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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended June 30, 2004 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________ to
____________
Commission file number 0-6814
U.S. ENERGY CORP.
- --------------------------------------------------------------------------------
(Exact Name of Company as Specified in its Charter)
Wyoming 83-0205516
- -------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West, Riverton, WY 82501
- -------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (307) 856-9271
------------------------------
Not Applicable
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Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the Company (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 Company
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 13, 2004
- ------------------------- ---------------------------------------
Common stock, $.01 par value 14,734,324 Shares
U.S. ENERGY CORP. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2004 and December 31, 2003 . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of
Operations (Unaudited) for the Three and Six Months Ended
June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . 5-6
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2004 and 2003 . . . . . . . . . . . . 7-8
Notes to Condensed Consolidated (Unaudited)
Financial Statements . . . . . . . . . . . . . . . . . . . . . 9-15
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 16-22
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk . . . 22-23
ITEM 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . 23-24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . 28-31
-2-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
2004 2003
------------ --------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,378,800 $ 4,084,800
Accounts receivable
Trade, net of allowance of $27,800 935,600 300,900
Affiliates 9,900 96,800
Current portion of long-term notes receivable, net 30,200 102,500
Prepaid expenses 644,500 584,700
Inventories 177,300 21,700
------------ --------------
Total current assets 5,176,300 5,191,400
INVESTMENTS:
Non-affiliated company 957,700 957,700
Restricted investments 6,812,800 6,874,200
------------ --------------
Total investments and advances 7,770,500 7,831,900
PROPERTY AND EQUIPMENT: 20,879,400 14,088,500
Less accumulated depreciation,
depletion and amortization (7,575,700) (6,901,400)
------------ --------------
Net property and equipment 13,303,700 7,187,100
OTHER ASSETS:
Note receivable 2,955,200 2,950,600
Deposits and other 611,600 768,700
------------ --------------
Total other assets 3,566,800 3,719,300
------------ --------------
Total assets $29,817,300 $ 23,929,700
============ ==============
-3-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2004 2003
------------- --------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,478,500 $ 977,500
Asset retirement obligation 642,700 --
Current portion of long-term debt 3,801,900 932,200
------------- --------------
Total current liabilities 6,923,100 1,909,700
LONG-TERM DEBT 1,320,900 1,317,600
ASSET RETIREMENT OBLIGATIONS 7,177,400 7,264,700
OTHER ACCRUED LIABILITIES 2,337,300 2,158,600
DEFERRED GAIN ON SALE OF ASSET 1,293,400 1,295,700
MINORITY INTERESTS 887,200 496,000
COMMITMENTS AND CONTINGENCIES
FORFEITABLE COMMON STOCK, $.01 par value
442,740 and 465,880 shares issued,
forfeitable until earned 2,599,000 2,726,600
PREFERRED STOCK,
$.01 par value; 100,000 shares authorized
No shares issued or outstanding; -- --
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value; unlimited shares authorized;
14,448,719 and 12,824,698 shares issued respectively 144,500 128,200
Additional paid-in capital 57,582,800 52,961,200
Accumulated deficit (46,457,200) (43,073,000)
Treasury stock at cost,
972,306 and 966,306 shares respectively (2,779,900) (2,765,100)
Accumulated comprehensive loss (720,700) --
Unallocated ESOP contribution (490,500) (490,500)
------------- --------------
Total shareholders' equity 7,279,000 6,760,800
------------- --------------
Total liabilities and shareholders' equity $ 29,817,300 $ 23,929,700
============= ==============
-4-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
-------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
OPERATING REVENUES:
Real estate operations $ 57,400 $ 65,300 $ 108,600 $ 179,400
Gas sales 906,400 145,100 1,499,800 285,100
Management fees and other 403,600 30,900 626,500 144,500
------------ ------------ ------------ ------------
1,367,400 241,300 2,234,900 609,000
OPERATING COSTS AND EXPENSES:
Real estate operations 60,300 51,000 137,800 131,500
Gas operations 1,281,500 140,500 2,022,900 291,300
Mineral holding costs 447,000 703,600 836,200 1,006,600
General and administrative 1,321,000 1,765,000 2,851,700 2,764,300
------------ ------------ ------------ ------------
3,109,800 2,660,100 5,848,600 4,193,700
------------ ------------ ------------ ------------
OPERATING LOSS: (1,742,400) (2,418,800) (3,613,700) (3,584,700)
OTHER INCOME & EXPENSES:
Gain on sales of assets 31,800 47,400 31,800 42,400
Gain on sale of investment 379,200 40,600 658,400 40,600
Interest income 107,500 182,100 168,400 354,500
Interest expense (193,700) (205,300) (478,100) (432,400)
------------ ------------ ------------ ------------
324,800 64,800 380,500 5,100
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST,
INCOME TAXES, DISCONTINUED
OPERATIONS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE: (1,417,600) (2,354,000) (3,233,200) (3,579,600)
MINORITY INTEREST IN LOSS OF
CONSOLIDATED SUBSIDIARIES
AND PERFERRED DIVIDENDS PAID
TO MINORITY INTEREST (191,600) 139,900 (151,000) 177,600
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES,
DISCONTINUED OPERATIONS
AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (1,609,200) (2,214,100) (3,384,200) (3,402,000)
-5-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS FROM
CONTINUING OPERATIONS (1,609,200) (2,214,100) (3,384,200) (3,402,000)
DISCONTINUED OPERATIONS,
NET OF TAX -- (17,400) -- (136,400)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE -- -- -- 1,615,600
------------ ------------ ------------ ------------
NET LOSS $(1,609,200) $(2,231,500) $(3,384,200) $(1,922,800)
============ ============ ============ ============
NET LOSS PER SHARE BASIC AND DILUTED
FROM CONTINUED OPERATIONS $ (0.13) $ (0.20) $ (0.27) $ (0.31)
FROM DISCONTINUED OPERATIONS -- -- -- (0.01)
FROM EFFECT OF
ACCOUNTING CHANGE -- -- -- 0.14
------------ ------------ ------------ ------------
$ (0.13) $ (0.20) $ (0.27) $ (0.18)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 12,873,194 10,916,971 12,596,426 10,967,229
============ ============ ============ ============
-6-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
-----------------------
2004 2003
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,384,200) $(1,922,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in loss of consolidated subsidiaries
and preferred dividends paid to minority interest 151,000 (177,600)
Depreciation and amortization 674,300 342,000
Accretion of asset retirement obligations 183,300 183,300
Noncash services 66,400 1,098,900
Amortization of debt discount 240,300 262,300
Gain on sale of assets (690,200) (8,700)
Noncash cumulative effect of accounting change -- (1,615,600)
Noncash compensation 189,000 133,600
Net changes in assets and liabilities: 297,400 748,800
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (2,272,700) (955,800)
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration of coalbed methane gas properties (142,000) (134,800)
Proceeds from sale of gas interests 167,700 2,586,200
Proceeds from sale of property and equipment 690,200 15,300
Acquisition of properties (4,372,500) --
Net change in restricted investments 61,400 (29,600)
Purchase of property and equipment (171,600) (30,100)
Net change in investments in affiliates -- 46,000
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,766,800) 2,453,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 350,000 351,500
Proceeds from issuance of stock by subsidiary 2,068,700 650,000
Proceeds from third party debt 3,671,300 2,600
Repayments of third party debt (756,500) (632,700)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,333,500 371,400
------------ ------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (706,000) 1,868,600
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,084,800 1,741,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,378,800 $ 3,609,600
============ ============
-7-
U.S. ENERGY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
--------------------
2004 2003
---- ----
SUPPLEMENTAL DISCLOSURES:
Income tax paid $ -- $ --
========== ========
Interest paid $ 478,100 $432,400
========== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Initial valuation of new asset retirement obligations $ 372,100 $ --
========== ========
Accumulated comprehensive loss $ 720,700 $ --
========== ========
Acquisition of assets through issuance of debt $ -- $ 26,300
========== ========
Acquisition of assets through issuance of stock $1,396,200 $ --
========== ========
Issuance of stock as deferred compensation $ -- $151,900
========== ========
Issuance of stock to satisfy debt $ 500,000 $100,000
========== ========
Issuance of stock for retired employees $ -- $435,200
========== ========
Issuance of stock for services $ -- $ 84,000
========== ========
Satisfaction of receivable - employee
with stock in company $ 20,500 $ 20,500
========== ========
-8-
U.S. ENERGY CORP. & SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) The Condensed Consolidated Balance Sheet as of June 30, 2004, the
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2004 and 2003 and the Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 2004 and 2003 have been prepared by the
Company without audit. The Condensed Consolidated Balance Sheet at December 31,
2003 has been taken from the audited financial statements included in the
Company's Annual Report on Form 10-K for the period then ended. In the opinion
of the Company, the accompanying financial statements contain all adjustments
(consisting of only normal recurring accruals except for the cumulative effect
of a change in accounting principal in 2003) necessary to present fairly the
financial position of the Company as of June 30, 2004 and December 31, 2003, the
results of operations for the three and six months ended June 30, 2004 and 2003
and cash flows for the six months ended June 30, 2004 and 2003.
2) Certain reclassifications have been made in the December 31, 2003
Financial Statements to conform to the classifications used in the June 30, 2004
Financial Statements.
3) Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is
suggested that these financial statements be read in conjunction with the
Company's December 31, 2003 Form 10-K. The results of operations for the periods
ended June 30, 2004 and 2003 are not necessarily indicative of the operating
results for the full year.
4) The consolidated financial statements of the Company include its
majority-owned and controlled subsidiaries: Energx Ltd. ("Energx")(90%); Crested
Corp. ("Crested")(71.5%); Plateau Resources Limited ("Plateau")(100%); Sutter
Gold Mining Co. ("SGMC")(78.5%); Yellow Stone Fuels Corp. ("YSFC")(35.9%); Four
Nines Gold, Inc. ("FNG")(50.9%); Rocky Mountain Gas, Inc. ("RMG")(91%), and the
USECC joint venture ("USECC"), a consolidated joint venture which is equally
owned by the Company and Crested, through which the bulk of their operations are
conducted. All material intercompany profits and balances have been eliminated.
5) Components of Properties and Equipment at June 30, 2004, consist of
coalbed methane properties, land, buildings and equipment.
Accumulated
Amortization
Cost and Depreciation Net Value
------------ -------------- ------------
Coalbed methane and oil properties $ 9,497,600 $ (2,262,700) $ 7,234,900
Buildings, land and equipment 11,381,800 (5,313,000) $ 6,068,800
------------ -------------- ------------
$ 20,879,400 $ (7,575,700) $ 13,303,700
============ ============== ============
The Company has impaired a portion of historical costs associated with its
properties in prior periods. The Company will provide additional impairments if
necessary in the future.
6) The Company presents basic and diluted earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share". Basic earnings per common share, is based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed based on the weighted average number of common shares
outstanding adjusted for the incremental shares attributed to outstanding
options to
-9-
purchase common stock, if dilutive. Potential common shares relating to options
and warrants are excluded from the computation of diluted earnings (loss) per
share, because they are antidilutive. These options and warrants totaled
4,458,617 and 4,374,637 at June 30, 2004 and 2003, respectively. Stock options
and warrants have a weighted average exercise price of $2.97 and $2.93 per share
at June 30, 2004 and 2003, respectively. Potential common shares relating to
convertible debt are excluded from the computation of diluted loss per share,
because they are antidilutive. They total 222,222 and 444,444 shares at June 30,
2004 and December 31, 2003, respectively, with a conversion price of $2.25.
Shares of RMG common stock convertible to shares of the Company's common stock
are excluded from the computation of diluted loss per share because they are
antidilutive. As of June 30, 2004, there were 300,000 shares of RMG Series A
preferred stock which, at the holders' election, could be converted to shares of
the Company's stock. The conversion is tied to market price at the time of
conversion but not to be less than $1.50 per share. There were no convertible
common shares of RMG outstanding at June 30, 2003.
7) The Company has shut-down the uranium properties in Wyoming and southern
Utah for which it is responsible for the reclamation expense. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America, requires management to make estimates for these
reclamation expenses based on certain assumptions. These estimates and
assumptions affect 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.
The Company accounts for the reclamation obligation of these properties and
the retirement obligations of its coalbed methane and oil properties pursuant to
SFAS No. 143, "Accounting for Asset Retirement Obligation." Under the provisions
of this accounting statement, the Company records the estimated fair value of
the reclamation liability on its shut-down uranium properties as of the date
that the liability is incurred with a corresponding increase in the properties
book value. Actual costs could differ from those estimates. The reclamation
liabilities are reviewed each quarter to determine whether estimates for the
total asset retirement obligation are sufficient to complete the reclamation
work required.
The Company deducts any actual funds expended for reclamation during the
quarter in which it occurs. As a result of the Company taking impairment
allowances in prior periods on its shut-down mining properties, it has no
remaining book value for these properties. Any upward revisions of retirement
costs, on its mines will therefore be expensed in the quarter in which they are
recorded. Retirement obligations related to coalbed methane and oil properties
result in increases to the property costs which are depleted over the economic
life of the properties.
The following is a reconciliation of the total liability for asset
retirement obligations (unaudited):
Balance December 31, 2003 $ 7,264,700
Addition to Liability 372,100
Liability Settled --
Accretion Expense 183,300
-------------
Balance June 30, 2004 $ 7,820,100
=============
8) The Company has adopted the disclosure requirements of SFAS No. 148
"Accounting for Stock - Based Compensation - Transition and Disclosure" and has
elected to continue to record employee compensation expense utilizing the
intrinsic value method permitted under Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, any deferred compensation expense is recorded for
stock options based on the excess of the market value of the common stock on the
date the options were granted over the aggregate exercise price
-10-
of the options. This deferred compensation will be amortized over the vesting
period of each option. There were no options granted to employees under the two
plans during the three and six months ended June 30, 2004.
9) The Company has reviewed recent authorative literature and does not
believe that any of those statements will have a material affect on the
financial statements of the Company when adopted.
10) The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. The Company has sustained substantial losses from operations in
recent years, and such losses have continued through June 30, 2004. In addition,
the Company has used, rather than provided, cash in our operations.
In view of the matters described in the preceding paragraph, recoverability
of a major portion of the recorded asset amounts shown in the condensed
consolidated accompanying balance sheet is dependent upon continued operations
of the Company, which in turn is dependent upon our ability to meet our
financing requirements on a continuing basis, and to succeed in our future
operations.
On July 30, 2003, the Company received an Order and thereafter a Judgment
on August 1, 2003 from the U.S. District Court of Colorado wherein Chief Judge
Lewis T. Babcock entered an Order that Judgment be entered against Nukem/CRIC
("Nukem") in favor of the Company the total amount of $20,044,184. The Judgment
was entered and defendant Nukem posted a supersedeas bond in the full amount of
the Judgment plus interest for one year, which was approved by the Court. On
October 3, 2003, Nukem, as Appellants, filed a Notice of Appeal to the 10th
Circuit Court of Appeals and thereafter on October 15, 2003, the Company filed a
Notice of Cross-Appeal to the 10th Circuit. Oral Arguments have been set for
September 27, 2004 before the 10th Circuit Court of Appeals. In the event the
Company should prevail, the receipt of this cash would provide significant
working capital to the Company.
To insure that the Company has adequate cash to satisfy our capital
requirements, the Company is working with several different sources for capital
resources, including both strategic and financial investors. Although there is
no assurance that funding will be available or that the outcome in the Nukem
litigation will be positive, we believe that our current business plan, if
funded, will significantly improve our operating results and cash flow in the
future.
11) During the six months ended June 30, 2004, the Company issued 233,667
shares of common stock as payment of principal and interest to settle the note
due Caydal, LLC ("Caydall"); 108,613 shares of common stock in exchange for
111,111 shares of RMG stock as part of a provision given to an accredited
investor when it invested in RMG common stock; 678,888 shares of common stock
and 318,465 common stock warrants in the purchase of producing coal bed methane
properties (see note 12); 100,000 shares of common stock and 250,000 warrants to
purchase common stock to an accredited investor in a private placement; 456,853
shares of common stock to an accredited investment firm in exchange for 300,000
shares of RMG Series A preferred stock; released 21,000 shares of forfeitable
shares to a retired employee and 25,000 shares of common stock to five employees
under the 2001 Stock Award Program, which was approved by the shareholders
during the 2002 shareholder's meeting The investment firms hold an additional
300,000 shares of RMG preferred stock which are convertible to the Company's
common stock at 90% of the market value of the Company's common stock when
converted. The Company also issued a total of 150,000 common stock purchase
warrants to three accredited investment firms as part of their investment in RMG
Series A preferred stock.
-11-
The following table details the dollar values received and the number of
shares issued.
ADDITIONAL
COMMON STOCK PAID IN
SHARES AMOUNT CAPITAL
------------ -------- -----------
Balance December 31, 2003 12,824,698 $128,200 $52,961,200
Debt Retirement 222,220 $ 2,200 $ 497,800
Interest on Debt Retirement 11,447 $ 100 $ 25,600
Conversion of RMG Investment 108,613 $ 1,100 $ 304,100
Commission on Investment $ (22,500)
Purchase of Coalbed Methane Property 678,888 $ 6,800 $ 1,895,900
Value of Warrants issued to Lender $ 193,500
Investment by Accredited Investor 100,000 $ 1,000 $ 286,000
Value of Warrants to Investor $ 63,000
Conversion of 300,000 RMG
Series A Preferred Shares 456,853 $ 4,600 $ 895,400
Release of Forfeitable Shares 21,000 $ 200 $ 121,700
2001 Stock Compensation Plan 25,000 $ 300 $ 69,600
Value of RMG Series A Prefered
Stock Conversion Right $ 174,000
Value of Company Warrants attached to RMG
Series A Preferred Stock $ 117,500
------------ -------- -----------
Balance at June 30, 2004 14,448,719 $144,500 $57,582,800
============ ======== ===========
12) On January 30, 2004, the Company, through its indirect subsidiary RMG
I, a 100% owned subsidiary of RMG purchased the producing, and non-producing
properties of Hi-Pro Production LLC ("Hi-Pro"), a company in the Powder River
Basin of Wyoming. The operations of the properties are included in the
operations of the Company subsequent to January 30, 2004 (see the 8-K/A filed on
April 15, 2004 for further information on the Hi-Pro transaction). The terms of
the purchase were as follows:
$ 776,700 cash paid by RMG I, $75,000 of which was non-refundable as of
December 31, 2003.
$ 588,000 net revenues from November 1, 2003 to December 31, 2003, which
were retained by Hi-Pro.(1)
$ 500,000 by USE's 30 day promissory note (secured by 166,667 restricted
shares of USE common stock, valued at $3.00 per share).(2)
-12-
$ 600,000 by 200,000 restricted shares of USE common stock (valued at $3.00
per share).(3)
$ 700,000 by 233,333 restricted shares of RMG common stock (valued at $3.00
per share).(4)
$3,635,000 cash, loaned to RMG I under the credit facility agreement.
---------
$6,800,000
- ----------------------------------
(1) RMG I paid all January operating costs at closing. Net revenues from
the purchased properties for January 2003 were credited to RMG I's
obligations under the credit facility agreement. These net revenues
were considered by the parties to be a reduction in the purchase price
which RMG I otherwise would have paid at the January 30, 2004 closing.
(2) Pursuant to the terms of the promissory note, USE issued 166,667
shares as payment in full of this obligation during the first quarter
of 2004.
(3) USE has filed a resale registration statement with the SEC to cover
public resale of these 200,000 shares.
(4) From November 1, 2004 to November 1, 2006, the RMG shares were
convertible at Hi-Pro's sole election into restricted shares of common
stock of USE. The number of USE shares to be issued were based upon
(A) the number of RMG share to be converted, multiplied by $3.00 per
shares, divided by (B) the average closing sale price of the shares of
USE for the 10 trading days prior to notice of conversion. During the
quarter ended June 30, 2004, all of these shares were converted into
312,221 shares of the Company's common stock. The Company has filed a
resale registration statement with the Securities and Exchange
Commission to cover public resale of these shares.
RMG I purchased these properties to continue its entry into the coalbed
methane gas business and accounted for as a purchase transaction with the
estimated fair value of assets and liabilities assumed in the acquisition as
follows:
Estimated fair value of assets acquired
Current assets $ 639,400
Oil and gas properties 6,498,300
Other property and equipment 146,700
Other long term assets 145,000
-------------
Total assets acquired 7,429,400
Estimated fair value of liabilities assumed
Current liabilities $ 884,800
Asset retirement obligation 372,100
-------------
Total liabilities assumed 1,256,900
-------------
Net assets acquired $ 6,172,500
=============
-13-
Pro Forma (Unaudited) Statement of Operations, including the purchase of
the Hi-Pro properties for the periods ended June 30, 2004 and 2003 as if the
acquisition had been consummated immediately for the Company prior to January 1,
2003. The Pro Forma results are not indicative of future results.
Pro Forma (Unaudited)
Three months ended June 30,
2004 2003
------------------------------
Revenues $ 1,367,400 $ 1,506,100
Net Loss from continuing operations $ (1,742,400) $ (1,560,800)
Net (loss) income $ (1,609,200) $ (1,373,500)
Net (loss) earnings per share basic $ (0.13) $ (0.13)
Net (loss) earnings per share - diluted $ (0.13) $ (0.13)
Pro Forma (Unaudited)
Six months ended June 30,
2004 2003
------------------------------
Revenues $ 2,536,800 $ 2,952,300
Net Loss from continuing operations $ (3,403,700) $ (2,877,300)
Net (loss) income $ (3,174,200) $ (1,215,400)
Net (loss) earnings per share basic $ (0.25) $ (0.11)
Net (loss) earnings per share - diluted $ (0.25) $ (0.11)
RMG I financed $3.6 million of the cash component from a recently
established $25 million credit facility arranged by Petrobridge Investment
Management, LLC (Petrobridge), a mezzanine lender headquartered in Houston, TX.
The properties acquired from Hi-Pro serve as the sole collateral for the credit
facility. As defined by the agreement, terms under the credit facility include
the following: (1) advances under the credit facility are subject to lender's
approval; (2) all revenues from oil and gas properties securing the credit
facility will be paid to a lock box controlled by the lender. All disbursements
for lease operating costs, revenue distributions and operating expense require
approval by the lender before distributions are made; and (3) RMG I must
maintain certain financial ratios and production volume, among other
requirements.
At June 30, 2004, RMG I was not in compliance with three of the financial
covenants under the Petrobridge agreement. The ratios and production figures
that RMG I is not in compliance with are:
Terms of Loan Actual at 6-30-04
--------------- -------------------
Total Debt to EBITDA No Greater than 2 to 1 5.2 to 1
EBITDA to Interest and Not less than 3 to 1 1.8 to 1
Sales Volumes 230 mmcf per quarter 217mmcf
-14-
A waiver was granted for this reporting period by the lender. Management of
RMG I continues to seek solutions in the production of coalbed methane gas to
bring the project into compliance. Due to lower than projected sales volumes,
the Hi-Pro field will remain out of compliance unless (1) higher prices are
realized, (2) costs are reduced and (3) the debt is paid down. Because it is
probable that RMG I will not be in compliance with these ratios for the next
reporting period the entire $3,300,000 is classified as current debt at June 30,
2004. Should the lender declare the note in default, the only asset available
for recourse is the Hi-Pro property owned by RMG I.
13) Hedging Activities. The results of operations and operating cash flows
are impacted by changes in market prices for oil and gas. To mitigate a portion
of this exposure, RMG I has entered into certain derivative instruments. RMG I's
derivative instruments covered approximately 84% of net gas sales for the period
ended June 30, 2004. All derivative instruments have been entered into and
designated as cash flow hedges of gas price risk and not for speculative or
trading purposes. As of June 30, 2004, the RMG I's derivative instruments were
comprised of swaps. For swap instruments, RMG I receives (pays) a fixed price
for the hedged commodity and pays (receives) a floating market price, as defined
in each instrument, to the counterparty. These instruments have been designated
and have qualified as cash flow hedges.
The carrying values of these instruments are equal to the estimated fair
values. The fair values of the derivative instruments were established using
appropriate future cash flow valuation methodologies. The actual contribution to
future results of operations will be based on the market prices at the time of
settlement and may be more or less than fair value estimates used at June 30,
2004.
Hedging activities included in the condensed consolidated statement of
operations were nominal during the period ended June 30, 2004. All forecasted
transactions hedged as of June 30, 2004 are expected to occur by December 2005.
Approximately 60,000 mmbtu per month are hedged at $4.76 per mmbtu through
December 2004 and 30,000 mmbtu per month are hedged at $4.14 per mmbtu through
December 2005.
14) Comprehensive loss. Other comprehensive loss consists of the fair value
of derivative instruments which was a liability of $720,700 at June 30, 2004.
Total comprehensive loss for the three and six months ended June 30, 2004 was
$2,077,600 and $4,104,900 respectively.
15) Subsequent Event - On July 30, 2004 the Company signed a Credit
Agreement which will allow the Company to borrow up to $3 million for the
development of coalbed methane properties and general corporate overhead. The
associated promissory note bears interest at 10%, matures in two years and has
as security the net interest of the Company in one of the corporate aircraft;
RMG's working interest in the Castle Rock coalbed methane properties; the note
and mortage from the Cactus Group on the Ticaboo townsite, and 4,333,333 shares
of RMG stock owned by the Company.
-15-
U.S. ENERGY CORP. & SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ----------------------------------- ----- ----- ----- ----- ----- ----- ----- -
OF OPERATIONS.
- --------------
The following is Management's Discussion and Analysis of the significant
factors which have affected our liquidity, capital resources and results of
operations during the periods included in the accompanying financial statements.
For a detailed explanation of the Company's Business Overview, it is suggested
that Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and six months ended June 30, 2004 be read in
conjunction with the Company's Form 10-K for the year ended December 31, 2003.
The discussion contains forward-looking statements that involve risks and
uncertainties. Due to uncertainties in our business, actual results may differ
materially from the discussion below.
FORWARD LOOKING STATEMENTS
- --------------------------
This Report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended ("the
Exchange Act"). All statements other than statements of historical fact included
in this Report, are forward-looking statements. In addition, whenever words like
"expect", "anticipate, or "believe" are used, we are making forward looking
statements. Actual results may vary materially from the forward-looking
statements and there is no assurance that the assumptions used will be realized
in fact.
OVERVIEW OF BUSINESS
The Company owns controlling interests in coalbed methane properties in
southwest Wyoming and the Powder River Basin in Wyoming and Montana; a uranium
mine and mill in southern Utah; uranium mines in central Wyoming; a gold
property in California, and various real estate holdings. The coalbed methane
business is conducted through our subsidiary, Rocky Mountain Gas, Inc. ("RMG").
The mine properties are all shut-down. All these properties are held in
conjunction with the Company's subsidiary, Crested Corp. ("Crested") through the
USECC joint venture between the two companies.
The acquisition, exploration and development of coalbed methane properties
is our only recurring business activity at the present time.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Asset Impairments - We assess the impairment of property and equipment
whenever events or circumstances indicate that the carrying value may not be
recoverable.
Oil and Gas Producing Activities - We follow the full cost method of
accounting for oil and gas properties. Accordingly, all costs associated with
acquisition, exploration and development of oil and gas reserves, including
directly related overhead costs, are capitalized.
Reclamation Liabilities - The Company's policy is to accrue the liability
for future reclamation costs of its mineral properties under SFAS 143 based on
the current estimate of the future reclamation costs as determined by internal
and external experts. The present value of the obligation is accreted each
period as the date of obligation settlement approaches. Changes in estimates of
retirement costs or in the timing of cash flows will cause revisions to our
estimated liability.
-16-
Use of Accounting 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. These estimates
and assumptions affect 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.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
The Company has reviewed recent authoritative literature and does not
believe that any of those statements will have a material adverse effect on the
financial statements of the Company when adopted.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to implement its strategy of expanding activities in
the coalbed methane business. Capital resources have been provided by the
issuance of equity; obtaining third party debt; sale of assets, and the sale of
interests in coalbed methane properties. These capital resources have been used
to purchase and operate both developed and undeveloped coalbed methane
properties.
All production of coalbed methane gas during the six months ended June 30,
2004 was from the producing properties acquired from Hi-Pro Production LLC
("Hi-Pro") during the first quarter of 2004. As expected, initial operating
expenses for the Hi-Pro field were high during the first six months of
operations. A substantial amount of routine maintenance work had been deferred
by the Hi-Pro sellers prior to January 30, 2004. Production to date at the
Hi-Pro properties is much lower than initially anticipated by management of RMG.
All net cash flows from the Hi-Pro production are applied to the payment of
interest and principle on the mezzanine debt incurred in the purchase
transaction. During the six months ended June 30, 2004, RMG I paid all field
operating costs, $171,900 in interest and $486,600 in net principal payments
from positive cash flow from the Hi-Pro property. RMG I also borrowed an
additional $363,500 for field enhancements. Although the property has had
sufficient cash flows to pay field operating costs and service debt, it has made
no contribution to the payment of overhead costs. The property has been and
remains unprofitable. The Hi-Pro property will not be profitable until one or
all of the following occur: (1) higher prices are realized from the sale of
coalbed methane gas (2) costs are reduced significantly and (3) debt is repaid,
which would reduce interest cost. Lower production has caused RMG I to be out of
compliance on its loan covenants. (see note 12) A waiver from these covenants
has been obtained for the six months ended June 30, 2004. Because it is probable
that RMG I will not be in compliance with these covenants for the next reporting
period, the entire debt to purchase the property of $3,300,000 is classified as
current. Should the lender place the note in default, the only asset available
to it for recovery is the Hi-Pro field owned by RMG I.
The purchase, exploration and development of coalbed methane properties is
a capital intensive business. Continued capital resources will need to be
obtained to continue in the coalbed methane business. Management of RMG
continues to search for sources of capital to fully develop its undeveloped
properties. In addition to equity and debt financings, the Company will continue
to seek out industry partners to assist in funding projects.
Cash and cash equivalents on hand at June 30, 2004, are not sufficient to
complete all the coalbed methane exploration and development plans that RMG is
currently contemplating. If sufficient capital resources are not located, the
Company will have to implement alternate plans which could include delaying
development of certain properties or selling a portion of the RMG's coalbed
methane assets.
-17-
CAPITAL RESOURCES
The primary sources of our capital resources are cash on hand; equity
financings; the final determination of the Sheep Mountain Partners ("SMP")
arbitration/litigation; proceeds under the line of credit; receipt of monthly
payments from CCBM, Inc. ("CCBM") for the purchase of an interest in RMG's
coalbed methane properties; projected future production from RMG's coalbed
methane properties; receipt of monthly payments from the Cactus Group on the
sale of the Ticaboo townsite; sale of excess mine, construction and drilling
equipment; sale of real estate properties which are no longer needed in the core
business of the Company; and the sale of partial ownership interests in
exploration properties.
We have been involved in litigation with Nukem, Inc. involving Sheep
Mountain Partners, ("SMP") for the past thirteen years. On August 1, 2003, the
Company and Crested received a Judgment from the U.S. District Court of Colorado
in the amount of $20,044,184 against Nukem, Inc. The Judgment was entered and
defendant Nukem posted a supersedeas bond in the full amount of the Judgment
plus interest for one year, which was approved by the Court. Nukem filed a
motion to alter and amend portions of the Order and Judgment and a motion to
remand the case to the Arbitration Panel. The Company also filed a motion to
alter and amend certain portions of the Order and Judgment. Both motions were
overruled. Nukem filed an appeal and the Company filed a cross-appeal to the
10th Circuit Court of Appeals. Oral arguments have been set for September 27,
2004 before a panel of the 10th Circuit Court of Appeals. Management is
optimistic that the ultimate determination will be favorable to the Company. No
assurance, however, can be given as to the outcome of this litigation. See Item
1 Part II Legal Proceedings.
During the quarter ended June 30, 2004, CCBM elected to discontinue paying
on the Oyster Ridge property. As a result of this decision, CCBM has earned a
25% interest in RMG's ownership in the Oyster Ridge property. However, CCBM
elected to continue paying to complete its 6.25% ownership position in the
Castle Rock properties of the Powder River basin in Wyoming. As a result of
these elections there was a balance of $299,600 due from CCBM at June 30, 2004
under its purchase agreement. Under the terms of the promissory note, this
amount is to be paid at the rate of approximately $26,400 per month until
November 2004 at which time a balloon payment of $141,200 is due. Receipt of
these funds will provide capital to complete a portion of the work that the
Company anticipates completing during the balance of 2004. CCBM's interest in
RMG's coalbed methane properties is pledged as security for the note to RMG.
CCBM can discontinue making payments at any time subject to certain earn-in
provisions and penalties.
During the six months ended June 30, 2004, RMG signed a credit agreement
with a group of mezzanine credit lenders for up to $25,000,000 of loans. The
commitment is through June 30, 2006. All borrowings are due three years from the
date of funding. The credit facility is available to RMG to purchase and improve
coalbed methane properties subject to a development plan. The first draw down,
in the amount of $3.7 million, was made at the end of January 2004 to partially
fund the purchase of the Hi-Pro coalbed methane properties. RMG is currently
evaluating additional prospective acquisition targets which may be funded from
this credit facility.
The Company and Crested currently have a $750,000 line of credit with a
commercial bank. At June 30, 2004, the entire line of credit was available to
the Company and Crested.
During the six months ended June 30, 2004, operating and investing
activities consumed $2,272,700 and $3,766,800, respectively while financing
activities provided $5,333,500. These activities are consistent with the
Company's stated business plan of entering into the coalbed methane gas
business. The capital resources which were obtained through the sale of equity
of both the Company and RMG, and third party debt were used to purchase
additional properties and reduce long term debt.
-18-
CAPITAL REQUIREMENTS
The primary requirement of the Company for capital resources at June 30,
2004, is the funding of the purchase, exploration and development of its coalbed
methane properties. Other requirements for capital resources include the
maintaining and reclamation of certain uranium properties that are currently in
a shut-down status.
PURCHASE AND EXPLORATION OF COALBED METHANE PROPERTIES
- ------------------------------------------------------
During the six months ended June 30, 2004, the Company through RMG I,
purchased producing and undeveloped coalbed methane properties from Hi-Pro. The
purchase price for the properties was $6.8 million subject to certain
adjustments. See Note 12 above. In addition to the purchase of the coalbed
methane properties, certain equipment, vehicles, tools and inventory were also
purchased for a total $171,600. RMG also expended $142,000 for the development
of certain coalbed methane properties.
During the balance of calendar 2004, the Company has an approximate $1.1
million commitment for its portion of drilling of coal bed methane properties.
Certain of these drilling commitments are required to hold leases. CCBM has
funded its portion of the drilling commitment under the terms of the contract.
The $1.1 million in commitment therefore will need to come from cash on hand,
borrowings or the sale of equity. Should the drilling not be completed, the
Company may lose those leases.
MAINTAINING MINERAL PROPERTIES
- ------------------------------
SMP URANIUM PROPERTIES
The holding costs associated with the uranium properties in Wyoming
formerly owned by Sheep Mountain Partners ("SMP"), are approximately $14,000 per
month. It is estimated that approximately $116,300 in reclamation work will be
completed on the SMP properties during 2004.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns and maintains the Shootaring Canyon uranium mill. We are
pursuing alternative uses for these properties including the potential sale or
entering into a joint venture to operate the uranium mill.
SUTTER GOLD MINING COMPANY PROPERTIES ("SGMC")
We have one full time employee at the SGMC properties to maintain the core
properties. On August 9, 2004, Globemin Resources, Inc. ("Globemin"), a Canadian
company, approved the acquisition of SGMC at its shareholders meeting. The
closing of the acquisition is subject to acceptance by SGMC shareholders in the
third or fourth quarter of 2004. Sutter shareholders who elect to merge with
Globemin will submit their shares of SGMC common stock for exchange into common
stock of the new company under a voluntary share exchange agreement. The
management of SGMC believes that this merger will provide the equity financing
necessary to complete the development of the mine, construct a mill and place
the property into production. The commitment of capital resources to the Sutter
properties will be held at a minimum until such time as financing is available
or the properties are sold.
-19-
DEBT PAYMENTS
- -------------
Debt to non-related parties at June 30, 2004 was $5,122,800. This debt
consists of debt owed by RMG I to mezzanine lenders to purchase the Hi-Pro
assets of $3.3 million; long term debt related to the purchase of vehicles and a
corporate aircraft of $1.5 million, and convertible debt. The commitment of
capital resources during the balance of calendar 2004 for equipment debt is
$430,700. The convertible debt is a forced conversion to common stock of the
Company so will not require any of the Company's capital resources. The
mezzanine lenders for the Hi-Pro acquisition sweep all funds from operations of
the field to pay interest and principal with the exception of funds to pay (a)
lease operating expenses, (b) royalties and (c) production related taxes. At
June 30, 2004, RMG was not in compliance with three of the financial covenants
under the Petrobridge agreement. (see note 12) A waiver was granted for this
reporting period by the lender. Management of RMG I continues to seek solutions
in the production of coalbed methane gas to bring the project into compliance.
Because it is probable that RMG I will not be in compliance with these
covenants, the entire debt of $3,300,000 is classified as current.
On July 30, 2004 the Company signed a Credit Agreement which will allow the
Company to borrow up to $3 million for the development of coalbed methane
properties and general corporate overhead. The associated promissory note bears
interest at 10%, matures in two years and has as security the net interest of
the Company in the corporate plane; RMG's working interest in the Castle Rock
coalbed methane properties; the note and mortage from the Cactus Group on the
Ticaboo townsite, and 4,333,333 shares of RMG stock owned by the Company.
RECLAMATION COSTS
- -----------------
The asset retirement obligations are substantially long term and are either
bonded through the use of cash bonds or the pledge of assets. It is anticipated
that $116,300 of reclamation work on the SMP properties and $52,600 on the
southern Utah mine uranium mine properties will be performed during 2004. The
Company has submitted a reclamation plan to the Nuclear Regulatory Commission
("NRC") for the reclamation of the Shootaring Uranium Mill. The Company has
initiated portions of the Shootaring reclamation during 2004.
The asset retirement obligation on the Plateau uranium mining and milling
properties in Utah at June 30, 2004 was $5,156,600, which is reflected on the
Balance Sheet. This liability is fully funded by cash investments that are
recorded as long term restricted assets.
The asset retirement obligation of the Sheep Mountain uranium properties in
Wyoming at June 30, 2004 are $2,249,000 and are covered by a reclamation bond
which is secured by a pledge of certain real estate assets of the Company and
Crested.
The asset retirement obligation on the RMG coalbed methane properties in
Wyoming are $392,100. It is not anticipated that any reclamation work will
commence on the coalbed methane properties during 2004.
The asset retirement obligation for SGMC is $22,400 which is covered by a
cash bond.
RESULTS OF OPERATIONS
- ---------------------
During the three and six months ended June 30, 2004, the Company recorded
operating losses of $1,742,400 and $3,613,700 as compared to operating losses of
$2,418,800 and $3,584,700 for the three and six months ended June 30, 2003.
-20-
Revenues from operations for the six months ended June 30, 2004, were
$2,234,900 as compared to $609,000 for the six months ended June 30, 2003. This
increase in revenues of $1,625,900 was as a result of the increase in gas sales
and management fees received by the Company. These increases were directly as a
result of the purchase of the Hi-Pro assets during the first quarter of 2004. In
addition, the purchase of the Hi-Pro properties resulted in an increase of
$1,731,600 in gas operating expenses. Although cash flows from gas operations
during the six months ended June 30, 2004 were sufficient to pay field operating
expenses of $1,264,600, interest of $171,900 and note principal payments of
$486,600, operations from the sale of coalbed methane gas resulted in a loss of
$523,100. This loss included $489,100 of amortization expense.
With the exception of expenses incurred at the Sutter Gold Mine to complete
the permitting process and place the SGMC properties in a position of being able
to be merged with an industry partner, the other increases in operating costs
and expenses are directly related to the acquisition of the Hi-Pro assets. As a
result of the purchase of those assets, the Company has added additional
personnel to manage the properties as well as professional staff to direct
operations and assess the potential of acquisition targets. RMG also incurred
approximately $252,700 in professional services in the Hi-Pro acquisition.
Other income and expenses for the six months ended June 30, 2004, increased
by $375,400 over the same period of the previous year primarily as a result of
the sale of Ruby Mining stock for $410,400 and a gain on the sale of certain
real estate investments of $248,000.
The Company recorded non-cash income of $1,615,600 during the six months
ended June 30, 2003, as a result of the implementation of SFAS No. 143. There
was no similar non-cash income during the six months ended June 30, 2004.
During the quarter ended June 30, 2004 revenues increased $1,126,100 over
the quarter ended June 30, 2003 to $1,367,400. This increase was a result of
revenues and associated revenue from the production and sale of coalbed methane
during the three months ended June 30, 2004. The increase in costs and expenses
during the quarter ended June 30, 2004 over the quarter ended June 30, 2003 of
$449,700 are related to costs associated with the production of coalbed methane.
Offsets to these increases were reductions to general and administrative and
mine holding costs.
During the six months ended June 30, 2004, the Company recognized a net
loss of $3,384,200 or $0.27 per share as compared to a net loss of $1,922,800 or
$0.18 per share during the six months ended June 30, 2003. The primary increase
in the loss for the six months ended June 30, 2004 over the loss for the six
months ended June 30, 2003 is the recognition of $1,615,600 in non-cash income
as a result of an accounting change in 2003.
CONTRACTUAL OBLIGATIONS
- -----------------------
The Company has two divisions of contractual obligations as of June 30,
2004: debt to third parties of $5,122,800, and asset retirement obligations of
$7,820,100 which will be paid over a period of five to seven years. During the
six months ended June 30, 2004, RMG incurred new debt of $3,356,700, in the
acquisition of the assets of the Hi-Pro company. The Company did an initial
valuation of the asset retirement obligation of the acquired assets, of
$372,100. The following table shows the schedule of the payments on the debt,
and the expenditures for budgeted asset retirement obligations.
-21-
Less One to Three to More than
than one Three Five Five
Total Year Years Years Years
----------- ---------- ---------- ---------- ----------
Long-term debt obligations 5,122,700 612,200 4,486,100 24,400 -
Other long-term liabilities 7,820,100 642,700 2,974,700 2,917,200 1,285,500
----------- ---------- ---------- ---------- ----------
Totals $12,942,800 $1,254,900 $7,460,800 $2,941,600 $1,285,500
=========== ========== ========== ========== ==========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------
GAS HEDGING ACTIVITIES
- ------------------------
Our results of operations and operating cash flows are impacted by changes
in market prices for gas. To mitigate a portion of the exposure to adverse
market changes, RMG has entered into a derivative instruments. As of June 30,
2004, our gas derivative instruments are comprised of swaps. These instruments
allow the Company to predict with greater certainty the effective gas prices to
be received for our hedged production. Although derivatives often fail to
achieve 100% effectiveness for accounting purposes, we believe our derivative
instrument will continue to be highly effective in achieving the risk management
objectives for which they are intended.
For swap instruments, RMG receives a fixed price for the hedged commodity
and pays a floating market price, as defined in each instrument, to the
counterparty. The fixed-price payment and the floating-price payment are netted,
resulting in a net amount due to or from the counterparty.
In accordance with FASB Interpretation No. 39, the Company nets the value
of its derivative arrangements with the same counterparty in the accompanying
consolidated balance sheets, to the extent that a legal right of setoff exists.
Gain or losses from derivative transactions are reflected as adjustments to
gas sales on the consolidated statements of operations. Following provisions of
SFAS 133, changes in the fair value of derivative instruments designated as cash
flow hedges, to the extent they are effective in offsetting cash flows
attributable to the hedged risk, are recorded in other comprehensive income
until the hedged item is recognized in earnings. Any change in fair value
resulting from ineffectiveness is recognized currently in gas sales. No
ineffectiveness was recorded in the quarter ended June 30, 2004.
As of June 30, 2004, RMG had the following open gas derivative instruments
designed to hedge a portion of our gas production for periods after June 30,
2004:
-22-
NATURAL GAS (MMBTU):
- ----------------------
Weighted- Fair
Average Value at
Volume Strike June 30,
Mmbtu Price 2004
----- -------- --------
Swaps:
2004 360,000 $4.76 $(285,400)
2005 360,000 4.14 (435,300)
------- ----------
Total Gas 720,000 $(720,700)
------- ==========
The Company has established the fair value of all derivative instruments
using appropriate future cash flow valuation methodology. The actual
contribution to our future results of operations will be based on the market
prices at the time of settlement and may be more or less than the fair value
estimates used at June 30, 2004. All hedged transactions as of June 30, 2004,
are expected to mature by December 31, 2005.
Additional information concerning the fair value of our gas derivative
instruments is as follows for the six months ended June 30, 2004:
Fair value of contracts outstanding as of January 1 $ --
Change in fair value of contracts during the six months (725,100)
Contracts realized or otherwise settled during the six months 4,400
Fair value of new contracts when entered into during the
six months --
Fair value of contracts when closed during the six months --
---------------
Fair value of contracts outstanding as of June 30 $ (720,700)
===========
Derivative instruments reflected as current in the condensed consolidated
balance sheet represent the estimated fair value of derivative instrument
settlements scheduled to occur over the subsequent twelve month period based on
market prices for gas as of the condensed consolidated balance sheet date. The
derivative settlement amounts are not due and payable until the month in which
the related underlying hedged transaction occurs.
The Company uses a sensitivity analysis technique to evaluate the
hypothetical effect that changes in the market value of gas may have on the fair
value of its commodity hedging instruments. At June 30, 2004, a 10% change in
the underlying commodities' prices would change the net liabilities recorded for
the Company's hedging instruments by approximately $347,200.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has
evaluated the effectiveness of our disclosure controls and procedures as defined
in Securities and Exchange Commission ("SEC") Rule 13a-15(e) and 15d-15(e) as of
the end of the period covered by this Report. Based upon that evaluation,
management has concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that
we file or submit under the Securities Exchange Act is communicated to
management, including the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure and is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
-23-
During the six months covered by this Report, there have been no
significant changes in internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
-24-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
------------------
(a) On July 30, 2003, the Company and Crested received an Order and
thereafter a Judgment on August 1, 2003 from the U.S. District Court
of Colorado wherein Chief Judge Lewis T. Babcock entered an Order that
Judgment be entered against Nukem/CRIC ("Nukem") in favor of the
Company in the total amount of $20,044,184. The Judgment was entered
and defendant Nukem posted a supersedeas bond in the full amount of
the Judgment plus interest for one year, which was approved by the
Court. On October 3, 2003, Nukem, as Appellants, filed a Notice of
Appeal to the 10th Circuit Court of Appeals and thereafter on October
15, 2003, the Company filed a Notice of Cross-Appeal to the 10th
Circuit. Oral arguments have been scheduled before a panel of the 10th
Circuit Court on September 27, 2004.
(b) The U.S. District Court of Colorado entered various orders in the case
of Phelps Dodge Corporation ("PD") et al vs. Crested Corp. and U.S.
Energy Corp. ("USECC"). The orders addressed three motions for partial
summary judgment by Phelps Dodge as follows: (1) granted Phelps
Dodge's request for partial summary judgment that the 1999 merger of
Cyprus Amax and CAV Corp. was not a sale that triggered an obligation
of PD to pay $3.75 million to USECC; (2) held in favor of USECC that
there are genuine issues of fact that reuire a trial on the issue
whether USECC must accept transfer of the Mount Emmons Water Treatment
Plant along with the mining properties, and (3) granted Phelps Dodge's
request for partial summary judgment that certain USECC counterclaims
for breach of contract, unjust enrichment, negligence and an
accounting be dismissed. A final pre-trial conference is being held on
August 25, 2004 with the magistrate to review the final pre-trial
order.
No other material developments in the other pending Legal Proceedings have
occurred since they were last reported by the Company in Item 3 of its Form 10-K
for the year ended December 31, 2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
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SECURITIES
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During the six months ended June 30, 2004, the Company issued 233,667
shares of common stock as payment of principal and interest to settle the note
due Caydal, LLC ("Caydall"); 108,613 shares of common stock in exchange for
111,111 shares of RMG stock as part of a provision given to an accredited
investor when it invested in RMG common stock; 678,888 shares of common stock
and 318,465 common stock warrants in the purchase of producing coal bed methane
properties (see note 12); 100,000 shares of common stock and 250,000 warrants to
purchase common stock to an accredited investor in a private placement; 456,853
shares of common stock to an accredited investment firm in exchange for 300,000
shares of RMG Series A preferred stock; released 21,000 shares of forfeitable
shares to a retired employee and 25,000 shares of common stock to five employees
under the 2001 Stock Award Program, which was approved by the shareholders
during the 2002 shareholder's meeting The investment firms hold an additional
300,000 shares of RMG preferred stock which are convertible to the Company's
common stock at 90% of the market value of the Company's common stock when
converted. The Company also issued a total of 150,000 common stock purchase
warrants to three accredited investment firms as part of their investment in RMG
Series A preferred stock. For values received see Note 11 to Financial
Statement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits.
31.1 Certification under Rule 13a-14(a) John L. Larsen
31.2 Certification under Rule 13a-14(a) Robert Scott Lorimer
32.1 Certification under Rule 13a-14(b) John L. Larsen
32.2 Certification under Rule 13a-14(b) Robert Scott Lorimer
(b) REPORTS ON FORM 8-K. The Company filed one report on Form 8-K for the
quarter ended June 30, 2004. The event reported was:
1. An amendment to the report filed March 5, 2004 under Items 2 and 7,
referenced the Company's subsidiary, Rocky Mountain Gas, Inc. (RMG)
purchasing coalbed methane properties in the Power River Basin of
Wyoming;
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this Report to be signed on its behalf by the
undersigned, there unto duly authorized.
U.S. ENERGY CORP.
(Company)
Date: August 13, 2004 By: /s/ John L. Larsen
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JOHN L. LARSEN,
CHAIRMAN and CEO
Date: August 13, 2004 By: /s/ Robert Scott Lorimer
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ROBERT SCOTT LORIMER
Principal Financial Officer and
Chief Accounting Officer
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