EPSN - Epsilon Reports Second Quarter 2021 Results and Encouraging Oklahoma Appraisal Well Results
HOUSTON, Aug. 12, 2021 (GLOBE NEWSWIRE) -- Epsilon Energy Ltd. (“ Epsilon ” or the “ Company ”) (NASDAQ: EPSN) today reported second quarter 2021 financial and operating results and material subsequent events following the end of the quarter through the date of this release.
- Net cash provided by operations of $2.4 million and $8.0 million for the three and six months ended June 30, 2021, with free cash flow (FCF) of $1.2 million and $6.3 million for the same periods.
- Realized gas prices of $1.97/Mcf including hedges ($2.00/Mcf excluding hedges), for the three months ended June 30, 2021.
- Through June 30, 2021 the company returned a total of $1.1 million to shareholders through share repurchases of 264,215 representing a reduction of 1.1% of outstanding shares from December 31, 2020.
- Marcellus net revenue interest (NRI) gas production averaged 27.6 MMcf/d (Working Interest of 31.7 MMcf/d) for the second quarter. Working interest exit rate for the second quarter was 33.7 MMcf/d.
- Auburn System gathered and delivered 15.0 Bcf gross (5.3 Bcf net to Epsilon’s interest) during the three months ended June 30, 2021 through the Auburn GGS which represents approximately 75% of maximum throughput as currently configured.
- Total revenues of $7.1 million and EBITDA of $3.0 million for the quarter.
- Cash at quarter end of $18.5 million ($19.1 million including restricted cash).
- Net loss before tax of $0.7 million for the quarter. Includes estimated non-cash unrealized losses on derivative contracts in the amount of $1.7 million.
- Operating expenses including SG&A was $1.58/Mcfe.
- After June 30 th , 2021, we completed a well under our Meramec appraisal program in Oklahoma. The IP30 (Initial 30 day production period) resulted in flowing approximately 640 bbls/d of oil and 7.0 MMcf/d of wet gas prior to stripping the NGLs which are estimated at 77 bbls per MMcf of wet gas, or total liquids production of approximately 1,100 barrels of liquids per day.
Michael Raleigh, CEO, commented, “As we expected, the decline in drilling activity in 2020 has led natural gas production in both Appalachia and the US to remain relatively flat while demand levels for LNG over 10 Bcf/d and exports to Mexico in excess of 7 Bcf/d have created a supply shortfall. This imbalance supported a 40% rally in Henry Hub futures contract prices for natural gas during the quarter. The price for natural gas is well supported as exporters compete with US utilities and local distribution companies who must build sufficient inventories in storage prior to the upcoming winter. Despite the increases in price, natural gas storage levels for the US and in the East remain 6.4% and 7.8% below their five-year average levels, respectively.
Epsilon resumed its Meramec appraisal program in Oklahoma with the completion in July 2021 of the 50% WI horizontal well that was previously drilled. We have now gathered sufficient data over the initial 30 day period to assess the expected performance against the pre-drill type curve used to forecast the economics. We are very excited by the initial performance of this well as the gas rate is 2x the expected pre-drill rate and 2.5x the expected pre-drill oil rate. We developed a completion program that optimized on the historical designs and are evaluating the degree to which this is providing the observed uplift in productivity. At current commodity prices, we anticipate drilling and completing additional wells over the several sections we have interests within this area that our subsurface team estimates are analogous.”
Financial and Operating Results
| Three months ended |
| Six months ended |
| June 30, |
| June 30, |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Revenues |
| Natural gas revenue |
| $ |
| 5,106,922 |
| $ |
| 3,876,340 |
| $ |
| 11,439,021 |
| $ |
| 7,896,104 |
| Volume (MMcf) |
| 2,548 |
| 2,858 |
| 5,014 |
| 5,585 |
| Avg. Price ($/Mcf) |
| $ |
| 2.00 |
| $ |
| 1.36 |
| $ |
| 2.28 |
| $ |
| 1.41 |
| PA Exit Rate (MMcfpd) |
| 33.7 |
| 45.5 |
| 33.7 |
| 45.5 |
| Oil and other liquids revenue |
| $ |
| 131,832 |
| $ |
| 138,707 |
| $ |
| 238,888 |
| $ |
| 230,087 |
| Volume (MBO) |
| 3.2 |
| 4.8 |
| 6.9 |
| 7.9 |
| Avg. Price ($/Bbl) |
| $ |
| 41.68 |
| $ |
| 29.10 |
| $ |
| 34.58 |
| $ |
| 29.15 |
| Gathering system revenue |
| $ |
| 1,851,095 |
| $ |
| 2,263,740 |
| $ |
| 3,853,252 |
| $ |
| 4,580,442 |
| Total Revenues |
| $ |
| 7,089,849 |
| $ |
| 6,278,787 |
| $ |
| 15,531,161 |
| $ |
| 12,706,633 |
Capital Expenditures
Epsilon’s capital expenditures were $0.5 million for the three months ended June 30, 2021. This capital was mainly related to the completion of one gross (0.22 net to EPSN) well during the second quarter of 2021, as well as expenditures for the Auburn Gas Gathering system.
Operational Guidance
During the second quarter of 2021, the operator completed and turned in line one gross (0.22 net to EPSN) well in Marcellus. Additionally, the operator completed one gross (0.50 net to EPSN) well in Oklahoma that was turned to production in early July.
Second Quarter Results
Epsilon generated revenues of $7.1 million for the three months ended June 30, 2021 compared to $6.3 million for the three months ended June 30, 2020.
Realized natural gas prices averaged $1.95/Mcf (excluding hedges) for Marcellus Upstream operations in the second quarter of 2021. Operating expenses for Marcellus Upstream operations in the second quarter were $1.6 million.
Auburn System gathered and delivered 15.0 Bcf gross of natural gas during the quarter as compared to 17.5 Bcfe during the first quarter of 2021. Primary gathering volumes declined 2.0% quarter over quarter to 12.3 Bcfe. Imported cross-flow volumes decreased 42.1% to 3.0 Bcfe.
Epsilon reported a net after tax loss of $0.5 million attributable to common shareholders or $0.02 per basic and diluted common share outstanding for the three months ended June 30, 2021, compared to net loss of $0.6 million, and $0.02 per basic and diluted common share outstanding for the three months ended June 30, 2020.
For the three months ended June 30, 2021, Epsilon's Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization ("Adjusted EBITDA") was $3 million as compared to $3.1 million for the three months ended June 30, 2020.
About Epsilon
Epsilon Energy Ltd. is a North American onshore natural gas production and midstream company with a current focus on the Marcellus Shale of Pennsylvania.
Forward-Looking Statements
Certain statements contained in this news release constitute forward-looking statements. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “should”, “believe”, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated. Forward-looking statements are based on reasonable assumptions, but no assurance can be given that these expectations will prove to be correct and the forward-looking statements included in this news release should not be unduly relied upon.
The reserves and associated future net revenue information set forth in this news release are estimates only. In general, estimates of oil and natural gas reserves and the future net revenue therefrom are based upon a number of variable factors and assumptions, such as production rates, ultimate reserves recovery, timing and amount of capital expenditures, ability to transport production, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially from actual results. For those reasons, estimates of the oil and natural gas reserves attributable to any particular group of properties, as well as the classification of such reserves and estimates of future net revenues associated with such reserves prepared by different engineers (or by the same engineers at different times) may vary. The actual reserves of the Company may be greater or less than those calculated. In addition, the Company's actual production, revenues, development and operating expenditures will vary from estimates thereof and such variations could be material.
Statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and can be profitably produced in the future. There is no assurance that forecast price and cost assumptions will be attained and variances could be material.
Proved reserves are those reserves which are most certain to be recovered. There is at least a 90% probability that the quantities actually recovered will equal or exceed the estimated proved reserves. Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure (for example, when compared to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned. Proved undeveloped reserves are those reserves that can be estimated with a high degree of certainty and are expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production.
The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties due to the effects of aggregation. The estimated future net revenues contained in this news release do not necessarily represent the fair market value of the Company's reserves.
Contact Information:
281-670-0002
Michael Raleigh
Chief Executive Officer
Michael.Raleigh@EpsilonEnergyLTD.com
Special note for news distribution in the United States
The securities described in the news release have not been registered under the United Stated Securities Act of 1933, as amended, (the “1933 Act”) or state securities laws. Any holder of these securities, by purchasing such securities, agrees for the benefit of Epsilon Energy Ltd. (the “Corporation”) that such securities may not be offered, sold, or otherwise transferred only (A) to the Corporation or its affiliates; (B) outside the United States in accordance with applicable state laws and either (1) Rule 144(as) under the 1933 Act or (2) Rule 144 under the 1933 Act, if applicable.
EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
(All amounts stated in US$)
| Three months ended June 30, |
| Six months ended June 30, |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Revenues from contracts with customers: |
| Gas, oil, NGLs and condensate revenue |
| $ |
| 5,238,754 |
| $ |
| 4,015,047 |
| $ |
| 11,677,909 |
| $ |
| 8,126,191 |
| Gas gathering and compression revenue |
| 1,851,095 |
| 2,263,740 |
| 3,853,252 |
| 4,580,442 |
| Total revenue |
| 7,089,849 |
| 6,278,787 |
| 15,531,161 |
| 12,706,633 |
| Operating costs and expenses: |
| Lease operating expenses |
| 1,784,138 |
| 2,034,120 |
| 3,378,327 |
| 4,081,887 |
| Gathering system operating expenses |
| 173,547 |
| 79,702 |
| 364,494 |
| 177,480 |
| Development geological and geophysical expenses |
| 11,451 |
| 2,273 |
| 22,990 |
| 4,902 |
| Depletion, depreciation, amortization, and accretion |
| 1,646,094 |
| 2,577,770 |
| 3,328,954 |
| 4,992,146 |
| Impairment of proved properties |
| — |
| — |
| — |
| 1,760,000 |
| Bad Debt Expense |
| — |
| 819,000 |
| — |
| 819,000 |
| General and administrative expenses: |
| Stock based compensation expense |
| 236,041 |
| 172,052 |
| 438,540 |
| 345,971 |
| Other general and administrative expenses |
| 2,048,300 |
| 1,236,729 |
| 3,375,461 |
| 2,244,842 |
| Total operating costs and expenses |
| 5,899,571 |
| 6,921,646 |
| 10,908,766 |
| 14,426,228 |
| Operating income (loss) |
| 1,190,278 |
| (642,859 |
| ) |
| 4,622,395 |
| (1,719,595 |
| ) |
| Other income (expense): |
| Interest income |
| 8,904 |
| 13,041 |
| 16,717 |
| 34,570 |
| Interest expense |
| (22,345 |
| ) |
| (28,317 |
| ) |
| (49,418 |
| ) |
| (56,323 |
| ) |
| Gain (loss) on derivative contracts |
| (1,827,334 |
| ) |
| (85,348 |
| ) |
| (1,361,993 |
| ) |
| 1,635,669 |
| Other income (expense) |
| (279 |
| ) |
| (3 |
| ) |
| 1,663 |
| (2,227 |
| ) |
| Other income (loss), net |
| (1,841,054 |
| ) |
| (100,627 |
| ) |
| (1,393,031 |
| ) |
| 1,611,689 |
| Net income (loss) before income tax expense |
| (650,776 |
| ) |
| (743,486 |
| ) |
| 3,229,364 |
| (107,906 |
| ) |
| Income tax expense (benefit) |
| (165,751 |
| ) |
| (177,452 |
| ) |
| 978,822 |
| 147,829 |
| NET INCOME (LOSS) |
| $ |
| (485,025 |
| ) |
| $ |
| (566,034 |
| ) |
| $ |
| 2,250,542 |
| $ |
| (255,735 |
| ) |
| Currency translation adjustments |
| 242 |
| 6,132 |
| (1,242 |
| ) |
| 6,018 |
| NET COMPREHENSIVE INCOME (LOSS) |
| $ |
| (484,783 |
| ) |
| $ |
| (559,902 |
| ) |
| $ |
| 2,249,300 |
| $ |
| (249,717 |
| ) |
| Net income (loss) per share, basic |
| $ |
| (0.02 |
| ) |
| $ |
| (0.02 |
| ) |
| $ |
| 0.09 |
| $ |
| (0.01 |
| ) |
| Net income (loss) per share, diluted |
| $ |
| (0.02 |
| ) |
| $ |
| (0.02 |
| ) |
| $ |
| 0.09 |
| $ |
| (0.01 |
| ) |
| Weighted average number of shares outstanding, basic |
| 23,779,205 |
| 26,147,403 |
| 23,862,749 |
| 26,356,244 |
| Weighted average number of shares outstanding, diluted |
| 23,779,205 |
| 26,147,403 |
| 23,941,340 |
| 26,356,244 |
EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Balance Sheets
(All amounts stated in US$)
| June 30, |
| December 31, |
| 2021 |
| 2020 |
| ASSETS |
| Current assets |
| Cash and cash equivalents |
| $ |
| 18,527,531 |
| $ |
| 13,270,913 |
| Accounts receivable |
| 3,528,376 |
| 3,917,288 |
| Prepaid income taxes |
| 418,448 |
| 89,285 |
| Other current assets |
| 183,896 |
| 500,583 |
| Total current assets |
| 22,658,251 |
| 17,778,069 |
| Non-current assets |
| Property and equipment: |
| Oil and gas properties, successful efforts method |
| Proved properties |
| 135,256,824 |
| 133,902,723 |
| Unproved properties |
| 21,557,121 |
| 21,552,063 |
| Accumulated depletion, depreciation, amortization and impairment |
| (100,725,088 |
| ) |
| (98,200,111 |
| ) |
| Total oil and gas properties, net |
| 56,088,857 |
| 57,254,675 |
| Gathering system |
| 42,273,148 |
| 42,202,644 |
| Accumulated depletion, depreciation, amortization and impairment |
| (32,835,561 |
| ) |
| (32,101,624 |
| ) |
| Total gathering system, net |
| 9,437,587 |
| 10,101,020 |
| Land |
| 637,764 |
| 637,764 |
| Buildings and other property and equipment, net |
| 326,671 |
| 338,419 |
| Total property and equipment, net |
| 66,490,879 |
| 68,331,878 |
| Other assets: |
| Restricted cash |
| 567,345 |
| 565,858 |
| Prepaid drilling costs |
| 979,464 |
| 379 |
| Total non-current assets |
| 68,037,688 |
| 68,898,115 |
| Total assets |
| $ |
| 90,695,939 |
| $ |
| 86,676,184 |
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| Current liabilities |
| Accounts payable trade |
| $ |
| 2,310,143 |
| $ |
| 1,195,479 |
| Gathering fees payable |
| 844,908 |
| 909,768 |
| Royalties payable |
| 1,323,096 |
| 1,155,698 |
| Accrued capital expenditures |
| 162,399 |
| 139,766 |
| Other accrued liabilities |
| 571,877 |
| 1,002,935 |
| Fair value of derivatives |
| 1,334,533 |
| — |
| Asset retirement obligations |
| 109,671 |
| 106,734 |
| Total current liabilities |
| 6,656,627 |
| 4,510,380 |
| Non-current liabilities |
| Asset retirement obligations |
| 3,059,782 |
| 3,043,509 |
| Deferred income taxes |
| 10,333,715 |
| 10,102,852 |
| Total non-current liabilities |
| 13,393,497 |
| 13,146,361 |
| Total liabilities |
| 20,050,124 |
| 17,656,741 |
| Commitments and contingencies (Note 9) |
| Shareholders' equity |
| Common shares, no par value, unlimited shares authorized and 23,985,799 issued and 23,721,584 outstanding at June 30, 2021, and 23,985,799 shares issued and outstanding at December 31, 2020. |
| 131,730,401 |
| 131,730,401 |
| Treasury shares, 264,215 at June 30, 2021 |
| (1,061,468 |
| ) |
| — |
| Additional paid-in capital |
| 8,317,659 |
| 7,879,119 |
| Accumulated deficit |
| (78,160,182 |
| ) |
| (80,410,724 |
| ) |
| Accumulated other comprehensive income |
| 9,819,405 |
| 9,820,647 |
| Total shareholders' equity |
| 70,645,815 |
| 69,019,443 |
| Total liabilities and shareholders' equity |
| $ |
| 90,695,939 |
| $ |
| 86,676,184 |
EPSILON ENERGY LTD.
Unaudited Condensed Consolidated Statements of Cash Flows
(All amounts stated in US$)
| Six months ended June 30, |
| 2021 |
| 2020 |
| Cash flows from operating activities: |
| Net income (loss) |
| $ |
| 2,250,542 |
| $ |
| (255,735 |
| ) |
| Adjustments to reconcile net income to net cash provided by operating activities: |
| Depletion, depreciation, amortization, and accretion |
| 3,328,954 |
| 4,992,146 |
| Impairment of proved properties |
| — |
| 1,760,000 |
| (Gain) loss on derivative contracts |
| 1,361,993 |
| (1,635,669 |
| ) |
| Bad debt expense |
| — |
| 819,000 |
| Cash received (paid) from settlements of derivative contracts |
| (27,460 |
| ) |
| 2,377,769 |
| Settlement of asset retirement obligation |
| (3,483 |
| ) |
| — |
| Stock-based compensation expense |
| 438,540 |
| 345,971 |
| Deferred income tax expense (benefit) |
| 230,863 |
| (2,201 |
| ) |
| Changes in assets and liabilities: |
| Accounts receivable |
| 388,912 |
| 171,271 |
| Prepaid income taxes and other current assets |
| (12,476 |
| ) |
| 359,795 |
| Accounts payable, royalties payable and other accrued liabilities |
| 77,248 |
| (630,262 |
| ) |
| Net cash provided by operating activities |
| 8,033,633 |
| 8,302,085 |
| Cash flows from investing activities: |
| Additions to unproved oil and gas properties |
| (70,058 |
| ) |
| (128,398 |
| ) |
| Additions to proved oil and gas properties |
| (1,557,869 |
| ) |
| (3,691,408 |
| ) |
| Additions to gathering system properties |
| (79,419 |
| ) |
| (152,257 |
| ) |
| Additions to land, buildings and property and equipment |
| (5,745 |
| ) |
| (151,800 |
| ) |
| Prepaid drilling costs |
| 273 |
| (1,301 |
| ) |
| Net cash used in investing activities |
| (1,712,818 |
| ) |
| (4,125,164 |
| ) |
| Cash flows from financing activities: |
| Buyback of common shares |
| (1,061,468 |
| ) |
| (1,927,198 |
| ) |
| Net cash used in financing activities |
| (1,061,468 |
| ) |
| (1,927,198 |
| ) |
| Effect of currency rates on cash, cash equivalents and restricted cash |
| (1,242 |
| ) |
| 6,018 |
| Increase in cash, cash equivalents and restricted cash |
| 5,258,105 |
| 2,255,741 |
| Cash, cash equivalents and restricted cash, beginning of period |
| 13,836,771 |
| 14,613,711 |
| Cash, cash equivalents and restricted cash, end of period |
| $ |
| 19,094,876 |
| $ |
| 16,869,452 |
| Supplemental cash flow disclosures: |
| Income taxes paid |
| $ |
| 1,074,025 |
| $ |
| — |
| Interest paid |
| $ |
| 27,073 |
| $ |
| 56,323 |
| Non-cash investing activities: |
| Change in unproved properties accrued in accounts payable and accrued liabilities |
| $ |
| (65,000 |
| ) |
| $ |
| — |
| Change in proved properties accrued in accounts payable and accrued liabilities |
| $ |
| 805,443 |
| $ |
| (1,516,946 |
| ) |
| Change in gathering system accrued in accounts payable and accrued liabilities |
| $ |
| (8,915 |
| ) |
| $ |
| (10,310 |
| ) |
| Change in prepaid drilling costs |
| $ |
| 979,358 |
| $ |
| — |
| Asset retirement obligation asset additions and adjustments |
| $ |
| (29,853 |
| ) |
| $ |
| 3,937 |
EPSILON ENERGY LTD.
Adjusted EBITDA Reconciliation
(All amounts stated in US$)
| Three months ended June 30, |
| Six months ended June 30, |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Net income |
| $ |
| (485,025 |
| ) |
| $ |
| (566,034 |
| ) |
| $ |
| 2,250,542 |
| $ |
| (255,735 |
| ) |
| Add Back: |
| Net interest expense |
| 13,441 |
| 15,276 |
| 32,701 |
| 21,753 |
| Income tax expense |
| (165,751 |
| ) |
| (177,452 |
| ) |
| 978,822 |
| 147,829 |
| Depreciation, depletion, amortization, and accretion |
| 1,646,094 |
| 2,577,770 |
| 3,328,954 |
| 4,992,146 |
| Impairment expense |
| — |
| — |
| — |
| 1,760,000 |
| Stock based compensation expense |
| 236,041 |
| 172,052 |
| 438,540 |
| 345,971 |
| Gain on derivative contracts net of cash received or paid on settlement |
| 1,735,674 |
| 1,117,176 |
| 1,334,533 |
| 742,100 |
| Foreign currency translation loss |
| 279 |
| 3 |
| 610 |
| 2,228 |
| Adjusted EBITDA |
| $ |
| 2,980,753 |
| $ |
| 3,138,791 |
| $ |
| 8,364,702 |
| $ |
| 7,756,292 |
Epsilon defines Adjusted EBITDA as earnings before (1) net interest expense, (2) taxes, (3) depreciation, depletion, amortization and accretion expense, (4) impairments of natural gas and oil properties, (5) non-cash stock compensation expense, (6) gain or loss on derivative contracts net of cash received or paid on settlement, and (7) other income. Adjusted EBITDA is not a measure of financial performance as determined under U.S. GAAP and should not be considered in isolation from or as a substitute for net income or cash flow measures prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity.
Additionally, Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. Epsilon has included Adjusted EBITDA as a supplemental disclosure because its management believes that EBITDA provides useful information regarding its ability to service debt and to fund capital expenditures. It further provides investors a helpful measure for comparing operating performance on a "normalized" or recurring basis with the performance of other companies, without giving effect to certain non-cash expenses and other items. This provides management, investors and analysts with comparative information for evaluating the Company in relation to other natural gas and oil companies providing corresponding non-U.S. GAAP financial measures or that have different financing and capital structures or tax rates. These non-U.S. GAAP financial measures should be considered in addition to, but not as a substitute for, measures for financial performance prepared in accordance with U.S. GAAP.
EPSILON ENERGY LTD.
Free Cash Flow Reconciliation
(All amounts stated in US$)
| Three months ended June 30 |
| Six months ended June 30 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| Net cash provided by operating activities |
| $ |
| 2,408,765 |
| $ |
| 3,088,564 |
| $ |
| 8,033,633 |
| $ |
| 8,302,085 |
| Less: Net cash used in investing activities (Capital Expenditures) |
| (1,161,542 |
| ) |
| (1,770,877 |
| ) |
| (1,712,818 |
| ) |
| (4,125,164 |
| ) |
| Free cash flow |
| $ |
| 1,247,222 |
| $ |
| 1,317,687 |
| $ |
| 6,320,815 |
| $ |
| 4,176,921 |
Epsilon defines Free cash flow (“FCF”) as net cash provided by operating activities in the period minus payments for property and equipment made in the period. FCF is considered a non-GAAP financial measure under the SEC’s rules. Management believes, however, that FCF is an important financial measure for use in evaluating the Company’s financial performance, as it measures our ability to generate additional cash from our business operations. FCF should be considered in addition to, rather than as a substitute for, net income as a measure of our performance or net cash provided by operating activities as a measure of our liquidity. Additionally, our definition of FCF is limited and does not represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other obligations, payments made for business acquisitions, or amounts spent to buys back shares. Therefore, we believe it is important to view FCF as supplemental to our entire statement of cash flows.