GreenHunter Energy, Inc. (NYSE Amex: GRH) filed their 10Q with the SEC.
Management’s Discussion and Analysis of Financial Condition and Results of Operations provides an excellent overall review of the Company’s progress together with a short-term and long-term outlook. The Discussion found on pages 15 through 17, indicates in part, as follows:
We believe that our ability to successfully compete in the clean water and renewable energy industries depends on many factors, including the location and low cost construction of our planned facilities, execution of our acquisition strategy, development of strategic relationships, achievement of our anticipated low cost production model, access to adequate debt and equity capital, proper and meaningful governmental support including tax incentives and credit enhancements, and recruitment and retention of experienced management.
Current Plan of Operations and Ability to Operate as a Going Concern
… Execution of our business plan for the next twelve months requires the ability to generate cash to satisfy planned operating requirements. With the funds from the proceeds from our recently issued private placement offering, $500 thousand in anticipated proceeds as another progress payment from the sale of our Ocotillo wind project to be received in September 2011, and the letter of guarantee and credit support from our chairman and CEO, we anticipate having sufficient cash reserves to meet all of our anticipated operating obligations for the next twelve months. Planned capital expenditures are wholly dependent on the Company’s ability to secure additional capital. As a result, we are in the process of seeking additional capital through a number of different sources for working capital and development costs of our new water service business and our Mesquite Lake plant and water resource projects.
Water Resource Management
Recent improvements in drilling and completion technologies have unlocked large reserves of hydrocarbons in multiple unconventional resources plays in North America. These new drilling methods often involve a procedure called hydraulic fracturing or hydrofracking. This process involves the injection of large amounts of water, sand and chemicals under high pressures into rock formations to stimulate production. Unconventional wells can require more than four million gallons of water to complete a hydrofracking procedure. Some portion of the water used in production process will return to the surface as a by-product or waste stream; this water is commonly referred to by operators in the oil and gas industry as frack-flowback. In addition to frack-flowback, oil and natural gas wells also generate produced salt water or brine which is water from underground formations that is brought to the surface during the normal course of oil or gas production. Because the water has been in contact with hydrocarbon-bearing formations, it contains some of the chemical characteristics of the formations and the hydrocarbons. The physical and chemical properties of produced water vary considerably depending on the geographic location of the field, the geologic formation, and the type of hydrocarbon product being produced. Produced water properties and volume also vary through the lifetime of a reservoir.
Produced water is the largest volume by-product or waste stream associated with oil and gas exploration and production. Although the details on generation and management of produced water are not well understood on a national scale, the U.S. Department of Energy’s National Energy Technology Laboratory (NETL) estimates that the total volume of produced water generated by U.S. onshore and offshore oil and gas production activities in 2007 was nearly 21 billion barrels or 882 billion gallons (1 barrel equals 42 U.S. gallons).
While produced water (also known as oil field brine or brine due to its high salinity content) can be reused if certain water quality conditions are met, approximately 95 percent of U.S. onshore produced water generated by the oil and gas industry is disposed of by using high-pressure pumps to inject the water into under-ground geologic formations or is discharged under National Pollutant Discharge Elimination System (NPDES) permits. The remaining 5 percent is managed through beneficial reuse or disposed through other methods including evaporation, percolation pits, and publicly owned treatment works.
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing are expected to result in increased costs and additional operating restrictions for oil and gas explorers and producers. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Sponsors of two companion bills, which are currently pending in the House Energy and Commerce Committee and the Senate Committee on Environment and Public Works Committee have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, this legislation, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens for oil and natural gas operators. Several states are also considering implementing, or in some instances, have implemented, new regulations pertaining to hydraulic fracturing, including the disclosure of chemicals used in connection therewith. The adoption of any future federal or state laws or implementing regulations imposing reporting obligations on, or otherwise limiting, the hydraulic fracturing process would make it more difficult and more expensive to complete new wells in the unconventional shale resource formations and increase costs of compliance and doing business for oil and natural gas operators.
Management, which has a significant background in the oil and gas industry, has identified water reuse and water management opportunities in the energy industry as a significant growth opportunity and is exploring various ways to reposition the Company to serve this growing segment through joint ventures, targeted acquisitions, development and deployment of water resource management technologies, and services including underground injection for disposal, evaporation, pre-treatment of water for underground injection for increasing oil recovery, offsite commercial disposal, onsite remediation and beneficial reuse.
We recently entered into a definitive agreement to acquire approximately 99 mineral acres and 84 surface acres located in West Virginia where we plan to develop a commercial water service facility. The acquisition includes an existing well that has been approved for commercial water disposal. The acquisition will close in two phases with the first closing is anticipated on August 31, 2011 and the second closing will be upon the well commencing commercial operations. Total consideration to be paid consists of $750 thousand in cash and preferred stock to be valued at $300 thousand.
On August 2, 2011, a wholly owned subsidiary of GreenHunter Water, LLC, entered into a definitive agreement to lease approximately 5 mineral acres in Wilson County, Texas, where it will develop a wastewater injection well. Total consideration paid consists of $1 thousand per acre leased per year during the term of the lease. The primary term of the lease is ten years.
Planned uses for both the West Virginia and Texas locations include treatment facilities for oilfield produced water, frac water and drilling mud, salt water disposal wells and heavy equipment and frac tank lay-down yards. The properties to be acquired and leased through these transactions are strategically located in the heart of the drilling activity within the Appalachian resource plays of the Marcellus Shale, the new Utica Shale, and the Eagle Ford Shale, as well as being strategically located nearby existing highway infrastructure where water hauling trucks are very active.
In May 2007, we acquired Mesquite Lake, an inactive 18.5 megawatt (nameplate capacity) biomass waste-to-energy electricity facility located on a 40-acre site in unincorporated Imperial County, California. We began refurbishing the plant during 2008. During 2008, we found that the existing air permit for the plant was not sufficient to support our planned operations, and we put this project on hold during the fourth quarter of 2008 while we went through the re-permitting process. We executed a new power purchase agreement for this facility in October 2009 and we obtained the air permit in July 2010. We plan to resume construction on the facility, including an expansion of up to 10 Megawatts (“MW”), sometime during the second half of 2011, assuming additional sources of funding are obtained.
Phase I of the project is anticipated to be operational by mid 2012. When Phase II of the project is completed and in operation, which is anticipated by the second half of 2012, the Mesquite Lake biomass facility will burn annually more than 280,000 tons of waste woody biomass which will be converted into green electricity to serve residential and industrial users in California’s Imperial Valley through our power purchase agreement with Imperial Irrigation District (IID).
Mesquite Lake is located in a region that the U.S. Bureau of Labor Statistics registers as having the highest unemployment rate in the United States of 27.3 percent, and the Imperial Valley Economic Development Corporation estimates that approximately 642 jobs will be directly or indirectly created as a result of the project development.
Until April 2007, our primary business was the investment in and development of wind energy farms. We continue to own rights to a wind energy farm under development located in California. The nature of these wind energy projects necessitates a longer term horizon than our other development projects before they become operational, if ever. The significant decrease in natural gas prices over the past several years has in turn caused a significant decline in wholesale electric prices which has caused our ability to develop future wind projects to be commercially uneconomical.
According to the National Renewable Energy Laboratory (NREL), average annual irradiance per square meter in the Imperial County is 6.23 kilowatt hours per day. Our Mesquite Lake biomass facility is located on a 40-acre parcel of which 30 acres could be utilized for the biomass operation leaving 10 to 15 acres for the development of additional renewable energy projects. During the first quarter of 2010, we formed a new subsidiary to explore the development of a solar energy farm on our Mesquite Lake project site and completed a generator interconnection request with the Imperial Irrigation District (IID). On March 16, 2010 we were notified that IID had preserved an interconnection queue position for our solar project. Subject to regulatory and permitting approvals, we believe there are unique economic and operational advantages to building a solar farm on this site most significant being the ability to share existing interconnection infrastructure with the biomass facility.
GreenHunter Energy, Inc.
Jonathan D. Hoopes President & COO
1048 Texan Trail Grapevine, TX 76051
Tel: (972) 410-1044
Any statements in this release regarding future expectations and prospects for GreenHunter Energy and its business and other statements containing the words “believes”, “anticipates”, “plans”, “expects”, “will” and similar expressions constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including the substantial capital expenditures required to fund its operations, the ability of the Company to implement its business plan, government regulation and competition. GreenHunter Energy undertakes no obligation to update these forward-looking statements in the future.
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