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| ESA > SEC Filings for ESA > Form 10-K on 29-Dec-2008 | All Recent SEC Filings |
29-Dec-2008
Annual Report
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the "Unaudited Pro Forma Consolidated Financial information " appearing in this section of this annual report as well as the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.
Forward Looking Statements
Within Energy Services' financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "may," "will," "should," "could," "expect," "believe," "intend" and other words of similar meaning.
These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services' control. Energy Services has based its forward-looking statements on management's beliefs and assumptions based on information available to management at the time the statements are made. Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and that any or all of Energy Services' forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.
All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, Energy Services does not undertake and expressly disclaim any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.
Overview
Energy Services was formed on March 31, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. It operated as a "Blank Check Company" until August 15, 2008 at which time it completed the acquisitions of ST Pipeline, Inc. and C J Hughes Construction Company, Inc. S.T. Pipeline and C.J. Hughes are considered predecessor companies to Energy Services. The discussion of financial condition and operating results include the results of the two predecessors prior to the acquisition. This discussion is based in part on pro-forma income statement information. The Company acquired ST Pipeline for $16.2 million in cash and $3.0 million in a promissory note. The C J Hughes purchase price totalled $34 million, one half of which was in cash and one half in Energy Services common stock. The acquisitions are accounted for under the purchase method and the financial results of both acquisitions are included in the results of Energy Services from the date of acquisition.
Since the acquisitions, Energy Services has been engaged in one segment of operations which is the providing of contracting services for energy related companies. Currently Energy Services primarily services the Gas, Oil and Electrical industries though it does some other incidental work. For the Gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the Oil industry the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the Electrical industry, the Company provides a full range of electrical installations and repairs including substation and switchyard services, site preparation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services' other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company's customers are located in West Virginia, Virginia, Ohio, Kentucky and North Carolina. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as building and replacing gas line services to individual customers of the various utility companies. The Company had consolidated operating revenues of $28.5 million for the year ended September 30, 2008 of which 13% was attributable to electrical customers, 81% to natural gas customers, 2% for the oil industry, 3% for governmental entities and 1% for all other customers.
Energy Services' customers include many of the leading companies in the industries it serves, including Marathon Ashland Petroleum LLC, Spectra Energy, Equitable Resources, Hitachi and Nisource. The Company enters into various types of contracts, including competitive unit price, cost-plus (or time and materials basis) and fixed price (lump sum) contracts. The terms of the contracts will vary from job to job and customer to customer though most contracts are on the basis of either unit pricing in which the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project. Most of the Company's projects are completed within one year of the start of the work. On occasion, the Company's customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed.
The Company generally recognizes revenue on unit price and cost-plus contracts when units are completed or services are performed. Fixed price contracts usually results in recording revenues as work on the contract progresses on a percentage of completion basis. Under this accounting method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract. Many contacts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.
Seasonality: Fluctuation of Results
Our revenues and results of operations can and usually are subject to seasonal variations. These variations are the result of weather, customer spending patterns, bidding seasons and holidays. The first quarter of the calendar year is typically the lowest in terms of revenues because inclement weather conditions causes delays in production and customers usually do not plan large projects during that time. While usually better than the first quarter, the second quarter often has some inclement weather which can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. The third quarter usually is least impacted by weather and usually has the largest number of projects underway. The fourth quarter is usually lower than the third due to the various holidays. Many projects are completed in the fourth quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.
In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.
Accordingly, our operating results in any particular quarter or year may not be indicative of the results that can be expected for any other quarter or any other year. You should read "Understanding Gross Margins" and "Outlook" below for discussions of trends and challenges that may affect our financial condition and results of operations.
Our gross margin is gross profit expressed as a percentage of revenues. Cost of revenues consists primarily of salaries, wages and some benefits to employees, depreciation, fuel and other equipment, equipment rentals, subcontracted services, portions of insurance, facilities expense, materials and parts and supplies. Various factors, some controllable, some not impact our gross margin on a quarterly or annual basis.
Seasonal. As discussed above, seasonal patterns can have a significant impact on gross margins. Usually, business is slower in the winter months versus the warmer months.
Weather. Adverse or favorable weather conditions can impact gross margin in a given period. Periods of wet weather, snow or rainfall, as well severe temperature extremes can severely impact production and therefore negatively impact revenues and margins. Conversely, periods of dry weather with moderate temperatures can positively impact revenues and margins due to the opportunity for increased production and efficiencies.
Revenue Mix. The mix of revenues between customer types and types of work for various customers will impact gross margins. Some projects will have more margins while others that are extremely competitive in bidding may have narrower margins.
Service and Maintenance versus installation. In general, installation work has a higher gross margin than maintenance work. This is due to the fact that installation work usually is more of a fixed price nature and therefore has higher risks involved. Accordingly, a higher portion of the revenue mix from installation work typically will result in higher margins.
Subcontract work. Work that is subcontracted to other service providers generally has lower gross margins. Increases in subcontract work as a percentage of total revenues in a given period may contribute to a decrease in gross margin.
Materials versus Labor. Typically materials supplied on projects have smaller margins than labor. Accordingly, projects with a higher material cost in relation to the entire job will have a lower overall margin.
Depreciation. Depreciation is included in our cost of revenue. This is a common practice in our industry, but can make comparability to other companies difficult.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees, general liability insurance and miscellaneous other expenses.
The following table sets forth the Pro Forma Statements of operations data and such data as a percentage of revenues for the years indicated (dollars in thousands) This information is based upon and should be read in conjunction with the more detailed information included in the section titled "Unaudited Pro Forma Consolidated Financial Information".
Year ended Year ended
September 30, September 30,
2008 Percent 2007 Percent
Contract Revenues $ 208,240 100.0 % $ 133,091 100.0 %
Cost of Revenues 176,166 84.6 % 115,393 86.7 %
Gross Profit 32,074 15.4 % 17,698 13.3 %
General and administrative expenses 6,913 3.3 % 4,660 3.5 %
Income from operations before taxes 25,160 12.1 % 13,038 9.8 %
Interest Income 349 0.2 % 448 0.3 %
Interest Expense (1,662 ) -0.8 % (1,454 ) -1.1 %
Other Income (Expense) 1,233 0.6 % 259 0.2 %
Income before Income taxes 25,080 12.0 % 12,290 9.2 %
Income taxes 10,078 4.8 % 5,171 3.9 %
Net Income $ 15,002 7.2 % $ 7,120 5.3 %
Earnings Per Share - Basic $ 1.24 $ 0.59
Earnings Per Share - Diluted $ 1.03 $ 0.51
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary financial information for our pro forma consolidated results for the years ended September 30, 2008 and September 30, 2007. The information is presented to show what the consolidated income statements would have looked like had the transactions with ST Pipeline and CJ Hughes been completed at the beginning of each of those years. The information includes such adjustments as deemed necessary to reflect the transactions in a proper manner. This information should be read in conjunction with the notes thereto as well as the financial statements for the various entities included elsewhere in this document.
The unaudited pro forma information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations that we would have reported had the merger transactions been completed as of the date presented and should not be taken as representative of our future consolidated results of operations.
Energy Services of America Corporation
ST Pipeline, Inc./C J Hughes
Pro Forma Combined, Condensed, Consolidated Statement of Income
Year ended September 30, 2008
(Unaudited)
ST Pipeline ST Pipeline C J Hughes C J Hughes
Energy October 1- October 1-
Services of January 1, 2008- December ST Pipeline January 1, 2008- December C J Hughes
America 31 Pro Forma 31 Pro Forma Redemption Pro Forma
Corporation August 15, 2008 2007 Adjustments August 15, 2008 2007 Adjustments Adjustments Combined
Audited Audited Unaudited Audited Unaudited Unaudited
Contract Revenues $ 28,517,688 $ 37,410,877 $ 37,520,704 $ 79,217,380 $ 25,573,278 $ 208,239,927
Cost of Revenues 23,830,404 30,676,571 22,409,225 $ 1,210,813 (1) 74,794,447 22,428,832 $ 816,113 (1) 176,166,405
Gross Profit 4,687,284 6,734,306 15,111,479 (1,210,813 ) 4,422,933 3,144,446 (816,113 ) - 32,073,522
General and administrative
expenses 1,350,246 996,049 419,290 3,473,283 674,345 6,913,213
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Net income( loss) from
operations 3,337,038 5,738,257 14,692,189 (1,210,813 ) 949,650 2,470,101 (816,113 ) - 25,160,309
Interest Income 1,585,074 34,675 - (513,160 )(2) - 91,897 (543,081 )(2) (306,545 )(5) 348,860
Interest Expense (220,274 ) (142,940 ) - (225,000 )(3) (707,622 ) (366,488 ) (1,662,324 )
Other Income (Expense) 111,301 932,101 204,133 164,709 (178,747 ) 1,233,497
Income before income taxes 4,813,139 6,562,093 14,896,322 (1,948,973 ) 406,737 2,016,763 (1,359,194 ) (306,545 ) 25,080,342
Income taxes 2,001,981 - 7,803,777 (4) - - 395,109 (4) (122,618 )(6) 10,078,249
Net Income $ 2,811,158 $ 6,562,093 $ 14,896,322 $ (9,752,750 ) $ 406,737 $ 2,016,763 $ (1,754,303 ) $ (183,927 ) $ 15,002,093
Weighted
average shares
outstanding -
basic 10,750,000 2,964,763 (1,622,456 ) 12,092,307
Weighted average
shares - diluted 13,160,643 2,964,763 (1,622,456 ) 14,502,950
Net income per
share - basic $ 0.26 $ 1.24
Net income per
share -
diluted $ 0.21 $ 1.03
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Energy Services of America Corporation
ST Pipeline, Inc./C J Hughes
Pro Forma Combined, Condensed, Consolidated Statement of Income
Year ended September 30, 2007
(Unaudited)
Net change Net change
removing removing
ST Pipeline Oct 1-Dec Oct 1-Dec
Energy Year ended 31 C J Hughes 31
Services of December 2007, ST Pipeline December 2007, C J Hughes
America 31. adding Pro Forma 31. adding Pro Forma Redemption Pro Forma
Corporation 2007 2006 Adjustments 2007 2006 Adjustments Adjustments Combined
Audited Audited Unaudited Audited Unaudited
Contract Revenues $ 100,385,098 (27,441,017 ) $ 75,305,234 $ (15,158,476 ) $ 133,090,839
Cost of Revenues 70,948,130 (13,291,520 ) $ 1,210,813 (1) 68,096,279 (12,387,188 ) $ 816,113 (1) 115,392,627
Gross Profit 29,436,968 (14,149,497 ) (1,210,813 ) 7,208,955 (2,771,288 ) (816,113 ) - 17,698,212
General and administrative
expenses $ 385,773 1,547,125 (1,400 ) 3,218,114 (489,242 ) 4,660,370
-
Net income( loss) from
operations (385,773 ) 27,889,843 (14,148,097 ) (1,210,813 ) 3,990,841 (2,282,046 ) (816,113 ) - 13,037,842
Interest Income 2,612,835 45,939 1,088 (843,961 )(2) - 28,962 (893,170 )(2) (504,154 )(5) 447,539
Interest Expense (298,799 ) (28,067 ) (225,000 )(3) (1,063,198 ) 160,666 (1,454,398 )
Other Income (Expense) 307,524 (13,829 ) 118,135 (152,681 ) 259,149
Income before income taxes 2,227,062 27,944,507 (14,188,905 ) (2,279,774 ) 3,045,778 (2,245,099 ) (1,709,283 ) (504,154 ) 12,290,131
Income taxes 846,000 - - 4,590,331 (4) 275,000 - (339,101 )(4) (201,662 )(6) 5,170,568
Net Income $ 1,381,062 $ 27,944,507 $ (14,188,905 ) $ (6,870,105 ) $ 2,770,778 $ (2,245,099 ) $ (1,370,182 ) $ (302,493 ) $ 7,119,563
Weighted average shares
outstanding 10,750,000 2,964,763 (1,622,456 ) 12,092,307
Weighted average shares -
diluted 12,688,930 2,964,763 (1,622,456 ) 14,031,307
Net income per share -
basic $ 0.13 $ 0.59
Net income per share -
diluted $ 0.11 $ 0.51
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Notes to pro forma income statements
(1) These adjustments represent the added depreciation created from the mark to market of the fixed assets of ST Pipeline and CJ Hughes as required by purchase accounting
(2) These adjustments reflect the interest income lost from the cash payments made to the shareholders of ST Pipeline and CJ Hughes, etc. had the transaction been completed at the beginning of each period and therefore not earning interest.
(3) This adjustment is to reflect the added interest cost that would have occurred relating to the notes issued to the Shareholders of ST Pipeline had the transaction been in place for the respective periods
(4) ST Pipeline and CJ Hughes were both Sub S corporations and therefore had no Federal income taxes. These entries are to reflect the estimated taxes for these companies had they been a part of Energy Services during the respective periods.
(5) In accordance with the bylaws of Energy Services, shareholders had the right to vote against the transactions and request their shares be redeemed. These entries reflect the lost interest income from the purchase of those shares so redeemed.
(6) These entries are to reflect the tax savings related to the interest income lost on the payments to redeem shares.
2008 compared to 2007- Pro Forma basis
Revenues. Revenues increased by $75.1 million or 56.5% to $208.2 million for the year ended September 30, 2008. This increase was primarily due to an increase in revenues as the result of the added revenues from Nitro Electric which was acquired by CJ Hughes in May of 2007 and accordingly revenues were only included from that time forward. .
Cost of Revenues. Cost of revenues increased by $60.8 million or 52.7% to $176.2 million for the year ended September 30, 2008. The driver of this increase was primarily the Nitro Electric acquisition by CJ Hughes in May of 2007 and the inclusion of that information from that time forward in 2007
Gross Profit. Gross profits for 2008 were $32.1 Million. This was an increase of $14.4 million or 81.2% over the 2007 gross profit of $17.7 million. As explained above this was a result of Nitro Electric performance only being included from May of 2007 forward.
Selling general and administrative expenses. Selling, general and administrative increased by $2.2 million (48.3%)to $6.9 million for the year ended September 30, 2008. This increase was primarily driven by the acquisition of Nitro Electric by CJ Hughes and the inclusion of Nitro performance from that time forward.
Income from Operations. Income from operations increased $12.1 million or 93% to $25.2 million for the year ended September 30, 2008 from $13.0 million for the year ended September 30, 2007. This is a function of the previous categories.
Interest Income. Interest income was about even with the prior year at $349,000 for 2008 and $448,000 for 2007.
Interest Expense Interest Expense increased by $208,000 to $1.7 million at September 30, 2008. This increase was driven primarily by added borrowings on lines of credit and for equipment purchases.
Other Income. Other income increased by $974,000 to $1.2 million for the year ended September 30, 2008 over the 2007 amount of $259,000. This increase was driven by the rental of equipment to outside parties.
Net Income. Net Income increased by $7.8 million or 110.7% to $15.0 million for the year ended September 30, 2008 from a net income of $7.1 million for the year ended September 30, 2007. The increase occurred due to the various changes as previously discussed.
2008 for Energy Services
Energy Services for 2008 had sales of $28.5 million, a net income of $2.8 million which resulted in earnings per share of $0.26 basic and $0.21 fully . . .
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