Table of Contents

 

 

 

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 quarterly period ended June 30, 2013

 

OR

 

o         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 001-32960

 


 

GeoMet, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

76-0662382

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

909 Fannin, Suite 1850

Houston, Texas 77010

(713) 659-3855

(Address of principal executive offices and telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 


 

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.    x  Yes    o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No

 

As of August 1, 2013, 40,662,749 shares and 5,642,541 shares, respectively, of the registrant’s common stock and preferred stock, par value $0.001 per share, were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

Part I. Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

3

 

Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012

4

 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012

5

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosures

29

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

29

 

2



Table of Contents

 

Part I. FINANCIAL INFORMATION

 

Item  1.                                Financial Statements

 

GEOMET, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

 

 

 

June 30, 2013

 

December 31, 2012

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

11,533,406

 

$

7,234,225

 

Accounts receivable, net of allowance of $14,744 and $17,634 at June 30, 2013 and December 31, 2012, respectively

 

4,817,473

 

6,248,819

 

Inventory

 

106,974

 

262,885

 

Derivative asset—natural gas contracts

 

360,679

 

3,929,767

 

Other current assets

 

847,772

 

1,437,819

 

Total current assets

 

17,666,304

 

19,113,515

 

Gas properties—utilizing the full cost method of accounting:

 

 

 

 

 

Proved gas properties

 

333,524,433

 

539,077,119

 

Other property and equipment

 

3,332,394

 

3,749,621

 

Total property and equipment

 

336,856,827

 

542,826,740

 

Less accumulated depreciation, depletion, amortization and impairment of gas properties

 

(292,324,195

)

(467,702,053

)

Property and equipment—net

 

44,532,632

 

75,124,687

 

Other noncurrent assets:

 

 

 

 

 

Deferred income taxes

 

99,365

 

1,125,804

 

Other

 

840,799

 

962,451

 

Total other noncurrent assets

 

940,164

 

2,088,255

 

TOTAL ASSETS

 

$

63,139,100

 

$

96,326,457

 

LIABILITIES, MEZZANINE AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

3,972,380

 

$

5,728,879

 

Royalties payable

 

3,621,726

 

3,830,904

 

Accrued liabilities

 

2,870,771

 

1,793,946

 

Paid in-kind dividend payable on Series A Convertible Redeemable Preferred Stock

 

1,367,488

 

 

Deferred income taxes

 

99,365

 

1,125,804

 

Derivative liability—natural gas contracts

 

 

919,572

 

Asset retirement obligations

 

11,983

 

73,706

 

Current portion of long-term debt

 

77,000,000

 

10,300,000

 

Total current liabilities

 

88,943,713

 

23,772,811

 

Long-term debt

 

 

129,000,000

 

Asset retirement obligations

 

9,387,734

 

13,235,318

 

Derivative liability—natural gas contracts

 

824,920

 

1,636,348

 

Other long-term accrued liabilities

 

128,558

 

143,682

 

TOTAL LIABILITIES

 

99,284,925

 

167,788,159

 

Commitments and contingencies (Note 16)

 

 

 

 

 

Mezzanine equity:

 

 

 

 

 

Series A Convertible Redeemable Preferred Stock—net of offering costs of $1,660,435; redemption amount $53,058,650; $.001 par value; 7,401,832 shares authorized, 5,471,610 and 5,305,865 shares were issued and outstanding at June 30, 2013 and December 31, 2012, respectively

 

37,953,945

 

35,851,887

 

Stockholders’ Deficit:

 

 

 

 

 

Preferred stock, $0.001 par value—2,598,168 shares authorized, none issued

 

 

 

Common stock, $0.001 par value—authorized 125,000,000 shares; 40,663,554 and 40,690,077 issued and outstanding at June 30, 2013 and December 31, 2012, respectively

 

40,664

 

40,690

 

Treasury stock—10,432 shares at June 30, 2013 and December 31, 2012

 

(94,424

)

(94,424

)

Paid-in capital

 

191,499,298

 

195,033,585

 

Accumulated other comprehensive loss

 

(102,547

)

(53,020

)

Retained deficit

 

(265,442,761

)

(302,057,496

)

Less notes receivable

 

 

(182,924

)

Total stockholders’ deficit

 

(74,099,770

)

(107,313,589

)

TOTAL LIABILITIES, MEZZANINE AND STOCKHOLDERS’ DEFICIT

 

$

63,139,100

 

$

96,326,457

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited)

 

3



Table of Contents

 

GEOMET, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

Gas sales

 

$

12,053,170

 

$

7,711,969

 

$

22,932,434

 

$

17,855,143

 

Operating fees

 

38,113

 

59,446

 

83,069

 

135,211

 

Total revenues

 

12,091,283

 

7,771,415

 

23,015,503

 

17,990,354

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Lease operating expense

 

4,122,868

 

4,491,593

 

8,592,107

 

8,933,027

 

Compression and transportation expense

 

1,868,165

 

2,300,765

 

3,706,801

 

4,540,254

 

Production taxes

 

647,371

 

364,437

 

1,197,917

 

834,086

 

Depreciation, depletion and amortization

 

1,370,777

 

3,290,420

 

2,877,143

 

6,920,889

 

Impairment of gas properties

 

 

42,255,847

 

 

58,035,288

 

General and administrative

 

1,408,521

 

1,366,142

 

2,406,754

 

2,668,167

 

Restructuring costs

 

17,396

 

765,233

 

87,584

 

765,233

 

(Gains) losses on natural gas derivatives

 

(4,149,649

)

4,891,613

 

1,385,470

 

(5,125,467

)

Total operating expenses

 

5,285,449

 

59,726,050

 

20,253,776

 

77,571,477

 

 

 

 

 

 

 

 

 

 

 

Gain on the sale of Properties in Alabama

 

37,135,611

 

 

37,135,611

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

43,941,445

 

(51,954,635

)

39,897,338

 

(59,581,123

)

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

428

 

597

 

848

 

4,299

 

Interest expense

 

(1,559,276

)

(1,268,399

)

(3,235,605

)

(2,544,243

)

Other

 

(6,698

)

253

 

(35,346

)

(4,099

)

Total other income (expense):

 

(1,565,546

)

(1,267,549

)

(3,270,103

)

(2,544,043

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes from continuing operations

 

42,375,899

 

(53,222,184

)

36,627,235

 

(62,125,166

)

Income tax expense

 

(6,250

)

(6,250

)

(12,500

)

(44,030,700

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

42,369,649

 

(53,228,434

)

36,614,735

 

(106,155,866

)

Discontinued operations, net of tax

 

 

(675,809

)

 

(696,381

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

42,369,649

 

$

(53,904,243

)

$

36,614,735

 

$

(106,852,247

)

Accretion of Series A Convertible Redeemable Preferred Stock

 

(532,836

)

(470,953

)

(1,026,373

)

(932,969

)

Paid-in-kind dividends on Series A Convertible Redeemable Preferred Stock

 

(1,367,488

)

(619,625

)

(2,443,173

)

(1,860,345

)

Cash dividends paid on Series A Convertible Redeemable Preferred Stock

 

(568

)

(651

)

(1,201

)

(1,296

)

Net income (loss) available to common stockholders

 

$

40,468,757

 

$

(54,995,472

)

$

33,143,988

 

$

(109,646,857

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share—basic:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share from continuing operations

 

$

1.00

 

$

(1.36

)

$

0.82

 

$

(2.74

)

Net loss per common share from discontinued operations

 

 

(0.01

)

 

(0.01

)

Net income (loss) per common share—basic

 

$

1.00

 

$

(1.37

)

$

0.82

 

$

(2.75

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share—diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share from continuing operations

 

$

0.51

 

$

(1.36

)

$

0.45

 

$

(2.74

)

Net loss per common share from discontinued operations

 

 

(0.01

)

 

(0.01

)

Net income (loss) per common share—diluted

 

$

0.51

 

$

(1.37

)

$

0.45

 

$

(2.75

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

Basic

 

40,477,411

 

40,003,977

 

40,467,149

 

39,883,409

 

Diluted

 

82,683,271

 

40,003,977

 

82,039,050

 

39,883,409

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited)

 

4



Table of Contents

 

GEOMET, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

42,369,649

 

$

(53,904,243

)

$

36,614,735

 

$

(106,852,247

)

(Loss) gain on foreign currency translation adjustment

 

(10,350

)

9,470

 

(9,118

)

2,019

 

Unrealized (loss) gain on available for sale securities

 

(60,472

)

36,952

 

(40,409

)

36,952

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

$

42,298,827

 

$

(53,857,821

)

$

36,565,208

 

$

(106,813,276

)

 

See accompanying Notes to Consolidated Financial Statements (Unaudited)

 

5



Table of Contents

 

GEOMET, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Cash flows provided by operating activities:

 

 

 

 

 

Net income (loss)

 

$

36,614,735

 

$

(106,852,247

)

Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:

 

 

 

 

 

Depreciation, depletion and amortization

 

2,877,143

 

6,919,168

 

Impairment of gas properties

 

 

58,035,288

 

Amortization of debt issuance costs

 

454,340

 

316,671

 

Deferred income tax expense

 

 

44,018,200

 

Unrealized losses from the change in market value of open derivative contracts

 

1,838,088

 

4,978,668

 

Stock-based compensation

 

119,374

 

393,536

 

Gain on the sale of Properties in Alabama

 

(37,135,611

)

 

Loss on sale of Hudson’s Hope Gas, Ltd

 

 

683,154

 

Loss on sale of other assets

 

35,348

 

5,200

 

Accretion expense—asset retirement obligation

 

612,553

 

391,687

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,100,139

 

810,421

 

Other assets

 

99,190

 

477,654

 

Accounts payable

 

(2,408,500

)

(675,844

)

Other accrued liabilities

 

1,139,382

 

912,190

 

 

 

 

 

 

 

Net cash provided by operating activities

 

6,346,181

 

10,413,746

 

 

 

 

 

 

 

Cash flows provided by investing activities:

 

 

 

 

 

Capital expenditures

 

(494,031

)

(508,657

)

Return of original basis through the settlement of natural gas derivative contracts

 

 

4,925,738

 

Net proceeds from the sale of Properties in Alabama

 

60,732,775

 

 

Proceeds from sale of other property and equipment

 

19,276

 

3,500

 

 

 

 

 

 

 

Net cash provided by investing activities

 

60,258,020

 

4,420,581

 

 

 

 

 

 

 

Cash flows used in financing activities:

 

 

 

 

 

Proceeds from revolving credit facility borrowings

 

 

10,500,000

 

Payments on revolving credit facility

 

(62,300,000

)

(19,800,000

)

Deferred financing costs

 

(3,801

)

(403,383

)

Payments on other debt

 

 

(167,087

)

Purchase and cancellation of treasury stock

 

(586

)

(2,037

)

Cash dividends paid on Series A Convertible Redeemable Preferred Stock

 

(633

)

(1,296

)

 

 

 

 

 

 

Net cash used in financing activities

 

(62,305,020

)

(9,873,803

)

Effect of exchange rate changes on cash

 

 

5,115

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

4,299,181

 

4,965,639

 

Cash and cash equivalents at beginning of period

 

7,234,225

 

457,865

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

11,533,406

 

$

5,423,504

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for interest expense

 

$

1,664,956

 

$

2,509,404

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

12,500

 

$

12,500

 

 

 

 

 

 

 

Significant noncash investing and financing activities:

 

 

 

 

 

Accrued capital expenditures

 

$

444,102

 

$

817,015

 

 

See accompanying Notes to Consolidated Financial Statements (Unaudited)

 

6



Table of Contents

 

GEOMET, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1—Organization and Our Business

 

GeoMet, Inc. (“GeoMet,” “Company,” “we,” or “our”) (formerly GeoMet Resources, Inc.) was incorporated under the laws of the state of Delaware on November 9, 2000. We are primarily engaged in the exploration for and development and production of natural gas from coal seams (“coalbed methane” or “CBM”). All of our production is CBM, which is a dry natural gas containing no hydrocarbon liquids. We were originally founded as a consulting company to the coalbed methane industry in 1985 and have been active as an operator, developer and producer of coalbed methane properties since 1993. Subsequent to the asset sale, our core area of operations is the Central Appalachian Basin of Virginia and West Virginia. We also own additional coalbed methane development rights, principally in Virginia and West Virginia.

 

Note 2— Sale of Coalbed Methane Properties in Alabama

 

On June 14, 2013, the Company closed the sale of all of its coal bed methane properties located in the state of Alabama. The sale resulted in proceeds of approximately $62.0 million after normal and customary purchase price adjustments of $1.2 million to account for net cash flows from the effective date to the closing date. Simultaneously with the close of the property sale, approximately $57.0 million was used to repay outstanding borrowings under the Company’s Credit Agreement and $5.0 million was held in reserve to pay transaction related costs and expenses, including the liquidation of certain natural gas hedge positions. After this repayment, borrowings outstanding under the Credit Agreement totaled $77.0 million and such amount has been established as the new borrowing base. In connection with this repayment the non-conforming “Tranche B” portion of total outstanding borrowings, which has existed since August 2012, has been eliminated and the Company no longer has a borrowing base deficiency under the Credit Agreement. The next scheduled borrowing base determination is expected to occur on or around December 15, 2013 and will be based on the Company’s reserves at June 30, 2013. The Credit Agreement continues to have a maturity date of April 1, 2014.

 

GeoMet’s net interest in the sold properties produced approximately 9,700 Mcf of natural gas per day during the month of March 2013 (the effective date of the sale was April 1, 2013), or approximately 29% of GeoMet’s total production for this time period. As of April 1, 2013 and based on Securities and Exchange Commission guidelines, GeoMet’s net proved reserves attributable to the coalbed methane properties in Alabama being sold were estimated to be approximately 43 Bcf, all classified as proved developed reserves.

 

Total gain on the sale included the following:

 

Cash proceeds

 

$

62,007,639

 

Buyer’s assumption of asset retirement obligations

 

4,411,201

 

Buyer’s assumption of other liabilities

 

164,108

 

Net book value of sold gas properties

 

(27,998,835

)

Net book value of sold inventory

 

(133,732

)

Net book value of sold equipment

 

(108,642

)

Transaction costs

 

(1,206,128

)

Total gain on sale

 

$

37,135,611

 

 

No current federal or state income taxes payable were recorded in conjunction with the sale of the Alabama properties which is the result of 2013 tax basis operating losses generated in the normal course of business that are estimated to be available to offset the taxable gain. Additionally, under GAAP, our pre-gain net deferred tax asset of $97.4 million and the offsetting $97.4 valuation allowance recorded against it were both reduced by $14.2 million as a result of recording the gain. At June 30, 2013, the remaining net deferred tax asset is $83.2 million for which a full valuation allowance remains recorded against it.

 

Pro forma adjustments related to the unaudited pro forma financial information presented below were computed assuming the transaction was consummated on January 1, 2012 and include adjustments which give effect to events that are (i) directly attributable to the transaction, (ii) expected to have a continuing impact on the registrant, and (iii) factually supportable. As such, included in Net income (loss), Net income (loss) available to common stockholders and Net income (loss) per common share (basic and diluted) is the Total gain on sale disclosed above of $37,135,611.

 

7



Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue

 

$

8,969,890

 

$

5,452,801

 

$

16,770,976

 

$

12,535,769

 

Income (loss) from continuing operations

 

$

41,421,377

 

$

(39,469,009

)

$

34,960,777

 

$

(86,907,781

)

Net income (loss)

 

$

41,421,377

 

$

(40,144,818

)

$

34,960,777

 

$

(87,604,162

)

Net income (loss) available to common stockholders

 

$

39,520,485

 

$

(41,236,047

)

$

31,490,030

 

$

(90,398,772

)

Net income (loss) per common share—basic

 

$

0.98

 

$

(1.03

)

$

0.78

 

$

(2.27

)

Net income (loss) per common share—diluted

 

$

0.50

 

$

(1.03

)

$

0.43

 

$

(2.27

)

 

Note 3— Going Concern and Management’s Plans

 

The accompanying consolidated financial statements (unaudited) have been prepared in conformity with accounting principles generally accepted in the United States which contemplate continuation of the Company as a going concern. In 2012, the amounts outstanding under the Company’s Fifth Amended and Restated Credit Agreement (“Credit Agreement”) exceeded the borrowing base as determined by the lenders under the Credit Agreement.  Although the recent sale of gas properties by the Company caused the Company to be in conformity with its borrowing base, the Company remains highly leveraged.  In addition, the Credit Agreement matures on April 1, 2014, and no assurances can be made that the Company will be able to refinance, repay or further extend the maturity date of the Credit Agreement.  Also, as of June 30, 2013, the Company had a working capital deficit of $71.3 million, a retained deficit of $265.4 million and stockholders’ deficit of $74.1 million.  Depressed natural gas prices in 2012 resulted in significant property impairments and full valuation of our deferred tax assets during 2012. On April 2, 2013, all the indebtedness under the Company’s Credit Agreement was reclassified to current liabilities. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months.

 

Management’s current business plan is to continue to evaluate its strategic alternatives. Additionally, management is seeking to divest properties with limited value and will consider additional asset sale opportunities as they arise. Management also remains focused on maintaining compliance with the Credit Agreement, as amended, maintaining production levels, and keeping costs under control.

 

The ability of the Company to continue as a going concern is dependent upon its ability to generate sufficient cash flows and sales proceeds or other sources of capital sufficient to repay or refinance its indebtedness, continue its operations and fund its long-term capital needs. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Note 4—Recent Pronouncements

 

In July 2013, the FASB, issued ASU, No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in ASU 2013-10 permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We are presently assessing the potential impact of ASU 2013-11.

 

In February 2013, the FASB issued ASU No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance. The update is effective for interim and annual periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presented for those obligations that existed upon adoption of ASU 2013-04. We are presently assessing the potential impact of ASU 2013-04.

 

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. The update requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under accounting principles generally accepted in the United States (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted and applied the provisions of ASU 2012-02 which did not impact its operating results, financial position or cash flows.

 

8



Table of Contents

 

In January 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this update clarify that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with ASC 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The amendments are effective during interim and annual periods beginning on or after January 1, 2013. The Company has adopted and applied the provisions of ASU 2013-01. See disclosure provided in Note 9—Derivative Instruments and Hedging Activities.

 

Note 5—Net Income (Loss) Per Common Share

 

Net income (loss) per common share—basic is calculated by dividing Net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income (loss) per common share—diluted assumes the conversion of all potentially dilutive securities and is calculated by dividing Net income (loss) available to common stockholders by the sum of the weighted average number of shares of common stock outstanding plus potentially dilutive securities. Net income (loss) per common share—diluted considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. A reconciliation of Net income (loss) per common share is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss) available to common stockholders—basic

 

$

40,468,757

 

$

(54,995,472

)

$

33,143,988

 

$

(109,646,857

)

Dilutive related add back:

 

 

 

 

 

 

 

 

 

Accretion of Preferred Stock

 

532,836

 

470,953

 

1,026,373

 

932,969

 

Paid-in-kind dividends on Preferred Stock

 

1,367,488

 

619,625

 

2,443,173

 

1,860,345

 

Cash dividends paid on Preferred Stock

 

568

 

651

 

1,201

 

1,296

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders—diluted

 

$

42,369,649

 

$

(53,904,243

)

$

36,614,735

 

$

(106,852,247

)

Net income (loss) per common share—basic:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share from continuing operations

 

$

1.00

 

$

(1.36

)

$

0.82

 

$

(2.74

)

Net loss per common share from discontinued operations

 

 

(0.01

)

 

(0.01

)

Net income (loss) per common share—basic

 

$

1.00

 

$

(1.37

)

$

0.82

 

$

(2.75

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share—diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) per common share from continuing operations

 

$

0.51

 

$

(1.36

)

$

0.45

 

$

(2.74

)

Net loss per common share from discontinued operations

 

 

(0.01

)

 

(0.01

)

Net income (loss) per common share—diluted

 

$

0.51

 

$

(1.37

)

$

0.45

 

$

(2.75

)

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

Basic

 

40,477,411

 

40,003,977

 

40,467,149

 

39,883,409

 

Potentially dilutive securities:

 

 

 

 

 

 

 

 

 

Preferred stock

 

42,089,307

 

 

41,455,348

 

 

Restricted stock units

 

116,553

 

 

116,553

 

 

Diluted

 

82,683,271

 

40,003,977

 

82,039,050

 

39,883,409

 

 

Net income (loss) per common share—basic for both the three and six months ended June 30, 2013 included $0.92 per common share, net of $0 tax, resulting from the Gain on the sale of Properties in Alabama. Net income (loss) per common share—diluted for both the three and six months ended June 30, 2013 included $0.45 per common share, net of $0 tax, resulting from the Gain on the sale of Properties in Alabama.

 

Net income per common share—diluted for the three months ended June 30, 2013 excluded the effect of outstanding exercisable options to purchase 2,099,658 shares and 231,457 weighted average restricted shares outstanding because they were assumed reacquired under the treasury stock method.

 

Net income per common share—diluted for the six months ended June 30, 2013 excluded the effect of outstanding exercisable options to purchase 2,099,658 shares and 232,274 weighted average restricted shares outstanding because they were assumed reacquired under the treasury stock method.

 

9



Table of Contents

 

Net loss per common share—diluted for the three months ended June 30, 2012 excluded the effect of outstanding exercisable options to purchase 2,490,558 shares, 164,565 weighted average restricted stock units for which common shares are distributed upon achievement of certain performance targets, 268,739 weighted average restricted shares outstanding, and 4,691,632 shares of Series A Convertible Redeemable Preferred Stock (36,089,476 in dilutive shares, as converted, which assumes conversion on the first day of the period) because we reported a net loss available to common stockholders which caused the options, restricted stock units, restricted shares and preferred shares to be anti-dilutive.

 

Net loss per common share—diluted for the six months ended June 30, 2012 excluded the effect of outstanding exercisable options to purchase 2,490,558 shares, 198,327 restricted stock units for which common shares are distributed upon achievement of certain performance targets, 258,399 weighted average restricted shares outstanding, and 4,549,537 shares of Series A Convertible Redeemable Preferred Stock (34,996,440 in dilutive shares, as converted, which assumes conversion on the first day of the period) because we reported a net loss available to common stockholders which caused the options, restricted stock units, restricted shares and preferred shares to be anti-dilutive.

 

Note 6—Discontinued Operations

 

On June 20, 2012, we disposed of Hudson’s Hope Gas, Ltd., a subsidiary which held our Canadian gas properties, in exchange for two million shares of Canada Energy Partners, Inc. (“CEP Shares”) which we are restricted from selling before June 20, 2013. We recognized a loss on the disposition in the amount of $0.7 million, which was made up of a $1.3 million loss related to the currency translation adjustment, offset by $0.3 million in asset retirement obligations conveyed to the buyer and the proceeds consisting of the $0.3 million in estimated fair value of the CEP shares received. The loss on this disposition has been included in Discontinued operations, net of tax, in the Consolidated Statements of Operations (Unaudited). Additionally, all historical operating results related to the disposed company have been removed from Operating (loss) income and included in Discontinued operations, net of tax, in the Consolidated Statements of Operations (Unaudited) for the periods presented.

 

As a result of the disposition, we are classifying these activities as a discontinued operation for all the periods presented. Results for activities reported as discontinued operations for the three and six months ended June 30, 2013 and 2012 were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues

 

$

 

$

 

$

 

$

 

Total operating benefit (expenses)

 

 

7,426

 

 

(13,123

)

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

7,426

 

 

(13,123

)

Loss on sale of Hudson’s Hope, Ltd.

 

 

(683,154

)

 

(683,154

)

Other income (expense)

 

 

(81

)

 

(104

)

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

 

$

(675,809

)

$

 

$

(696,381

)

 

Note 7—Gas Properties

 

The method of accounting for oil and gas producing activities determines which costs are capitalized and how these costs are ultimately matched with revenues and expenses. We use the full cost method of accounting for our gas properties. Under this method, all direct costs and certain indirect costs associated with the acquisition, exploration, and development of our gas properties are capitalized.

 

Gas properties are depleted using the units-of-production method. The depletion expense is significantly affected by the unamortized historical and future development costs and the estimated proved gas reserves.

 

Estimation of proved gas reserves involves professional judgment and use of factors that cannot be precisely determined. Subsequent proved reserve estimates materially different from those reported would change the depletion expense recognized during future reporting periods. No gains or losses are recognized upon the sale or disposition of gas properties unless the sale or disposition represents a significant quantity of gas reserves, which would have a significant impact on the depreciation, depletion and amortization rate.

 

Under full cost accounting rules, total capitalized costs are limited to a ceiling equal to the present value of estimated future net revenues, discounted at 10% per annum, plus cost of properties not being amortized plus the lower of cost or fair value of unevaluated properties less income tax effects (the “ceiling limitation”). We perform a quarterly ceiling test to evaluate whether the net book value

 

10



Table of Contents

 

of our full cost pool exceeds the ceiling limitation. If capitalized costs (net of accumulated depreciation, depletion and amortization) less related deferred taxes are greater than the discounted future net revenues or ceiling limitation, a write-down or impairment of the full cost pool is required. A write-down of the carrying value of the full cost pool is a non-cash charge that reduces earnings and stockholders’ equity in the period of occurrence and typically results in lower depreciation, depletion and amortization expense in future periods. Once incurred, a write-down is not reversible at a later date.

 

The ceiling test is calculated using the unweighted arithmetic average of the natural gas price on the first day of each month within the twelve-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements, excluding escalations based on future conditions. In addition, the future cash outflows associated with settling asset retirement obligations were not included in the computation of the discounted present value of future net revenues for the purposes of the ceiling test calculation.

 

For the twelve months ended June 30, 2013, the unweighted arithmetic average of the Henry Hub spot market price on the first day of each month was $3.47 per Mcf, resulting in a natural gas price of $3.53 per Mcf when adjusted for regional price differentials. Based on the ceiling test performed utilizing the aforementioned prices, no write-down of the carrying value of our U.S. full cost pool was required at June 30, 2013.

 

For the twelve months ended June 30, 2012, the unweighted arithmetic average of the Henry Hub spot market price on the first day of each month was $3.17 per Mcf, resulting in a natural gas price of $3.34 per Mcf when adjusted for regional price differentials. For the three and six months ended June 30, 2012, we recorded a $42.3 million and a $58.0 million write-downs, respectively, of the carrying value of our U.S. full cost pool.

 

In accordance with the full cost method of accounting for gas properties as prescribed by the SEC, sales of oil and gas reserves in place are generally accounted for as adjustments of capitalized cost, with no gain or loss recognized, unless such adjustments significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center (i.e. depletion rate).  A significant alteration would not ordinarily be expected to occur for sales involving less than 25 percent of the reserve quantities of a given cost center.  The sale of the Alabama gas properties, as disclosed in Note 2— Sale of Coalbed Methane Properties in Alabama, would have significantly altered the depletion rate. As such, a gain on the sale was recorded in the Consolidated Statements of Operations for the three and six months ended June 30, 2013.

 

Note 8—Asset Retirement Liability

 

We record an asset retirement obligation (“ARO”) on the Consolidated Balance Sheets (Unaudited) and capitalize the asset retirement costs in gas properties in the period in which the retirement obligation is incurred. The amount of the ARO and the costs capitalized are equal to the estimated future costs to satisfy the obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date, which is then discounted back to the date we incurred the abandonment obligation using an assumed interest rate. Once the ARO is recorded, it is then accreted to its estimated future value using the same assumed interest rate.

 

The following table details the changes to our asset retirement liability for the six months ended June 30, 2013:

 

Current portion of liability at January 1, 2013

 

$

73,706

 

Add: Long-term asset retirement liability at January 1, 2013

 

13,235,318

 

Asset retirement liability at January 1, 2013

 

13,309,024

 

Buyer’s assumption of asset retirement obligations

 

(4,411,201

)

Settlements

 

(110,659

)

Accretion

 

612,553

 

Asset retirement liability at June 30, 2013

 

9,399,717

 

Less: Current portion of liability

 

(11,983

)

Long-term asset retirement liability

 

$

9,387,734

 

 

Note 9—Derivative Instruments and Hedging Activities

 

The energy markets have historically been volatile, and there can be no assurance that future natural gas prices will not be subject to wide fluctuations. At June 30, 2013, we do not have the ability to enter into natural gas hedges because we do not have the credit capacity with our existing natural gas hedge counterparties.

 

11



Table of Contents

 

In an effort to reduce the effects of the volatility of the price of natural gas on our operations, management has historically hedged natural gas prices primarily using derivative instruments in the form of three-way collars, traditional collars and swaps. While the use of these hedging arrangements limits the downside risk of adverse price movements, it also limits future gains from favorable movements. We entered into hedging transactions, generally for forward periods up to two years or more, which increased the probability of achieving our targeted level of cash flows.  Our price risk management policy strictly prohibits the use of derivatives for speculative positions.

 

Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Costless collars set both a maximum ceiling (a sold ceiling) and a minimum floor (a bought floor) future price. We have accounted for these transactions using the mark-to-market accounting method. Generally, we incur accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in our Consolidated Balance Sheets (Unaudited) and Consolidated Statements of Operations (Unaudited).

 

Commodity Price Risk and Related Hedging Activities

 

At June 30, 2013, we had the following natural gas derivative contracts:

 

Contract
Type

 

Period

 

Volume
(MMBtu)

 

Fixed Price or
Sold Ceiling/

Bought Floor

 

Derivative
asset—
current

 

Derivative
liability—
non-current

 

Total Fair
Value of
Contract

 

Collar

 

January 2014 through December 2015

 

3,650,000

 

$4.30/$3.60

 

$

25,275

 

$

(327,599

)

$

(302,324

)

Collar

 

January 2014 through December 2015

 

3,650,000

 

$4.20/$3.50

 

(32,176

)

(497,321

)

(529,497

)

Swap

 

July 2013 through December 2013

 

1,104,000

 

$3.60

 

(47,156

)

 

(47,156

)

Swap

 

July 2013 through March 2014

 

2,192,000

 

$3.81

 

184,627

 

 

184,627

 

Swap

 

July 2013 through March 2014

 

1,832,000

 

$3.82

 

230,109

 

 

230,109

 

 

 

 

 

12,428,000

 

 

 

$

360,679

 

$

(824,920

)

$

(464,241

)

 

At December 31, 2012, we had the following natural gas derivative contracts:

 

Contract
Type

 

Period

 

Volume
(MMBtu)

 

Fixed Price or
Sold Ceiling/
Bought Floor

 

Derivative
asset—
current

 

Derivative
liability—
current

 

Derivative
liability—
non-current

 

Total Fair
Value of
Contract

 

Collar

 

January 2014 through December 2015

 

3,650,000

 

$4.30/$3.60

 

$

 

$

 

$

(556,636

)

$

(556,636

)

Collar

 

January 2014 through December 2015

 

3,650,000

 

$4.20/$3.50

 

 

 

(796,266

)

(796,266

)

Swap

 

January 2013 through March 2013

 

360,000

 

$6.42

 

1,100,395

 

 

 

1,100,395

 

Swap

 

January 2013 through March 2013

 

540,000

 

$6.50

 

1,156,734

 

 

 

1,156,734

 

Swap

 

January 2013 through December 2013

 

2,190,000

 

$3.60

 

127,253

 

 

 

127,253

 

Swap

 

January 2013 through March 2014

 

3,640,000

 

$3.81

 

758,669

 

 

(144,994

)

613,675

 

Swap

 

January 2013 through March 2014

 

3,640,000

 

$3.82

 

786,716

 

 

(138,452

)

648,264

 

Swap

 

April 2013 through December 2013

 

2,750,000

 

$3.25

 

 

(919,572

)

 

(919,572

)

 

 

 

 

20,420,000

 

 

 

$

3,929,767

 

$

(919,572

)

$

(1,636,348

)

$

1,373,847

 

 

At December 31, 2012, we had the following forward sales at NYMEX plus a fixed basis:

 

Period

 

Volume
(MMBtu)

 

Fixed
Basis

 

January 2013 through March 2013

 

450,000

 

$

0.19

 

January 2013 through March 2013

 

918,000

 

$

0.22

 

 

 

1,368,000

 

 

 

 

The aforementioned forward physical sale contracts qualified for normal purchase and sale exemption and, as such, we have elected not to record it on the Consolidated Balance Sheets (Unaudited) using mark-to-market accounting.

 

We have reviewed the financial strength of our hedge counterparties and believe our credit risk to be minimal. Our hedge counterparties are participants or affiliates of the participants in our Credit Agreement and the collateral for the outstanding

 

12



Table of Contents

 

borrowings under our Credit Agreement is used as collateral for our hedges. We do not have rights to collateral from our counterparties, nor do we have rights of offset against borrowings under our Credit Agreement.

 

We estimate the fair value of our natural gas derivative contracts and interest rate swaps using the income approach. The income approach uses valuation techniques that convert future cash flows to a single discounted value. Fair value measurement for an asset or liability reflects its nonperformance risk, the risk that the obligation will not be fulfilled. Because nonperformance risk includes our counterparties’ and our credit risk, we have considered the effect of credit risk on the fair value of the assets and liabilities related to the items stated below. The consideration for discounting our counterparties’ liabilities (our assets) was based on the difference between the S&P credit rating of a comparable company to our counterparties and the 13-week Treasury bill rate, both at the reporting date. The consideration for discounting our liabilities was based on the difference between the market weighted average cost of debt capital plus a premium over the capital asset pricing model and the stated interest rates of the debt instruments included our long-term debt.

 

In order to estimate the fair value of our natural gas derivative contracts, a forward price curve and volatility estimates were compiled from sources that include NYMEX settlements and observed trading activity in the Over-the-Counter (“OTC”) markets. Pricing estimates for the theoretical market value of hedge positions were developed using analytical models accepted and employed by a broad cross-section of industry participants. To extrapolate future cash flows, discount factors incorporating our counterparties’ and our credit standing are used to discount future cash flows.

 

We did not have any transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy during the three and six months ended June 30, 2013. Based on the use of observable market inputs, we have designated these types of instruments designated below as Level 2. The fair value of our Level 2 derivative instruments were as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

June 30, 2013

 

December 31, 2012

 

June 30, 2013

 

December 31, 2012

 

 

 

Balance Sheet
Location

 

Fair
Value

 

Balance Sheet
Location

 

Fair
Value

 

Balance Sheet
Location

 

Fair
Value

 

Balance Sheet
Location

 

Fair
Value

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas hedge positions

 

Derivative asset (current)

 

$

360,679

 

Derivative asset (current)

 

$

3,929,767

 

Derivative liability (current)

 

$

 

Derivative liability (current)

 

$

919,572

 

Natural gas hedge positions

 

Derivative asset (non- current)

 

 

Derivative asset (non- current)

 

 

Derivative liability (non- current)

 

824,920

 

Derivative liability (non-current)

 

1,636,348

 

Total derivatives not designated as hedging instruments

 

 

 

$

360,679

 

 

 

$

3,929,767

 

 

 

$

824,920

 

 

 

$

2,555,920

 

 

The following (gains) losses on our hedging instruments included in the unaudited Consolidated Statements of Operations and Other Comprehensive Income (Loss) (“OCI”) are as follows:

 

The Effect of Derivative Instruments on the Unaudited Consolidated Statements of Operations and

Other Comprehensive Income for the Three and six months ended June 30, 2013 and 2012

 

 

 

 

 

Amount of (Gain) or Loss
Recognized in Income on
Derivative

 

 

 

Location of (Gain)

 

Three Months Ended

 

Six Months Ended

 

 

 

or Loss Recognized in

 

June 30,

 

June 30,

 

Derivatives

 

Income on Derivative

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under ASC 815-20-25

 

 

 

 

 

 

 

 

 

 

 

Natural gas collar/swap settled positions

 

(Gains) losses on natural gas derivatives

 

$

1,440,084

 

$

(5,311,266

)

$

(1,659,668

)

$

(10,104,135

)

Natural gas swap positions terminated (1)

 

(Gains) losses on natural gas derivatives

 

1,207,050

 

 

1,207,050

 

 

Natural gas collar/swap unsettled positions

 

(Gains) losses on natural gas derivatives

 

(6,796,783

)

10,202,879

 

1,838,088

 

4,978,668

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (gain) loss

 

 

 

$

(4,149,649

)

$

4,891,613

 

$

1,385,470

 

$

(5,125,467

)

 


(1)  The natural gas swap positions were terminated in order to prevent the Company from being over-hedged after the closing of the sale of its coalbed methane properties in Alabama.

 

13



Table of Contents

 

Note 10—Investment in Canada Energy Partners

 

At June 30, 2013 and December 31, 2012, we own two million shares of Canada Energy Partners (“CEP”), discussed in Note 6—Discontinued Operations, which we classify as available for sale and record at fair value in Other noncurrent assets on the Consolidated Balance Sheets (Unaudited) based on the closing price of the shares on the TSX Venture Exchange on that date. Gains or losses related to both market price fluctuation and currency translation adjustment on the shares of CEP are held in Accumulated other comprehensive loss in the Consolidated Balance Sheets (Unaudited). At June 30, 2013 and December 31, 2012, the value of the shares recorded in Other noncurrent assets was $191,222 and $240,749, respectively, using a Level 1 input. Accumulated other comprehensive loss of $102,547 in the Consolidated Balance Sheets (Unaudited) as of June 30, 2013 consisted of a $102,070 cumulative decrease in market value and a $477 cumulative loss related to currency translation on the CEP shares. Accumulated other comprehensive loss of $53,020 in the Consolidated Balance Sheets (Unaudited) as of December 31, 2012 consisted of a $61,661 cumulative decrease in market value offset by a $8,641 cumulative gain related to currency translation on the CEP shares.

 

Note 11—Long-Term Debt

 

Under our Credit Agreement, outstanding borrowings may not exceed a borrowing base determined by the lenders.  During 2012, the amounts borrowed under our Credit Agreement exceeded the borrowing base.  On August 8, 2012, in connection with the excess of borrowings over the borrowing base, we amended the Credit Agreement. Borrowings under the Credit Agreement at August 8, 2012 totaled $148.6 million. The Credit Agreement, as amended, provided for a tranche A loan in the amount of our borrowing base and a tranche B loan in the amount of the borrowing base deficiency.

 

On June 14, 2013, the Company closed the sale of all of its coal bed methane properties located in the state of Alabama. Simultaneously with the close of the property sale, approximately $57.0 million was used to repay outstanding borrowings under the Company’s Credit Agreement, which eliminated the borrowing base deficiency. After this repayment, borrowings outstanding under the Credit Agreement totaled $77.0 million. The new borrowing base will be the lesser of the total amount of outstanding borrowings under the Credit Agreement and the current balance of $77.0 million. The next scheduled borrowing base determination is expected to occur on or around December 15, 2013 and will be based on the Company’s reserves at June 30, 2013.

 

With the closing of the sale of its coalbed methane properties in Alabama, the Company retained a $5.0 million reserve to be disbursed from time to time solely to pay transaction related costs as defined in the Credit Agreement, as amended, until the final settlement date of December 31, 2013, at which time, any remaining reserve shall be used to repay the outstanding principal balance of the Tranche A Loans until repaid in full. At June 30, 2013, a reserve of $2.1 million remained in Cash and cash equivalents in the Consolidated Balance Sheets (Unaudited).

 

The Credit Agreement no longer provides for loans to be available on a revolving basis up to the amount of the borrowing base. As a result, the current outstanding loans, once repaid, may not be re-borrowed by the Company. All outstanding borrowings under the Credit Agreement are due and payable on April 1, 2014. The Credit Agreement provides for interest to accrue at a rate calculated, at our option, at the Adjusted Base Rate plus a margin of 2.00% or the London Interbank Offered Rate (the “LIBOR Rate”) plus a margin of 3.00%. Adjusted Base Rate is defined to be the greater of (i) the agent’s base rate or (ii) the federal funds rate plus one half of one percent or (iii) the LIBOR Rate plus a margin of 1.00%. All financial covenants were deleted by the Amendment and were replaced with a capital expenditure covenant (a maximum of $1.5 million in 2012 and $1.5 million in 2013). As of June 30, 2013, we had $77.0 million of borrowings outstanding under our Credit Agreement. As of June 30, 2013, the interest rates applied to borrowings were 3.24%.

 

For the three months ended June 30, 2013, we had no borrowings and made payments of $57.8 million under the Credit Agreement. For the three months ended June 30, 2012 we borrowed $3.1 million and made payments of $4.0 million under the Credit Agreement. For the three months ended June 30, 2013 and 2012, interest on the borrowings averaged 3.83% and 2.99% per annum, respectively.

 

For the six months ended June 30, 2013, we had no borrowings and made payments of $62.3 million under the Credit Agreement. For the six months ended June 30, 2012 we borrowed $10.5 million and made payments of $19.8 million under the Credit Agreement. For the six months ended June 30, 2013 and 2012, interest on the borrowings averaged 4.06% and 2.94% per annum, respectively.

 

14



Table of Contents

 

The following is a summary of our long-term debt at June 30, 2013 and December 31, 2012:

 

 

 

June 30,
2013

 

December 31,
2012

 

 

 

 

 

 

 

Borrowings under Credit Agreement

 

$

77,000,000

 

$

139,300,000

 

Less current maturities included in current liabilities

 

(77,000,000

)

(10,300,000

)

 

 

 

 

 

 

Total long-term debt

 

$

 

$

129,000,000

 

 

We record our debt instruments based on contractual terms. We did not elect to apply the fair value option for recording financial assets and financial liabilities. We measure the fair value of our debt instruments using discounted cash flow analyses based on our current borrowing rates for similar types of borrowing arrangements (categorized as level 3). We do not have any debt instruments with fair value measurements categorized as level 1 or 2 within the fair value hierarchy. Fair value measurement for an asset or liability reflects its nonperformance risk, the risk that the obligation will not be fulfilled. Because nonperformance risk includes our credit risk, we have considered the effect of our credit risk on the fair value of the long-term debt. This consideration involved discounting our long-term debt based on the difference between the market weighted average cost of equity capital plus a premium over the capital asset pricing model and the stated interest rates of the debt instruments included in our long-term debt.  The fair value of long-term debt at June 30, 2013 and December 31, 2012 was estimated to be approximately $73.7 million and $121.6 million, respectively.

 

Note 12—Income Taxes

 

We record our income taxes using an asset and liability approach. This results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities using enacted tax rates at the end of the period. The effect of a change in tax rates of deferred tax assets and liabilities is recognized in the year of the enacted change.

 

For tax reporting purposes, we have federal and state net operating losses (“NOL’s”) of approximately $138.1 million and $143.4 million, respectively, at June 30, 2013 that are available to reduce future taxable income. For tax reporting purposes, we had federal and state NOL’s of approximately $137.8 million and $127.0 million, respectively, at December 31, 2012 that were available to reduce future taxable income. Our first material federal NOL carryforward expires in 2022 and the last one expires in 2032.

 

Additionally, for tax reporting purposes, we have a federal capital loss carryforward generated by the sale of Hudson’s Hope Gas, Ltd., as described in Note 6—Discontinued Operations, of approximately $34.9 million at June 30, 2013 that is available to reduce future taxable capital gains and expiring in 2017.

 

At June 30, 2013, we have a valuation allowance of $83.2 million recorded against our net deferred tax asset which includes $69.8 million related to our U.S. operations and $13.4 million related to the capital loss carryforward generated by the sale of Hudson’s Hope Gas, Ltd., as described in Note 6—Discontinued Operations.

 

A reconciliation of the effective tax rate to the statutory rate for the three months ended June 30, 2013 is as follows:

 

 

 

Total

 

 

 

Amount computed using statutory rates

 

$

14,407,806

 

34.00

%

State income taxes—net of federal benefit

 

1,084,723

 

2.56

%

Reduction of valuation allowance

 

(15,629,252

)

-36.88

%

Nondeductible items and other

 

142,973

 

0.33

%

Income tax provision

 

$

6,250

 

0.01

%

 

A reconciliation of the effective tax rate to the statutory rate for the six months ended June 30, 2013 is as follows:

 

 

 

Total

 

 

 

Amount computed using statutory rates

 

$

12,453,260

 

34.00

%

State income taxes—net of federal benefit

 

876,006

 

2.39

%

Reduction of valuation allowance

 

(13,472,543

)

-36.78

%

Nondeductible items and other

 

155,777

 

0.42

%

Income tax provision

 

$

12,500

 

0.03

%

 

15



Table of Contents

 

Note 13—Common Stock

 

At June 30, 2013 and December 31, 2012, there were 40,663,554 and 40,690,077 shares, respectively, of common stock outstanding, both including 10,432 shares of treasury stock held by the Company. Also included in common stock outstanding at June 30, 2013 and December 31, 2012 were 180,233 and 254,260 shares of restricted stock, respectively. The following table details the activity related to our common stock for the three months ended June 30, 2013:

 

 

 

Date

 

Shares

 

Common stock outstanding at January 1, 2013

 

 

 

40,690,077

 

Purchased by the Company and cancelled for the payment of withholding taxes due on vested shares of restricted stock

 

01/07/2013

 

(121

)

Purchased by the Company and cancelled for the payment of withholding taxes due on vested shares of restricted stock

 

03/15/2013

 

(470

)

Forfeited upon default of shareholder loans

 

06/06/2013

 

(24,428

)

Shares of restricted stock forfeited upon termination of employment

 

06/14/2013

 

(1,504

)

Common stock outstanding at June 30, 2013

 

 

 

40,663,554

 

 

Note 14—Series A Convertible Redeemable Preferred Stock

 

At June 30, 2013 and December 31, 2012, 5,471,610 and 5,305,865 shares of preferred stock were issued and outstanding, respectively. At June 30, 2013, an additional 1,930,222 shares of our Series A Convertible Redeemable Preferred Stock (“Preferred Stock”) are reserved exclusively for the payment of paid-in-kind dividends (“PIK dividends”). We measure the fair value of PIK dividends using the closing quoted NASDAQ market price on the dividend date (categorized as level 1). The following table details the activity related to the Preferred Stock for the six months ended June 30, 2013:

 

 

 

Dividend Period
(Three Months Ended)

 

Date Issued

 

Number of Shares

 

Balance

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

 

 

 

 

5,305,865

 

$

35,851,887

 

Accretion of Preferred Stock

 

 

 

 

 

 

 

1,026,373

 

PIK Dividend Issued for Preferred Stock

 

3/31/13

 

4/1/13

 

165,745

 

1,075,685

 

Balance At June 30, 2013

 

 

 

 

 

5,471,610

 

$

37,953,945

 

 

On June 5, 2013, we declared a quarterly dividend of 170,931 shares of Preferred Stock covering the period April 1, 2013 through June 30, 2013. As those shares were not issued until July 1, 2013, they were not included in the Preferred Stock balance at June 30, 2013. As such, we recorded a dividend payable in Current liabilities in the Consolidated Balance Sheets (Unaudited) at June 30, 2013 at an estimated fair value of $1,367,488.

 

Note 15—Share-Based Awards

 

As of June 30, 2013, our 2006 Long-Term Incentive Plan (the “2006 Plan”) is our only authorized stock-based award plan. Our 2005 Stock Option Plan was terminated on March 11, 2011 as no options granted under the plan remained outstanding at that time. Our 2006 Plan authorizes the granting of incentive stock options, non-qualified stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and performance awards. A maximum of 4,000,000 shares are available for grant under this plan. The 2006 Plan is available to our employees and independent directors. However, the Company does not anticipate any additional grants will be awarded under the 2006 Plan in the immediate future. The exercise price of stock options granted under this plan may not be less than the fair market value of the common stock on the date of grant. The options generally have a term of seven years and vest evenly over three years, except performance based awards which are granted solely to our named executive officers, and options issued to directors. Performance based awards granted under the 2006 Long-Term Incentive Plan vest once the performance criteria have been met. Options granted to our directors vest immediately.

 

During the three months ended June 30, 2013, we recorded a compensation expense accrual of $60,650 which was allocated as an addition of $6,759 to lease operating expenses and an addition of $53,891 to general and administrative expense. During the six months ended June 30, 2013, we recorded a compensation expense accrual of $119,374 which was allocated as an addition of $13,511 to lease operating expenses and an addition of $105,863 to general and administrative expense. The future compensation cost of all the outstanding awards is $172,100 which will be amortized over the vesting period of such stock options and restricted stock. The weighted average remaining useful life of the future compensation cost is 0.61 years.

 

16



Table of Contents

 

During the three months ended June 30, 2012, we recorded a compensation expense accrual of $282,350 of which $12,433 was allocated to lease operating expenses, $135,220 was allocated to general and administrative expenses, $131,127 was allocated to restructuring costs, and $3,570 was capitalized to gas properties. During the six months ended June 30, 2012, we recorded a compensation expense accrual of $414,149 of which $22,294 was allocated to lease operating expenses, $240,116 was allocated to general and administrative expenses, $131,127 was allocated to restructuring costs, and $20,612 was capitalized to gas properties.

 

Incentive Stock Options

 

The table below summarizes incentive stock option activity for the three months ended June 30, 2013:

 

 

 

Number of
Options

 

Weighted
Average
Exercise
Price

 

Average
Remaining
Contractual
Life

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2012

 

1,412,739

 

$

1.11

 

 

 

 

 

Forfeited

 

(87,846

)

$

1.18

 

 

 

 

 

Outstanding at June 30, 2013

 

1,324,893

 

$

1.11

 

3.4

 

$

 

Options exercisable at June 30, 2013

 

909,208

 

$

0.99

 

3.8

 

$

 

 

Non-Qualified Stock Options

 

The table below summarizes non-qualified stock option activity for the three months ended June 30, 2013:

 

 

 

Number of
Options

 

Weighted
Average
Exercise
Price

 

Average
Remaining
Contractual
Life

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2012

 

974,765

 

$

2.33

 

 

 

 

 

Expired

 

(200,000

)

$

2.50

 

 

 

 

 

Outstanding at June 30, 2013

 

774,765

 

$

2.28

 

0.9

 

$

 

Options exercisable at June 30, 2013

 

733,242

 

$

2.37

 

1.1

 

$

 

 

Restricted Stock Awards

 

The table below summarizes non-vested restricted stock awards activity for the three months ended June 30, 2013:

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date
Fair Value

 

Non-vested restricted stock at December 31, 2012

 

254,260

 

$

1.43

 

Vested

 

(72,053

)

$

0.70

 

Forfeited

 

(1,974

)

$

1.32

 

Non-vested restricted stock at June 30, 2013

 

180,233

 

$

1.72

 

 

Restricted Stock Unit Awards

 

On April 5, 2011, we granted 232,089 restricted stock units to our five executive officers. These restricted stock units vest upon the Company’s achievement of certain performance targets, but no earlier than ratably over the three year period following the grant date, at which time one common share will be issued and exchanged for each restricted stock unit held. If the requisite performance targets are not achieved in the seven year period ended April 5, 2018, the restricted stock units will expire. Restricted stock units are included in the calculation of diluted earnings per share utilizing the treasury stock method. On April 30, 2012, 99,108 restricted stock units vested with a vesting date fair value of $0.53 per share. On June 25, 2012, 16,428 restricted stock units were forfeited. There have been no grants of restricted stock units subsequent to the aforementioned grant. Unrecognized compensation cost related the restricted stock units is $116,553 at June 30, 2013.

 

17



Table of Contents

 

Note 16—Commitments and Contingencies

 

From time to time we are a party to litigation in the normal course of business. While the outcome of lawsuits or other proceedings against us are not possible to reasonably predict, management does not believe that the adverse effect on our financial condition, results of operations or cash flows, if any, will be material.

 

Environmental and Regulatory

 

As of June 30, 2013, there were no known environmental or other regulatory matters related to our operations that are reasonably expected to result in a material liability to us.

 

18



Table of Contents

 

Item 2.                                  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Statement Regarding Forward-Looking Information

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations and other items in this Quarterly Report on Form 10-Q contain forward-looking statements and information that are based on management’s beliefs, as well as assumptions made by, and information currently available to, management. When used in this document, the words “believe,” “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” “project,” “forecast,” “plan,” and similar expressions are intended to identify forward-looking statements. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to have been correct. These statements are subject to certain risks, uncertainties and assumptions. Certain of these risks are summarized in our 2012 Annual Report on Form 10-K that we filed with the SEC on March 28, 2013, which you should read carefully in connection with our forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated. We undertake no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the corresponding sections and our audited consolidated financial statements for the fiscal year ended December 31, 2012, which are included in our 2012 Annual Report on Form 10-K.

 

Overview

 

GeoMet, Inc. is primarily engaged in the exploration for and development and production of natural gas from coal seams (“coalbed methane” or “CBM”). All of our production is CBM, which is a dry natural gas containing no hydrocarbon liquids.  We were originally founded as a consulting company to the coalbed methane industry in 1985 and have been active as an operator, developer and producer of coalbed methane properties since 1993.

 

Natural gas prices in 2012 were depressed compared with prices generally prevailing over the last several years.  The low natural gas prices in 2012 had pervasive adverse consequences to our business.  A borrowing base deficiency under our Credit Agreement was caused by the then low natural gas prices. On August 8, 2012, we amended our Credit Agreement to include a conforming tranche equal to the borrowing base, and a non-conforming tranche in the amount of outstanding loans in excess of the borrowing base. The amendment required that we use all of our excess cash flows, as defined, to reduce outstanding borrowings under the Credit Agreement and significantly limited our capital expenditures. On June 14, 2013, we closed the sale of the Alabama properties and used approximately $57.0 million of the proceeds to repay outstanding borrowings under our Credit Agreement. After this repayment, borrowings outstanding under the Credit Agreement totaled $77.0 million. The new borrowing base was set at the lesser of the total amount of outstanding borrowings under the Credit Agreement and $77.0 million. In connection with this repayment the non-conforming “Tranche B” portion of total outstanding borrowings has been repaid and the Company no longer has a borrowing base deficiency under the Credit Agreement. The next scheduled borrowing base determination is expected to occur on or around December 15, 2013 and will be based on the Company’s reserves at June 30, 2013. As of June 30, 2013, the interest rates applied to borrowings was 3.24%.  The Credit Agreement continues to have a maturity date of April 1, 2014.

 

Additionally, depressed natural gas prices resulted in significant property impairments and full valuation of our net deferred tax asset during 2012. We believe that low natural gas prices and our indebtedness contributed to our common stock being delisted by NASDAQ as we had no remaining equity and the market price of our common stock had diminished.

 

Management’s current business plan is to continue to evaluate its strategic alternatives. Additionally, management is seeking to divest properties with limited value and will consider additional asset sale opportunities as they arise. Management also remains focused on maintaining compliance with the Credit Agreement, as amended, maintaining production levels, and keeping costs under control.

 

During 2011 and the first five months of 2012, prices received for natural gas in the United States continued to decline significantly which we believe, among other things, was due to an over-supply of natural gas, primarily resulting from shale drilling and reduced demand due to a much warmer winter than normal. On April 21, 2012, the Henry Hub spot price closed at $1.825/ MMBtu, its lowest in over ten years. Presented below are the NYMEX Settle Prices for the period January 2011 through August 2013 and the NYMEX Forward Curve Prices (as of August 7, 2013) for natural gas for the period September 2013 through December 2013.

 

19



Table of Contents

 

 

Recent Developments

 

On June 14, 2013, the Company closed the sale of all of its coal bed methane properties located in the state of Alabama. The sale resulted in proceeds of approximately $62.0 million after normal and customary purchase price adjustments of $1.2 million to account for net cash flows from the effective date to the closing date. Simultaneously with the close of the property sale, approximately $57.0 million was used to repay outstanding borrowings under the Company’s Credit Agreement and $5.0 million was held in reserve to pay transaction related costs and expenses, including the liquidation of certain natural gas hedge positions.

 

GeoMet’s net interest in the coalbed methane properties in Alabama sold produced approximately 9,700 Mcf of natural gas per day during the month of March 2013, or approximately 29% of GeoMet’s total production for this time period. As of March 31, 2013 and based on Securities and Exchange Commission guidelines, GeoMet’s net proved reserves attributable to the coalbed methane properties in Alabama sold were estimated to be approximately 43 Bcf, all classified as proved developed reserves.

 

Areas of Operation

 

Subsequent to the asset sale, our core area of operations is the Central Appalachian Basin of Virginia and West Virginia. The Central Appalachian Basin is a mountainous region where coal mining is prevalent. We also own additional coalbed methane and oil and gas development rights, principally in Virginia and West Virginia. As of June 30, 2013, we own a total of approximately 93,000 net acres of coalbed methane and oil and gas development rights.

 

Central Appalachia

 

Pond Creek and Lasher Fields—We are the operator of 298 producing vertical CBM wells in which we own a 99.0% average working interest in the Pond Creek and Lasher fields located in southern West Virginia and southwestern Virginia. Net daily sales of gas averaged 16.0 MMcf per day for the three and six months ended June 30, 2013. Our natural gas production from the Pond Creek field is delivered into the Jewell Ridge pipeline system owned by East Tennessee Natural Gas, LLC (“ETNG”). We have two long-term transportation agreements with ETNG which went into effect in April 2007 with total maximum daily quantities of 15,000 MMBtu’s and 10,000 MMBtu’s and primary terms of 15 years and 10 years, respectively. Our gas from the Lasher field is delivered into the Columbia Gas Transmission pipeline with firm transportation for 500 MMBtu’s per day. We also own and operate a 12 mile, 8 inch high-pressure steel pipeline and gas treatment and compression facilities through which the Pond Creek field natural gas production is gathered, dehydrated, and compressed for delivery into the Jewell Ridge Lateral of the East Tennessee pipeline system.

 

Pinnate Horizontal Wells—We are the operator of 44 producing pinnate horizontal CBM wells in which we own a 71.6% average working interest in central and northern West Virginia. We also have a 33.7% average working interest in 67 non-operated pinnate horizontal wells in central West Virginia. Net daily sales of natural gas averaged 7.7 MMcf per day and 8.0 MMcf per day for the three and six months ended June 30, 2013, respectively.  We are party to two firm transportation agreements with total maximum daily capacity of 18,500 MMBtu per day and primary terms expiring from April 2013 through November 2024 which can be automatically extended at GeoMet’s option at the maximum tariff rate. We are also party to a 10,000 MMBtu per day gathering

 

20



Table of Contents

 

contract that is currently in a month-to-month evergreen term.  In some cases, our natural gas sales volumes are delivered to market under transportation agreements controlled by our working interest partners. Generally, our natural gas sales volumes are sold at a delivery point into the respective interstate pipeline system utilized.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires us to use our judgment to make estimates and assumptions that affect certain amounts reported in our financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. We periodically update our estimates used in the preparation of the financial statements based on our latest assessment of the current and projected business and general economic environment. There have been no significant changes to our critical accounting policies during the three months ended June 30, 2013.

 

21



Table of Contents

 

Natural Gas Production Operations Summary

 

The table below presents information on gas sales, net sales volumes, production expenses and per Mcf data for the three and six months ended June 30, 2013 and 2012. This table should be read in conjunction with the discussion of the results of operations for the periods presented below (in thousands, except per Mcf amounts).

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Gas sales

 

$

12,053

 

$

7,712

 

$

22,932

 

$

17,855

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

$

4,123

 

$

4,492

 

$

8,592

 

$

8,933

 

Compression and transportation expenses

 

1,868

 

2,301

 

3,707

 

4,540

 

Production taxes

 

647

 

364

 

1,198

 

834

 

Total production expenses

 

$

6,638

 

$

7,157

 

$

13,497

 

$

14,307

 

 

 

 

 

 

 

 

 

 

 

Net sales volumes (Consolidated) (MMcf)

 

2,908

 

3,448

 

6,016

 

7,078

 

Pond Creek field (Central Appalachian Basin) (MMcf)

 

1,411

 

1,459

 

2,822

 

2,925

 

Other Central Appalachian Basin fields (MMcf)

 

744

 

996

 

1,539

 

2,045

 

Gurnee field (Cahaba Basin) (MMcf)

 

328

 

438

 

723

 

895

 

Black Warrior Basin fields (MMcf)

 

425

 

555

 

932

 

1,213

 

 

 

 

 

 

 

 

 

 

 

Per Mcf data ($/Mcf):

 

 

 

 

 

 

 

 

 

Average natural gas sales price (Consolidated)

 

$

4.14

 

$

2.24

 

$

3.81

 

$

2.52

 

Pond Creek field (Central Appalachian Basin)

 

$

4.14

 

$

2.26

 

$

3.87

 

$

2.61

 

Other Central Appalachian Basin fields

 

$

4.18

 

$

2.14

 

$

3.77

 

$

2.38

 

Gurnee field (Cahaba Basin)

 

$

4.16

 

$

2.25

 

$

3.77

 

$

2.52

 

Black Warrior Basin fields

 

$

4.09

 

$

2.32

 

$

3.73

 

$

2.56

 

Average natural gas sales price realized (Consolidated)(1) (2)

 

$

3.23

 

$

3.78

 

$

3.89

 

$

3.95

 

Lease operating expenses (Consolidated)

 

$

1.42

 

$

1.29

 

$

1.43

 

$

1.26

 

Pond Creek field (Central Appalachian Basin)

 

$

1.11

 

$

1.05

 

$

1.15

 

$

1.04

 

Other Central Appalachian Basin fields

 

$

1.68

 

$

1.41

 

$

1.69

 

$

1.42

 

Gurnee field (Cahaba Basin)

 

$

2.93

 

$

2.75

 

$

2.84

 

$

2.60

 

Black Warrior Basin fields

 

$

0.80

 

$

0.59

 

$

0.74

 

$

0.52

 

Compression and transportation expenses (Consolidated)

 

$

0.64

 

$

0.67

 

$

0.61

 

$

0.64

 

Pond Creek field (Central Appalachian Basin)

 

$

0.67

 

$

0.64

 

$

0.62

 

$

0.58

 

Other Central Appalachian Basin fields

 

$

1.02

 

$

1.14

 

$

1.02

 

$

1.16

 

Gurnee field (Cahaba Basin)

 

$

0.26

 

$

0.23

 

$

0.29

 

$

0.26

 

Black Warrior Basin fields

 

$

0.18

 

$

0.21

 

$

0.18

 

$

0.19

 

Production taxes (Consolidated)

 

$

0.22

 

$

0.10

 

$

0.20

 

$

0.12

 

Pond Creek field (Central Appalachian Basin)

 

$

0.22

 

$

0.13

 

$

0.21

 

$

0.15

 

Other Central Appalachian Basin fields

 

$

0.22

 

$

0.06

 

$

0.18

 

$

0.06

 

Gurnee field (Cahaba Basin)

 

$

0.21

 

$

0.09

 

$

0.18

 

$

0.10

 

Black Warrior Basin fields

 

$

0.23

 

$

0.14

 

$

0.23

 

$

0.15

 

Total production expenses (Consolidated)

 

$

2.28

 

$

2.06

 

$

2.24

 

$

2.02

 

Pond Creek field (Central Appalachian Basin)

 

$

2.00

 

$

1.82

 

$

1.98

 

$

1.77

 

Other Central Appalachian Basin fields

 

$

2.92

 

$

2.61

 

$

2.89

 

$

2.64

 

Gurnee field (Cahaba Basin)

 

$

3.40

 

$

3.07

 

$

3.31

 

$

2.96

 

Black Warrior Basin fields

 

$

1.21

 

$

0.94

 

$

1.13

 

$

0.86

 

Depletion (Consolidated)

 

$

0.48

 

$

0.92

 

$

0.46

 

$

0.95

 

 


(1)                  Average natural gas sales price realized includes the effects of realized gains and losses on derivative contracts.

(2)                  Average natural gas sales prices realized for the three and six months ended June 30, 2013 would have been $3.65/Mcf and $4.09/Mcf when excluding $1.2 million in realized losses on derivative contracts related to natural gas swap positions terminated in order to prevent the Company from being over-hedged after the closing of the sale of its coalbed methane properties in Alabama.

 

22



Table of Contents

 

Results of Operations

 

Three months ended June 30, 2013 compared with three months ended June 30, 2012

 

The following are selected items derived from our Consolidated Statement of Operations (Unaudited) and their percentage changes from the comparable period are presented below.

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

2013

 

2012

 

Change

 

 

 

(in thousands)

 

Gas sales volume (MMcf)

 

2,908

 

3,448

 

-16

%

Gas sales

 

$

12,053

 

$

7,712

 

56

%

Lease operating expenses

 

$

4,123

 

$

4,492

 

-8

%

Compression expense

 

$

1,189

 

$

1,256

 

-5

%

Transportation expense

 

$

679

 

$

1,045

 

-35

%

Production taxes

 

$

647

 

$

364

 

78

%

Depreciation, depletion and amortization

 

$

1,371

 

$

3,290

 

-58

%

Impairment of gas properties

 

$

 

$

42,256

 

NM

 

General and administrative

 

$

1,409

 

$

1,366

 

3

%

Realized losses (gains) on derivative contracts

 

$

2,647

 

$

(5,311

)

NM

 

Unrealized (gains) losses from the change in market value of open derivative contracts

 

$

(6,797

)

$

10,203

 

NM

 

Gain on the sale of Properties in Alabama

 

$

37,136

 

$

 

NM

 

Interest expense

 

$

1,559

 

$

1,268

 

23

%

Income tax expense

 

$

6

 

$

6

 

%

 

NM-Not Meaningful

 

Gas sales. Gas sales increased by $4.3 million, or 56%, to $12.1 million compared to the prior year period. The increase in gas sales was the result of a 85% increase in natural gas prices, excluding hedging transactions, partially offset by of 11% lower daily production volumes and 5% lower total volume resulting from the sale of our Alabama properties on June 14, 2013.

 

Lease operating expenses. Lease operating expenses remained flat compared to the prior year period.

 

Compression expense. Compression expense remained flat compared to the prior year period.

 

Transportation expense. Transportation expense decreased by $0.4 million, or 35%, to $0.7 million compared to the prior year period. The decrease was primarily due to contract expirations or renegotiations.

 

Production taxes. Production taxes remained flat compared to the prior year period. However, we expect future production taxes to increase over time as our West Virginia exemptions diminish.

 

Depreciation, depletion and amortization. Depreciation, depletion and amortization decreased by $1.9 million, or 58%, to $1.4 million compared to the prior year period. This decrease was primarily due to the $95.7 million in impairments recorded to our gas properties in 2012.

 

General and administrative. General and administrative expense remained flat compared to the prior year period. Included in general and administrative expense was a decrease in professional fees, offset by non-recurring executive compensation. In November 2012, the Compensation Committee approved the payment of a contingent bonus in the amount of $0.4 million to be paid to the named executive officers in connection with the elimination of the borrowing base deficiency that existed under the Company’s Credit Agreement.

 

Realized losses (gains) on derivative contracts. Realized losses on derivative contracts were $2.6 million in the current year period of which $1.2 million was related to natural gas swap positions terminated in order to prevent the Company from being over-hedged after the closing of the sale of its coalbed methane properties in Alabama. Realized losses represent net cash flow settlements paid to the contract counterparty, while realized gains represent net cash flow settlements paid to us from the contract counterparty. Realized losses occur when natural gas prices exceed the derivative ceiling prices. Conversely, realized gains occur when natural gas prices go below the derivative floor prices.

 

23



Table of Contents

 

Unrealized (gains) losses from the change in market value of open derivative contracts. Unrealized gains on open derivative contracts were $6.8 million in the current year period. Unrealized gains and losses are non-cash transactions that occur when the corresponding asset or liability derivative contracts are marked-to-market at the end of each reporting period.

 

Gain on the sale of Properties in Alabama. On June 14, 2013, the Company closed the sale of all of its coal bed methane properties located in the state of Alabama, recording a gain on the sale of $37.1 million, as described in Note 2— Sale of Coalbed Methane Properties in Alabama in the Notes to Consolidated Financial Statements (Unaudited).

 

Interest expense. Interest expense increased by $0.3 million, or 23%, to $1.6 million compared to the prior year period. The increase was primarily due to average interest on the borrowings increasing to 3.83% per annum in the current year period from 2.99% per annum in the prior year period. The increased rates resulted from the August 2012 amendment to the Credit Agreement.

 

Income tax expense. The income tax expense in the current year period was different than the amount computed using the statutory rate primarily due to a $15.6 million reduction of the valuation allowance on our deferred tax asset. A reconciliation of the effective tax rate to the statutory rate is as follows:

 

 

 

Total

 

 

 

Amount computed using statutory rates

 

$

14,407,806

 

34.00

%

State income taxes—net of federal benefit

 

1,084,723

 

2.56

%

Reduction of valuation allowance

 

(15,629,252

)

-36.88

%

Nondeductible items and other

 

142,973

 

0.33

%

Income tax provision

 

$

6,250

 

0.01

%

 

Six months ended June 30, 2013 compared with six months ended June 30, 2012

 

The following are selected items derived from our Consolidated Statement of Operations (Unaudited) and their percentage changes from the comparable period are presented below.

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

2013

 

2012

 

Change

 

 

 

(in thousands)

 

Gas sales volume (MMcf)

 

6,016

 

7,078