SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF |
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For the period ended March 31, 2003 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF |
Commission file number 0-32667
(Exact Name of Registrant as Specified in Its Charter)
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TEXAS |
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75-2794300 |
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(State or Other Jurisdiction of |
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(I.R.S Employer |
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500 West Wall Street, Suite 400, Midland, Texas |
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79701 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(432) 683-5422 |
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(Registrant’s Telephone Number, Including Area Code) |
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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 ý No o
As of March 31, 2003, the Registrant had 1,302,355 shares of its $.01 par value common stock issued and outstanding.
CAP ROCK ENERGY CORPORATION
2
CAP ROCK ENERGY CORPORATION
Consolidated Statements of Operations
Three Months Ended March 31, 2003 and 2002
(In thousands, except per share amounts)
(Unaudited)
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2003 |
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2002 |
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Operating Revenues: |
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Electric sales |
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$ |
21,987 |
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$ |
17,889 |
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Other |
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357 |
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230 |
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Total operating revenues |
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22,344 |
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18,119 |
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Operating Expenses: |
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Purchased power |
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10,965 |
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8,760 |
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Operations and maintenance |
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2,380 |
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1,673 |
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Administrative and general |
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1,513 |
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1,414 |
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Depreciation and amortization |
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1,817 |
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1,546 |
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Property taxes |
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321 |
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444 |
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Other |
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168 |
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56 |
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Total operating expenses |
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17,164 |
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13,893 |
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Operating Income |
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5,180 |
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4,226 |
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Other Income (Expense): |
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Allocation of income from associated organizations |
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— |
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7 |
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Interest expense, net of capitalized interest |
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(1,712 |
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(1,718 |
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Interest and other income |
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266 |
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259 |
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Equity earnings in MAP |
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26 |
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8 |
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Total other income (expense) |
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(1,420 |
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(1,444 |
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Income before income taxes: |
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3,760 |
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2,782 |
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Income tax expense |
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699 |
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— |
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Net Income |
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$ |
3,061 |
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$ |
2,782 |
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Net income per common share: |
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Basic |
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$ |
2.35 |
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$ |
2.14 |
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Diluted |
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$ |
2.25 |
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$ |
2.14 |
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Weighted average number of common shares outstanding: |
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Basic |
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1,302,355 |
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1,302,355 |
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Diluted |
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1,357,653 |
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1,302,355 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
CAP ROCK ENERGY CORPORATION
(In thousands)
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March 31, |
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December 31, |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash |
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$ |
10,106 |
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$ |
9,899 |
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Accounts receivable: |
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Electric sales, net |
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6,969 |
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4,680 |
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Other |
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317 |
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380 |
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Current portion of notes receivable |
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12,225 |
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12,490 |
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Purchased power subject to recovery |
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3,322 |
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3,501 |
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Other current assets |
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8,219 |
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7,805 |
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Total current assets |
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41,158 |
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38,755 |
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Investments and notes receivable |
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12,376 |
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12,490 |
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Utility plant, net |
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155,162 |
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157,447 |
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Nonutility property, net |
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1,551 |
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1,564 |
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Other assets |
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800 |
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1,038 |
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Total Assets |
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$ |
211,047 |
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$ |
211,294 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
32,381 |
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$ |
33,924 |
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Accounts payable: |
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Purchased power |
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4,219 |
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3,381 |
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Other |
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643 |
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1,796 |
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Equity redemption credits |
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587 |
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732 |
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Accrued and other current liabilities |
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3,163 |
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3,066 |
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Current income tax payable |
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413 |
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414 |
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Total current liabilities |
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41,406 |
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43,313 |
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Long-term debt, net of current portion: |
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Mortgage notes |
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146,843 |
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147,744 |
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Note payable and other capital leases |
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280 |
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308 |
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Total long-term debt |
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147,123 |
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148,052 |
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Deferred credits |
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4,719 |
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5,191 |
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Stockholders’ equity: |
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Common stock |
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13 |
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13 |
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Preferred stock |
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— |
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— |
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Paid in capital |
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5,949 |
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5,949 |
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Retained earnings |
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11,837 |
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8,776 |
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Total stockholders’ equity |
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17,799 |
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14,738 |
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Total Liabilities and Equity |
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$ |
211,047 |
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$ |
211,294 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
CAP ROCK ENERGY CORPORATION
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002
(In thousands)
(Unaudited)
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2003 |
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2002 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
3,061 |
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$ |
2,782 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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3,614 |
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2,895 |
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Noncash employee compensation |
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30 |
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— |
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Equity earnings in Map |
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(26 |
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(8 |
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Change in: |
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Other assets/deferred credits |
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(522 |
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2,121 |
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Accounts receivable |
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(2,226 |
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(724 |
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Purchased power cost subject to refund/recovery |
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179 |
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(3,774 |
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Other current assets |
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(414 |
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890 |
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Accounts payable and accrued expenses |
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(249 |
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(2,594 |
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Net cash provided by operating activities |
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3,447 |
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1,588 |
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Cash Flows From Investing Activities: |
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Utility plant additions, net |
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(1,028 |
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(904 |
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Additions/deletions to nonutility investments |
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140 |
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130 |
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Collection of notes receivable |
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265 |
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250 |
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Net cash provided by (used in) investing activities |
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(623 |
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(524 |
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Cash Flows From Financing Activities: |
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Payments on mortgage notes |
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(871 |
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(710 |
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Payments on other long-term debt and capital leases |
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(1,601 |
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(1,486 |
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Retirement of former member equity |
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(145 |
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(394 |
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Net cash provided by (used in) financing activities |
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(2,617 |
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(2,590 |
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Increase (Decrease) In Cash and Cash Equivalents |
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207 |
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(1,526 |
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Cash and Cash Equivalents: |
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Beginning of period |
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9,899 |
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5,498 |
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End of period |
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$ |
10,106 |
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$ |
3,972 |
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Supplemental Cash Flow Information: |
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Cash paid during the period for interest |
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$ |
1,960 |
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$ |
1,776 |
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The accompanying notes are an integral part of these consolidated financial statements.
5
CAP ROCK ENERGY CORPORATION
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Registrant, Cap Rock Energy Corporation (the “Company”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management of Cap Rock Energy Corporation, the accompanying unaudited consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2003 and 2002, and its consolidated results of operations and cash flows for the three months ended March 31, 2003, and 2002. The consolidated results of operations for the three months ended March 31, 2003, are not necessarily indicative of the results to be expected for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission (Commission File No. 333-53112), and the Company’s annual reports on Form 10-K and the quarterly reports on Form 10-Q.
2. Stock —Based Compensation
The Company accounts for stock based compensation utilizing the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), as amended, requires pro-forma disclosure of net income and earnings per share as if the stock grants were accounted for using the fair value method. For the three months ended March 31, 2003, net income of $3,061,000 would be the same for both the intrinsic and fair value methods. The reconciliation of net income as reported of $3,061,000 using the intrinsic method to the pro-forma net income of $3,061,000 as if the fair value method was used, includes only one item of stock-based employee compensation expense. The expense of $30,000 would be both added to the reported net income, and then subtracted from the resulting subtotal. Basic and diluted earnings per share of $2.35 and $2.25 respectively, as reported, would remain the same for pro-forma presentation.
3. Change in Accounting Principle
Prior to March 2003, the Company utilized the cycle billing method to recognize revenue under its board approved rate structure. The cycle billing method recognized revenue on an “as billed basis” when the customer was billed and not on an accrual basis.
During the first quarter of 2003, the Company’s Board of Directors changed the Company’s rate-making policy to recognize unbilled revenue. Therefore, the Company is required to change accounting principles in order to recognize revenue on the accrual basis. The Company believes the accrual method more closely matches revenues and expenses and is more consistent with its current rate-making policies. The effect of the change in accounting principle is an increase in operating revenues for the three months ended March 31, 2003, in the amount of $2,346,000.
Also due to this change in accounting principle, the Company is no longer deferring certain purchased power costs associated with electric services delivered to customers but unbilled at period end. This change resulted in an increase to purchased power costs for the three months ended March 31, 2003, in the amount of $1,318,000.
4. Repurchase Offer
Shares of the Company’s common stock were originally distributed to certain former members of Cap Rock Electric Cooperative, Inc. (the “Cooperative”), the Company’s predecessor, who elected to receive shares of stock as payment for their equity and membership interest in the Cooperative. Pursuant to the conversion
6
plan, the Company made a commitment to purchase those shares, held continuously by the original owners of record until the first anniversary of the distribution of the shares at a price of $10 per share if the Company had sufficient cash available to purchase all shares tendered.
On February 5, 2003, the Company filed Schedule TO with the Securities and Exchange Commission, thus commencing the repurchase period, which expired April 30, 2003. In an effort to be inclusive rather than exclusive, the Company made the offer to all shareholders of the Company. The number of shares ultimately tendered to and accepted by the Company for repurchase was 82,140, with $821,400 being paid to tendering shareholders in early May 2003. There are no further obligations related to the Company’s repurchase commitment.
5. Income Taxes
Unlike the predecessor company, Cap Rock Energy Corporation is a taxable entity. One of it’s wholly-owned subsidiaries, NewCorp Resources Electric Cooperative, Inc., (NewCorp), is a tax-exempt cooperative under IRS Code Section 501(c) (12), and files a separate tax return. Income tax expense of $699,000 has been recorded for the three months ended March 31, 2003, based upon the Company's estimate of its ability to utilize its net operating loss carryforwards in future periods. No income tax expense was recorded for the three months ended March 31, 2002, because net operating loss carryforwards were available to reduce any taxable income during that quarter.
6. New Accounting Standards
Effective January 1, 2003, the Company adopted SFAS No. 143, “Asset Retirement Obligations,” which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The implementation of this standard did not have a material impact on the Company’s financial position or results of operations.
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, and was adopted by the Company effective January 1, 2003. The implementation of this standard did not have an impact on the Company’s financial position or results of operations.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities —an interpretation of ARB No. 51” (“FIN 46”), requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 provisions are effective for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The Company does not expect that the provisions of FIN 46 will have a material impact on the Company’s results of operations or financial position.
In December, 2002, the FASB issued No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” (SFAS No. 148), an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company currently accounts for stock-based compensation in accordance with APB Opinion No. 25, which allows recognition of compensation expense to the extent that the fair market value is greater than the option price.
On April 22, 2003, the FASB announced its decision to require all companies to expense the fair value of employee stock options. Companies will be required to measure the cost according to the fair value of the options. Although the new guidelines have not yet been released, it is expected that they will be finalized soon and effective in 2004. When final rules are announced, the Company will assess the impact to its
7
financial statements.
7. Contingencies
Currently under the Public Utility Regulatory Act (“PURA”), the definition of “electric cooperative” includes a “successor to an electric cooperative created before June 1, 1999, in accordance with a conversion plan approved by a vote of the electric cooperative, regardless of whether the successor later purchases, acquires, merges with or consolidates with, other electric cooperatives.” Senate Bill 1280 (“SB 1280”) is proposed legislation in the Texas Legislature that, if passed, would amend the PURA to treat a successor to an electric cooperative as an investor owned utility. SB 1280 also provides for establishment by the Public Utility Commission of Texas (“PUCT”) of schedules and procedures for such a successor that were not previously subject to regulation as an investor owned utility prior to September 1, 2003, to comply with the requirements of deregulation and competition.
As of May 14, 2003, SB 1280 has passed the Texas Senate and has passed in Committee in the Texas House of Representatives. It will now be considered by the full House. If it passes the Texas House of Representatives, it will become law unless it is vetoed by the Governor. If SB 1280 becomes law, the Company’s rates will be subject to regulation and approval by the PUCT. The Company believes operational costs will increase due to regulation by the PUCT as an investor owned utility and entering into competition. The Company cannot predict what other effects, some of which could be material, SB 1280 may have on the Company or its customers.
8. Reclassifications
Certain reclassifications have been made to prior periods’ financial statements to conform to the presentation adopted in the current period.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding matters that could have an impact on our business, financial condition and future operations. These statements, based on our expectation and estimates, are not guarantees of future performance and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to:
• General business conditions;
• Increased competition in the electric utility industry;
• Changes in our tax status;
• Demands for and cost of electric power;
• Federal and state legislative and regulatory actions and legal and administrative proceedings;
• Changes in and compliance with environmental laws and policies;
• Weather conditions; and,
• Unexpected changes in operating expenses and capital expenditures.
Our actual results may vary materially from those discussed in the forward-looking statements as a result of these and other factors. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made even if new information becomes available or other events occur in the future.
8
Overview
The Company is successor in interest to Cap Rock Electric Cooperative, Inc., which was a member-owned cooperative founded in 1939. The Company was formed on January 1, 1999, in conjunction with a corporate restructuring plan involving the conversion of the Cooperative from a Texas electric cooperative to a Texas business corporation. Effective January 1, 2002, all assets and liabilities of the Cooperative were transferred to the Company in exchange for common stock. The financial statements presented for the periods ending on or before December 31, 2001, are the historical consolidated financial statements of the Cooperative, and the financial statements for periods ending after January 1, 2002, are those of the successor, Cap Rock Energy Corporation.
Results of Operations
Three Months ended March 31, 2003 Compared With Three Months Ended March 31, 2002
Net Income
For the three months ended March 31, 2003, net income was $3,061,000 as compared to net income of $2,782,000 for the three months ended March 31, 2002, an increase of $279,000. The majority of the increase is due to:
• An increase in operating revenues of $4,225,000;
• A net increase in operating expenses of $3,271,000; and
• An increase in tax expense of $699,000.
Operating Revenues
Operating revenues for the three months ended March 31, 2003, were $4,225,000 greater than those of the three months ended March 31, 2002. The increase was due primarily to $2,346,000 in accrued revenues related to a change in accounting principle in March 2003, an increase of $1,318,000 in power cost recovery and approximately $1 million of increased electric sales. See Note 3 to the Financial Statements for a discussion of the accounting change.
Operating Expenses
Operating expenses for the three months ended March 31, 2003 and 2002, were $17,164,000 and $13,893,000, respectively, an increase of $3,271,000, for the following reasons:
Purchased power cost increased by $2,205,000 due to higher natural gas prices offset by fixed price contract losses during the early months of 2002, totaling approximately $1 million. Natural gas prices affect the cost of power generation, which is passed through from our power suppliers. Additionally, there was an adjustment of $1,318,000 for the lag in purchase power cost related to a change in accounting principle from the cycle billing method to accrued revenues. Maintenance and operations expenses increased by $707,000 because personnel were devoting more time to maintenance activities that result in current expenses as opposed to engaging in construction activities that result in capitalized cost.
Income Taxes
Current income tax expense was $699,000 in 2003. The effective tax rate of 19% for the three months ended March 31, 2003, is lower than the statutory rate due to the nontaxable status of some of the entities and the reversal of a portion of the valuation allowance related to net operating loss carryforwards expected to be utilized by the Company in future periods. There was no current income tax expense in 2002 due to utilization of net operating loss carryforwards.
9
Liquidity and Capital Resources
As of March 31, 2003, the Company had:
• Cash and cash equivalents of $10,106,000;
• Working capital deficit of $248,000;
• Long-term indebtedness of $147,123,000, net of current portion.
Historically, the Company’s primary sources of liquidity have been cash flows from operations and borrowings from CFC, the Company’s primary lender. These borrowings are collateralized by substantially all of the Company’s utility distribution assets. The existing long-term debt consists of a series of loans from CFC that impose various restrictive covenants, including the prohibition of additional secured indebtedness, or the guaranty of such, and requires the maintenance of a debt service coverage ratio as defined in the CFC loan agreements. In addition, the Company may not make any cash distribution or any general cancellation or abatement of charges for electric energy or services to its customers if the ratio of equity to total assets is less than a stated percentage. At December 31, 2002, the Company was in compliance with its CFC loan agreements or had obtained waivers of certain covenants therein that the Company was required to meet.
As of March 31, 2003, the Company had utilized all available borrowing capacity under the CFC loan agreements. Historically, the majority of the Company’s distribution property additions have been financed with long-term borrowings from CFC. In order for the Company to meet its working capital needs, debt service requirements and planned capital expenditures, the following options may be available:
• Securing financing from new sources;
• Reducing short-term capital expenditures;
• Selling or collateralizing non-strategic assets; and
• Refinancing existing debt obligations.
Additionally, effective December 1, 2002, the Company converted its existing long-term debt from variable interest rates to one-year, two-year and three-year fixed rates in order to minimize its interest rate exposure. Interest rates were fixed for the next three years at rates under 5%. Approximately 10% of the note balances were fixed for one year, 60% for two years and 30% for 3 years.
The Company has debt service payment obligations for the next 12 months as
summarized below:
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Quarter ended |
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June 30, |
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September 30, |
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December 31, |
|
March 31, |
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|
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Long-term debt payments |
|
$ |
1,129 |
|
$ |
13,011 |
|
$ |
893 |
|
$ |
901 |
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Capital lease payments |
|
1,375 |
|
15,011 |
|
33 |
|
28 |
|
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Total cash commitments |
|
$ |
2,504 |
|
$ |
28,022 |
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$ |
926 |
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$ |
929 |
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CFC has approved the conversion of the prior line of credit for $28 million to a five year term loan. The terms of the new arrangement include quarterly payments of approximately $233,000 based on a 30 year amortization schedule with a final balloon payment at the end of year five, initial principal payment deferral of one year and a fee of $210,000. The execution and delivery of the new loan documents was completed in May 2003. The $28 million term loan is not included in the above table due to deferral of any principal payments until the second quarter of 2004.
The Company anticipates receipt of payment for the United Fuel notes receivable balance of approximately $11.9 million prior to the scheduled maturity date because United Fuel is currently in discussions with lenders in order to obtain financing that would provide funds to allow it to fully repay the Company’s notes receivable. These proceeds will be used to satisfy the cross-collateralized note payable of the same amount included in the table above under long-term debt payments. The maturity date for both the notes receivable and note payable is in the third quarter of 2003. In the event United Fuel is not successful in obtaining financing, the Company is considering an opportunity to extend the payment date of the note payable to the bank for $12,225,000 for an additional year. An additional option available to the Company is that United Fuel, or its shareholders who have provided the Company with personal guarantees of the notes receivable, would pay down the notes and provide funds to the Company such that the Company would together with its cash flow from operations, be able to satisfy its debt obligations as they become due in 2003.
The Company believes cash generated from normal operations will be sufficient to service the remaining debt obligations listed in the table above, which includes the transmission system capital lease balloon payment of approximately $14 million due in the third quarter of 2003. This capital lease balloon payment will be offset by sinking fund monies which will approximate $8 million at September 2003. The current sinking fund balance of approximately $7.8 million is reflected in Other current assets.
One of the Company’s subsidiaries, NewCorp Resources Electric Cooperative, Inc., owns a 305 mile transmission system in West Texas. Even though, as described above, there is sufficient cash flow to satisfy debt obligations, the Company is attempting to either refinance or sell this transmission system and has
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received various proposals to do so. The decision on which alternative best suits the Company’s needs will be based upon various factors such as the amount of sale or loan proceeds, documentation requirements, the regulatory approval process and management approval. Any proposed transaction would be subject to several conditions, including:
• Approval of the transaction by the Company’s Board of Directors and the appropriate management of the buyer or lender;
• Completion of any due diligence reviews;
• Execution by the parties of definitive agreements and all other necessary agreements; and
• Approval of regulatory agencies having jurisdiction over the transmission system, if applicable or necessary.
At the closing, funds would be used to repay all amounts owed with respect to the original transmission line financing, to fund any capital investment needs and to satisfy general corporate needs such as reserves for storm damage.
As discussed in Note 26 to the consolidated financial statements in the annual report on Form 10-K for the year ended December 31, 2002, the Cooperative and the Company filed an application to transfer the Cooperative’s certified territory to the Company. This was the last step in the conversion process. The Company’s current ongoing negotiations to refinance the transmission system through a loan or sale have been delayed and interrupted due to the above mentioned issues relative to the PUCT and the CCN.
Commencing one year from the date of the distribution of the Company’s common stock to the former members of the Cooperative in connection with the conversion plan and ending 60 days thereafter, the Company offered to purchase at a price of $10 per share all of its shares of common stock that were distributed in connection with the Plan. Shares of the Company’s common stock were originally distributed to certain former members of the Cooperative who elected to receive shares of stock as payment for their equity and membership interest in the Cooperative. Pursuant to the conversion plan, the Company made a commitment to purchase those shares, held continuously by the original owners of record until the first anniversary of the distribution of the shares at a price of $10 per share if the Company had sufficient cash available to purchase all shares tendered. The Company’s original purchase commitment was only to those shareholders who were the original holders of record, and who had held those shares continuously until the first anniversary of the distribution of the shares. In an effort to be inclusive, rather than exclusive, the Company made the offer to all shareholders and extended the offering period beyond the original 60 days. The offering period began February 5, 2003, and ended April 30, 2003, with 82,140 shares of common stock tendered to and accepted by the Company at $10 per share, totaling $821,400.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in the value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign currency exchange rates, prices of commodities and equity price risks.
Commodity Price Risk
All purchases of electricity are pursuant to long-term wholesale electric power contracts based on a fixed price for kWh usage, transportation and auxiliary services and a variable charge for fuel cost, which is generally natural gas. All of the actual costs associated with the purchase of electricity are able to be recovered from billings to our customers, which mitigates most of the risk of variations in gas costs.
In the first quarter of 2001, the Company entered into two derivative transactions to fix a portion of the natural gas component of the related power costs over the next twelve months to minimize the fluctuations in their customer’s power bills. These transactions fixed the price on approximately 35,000 to 260,000 MMBtus of natural gas at fixed prices ranging from $3.79 to $5.31 an MMBtu. All payments made or received in connection with these transactions were collected or rebated to the customers through the power cost recovery component of the customers’ power bills. The last derivative contract expired in May 2002. The Company uses this type of instrument to manage costs for its customers.
Credit Risk
The Company’s concentrations of credit risk consist primarily of cash, trade accounts receivable, sales concentrations with certain customers and a note receivable from a third party.
Credit risk with financial institutions is considered minimal because of the number and various physical locations of different financial institutions utilized. The Company has utilized repurchase agreements, and may consider using that vehicle again in the future to maximize return and minimize credit risk.
The Company conducts credit evaluations of new customers and assesses the need for a deposit by that customer. The deposit amount is normally set as 1/6 of an annual customer billing, with such amounts being refunded or credited to the customer after one year if they have paid timely at least 10 of the last 12 billings. No customer accounted for 10% or more of operating revenues of the Company.
In connection with an investment in United Fuel and Energy Corporation, the Company has a note receivable from United Fuel with a current balance of $12,225,000, with a final balloon payment due in July 2003. The interest rate is variable, and is tied to the interest rate on the Company’s note payable to a bank.
Interest Rate Risk
We are subject to market risk associated with interest rates on our CFC long-term indebtedness. The Company’s mortgage debt with CFC allows for a change from variable rate to fixed rate with no additional fees. In order to take advantage of the interest rate environment in late 2002 as well as employ an interest rate management strategy, the Company fixed the interest rates on $11,525,000 of its debt at 3.35% for a period of one year, on $70,519,000 at 4.20% for a period of two years and on $35,189,000 at 4.70% for a period of three years. At March 31, 2003, there was $28,000,000 at an average variable rate of 3.6% and $6,167,000 at a fixed rate of 6.5%. Pursuant to the terms of the mortgage notes, our variable debt with CFC is CFC prime rate plus 1%. A 1% increase in interest rates results in an approximate increase of $280,000 in interest expense.
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Company Purchase Commitment
Shares of the Company’s common stock were originally distributed to certain former members of the Cooperative who elected to receive shares of stock as payment for their equity and membership interest in the Cooperative. Pursuant to the terms of the conversion plan, the Company made a commitment to offer to purchase those shares, held continuously by the original owners of record until the first anniversary of the distribution of the shares at a price of $10 per share if the Company had sufficient cash available to purchase all shares tendered. Although the original purchase commitment was only to original holders, the Company, in its desire to be inclusive rather than exclusive, has extended the offer to all shareholders. The offering period began February 5, 2003, and ended April 30, 2003, with 82,140 shares of common stock tendered to and accepted by the Company at $10 per share, totaling $821,400.
Item 4. Controls and Procedures
Within the 90-day period prior to the date of this report, an evaluation was carried out, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, subject to the limitations below, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
The Company, including its CEO and CFO, does not expect that the Company’s disclosure and internal controls and procedures will prevent or detect all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of a control system are met.
Other than certain legal proceedings arising in the ordinary course of business, litigation arising out of the Company’s proposed acquisition of Lamar County Electric Cooperative Association, litigation regarding the transfer of the Cooperative’s certified territory to the Company, litigation involving every utility that provides or receives transmission services in the state and a threat of a derivative lawsuit by one or more former members of the cooperative, none of which management believes will have a material adverse impact on the results of operations or financial condition of the Company, there is no other litigation pending or threatened against the Company.
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SIGNATURES
Pursuant to the requirements 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.
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CAP ROCK ENERGY CORPORATION |
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May 15, 2003 |
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/s/ Lee D. Atkins |
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Lee D. Atkins |
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Senior Vice President
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CERTIFICATIONS
I, David W. Pruitt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cap Rock Energy Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
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By: /s/ David W. Pruitt |
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David W. Pruitt |
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Co-Chairman/President/Chief Executive Officer |
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CERTIFICATIONS
I, Lee D. Atkins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cap Rock Energy Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
e) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
f) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
c) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
d) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
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By: /s/ Lee D. Atkins |
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Lee D. Atkins |
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Senior Vice President and |
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Exhibit Number |
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Description of Document |
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18.1 |
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Change in Accounting Principle Letter from KPMG LLP. * |
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99.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). * |
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99.2 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). * |
* filed herewith
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