per equivalent unit in 2003 increased to $0.90
per Mcfe from $0.68 per Mcfe in 2002. The per unit cost increased
primarily as a result of the higher costs noted above.
Depreciation, depletion and amortization ("DD&A")
expense for 2003 increased 12% to $11.9 million from $10.6 million
in 2002. This increase was primarily due to the increased land,
seismic and drilling costs added to the proved property cost base.
General and administrative ("G&A") expense
for 2003 increased 36% to $5.6 million from $4.1 million for 2002.
The increase in G&A was due primarily to higher incentive compensation
of $0.6 million, executive severance of $0.3 million, increased
legal and professional fees attributable to special projects and
rising insurance costs of $0.1 million.
We recorded a $0.8 million aftertax charge,
or $0.05 per fully diluted share, on our minority interest in Pinnacle.
Of this charge, $0.2 million, or $0.01 per fully diluted share,
relates to a valuation allowance for federal income taxes. It is
likely that Pinnacle will continue to record a valuation allowance
on the deferred federal tax benefit generated from the operating
losses incurred during the early development stages of Pinnacle's
coalbed methane project. Concurrently, we will record valuation
allowances relative to our share of Pinnacle's financial results.
Income taxes increased to $5.1 million in
2003 from $2.8 million in 2002 due to the increase in pre-tax income.
Dividends and accretion of discount on preferred
stock increased to $0.7 million in 2003 from $0.6 million in 2002
as a result of the declaration of dividends on preferred stock in
2003.
Net income available to common shareholders
before cumulative effect of change in accounting principle for 2003
increased to $7.3 million from $4.2 million in 2002 primarily as
a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
During 2004, we made capital expenditures in
excess of our net cash flows provided by operating activities, using
the proceeds generated from our 2004 public offering, as described
in "--General Overview--2004 Public Offering," and from our October
2004 sale of the 10% Senior Subordinated Secured Notes (the "Senior
Secured Notes") . For future capital expenditures in 2005, we expect
to use cash on hand and cash generated by operating activities,
draws on the Credit Facility and additional sales of Senior Secured
Notes to partially fund our planned drilling expenditures and fund
leasehold costs and geological and geophysical costs on our exploration
projects in 2005. We also continue to consider other financing alternatives
to fund our 2005 capital expenditures program, including possible
debt or equity financings.
We may not be able to obtain adequate financing
on terms that would be acceptable to us. If we cannot obtain adequate
financing, we anticipate that we may be required to limit or defer
our planned natural gas and oil exploration and development program,
thereby adversely affecting the recoverability and ultimate value
of our natural gas and oil properties.
Our liquidity position was enhanced by our
receipt of approximately $23.3 million in net proceeds from the
completion of the 2004 public offering, the increase in availability
of funds under the Credit Facility and the proceeds from the October
2004 sale of the Senior Secured Notes. Our other primary sources
of liquidity have included funds generated by operations, proceeds
from the issuance of various securities, including our common stock,
preferred stock and warrants, and borrowings, primarily under revolving
credit facilities and through the issuance of Senior Subordinated
Notes. We also recently increased our liquidity through the sale
of certain oil and gas properties for $9.0 million in the first
quarter of 2005.
Cash flows provided by operating activities
were $18.6 million, $33.4 million and $32.5 million for 2002, 2003
and 2004, respectively. This increase in cash flows provided by
operations in 2003 as compared to 2002 was due primarily to higher
commodity prices and higher trade payables in 2003. The decrease
in cash flows provided by operations in 2004 as compared to 2003
was primarily due to a smaller increase in trade payables, partially
offset by higher operating income, generally due to record production
and record commodity prices realized in 2004.
Estimated maturities of long-term debt are
$0.1 million in 2005, none in 2006, $18.0 million in 2007 and the
remainder in 2008. The following table sets forth estimates of our
contractual obligations as of December 31, 2004:
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