Monday, April 15, 2013 8:54:25 PM
Form 10-K for UNIVERSAL BIOENERGY, INC.
15-Apr-2013
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis presents management's perspective of our business, financial condition, and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition, and outlook for the future; and should be read in conjunction with "Item 8: Financial Statements and Supplementary Data" of this report.
Included in this annual report are "forward-looking" statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA") as well as historical information.
As used below, "we", "us", "our", "Universal", "Universal Bioenergy", "Company", or "our company", refers to Universal Bioenergy, Inc. and all of its subsidiaries.
Management's Discussion and Analysis contains various "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-K, including, without limitation, statements related to anticipated cash flow sources and uses; and words including, but not limited to, "anticipates", "believes", "plans", "expects", "future", and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business, including, but not limited to, reliance on key customers and competition in its markets, market demand, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel, and any changes in current accounting rules, planned capital expenditures, potential increases in prospective production costs, future cash flows and borrowings, pursuit of potential acquisition opportunities, the possibility that the industry may be subject to future regulatory or legislative actions (including additional taxes, changes in environmental regulation, and disclosure requirements under the Dodd-Frank Wall Street Reform and the Jobs Act of 2012 ), our financial position, business strategy, and other plans, objectives, for future operations, difficulties of hiring or retaining key personnel, and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company adopted at management's discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC in terms of recognition of software licenses and recurring revenue. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Forward-looking statements involve risks, uncertainties, and other factors which may cause our actual results, performance, or achievements, to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements, and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2011, as well as other factors that we are currently unable to identify or quantify; but that may exist in the future.
We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
A Fluctuations in crude oil, natural gas, and natural gas liquids prices, refining, and marketing margins. Potential failures or delays in achieving expected reserve or production
B levels from existing and future oil and gas development projects due to operating hazards, drilling risks, and the inherent uncertainties in predicting oil and gas reserves, and oil and gas reservoir performance.
C Failure of new products and services to achieve market acceptance.
D Unexpected technological or commercial difficulties in manufacturing, refining, or transporting our products. Lack of, or disruptions in, adequate and reliable transportation for our
E crude oil, natural gas, natural gas liquids, liquefied natural gas (LNG), and refined products. Inability to timely obtain or maintain permits, including those necessary
F for construction projects; or to comply with government regulations; or make capital expenditures required to maintain compliance. Failure to complete definitive agreements and feasibility studies for, and
G to timely complete construction of, announced and future exploration and production, LNG, and transportation projects.
H Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events, or terrorism.
I International monetary conditions and exchange controls.
J Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
K Liability resulting from litigation. General domestic and international economic and political developments, including armed hostilities; expropriation of assets; changes in
L governmental policies relating to crude oil, natural gas, natural gas liquids, or refined product pricing, regulation, or taxation; other political, economic or diplomatic developments; and international monetary fluctuations.
M Changes in tax and other laws, regulations (including alternative energy mandates), or royalty rules applicable to our business.
N Limited access to capital or significantly higher cost of capital related to uncertainty in the domestic or international financial markets.
O Inability to obtain economical financing for projects, construction, or modification of facilities, and general corporate purposes.
In addition, the foregoing factors may affect generally our business, results of operations, and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
Overview of Our Company
Universal Bioenergy Inc. is an independent diversified energy company, headquartered in Irvine, California. Our common stock is presently listed on the OTC Markets Group under the trading symbol "UBRG". Universal Bioenergy Inc. was incorporated on August 13, 2004, in the State of Nevada, under the name of Palomine Mining Inc. On October 24, 2007, the Company changed its name from Palomine Mining Inc. to Universal Bioenergy Inc. to better reflect its new business plan and strategic direction.
Our primary business focus is the production, marketing, and sales of natural gas, propane, coal, oil, and alternative energy. Through our subsidiary, NDR Energy Group, located in Charlotte, North Carolina, we presently sell natural gas. Through NDR Energy Group we have contracts signed with 30 major utility companies in the United States with strong Standard & Poor's credit ratings. NDR Energy Group markets and distributes natural gas and propane to 30 of the largest public utilities, electric power producers, and local gas distribution companies that serve millions of commercial, industrial, and residential customers, throughout the country. Our customers include Southern California Gas Company, Pacific Gas & Electric, CenterPoint Energy Resources, Baltimore Gas & Electric, Memphis Light Gas & Water, Duke (Ohio & Kentucky), Michigan Consolidated, and National Grid. Our gas suppliers include EDF Trading, Pacific Summit Energy, Chevron Texaco, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.
We are also engaged in the acquisition of oil and gas fields, lease acquisitions, and development of newly discovered, or recently discovered oil and gas fields, re-entering existing wells, and the transmission and marketing of the products to our customer base. We are continuing our growth through an ongoing series of acquisitions.
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Energy Market's Impact on Universal's Operations and Revenues
Our primary revenues from this period are from the sale of natural gas. Our revenues for the twelve months period ended December 31, 2012, decreased due to the following conditions in the U.S. energy market:
U.S. Natural Gas Market
During 2012, natural gas traded at prices we have not experienced for a decade. These low prices are the result of a significant imbalance between supply and demand in North America. On the supply side, new technologies, particularly hydraulic fracturing and horizontal drilling, have enabled natural gas producers to bring on line meaningful new supplies of natural gas around North America. On the demand side, the past winter was one of the warmest on record, which reduced demand for natural gas. Consequently, North America has an unusually high amount of gas in storage that will continue to oversupply the market.
According to the Energy Information Administration, the unseasonably warm weather for the winter of December 2011, through March 2012, resulted in natural gas working inventories that continued to set new record seasonal highs. EIA's average 2012 Henry Hub natural gas spot price forecast was $3.17 per million British thermal units (MMBtu); a decline of about $0.83 per MMBtu from the 2011 average spot price. EIA expected that Henry Hub spot prices will average $3.96 per MMBtu in 2013.
For the same winter period, according to Bloomberg/Business week, "The price of natural gas is at a 10-year low after a surprising jump in supplies. But the government says natural gas inventories expanded more than expected following a recent production boom. Supplies are currently 59 percent above the five-year average, and they're expected to keep growing over the next few months."
Our revenue, profitability and cash flow substantially depend upon the prices and demand for natural gas. The natural gas market is very volatile, and a drop in prices can significantly affect our financial results and impede our growth. Changes in natural gas prices had a significant impact on our revenues and on our cash flow for this reporting period. Prices for natural gas can fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:
a. weather conditions and fluctuating and seasonal demand;
b. technological advances affecting energy consumption;
c. the level of supply and consumer product demand;
d. the impact of energy conservation efforts;
e. the overall economic environment; and
f. the price and availability of alternative fuels.
In the past, the prices of natural gas has been extremely volatile, and we expect this volatility to continue. For example, during the year ended December 31, 2012, the NYMEX Henry Hub natural gas index price ranged from a high of $3.90 per MMBtu to a low of $1.91 per MMBtu, which is a decline of $1.99 per MMBtu or -51%. Between January 1, 2013 and February 25, 2013, the NYMEX Henry Hub natural gas index price ranged from a high of $3.57 per MMBtu to a low of $3.11 per MMBtu, or a difference of $0.46 per MMBtu or 13%.
NDR Energy Group sold 13,148,883 MMBtus of gas in 2010, and generated $52.48 million in revenues. Through NDR, we generated $71.74 million in revenues in 2011. In 2012 we sold 16,572,329 MMBtus of gas and generated $50.51 million in revenues. However, due the unseasonably warm winter, our sales of gas for the first quarter declined from 5,052,704 MMBtus in 2011, to 3,443,668 MMBtus in 2012, or by 1,609,016 MMBtus, or 32%. However, in spite of the negative market conditions, we had significant increases in sales volumes of natural gas for the balance of the year. Had we sold our gas in 2012 at the same average prices of $4.29 MMBtu as in 2011, then our revenues from natural gas sales would have been approximately $71.01 million.
The United States energy market has experienced a significant increase in in the quantity natural gas production related to new and increased drilling for deeper natural gas formations and the implementation of new exploration and production techniques, including horizontal and multiple fracturing techniques. The increase in the supply of natural gas has put a downward pressure on domestic natural gas prices.
However, there are some favorable trends. Utilities around the country are switching from coal to natural gas at a meaningful rate. New petro-chemical plants are being built and other industries are expanding in the U.S. Looking to 2013, increased demand should cause natural gas prices to stabilize or possibly to increase moderately from 2012 levels. As a result of the low natural gas prices, the Company has been focusing more on sales of coal in the international market, sales of petroleum, refined petroleum products, wholesale electric power and alternative energy.
We intend to use revenues from these energy products to maintain a diversified product portfolio and explore other opportunities to maximize shareholder value, including monetization of our existing assets or entering into new ventures or acquisitions.
U.S. Coal Market
Our results during 2012 were impacted substantially by weak market conditions. Challenging coal markets significantly impacted our results in 2012. Global benchmark metallurgical prices declined 50% since their peak in mid-2011, while U.S. thermal coal consumption declined to levels not seen since the mid-1990s.
Driving the weakness in the domestic demand for thermal coal during 2012 was reduced coal-fired generation resulting from an unseasonably warm 2011/2012 winter coupled with low natural gas prices, which resulted in the substitution of natural gas for coal by power generators. As a result, coal stockpiles at generators remain at higher than normal levels, though levels declined during the second half of 2012. A rise in natural gas prices relative to the last year should increase output at coal-fueled power plants.
According to the EIA, coal accounted for approximately 37% of U.S. electricity generation from January through November 2012. This is a decrease of approximately 5% from full-year 2011, as increased competition between fuels and an unseasonably warm winter led to lower electricity demand and therefore lower consumption of fossil fuels. The warm winter also pushed coal stockpiles higher at electric power plants. Inventories remained above the 5-year average through November 2012. Coal consumption has improved month on month after last year's warm winter decreased overall electricity generation requirements and impacted generation fuels, including coal and natural gas.
In response to these weak market conditions, we, along with many other domestic producers, took steps to control costs in a reduced-volume environment. This led us to rationalize our supply through periodic idling or temporary closure of the Whitesburg Friday Branch Mine, and production curtailments. We believe, these efforts will help position us for expected market recovery in the metallurgical and thermal export markets.
Thermal coal exports somewhat offset the weakness in domestic markets in 2012. Colder winter temperatures in major coal-burning regions of Asia, as well as coal's competitive advantage versus other power generation fuels in Europe, should help support U.S. coal exports in 2013.
As a result of the weak domestic coal market, the Company has been focusing more on sales of coal in the international market, metallurgical coal, sales of petroleum, refined petroleum products, wholesale electric power and alternative energy.
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Whitesburg Friday Branch Mine LLC Thermal Coal Mining Operations
On February 20, 2012, the Company completed the closing of the Whitesburg Friday Branch Mine transaction. Previously on October 17, 2011, our company and Whitesburg Friday Branch Mine LLC, a Kentucky limited liability company ("Whitesburg"), entered into a Member Interest Exchange Agreement, (the "Exchange Agreement"). Pursuant to the Exchange Agreement, and subject to the conditions set forth therein, our Company will acquired, subject to the terms and conditions of the Exchange Agreement, 40% of the Member Interests and assets of Whitesburg Friday Branch Mine LLC, of Kentucky, a privately held company from JLP and Partners LLC, a Kentucky Limited Liability Company ("JLP"), for a total consideration of $2.7 million. The Whitesburg Friday Branch Mine, operates, mines, and produces, thermal coal in eastern Kentucky for sale to electric utilities for use in coal fired generation, steam plant electric power production.
This acquisition was reported on the Company Report on Form 8-K, filed with the Securities and Exchange Commission on February 28, 2012.
NDR Energy Group LLC.
In April 2010, we expanded into the natural gas energy market by the acquisition of a 49% stake in NDR Energy Group LLC, in Charlotte, North Carolina ("NDR Energy"). NDR Energy Group was established in the State of Maryland on September 28, 2005. Through NDR Energy, we have contracts signed with 30 major utility companies in the United States with strong Standard & Poor's credit ratings. NDR Energy Group markets and distributes natural gas and propane to 30 of the largest public utilities, electric power producers, and local gas distribution companies that serve millions of commercial, industrial, and residential customers throughout the country. Our customers include Southern California Gas Company, Pacific Gas & Electric, CenterPoint Energy Resources, Baltimore Gas & Electric, Memphis Light Gas & Water, Duke (Ohio & Kentucky), Michigan Consolidated, and National Grid. Our gas suppliers include EDF Trading, Pacific Summit Energy, Chevron Texaco, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.
Our Business Strategy
Our primary objective is be one of the top independent energy companies in the U.S., and to deliver maximum value to our shareholders, and generate increasing revenues and solid earnings for the long-term growth of our Company. By building on our successes in 2012 we plan, although we cannot provide assurances as to timing and attainment, to achieve these future objectives by pursuing the following strategies:
In the year 2010, management totally re-organized and re-structured the Company with a new strategic direction and business plan, of which these strategies were implemented in 2011 and are ongoing. Our primary objective is to exploit changes in the energy market, with the intent to propel the Company to a dominant market position, and be one of the top independent energy companies in the United States. Another major objective in our revised business plan is to finding new ways to create more value for our shareholders and investors. Our management intends to deliver greater value to our shareholders and investors by generating increasing revenues, producing solid earnings, and improving returns on invested capital for the long-term growth of our Company. We believe this is the ultimate measure of our success.
Mergers and Acquisitions
Management has determined that it is in our best interests to chart a strategic course for the Company to grow faster by more mergers and acquisitions. Management is planning for expansion, by additional mergers and acquisitions to generate greater revenues and profits, and by shifting our focus to invest in far more profitable natural and alternative energy technologies. We anticipate, but can provide no assurances, of acquiring 5 to 10 "bolt on" acquisitions of additional new companies with revenues in the $10 million to $80 million range with stable cash flows and EBITDA's in the $1 million to $8 million range in the next 1 to 3 years. The potential target's profile will primarily include companies with well-established marketing and distribution channels, a defensible competitive position, and strong growth opportunities. This will also include companies that have a strong asset base with hard or fixed assets, property, plant, equipment, proprietary technologies, patents, and exclusive licenses. We are aggressively seeking potential acquisition targets to meet these objectives.
Some companies being targeted are, oil producers, oil drilling companies, refined oil product producers, natural gas producers, gas marketers, pipeline companies, pipeline construction companies, gas storage facilities, propane producers, high wall surface coal mines, refined oil product producers, and the acquisition of energy technology patents and licenses. We're also looking at acquiring producing petroleum and gas wells, assets/properties, and related energy companies. Acquiring interests in properties in these areas will work very well with our strategic plans for the expansion of our subsidiary Texas Gulf Oil & Gas Inc. We have adapted our business strategy to become a more vertically integrated company, to give us greater management control over our supply chain from the producer, through marketing, distribution, and directly to the customer. We believe, but can provide no assurances, that this will bring even greater revenues for our Company, solid earnings, and bring more value to our shareholders.
Vertical Integration
We have adapted our business strategy to become a more vertically integrated company to give us greater management control over our supply chain from the producer, through marketing, distribution, and directly to our customer.
Oil and Gas Field Development
We intend to pursue the acquisition of more oil and gas properties and assets. This includes existing oil and gas fields, development of newly discovered or recently discovered oil and gas fields, re-entering existing capped wells, and lease acquisitions. We especially have a high level of interest in the development of existing fields whereby we can re-enter previously drilled capped wells to extract the oil and gas using new drilling/extraction methods and techniques. Fields with previously drilled capped wells would be of highest priority for us since they had been "proven wells" before, and would therefore have lower development costs and lower associated financial risks.
Own Our Oil and Gas Supply
We plan to own and/or control our own natural gas supply by obtaining the gas at the wellhead from suppliers with large reserves and inventories, to market and distribute directly to our growing customer base.
Increase Operating Income
We intend to increase our operating income and earnings by obtaining our gas at the wellhead at the producers' price, and aggregating the purchase of our gas supply through a large number of independent producers with long-term purchase agreements to supply to our customers.
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CORPORATE FINANCE
The Company's Capital Structure
In management'sefforts to grow and expand the Company we must obtain the necessary capital to achieve those objectives, decide on the best methods to obtain that capital, and the capital structure of the Company. The primary ways a company will raise capital is either through debt financing (borrowing money), or equity financing (selling a portion of the company via shares of stock), or a combination of both. The type of capital chosen (debt or equity), and methods of raising the capital, depend on a number of factors including; the company's life cycle stage, e.g., start-up, development, high-growth or maturity, future growth prospects, strength of the national economy, and the credit markets.
Potential investors in any company, including ours, will consider those factors and the relative risks to their investment capital. To limit their risks, these investors may limit the size of their investment, or provide it to the company in stages that is contingent upon the company reaching stated goals, e.g., production, marketing, distribution and revenues. The ultimate question for management is: How do you get the investors to commit to making what could be a high risk investment for them, although one that would correspondingly benefit the Company; however, one that the investor could lose if the Company were to fail? Management considered both the equity and the debt financing options based on the Company's life cycle stage, economy, credit markets, and other circumstances at the time, and reached the following conclusions:
Equity Financing - Management decided not to raise capital through an equity offering in its initial start-up and development stage for a variety of reasons.
(1) The Company would have had to go through the process of filing a registration statement.
(2) The direct and indirect flotation costs of the issuance of an equity capital raise could have run $250,000 or more, and the Company did not have those funds available.
(3) It would have been very difficult to get an investment banker to underwrite a new issuance for a development stage company with a limited operating history and revenues.
(4) Many investors did not want to take an equity position in the Company at that time, and the corresponding risks of ownership.
(5) The issuance of equity to these investors, after resolving the potential regulatory hurdles, legal issues, time constraints, and costs, would have resulted in immediate dilution for the other shareholders, giving them only limited hopes that value would be created.
Therefore, due to the above stated reasons, the economic climate, and the Company's circumstances at that time, management elected not to pursue raising capital through an equity offering at that time.
Debt Financing- Management elected to raise capital for the Company through debt financing for the following reasons.
(1) Due to the Companies rapid growth, it had immediate and continuous need for capital.
(2) The investors were more willing to invest funds more expeditiously, and take a creditor's position, instead of as an owner by taking an equity position.
(3) With those immediately available funds, management could grow the Company rapidly and create short-term economic value to the Company by closing on several target mergers and acquisitions prior to any equity dilution taking place.
(4) The investors were issued Promissory Notes that were unsecured without any collateral (taking a high risk).
(5) The Notes required no monthly payments; which allowed us to use that free cash flow for operating expenses, reduced our cash outlays, interest payments, and improve our budget plans, and forecast our cash flow.
(6) The investor received the potential upside of conversion of the Notes into equity while protecting our downside with the use of the cash flow.
(7) Should the investors decide to convert the Notes into common stock, then the Company's debt would be eliminated from its balance sheet.
(8) The tax benefits of debt financing are that it's less expensive. While the Company is taxed on earnings, it is not generally taxed on borrowed money, and the interest on the Notes is tax deductible.
(9) Since the investors do not have any equity interests, it has no voting . . .
(sorry, this was all there was on Yhoo board, I have to look up the rest of it and post it...)
15-Apr-2013
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis presents management's perspective of our business, financial condition, and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition, and outlook for the future; and should be read in conjunction with "Item 8: Financial Statements and Supplementary Data" of this report.
Included in this annual report are "forward-looking" statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA") as well as historical information.
As used below, "we", "us", "our", "Universal", "Universal Bioenergy", "Company", or "our company", refers to Universal Bioenergy, Inc. and all of its subsidiaries.
Management's Discussion and Analysis contains various "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding future events or the future financial performance of the Company that involve risks and uncertainties. Certain statements included in this Form 10-K, including, without limitation, statements related to anticipated cash flow sources and uses; and words including, but not limited to, "anticipates", "believes", "plans", "expects", "future", and similar statements or expressions, identify forward looking statements. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business, including, but not limited to, reliance on key customers and competition in its markets, market demand, technological developments, maintenance of relationships with key suppliers, difficulties of hiring or retaining key personnel, and any changes in current accounting rules, planned capital expenditures, potential increases in prospective production costs, future cash flows and borrowings, pursuit of potential acquisition opportunities, the possibility that the industry may be subject to future regulatory or legislative actions (including additional taxes, changes in environmental regulation, and disclosure requirements under the Dodd-Frank Wall Street Reform and the Jobs Act of 2012 ), our financial position, business strategy, and other plans, objectives, for future operations, difficulties of hiring or retaining key personnel, and any changes in current accounting rules, all of which may be beyond the control of the Company. The Company adopted at management's discretion, the most conservative recognition of revenue based on the most astringent guidelines of the SEC in terms of recognition of software licenses and recurring revenue. Management will elect additional changes to revenue recognition to comply with the most conservative SEC recognition on a forward going accrual basis as the model is replicated with other similar markets (i.e. SBDC). The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth therein.
We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Forward-looking statements involve risks, uncertainties, and other factors which may cause our actual results, performance, or achievements, to be materially different from those expressed or implied by such forward-looking statements. Factors and risks that could affect our results and achievements, and cause them to materially differ from those contained in the forward-looking statements include those identified in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2011, as well as other factors that we are currently unable to identify or quantify; but that may exist in the future.
We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
A Fluctuations in crude oil, natural gas, and natural gas liquids prices, refining, and marketing margins. Potential failures or delays in achieving expected reserve or production
B levels from existing and future oil and gas development projects due to operating hazards, drilling risks, and the inherent uncertainties in predicting oil and gas reserves, and oil and gas reservoir performance.
C Failure of new products and services to achieve market acceptance.
D Unexpected technological or commercial difficulties in manufacturing, refining, or transporting our products. Lack of, or disruptions in, adequate and reliable transportation for our
E crude oil, natural gas, natural gas liquids, liquefied natural gas (LNG), and refined products. Inability to timely obtain or maintain permits, including those necessary
F for construction projects; or to comply with government regulations; or make capital expenditures required to maintain compliance. Failure to complete definitive agreements and feasibility studies for, and
G to timely complete construction of, announced and future exploration and production, LNG, and transportation projects.
H Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events, or terrorism.
I International monetary conditions and exchange controls.
J Substantial investment or reduced demand for products as a result of existing or future environmental rules and regulations.
K Liability resulting from litigation. General domestic and international economic and political developments, including armed hostilities; expropriation of assets; changes in
L governmental policies relating to crude oil, natural gas, natural gas liquids, or refined product pricing, regulation, or taxation; other political, economic or diplomatic developments; and international monetary fluctuations.
M Changes in tax and other laws, regulations (including alternative energy mandates), or royalty rules applicable to our business.
N Limited access to capital or significantly higher cost of capital related to uncertainty in the domestic or international financial markets.
O Inability to obtain economical financing for projects, construction, or modification of facilities, and general corporate purposes.
In addition, the foregoing factors may affect generally our business, results of operations, and financial position. Forward-looking statements speak only as of the date the statement was made. We do not undertake and specifically decline any obligation to update any forward-looking statements.
Overview of Our Company
Universal Bioenergy Inc. is an independent diversified energy company, headquartered in Irvine, California. Our common stock is presently listed on the OTC Markets Group under the trading symbol "UBRG". Universal Bioenergy Inc. was incorporated on August 13, 2004, in the State of Nevada, under the name of Palomine Mining Inc. On October 24, 2007, the Company changed its name from Palomine Mining Inc. to Universal Bioenergy Inc. to better reflect its new business plan and strategic direction.
Our primary business focus is the production, marketing, and sales of natural gas, propane, coal, oil, and alternative energy. Through our subsidiary, NDR Energy Group, located in Charlotte, North Carolina, we presently sell natural gas. Through NDR Energy Group we have contracts signed with 30 major utility companies in the United States with strong Standard & Poor's credit ratings. NDR Energy Group markets and distributes natural gas and propane to 30 of the largest public utilities, electric power producers, and local gas distribution companies that serve millions of commercial, industrial, and residential customers, throughout the country. Our customers include Southern California Gas Company, Pacific Gas & Electric, CenterPoint Energy Resources, Baltimore Gas & Electric, Memphis Light Gas & Water, Duke (Ohio & Kentucky), Michigan Consolidated, and National Grid. Our gas suppliers include EDF Trading, Pacific Summit Energy, Chevron Texaco, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.
We are also engaged in the acquisition of oil and gas fields, lease acquisitions, and development of newly discovered, or recently discovered oil and gas fields, re-entering existing wells, and the transmission and marketing of the products to our customer base. We are continuing our growth through an ongoing series of acquisitions.
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Energy Market's Impact on Universal's Operations and Revenues
Our primary revenues from this period are from the sale of natural gas. Our revenues for the twelve months period ended December 31, 2012, decreased due to the following conditions in the U.S. energy market:
U.S. Natural Gas Market
During 2012, natural gas traded at prices we have not experienced for a decade. These low prices are the result of a significant imbalance between supply and demand in North America. On the supply side, new technologies, particularly hydraulic fracturing and horizontal drilling, have enabled natural gas producers to bring on line meaningful new supplies of natural gas around North America. On the demand side, the past winter was one of the warmest on record, which reduced demand for natural gas. Consequently, North America has an unusually high amount of gas in storage that will continue to oversupply the market.
According to the Energy Information Administration, the unseasonably warm weather for the winter of December 2011, through March 2012, resulted in natural gas working inventories that continued to set new record seasonal highs. EIA's average 2012 Henry Hub natural gas spot price forecast was $3.17 per million British thermal units (MMBtu); a decline of about $0.83 per MMBtu from the 2011 average spot price. EIA expected that Henry Hub spot prices will average $3.96 per MMBtu in 2013.
For the same winter period, according to Bloomberg/Business week, "The price of natural gas is at a 10-year low after a surprising jump in supplies. But the government says natural gas inventories expanded more than expected following a recent production boom. Supplies are currently 59 percent above the five-year average, and they're expected to keep growing over the next few months."
Our revenue, profitability and cash flow substantially depend upon the prices and demand for natural gas. The natural gas market is very volatile, and a drop in prices can significantly affect our financial results and impede our growth. Changes in natural gas prices had a significant impact on our revenues and on our cash flow for this reporting period. Prices for natural gas can fluctuate widely in response to relatively minor changes in the supply of and demand for natural gas, market uncertainty and a variety of additional factors that are beyond our control, such as:
a. weather conditions and fluctuating and seasonal demand;
b. technological advances affecting energy consumption;
c. the level of supply and consumer product demand;
d. the impact of energy conservation efforts;
e. the overall economic environment; and
f. the price and availability of alternative fuels.
In the past, the prices of natural gas has been extremely volatile, and we expect this volatility to continue. For example, during the year ended December 31, 2012, the NYMEX Henry Hub natural gas index price ranged from a high of $3.90 per MMBtu to a low of $1.91 per MMBtu, which is a decline of $1.99 per MMBtu or -51%. Between January 1, 2013 and February 25, 2013, the NYMEX Henry Hub natural gas index price ranged from a high of $3.57 per MMBtu to a low of $3.11 per MMBtu, or a difference of $0.46 per MMBtu or 13%.
NDR Energy Group sold 13,148,883 MMBtus of gas in 2010, and generated $52.48 million in revenues. Through NDR, we generated $71.74 million in revenues in 2011. In 2012 we sold 16,572,329 MMBtus of gas and generated $50.51 million in revenues. However, due the unseasonably warm winter, our sales of gas for the first quarter declined from 5,052,704 MMBtus in 2011, to 3,443,668 MMBtus in 2012, or by 1,609,016 MMBtus, or 32%. However, in spite of the negative market conditions, we had significant increases in sales volumes of natural gas for the balance of the year. Had we sold our gas in 2012 at the same average prices of $4.29 MMBtu as in 2011, then our revenues from natural gas sales would have been approximately $71.01 million.
The United States energy market has experienced a significant increase in in the quantity natural gas production related to new and increased drilling for deeper natural gas formations and the implementation of new exploration and production techniques, including horizontal and multiple fracturing techniques. The increase in the supply of natural gas has put a downward pressure on domestic natural gas prices.
However, there are some favorable trends. Utilities around the country are switching from coal to natural gas at a meaningful rate. New petro-chemical plants are being built and other industries are expanding in the U.S. Looking to 2013, increased demand should cause natural gas prices to stabilize or possibly to increase moderately from 2012 levels. As a result of the low natural gas prices, the Company has been focusing more on sales of coal in the international market, sales of petroleum, refined petroleum products, wholesale electric power and alternative energy.
We intend to use revenues from these energy products to maintain a diversified product portfolio and explore other opportunities to maximize shareholder value, including monetization of our existing assets or entering into new ventures or acquisitions.
U.S. Coal Market
Our results during 2012 were impacted substantially by weak market conditions. Challenging coal markets significantly impacted our results in 2012. Global benchmark metallurgical prices declined 50% since their peak in mid-2011, while U.S. thermal coal consumption declined to levels not seen since the mid-1990s.
Driving the weakness in the domestic demand for thermal coal during 2012 was reduced coal-fired generation resulting from an unseasonably warm 2011/2012 winter coupled with low natural gas prices, which resulted in the substitution of natural gas for coal by power generators. As a result, coal stockpiles at generators remain at higher than normal levels, though levels declined during the second half of 2012. A rise in natural gas prices relative to the last year should increase output at coal-fueled power plants.
According to the EIA, coal accounted for approximately 37% of U.S. electricity generation from January through November 2012. This is a decrease of approximately 5% from full-year 2011, as increased competition between fuels and an unseasonably warm winter led to lower electricity demand and therefore lower consumption of fossil fuels. The warm winter also pushed coal stockpiles higher at electric power plants. Inventories remained above the 5-year average through November 2012. Coal consumption has improved month on month after last year's warm winter decreased overall electricity generation requirements and impacted generation fuels, including coal and natural gas.
In response to these weak market conditions, we, along with many other domestic producers, took steps to control costs in a reduced-volume environment. This led us to rationalize our supply through periodic idling or temporary closure of the Whitesburg Friday Branch Mine, and production curtailments. We believe, these efforts will help position us for expected market recovery in the metallurgical and thermal export markets.
Thermal coal exports somewhat offset the weakness in domestic markets in 2012. Colder winter temperatures in major coal-burning regions of Asia, as well as coal's competitive advantage versus other power generation fuels in Europe, should help support U.S. coal exports in 2013.
As a result of the weak domestic coal market, the Company has been focusing more on sales of coal in the international market, metallurgical coal, sales of petroleum, refined petroleum products, wholesale electric power and alternative energy.
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Whitesburg Friday Branch Mine LLC Thermal Coal Mining Operations
On February 20, 2012, the Company completed the closing of the Whitesburg Friday Branch Mine transaction. Previously on October 17, 2011, our company and Whitesburg Friday Branch Mine LLC, a Kentucky limited liability company ("Whitesburg"), entered into a Member Interest Exchange Agreement, (the "Exchange Agreement"). Pursuant to the Exchange Agreement, and subject to the conditions set forth therein, our Company will acquired, subject to the terms and conditions of the Exchange Agreement, 40% of the Member Interests and assets of Whitesburg Friday Branch Mine LLC, of Kentucky, a privately held company from JLP and Partners LLC, a Kentucky Limited Liability Company ("JLP"), for a total consideration of $2.7 million. The Whitesburg Friday Branch Mine, operates, mines, and produces, thermal coal in eastern Kentucky for sale to electric utilities for use in coal fired generation, steam plant electric power production.
This acquisition was reported on the Company Report on Form 8-K, filed with the Securities and Exchange Commission on February 28, 2012.
NDR Energy Group LLC.
In April 2010, we expanded into the natural gas energy market by the acquisition of a 49% stake in NDR Energy Group LLC, in Charlotte, North Carolina ("NDR Energy"). NDR Energy Group was established in the State of Maryland on September 28, 2005. Through NDR Energy, we have contracts signed with 30 major utility companies in the United States with strong Standard & Poor's credit ratings. NDR Energy Group markets and distributes natural gas and propane to 30 of the largest public utilities, electric power producers, and local gas distribution companies that serve millions of commercial, industrial, and residential customers throughout the country. Our customers include Southern California Gas Company, Pacific Gas & Electric, CenterPoint Energy Resources, Baltimore Gas & Electric, Memphis Light Gas & Water, Duke (Ohio & Kentucky), Michigan Consolidated, and National Grid. Our gas suppliers include EDF Trading, Pacific Summit Energy, Chevron Texaco, Conoco Phillips, Chesapeake Energy Marketing, and Anadarko.
Our Business Strategy
Our primary objective is be one of the top independent energy companies in the U.S., and to deliver maximum value to our shareholders, and generate increasing revenues and solid earnings for the long-term growth of our Company. By building on our successes in 2012 we plan, although we cannot provide assurances as to timing and attainment, to achieve these future objectives by pursuing the following strategies:
In the year 2010, management totally re-organized and re-structured the Company with a new strategic direction and business plan, of which these strategies were implemented in 2011 and are ongoing. Our primary objective is to exploit changes in the energy market, with the intent to propel the Company to a dominant market position, and be one of the top independent energy companies in the United States. Another major objective in our revised business plan is to finding new ways to create more value for our shareholders and investors. Our management intends to deliver greater value to our shareholders and investors by generating increasing revenues, producing solid earnings, and improving returns on invested capital for the long-term growth of our Company. We believe this is the ultimate measure of our success.
Mergers and Acquisitions
Management has determined that it is in our best interests to chart a strategic course for the Company to grow faster by more mergers and acquisitions. Management is planning for expansion, by additional mergers and acquisitions to generate greater revenues and profits, and by shifting our focus to invest in far more profitable natural and alternative energy technologies. We anticipate, but can provide no assurances, of acquiring 5 to 10 "bolt on" acquisitions of additional new companies with revenues in the $10 million to $80 million range with stable cash flows and EBITDA's in the $1 million to $8 million range in the next 1 to 3 years. The potential target's profile will primarily include companies with well-established marketing and distribution channels, a defensible competitive position, and strong growth opportunities. This will also include companies that have a strong asset base with hard or fixed assets, property, plant, equipment, proprietary technologies, patents, and exclusive licenses. We are aggressively seeking potential acquisition targets to meet these objectives.
Some companies being targeted are, oil producers, oil drilling companies, refined oil product producers, natural gas producers, gas marketers, pipeline companies, pipeline construction companies, gas storage facilities, propane producers, high wall surface coal mines, refined oil product producers, and the acquisition of energy technology patents and licenses. We're also looking at acquiring producing petroleum and gas wells, assets/properties, and related energy companies. Acquiring interests in properties in these areas will work very well with our strategic plans for the expansion of our subsidiary Texas Gulf Oil & Gas Inc. We have adapted our business strategy to become a more vertically integrated company, to give us greater management control over our supply chain from the producer, through marketing, distribution, and directly to the customer. We believe, but can provide no assurances, that this will bring even greater revenues for our Company, solid earnings, and bring more value to our shareholders.
Vertical Integration
We have adapted our business strategy to become a more vertically integrated company to give us greater management control over our supply chain from the producer, through marketing, distribution, and directly to our customer.
Oil and Gas Field Development
We intend to pursue the acquisition of more oil and gas properties and assets. This includes existing oil and gas fields, development of newly discovered or recently discovered oil and gas fields, re-entering existing capped wells, and lease acquisitions. We especially have a high level of interest in the development of existing fields whereby we can re-enter previously drilled capped wells to extract the oil and gas using new drilling/extraction methods and techniques. Fields with previously drilled capped wells would be of highest priority for us since they had been "proven wells" before, and would therefore have lower development costs and lower associated financial risks.
Own Our Oil and Gas Supply
We plan to own and/or control our own natural gas supply by obtaining the gas at the wellhead from suppliers with large reserves and inventories, to market and distribute directly to our growing customer base.
Increase Operating Income
We intend to increase our operating income and earnings by obtaining our gas at the wellhead at the producers' price, and aggregating the purchase of our gas supply through a large number of independent producers with long-term purchase agreements to supply to our customers.
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CORPORATE FINANCE
The Company's Capital Structure
In management'sefforts to grow and expand the Company we must obtain the necessary capital to achieve those objectives, decide on the best methods to obtain that capital, and the capital structure of the Company. The primary ways a company will raise capital is either through debt financing (borrowing money), or equity financing (selling a portion of the company via shares of stock), or a combination of both. The type of capital chosen (debt or equity), and methods of raising the capital, depend on a number of factors including; the company's life cycle stage, e.g., start-up, development, high-growth or maturity, future growth prospects, strength of the national economy, and the credit markets.
Potential investors in any company, including ours, will consider those factors and the relative risks to their investment capital. To limit their risks, these investors may limit the size of their investment, or provide it to the company in stages that is contingent upon the company reaching stated goals, e.g., production, marketing, distribution and revenues. The ultimate question for management is: How do you get the investors to commit to making what could be a high risk investment for them, although one that would correspondingly benefit the Company; however, one that the investor could lose if the Company were to fail? Management considered both the equity and the debt financing options based on the Company's life cycle stage, economy, credit markets, and other circumstances at the time, and reached the following conclusions:
Equity Financing - Management decided not to raise capital through an equity offering in its initial start-up and development stage for a variety of reasons.
(1) The Company would have had to go through the process of filing a registration statement.
(2) The direct and indirect flotation costs of the issuance of an equity capital raise could have run $250,000 or more, and the Company did not have those funds available.
(3) It would have been very difficult to get an investment banker to underwrite a new issuance for a development stage company with a limited operating history and revenues.
(4) Many investors did not want to take an equity position in the Company at that time, and the corresponding risks of ownership.
(5) The issuance of equity to these investors, after resolving the potential regulatory hurdles, legal issues, time constraints, and costs, would have resulted in immediate dilution for the other shareholders, giving them only limited hopes that value would be created.
Therefore, due to the above stated reasons, the economic climate, and the Company's circumstances at that time, management elected not to pursue raising capital through an equity offering at that time.
Debt Financing- Management elected to raise capital for the Company through debt financing for the following reasons.
(1) Due to the Companies rapid growth, it had immediate and continuous need for capital.
(2) The investors were more willing to invest funds more expeditiously, and take a creditor's position, instead of as an owner by taking an equity position.
(3) With those immediately available funds, management could grow the Company rapidly and create short-term economic value to the Company by closing on several target mergers and acquisitions prior to any equity dilution taking place.
(4) The investors were issued Promissory Notes that were unsecured without any collateral (taking a high risk).
(5) The Notes required no monthly payments; which allowed us to use that free cash flow for operating expenses, reduced our cash outlays, interest payments, and improve our budget plans, and forecast our cash flow.
(6) The investor received the potential upside of conversion of the Notes into equity while protecting our downside with the use of the cash flow.
(7) Should the investors decide to convert the Notes into common stock, then the Company's debt would be eliminated from its balance sheet.
(8) The tax benefits of debt financing are that it's less expensive. While the Company is taxed on earnings, it is not generally taxed on borrowed money, and the interest on the Notes is tax deductible.
(9) Since the investors do not have any equity interests, it has no voting . . .
(sorry, this was all there was on Yhoo board, I have to look up the rest of it and post it...)
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