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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Dec. 31, 2014
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Abstract] |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and gas reserves used for depletion and impairment considerations, accrued revenue and related receivables, valuation of commodity derivative instruments and the cost of future asset retirement obligations. The Company evaluates its estimates on an on-going basis and bases its estimates on historical experience and on various other assumptions the Company believes to be reasonable under the circumstances. Due to inherent uncertainties, including the future prices of oil and gas, these estimates could change in the near term and such changes could be material. Principles of Consolidation The financial statements of USE as of December 31, 2014 include the accounts of USE and its wholly owned subsidiary Energy One, LLC ("Energy One"). The financial statements of USE as of December 31, 2013 and 2012 include the accounts of USE and its then wholly owned subsidiaries Energy One and Remington Village, LLC ("Remington Village"). All inter-company balances and transactions have been eliminated in consolidation. The financial statements as of December 31, 2014, 2013 and 2012 reflect USE's ownership in a geothermal company, Standard Steam Trust LLC ("SST"), which is accounted for using the equity method. The Company recorded an impairment of $2.2 million on the investment in SST during the year ended December 31, 2013, which reduced the carrying amount of our investment in SST to zero. Subsequently, we no longer record our share of equity in earnings or losses. At December 31, 2014 USE's ownership interest in SST was 19.54%. Cash and Cash Equivalents USE considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these instruments. USE maintains its cash and cash equivalents in bank deposit accounts which may exceed federally insured limits. USE has not experienced any losses in such accounts and believes the accounts are not exposed to any significant credit risk on cash and cash equivalents. Marketable Securities USE categorizes its marketable securities as available-for-sale or held-to-maturity. Increases or decreases in the fair value of available-for-sale securities which are considered temporary are recorded within equity as comprehensive income or losses. Gains or losses as a result of sale are recorded in operations when realized. As of December 31, 2014 and 2013, USE had unrealized gains in the marketable securities before tax effect of $1,000 and $45,000, respectively. Accounts Receivable USE determines any required allowance by considering a number of factors including the length of time trade and other accounts receivable are past due and our previous loss history. USE provides reserves for account receivable balances when they become uncollectable. Payments subsequently received on such reserved receivables are credited to the allowance for doubtful accounts. During the years ended December 31, 2014 and 2013, USE recorded $0 in bad debt expense. The balance of accounts receivable at December 31, 2014 and 2013 are primarily related to the sale of oil and gas. Generally, the Company's oil and gas receivables are collected within two months, and the company has had minimal bad debts. No reserve for uncollectable receivables was booked during the year ended December 31, 2014 or 2013. Valuation of Equity Method Investment The Company's investment in SST is evaluated quarterly for possible impairment as applicable in accordance with ASC 323-10-35-32, which provides guidance related to a loss in value of an equity method investment. This evaluation as of December 31, 2013, based on historical losses, current market conditions and forward business plans of SST, resulted in a determination by management that the Company's investment in SST was impaired as of December 31, 2013. As a result, the Company incurred a non-cash impairment charge of $2.2 million to write off the carrying amount of the investment in SST at December 31, 2013 to zero. Future equity losses will not be recorded, however, the Company will resume accounting for the investment in SST under the equity method if SST subsequently reports net income and the Company's share of that net income equals the net losses not recognized during the period in which the equity method was suspended. For additional information about the Company's investment in SST, please refer to Note G – Investment in Standard Steam Trust, LLC. Restricted Investments USE accounts for cash deposits held as collateral for reclamation obligations as restricted investments. Maturities or release dates less than twelve months from the end of the reported accounting period are reported as current assets while maturities or release dates in excess of twelve months from report dates are reported as long term assets. Properties and Equipment Land, buildings, improvements, machinery and equipment are carried at cost. Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from 3 to 45 years. Following is a breakdown of the lives over which assets are depreciated:
Machinery and Equipment: |
| Office Equipment | 3 to 5 years
| Field Tools and Hand Equipment | 5 to 7 years
| Vehicles and Trucks | 3 to 7 years
| Heavy Equipment | 7 to 10 years
Buildings and Improvements: |
| Service Buildings | 20 years
| Corporate Headquarters Building | 45 years
Components of Property and Equipment as of December 31, 2014 and 2013 are as follows:
|  | (In thousands) |
|  | December 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Oil and Gas properties |  |  |  |  |  |
Proved |  | $ | 147,486 |  |  | $ | 136,521 |
Unproved |  |  | 10,188 |  |  |  | 7,478 |
Exploratory wells in progress |  |  | 2,357 |  |  |  | -- |
|  |  | 160,031 |  |  |  | 143,999 |
Less accumulated depreciation |  |  |  |  |  |  |  |
depletion and amortization |  |  | (71,762 | ) |  |  | (57,077 | )
Net book value |  | $ | 88,269 |  |  | $ | 86,922 |
Mineral properties |  | $ | 21,942 |  |  | $ | 20,739 |
Property, plant and equipment |  | $ | 8,346 |  |  | $ | 8,334 |
Less accumulated depreciation |  |  | (4,404 | ) |  |  | (4,135 | )
Net book value |  | $ | 3,942 |  |  | $ | 4,199 |
Oil and Gas Properties The Company follows the full cost method in accounting for its oil and gas properties. Under the full cost method, all costs associated with the acquisition, exploration and development of oil and gas properties are capitalized and accumulated in a country-wide cost center. This includes any internal costs that are directly related to development and exploration activities, but does not include any costs related to production, general corporate overhead or similar activities. Proceeds received from property disposals are credited against accumulated cost except when the sale represents a significant disposal of reserves, in which case a gain or loss is recognized. The sum of net capitalized costs and estimated future development and dismantlement costs for each cost center is depleted on the equivalent unit-of-production method, based on proved oil and gas reserves. Excluded from amounts subject to depletion are costs associated with unproved properties. Full Cost Pool – Full cost pool capitalized costs are amortized over the life of production of proven properties. Capitalized costs at December 31, 2014 and 2013 which were not included in the amortized cost pool were $12.5 million and $7.5 million, respectively. These costs consist of exploratory wells in progress and land costs related to unevaluated properties. No capitalized costs related to unproved properties are included in the amortization base at December 31, 2014 and 2013. Ceiling Test Analysis – Under the full cost method, net capitalized costs are limited to the lower of unamortized cost reduced by the related net deferred tax liability and asset retirement obligations or the cost center ceiling. The cost center ceiling is defined as the sum of (i) estimated future net revenue, discounted at 10% per annum, from proved reserves, based on unescalated average prices per barrel of oil and per MMbtu of natural gas at the first day of each month in the 12-month period prior to the end of the reporting period and costs, adjusted for contract provisions and financial derivatives that hedge USE's oil and gas revenue and asset retirement obligations, (ii) the cost of properties not being amortized, and (iii) the lower of cost or market value of unproved properties included in the cost being amortized, reduced by (iv) the income tax effects related to differences between the book and tax basis of the crude oil and natural gas properties. If the net book value reduced by the related net deferred income tax liability and asset retirement obligations exceeds the cost center ceiling limitation, a non-cash impairment charge is required in the period in which the impairment occurs. We perform a quarterly ceiling test for each of our oil and gas cost centers. There was only one such cost center in 2014. The reserves used in the ceiling test and the ceiling test itself incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In arriving at the ceiling test for the year ended December 31, 2014, USE used $94.99 per barrel for oil and $4.35 per MMbtu for natural gas (and adjusted for property specific gravity, quality, local markets and distance from markets) to compute the future cash flows of USE's producing properties. The discount factor used was 10%. The Company recorded no proved property impairments related to its oil and gas assets during the year ended December 31, 2014. In 2013, we recorded a proved property impairment of $5.8 million related to our oil and gas assets. The impairment was primarily due to a decline in the price of oil, additional capitalized well costs and changes in production. As of December 31, 2014, there were no unproved properties that were considered to be impaired and reclassified to properties being amortized. Management will continue to review the Company's unproved properties based on market conditions and other changes and if appropriate, unproved property amounts may be reclassified to the amortized base of properties within the full cost pool. Recent declines in the price of oil have significantly increased the risk of a ceiling test write-down in future periods. Wells in Progress - Wells in progress represent the costs associated with unproved wells that have not reached total depth or have not been completed as of period end. They are classified as wells in progress and withheld from the depletion calculation and the ceiling test. The costs for these wells are then transferred to evaluated property when the wells reach total depth and are cased and the costs become subject to depletion and the ceiling test calculation in future periods. Mineral Properties We capitalize all costs incidental to the acquisition of mineral properties. Mineral exploration costs are expensed as incurred. When exploration work indicates that a mineral property can be economically developed as a result of establishing proved and probable reserves, costs for the development of the mineral property as well as capital purchases and capital construction are capitalized and amortized using units of production over the estimated recoverable proved and probable reserves. Costs and expenses related to general corporate overhead are expensed as incurred. All capitalized costs are charged to operations if we subsequently determine that the property is not economic due to permanent decreases in market prices of commodities, excessive production costs or depletion of the mineral resource. Mineral properties at December 31, 2014 and 2013 reflect capitalized costs associated with our Mt. Emmons molybdenum property near Crested Butte, Colorado. Our carrying balance in the Mt. Emmons property at December 31, 2014 and 2013 is as follows:
|  | (In thousands) |
|  | December 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Costs associated with Mount Emmons |  |  |  |  |  |
beginning of year |  | $ | 20,739 |  |  | $ | 20,739 |
Property purchase (1) |  |  | 1,203 |  |  |  | -- |
Costs at the end of the period |  | $ | 21,942 |  |  | $ | 20,739 |
(1)On January 21, 2014, the Company acquired Thompson Creek Metals' ("TCM") 50% interest in 160 acres of fee land in the vicinity of the Mt. Emmons project mining claims for $1.2 million. The property was originally acquired jointly by the Company and TCM in January 2009. Long-Lived Assets We evaluate our long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. Impairment calculations are generally based on market appraisals. If estimated future cash flows, on an undiscounted basis, are less than the carrying amount of the related asset, an asset impairment is considered to exist. Changes in significant assumptions underlying future cash flow estimates may have a material effect on our financial position and results of operations. Assets Held for Sale In accordance with authoritative accounting guidance regarding property plant and equipment, assets are classified as held for sale when we commit to a plan to sell the assets and there is reasonable certainty that the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated or depleted, and a measurement for impairment is performed to determine if there is any excess of carrying value over fair value less costs to sell. Subsequent changes to estimated fair value less the cost to sell will impact the measurement of assets held for sale if the fair value is determined to be less than the carrying value of the assets. In January 2011, we made the decision to sell our Remington Village multifamily project in Gillette, Wyoming and in September 2012, we made the decision to sell our corporate aircraft and related facilities to reduce overhead costs. All assets classified as assets held for sale at December 31, 2012 were sold in the year ending December 31, 2013. Operations related to Remington Village are shown in discontinued operations on the accompanying consolidated statements of operations. For additional discussion please refer to Note H – Discontinued Operations. Derivative Instruments The Company uses derivative instruments, typically costless collars and fixed-rate swaps, to manage price risk underlying its oil and gas production. All derivative instruments are recorded in the consolidated balance sheets at fair value. The Company offsets fair value amounts recognized for derivative instruments executed with the same counterparty. Although the Company does not designate any of its derivative instruments as cash flow hedges, such derivative instruments provide an economic hedge of our exposure to commodity price risk associated with forecasted future oil and gas production. These contracts are accounted for using the mark-to-market accounting method and accordingly, the Company recognizes all unrealized and realized gains and losses that are related to these contracts currently in earnings and classifies them as gain (loss) on derivative instruments, net in our consolidated statements of operations. The Company may also use puts, calls and basis swaps in the future. The Company's Board of Directors sets all risk management policies and reviews the status and results of derivative activities, including volumes, types of instruments and counterparties on a quarterly basis. These policies require that derivative instruments be executed only by the Chief Executive Officer or President. The agreements with approved counterparties identify the Chief Executive Officer and President as the only Company representatives authorized to execute trades. See Note E, Commodity Price Risk Management, for further discussion. Fair Value of Financial Instruments The carrying amount of cash equivalents, receivables, other current assets, accounts payable and accrued expenses approximate fair value because of the short-term nature of those instruments. The recorded amounts for short-term and long-term debt approximate the fair market value due to the variable nature of the interest rates on the short-term debt, and the fact that interest rates remain generally unchanged from issuance of the long-term debt. Asset Retirement Obligations USE accounts for its asset retirement obligations under FASB ASC 410-20, "Asset Retirement Obligations." USE records the fair value of the reclamation liability on its inactive mining properties and its operating oil and gas properties as of the date that the liability is incurred. USE reviews the liability each quarter and determines if a change in estimate is required, and it accretes the discounted liability on a quarterly basis for the future liability. Final determinations are made during the fourth quarter of each year. USE deducts any actual funds expended for reclamation during the quarter in which it occurs. The following is a reconciliation of the total liability for asset retirement obligations:
|  | (In thousands) |
|  | December 31, |  |  | December 31, |
|  | 2014 |  |  | 2013 |
Beginning asset retirement obligation |  | $ | 812 |  |  | $ | 686 |
Accretion of discount |  |  | 40 |  |  |  | 38 |
Liabilities incurred |  |  | 310 |  |  |  | 131 |
Liabilities settled |  |  | (29 | ) |  |  | (43 | )
Ending asset retirement obligation |  | $ | 1,133 |  |  | $ | 812 |
Mineral properties |  | $ | 187 |  |  | $ | 175 |
Oil and Gas wells |  |  | 946 |  |  |  | 637 |
Ending asset retirement obligation |  | $ | 1,133 |  |  | $ | 812 |
Revenue Recognition USE derives revenue primarily from the sale of produced oil, gas, and NGLs. The Company reports revenue as the gross amount received before taking into account production taxes and transportation costs, which are reported separately as expenses and are included in oil and gas production expense in the accompanying statements of operations. USE records natural gas and oil revenue under the sales method of accounting. Revenue is recorded in the month that the production is delivered to the purchaser. Payment is generally received between 30 and 90 days after the date of production. At the end of each month, we estimate the amount of production delivered to the purchaser and the price we will receive. USE uses its knowledge of its properties, their historical performance, market prices, and other factors as the basis for these estimates. USE has exposure to credit risk in the event of nonpayment by our operators, which are all in energy related industries. During 2014, we had three major operators, Contango Oil & Gas Company, Statoil and Zavanna, LLC and which accounted for approximately 38 percent, 28 percent and 20 percent of our total oil, gas and NGL revenues, respectively. During 2013, we had three major operators, Statoil, Zavanna, LLC and Contango Oil & Gas Company which accounted for approximately 38 percent, 32 percent and 18 percent of our total oil, gas and NGL revenues, respectively. During 2012, we had two major operators, Statoil and Zavanna, which accounted for 57 percent and 32 percent of our total oil, gas and NGL revenues, respectively. Revenues from real estate operations are reported on a gross revenue basis and are recorded at the time the service is provided. Stock Based Compensation USE measures the cost of employee and director services received in exchange for all equity awards granted, including stock options, based on the fair market value of the award as of the grant date. USE computes the fair values of its options granted to employees using the Black Scholes pricing model and the following weighted average assumptions:
| For the years ended December 31,
| 2014 | 2013 | 2012
Risk-free interest rate | 2.06% | 1.66% | 0.82% to 1.41%
Expected lives (years) | 6.0 | 6.0 | 5.0 to 6.0
Expected volatility | 65.45% | 62.59% | 61.87% to 63.59%
Expected dividend yield | -- | -- | --
USE recognizes the cost of the equity awards over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. As share-based compensation expense is recognized based on awards ultimately expected to vest, the expense has been reduced for estimated forfeitures based on historical forfeiture rates. Income Taxes USE recognizes deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carry forwards. Additionally, USE recognizes deferred tax assets for the expected future effects of all deductible temporary differences, loss carry forwards and tax credit carry forwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized. At December 31, 2014 and 2013, management believed it was more likely than not that such tax benefits would not be realized and a valuation allowance has been provided. For further discussion, please refer to Note J – Income Taxes. Earnings Per Share Basic net income (loss) per share is computed based on the weighted average number of common shares outstanding. Common shares held by the ESOP are included in the computation of earnings per share. Total shares held by the ESOP at December 31, 2014, 2013, and 2012 were 949,870, 877,399, and 824,123, respectively. Diluted net income (loss) per share is calculated by dividing net income or loss by the diluted weighted average common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities for this calculation consist of in-the-money outstanding stock options. When there is a loss from continuing operations, all potentially dilutive shares are anti-dilutive and are excluded from the calculation of net income (loss) per share. The treasury stock method is used to measure the dilutive impact of in-the-money stock options. The following table sets forth the calculations of basic and diluted earnings per share:
|  | (In thousands except share amounts and per share data) |
|  | For the years ended December 31, |
|  | 2014 |  |  | 2013 |  |  | 2012 |
Net (loss) |  | $ | (2,091 | ) |  | $ | (7,379 | ) |  | $ | (11,245 | )
Basic weighted-average common shares outstanding |  |  | 27,832,859 |  |  |  | 27,678,698 |  |  |  | 27,466,549 |
Add: dilutive effect of stock options |  |  | -- |  |  |  | -- |  |  |  | -- |
Diluted weighted-average common shares outstanding |  |  | 27,832,859 |  |  |  | 27,678,698 |  |  |  | 27,466,549 |
Basic net (loss) per share |  | $ | (0.08 | ) |  | $ | (0.27 | ) |  | $ | (0.41 | )
Diluted net (loss) per share |  | $ | (0.08 | ) |  | $ | (0.27 | ) |  | $ | (0.41 | )
The following table details the weighted-average anti-dilutive securities related to stock options for the years presented:
|  | For the years ended December 31,
|  | 2014 |  | 2013 |  | 2012
Weighted-average anti-dilutive stock options |  | 1,355,195 |  | 2,531,202 |  | 2,491,746
Recent Accounting Pronouncements In April 2014, the Financial Accounting Standard Board ("FASB") issued new authoritative accounting guidance related to the recognition and presentation of discontinued operations in the financial statements. The guidance is aimed at reducing the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity's operations and financial results. This authoritative accounting guidance is effective for interim and annual periods beginning after December 15, 2014, and is to be applied prospectively. The Company is currently evaluating the provisions of this authoritative guidance and assessing its impact, but does not currently believe it will have a material effect on the Company's financial statements or disclosures. In May 2014, the FASB issued new authoritative accounting guidance related to the recognition of revenue. This authoritative accounting guidance is effective for the annual period beginning after December 15, 2016, including interim periods within that reporting period, and is to be applied using one of two acceptable methods. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. In June 2014, the FASB issued new authoritative accounting guidance related to the recognition of share-based compensation when an award provides that a performance target can be achieved after the requisite service period. This authoritative accounting guidance may be applied either prospectively or retrospectively and is effective for annual periods and interim periods beginning after December 15, 2015. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. In August 2014, the FASB issued new authoritative guidance that requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date that the entity's financial statements are issued, or within one year after the date that the entity's financial statements are available to be issued, and to provide disclosures when certain criteria are met. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. In January 2015, the FASB issued new authoritative accounting guidance that simplifies income statement presentation by eliminating extraordinary items from GAAP. This guidance is to be applied either prospectively or retrospectively and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted provided the guidance is applied from the beginning of the annual year of adoption. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. In February 2015, the FASB issued new authoritative accounting guidance meant to clarify the consolidation reporting guidance in GAAP. This guidance is to be applied using a retrospective method or a modified retrospective method, as outlined in the guidance, and is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early application is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. There are no other accounting standards applicable to the Company that have been issued but not yet adopted by the Company as of December 31, 2014, and through the filing date of this report.

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