10,061,427      10,061,427     LIBOR + 1.250%             2004



Buzzard's term debt obligation:

   Variable rate term loan                 1,188,573       1,188,573     LIBOR + 1.250%             2004

</TABLE>



The Lessor's debt obligations and Buzzard's debt obligation incur interest at

either quoted rates or variable rates which are based on the London Interbank

Offering Rate ("LIBOR"). On December 22, 1995, the Lessor entered into an

interest rate swap arrangement which fixed the LIBOR component for the life of

its swap rate term loan at 6.4225%. As a result, the interest rate for the swap

rate term loan was fixed at 7.5475% (LIBOR + 1.125%) through December 31, 2000

and 7.6725% (LIBOR + 1.25%) for the remaining term of the obligation. The

Lessor's tax-exempt bonds incurred interest at floating rates ranging from 3.35%

to 6.15% and 2.8% to 4.2% during 2000 and 1999, respectively. Under the terms of

the Lessor's loan agreements, the Company is subject to various customary

financial and operating covenants. As of December 31, 2000 and 1999, NEG

believes the Company was in compliance with all such covenants.



During 1997, the Company's planned maintenance outage was significantly extended

because the Company needed to perform a complete rewind on the Facility's

generator. The Facility's extended outage created an extensive cash flow

deficiency because of the loss of revenues plus associated costs and expenses.

The Company addressed this cash deficiency by securing additional debt

financing, negotiating agreements with the generator manufacturer, and utilizing

available restricted cash which are each discussed as follows:



      Term Credit Facility - In June 1997, the Lessor entered into a three-year

      credit facility with the lenders of the Scrubgrass Project to provide up

      to $3 million to fund general debt service expenses. The maximum allowable

      borrowings under this credit facility were $3 million through July 1,

      1998. On July 1, 1998, the maximum allowable borrowings began reducing in

      $600,000 increments every six months through July 3, 2000, at which time

      the credit facility expired. As of December 31, 2000 and 1999, the

      outstanding borrowings under this credit facility, which were advanced to

      the Company by the Lessor, amounted to $-0- and $600,000, respectively.



      Agreements with Generator Manufacturer - Prior to the 1997 outage, the

      Company negotiated extended financing terms with GEC Alsthom ("GEC"), the

      manufacturer of the Facility's generator, which allowed the Company to pay

      the $660,000 cost of the generator repair in six annual installments of

      $110,000, without interest, beginning in May 1997. On April 15, 1998, the

      Company reached an agreement with GEC which modified the terms of its

      original financing contract. Under the terms of the original contract, the

      Company had yet to pay five installments of $110,000 and had also agreed

      to pay an additional $75,000 bonus to GEC for completing its work ahead of

      a pre-established schedule. Furthermore, the Company engaged GEC to

      perform certain maintenance procedures to the generator during the 1998

      scheduled outage at the Facility. Under the terms of the revised agreement

      with GEC, as payment in full for the work performed during the 1998 outage

      and for the five remaining installments of $110,000 and $75,000 bonus owed

      under the original contract, the Company agreed to pay GEC a total of

      $450,000 over a four-year period. The revised agreement provides that

      $50,000 was payable upon the completion of the work during the scheduled

      1998 plant outage and that $100,000 is payable upon each of the first four

      anniversaries of the first payment thereof. As of December 31, 2000 and

      1999, the Company has recorded on its balance sheet the next installment

      of $100,000 in its other current liabilities and the present value of the

      remaining installments, discounted at the Facility's incremental borrowing

      rate (6.75%), which amounted to $90,446 and $176,948, respectively, in its

      other borrowings. The Company is recognizing the balance of the remaining

      installments under the revised agreement, which



                                      F-8
<PAGE>

      amounted to $9,554 and $23,052 as of December 31, 2000 and 1999,

      respectively, as interest expense over the remaining term of the financing

      contract with GEC. During 1998, the Company recognized, through a

      reduction of its operating expenses, the reduction of the present value of

      the future installments due to GEC, which amounted to $169,045. The

      Company also recognized interest expense of $13,498, $20,328 and $26,661

      during 2000, 1999 and 1998, respectively, under the agreements with GEC.



      Utilization of Restricted Cash - The Company utilized its restricted cash

      reserves to finance most of its additional maintenance expenditures

      incurred during the 1997 outage since substantially all of such

      expenditures were deemed to be major overhauls. Under the terms of its

      project agreements, the Company began replenishing these restricted funds

      over a seven-year period beginning in 1998.



The Environmental Protection Agency and the Pennsylvania Department of

Environmental Protection (the "Regional Authorities") grant Nitrogen Oxide Ozone

Transport Region Budget Allowances ("NOx Credits") to the Company based on

numerous factors which primarily pertain to the design and operation of the

Facility. The Company is required annually to maintain sufficient NOx Credits

which equal or exceed the quantity of its nitrogen oxide emissions during a

specified seasonal period (the "ozone season"). If the Company's nitrogen oxide

emissions exceed its available NOx Credits, the Company would be subject to

fines by the Regional Authorities. During 1999, the Company installed machinery,

with a cost of $811,568, which is expected to significantly reduce its nitrogen

oxide emissions. As such, the Company anticipates that it may not require a

portion of its future NOx Credits to maintain its compliance with the applicable

regulations. Because NOx Credits are transferable and marketable, the Company

may sell its available NOx Credits or purchase additional NOx credits that are

necessary to meet the applicable regulations.



During 1998, the Company expected to receive an aggregate of 1,549 NOx Credits

during 1999 and 2000, which would be available for use during the 1999, 2000,

2001 and 2002 ozone seasons. Therefore, during December 1998 and January 1999,

the Company entered into commitments to sell an aggregate of 839 NOx Credits,

which the Company projected would not be needed to comply with the applicable

regulations during those ozone seasons. However, the Company was informed in

1999 that 111 projected available NOx Credits would not be received and,

accordingly, the Company terminated the sales commitment for that portion of the

NOx Credits. During 2000, the Company received an aggregate of 1,077 NOx Credits

for the ozone seasons in 2000, 2001 and 2002, of which 546 NOx Credits were

subject to existing sales commitments and sold for $1,161,888. During 1999, the

Company received 361 NOx Credits for the 1999 ozone season, of which 182 NOx

Credits were subject to existing sales commitments and sold for $629,720. The

Company also purchased 15 NOx Credits in 2000 for $5,550 and 36 NOx Credits in

1999 for $22,760 which were required to comply with the applicable regulations

during those ozone seasons. The Company has included the net proceeds from sales

of NOx Credits of $1,156,338 and $606,960 for 2000 and 1999, respectively, in

other income on the accompanying financial statements. As of December 31, 2000,

the Company has 180 NOx Credits available for the 2001 and 2002 ozone seasons.



    Sunnyside



The Sunnyside Project is an approximately 51 Mw (net) waste coal-fired facility

at a site located adjacent to the Sunnyside Coal Mine in Carbon County, Utah

which was constructed by Parsons Main, Inc., ("PMI"). The facility reached

commercial operation on November 19, 1993. The Sunnyside Project is owned by

Sunnyside Cogeneration Associates ("SCA"), a joint venture in which the Company

owned varying majority interests from 100% to approximately 70% until September

28, 1994 and thereafter an approximate 40% interest until December 31, 1994 at

which time the Company sold its remaining interest in SCA to B&W Sunnyside, Inc.

and NRG Sunnyside, Inc. (collectively, "the Purchasers").



In connection with the sale, the Company received total consideration of

$6,042,294 which included cash of $2,792,294 received on January 5, 1995 and

promissory notes aggregating $3,250,000, bearing interest at 10% per annum,

received on December 31, 1994. In addition, after audits were performed to

verify certain financial information for SCA, the Purchasers were required to

pay a purchase price closing adjustment of $1,061,107 in 1995. Under the terms

of the promissory notes, interest is payable quarterly to the Company and

aggregate



                                      F-9
<PAGE>

principal payments of $312,500, $1,187,500 and $1,750,000 were due on September

30, 1995, December 31, 1996 and December 31, 1997, respectively. To date, the

Purchasers have made principal payments aggregating $312,500 and quarterly

interest payments through March 31, 1996 pursuant to the promissory notes. The

Purchasers have also made aggregate payments of $708,000 toward the purchase

price closing adjustment. However, as more fully described in "Note N - Legal

Proceedings", the Purchasers commenced a legal proceeding with the Company on

May 3, 1996. Pending the resolution of the legal proceeding, the Purchasers have

withheld all payments of principal and interest due on the promissory notes

since June 1996. The Purchasers are also disputing the balance of the purchase

price closing adjustment in the legal proceeding. As of December 31, 2000 and

1999, the Company had aggregate uncollected balances for principal, interest and

the purchase price closing adjustment due from the Purchasers of $4,686,925 and

$4,393,175, respectively, which are not recognized on the Company's Consolidated

Balance Sheets. (the "Purchasers' Obligations"). The Company was entitled to

interest income from the Purchasers of $293,750 during each of 2000, 1999 and

1998. However, in light of the Company's interest income reporting policy, the

Company did not recognize interest income from the Purchasers during these

periods.



Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 114, as

amended by SFAS No. 118, the Company is required to recognize impairment losses

on loans whenever changes in circumstances indicate that the carrying amounts of

the loans exceed their fair market values. In the case of the Purchasers'

Obligations, because there were no quoted market values, the best indication of

fair market value was the present value of the expected future cash flows from

the Purchasers' Obligations. As of December 31, 1998, given the uncertainty

surrounding the timing of collecting the Purchasers' Obligations, the Company

could not reasonably estimate a fair market value for such obligations. As such,

the Company opted to take a conservative position and write-off the Purchasers'

Obligations in its 1998 Consolidated Financial Statements. The write-off was

reported as a charge to other expense for $3,508,498 in the accompanying 1998

Consolidated Statement of Operations. The charge represents the aggregate

balance before the write-off for the notes receivable of $2,937,500 and the

receivable from sale of affiliate of $570,998. Recently, the Company has been in

discussions with the Purchasers to settle the litigation. In the event of a

settlement, the Company would report any financial recoveries as additional

income in the year of receipt. See "Note N - Legal Proceedings" for further

information about the litigation.



    Milesburg



On April 30, 1987, the Company purchased all of the outstanding capital stock of

Milesburg Energy, Inc. ("MEI"), which owned a 30 year power purchase agreement

with West Penn Power Company ("West Penn") and development rights for a retired

43 Mw (net) coal-fired facility (collectively the "Milesburg Project"). MEI's

efforts to develop the Milesburg Project were delayed by litigation with West

Penn and various industrial intervenors for approximately ten years. On August

26, 1997, the litigation was terminated when MEI and West Penn reached a Buy-Out

Agreement concerning the Milesburg Project. Pursuant to the Buy-Out Agreement,

West Penn purchased Milesburg's rights to the 30 year power purchase agreement

for the sum of $15 million plus 8% interest from the date the Buy-Out Agreement

was filed for Pennsylvania Public Utility Commission approval. Furthermore, West

Penn also assumed ownership of and responsibility for the Milesburg Project

facility, which consisted of land along with a decommissioned coal-fired

electric-generating facility erected thereon, for a stated consideration of $1.

On December 5, 1997, the date of the asset disposition, MEI received aggregate

proceeds of $15,328,768 from West Penn pursuant to the Buy-Out Agreement. After

MEI's payment of its remaining liabilities, the Company had available in excess

of $10 million from the Milesburg proceeds. In light of this projected

availability of cash, the Company's Board of Directors on December 10, 1997

declared a special dividend of 87 cents per common share payable out of the

proceeds received from the sale of the Milesburg project assets. The dividend

was payable on January 7, 1998 to stockholders of record on December 30, 1997.



On December 31, 1997, because MEI did not expect to carry on further business

activities after the sale of the Milesburg Project, EPC adopted a Plan of

Liquidation to dissolve MEI. Under the Plan of Liquidation, MEI ceased to carry

on business activities except to the extent necessary to liquidate its assets,

pay its liabilities and distribute its assets remaining after the payment of its

liabilities to EPC. During 1998, MEI's assets remaining after the payment of its

liabilities were distributed to EPC.



                                      F-10
<PAGE>

NOTE B -- SIGNIFICANT ACCOUNTING POLICIES



Principles of Consolidation: The Consolidated Financial Statements include the

accounts of Environmental Power Corporation and its wholly owned or majority

owned subsidiaries. All significant intercompany accounts and transactions have

been eliminated in consolidation.



Use of Estimates: The preparation of financial statements in conformity with

accounting principles generally accepted in the United States of America

requires management to make estimates and assumptions that effect the reported

amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of

revenues and expenses during the reporting period. Actual results could differ

from those estimates.



Cash Flows: The Company considers all highly liquid investments with a maturity

of three months or less when purchased to be cash equivalents.



Concentrations of Credit Risk: The Company's financial instruments that are

exposed to concentrations of credit risk consist primarily of cash equivalents

and receivable from utility. The Company's cash equivalents represent short-term

financial instruments which are issued from reputable financial institutions.

Receivable from utility represents amounts due from the Company's sole customer

PENELEC, a public utility with a credit rating of A by Standard & Poors,

pursuant to the terms of the 25 year power purchase agreement.



Restricted Cash: Restricted cash includes all cash held by the disbursement

agent for the Scrubgrass Project pursuant to project agreements which require

requisition and/or certification by the Lessor or bank to withdraw (See Note A).

The Company makes scheduled deposits to restricted cash accounts which are

restricted primarily for scheduled maintenance procedures.



Fuel Inventory: Fuel inventory consists primarily of handling and hauling costs

and is recorded on a lower of cost or market basis with cost determined on a

monthly weighted average basis.



Property, Plant and Equipment: Property, plant and equipment are stated at cost

less accumulated depreciation. The Company capitalizes significant renewals and

betterments that increase the useful lives of assets while repairs and

maintenance are expensed when incurred. The cost and accumulated depreciation

for property, plant and equipment disposals are removed from the balance sheet

and any resulting gains or losses are reported in the statement of operations at

the time of the asset disposition. The Company depreciates its property plant

and equipment using straight-line and accelerated methods over the estimated

useful lives of the assets. The Company records depreciation for office

equipment and furniture using the straight-line method over five years and for

machinery and equipment modifications using the double declining balance method

over seven years. The Company periodically reviews its property plant and

equipment and other long-term assets for impairment and recognizes impairment

losses in situations where the Company estimates that it will not recover the

carrying value of these assets.



Deferred Financing Costs: In 1997 and 1995, the Company incurred deferred

financing costs of $139,925 and $300,000, respectively in connection with

restructuring certain debt related to the Scrubgrass Project. Deferred financing

costs are being amortized over the respective lives of the related debt which

range from three to nine years (See Note E). Accumulated amortization related to

deferred financing costs was $318,155 and $275,801 at December 31, 2000 and

1999, respectively.



Lease Rights: Lease rights are recorded at cost and are being amortized over the

22 year lease term related to the Scrubgrass facility. Accumulated amortization

related to the lease rights was $968,553 and $819,549 at December 31, 2000 and

1999, respectively.



Accrued Power Generation Revenue and Accrued Lease Expense: As discussed in Note

A, the Company has entered into a long term agreement, to provide electricity to

PENELEC, which provides for scheduled rate increases.



                                      F-11
<PAGE>

In accordance with accounting principles generally accepted in the United States

of America, revenue has been recorded on the straight-line basis over the 22

year lease term. The accrual for power generation revenue is limited to the

amount of accrued lease expense, as described below. Therefore, no amount for

the straight-lining of future revenues, which would result in profits, has been

provided for in the Consolidated Financial Statements. Accrued power generation

revenue was $56,188,143 and $49,152,131 at December 31, 2000 and 1999,

respectively, and represents that portion of revenue earned that has not yet

been received.



As discussed in Note A, the Company has entered into a long term lease agreement

for the Scrubgrass Project which provides for scheduled lease expense increases.

In accordance with accounting principles generally accepted in the United States

of America, the scheduled lease expense has been recorded on the straight-line

basis over the 22 year lease term. Accrued lease expense was $56,188,143 and

$49,152,131 at December 31, 2000 and 1999, respectively, and represents that

portion of lease expense that has not yet been paid.



Deferred Gain: The sale of the Scrubgrass Project by the Company on December 28,

1990 was not treated as a sale for financial accounting purposes. This was

originally due to the existence of an option which enabled the Company to

reacquire Buzzard and to lease the Scrubgrass Project for a substantial portion

of its commercial operation. This option constituted a significant continuing

involvement by the Company which provided evidence that it had retained

substantial risks or rewards of ownership of the Scrubgrass Project. In December

1993, the Company agreed to a modification to the proposed form of lease thereby

relinquishing the fair market value purchase option. Accordingly, the Company

removed from the Consolidated Balance Sheet the gross assets and liabilities of

the Scrubgrass Project and recorded a deferred gain of $6,785,035 arising from

the original sale of the Scrubgrass Project in 1990. The deferred gain is being

amortized over the 22 year minimum lease term, which commenced on June 30, 1994.

Accumulated amortization of the deferred gain at December 31, 2000 and 1999 was

$2,004,670 and $1,696,259, respectively.



Maintenance Reserve: Prior to 1999, the Company recorded the expense of major

equipment overhauls on a straight-line basis using management's best estimate of

the future cash outlays. Management's estimates were charged to expense and

credited to a major maintenance reserve in anticipation of the future outlays

for major overhauls. Beginning January 1, 1999, the Company recorded the expense

of major equipment overhauls as incurred. The Company's change in accounting

principle is discussed further in Note O.



Interest Payments: The Company classifies interest payments according to the

nature of its contractual obligations. The Company's base lease payments for

interest on the Lessor's debt obligations are reported as lease expense. The

Company's interest payments on its own debt obligations are reported as interest

expense. The Company paid interest on its own debt obligations of $289,116,

$391,857 and $455,146 during the years ended December 31, 2000, 1999 and 1998,

respectively.



Income Taxes: The Company accounts for income taxes in accordance SFAS No. 109,

"Accounting for Income Taxes". This standard requires, among other things,

recognition of future tax benefits, measured by enacted tax rates, attributable

to deductible temporary differences between the financial statement and income

tax bases of assets and liabilities, and net operating loss carryforwards to the

extent that realization of such benefits is more likely than not.



Earnings (Loss) Per Common Share: The Company computes its earnings per common

share using the treasury stock method in accordance with SFAS No. 128, "Earnings

per Share". The Company computes basic earnings per share by dividing net income

for the period by the weighted average number of shares of common stock

outstanding during the period. For purposes of calculating diluted earnings per

share, the Company considers its shares issuable in connection with stock

options to be dilutive common stock equivalents when the exercise price is less

than the average market price of the Company's common stock for the period. The

following table outlines the calculation of basic earnings (loss) per share and

diluted earnings (loss) per share for the years ended December 31, 2000, 1999

and 1998.



                                      F-12
<PAGE>

<TABLE>

<CAPTION>



                                                          INCOME         SHARES       PER SHARE

                                                        (NUMERATOR)   (DENOMINATOR)    AMOUNTS

                                                        -----------    -----------   -----------

<S>                                                     <C>             <C>          <C>

YEAR ENDED DECEMBER 31, 2000:

Income available to shareholders                        $ 1,826,808     11,406,783   $       .16

Effect of dividends to preferred stockholders                (5,000)

                                                        -----------    -----------   -----------

Basic EPS - income available to common shareholders       1,821,808     11,406,783           .16

Effect of dilutive securities:

     Assumed exercise of dilutive stock options                              2,026

                                                        -----------    -----------   -----------

Diluted EPS - income available to common shareholders   $ 1,821,808     11,408,809   $       .16

                                                        ===========    ===========   ===========



YEAR ENDED DECEMBER 31, 1999:

Income available to shareholders                        $ 1,777,562     11,406,783   $       .16

Effect of dividends to preferred stockholders                (5,000)

                                                        -----------    -----------   -----------

Basic EPS - income available to common shareholders       1,772,562     11,406,783           .16

Effect of dilutive securities:

     Assumed exercise of dilutive stock options                                293

                                                        -----------    -----------   -----------

Diluted EPS - income available to common shareholders   $ 1,772,562     11,407,076   $       .16

                                                        ===========    ===========   ===========



YEAR ENDED DECEMBER 31, 1998:

Loss available to shareholders                          $(1,649,186)    11,406,783   $      (.14)

Effect of dividends to preferred stockholders                (5,000)

                                                        -----------    -----------   -----------

Basic EPS - loss available to common shareholders        (1,654,186)    11,406,783          (.14)

Effect of dilutive securities:

     Assumed exercise of dilutive stock options

                                                        -----------    -----------   -----------

Diluted EPS - loss available to common shareholders     $(1,654,186)    11,406,783   $      (.14)

                                                        ===========    ===========   ===========

</TABLE>



As of December 31, 2000, there were outstanding options to purchase 40,000

shares of the Company's common stock which were antidilutive and not included in

the computation of diluted EPS. The options expire at various dates through

2010.



Stock Options: Effective January 1, 1996, the Company adopted the disclosure

provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No.

123 defines a fair value method of accounting for the issuance of stock options

and other equity instruments. Under the fair value method, compensation is

measured at the grant date based on the fair value of the award and is

recognized over the service period, which is usually the vesting period.

Pursuant to SFAS No. 123, companies are encouraged, but not required, to adopt

the fair value method of accounting for employee stock-based transactions.

Companies are also permitted to continue to account for such transactions under

Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to

Employees", but would be required to disclose in a note to the financial

statements pro forma net income and per share amounts as if the company had

applied the new method of accounting. SFAS No. 123 also requires increased

disclosures for stock-based compensation arrangements regardless of the method

chosen to measure and recognize compensation for employee stock-based

arrangements. The Company has elected to continue to account for its stock

option transactions under the principles of Accounting Principles Board Opinion

No. 25 and has disclosed in Note K of its Consolidated Financial Statements the

pro forma net income and per share amounts as if the Company had applied the

provisions of SFAS No. 123.



Derivative Instruments and Hedging Activities: On January 1, 2001, the Company

adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging

Activities", which established accounting and reporting standards for derivative

instruments, derivative instruments embedded in other contracts, and hedging

activities. SFAS No. 133 requires that entities recognize all derivative

instruments as either assets or liabilities in the statement of financial

position and measure those instruments at fair value. The Company does not have

any derivative instruments which should be recognized in its financial

statements. However, the Lessor has certain interest rate swap arrangements with

financial institutions that meet the definition of derivative instruments under

SFAS No.



                                      F-13
<PAGE>

133. Since Buzzard funds the Lessor's debt obligations as a base lease payment,

the Company has disclosed in Note L certain information about the Lessor's

derivative instruments.



NOTE C -- OTHER CURRENT ASSETS



Other current assets consists of the following as of December 31, 2000 and 1999:



                                                        2000            1999

                                                     ----------      ----------

Fuel inventory                                       $  630,039      $  532,585

Prepaid expenses                                        126,845          59,310

Insurance refund receivable                                  --          51,300

Deposits                                                  1,300           1,300

Other                                                     2,796           1,357

                                                     ----------      ----------

                                                     $  760,980      $  645,852

                                                     ==========      ==========



NOTE D -- PROPERTY, PLANT AND EQUIPMENT



Property, plant and equipment is recorded at cost less accumulated depreciation

and consists of the following as of December 31, 2000 and 1999:



                                                        2000            1999

                                                     ----------      ----------

Power generating facilities:

     Machinery and equipment modifications

       - Scrubgrass                                  $  936,568      $  936,568

     Less: Accumulated depreciation                    (400,676)       (186,311)

                                                     ----------      ----------

                                                        535,892         750,257

                                                     ----------      ----------

Office:

     Equipment and furniture                            143,171         140,148

     Less: Accumulated depreciation                    (121,048)       (111,541)

                                                     ----------      ----------

                                                         22,123          28,607

                                                     ----------      ----------



                                                     $  558,015      $  778,864

                                                     ==========      ==========



NOTE E -- OTHER ASSETS



Other assets consists of the following as of December 31, 2000 and 1999:



                                                        2000            1999

                                                     ----------      ----------

Scrubgrass Project receivables                       $  358,016      $  272,721

Deferred financing costs  (See Note B)                  121,770         164,124

Note receivable and accrued interest due

   from officer                                              --         122,894

                                                     ----------      ----------

                                                     $  479,786      $  559,739

                                                     ==========      ==========



Scrubgrass Project receivables are deposits in connection with fuel reserves

under long term leases (See Note L).



                                      F-14
<PAGE>

NOTE F -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES



Accounts payable and accrued expenses consists of the following as of December

31, 2000 and 1999:



                                                        2000            1999

                                                     ----------      ----------

Accounts payable                                     $3,306,614      $2,269,401

Accrued expenses                                      2,902,232       1,942,725

Corporate taxes payable                                 743,208         539,780

                                                     ----------      ----------

                                                     $6,952,054      $4,751,906

                                                     ==========      ==========



Accounts payable at December 31, 2000 and 1999 includes $3,076,183 and

$2,020,584, respectively which are related to Scrubgrass Project operations.



Accrued expenses at December 31, 2000 and 1999 includes $2,749,343 and

$1,823,671, respectively which are related to Scrubgrass Project operations.



NOTE G - RETIREMENT PLAN



Effective January 1, 1998 the Company established a non-contributory defined

benefit pension plan (the "Plan") covering all of its employees who are at least

21 years of age and who have completed at least one year of service. Under the

Plan, the benefits payable to each employee at normal retirement age are based

on years of service and compensation during the three consecutive years of the

latest 10 years immediately preceding retirement which would yield the highest

monthly benefit payment. Employees who have at least 20 years of service at the

time of their retirement would receive the maximum retirement benefit. The

Company's general funding policy is to contribute annually to the Plan the

maximum amount that can be deducted for Federal income tax purposes.



As of January 1, 1998, the commencement date for the Plan, the Company had a

projected benefit obligation of $871,130. The projected benefit obligation as of

January 1, 1998 is being amortized as a prior service cost over 18 years which

represents the average future years of service for the participants in the Plan

at that date.



The following table sets forth the changes during 2000 and 1999 in the projected

benefit obligation for the Plan:



                                                        2000            1999

                                                     ----------      ----------

Projected benefit obligation, beginning

   of the year                                       $1,139,624     $  990,623

Service cost                                             97,079         71,260

Interest cost                                            68,377         59,436

Actuarial loss                                          133,233         18,305

                                                     ----------     ----------

Projected benefit obligation, end of the year        $1,438,313     $1,139,624

                                                     ==========     ==========



The following table sets forth a reconciliation of the funded status of the Plan

to the amounts recognized in the consolidated balance sheets as of December 31,

2000 and 1999:



                                                       2000             1999

                                                   -----------      -----------

Projected benefit obligation                       $ 1,438,313      $ 1,139,624

Fair market value of Plan assets                      (347,400)        (396,164)

                                                   -----------      -----------

Unfunded projected benefit obligation                1,090,913          743,460

Unrecognized actuarial (loss) gain                    (254,612)         122,797

Unrecognized prior service cost                       (733,583)        (779,432)

                                                   -----------      -----------

Accrued pension cost                               $   102,718      $    86,825

                                                   ===========      ===========



                                      F-15
<PAGE>

The amounts recognized in the consolidated balance sheets as of December 31,

2000 and 1999 consist of:



                                                        2000            1999

                                                     ----------      ----------

Accrued benefit liability                            $  683,815      $   86,825

Intangible asset                                       (581,097)             --

                                                     ----------      ----------

Net amount recognized                                $  102,718      $   86,825

                                                     ==========      ==========



The following table sets forth the changes during 2000 and 1999 in the fair

market value of Plan assets:



                                                        2000            1999

                                                     ----------      ----------

Fair market value of Plan assets, beginning

   of the period                                     $  396,164      $       --

Contributions by the Company to the Plan                163,130         255,062

Return on Plan assets                                  (211,894)        141,102

                                                     ----------      ----------

Fair market value of Plan assets, end of

   the period                                        $  347,400      $  396,164

                                                     ==========      ==========



The Company has invested the Plan assets in a portfolio of mutual funds which

consist primarily of growth stocks. The Company expects to make an additional

contribution of $346,879 to the Plan prior to the due date for filing its 2000

Federal income tax return.



The Company's net periodic pension cost for 2000 and 1999 are comprised of the

following components:



                                                        2000            1999

                                                     ----------      ----------

Service cost                                         $   97,079      $   71,260

Interest cost                                            68,377          59,436

Expected return on assets                               (31,693)             --

Amortization of actuarial gain                             (589)             --

Amortization of prior service cost                       45,849          45,849

                                                     ----------      ----------

Net periodic pension cost                            $  179,023      $  176,545

                                                     ==========      ==========



The actuarial assumptions used in 2000 and 1999 to determine the pension

benefits for the Plan were:



                                                        2000            1999

                                                     ----------      ----------

Weighted average discount rate                              7.0%            5.5%

Expected long-term return on Plan assets                    8.0%            8.0%

Weighted average rate of increase in

   compensation levels                                      5.0%            5.0%



NOTE H -- OTHER CURRENT LIABILITIES



Other current liabilities consists of the following as of December 31, 2000 and

1999:



                                                        2000            1999

                                                     ----------      ----------

Scrubgrass Project working capital loan              $2,742,961      $1,994,619

Scrubgrass Project note payable (See Note I)            202,826              --

Scrubgrass Project long-term debt to supplier

  (See Note I)                                          100,000         100,000

Scrubgrass Project long-term credit facility                 --         600,000

                                                     ----------      ----------

                                                     $3,045,787      $2,694,619

                                                     ==========      ==========



The Scrubgrass Project working capital loan represents outstanding borrowings

due to the Lessor under a Lessee Working Capital Loan Agreement. Under the terms

of this agreement, which expires in December 2002, Buzzard may borrow up to $4

million for the ongoing working capital requirements of the Scrubgrass Project.

The outstanding borrowings under this agreement incur interest at LIBOR plus

1.125% (7.93% as of December 31, 2000 and ranging from 7.02% to 7.93% during

2000 and 6.03% to 7.62% during 1999).



                                      F-16
<PAGE>

The Scrubgrass Project long-term credit facility represents borrowings from the

Lessor under a three-year agreement which provided the Scrubgrass Project with

up to $3 million to fund general debt service expenses when operating revenues

became unavailable as a result of the 1997 extended facility outage (See Note

A). As of December 31, 2000 and 1999, the Company had outstanding borrowings of

$-0- and $600,000, respectively from the Lessor under this agreement which

incurred interest at LIBOR plus 1.125% (7.93% as of December 31, 2000 and

ranging from 7.02% to 7.93% during 2000 and 6.03% to 7.62% during 1999).



NOTE I -- SECURED PROMISSORY NOTES PAYABLE AND OTHER BORROWINGS



Secured promissory notes payable and other borrowings as of December 31, 2000

and 1999 consists of:



                                                        2000            1999

                                                     ----------      ----------

Scrubgrass Project note payable                      $  985,747      $1,188,573

Scrubgrass Project long-term debt to supplier            90,446         176,948

Sunnyside Project obligations                         1,040,116       1,028,716

                                                     ----------      ----------

                                                     $2,116,309      $2,394,237

                                                     ==========      ==========



The Scrubgrass Project note payable represents the non-current portion of an

obligation which was incurred as part of the Lessor's debt restructuring in

December 1995, when Buzzard extended the term of certain current liabilities

through 2004. The outstanding borrowings under the Scrubgrass Project note

payable incur interest at LIBOR plus 1.25% (8.05% as of December 31, 2000 and

ranging from 7.14% to 8.05% during 2000 and 6.15% to 7.74% during 1999). The

scheduled aggregate annual repayments for the Scrubgrass Project note payable

are $202,826 in 2001, $148,310 in 2002, $447,902 in 2003 and $389,535 in 2004

(See Note H).



The Scrubgrass Project long-term debt to supplier, which is discussed further in

Note A, represents the present value of the long-term installments due to GEC

under a financing agreement (See Note H).



The Sunnyside Project obligations principally represent selling expenses in

connection with the sale of the Sunnyside Project which are payable upon receipt

of the principal proceeds from the notes receivable which were due by December

31, 1997. The repayment of these obligations is contingent upon the outcome of

the litigation with the purchasers of the Sunnyside Project (See Notes A and N).



NOTE J -- INCOME TAXES



Income tax expense (benefit) consists of the following for the years ended

December 31, 2000, 1999 and 1998:

<TABLE>

<CAPTION>



                                                     2000          1999           1998

                                                 -----------   -----------    -----------

<S>                                              <C>           <C>            <C>

Current:

     Federal                                     $   853,791   $   193,035    $       594

     State                                           657,330       139,701        213,267

                                                 -----------   -----------    -----------

          Total current tax expense                1,511,121       332,736        213,861

                                                 -----------   -----------    -----------



Deferred:

     Federal                                          99,245       121,292       (838,439)

     State                                            21,867        16,524       (170,367)

                                                 -----------   -----------    -----------

          Total deferred tax expense (benefit)       121,112       137,816     (1,008,806)

                                                 -----------   -----------    -----------



                                                 $ 1,632,233   $   470,552    $  (794,945)

                                                 ===========   ===========    ===========

</TABLE>



                                      F-17
<PAGE>

In 1999, the Company reported deferred income tax expense of $812,440 in its

Consolidated Statement of Operations as a reduction of the cumulative effect of

a change in accounting principle (See Note O).



Income taxes paid during the years ended December 31, 2000, 1999 and 1998

amounted to $1,273,280, $267,104 and $1,187,057, respectively.



A reconciliation between the actual income tax expense (benefit) and the income

tax expense (benefit) computed by applying the statutory federal income tax rate

to the income (loss) before income taxes, for the years ended December 31, 2000,

1999 and 1998 is as follows:

<TABLE>

<CAPTION>



                                                       2000         1999          1998

                                                    ----------   ----------    ----------

<S>                                                 <C>          <C>           <C>

Federal tax expense (benefit) at 34%                $1,176,074   $  360,103    $ (831,005)

State tax expense, net of federal tax benefit          448,270      103,116        28,315

Nondeductible portion of  meals and entertainment        5,970        5,626         3,525

Other                                                    1,919        1,707         4,220

                                                    ----------   ----------    ----------

                                                    $1,632,233   $  470,552    $ (794,945)

                                                    ==========   ==========    ==========

</TABLE>



The components of the net deferred income tax asset as of December 31, 2000 and

1999 are as follows:

<TABLE>

<CAPTION>



                                                                               2000          1999

                                                                           -----------   -----------

<S>                                                                        <C>           <C>

Deferred tax assets:

     Accrued lease expense                                                 $22,808,678   $19,952,521

     Deferred tax effect of the sale of the Scrubgrass Project for which

          the net gain was deferred for financial reporting purposes           939,814     1,000,472

     Capital loss carryforwards                                                 98,200        98,200

     State net operating loss carryforwards                                     20,509        20,509

                                                                           -----------   -----------

                                                                            23,867,201    21,071,702

                                                                           -----------   -----------

Deferred tax liabilities:

     Accrued power generation revenue                                       22,808,678    19,952,521

     Defined benefit pension plan contribution                                  95,907        29,973

     Expenses deferred for financial reporting purposes                          3,878         9,358

     Other                                                                     203,545       203,545

                                                                           -----------   -----------

                                                                            23,112,008    20,195,397

                                                                           -----------   -----------



                                                                           $   755,193   $   876,305

                                                                           ===========   ===========

</TABLE>



NOTE K -- SHAREHOLDERS' EQUITY



STOCK OPTIONS



The Company has reserved 405,000 shares of common stock for issuance upon

exercise of stock options which are outstanding or may be granted under the

Company's 1993 Director Plan. The options granted under the 1993 Director Plan

were intended to constitute non-qualified options principally at an option price

of 100 percent of the fair market value of the common stock on the date of the

grant. All options are fully vested at the date of grant and expire on the 10th

anniversary of the date of grant. As of December 31, 2000, the Company has

options for 345,000 shares available for grant under the 1993 Director Plan. The

Company previously issued stock options pursuant to its 1990 Stock Plan. As of

December 31, 2000, there were no stock options outstanding or available for

grant under the 1990 Stock Plan.



                                      F-18
<PAGE>

The following table summarizes information about the Company's options

outstanding as of December 31, 2000:



                              OUTSTANDING        WEIGHTED-AVERAGE

              EXERCISE            AND               REMAINING

                PRICE         EXERCISABLE        CONTRACTUAL LIFE

            -------------- ------------------ ----------------------



                 $ 0.5000             10,000        9.42 years

                   0.6250             10,000        8.42 years

                   0.6875             10,000        9.50 years

                   0.7500             10,000        8.50 years

                   1.5000             10,000        7.50 years

                   1.6875             10,000        7.42 years

            -------------- ------------------ ----------------------



                 $ 0.9584             60,000        8.46 years

            ============== ================== ======================





Stock option transactions during 2000, 1999 and 1998 are summarized as follows:



                                                      OPTIONS OUTSTANDING

                                               ---------------------------------

                                                  SHARES              PRICE

                                               --------------    ---------------

        Balance at January 1, 1998                    50,000      $ .25  - 1.00

        Options granted                               30,000       1.50  - 1.688

        Option surrendered                          (60,000)        .25  - 1.625

                                               --------------    ---------------

        Balance at December 31, 1998                  20,000       1.50  - 1.688

        Option granted                                20,000        .625 -  .75

                                               --------------    ---------------

        Balance at December 31, 1999                  40,000        .625 - 1.688

        Options granted                               20,000        .50  -  .688

                                               --------------    ---------------

        Balance at December 31, 2000                  60,000      $ .50  - 1.688

                                               ==============    ===============



Under the provisions of Accounting Principles Board Opinion ("APB") No. 25, the

Company does not recognize compensation expense for stock option awards since

the underlying options have exercise prices equal to 100 percent of the fair

market value of the common stock on the date of grant (110 percent of the fair

market value in the case officers or other employees holding 10% or more of the

Company's common stock for the 1990 plan). However, pursuant to the provisions

of SFAS No. 123, the Company is required to calculate the fair market value of

its stock options using different criteria from the provisions of APB No. 25.

Using the fair market value criteria required by SFAS No. 123 to calculate

compensation expense on stock options granted during 2000, 1999 and 1998, the

Company would have incurred pro forma net income of $1,824,944 and pro forma net

earnings per share of $.16 in 2000, pro forma net income of $1,775,050 and pro

forma net earnings per share of $.16 in 1999, and pro forma net loss of

$1,657,178 and pro forma net loss per share of $.15 in 1998.



The estimated fair market values of the Company's options granted during 2000,

1999 and 1998 were $.18 per share, $.23 per share and $.59 per share,

respectively. The fair market values were calculated using the Binomial Option

Pricing Model with the following assumptions:



                                                2000        1999         1998

                                            ----------- ------------ -----------

           Dividend yield                           6%         10%           8%

           Risk free rate of return              5.99%       5.99%        5.99%

           Expected useful life               5 years     5 years      5 years

           Expected stock volatility rate       42.03%      57.38%       59.27%



                                      F-19
<PAGE>

DIVIDENDS



The Company has a quarterly dividend program which is subject to review and

consideration by the Board of Directors each quarter. In respect of this

dividend program, the Company declared quarterly dividends of 3 cents per share

during each of the two quarters through June 30, 1998 and quarterly dividends of

1.5 cents per share during each of the ten quarters through December 31, 2000.

Therefore, the Company declared aggregate dividends of 9 cents per share, 6

cents per share, and 6 cents per share during 1998, 1999 and 2000, respectively.



The Company also paid dividends of $5,000 per year to a preferred stockholder

during 1998, 1999 and 2000. The preferred stockholder, entitled to cumulative

dividends of $5,000 per year since December 1991, has a liquidation preference

to receive $500 per share, plus any cumulative unpaid dividends, prior to the

distribution of any remaining assets to common shareholders. There were no

dividends in arrears to the preferred stockholder as of December 31, 2000.



OTHER EQUITY TRANSACTIONS



The Company has outstanding notes receivable from its officers and directors for

shares purchased in connection with its 1990 Stock Plan and 1993 Directors' Plan

which amounted to $445,948 and $809,731 as of December 31, 2000 and 1999,

respectively. The notes, which are classified as a reduction of shareholders'

equity, are payable upon demand and bear interest at a floating rate which is

payable monthly. The Company has collected all of the interest payable by the

officers and directors on these notes through December 31, 2000.



NOTE L -- COMMITMENTS



CORPORATE



The Company is obligated under various non-cancelable operating leases for

office space and automotive vehicles. As of December 31, 2000, the future

minimum payments due under these leases are as follows:



                   2001                             $     38,056

                   2002                                   11,105

                                                    ------------

                  Total                             $     49,161

                                                    ============



Rent expense for these operating leases was $46,689, $44,230 and $42,787 in

2000, 1999 and 1998, respectively.



SCRUBGRASS PROJECT



The Company is obligated under a facility lease related to the Scrubgrass

Project. As of December 31, 2000, the estimated minimum lease payments over the

remaining 15.5 year base term of the Scrubgrass lease are as follows:



                   2001                             $ 14,384,000

                   2002                               15,301,000

                   2003                               16,723,000

                   2004                               19,703,000

                   2005                               21,715,000

             Thereafter                              304,207,000

                                                    ------------

                  Total                             $392,033,000

                                                    ============



The Company's Scrubgrass Project lease expense was $26,415,897, $23,110,677 and

$22,971,201 in 2000, 1999 and 1998, respectively. As discussed in Note A, in

addition to scheduled base rent and additional rent payments, the Scrubgrass

Project lease expense includes principal, interest and related fees on the

Lessor's debt obligations. Since



                                      F-20
<PAGE>

certain of the Lessor's debt obligations have variable interest rates, the

Company has estimated its future minimum lease payments using average interest

rates of 3.12% for the tax-exempt bonds and 7.795% for the variable rate term

loan.



As discussed in Notes A and B, the Lessor has an interest rate swap arrangement

for one of its term debt obligations which is considered a derivative

instrument. Beginning July 1, 2000, the Lessor was required to recognize the

interest rate swap as either an asset or liability in its statement of financial

position in accordance with SFAS No. 133. As of December 31, 2000, the Lessor

had a liability of $151,000 in its statement of financial position for the

estimated fair market value of the interest rate swap.



The Company has also been assigned various long-term noncancelable obligations

under contractual agreements for fuel handling and excavation, limestone supply,

and waste disposal. The contractual terms are generally for 5 to 15 years and

provide for renewal options. The estimated future minimum payments due under

these noncancelable obligations at December 31, 2000 are as follows (See Notes A

and E):



                      2001                          $    692,000

                      2002                               714,000

                      2003                               737,000

                      2004                               760,000

                      2005                               784,000

                Thereafter                             2,074,000

                                                    ------------

                     Total                          $  5,761,000

                                                    ============



NOTE M -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS



The Company's financial instruments primarily consist of cash and cash

equivalents, restricted cash, receivable from utility, accounts payable, Lessee

working capital loan and several long-term debt obligations. As of December 31,

2000 and 1999, the carrying amounts for cash and cash equivalents, restricted

cash, receivable from utility, accounts payable and Lessee working capital loan

approximate fair value because of the short maturity of these instruments. As of

December 31, 2000 and 1999, the carrying amounts for the long-term debt

obligations also approximate fair value because such obligations incur interest

at variable rates.



NOTE N -- LEGAL PROCEEDING



On May 3, 1996, Sunnyside II L.P. (f/k/a B&W Sunnyside L.P.), Babcock & Wilcox

Investment Company, Sunnyside I, Inc. (f/k/a NRG Sunnyside Inc.), NRG Energy

Inc., and Sunnyside Cogeneration Associates (collectively the "Plaintiffs")

filed a complaint, which was amended on September 27, 1996, December 21, 1998,

and March 17, 1999, against EPC and three of its wholly owned subsidiaries

(collectively hereafter "the Company") in Seventh District Court for Carbon

County, State of Utah (the "Court"). The third amended complaint alleges that

the Company breached the purchase and sale agreement by which the Company

transferred all of its interest in Sunnyside Cogeneration Associates ("SCA"), a

joint venture which owned and operated a nominal 51 megawatt waste coal-fired

facility located in Carbon County, Utah. The third amended complaint also

alleges that the Company made certain misrepresentations in connection with the

purchase and sale agreement. As a result of the alleged breaches of contract and

misrepresentations, the Plaintiffs allege that they suffered damages in an

unspecified amount that exceed the aggregate outstanding principal and interest

balances due to the Company by Sunnyside II L.P. and Sunnyside I, Inc. under

certain notes receivable. On April 9, 1999, in response to the Plaintiffs' third

amended complaint, the Company filed an answer and restatement of its earlier

restated counterclaim dated January 21, 1999. In the answer to the third amended

complaint, the Company denied all material allegations and asserted numerous

affirmative defenses. In the restated counterclaim, the Company alleges numerous

causes of action against the Plaintiffs which include breach of contract, breach

of the promissory notes, intentional, malicious and willful breach of contract,

intentional tort, interference and misrepresentation. Through the restated

counterclaim, the Company seeks remedies which include: (1)



                                      F-21
<PAGE>

compensatory, consequential and punitive damages; (2) acceleration and immediate

payment in full of the promissory notes; and (3) injunctions to require the

Plaintiffs to continue making payments under the promissory notes during the

pendency of this action and until the promissory notes are paid in full and

which enjoin the Plaintiffs from continuing certain malicious and intentional

actions that are alleged in the counterclaim, together with interest, reasonable

attorney's fees, costs and other such relief as the court deems proper. On May

17, 1999, the Plaintiffs responded to the restated counterclaim whereby they

denied all material allegations of the restated counterclaim and asserted

numerous affirmative defenses.



The Company has been vigorously defending against the third amended complaint

and vigorously pursuing the causes of action in the restated counterclaim for

the last several years. In December 2000, the Company and the Plaintiffs

(collectively the "Parties") held a non-binding mediation and settlement

conference to determine whether they could resolve their differences and settle

this litigation. During this settlement conference, the Parties deliberated

their differences and ultimately reached a verbal settlement proposal. Since the

settlement conference, the Parties have been negotiating a written binding

settlement agreement to end the litigation. In March 2001, the Parties prepared

a written settlement agreement which, by its terms, must be executed by the

Parties no later than April 16, 2001. At the time of this filing, the Parties

have yet to finalize the settlement agreement. Until the settlement agreement is

finalized, there can be no assurance that the litigation would not continue in

the future. Should the litigation continue, an unfavorable resolution and/or

extensive professional fees to defend the litigation could adversely affect the

Company's results of operations and financial position.



NOTE O -- CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE



Effective January 1, 1999, the Company changed its method of accounting for

major equipment overhauls to a method which is consistent with the viewpoints

recently expressed by the Securities and Exchange Commission. Previously, the

Company recorded the expense of major equipment overhauls on a straight-line

basis to a major maintenance reserve in anticipation of future outlays for the

major overhauls. Beginning in 1999, the Company recorded the expense of major

equipment overhauls when incurred. As a result of this change, the Company

realized an increase in operating expenses of $307,893 and a decrease in income

tax expense of approximately $125,000 during 1999. The Company also recognized

the effect of this change on years prior to 1999 with an increase to net income

of $1,188,989 in 1999. This increase in net income consists of an elimination of

the Company's major maintenance reserve, which had a balance of $2,001,429 at

December 31, 1998, and the reversal of $812,440 in deferred income tax benefits.



                                      F-22