SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended May 31, 2001 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______
Commission file number 0-6814
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U.S. ENERGY CORP.
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(Exact Name of Registrant as Specified in its Charter)
Wyoming 83-0205516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
877 North 8th West
Riverton, WY 82501
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (307) 856-9271
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Securities registered pursuant to Section 12(b) of the Act:
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NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
The aggregate market value of the shares of voting stock held by
non-affiliates of the Registrant as of August 17, 2001, computed by reference to
the average of the bid and asked prices of the Registrant's common stock as
reported by the National Market System of NASDAQ on that date, was approximately
$30,467,400.
Class Outstanding at August 17, 2001
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Common Stock, $0.01 par value 9,609,104 shares
Documents incorporated by reference: Portions of the documents listed below have
been incorporated by reference into the indicated parts of this report as
specified in the responses to the referenced sections of this filing.
Annual Meeting Proxy Statement for the fiscal year ended May 31, 2001 into
Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements other than statements of historical
fact included in this Report, are forward-looking statements, including without
limitation the statements under Management's Discussion and Analysis of
Financial Condition and Results of Operations and the disclosures about Rocky
Mountain Gas, Inc. and plans for developing its coalbed methane acreage. In
addition, whenever words like "expect," "anticipate" or "believe" are used, we
are making forward-looking statements.
Although we believe that our forward-looking statements are reasonable, we
don't know if our expectations will prove to be correct. Important future
factors that could cause actual results to differ materially from expectations
include: Domestic consumption rates for natural gas; domestic market prices for
natural gas, uranium, gold, and molybdenum; the amounts of gas we will be able
to produce from our coalbed methane properties; the availability of permits to
drill and operate coalbed methane wells; whether and when gas transmission lines
will be built to reasonable proximity to our coalbed methane properties; and
whether and on what terms the capital necessary to develop our properties can be
obtained. The forward-looking statements should be carefully considered in the
context of all the information set forth in this Annual Report.
PART I
ITEM 1 AND ITEM 2. BUSINESS AND PROPERTIES.
(A) GENERAL.
U.S. Energy Corp. is a Wyoming corporation (formed in 1966) in the business
of acquiring, exploring, developing and/or selling or leasing mineral
properties, and the mining and marketing of minerals. In this Annual Report,
"we", "Company" or "USE" refers to U.S. Energy Corp. including subsidiaries
unless otherwise specifically noted.
In fiscal 2001, we were engaged in three industry segments: minerals,
commercial operations, and contract drilling/construction operations. In the
minerals segment, we have three principal mineral sectors: coalbed methane gas,
uranium and gold (properties and other assets included in the latter two sectors
are in "care and maintenance" status). The uranium properties are located on
Sheep Mountain in Wyoming, and in southeast Utah; we also hold a royalty
interest in uranium claims on Green Mountain, Wyoming, now held by Kennecott
Uranium Company (see below). The gold property is located in Sutter Creek,
California, east of Sacramento. Interests are held in other mineral properties
(principally molybdenum), but are either non- operating interests or undeveloped
claims. We also operate a small oil field in Montana. Our fiscal year ends May
31.
The coalbed methane gas business is conducted through Rocky Mountain Gas,
Inc. ("RMG," a Wyoming corporation owned 41% by USE and 41% by Crested Corp.;
Crested is a 70.5% majority-owned subsidiary of USE, see below). Properties of
RMG are held in Wyoming and southeastern Montana. As of the filing date of this
Annual Report, RMG holds approximately 257,000 gross mineral acres of coalbed
methane properties:
For detailed information about our coalbed methane properties and business
strategy, please see "Minerals - Coalbed Methane" below.
USE and Crested Corp. ("Crested") originally were independent companies,
with two common affiliates (John L. Larsen and Max T. Evans). In 1980, USE and
Crested formed a joint venture ("USECC")
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to do business together (unless one or the other elected not to pursue an
individual project). As a result of USE funding certain of Crested's obligations
from time to time (due to Crested's lack of cash on hand), and Crested
subsequently paying these debts by issuing common stock to USE, Crested became a
majority-owned subsidiary of USE in fiscal 1993. In fiscal 2001, Crested issued
another 6,666,666 shares of its common stock to reduce Crested's debt owed to
USE by $3.0 million, which increased USE's ownership of Crested to 70.5%. All of
USE's (and Crested's) operations are in the United States. Principal executive
offices are located in the Glen L. Larsen building at 877 North 8th Street West,
Riverton, Wyoming 82501, telephone 307.856.9271.
Most of the Company's (USE's) operations are conducted through
subsidiaries, the USECC joint venture with Crested, and jointly-owned
subsidiaries of USE and Crested.
Until September 11, 2000, USE, USECC and Kennecott Uranium Company
("Kennecott") owned the Green Mountain Mining Venture ("GMMV"), which held a
large uranium deposit and uranium mill in Wyoming. On September 11, 2000, USE
and Crested settled litigation with Kennecott involving the GMMV by selling
their interest in the GMMV and its properties back to Kennecott for $3,250,000
and receiving a royalty interest in the uranium properties. Kennecott also
assumed all reclamation obligations on the GMMV properties. Other uranium
properties and a uranium mill in southeast Utah are held by Plateau Resources
Ltd., a wholly-owned subsidiary of USE. The Utah uranium properties are in a
care and maintenance status.
The gold assets held by Sutter Gold Mining Company ("SGMC"), a
majority-owned subsidiary of USE, are in care and maintenance status because the
current price of gold does not permit raising the capital necessary to put the
assets into production.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
During the three fiscal years ended May 31, 2001, we operated in three
business segments: (i) minerals, (ii) commercial operations, and (iii) contract
drilling/construction (principally in fiscal 2000 and the first quarter of
fiscal 2001). The principal products of the operating units within each of the
reportable industry segments for the three fiscal years ended May 31, 2001 were:
INDUSTRY SEGMENTS PRINCIPAL PRODUCTS
Minerals (including methane) Acquisition of coalbed methane
properties, and exploration and
development of such properties for
coalbed methane gas. Sales and leases of
mineral-bearing properties and, from
time to time, the production and/or
marketing of uranium, gold and receipt
of advance royalties on molybdenum.
Commercial Operations Operation of a motel and
rental of real estate, operation of an
aircraft fixed base operation (fuel
sales, flight instruction and aircraft
maintenance), and various contract
services, including managerial services
for subsidiary companies.
Contract Drilling/Construction Contract drilling of coalbed methane gas
wells, construction of drill sites, gas
pipe lines, reservoirs and reclamation
of locations.
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Percentage of Net Revenue contributions by the three segments (and by
interest on cash accounts) in the last three fiscal years were:
Percentage of Net Revenues During the Year Ended
---------------------------------------------------
May 31, May 31, May 31,
2001 2000 1999
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Minerals 3% 2% 2%
Commercial Operations 18% 36% 27%
Construction Operations 15% 46% 0%
Interest and Other 64% 16% 71%
In fiscal 2001, we received $442,800 in revenues from the minerals segment
as compared to $132,600 in fiscal 2000. During fiscal 2001 there were $108,500
from molybdenum advance royalties and $334,300 from uranium contract deliveries
and the sale of an uranium delivery contract. During fiscal 2000 we recorded
$132,600 from advance molybdenum royalties. During fiscal 1999, there were
revenues from mineral sales of $150,600 from molybdenum advance royalties and
$87,600 for uranium contract deliveries.
Commercial operations during fiscal 2001 generated revenues of $2,519,400,
compared to $2,786,800 during fiscal 2000, with the decrease due to a slower
tourist season at the commercial operations in southern Utah.
Contract drilling and construction operations for third parties in the
coalbed methane business resulted in revenues of $2,238,600 during fiscal 2001
compared to $3,584,900 during fiscal 2000. No revenues were recognized in this
segment in fiscal 1999, and in fiscal 2001, we temporarily suspended third-party
services in the coalbed methane business.
(C) NARRATIVE DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT (INCLUDING ITEM 2 -
PROPERTIES).
MINERALS
COALBED METHANE
GENERAL. Rocky Mountain Gas, Inc. ("RMG") was incorporated in Wyoming on
November 1, 1999 for business in the coalbed methane industry in Wyoming and
Montana. RMG is a subsidiary of the Company (owned 41.7% by the Company and
41.7% by Crested).
Methane is the primary commercial component of natural gas produced from
conventional gas wells. Methane also exists in its natural state in coal seams.
Natural gas produced from conventional wells generally contain other
hydrocarbons in varying amounts which require the natural gas to be processed.
Methane gas produced from coalbeds generally contains only methane and is
pipeline-quality gas after simple water dehydration.
Coalbed methane production is similar to conventional natural gas
production in terms of the physical producing facilities. However, the
subsurface mechanisms that allow gas movement to the wellbore are very
different. Conventional natural gas wells require a porous and permeable
reservoir, hydrocarbon migration and a natural structural or stratigraphic trap.
Coalbed methane gas is trapped (adsorbed) in the coal itself and in the water
contained in the pore space, until released by pressure changes when the water
in the coal is removed. In contrast to conventional gas wells, new coalbed
methane wells initially produce water for several months. As the formation water
pressure decreases, methane gas is released from the structure.
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Methane is a common component of coal since methane is created as part of
the coalification process. Coals vary in their methane content as measured by
standard cubic feet per ton. Whether a coalbed will produce commercial
quantities of methane gas depends on the coal quality, its content of natural
gas per ton of coal, the thickness of the coalbeds, the reservoir pressure, the
existence of natural fractures, the permeability of the coal, and saturated with
water to help hold methane in coalbed.
Due to the shallow coal seams in the Powder River Basin, of Montana and
Wyoming, the drilling, discovery, development and production of coalbed methane
has significant economic advantages compared with conventional natural gas
targets. Over the past several years, coalbed methane has become an important
source of pipeline quality gas in the United States. Methane gas production from
coalbed reservoirs has grown from virtually nothing a decade ago to
approximately seven percent of the total United States gas production today.
Development of coalbed methane in the Powder River Basin of northeastern Wyoming
and southeastern Montana continues at a high level in calendar 2001 and is
expected to continue for several years.
The principal coals in the Powder River Basin ("PRB") include the thick
coal seams of the Tongue River member of the Paleocene Fort Union Formation,
which are among the thickest in the world. Individual coalbeds range in
thickness from a few feet up to 250 feet. A typical well might penetrate
multiple coal zones in depths over a 200 to 1,200 foot range. Based on reports
filed by other companies with the State of Wyoming, reserves per coalbed methane
well in the PRB can vary considerably but a typical estimate can exceed 300
million cubic feet (MMcf) of gas per well. Given the expected low drilling and
completion costs, these levels of reserves make coalbed methane wells attractive
to gas companies.
OVERVIEW OF RMG. As of the filing date of this Annual Report, we hold
approximately 257,000 gross mineral acres under leases from the United States
Bureau of Land Management, the states of Wyoming and Montana, and private land
owners. Assuming the exercise of options held by Suncor Energy Natural Gas
America Inc. ("SENGAI"), a subsidiary of Suncor Energy Inc., (NYSE "SU" Calgary
Alberta, Canada), our working interest is 6.25% (5% net revenue interest) on
112,000 acres in the Castle Rock prospect in southeast Montana. The rest of the
Castle Rock prospect is owned 37.5% working interest, 30% net revenue interest,
by Quaneco, L.L.C.; and a 50% working interest, 40% net revenue interest by
SENGAI (assuming SENGAI exercises its option). We own a 25% working interest
(20% net revenue interest) on 74,500 acres in the Kirby prospect (southeast
Montana); and a 50% working interest (from 30% to 50% net revenue interest) on
70,500 acres in other prospects (all in Wyoming). Our interest in the Castle
Rock prospect will revert to 50% overall if SENGAI doesn't exercise its option;
in this event, we would continue to own a 50% working interest (40% net revenue
interest), and Quaneco L.L.C. would own a 50% working interest (40% net revenue
interest) in the Castle Rock prospect. CCBM, Inc. ("CCBM") a subsidiary of
Carrizo Oil & Gas, Inc. has the option to acquire half of our interest in the
Castle Rock prospect on similar terms as SENGAI if SENGAI does not exercise its
option. See below. Our original agreement with SENGAI would result in ownership
of a 12.5% working interest 10% net revenue interest, in Castle Rock, but one
subsequent agreement with CCBM resulted in them owning one half of our position.
In fiscal 2000 and 2001, we spent a total of $5,800,000 on land
acquisition costs for the coalbed methane properties we now hold, including
$5,500,000 paid to Quaneco L.L.C. to buy a 50% working interest (40% net revenue
interest) in the Castle Rock and Kirby prospects, and $51,200 in leases and
related costs for other prospects in Wyoming.
In fiscal 2001, we sold to SENGAI an option for 75% (or 37.5% of 50%) of
our working interest in our acreage in the Castle Rock prospect for $1,278,800
which was applied to our purchase commitment with Quaneco L.L.C.; if the options
are exercised in 2002 and 2003 by SENGAI, we will receive an additional
$2,942,800 in February 2002. In July 2001, we sold a 50% working interest in all
our coalbed methane leases except Castle Rock to CCBM for $7,500,000, plus other
considerations. If SENGAI does not exercise its
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option to purchase the Castle Rock prospect, CCBM has first right to purchase
50% of RMG's acreage for additional consideration.
We also have drilling programs in place with SENGAI and CCBM for up to
$7,250,000 funded by each for the respective properties in which they are
involved with us. One of the drilling programs with CCBM started work on the
Clearmont prospect in Wyoming in August 2001; the drilling program with SENGAI
on the Castle Rock prospect is anticipated to begin in September 2001. These
first two programs should be sufficient to drill approximately 60 coalbed
methane wells to completion or abandonment stage. A third drilling program
(which would be the second program on the Castle Rock prospect) will be
commenced if SENGAI exercises its option on the first acreage block on the
Castle Rock prospect with SENGAI paying for up to an additional $4,000,000 in
drilling and development costs. We have a carried working interest in all of the
wells drilled in these programs.
As of the filing date for this Annual Report, we had set casing on 10
locations (80 acre spacing units) on the Clearmont prospect and are drilling
twin holes on each prospect into two targeted coal formations. No reserves have
been established to date. Drilling permits for 10 additional wells have been
issued for the Clearmont prospect, and applications are pending for another 32
permits on the Clearmont prospect, which are expected to be issued by September
1, 2001.
We anticipate that from 30 to 60 wells will be drilled by the end of
calendar 2002 under the drilling programs with SENGAI and CCBM. Additionally,
the Company expects to commence a drilling program to drill 4 to 12 wells on the
Kirby prospect. Attaining these objectives will depend on when and where the
necessary drilling permits can be obtained.
After the drilling programs have been completed, we will need additional
capital to continue development efforts. The Company plans to obtain the capital
from institutions and/or joint ventures or other means, including the possible
sale of disposable company assets. We have estimated that our total capital and
operating reserve requirements will be up to $50,000,000 to execute our coalbed
methane strategy through calendar 2003 by developing our existing properties
beyond the initial drilling programs now in place, and acquiring and developing
more properties. See Item 7.
PRINCIPAL AGREEMENTS FOR DEVELOPMENT OF COALBED METHANE PROPERTIES.
Summaries of terms in the three principal agreements now in place follow. The
agreements are filed as exhibits to this Annual Report.
SUNCOR - OPTION AND FARMIN AGREEMENT. On February 8, 2001, RMG closed the
Option and Farmin Agreement with SENGAI.
By the Option and Farmin Agreement, 75% of RMG's 50% working interest (and
25% of Quaneco L.L.C.'s 50% interest) in 112,000 acres in southeast Montana has
been optioned for a cash sale to SENGAI, in two blocks, one of 105,265 acres
which expires February 8, 2002, subject to force majeure (option exercise amount
is $3,684,299 total, RMG's 75% share would be $2,763,224), and 6,301 acres for
the second block of acreage expiring on February 8, 2003 (option exercise amount
is $239,452 total, RMG's share would be $179,589).
In addition, SENGAI has committed to pay for all costs up to $2,000,000 in
a $2,250,000 drilling program on the first block of acreage, starting in the
fall of 2001. RMG will pay the remaining $250,000 for the drilling program (on
its behalf and for Quaneco L.L.C., which completes RMG's drilling commitment to
Quaneco; see below). SENGAI must complete the drilling program regardless of
whether it exercises the options. Upon exercise of the first option, the
agreement provides that SENGAI will have "farmed in" for
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a share of the working interests in the first block of acreage, so that the
working interests in the first block would be (i) 12.5% RMG (now 6.25% with CCBM
owning the other 6.25%; see "Carrizo - Purchase and Sale Agreement" ); (ii)
37.5% Quaneco L.L.C.; and (iii) 50% SENGAI. If the first option is not
exercised, all of the work paid under the drilling program will benefit RMG (and
now Carrizo) and Quaneco in their respective working interests. If the first
option is not exercised, SENGAI will have no rights in the Castle Rock prospect
or in any wells drilled on it.
If the first block option is exercised, then within 18 months of that date,
SENGAI will pay RMG and Quaneco L.L.C., in proportion to their 75% and 25%
shares of option payments, an additional $841,379 for the first block of
acreage. This payment will not be received by the parties in cash, but will be
made by Suncor America paying 75% (instead of 50%) of drilling and related well
costs on a second drilling program until the 25% differential so paid equals
$841,379. It is anticipated this second phase will cover up to $4,000,000 of
drilling and development costs. To the extent this second phase drilling program
does not result in SENGAI spending enough to carry RMG and Quaneco for the
$841,379 (i.e., pay for RMG's (and CCBM's) and Quaneco's working interest shares
of costs in wells), SENGAI will pay the difference to RMG and Quaneco parties in
cash.
The first block option must be exercised before SENGAI can exercise the
second block option.
SENGAI is the operator of record for all activities in the first drilling
program, and will continue as operator for the entire Castle Rock prospect (less
the second acreage block if the option thereon is not exercised). The first and
second drilling programs cover costs to drill, test, complete, production test
and shut-in (or plug if not economically viable) coalbed methane wells.
Gathering system construction, compression and other costs related to input of
gas buyer's transmission line are not included. SENGAI, as operator, is limited
to billing no more than 10% of the drilling programs for its overhead expenses.
CARRIZO - PURCHASE AND SALE AGREEMENT. On June 29, 2001, RMG signed and
closed on July 10, 2001 a Purchase and Sale Agreement with CCBM, Inc., a
Delaware corporation which is wholly-owned by Carrizo Oil & Gas, Inc., Houston,
Texas (NMS "CRZO"). Carrizo Oil & Gas, Inc. is engaged in the exploration,
development and production of oil and gas, primarily in the Texas and Louisiana
Gulf Coast regions. The agreement between CCBM and RMG is intended to finance
the further development of the acreage prospective for coalbed methane currently
owned by RMG in Montana and Wyoming, and to acquire and develop more acreage in
Wyoming.
RMG has assigned CCBM an undivided 50% interest in all of RMG's existing
coalbed methane properties for a purchase price of $7,500,000 by a promissory
note payable in principal amounts of $125,000 per month plus interest at an
annual rate of 8%, over 41 months (starting July 31, 2001) with a balloon
payment due on the forty-second month. The 50% undivided interest is pledged
back to RMG to secure the purchase price, and will be released 25% when 33.3% of
the principal amount of the purchase price is paid, another 25% when total
principal payments reach 66.6% of the principal amount of the purchase price,
and the balance of the total 50% undivided interest when all of the principal
amount of the purchase price, has been paid. The purchase price could be
reduced, based on allocations made by the parties as to each prospect now in
RMG's inventory, if defects exist in RMG's acreage and such defects are not
cured to CCBM's satisfaction. RMG believes the minor title defects already
identified by CCBM will be cured satisfactorily or otherwise accepted by CCBM so
that any incurable defects will not affect the purchase price in material
amounts.
To start development, and as part of the consideration for the acquisition,
CCBM has agreed to fund $5,000,000 for an initial drilling program. On these
wells, CCBM will pay for all drilling and completion expenses; RMG will be
"carried" for its 50% interest in these wells, and will not be required to pay
any of such costs. After the initial $5,000,000 has been spent, which should be
sufficient to drill between 30 to 40
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wells, RMG and CCBM each will pay for their 50% share of costs in subsequent
wells. Without CCBM's consent, none of the drilling funds can be used for
operations associated with water disposal wells, gas compression beyond 100
PSIG, or for facilities downstream of compression beyond 100 PSIG. CCBM will
earn a 50% working interest in each well location (80 acres) and production
therefrom. CCBM's ownership so earned will be earned regardless of the status of
payments on the promissory note.
Drilling under the CCBM agreement started in August 2001. Amounts remaining
out of the $5,000,000 will be carried over to drilling efforts in calendar 2002
and 2003, or applied to property acquisitions, as agreed upon by the parties. If
less than the entire $5,000,000 is spent within two years (subject to extensions
due to force majeure), CCBM shall pay RMG one-half the unspent portion of the
$5,000,000. However, this payment obligation back to RMG is subject to RMG
complying with all of the terms and provisions of the purchase and sale
agreement, the joint operating agreement, and the procedures therein set forth
regarding authorizations for expenditures to drill $5,000,000 worth of
"reasonable wells". This means wells which meet these economic criteria: (1)
individual well cost (including hook-up to sales) must meet a projected internal
rate of return in excess of 15% at prevailing market prices; (2) the wells must
be on acreage blocks that are touching and contain minimum sizes (Kirby
prospect, at least 2,560 acres; Clearmont, at least 640 acres; and Arvada, at
least 480 acres); and (3) no more than 10 wells per calendar year at Oyster
Ridge will qualify as reasonable. The intent of this provision is for CCBM to
spend $2,500,000 on behalf of RMG. If CCBM fails to do this despite a total of
$5,000,000 of reasonable well proposals by RMG, then CCBM shall be obligated to
pay any remaining unspent portion of the $2,500,000 directly to RMG.
In addition to its one-half share of revenues in proportion to its one-half
share of the working interest, CCBM will be entitled to a credit (applied as a
prepayment of the purchase price for the undivided 50% interest in RMG's
acreage), equal to 20% of RMG's net revenue interest from wells drilled with the
$5,000,000 drilling budget, until the amount of that credit in favor of CCBM
equals $1,250,000. This latter amount would be reduced proportionate to any
reductions in purchase price due to title defects (see above).
RMG is the designated operator under a Joint Operating Agreement (JOA)
between RMG and CCBM. The JOA will govern all operations on the properties
subject to the purchase and sale agreement between RMG and CCBM subject to
pre-existing JOA's with other entities, as well as all operations or properties
in the area of mutual interest ("AMI").
The AMI is established for a four year term starting June 30, 2001 and
ending June 30, 2005. It covers the entire state of Wyoming, and the Powder
River Basin of Montana, subject to the pre-existing AMI with Suncor. Operations
within the AMI will be governed by the JOA between RMG and CCBM.
All operations subject to the Carrizo Agreement will be overseen by a
management committee, with two members each from CCBM and RMG. All four members
must be present in person or by proxy to conduct a management committee meeting,
to be held at least quarterly. However, RMG shall have a tie- breaking vote
concerning all general operations until the $5,000,000 drilling commitment has
been expended and until the purchase price has been paid. Once the $5,000,000
drilling commitment has been expended and the full purchase price is paid, RMG
will allocate (with Quaneco's consent) to CCBM one of RMG's managing member
positions with Powder River Gas LLC, which is the operative entity for the
Montana acreage RMG holds with Quaneco L.L.C.
With respect to the Castle Rock prospect in Montana, which is subject to
the agreement with SENGAI, RMG will be entitled to all cash proceeds paid by
SENGAI to RMG if SENGAI exercises its option (deadline February 8, 2002). If
SENGAI doesn't exercise its option, CCBM will have the right to increase their
ownership up to 50% of RMG's interest in the subject 112,000 acres in Montana,
for the equivalent value per net mineral acre that would have been due to RMG
under the Suncor Agreement. If CCBM does not exercise this purchase right, all
the acreage will belong solely to RMG and that acreage will be removed from the
AMI
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with CCBM except the wells and acreage earned in the phase I drilling program.
In the meantime, with respect to SENGAI's initial drilling program on this
acreage, RMG will be entitled to have CCBM pay for $225,000 of RMG's drilling
obligations; for this funding (part of the $5,000,000 drilling program with
CCBM), CCBM will receive an undivided 6.25% working interest on each well so
drilled and the 80 acre spacing allocated to each such well, ie. one-half of our
12.5% working interest, during the 2001 SENGAI drilling program.
Under the agreement, CCBM will use its best efforts to seek out, obtain and
secure financing to raise no less than $20,000,000 to be used to acquire more
properties in the AMI. If CCBM's efforts are not successful by June 30, 2002,
the AMI shall be reduced to a 6 mile radius from all existing properties held
jointly by RMG and CCBM unless RMG agrees to an extension of this time frame to
no later than December 31, 2002.
QUANECO - AGREEMENT. On January 3, 2000, RMG purchased a 50% working
interest and 40% net revenue interest in the Castle Rock and Kirby prospects in
the PRB of southeast Montana consisting of approximately 185,000 net mineral
acres from Quaneco, L.L.C. (formerly Quantum Energy, L.L.C., Cleveland, Ohio
and Oklahoma City, Oklahoma). The acreage includes 88,410 net acres of BLM land,
14,916 net acres of state land (Montana), and 82,775 net acres of fee land. In
fiscal 2000 and 2001, RMG paid the cash purchase price of $5,500,000.
A separate provision in the Agreement required RMG to spend $2,500,000 to
drill and complete 25 wells, as identified and agreed to by the operating
company Powder River Gas, LLC (see below). Under the subsequent agreement with
SENGAI, SENGAI will pay $2,000,000 in their first drilling program on this
prospect, and RMG will pay $250,000. Of this amount, $225,000 will be paid to
RMG by CCBM and paid over to SENGAI, leaving RMG with a net obligation of
$25,000 which has already been met. RMG has previously performed work and paid
costs for a credit of approximately $250,000 on the Castle Rock and Kirby
prospects, such that when RMG pays the $250,000 for its share of SENGAI's first
drilling program, all of RMG's drilling obligations to Quaneco will have been
fulfilled, and RMG's, Quaneco's and SENGAI's working interests will be as agreed
with SENGAI (see above), and CCBM will own one-half RMG's 12.5% working
interests, or 6.25%.
The Kirby prospect, owned originally by RMG and Quaneco, and now CCBM as
well, is operated through Powder River Gas, LLC, a Wyoming limited liability
company. Initial CBM well sites have been selected by the management committee
in which Quaneco and RMG currently have equal representation; drilling,
completion and gathering system costs will be authorized by the committee and
funded according to the working interests of each owners. USECC has the right to
provide drilling services on the first 25 wells drilled by Powder River Gas, LLC
based on competitive drilling rates in the area surrounding the wells to be
drilled. Thereafter, USECC will have the right to submit bids on a competitive
basis to Powder River Gas LLC for drilling contracts on additional acreage. CCBM
has recently acquired 50% of RMG's interest in the Kirby prospects leaving
ownership interest at 25% RMG, 25% CCBM, and 50% Quaneco.
PROSPECTS AND ACREAGE. Our prospects and acreage are located in the Powder
River Basin in Montana and Wyoming, and in the Wind River, Green River, Washakie
and Big Horn basins of Wyoming:
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Castle Rock, Powder River County, MT 112,000 acres
Kirby, Big Horn and Rose Bud Counties, MT 74,500 acres
Oyster Ridge, Lincoln and Uinta County, WY 63,000 acres
Clearmont, Sheridan County, WY 4,000 acres
Sussex, Johnson County, WY 640 acres
Finley, Converse County, WY 160 acres
Baggs North, Carbon County, WY 120 acres
Gillette North, Campbell County, WY 80 acres
Arvada, Campbell County, WY 540 acres
CASTLE ROCK: The Castle Rock project consists of approximately 112,000
acres located in the north eastern portion of the Powder River Basin of Montana,
west of Broadus, Montana. Coals present are in the Tongue River member of the
Fort Union formation and appear comparable to coals currently being developed by
other operators south of the Castle Rock acreage near the Montana/Wyoming
border. The proposed Bison pipeline, tentatively scheduled for completion in
2003, will cross the property if constructed as currently planned. The Northern
Border pipeline is located 200 miles to the north. The federal leases are
generally 10 year term and fee and state leases are generally two to five year
term.
KIRBY: The Kirby project consists of approximately 74,500 acres located in
the northwestern portion of the Powder River Basin in Montana located in Big
Horn and Rosebud Counties, Montana, north of Sheridan, Wyoming. Coals are in the
lower portion of the tertiary Fort Union formation and are similar to productive
coals in the Wyoming portion of the Powder River Basin to the south. Redstone
(recently acquired by Montana Dakota Utilities) has established significant
coalbed methane production 12 miles south of Kirby at the CX field. At least two
other operators are currently planning to drill and develop nearby acreage.
CMS's Bighorn Gas Gathering recently extended a new 20" pipeline to within 10
miles of the Kirby project. Exploration drilling is currently scheduled to begin
at Kirby during the fall of 2001.
OYSTER RIDGE: The Oyster Ridge project consists of approximately 63,000
acres located in southwestern Wyoming in the Ham's Fork Coal Field adjacent to
the Green River Basin. RMG and CCBM has a 100% working interest in most of the
properties subject to a 25% participation option held by Anadarko Petroleum on
43,000 acres. The area is prospective for coalbed methane production from two
primary Cretaceous age coals, the Frontier and the Adaville. The Kern River
pipeline which services southern California, crosses the property. Exploratory
drilling and completion operations on previously drilled wells resumed at Oyster
Ridge in June of 2001.
CLEARMONT: The Clearmont project consists of approximately 6,000 gross
acres located in the western Powder River Basin of Wyoming. RMG (and now CCBM
jointly) owns working interests ranging from 25% to 100%. The area is
characterized by several shallow Fort Union coalbeds (most notable the Roland
and Anderson coals) as well as several deeper coals that hold significant
exploration potential. Substantial coalbed methane production and development is
ongoing in the immediate area including Federated's Box Elder Creek project 12
miles to the west and the Pennaco/CMS Wild Horse Creek project 15 miles to the
east. The Clearmont project is located at the convergence of the WBI Bitter
Creek and the Bighorn Sheridan Lateral pipelines. A 20 well exploration and
development drilling program began at Clearmont in August 2001 and could be in
production in 2002 depending on drilling results and gas prices.
SUSSEX: RMG and CCBM hold 640 acres in this project area located in Johnson
County, Wyoming. This State lease lies 3 miles south of Sussex, Wyoming. RMG has
a 100% working interest.
FINLEY: RMG and CCBM hold 160 acres in this project area located in
Converse County, Wyoming. This prospect is a State lease 12 miles east of
Edgerton, Wyoming. Review for a two well test is underway.
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BAGGS NORTH: This prospect contains 120 acres located in Carbon County,
Wyoming. This State lease is located 7 miles north of Baggs, Wyoming. RMG and
CCBM hold a 100% working interest in this prospect.
GILLETTE NORTH: RMG and CCBM holds a 100% working interest in 80 acres in
this project area located in Campbell County, Wyoming. This State lease lies at
the north end of the City of Gillette. Potential exists for one billion cubic
feet of gas on this 80 acres alone. Existing coalbed methane wells lay in the
section immediately north. Permitting of 2 wells has begun on RMG's property.
RMG intends to conduct test drilling and production techniques in this area that
lies in the heart of the current coalbed methane play in the Gillette area.
ARVADA: This prospect contains 540 acres located in Campbell County,
Wyoming. RMG and CCBM hold a 100% working interest, and a 60% net revenue
interest.
COALBED METHANE WELL PERMITTING
Drilling coalbed methane wells requires obtaining permits from various
governmental agencies. The ease of obtaining the necessary permits depends on
the type of mineral ownership and the state in which the property is located.
Intermittent delays in the permitting process can reasonably be expected
throughout the development of any play. For example, there is currently a
temporary moratorium for drilling coalbed methane wells on fee and state lands
in Montana. We may shift our exploration and development strategy as needed to
accommodate the permitting process. As with all governmental permit processes,
there is no assurance that permits will be issued in a timely fashion or in a
form consistent with our plan of operations.
On March 16, 2000, the Northern Plains Resource Council, Inc. ("NPRC")
filed suit against the Montana Board of Oil and Gas Conservation (Board)
requesting an order of the court compelling the defendant to prepare a
Supplemental Environmental Impact Statement ("SEIS") for coalbed methane
development, which could further delay development. RMG and others have filed a
motion to intervene to participate in this litigation and to ensure that some
drilling can be performed during any environmental analysis. The Board has
agreed to limit issuance of CBM well permits to 200 pending completion of the
SEIS which is currently scheduled to be completed in the Spring of 2002.
The Wyodak Environmental Impact Statement (EIS) for the Powder River Basin
in Wyoming issued in the fall of 1999, allowed the permitting of 5,000 CBM wells
to be drilled on Federal lands in Wyoming. More CBM well applications have been
submitted causing the BLM to begin a second EIS for the Powder River Basin Area
in Wyoming. The new EIS was to commence in early summer 2000. Development on
Federal lands in Wyoming has been stopped with the balance of the Wyodak EIS
permitted wells (4,000) occurring on fee and state lands. The BLM has started an
environmental assessment ("EA") reviewing drainage issues which could allow an
additional 1,500 new CBM well permits in the same region. This was scheduled for
scoping in early April 2000 with completion expected the following October.
Completion has been delayed and is not expected until late 2001 or early 2002.
Again, there is no assurance that the EA and EIS will negatively impact RMG's
business or operations.
In addition, the Wyoming and Montana Departments of Environmental Quality
have regulations applying to the surface disposal of water produced from CBM
drilling operations. CBM operators are currently seeking changes in permit
requirements and department policy that would allow operators more flexibility
to discharge water on the surface. If these changes are not made, it may be
necessary to install and operate treatment facilities or drill disposal wells to
reinject the produced water back into the underground rock formations adjacent
to the coal seams or lower sandstone horizons. If we cannot obtain the
appropriate permits or if applicable laws or regulations require water to be
disposed of in an alternative manner, the costs
11
to dispose produced water will likely increase. These costs could have a
material effect on operations in this area, including potentially rendering
future production and development in the affected areas uneconomic.
In Montana, we have pending applications to the BLM for approximately 60
permits to drill into shallow gas sand formations on Federal land held with
Quaneco and would be converted to production status upon receiving approval from
the Montana Board of Oil and Gas. These wells would evaluate potential CBM
production as well as conventional gas. Regarding other acreage held with
Quaneco in Montana, the State of Montana may lift its moratorium for CBM wells
on private and state ground in Montana, and start issuing new permits on these
lands in Spring 2002 (a voluntary moratorium is currently in place for wells on
private and state ground in Montana). We have not determined to what extent we
will participate in this procedure, and are evaluating how best to protect our
position to have reasonable exploration for CBM wells proceed on state and fee
ground. We have permits in place until Spring 2002 in order to conduct
exploration in expectation that commercial production will be approved on
completion of the EIS and EA.
In August 2001, Montana and Wyoming announced an agreement for water
quality officials in both states to coordinate monitoring of water flows in the
Powder River and Little Powder River drainages, to determine the impact of
coalbed methane well water production on river water. Although usually well
water is potable, it may contain high sodium absorption ratios which can impair
use of the water for irrigation purposes in clay-based soils. The respective
agencies will propose regulations to establish thresholds for potential
pollutants and require strict monitoring by local water quality officials. If
test results indicate some well water flows adversely impact river water
quality, operators could be required to put the water flow into holding ponds or
take other steps to eliminate or reduce water flows or pollutants in the water.
Implementation of the agreement is expected to benefit continued coalbed methane
development in these areas by opening up the water discharge permitting process
in the affected areas. Currently, we don't have acreage which would be impacted
by these regulations but future acreage could be acquired in the affected areas.
GATHERING AND TRANSMISSION OF CBM GAS
Companies involved in CBM production generally outsource their gas
gathering, compression and transmission. We intend to outsource compression and
gathering needs as well, possibly on a competitive basis with transmission
companies in the immediate area. Negotiations with various transmission
companies have been initiated in order to better manage future capital
investment, but no contracts have been signed to date.
Coalbed methane production growth in the Powder River Basin has
historically been impeded by a shortage of gathering system capacity and
transport capacity out of the Basin. However, two large diameter gathering
pipelines were completed in September 1999 and a third was ready for service in
early 2000. The two completed pipelines will provide an additional 900 million
cubic feet, (MMcf), of daily gas capacity as set forth below:
Fort Union Gas Gathering, LLC's 106-mile, 24" gathering pipeline, commenced
operations September 1, 1999, with an initial capacity of 450 MMcf per day; and
Thunder Creek Gas Services, LLC's 126-mile, 24" gathering pipeline,
commenced operations September 1, 1999, with an initial capacity of 450 MMcf per
day.
Additionally, CMS Energy's 110-mile, Big Horn Gas Gathering pipeline, that
connects to the northern terminus of the Fort Union pipeline, is continuing to
be expanded in length and has an initial capacity of 256 MMcf per day which can
readily be upgraded to 500 MMcf per day with the addition of booster
compression. Further, on June 19, 2000, Big Horn Gas Gathering announced the
extension of its pipeline to serve producers in the Sheridan area. This 50+ mile
extension will place a 20" high pressure pipeline within 5 miles of the
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Montana border and within close proximity to the development planned by RMG,
CCBM, and Quantum on their Kirby Prospect area.
Wyoming Interstate Gas Company's 143-mile, 24" Medicine Bow Lateral
pipeline commenced operations in November 1999 with an initial capacity of 260
MMcf per day. This pipeline will transport natural gas from the Thunder Creek
and Fort Union pipelines at the south end of the Powder River Basin to
interconnect with multiple interstate pipelines accessing markets to the east
and along the front range of Colorado. This system is already being expanded as
demand for transportation space grows. Further transmission lines are being
planned by other companies in the area.
MINERALS - URANIUM
GENERAL. We have interests in several uranium-bearing properties in Wyoming
and Utah and in a uranium processing mill in southeastern Garfield County, Utah
(the "Shootaring Mill"). All the uranium- bearing properties are in areas which
produced significant amounts of uranium in the 1970s and 1980s. At some future
date, we could develop and operate these properties (directly or through a
subsidiary company or a joint venture) to produce uranium concentrates ("U3O8")
for sale to public utilities that operate nuclear powered electricity generating
plants. However, until uranium oxide prices improve significantly, all of the
uranium properties are in a care and maintenance mode, meaning work is performed
to keep the assets in stand-by mode and ready for later activity and permitting
work is done as needed (monitoring and reporting) to keep existing permits in
effect.
SHEEP MOUNTAIN - WYOMING
Unpatented lode mining claims, underground and open pit uranium mines and
mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont
County, Wyoming and are adjacent to and west of the GMMV mining claims. From
December 21, 1988 to June 1, 1998, these assets were held by Sheep Mountain
Partners ("SMP"). On June 1, 1998, USE received back from SMP all of the Sheep
Mountain mineral properties and equipment, in partial settlement of disputes
with Nukem, Inc. ("Nukem") and its subsidiary Cycle Resource Investment Corp.
("CRIC"). The Judgment against Nukem impressing the CIS uranium supply contracts
in constructive trust with SMP remain in dispute. See "Legal Proceedings." The
Sheep Mountain Mines 1 and 2 were first operated by Western Nuclear, Inc., a
subsidiary of Phelps Dodge Corporation, in the late 1970s.
THE PROPERTY INTERESTS OF USE IN UTAH THROUGH PLATEAU RESOURCES LIMITED
("PLATEAU") ARE:
Plateau Resources Limited is a wholly-owned subsidiary of USE. See "Plateau
Shootaring Canyon Mill" below.
The Tony M Mine properties contains underground uranium deposits in San
Juan County, Utah, and are located partially on Utah State leases.
Plateau is the lessee of the Tony M Mine properties and has posted a bond
securing Plateau's obligations to reclaim these properties. The Tony M mine was
originally developed by Plateau at the time Plateau was owned by Consumers Power
Company ("CPC"), a Michigan public utility. Significant areas of uranium
mineralization have been accessed and delineated by the prior owner's
underground workings. When the Tony M Mine was in production (while Plateau was
owned by CPC), it produced ore containing from three to eight pounds of uranium
concentrates per ton. Some of this ore was processed at the Shootaring Mill. In
addition, low grade uranium ore was stockpiled at the Tony M Mine and at the
Shootaring Mill.
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Plateau also acquired the Velvet Mine and the nearby Woods Complex in the
Lisbon Valley area in southeastern Utah. The Velvet Mine was fully developed and
permitted by its prior owner and is located approximately 178 miles by road from
the Shootaring Mill. The Woods Complex was formerly an operating uranium mine
with a remaining undeveloped resource. Access to this resource would be by
extending a drift approximately 2,500 feet from the former Woods Mine. The Woods
Mine property is not permitted, but we do not expect difficulty in obtaining a
new permit, should we seek one, because the surface facilities would occupy the
site that has been disturbed from previous operations.
THE GREEN MOUNTAIN MINING VENTURE ("GMMV") PROJECT
GMMV. In fiscal 1991, we entered into an agreement to sell 50 percent of
our interests in the Green Mountain uranium claims, and certain other rights, to
Kennecott Uranium Company ("KUC" or "Kennecott"), a subsidiary of Kennecott
Energy and Coal Company of Gillette, WY. Kennecott Energy and Coal Company is a
subsidiary of Rio Tinto plc, formerly RTZ plc of London. In consideration of the
sale to Kennecott, we received $15,000,000 cash and a commitment by Kennecott to
fund the first $50,000,000 of GMMV expenditures pursuant to Management Committee
budgets. At the same time we and Kennecott formed the GMMV and entered into a
joint venture agreement (the "GMMV Agreement") to develop, mine and mill uranium
ore from the Green Mountain Claims, and market uranium oxide. For detailed
explanation of the GMMV agreement, please see U.S. Energy Corp.'s 1999 Form 10-K
at pages 8-11, and footnote F to the financial statements.
The GMMV holds 521 unpatented lode mining claims (the "Green Mountain
Claims") on Green Mountain in Fremont County, Wyoming, including 105 claims on
which the Round Park (Jackpot) uranium deposit is located, and the Sweetwater
Mill, (approximately 23 miles south of the proposed Jackpot Mine)., are held by
the Green Mountain Mining Venture ("GMMV"), which until September 11, 2000 was
owned 50% by Kennecott and 50% by USE and Crested.
In fiscal 2000, Kennecott filed a lawsuit to dissolve the GMMV and we
counterclaimed for damages. This lawsuit was settled on September 11, 2000.
Kennecott paid USECC $3,250,000 to acquire all of our (and Crested's and
USECC's) interest in the GMMV, its properties and the Sweetwater Uranium Mill
(with certain exceptions), and all parties' claims in the lawsuit have been
dismissed. Kennecott also assumed all reclamation and other liabilities
associated with the GMMV, its properties, the Sweetwater Mill and all
liabilities associated with the GMMV since its inception, including the
historical liabilities associated with the Sweetwater Mill prior to its
acquisition by the GMMV. We and Crested together have retained a 4% net profits
royalty in any future uranium oxide produced from the GMMV mining claims through
the Sweetwater Mill (currently in a standby mode and not operational).
The ion exchange facility on the Sheep Mountain properties will not be
transferred to Kennecott, nor will the cleanup liabilities associated therewith
be assumed by Kennecott. However, we and Kennecott have agreed to cooperate in
the disposal of the facility into the Sweetwater Mill's disposal and impoundment
areas. Also, certain items of mining equipment held by the GMMV were assigned to
USE and were removed from the GMMV properties in fiscal 2001.
At such time as Kennecott has completed necessary reclamation work on the
Green Mountain unpatented lode mining claims (including the Round Park uranium
deposit proposed to be mined through the Jackpot Mine) Kennecott will quit claim
all such mining claims to us and Crested, as well as certain equipment currently
being used at the mine (including a compressor and standby generator). Kennecott
plans to keep the Sweetwater Mill.
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PROPERTIES
The Green Mountain Claims include the Big Eagle Properties on Green
Mountain, which contain substantial uranium mineralization, and are adjacent to
other mining claims. The Big Eagle Properties contain two open-pit mines, as
well as related roads, utilities, buildings, structures, equipment and a
stockpile of 500,000 tons of uranium material with a grade of approximately .05%
U3O8. The assets include two buildings (38,000 square feet and 8,000 square
feet) formerly used by Pathfinder Mines Corporation ("PMC") in mining
operations.
The Round Park (Jackpot) mining claims contain deposits of uranium which
have been estimated to contain 52,000,000 pounds of U3O8; the grade averages 4.6
pounds of U3O8 per ton of mineralized material. The GMMV had planned to mine
this mineralized material from two decline tunnels (-17 percent slope) in the
Jackpot Mine driven underground from the south side of Green Mountain. The first
of several mineralized horizons in the Round Park deposits, is about 2,300 feet
vertically down from the surface of Green Mountain. This work was halted in July
1998.
SWEETWATER MILL. In fiscal 1993, the GMMV acquired the Sweetwater uranium
processing mill and associated properties located in Sweetwater County, Wyoming,
approximately 23 miles south of the proposed Jackpot Mine, from a subsidiary of
Union Oil Company of California ("UNOCAL"), primarily in consideration of
Kennecott and the GMMV assuming environmental liabilities, and decommissioning
and reclamation obligations. The Sweetwater Mill was designed as a 3,000 ton per
day ("tpd") facility.
As consideration for acquiring the Sweetwater Mill, GMMV agreed to
indemnify UNOCAL against certain reclamation and environmental liabilities,
which indemnification obligations are guaranteed by Kennecott Corporation
(parent of Kennecott Uranium Company). The GMMV is responsible for compliance
with mill decommissioning and land reclamation laws, for which the environmental
and reclamation bonding requirements are approximately $24,330,000, which
includes a $4,560,000 bond required by the Nuclear Regulatory Commission
("NRC"). None of the GMMV future reclamation and closure costs are reflected in
the consolidated financial statements.
The reclamation and environmental liabilities assumed by the GMMV (and now
Kennecott's sole responsibility) consist of two categories: (1) cleanup of the
inactive open pit mine site near the Mill (the source of ore feedstock for the
mill when operating under UNOCAL), including water (heavy metals and other
contaminants) and tailings (heavy metals dust and other contaminants requiring
abatement and erosion control) associated with the pit; and (2) decontamination
and cleanup and disposal of the Mill building, equipment and tailings cells
after Mill decommissioning. The Wyoming DEQ exercises delegated jurisdiction
from the United States Environmental Protection Agency ("EPA") to administer the
Clean Water Act and the Clean Air Act, and directly administers Wyoming statutes
on mined land reclamation. The Sweetwater Mill is also regulated by the NRC for
tailings cells and mill decontamination and cleanup. The EPA has continuing
jurisdiction under the Resource Conservation and Recovery Act, pertaining to any
hazardous materials which may be on site when cleanup work is started.
PLATEAU'S SHOOTARING CANYON MILL
ACQUISITION OF PLATEAU RESOURCES LIMITED ("PLATEAU"). In August 1993, USE
purchased from Consumers Power Company ("CPC"), all of the outstanding stock of
Plateau which owns the Shootaring Canyon uranium processing mill and support
facilities in southeastern Utah (the "Shootaring Mill") for a nominal cash
consideration. The Shootaring Mill holds a source materials license from the
NRC. In the purchase of the stock from CPC, we agreed to various obligations, as
disclosed in USE's 1998 Form 10-K at pages 15 and 16.
15
SHOOTARING MILL AND FACILITIES. The Shootaring Mill is located in
southeastern Utah and occupies 19 acres of a 265 acre plant site. The mill was
designed to process 750 tpd, but only operated on a trial basis for two months
in mid-summer of 1982. In 1984, Plateau placed the mill on standby because CPC
had canceled the construction of an additional nuclear energy plant.
Plateau also owns approximately 90,000 tons of uranium mineralized material
stockpiled at the mill site and approximately 172,000 tons of mineralized
material stockpiled at the Tony M Mine. Included with mill assets are tailings
cells, laboratory facilities, equipment shop and inventory. The NRC issued a
license to Plateau authorizing production of uranium concentrates, however,
since the mill was shut down, only maintenance and required safety and
environmental inspection activities were performed and the source materials
license with the NRC was for standby operations only. Plateau applied to the NRC
to convert the source materials license from standby to operational and upon
increasing the reclamation bond, the NRC issued the new license on May 2, 1997.
Plateau has a cash bond in favor of the NRC in the amount of $8,511,200 plus an
additional $1,136,800 in government securities for bonding future reclamation.
Plateau obtained approval of a water control permit for the tailings cell
from the Utah Water Control Division and is awaiting the NRC's review of the
operating license conditions so Plateau can continue with construction of
tailing facilities if it so desires.
TICABOO TOWNSITE
Plateau owns Canyon Homesteads, Inc., a Utah corporation, which developed
the Ticaboo, Utah townsite 3.5 miles south of the Shootaring Mill. The townsite
includes a motel, restaurant, lounge, convenience store and single family,
mobile home and recreational vehicle sites (all with utility access), located on
a State of Utah lease near Lake Powell, and is being operated as a commercial
enterprise. An amendment was entered into on April 1, 1997 on the Utah State
lease covering the Ticaboo Townsite whereby the State will convey portions of
the Townsite lease to Canyon on a sliding scale basis as they are sold. USE and
Crested are developing the Townsite in limited fashion and are selling home and
mobile home sites.
SHEEP MOUNTAIN PARTNERS ("SMP")
SMP PARTNERSHIP. In February 1988, USE acquired uranium mines, mining
equipment and mineralized properties (Sheep Mountain Mines) at Crooks Gap in
south-central Fremont County, Wyoming, from Western Nuclear, Inc. These Crooks
Gap mining properties are adjacent to the Green Mountain uranium properties.
USECC mined and milled uranium ore from one of the underground Sheep Mines
during fiscal 1988 and 1989. Production ceased in fiscal 1989, because uranium
could be purchased from the spot market at prices below the mining and milling
costs of USECC. In December 1988, USECC sold 50 percent of the interests in the
Crooks Gap properties to Nukem's subsidiary Cycle Resource Investment
Corporation ("CRIC") for cash. The parties thereafter contributed the properties
to and formed Sheep Mountain Partners ("SMP"), in which USECC received an
undivided 50 percent interest. SMP is a Colorado general partnership formed on
December 21, 1988, between USECC and Nukem, Inc. then of Stamford, CT ("Nukem")
through its wholly-owned subsidiary CRIC. Each group provided one-half of
$315,000 to purchase equipment from Western Nuclear, Inc.; USECC also
contributed its interests in three uranium supply contracts to SMP and agreed to
be responsible for property reclamation obligations. The SMP Partnership
agreement provided that each partner generally had a 50 percent interest in SMP
net profits, and an obligation to contribute 50 percent of funds needed for
partnership programs or discharge of liabilities. Capital needs were to have
been met by loans, credit lines and contributions. Nukem is a uranium brokerage
and trading concern.
SMP was directed by a management committee, with three members appointed by
USECC and three members appointed by Nukem/CRIC. The committee has not met since
1991 as a result of the SMP
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arbitration/litigation. During fiscal 1991, disputes arose between the SMP
partners which resulted in litigation. See Item 3, Legal Proceedings.
PROPERTIES. Until June 1, 1998, SMP owned 80 unpatented lode mining claims
on the Crooks Gap properties, including two open-pit and five underground
uranium mines and an inventory of uranium ore. In connection with a partial
settlement of litigation/arbitration between USECC and Nukem/CRIC, SMP conveyed
these mineral properties and equipment to USECC. Any future production from the
properties will continue to be subject to sliding-scale royalty payable to
Western Nuclear, Inc. (1% to 4% on recovered uranium concentrates). As of the
filing date of this Annual Report, USE, Crested and/or USECC own 98 unpatented
lode mining claims and a 644 acre Wyoming State Mineral Lease in the Crooks Gap
area.
An ion exchange plant is located on the properties which can be used to
remove natural soluble uranium from mine water. USE began reclamation of this
facility during the first quarter of fiscal 2002. The plant is being disposed of
at the Sweetwater Mill impoundment facility (see above).
PERMITS. Permits to operate existing mines (now in care and maintenance
status) on the Crooks Gap properties have been issued by the State of Wyoming.
Amendments are needed to open new mines within the permit area. As a condition
to issuance of the permits, a NPDES water discharge permit under the Clean Water
Act has been obtained. Monitoring and treatment of water removed from the mines
and discharged in nearby Crooks Creek is generally required. During the past two
years, USECC did not discharge wastewater into Crooks Creek, and the mine water
is presently being discharged into the USECC McIntosh Pit.
URANIUM MARKET INFORMATION.
URANIUM SPOT MARKET. Uranium restricted spot prices were $8.75/lb. U3O8 on
June 30, 2001, an increase of 8% from $8.10 at June 30, 2000. During the first
half of 2001, total spot market volume was approximately 7 million pounds U308
which was about the same volume as the first half of 2000.
URANIUM LONG-TERM MARKET. The long-term market has been active in 2001 with
the long-term contracts reported by market analysts to have exceeded 35 million
pounds of U3O8 during the first half of 2001. The uranium price indicator
published by Tradetech was at $10.00 per pound U3O8 at June 30, 2001, up from
the $9.75 at beginning of the second quarter of 2001.
GOLD
SUTTER GOLD MINE (CALIFORNIA)
SUTTER GOLD MINING COMPANY. In fiscal 1991, USE acquired an interest in the
underground Sutter Gold Mine and related properties (the "SGM") located in the
Mother Lode Mining District of Amador County, California. The entire Lincoln
Project is now owned by Sutter Gold Mining Company, a Wyoming corporation
("SGMC"), a majority-owned subsidiary of USE.
SGMC has a plan to put the SGM into production. However, implementation of
this plan will require substantial capital financing. Persistent low prices for
gold have made financing difficult, and in fiscal 1999 resulted in a substantial
write down of the SGMC assets. See "Managements Discussion and Analysis of
Financial Condition and Results of Operations" for fiscal 1999.
Due to the depressed gold price and lack of available funding, SGMC has
deferred the start of construction of a 1,000 ton-per-day gold mill complex and
development of the underground mine. The tourist visitor's center has been
leased to a third party for $1,500 per month plus a 4% gross royalty on
revenues.
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There is one caretaker employee at the Sutter operation. Except for limited
infrastructure improvements in 2000, the assets are in a care and maintenance
mode and the exploration permits are being kept current as necessary with the
current thinking of moving the project from a "large" mine to that of a smaller
ton per day operation.
PROPERTIES. SGMC holds approximately 216 acres of surface and mineral
rights (owned), 54 acres of surface rights (owned), 55 acres of surface rights
(leased), 154 acres of mineral rights (leased), and 366 acres of mineral rights
(owned), all on patented mining claims near Sutter Creek, Amador County,
California. The properties are located in the western Sierra Nevada Mountains at
from 1,000 to 1,500 feet in elevation; year round climate is temperate. Access
is by California State Highway 16 from Sacramento to California State Highway
49, then by paved county road approximately .4 mile outside of Sutter Creek.
Surface and mineral rights holding costs will be approximately $90,000 from
June 1, 2001 through May 31, 2002. Property taxes for fiscal 2001 are estimated
to be $30,000.
The leases are for varying terms, and require rental fees, advance
production royalties, real property taxes and insurance.
PERMITS AND FUTURE PLANS. In August 1993, the Amador County Board of
Supervisors issued a Conditional Use Permit ("CUP") allowing mining of the SGM
and milling of production, subject to conditions relating to land use,
environmental and public safety issues, road construction and improvement, and
site reclamation. The permit will allow construction of the mine and mill
facilities in stages as the project gets underway, thereby reducing initial
capital outlays. Additional permits (for road work, dust control and
construction of mill and other surface improvements) need to be applied for in
due course. In August and September 1998, the Amador County Board of Supervisors
certified the Final Subsequent Environmental Impact Report ("FSEIR") and
approved all of the amendments requested by SGMC. Amendments to the CUP will
remove two tailings dams, eliminate the need to use cyanide on-site, and
eliminate mine related traffic on two county roads. The certification and
decision has been challenged in a lawsuit filed by a local citizens' group,
currently under appeal, see "Legal Proceedings."
VISITOR'S CENTER. In fiscal 2000, SGMC spent approximately $298,000 for
surface infrastructure related to improving access to the mine site, and to a
lesser extent tourist related improvements. The visitors center is being
operated by a third party.
MOLYBDENUM
As a holder of royalty, reversionary and certain other interests in
properties located at Mt. Emmons near Crested Butte, Colorado, USE and Crested
are entitled to receive annual advance royalties of 50,000 pounds of molybdenum,
or cash equivalent. AMAX Inc. (which was acquired by Cyprus Minerals Company and
was renamed Cyprus Amax Minerals Company in November 1993 and was acquired later
by Phelps Dodge) delineated a deposit of molybdenum containing approximately
146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the
properties of USE and Crested.
Advance royalties are paid in equal quarterly installments until: (i)
commencement of production; (ii) failure to obtain certain licenses, permits,
etc., that are required for production; or (iii) AMAX's return of the properties
to USE and Crested. The advance royalty payments reduce the operating royalties
(6% of gross production proceeds) which would otherwise be due out of
production. There is no obligation to repay the advance royalties if the
property is not placed in production. Phelps Dodge ceased making the quarterly
installments in July 2001.
18
The Agreement with AMAX also provides that USE and Crested receive
$2,000,000 when the Mt. Emmons properties are put into production and, in the
event AMAX sells its interest in the properties, USE and Crested are to receive
15% of the first $25,000,000 received by AMAX. USE and Crested have asserted
that the acquisition of Cyprus Amax by Phelps Dodge would entitle USE and
Crested to such payment, and that position has been presented to Phelps Dodge,
the successor company to Cyprus Amax. This position has been rejected by Phelps
Dodge and USE and Crested are considering remedies. USE recognized $108,500,
$132,600 and $150,600 of revenues in fiscal 2001, 2000 and 1999 related to this
royalty interest.
OIL AND GAS
FORT PECK LUSTRE FIELD (MONTANA). We operate a small oil production
facility (three wells) at the Lustre Oil Field on the Ft. Peck Indian
Reservation in northeastern Montana. We receive a fee based on oil produced.
This fee and other assets of the Company collateralize a $750,000 line of credit
from a bank.
COMMERCIAL OPERATIONS
REAL ESTATE AND OTHER COMMERCIAL OPERATIONS. We own varying interests,
alone and with Crested, in affiliated companies engaged in real estate, and
other commercial businesses. The affiliated organizations include Western
Executive Air, Inc. ("WEA") and Canyon Homesteads, Inc. (through Plateau).
Activities of these and other subsidiaries in the business sectors include
ownership and management of a commercial office building, the townsite of
Jeffrey City, Wyoming and the townsite, motel, convenience store and other
commercial facilities in Ticaboo, Utah.
WYOMING. The Company and Crested own a 14-acre tract in Riverton, Wyoming,
with a two-story 30,400 square foot office building (including underground
parking). The first floor is rented to affiliates, nonaffiliates and government
agencies; the second floor is occupied by the Company and Crested. The property
is mortgaged to the WDEQ as security for future reclamation work on the Sheep
Mountain Crooks Gap uranium properties.
The Company and Crested (through WEA) also own a fixed base aircraft
operation, with fuel sales, and aircraft maintenance, at the Riverton Regional
Airport, including a 10,000 square foot aircraft hangar and 7,000 square feet of
associated offices and facilities. This operation is located on land leased from
the City of Riverton for a term ending December 16, 2005, with an option to
renew on mutually agreeable terms for five years.
The Company and Crested also own 17 semi-developed lots on 26.8 acres and
63 acres of undeveloped land near the Riverton Regional Airport, and three
mountain sites covering 16 acres in Fremont County, Wyoming.
USECC owned various buildings, 290 city lots and/or tracts and other
properties at the Jeffrey City townsite in south-central Wyoming, where about
130 people presently live. USECC sold these properties during May 2001.
In Riverton, Wyoming, the Company owns four city lots and a 9-acre tract
with improvements including two smaller office buildings and two other buildings
with 12,000 square feet of office facilities, and repair and maintenance shops
containing 8,000 square feet.
COLORADO. In connection with the AMAX transaction on the Mt. Emmons
molybdenum properties near Crested Butte, Colorado, USECC acquired an option
from AMAX (later Cyprus Amax) to purchase approximately 57 acres for $200,000 in
Mountain Meadows Business Park, Gunnison, Colorado. See
19
"Minerals - Molybdenum" above. The property was zoned commercial and industrial,
and is adjacent to Western State College. In fiscal 1995, USECC and Cyprus Amax
agreed to exercise the option by USE and Crested agreeing to forego six quarters
of advance royalties from Cyprus Amax (the option purchase price was $200,000),
plus payment of certain expenses i.e. real property taxes from 1987 and other
expenses amounting to $19,358. Thereafter, USE (together with Crested) signed
option agreements with Pangolin Corporation, a Park City, Utah developer, for
sale of the 57 acres, and a separate parcel owned in Gunnison County, Colorado.
Although initial payments on the option agreements were received, the
developer is in default on the balance. In July 1998, the Company filed a
lawsuit seeking recovery of the balance owing on promissory notes and contracts.
See "Item 3 - Legal Proceedings."
UTAH PROPERTIES. Canyon Homesteads, Inc. (a Plateau subsidiary) owns a
majority interest in a joint venture which holds the Ticaboo Townsite in
Ticaboo, Utah (see "Minerals - Uranium-Shootaring Canyon Mill - Ticaboo
Townsite" above). In fiscal 1995, USE acquired the minority interest in the
joint venture from a nonaffiliate.
Commercial operations are not dependent upon a single customer, or a few
customers, the loss of which would have a materially adverse effect on the
Company.
RESEARCH AND DEVELOPMENT
No research and development expenditures have been incurred, either on the
company's account or sponsored by customers, during the past three fiscal years.
ENVIRONMENTAL
GENERAL. Operations are subject to various federal, state and local laws
and regulations regarding the discharge of materials into the environment or
otherwise relating to the protection of the environment, including the Clean Air
Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"),
and the Comprehensive Environmental Response Compensation Liability Act
("CERCLA"). With respect to mining operations conducted in Wyoming, Wyoming's
mine permitting statutes, Abandoned Mine Reclamation Act and industrial
development and siting laws and regulations also impact us. Similar laws and
regulations in California affect SGMC operations and Utah laws and regulations
effect Plateau's operations.
Management believes the Company complies in all material respects with
existing environmental regulations.
CROOKS GAP. An inoperative ion exchange facility at Crooks Gap currently
holds a NRC license for possession of uranium operations byproducts. USE applied
to the NRC for permission to decommission and decontaminate the plant, and to
dispose low level waste into the Sweetwater Mill tailings cell, which is
currently underway and is anticipated to be completed in September 2001.
OTHER ENVIRONMENTAL COSTS. Actual costs for compliance with environmental
laws may vary considerably from estimates, depending upon such factors as
changes in environmental laws and regulation (e.g., the new Clean Air Act), and
conditions encountered in minerals exploration and mining. USE does not
anticipate that expenditures to comply with laws regulating the discharge of
materials into the environment, or which are otherwise designed to protect the
environment, will have any substantial adverse impact on the competitive
position of the Company.
20
EMPLOYEES
As of August 17, 2001, USE had approximately 55 full-time employees.
Crested uses approximately 50 percent of the time of USE employees, and
reimburses USE on a cost reimbursement basis.
MINING CLAIM HOLDINGS
TITLE. Nearly all the uranium mining properties held by the GMMV, USE,
USECC and Plateau are on federal unpatented claims. Unpatented claims are
located upon federal public land pursuant to procedure established by the
General Mining Law. Requirements for the location of a valid mining claim on
public land depend on the type of claim being staked, but generally include
discovery of valuable minerals, erecting a discovery monument and posting
thereon a location notice, marking the boundaries of the claim with monuments,
and filing a certificate of location with the county in which the claim is
located and with the BLM. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
the contained minerals. To preserve an otherwise valid claim, a claimant must
also pay certain rental fees annually to the federal government (currently $100
per claim) and make certain additional filings with the county and the BLM.
Failure to pay such fees or make the required filings may render the mining
claim void or voidable. Because mining claims are self-initiated and
self-maintained, they possess some unique vulnerabilities not associated with
other types of property interests. It is impossible to ascertain the validity of
unpatented mining claims solely from public real estate records and it can be
difficult or impossible to confirm that all of the requisite steps have been
followed for location and maintenance of a claim. If the validity of an
unpatented mining claim is challenged by the government, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Thus, it is conceivable that during times of falling metal prices,
claims which were valid when located could become invalid if challenged.
RMG's properties and mineral leases of BLM, state and fee lands require
annual cash payments of approximately $233,000 during fiscal 2002. RMG is
obligated for $48,900 of this amount to keep the leases in effect.
PROPOSED FEDERAL LEGISLATION. The U.S. Congress has, in legislative
sessions in recent years, actively considered several proposals for major
revision of the General Mining Law, which governs mining claims and related
activities on federal public lands. If any of the recent proposals become law,
it could result in the imposition of a royalty upon production of minerals from
federal lands and new requirements for mined land reclamation and other
environmental control measures. It remains unclear whether the current Congress
will pass such legislation and, if passed, the extent such new legislation will
affect existing mining claims and operations. The effect of any revision of the
General Mining Law on operations cannot be determined conclusively until such
revision is enacted; however, such legislation could materially increase the
carrying costs of mineral properties which are located on federal unpatented
mining claims, and could increase both the capital and operating costs for such
projects and impair the ability to hold or develop such properties.
ITEM 3. LEGAL PROCEEDINGS
Material pending proceedings are summarized below. Other proceedings which
were pending in fiscal 2001 have been settled or otherwise finally resolved.
SHEEP MOUNTAIN PARTNERS ARBITRATION/LITIGATION
In 1991, disputes arose between USE/Crested, and Nukem, Inc. and its
subsidiary Cycle Resource Investment Corp. ("CRIC"), concerning the formation
and operation of the Sheep Mountain Partners
21
partnership for uranium mining and marketing, and activities of the parties
outside SMP. Arbitration proceedings were initiated by CRIC in June 1991 and in
July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S.
District Court (District of Colorado) in Civil No. 91B1153. Later, USECC filed
another suit for the standby costs at the SMP mines against SMP in the Colorado
State Court. The Federal Court stayed both the arbitration proceedings and the
State Court case. In February 1994, all of the parties agreed to exclusive and
binding arbitration of the disputes before the American Arbitration Association
("AAA"), for which the legal claims made by both sides included fraud and
misrepresentation, breach of contract, breach of duties owed to the SMP
partnership, and other claims.
The AAA panel (the "Panel") entered an Order and Award (the "Order") in
April 1996 and clarified the Order on July 3, 1996, finding generally in favor
of USE and Crested on certain of their claims (including the claims for
reimbursement for standby maintenance expenses and profits denied SMP in Nukem's
trading of uranium), and in favor of Nukem/CRIC and against USE and Crested on
certain other claims, and imposing a constructive trust in favor of Sheep
Mountain Partners on uranium contracts Nukem entered into to purchase uranium
from CIS republics. USECC filed a petition for confirmation of the Order and on
June 30, 1997, and the U.S. District Court confirmed the Order in its Second
Amended Judgment (the "Judgment"). Thereafter, Nukem/CRIC appealed the Judgment
to the 10th Circuit Court of Appeals ("CCA").
A three judge panel of the 10th CCA issued an Order and Judgment on October
22, 1998, which unanimously affirmed the Federal District Court's Second Amended
Judgment without modification. The ruling affirmed (i) the imposition of a
constructive trust in favor of SMP on Nukem's rights to purchase CIS uranium,
the uranium acquired pursuant to those rights, and the profits therefrom; and
(ii) the damage award against Nukem/CRIC. As a result of the ruling of the 10th
CCA, USE and Crested received an additional $6,077,264 (including interest and
court costs) from Nukem in February 1999 for a total net monetary award of
$15,468,625 in the arbitration/litigation, and equitable relief in the form of
USE's and Crested's interest in SMP, which holds the constructive trust over the
CIS contracts. Nukem/CRIC filed two motions for entry of final satisfaction of
Judgment. The U.S. District Court denied both motions, Nukem again appealed to
the 10th CCA, which again affirmed the District Court's ruling, and held that
Nukem/CRIC had not demonstrated that the Judgment had been satisfied because
they had not provided USECC with an accounting of the partnerships assets.
In February 2001, the U.S. District Court appointed a Special Master to
determine the amounts, if any, owed by Nukem to SMP pursuant to the constructive
trust. The Special Master entered an Order on July 2, 2001 regarding the
formulation of an accounting plan. The District Court has set a hearing for
October 5, 2001 on the status of the accounting.
CONTOUR DEVELOPMENT LITIGATION
On July 28, 1998, USE filed a lawsuit in the United States District Court,
Denver, Colorado, Case No. 98WM1630, against Contour Development Company, L.L.C.
and entities and persons associated with Contour Development Company, L.L.C.
(together, "Contour") seeking compensatory and consequential damages of more
than $1.3 million from the defendants for dealings in real estate owned by USE
and Crested in Gunnison, Colorado. The Contour defendants asserted a
counterclaim asking for payment of attorneys fee and costs. Discovery has been
completed and the final pretrial conference is scheduled for October 2, 2001,
when the court will schedule the trial date. Trial is expected in early 2002.
See "Business - Commercial Operations - Real Estate and Other Commercial
Operations - Colorado Properties" above.
22
SGMC LITIGATION
In 1993, Amador County issued a conditional use permit ("CUP") to allow
SGMC to develop the SGM near the town of Sutter Creek, Amador County,
California. A number of conditions were attached to the original CUP which
accommodated local citizen and government agency concerns about noise, waste
disposal, traffic and other aspects of the proposed mining operation.
In 1997 and 1998, SGMC proposed amendments to the CUP for a new design of
the SGM which would lower its environmental impact by reducing traffic,
potentially eliminating the use of cyanide on-site, and removing two large
tailings dams which would have been built to hold mine and mill waste. The new
design also would significantly reduce capital and operating costs for the
mine/mill complex, but cover more land for waste disposal and other purposes.
The certification and approval by the Amador County Planning Commission of the
Final Subsequent Environmental Impact Report ("FSEIR") and CUP amendments on
July 14, 1998 was appealed (by a local citizens project opposition group) to the
Amador County Board of Supervisors. In August and September 1998, the Board of
Supervisors certified the FSEIR and approved the amendments to the CUP.
On September 28, 1998 a lawsuit was filed in Amador County Superior Court,
California (Case No. 98 CV 3298) by Concerned Citizens of Amador County as
plaintiffs, against the County of Amador and the Amador County Board of
Supervisors, and against SGMC as a real party in interest. The lawsuit
challenges the actions of Amador County and its Board of Supervisors in
certifying the FSEIR and approving the amended CUP. A hearing was held on June
7, 1999 and the Court denied all claims by the Plaintiffs Concerned Citizens who
appealed the decision. Oral arguments were made to the appellate court on August
20, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A meeting of shareholders was held at the company's offices at 877 North
8th West, Riverton, WY on December 8, 2000. The matters considered by the
shareholders was re-election of two directors, Keith G. Larsen and John L.
Larsen. Both were so elected to serve for a term expiring on the third
succeeding annual meeting.
INFORMATION CONCERNING EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS.
ROBERT SCOTT LORIMER, age 50, has been the Chief Accounting Officer for
both USE and Crested for more than the past five years. Mr. Lorimer also has
been Chief Financial Officer for both these companies since May 25, 1991, their
Treasurer since December 14, 1990, and Vice President Finance since April 1998.
He serves at the will of each board of directors. There are no understandings
between Mr. Lorimer and any other person, pursuant to which he was named as an
officer, and he has no family relationship with any of the other executive
officers or directors of USE or Crested. During the past five years, Mr. Lorimer
has not been involved in any Reg. S-K Item 401(f) listed proceeding.
DANIEL P. SVILAR, age 72, has been General Counsel for USE and Crested for
more than the past five years. He also has served as Secretary and a director of
Crested, and Assistant Secretary of USE. His positions of General Counsel to,
and as officers of the companies, are at the will of each board of directors.
There are no understandings between Mr. Svilar and any other person pursuant to
which he was named as officer or General Counsel. He has no family relationships
with any of the other executive officers or directors of USE or Crested, except
his nephew Nick Bebout is a USE director. During the past five years, Mr. Svilar
has not been involved in any Reg. S-K Item 401(f) proceeding.
23
MAX T. EVANS, age 76, has been Secretary for USE and President of Crested
for more than the past five years. Mr. Evans had been a director of USE for more
than the past five years, prior to April 17, 1997. He serves at the will of each
board of directors. There are no understandings between Mr. Evans and any other
person pursuant to which he was named as an officer. He has no family
relationships with any of the other executive officers or directors of USE or
Crested. During the past five years, Mr. Evans has not been involved in any Reg.
S-K Item 401(f) proceeding.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Shares of USE common stock are traded on the over-the-counter market, and
prices are reported on a "last sale" basis by the National Market System ("NMS")
of the National Association of Securities Dealers Automated Quotation System
("Nasdaq"). The range by quarter of high and low sales prices is set forth below
for fiscal 2001 and 2000.
High Low
---- ---
Fiscal year to ended May 31, 2001
----------------------------------
First quarter ended 8/31/00 $ 3.00 $ 1.75
Second quarter ended 11/30/00 3.375 1.75
Third quarter ended 2/28/01 4.00 2.00
Fourth quarter ended 5/31/01 6.25 3.563
Fiscal year ended May 31, 2000
----------------------------------
First quarter ended 8/31/99 $ 5.09 $ 3.25
Second quarter ended 11/30/99 4.50 3.19
Third quarter ended 2/29/00 3.88 3.13
Fourth quarter ended 5/31/00 3.63 2.06
(b) Holders
(1) At August 17, 2001 , the closing bid price was $4.23 per share and there
were approximately 733 shareholders of record. As of August 17, 2001, we have
7,202,697 shares of common stock issued and outstanding, which do not include
shares owned by our subsidiaries or shares in officers' and directors' names
that are subject to forfeiture.
(2) Not applicable.
(c) We have not paid any cash dividends with respect to common stock. There are
no contractual restrictions on our present or future ability to pay cash
dividends, however, we intend to retain any earnings in the near future for
operations.
24
ITEM 6. SELECTED FINANCIAL DATA.
The following tables show certain selected historical financial data for
USE for the five years ended May 31, 2001. The selected financial data is
derived from and should be read with the financial statements for USE included
in this Report.
May 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Current assets $ 3,330,000 $ 3,456,800 $ 12,718,900 $ 14,301,000 $ 4,400,900
Current liabilities 2,396,700 6,617,900 5,355,600 6,062,100 1,393,900
Working capital (deficit) 933,300 (3,161,100) 7,363,300 8,238,900 3,007,000
Total assets 30,465,200 30,876,100 33,391,000 45,019,100 30,387,100
Long-term obligations(1) 14,981,500 14,025,200 14,526,900 14,468,600 14,377,200
Shareholders' equity 7,320,600 4,683,800 10,180,300 17,453,500 12,723,600
(1)Includes $8,906,800, $8,906,800, $8,860,900, $8,778,800, and $8,751,800 of accrued reclamation
costs on mining properties at May 31, 2001, 2000, 1999, 1998 and 1997, respectively. See Note K of
Notes to Consolidated Financial Statements.
For Years Ended May 31,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 14,497,700 $ 7,773,800 $ 10,853,600 $ 11,558,500 $ 5,790,200
Income (loss) before minority
interests, equity in
income (loss) of affiliates,
and income taxes 1,701,100 (11,148,200) (16,057,800) 365,000 (3,706,000)
Minority interest in loss
(income) of consolidated
subsidiaries 220,100 509,300 4,468,400 (772,500) 672,300
Equity in loss of affiliates -- (2,900) (59,100) (575,700) (690,800)
Income taxes -- -- -- -- --
Preferred stock dividends (150,000) (20,800) -- -- --
------------ ------------- ------------- ------------ ------------
Net income (loss)
to common shareholders $ 1,771,200 $ (10,662,600) $ (11,648,500) $ (983,200) $ (3,724,500)
============ ============= ============= ============ ============
25
May 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Per shares financial data
Revenues $ 1.77 $ 1.01 $ 1.52 $ 1.74 $ .85
Income (loss) before minority
interests, equity in income
(loss) of affiliates and
income taxes $ .21 $ (1.45) $ (2.25) $ .05 $ (.55)
Minority interest in loss (income)
of consolidated subsidiaries .03 .06 .63 (.12) .10
Equity in loss of affiliates -- -- (.01) (.08) (.10)
Income taxes -- -- -- -- --
Net income (loss)
per share, basic $ .23 $ (1.39) $ (1.63) $ (.15) $ (.55)
======== ======== ======== ======== ========
Net income (loss)
per share diluted $ .21 $ (1.33) $ (1.63) $ (.15) $ (.55)
======== ======== ======== ======== ========
Cash dividends per share $ -0- $ -0- $ -0- $ -0- $ -0-
======== ======== ======== ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's Discussion and Analysis of significant
factors which have affected our liquidity, capital resources and results of
operations during the periods included in the accompanying financial statements.
The discussion contains forward-looking statements that involve risks and
uncertainties. Due to uncertainties in our business, actual results may differ
materially from the discussion below.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended May 31, 2001, we experienced an increase in working
capital of $4,094,400 consisting mainly of the non-cash recognition of the
deferred GMMV purchase option of $4,000,000. At May 31, 2000, we had a working
capital deficit of $3,161,100 as compared to working capital of $933,300 at May
31, 2001.
Components of the increase in working capital were increases in accounts
receivable trade $264,300; current portion of long term notes receivable of
$225,000; assets held for resale and other of $137,000; along with decreases in
accounts payable of $279,500; deferred GMMV purchase option of $4,000,000; and
current portion of long-term debt of $141,700. These increases in working
capital were offset by reductions in; cash of $230,900; accounts receivable
affiliates of $434,700, and inventory of $87,500, along with an increase in the
outstanding balance under the line of credit of $200,000.
On September 11, 2000, we entered into a settlement agreement with
Kennecott relating to a legal dispute between the joint venture partners in the
GMMV operations. As a result of this settlement, we received certain GMMV
equipment; cash payments of $3,250,000, and the ability to recognize the
$4,000,000 deferred GMMV purchase option as revenue. This transaction resulted
in the reclassification of the deferred purchase option and the decrease in
accounts payable trade. The transaction also resulted in the reduction of
26
accounts receivable affiliates as the Company had an outstanding receivable from
GMMV at May 31, 2000. Accounts receivable trade at May 31, 2000, consisted
primarily of amounts due for contract drilling and construction work. These
receivables were collected during the year ended May 31, 2001. This reduction in
accounts receivable trade was offset by amounts due from the auction of certain
mining and drilling equipment during the last month of the fiscal year ended May
31, 2001. Accounts receivable affiliates were reduced due to the collection of
accounts receivable from GMMV and accounts and notes receivable from employees.
The reduction of debt from employees consisted of the payment of cash,
settlement agreements, and the receipt of 5,000 shares of the Company's common
stock which was pledged for the indebtedness. These shares were recorded as
treasury shares at the value of the principal portion of the debt reduction.
During the year ended May 31, 2001, we sold our controlling interest in
Ruby Mining Company ("Ruby") to Admiralty Corporation ("Admiralty") of Atlanta
Georgia. Admiralty has developed technology that differentiates ferrous from
non-ferrous metals in sea water. This technology is used to explore for and
recover sunken treasures. Admiralty paid us $100,000 and signed a promissory
note for $225,000 for the purchase of Ruby. At the time of this report, the
promissory note was in default but we believe that Admiralty will pay the amount
due or we will reach other terms to satisfy the debt. We maintained a 4%
ownership position in Ruby by retaining 900,000 shares of its common stock. We
may hold or sell all or a portion of this stock.
Other assets increased by $137,000 as a result of increased deferred
compensation as a result of funding of the 1996 Stock Award Program. Inventories
decreased by $87,500 as of May 31, 2001 as a result of our leasing all of the
commercial operations in southern Utah to third parties with the exception of
the motel which has no retail inventory. Current portion of long term debt was
reduced by $141,700 from the proceeds of the sale of certain equipment. The line
of credit was drawn down by an additional $200,000 during fiscal 2001 to finance
operations. After May 31, 2001, the amount borrowed under the line of credit was
reduced to $350,000. As of the date of this report, the total amount available
under the line of credit has been reduced to $750,000, including the $350,000
that has been drawn down. The reduction in the limit on the line of credit is as
a result of the sale of a portion of the equipment which had been pledged on the
line of credit during the first quarter of 2002.
During the year ended May 31, 2001, investing and financing operations
generated cash of $174,100 and $1,578,200, respectively while operation
activities consumed cash of $1,983,200, for a net decrease in cash of $230,900.
Although operations resulted in a profit of $1,771,200, a large portion of this
gain was the non-cash transaction of recognizing $4,000,000 of deferred income
from GMMV as income although we had received the cash in a previous period.
Investing activities provided cash as a result of the sale of various
pieces of equipment and percentages of coalbed methane properties. This increase
in cash of $3,211,000 was offset by the acquisition of coalbed methane
properties of $2,011,000; the development of coalbed methane properties of
$455,600; the purchase of equipment of $1,719,400; and an increase in restricted
investments of $417,700. The equipment purchases consisted of $1,250,000 for the
purchase of our corporate aircraft (which had previously been leased) and
$469,400 for equipment used in our drilling and construction operations.
Cash was consumed in financing activities as the result of paying $828,400
on our debt. This reduction of debt was offset by new debt of $1,938,800. The
increase in debt during fiscal 2001 was to fund the purchase of a corporate
aircraft, the purchase of drilling and construction equipment and the partial
financing of our real estate operations in southern Utah of $300,000.
We issued 8,532 shares of our restricted common stock valued at $19,200
during year ended May 31, 2001 as non-cash compensation to our outside
directors. We also issued 15,000 shares of our common stock valued at $70,600 as
compensation to a consultant and 53,837 shares of common stock valued at
$288,000
27
to our employee retirement plan. As a partial retirement of employee debt, we
received 5,000 shares of stock valued at $20,600, which became treasury stock.
CAPITAL RESOURCES
The primary sources of our capital resources are cash on hand; collection
of receivables; projected equity financing of our coalbed methane affiliate RMG;
production of coalbed methane gas; sale of excess mine, construction and
drilling equipment; sale of partial ownership interest in mineral properties;
proceeds under the line of credit; receipt of contracted amounts from the sale
of interests in coalbed methane properties, and the final determination of the
SMP arbitration/litigation. We also will continue to receive revenues from our
commercial operations in southern Utah along with the rental and fixed base
airport operations in Wyoming.
We currently have a $750,000 line of credit with a commercial bank. At the
time of this report, this line of credit has been drawn down by $350,000. We
also have a $500,000 line of credit through our affiliate Plateau Resources.
This line of credit is for the development of the Ticaboo town site in southern
Utah. Plateau has drawn down this financing facility $300,000 which is repayable
over 10 years. All payments on these lines of credit are current as of the
filing date of this report.
Subsequent to May 31, 2001 we received $796,000 for 199,000 (restricted
under rule 144) shares of common stock through a private placement. We also
received $288,400 during fiscal 2001 and $310,200 during the first quarter of
2002 from employees as they exercised options. We continue to seek equity or
industry partner financing for RMG.
We have entered into agreements with two companies to sell a portion of our
interest in our coalbed methane properties. The first agreement is an option and
farm-in agreement with Suncor Energy Natural Gas America Inc. ("SENGAI"), a
subsidiary of Suncor Energy Inc. of Alberta, Canada. SENGAI is obligated to fund
$2,000,000 of a $2,250,000 drilling program in 112,000 acres in part of our
Montana coalbed methane properties. SENGAI, under the agreement, may exercise
its option by paying $3,684,300, of which we would receive $2,763,200, in
February of 2002. Should SENGAI exercise this option it would own a 50% working
interest and a 40% net revenue interest in the 112,000 acres. Our interest would
be reduced to 12.5% working interest and 10% net revenue interest should SENGAI
exercise its option, subject to further reduction to 6.25% and 5% respectively
by separate agreement with Carrizo.
We also have entered into a purchase and sale agreement with CCBM, Inc.
("CCBM"), a wholly owned subsidiary of Carrizo Oil & Gas, Inc. of Houston Texas.
CCBM signed a promissory note in the amount of $7,500,000 to purchase a 50%
undivided interest in all of our coalbed methane properties. The promissory note
bears interest at an annual rate of 8% and is payable at the rate of $125,000
per month plus interest for forty-one months with a balloon on the forty-second
month.
CCBM is also obligated to fund an initial drilling program in the amount of
$5,000,000 of which $2,500,000 will be credited to RMG's benefit. Of this amount
$250,000 will be committed to satisfy RMG's commitment under the SENGAI drilling
program (as well as the remaining obligation under the Quantum agreement). For
this advance of funds, CCBM will receive a 50% interest in RMG's interest in
those wells drilled under the SENGAI initial drilling program and a 6.25 %
working interest, and a 5% net revenue interest in the 112,000 acres which are
subject to the SENGAI option. Should SENGAI not exercise its option, CCBM has
the option to purchase an additional 18.75% of the total ownership in the
112,000 acres at the same price per net acre in the SENGAI agreement. If this
occurs both RMG and CCBM would own undivided 25% interests in the 112,000 acres.
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We believe that these cash resources will be sufficient to sustain
operations during fiscal 2002. We will continue to pursue equity and industry
partner financing to fund our portion of RMG's obligations under the drilling
programs.
CAPITAL REQUIREMENTS
The primary requirements for our working capital during fiscal 2002 are
expected to be development of coalbed methane properties; the cost of
maintaining our uranium properties; the SGMC gold properties holding costs, and
general and administrative costs.
DEVELOPMENT OF COALBED METHANE PROPERTIES
-----------------------------------------
The majority of the fiscal 2002 development costs associated with the
coalbed methane properties of RMG has been funded through the SENGAI and CCBM
agreements. Under the CCBM purchase and sale agreement, if properties are
drilled that are owned 50% by RMG, we may be required to fund the drilling costs
for the interest ownership of the remaining non participating parties. Should we
be required to fund any non- participating entities portion of the development
programs, there is a back-in provision on each property which gives RMG a
disproportionate amount of the production revenues until our cost and additional
amounts are recovered before the non participating parties begin to receive
production funds.
MAINTAINING URANIUM PROPERTIES
------------------------------
SMP URANIUM PROPERTIES
The care and maintenance costs associated with the Sheep Mountain uranium
mineral properties were approximately $33,300 per month during fiscal 2001. We
continue to implement cost cutting measures to reduce the holding cost while at
the same time preserve the assets. We are obligated to reclaim the GMIX plant
which was used to extract uranium from mine waters. We have begun the process of
reclamation and are moving any burying the GMIX plant in the Sweetwater mill
tailings cell which was an asset of the GMMV and is now owned by Kennecott. It
is anticipated that the reclamation will be completed during the second quarter
of 2002. Costs of such reclamation are dependent on the work that is required by
the regulatory agencies as the project progresses.
PLATEAU RESOURCES URANIUM PROPERTIES
Plateau owns the Ticaboo townsite, motel, convenience store, boat storage,
restaurant and lounge. Prior to fiscal 2002, we operated all of these entities.
A decision was made to lease out all but the motel operations during fiscal
2002. This decision relieved us of the obligation and expense of employees,
inventory and risk of loss for the leased operations.
Additionally, Plateau owns and maintains the Tony M uranium mine and
Shootaring Canyon Uranium Mill. We are pursuing alternative uses for these
properties including the potential sale of the uranium mill.
SUTTER GOLD MINING COMPANY GOLD PROPERTIES
Due to the depressed market price of gold, the development of the gold
properties has been deferred into the future. SGMC developed a tourism business
to cover the holding costs of the properties until such time as the price for
gold recovers. A decision was made to lease out the tourism business to a third
party. The revenues received from the lease cover a majority of our holding
costs associated with the mining property. We plan, if possible, to concurrently
run a gold mine operation with the mine tour when gold values improve. We have
one employee at the SGMC properties to preserve the core assets and properties.
SGMC
29
is in the process of evaluating the potential of selling certain of the non
essential land positions that it has acquired in developing a mine plan.
DEBT PAYMENTS
-------------
Debt to non-related parties at May 31, 2001 was $2,294,500 as compared to
$1,184,200 at May 31, 2000. The increase in debt to non-related parties consists
primarily of debt due on the financing of equipment and our corporate aircraft
which was previously leased. The balance of the debt to non-related parties, is
for the purchase of land and buildings by SGMC. All payments on the debt are
current.
At May 31, 2001, the Company had borrowed $850,000 of its line of credit.
As of the date of this report the outstanding amount under the line of credit
was $350,000. This debt is secured by the pledge of equipment and real estate
assets of the Company.
FEDERAL INCOME TAX ISSUES
-------------------------
The tax years through May 31, 1996 are closed after audit by the IRS.
RECLAMATION COSTS
-----------------
With the exception of any amounts that may become needed in excess of the
cash bond on the GMIX reclamation project, it is not anticipated that any of our
working capital will be used in fiscal 2002 for the reclamation of any of its
mineral property interests. The reclamation obligations are long term and are
either bonded through the use of cash bonds or the pledge of assets.
The reclamation liability on the Plateau uranium properties is $7,382,100
which is reflected on the Balance Sheet as a reclamation liability. This
liability is fully funded by cash investments which are recorded as long term
restricted assets.
The reclamation costs of the Sheep Mountain properties are $1,496,800 and
are covered by a reclamation bond which is secured by a pledge of certain of our
real estate assets.
The reclamation of SGMC gold properties is approximately $27,900. This
reclamation obligation is bonded with a cash bond.
RESULTS OF OPERATIONS
---------------------
FISCAL 2001 COMPARED TO FISCAL 2000
- -----------------------------------
Revenues:
- ---------
Revenues during fiscal 2001 increased $6,723,900 over revenues for the
previous year to $14,497,700. This increase was primarily as a result of an
increase in mineral sales, management fees and other revenues, the resolution of
the GMMV litigation with Kennecott and the gain on sales of surplus assets.
During fiscal 2001, we recorded $442,800 in revenues from mineral sales
compared to $132,600 during the previous year. The increase was the result of
the sale of a uranium delivery contract to a non- affiliated company, and a
delivery made under that market related contract before the sale of the
contract. There were no similar sales during the same period of the prior year.
30
As a result of the settlement of the Kennecott litigation, $7,132,800 was
recorded as revenue during fiscal 2001. This revenue has two components: (1)
Non-cash revenues as a result of the recognition of $4,000,000 of a deferred
GMMV purchase option payment that was received in 1997 and (2) the receipt of
cash from Kennecott as a result of the settlement, $3,132,800 - net of accounts
receivable from GMMV.