Energy Services of America CORP - Annual Report: 2008 (Form 10-K)

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INFORMATION ABOUT C.J. HUGHES

Business Overview

C.J. Hughes Construction, Inc. was organized in 1946 as a corporation under the laws of West Virginia and is primarily engaged in the construction, replacement and repair of natural gas pipelines for utility companies and private natural gas companies.  In addition, C.J. Hughes also engages in the installation of water and sewer lines and provides various maintenance and repair services for customers.  The majority of C.J. Hughes’ customers are located in West Virginia, Virginia, Ohio, Kentucky and North Carolina.  C.J. Hughes builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as building and replacing gas line services to individual customers of the various utility companies.  C.J. Hughes is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter.  C.J. Hughes also constructs storage facilities for its natural gas customers.  C.J. Hughes’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, and other services related to pipeline construction.  At September 30, 2008, C.J. Hughes had 626 employees.  Since 2002, C.J. Hughes has completed over 350 miles of pipeline, with its longest project consisting of 10 miles of 20-inch pipe.  C.J. Hughes is not directly involved in the exploration, transportation or refinement of natural gas.

Acquisition of Nitro Electric

In May 2007, C.J. Hughes acquired certain tangible and intangible assets of Nitro Electric Company LLC; primarily the fixed assets, employees and business franchise.  No cash or accounts receivable were acquired and no liabilities were assumed.  Nitro Electric has been in business since 1960.  Nitro Electric’s owners had made a business decision for various reasons to cease operations.  Nitro Electric had not bid on new work for several months and was preparing for closure when approached by C.J. Hughes.  Although the purchase of a business in this situation posed substantial risks of recapturing contracts and business viability, the management of C.J. Hughes, along with the retained management of Nitro Electric, not only was able to accomplish this, but was able to leverage new business from C.J. Hughes’ customer base and from performing joint contracts with C.J. Hughes.  Nitro Electric provides a full range of electrical contracting services to various industries.  These services include substation and switchyard services, including site preparation, packaged buildings, dry and oil-filled transformer installations and other ancillary work with regards thereto.  Nitro Electric also provides general electrical services such as underground, conduit/raceway, testing, cable installation, switchgear lineups as well as a full range of data and communication installation services such as fiber optics, attenuation and OTDR testing, cell/hub systems and various other electrical services to the industrial sector.  Though Nitro Electric has numerous customers, its primary focus since becoming part of C.J. Hughes has been the completion of a large project for Hitachi America.  That project in Council Bluffs, Iowa, was the largest project for Nitro Electric for 2007.  For the year ended December 31, 2007, Nitro Electric’s operations contributed $36.1 million of revenue to C.J. Hughes’ total revenues.  Unless otherwise stated, references to C.J. Hughes include Nitro Electric.

Set forth below is information regarding the sales, assets and operating income of C.J. Hughes’ business.

										Year (2)
		(1)				(3)				Ended
		September 30,				August 15,				December 31,
		2008				2008				2007
Sales		$	19,648,032			$	79,217,380			$	75,305,234
Operating Income		$	1,695,175			$	949,650			$	3,990,841
Assets		$	95,241,942			$	48,457,630			$	27,248,499

 

(1)	Information is as of and for the period August 15 through September 30, 2008
(2)	Information is as of and for the year ended December 31, 2007
(3)	Information is as of and for the period January 1 through August 15, 2008

 

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At September 30, 2008, C.J. Hughes’ largest project consists of a project for Markwest Energy  to install several miles of various size pipe.

C.J. Hughes is subject to extensive state and federal regulation, particularly in the areas of the siting and construction of new pipelines.  The work performed by C.J. Hughes on many projects relates to lines that are regulated by the U.S. Department of Transportation and therefore the work must be performed within the rules and guidelines of the U.S. Department of Transportation.  In addition, work at the various sites must comply with all Federal, state or local environmental laws.

Customers and Marketing

C.J. Hughes customers include Equitable Resources and various of its subsidiaries, Nisource/Columbia Gas Transmission, Nisource/Columbia Gas of Ohio and Pennsylvania, Kentucky American Water, Marathon Ashland Petroleum LLC and various state, county and municipal public service districts.  During the nine months ended September 30, 2008 and the year ended December 31, 2007, Columbia Gas of Ohio was C.J. Hughes’ largest customer, accounting for approximately 20% of total revenues. Other customers who represented over 10% of revenues in 2007 included Marathon Ashland Petroleum LLC at 18% and Columbia Gas of Pennsylvania at 12%. There can be no assurance that Columbia Gas of Ohio or any of C.J. Hughes’ other principal customers will continue to employ C.J. Hughes’ services or that the loss of any of such customers or adverse developments affecting any of such customers would not have a material adverse effect on C.J. Hughes’ financial condition and results of operations.

C.J. Hughes’ sales force consists of industry professionals with significant relevant sales and work experience who utilize industry contacts and available public data to determine how to most appropriately market C.J. Hughes’ services.  We rely on direct contact between our sales force and our customers’ engineering and contracting departments in order to obtain new business.  Due to the occurrence of inclement weather during the winter months, the business of C.J. Hughes (i.e., the construction of pipelines) is somewhat seasonal in that most of the work is performed during the non-winter months.

Nitro Electric’s customers include Hitachi of America, American Electric Power, Toyota and numerous other local companies.  Due to the large job that was underway in 2007, Hitachi of America was the largest customer of Nitro Electric, accounting for approximately 63% of total revenues for the period that Nitro Electric was owned by C.J. Hughes (May through December).  Other customers who represented over 10% of revenues of Nitro Electric included Toyota (18%) and American Electric Power (11%).  While Nitro Electric had a large portion of its resources devoted to the Hitachi of America project in 2007, it is believed that in 2008 and beyond, there are many opportunities to widen the customer base.  However, there can be no assurance that Hitachi of America’s business will continue and in fact the above described project was completed in early 2008.  Further, while it appears likely that most of Nitro Electric’s other customers will continue to do business with Nitro Electric, no assurances can be given to that occurring.

As with C.J. Hughes, the sales force for Nitro Electric consists of industry professionals with significant sales and work experience who utilize industry contacts and available public data to determine how to most appropriately market Nitro Electric’s services.  They rely on direct contact between their sales force and the customer’s engineering and contracting departments in order to obtain new business.  While inclement weather can have some effect on Nitro Electric’s business, that effect is much less than the effect of inclement weather on C.J. Hughes.

 

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Backlog/New Business

A company’s backlog represents orders or contracts which have not yet been completed.  At September 30, 2008, C.J. Hughes had a backlog of work to be completed of $25.4 Million.  At December 31, 2007, C.J. Hughes had a backlog of work to be completed on contracts of $54.2 million.  At September 30, 2008, Nitro Electric had a backlog of approximately of $13.7 Million.  At December 31, 2007, Nitro Electric had a backlog of approximately $16.4 million.  Due to the timing of C.J. Hughes and Nitro Electric construction contracts and the long-term nature of some of our projects, portions of our backlog may not be completed in the current fiscal year.

Types of Contracts

The contracts for C.J. Hughes are usually awarded on a competitive and negotiated basis. While contracts may be a lump sum for a project or one that is based upon time and materials, most of the work is bid based upon unit prices for various portions of the work.  The actual revenues produced from the project will be dependent upon how accurate the customer estimates are as to the units of the various items.

Raw Materials and Suppliers

The principal raw materials that we use are metal plate, structural steel, pipe, fittings and selected engineering equipment such as pumps, valves and compressors.  For the most part, the largest portion of these materials are supplied by the customer.  The materials that C.J. Hughes purchases would predominately be those of a consumable nature on the job, such as small tools and environmental supplies.  These materials are available from a variety of suppliers.  We anticipate being able to obtain these materials for the foreseeable future.

Industry Factors

C.J. Hughes’ revenues, cash flows and earnings are substantially dependent upon, and affected by, the level of natural gas exploration, development activity and the levels of integrity work on existing pipelines.  Such activity and the resulting level of demand for pipeline construction and related services are directly influenced by many factors over which C.J. Hughes has no control.  Such factors include, among others, the market prices of natural gas, market expectations about future prices, the volatility of such prices, the cost of producing and delivering natural gas, government regulations and trade restrictions, local and international political and economic conditions, the development of alternate energy sources and the long-term effects of worldwide energy conservation measures.  Substantial uncertainty exists as to the future level of natural gas exploration and development activity.

C.J. Hughes cannot predict the future level of demand for its pipeline construction services, future conditions in the pipeline construction industry or future pipeline construction rates.

Competition

The pipeline construction industry is a highly competitive business characterized by high capital and maintenance costs.  Pipeline contracts are usually awarded through a competitive bid process and, while C.J. Hughes believes that operators consider factors such as quality of service, type and location of equipment, or the ability to provide ancillary services, price and the ability to complete the project in a timely manner are the primary factors in determining which contractor is awarded a job.  There are a number of regional and national competitors that offer services similar to ours.  Certain of C.J. Hughes’ competitors have greater financial and human resources than C.J. Hughes, which may enable them to compete more effectively on the basis of price and technology.  Our largest competitors are Otis Eastern, LA Pipeline and Apex Pipeline.

The electrical contracting industry is also a highly competitive business, though the capital costs are less in that business and the primary costs are labor and supervision.  Electrical contracts are usually awarded through a competitive bid process.  While Nitro Electric believes that operators consider factors such as quality of service, type and location of equipment, or the ability to provide ancillary services, price and the ability to complete the project in a timely manner are the primary factors in determining which contractor is awarded a job.  There are a number of regional and national competitors that offer services similar to ours.  Certain of Nitro Electric’s competitors have greater financial and human resources than Nitro Electric, which may enable them to compete more effectively on the basis of price and technology.  The largest competitors for Nitro Electric are Green Electric and Summit Electric, Inc.

 

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Operating Hazards and Insurance

C.J. Hughes’ operations are subject to many hazards inherent in the pipeline construction business, including, for example, operating equipment in mountainous terrain, people working in deep trenches and people working in close proximity to large equipment.  These hazards could cause personal injury or death, serious damage to or destruction of property and equipment, suspension of drilling operations, or substantial damage to the environment, including damage to producing formations and surrounding areas.  C.J. Hughes seeks protection against certain of these risks through insurance, including property casualty insurance on its equipment, commercial general liability and commercial contract indemnity, commercial umbrella and workers’ compensation insurance.

C.J. Hughes’ and Nitro Electric’s insurance coverage for property damage to its equipment is based on both companies’ estimates of the cost of comparable used equipment to replace the insured property.  There is a deductible per occurrence on equipment of $2,500.  Third-party liability insurance coverage for both C.J. Hughes and Nitro Electric under the general policy is $1,000,000 per occurrence, with a self-insured retention of $0 per occurrence.  The commercial umbrella policy has a self-insured retention of $10,000 per occurrence, with coverage of $10,000,000 per occurrence.

Government Regulation and Environmental Matters

General.  C.J. Hughes operations are affected from time to time in varying degrees by political developments and federal, state and local laws and regulations.  In particular, natural gas production, operations and economics are or have been affected by price controls, taxes and other laws relating to the natural gas industry, by changes in such laws and by changes in administrative regulations.  Although significant capital expenditures may be required to comply with such laws and regulations, to date, such compliance costs have not had a material adverse effect on the earnings or competitive position of C.J. Hughes.  In addition, C.J. Hughes’ operations are vulnerable to risks arising from the numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection.

Environmental Regulation.  C.J. Hughes’ and Nitro Electric’s activities are subject to existing federal, state and local laws and regulations governing environmental quality, pollution control and the preservation of natural resources.  Such laws and regulations concern, among other things, the containment, disposal and recycling of waste materials, and reporting of the storage, use or release of certain chemicals or hazardous substances.  Numerous federal and state environmental laws regulate pipeline activities and impose liability for discharges of waste or spills, including those in coastal areas.  C.J. Hughes has conducted pipeline construction in or near ecologically sensitive areas, such as wetlands and coastal environments, which are subject to additional regulatory requirements.  State and Federal legislation also provide special protections to animal and marine life that could be affected by C.J. Hughes’ activities.  In general, under various applicable environmental programs, C.J. Hughes may potentially be subject to regulatory enforcement action in the form of injunctions, cease and desist orders and administrative, civil and criminal penalties for violations of environmental laws.  C.J. Hughes may also be subject to liability for natural resource damages and other civil claims arising out of a pollution event.  C.J. Hughes would be responsible for any pollution event that was caused by its actions.  It has insurance that it believes is adequate to cover any such occurrences.  While Nitro Electric’s business is usually performed in plant type situations, there are still risks associated with environmental issues that may occur in those locations.

Environmental regulations that affect C.J. Hughes’ and Nitro Electric’s customers also have an indirect impact on both companies.  Increasingly stringent environmental regulation of the natural gas industry and the electrical utility companies has led to higher costs and a more lengthy permitting process.

The primary environmental statutory and regulatory programs that affect C.J. Hughes’ and Nitro Electric’s operations include the following:  Department of Transportation regulations, regulations set forth by agencies such and FERC and various environmental agencies including state, Federal, and local government.

 

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Health and Safety Matters.  C.J. Hughes’ and Nitro Electric’s facilities and operations are also governed by various other laws and regulations, including the federal Occupational Safety and Health Act, relating to worker health and workplace safety.  As an example, the Occupational Safety and Health Administration has issued the Hazard Communication Standard.  This standard applies to all private-sector employers, including the natural gas exploration and producing industry.  The Hazard Communication Standard requires that employers assess their chemical hazards, obtain and maintain certain written descriptions of these hazards, develop a hazard communication program and train employees to work safely with the chemicals on site.  Failure to comply with the requirements of the standard may result in administrative, civil and criminal penalties.  C.J. Hughes and Nitro Electric believe that appropriate precautions are taken to protect employees and others from harmful exposure to materials handled and managed at its facilities and that it operates in substantial compliance with all Occupational Safety and Health Act regulations.  While it is not anticipated that C.J. Hughes or Nitro Electric will be required in the near future to make material expenditures by reason of such health and safety laws and regulations, C.J. Hughes and Nitro Electric are unable to predict the ultimate cost of compliance with these changing regulations.

Research and Development/Intellectual Property

C.J. Hughes has not made any material expenditures for research and development.  C.J. Hughes does not own any patents, trademarks or licenses.

Properties

C.J. Hughes owns and operates its main office at 75 West Third Avenue, Huntington, West Virginia 25703.  C.J. Hughes will lease temporary locations on an as-needed basis to accommodate its operations based on the projects it is working on.

Legal Proceedings

C.J. Hughes is not a party to any legal proceedings, other than in the ordinary course of business, that if decided in a manner adverse to C.J. Hughes would be materially adverse to C.J. Hughes’ financial condition or results of operations.

ITEM 1A.    Risk Factors

An effective registration statement may not be in place when an investor desires to exercise warrants, thus precluding such investor from being able to exercise his, her or its warrants.

 

No warrants will be exercisable and we will not be obligated to issue shares of common stock unless at the time a holder seeks to exercise, a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants.  Under the terms of the warrant agreement, we have agreed to use our best efforts to meet these conditions and to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants.  However, we cannot assure you that we will be able to do so.  Additionally, we have no obligation to settle the warrants for cash in the absence of an effective registration statement or under any other circumstances.  The warrants may be deprived of any value, the market for the warrants may be limited and the holders of warrants may not be able to exercise their warrants if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside.  Consequently, the warrants may expire unexercised or unredeemed.

 

We may redeem your unexpired warrants prior to their exercise while a prospectus is not current, thereby making your warrants worthless.

 

We have the ability to redeem outstanding warrants, in whole or in part, at any time after they become exercisable and prior to their expiration, at the price of $0.01 per warrant, provided that the last reported sales price of the common stock equals or exceeds $8.50 per share for any 20 trading days within a 30 trading-day period following proper notice of such redemption.  Such redemption can and may occur while a prospectus is not current and therefore the warrants are not exercisable.  If this occurs, your warrants would be worthless.

 

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Private placement warrants have a superior exercise right to warrants received in our initial public offering.

 

Warrants issued in the private placement may be exercised pursuant to an exemption to the requirement that the securities underlying such warrant be registered pursuant to an effective registration statement.  Therefore, such warrants may be exercised whether or not a current registration statement is in place.  The warrants received in our initial public offering are not issued under this exemption, therefore they may only be exercised if a current registration statement is in place.  We are required only to use our best efforts to maintain a current registration statement; therefore, the warrants issued in our initial public offering may expire worthless.

 

The loss of key executives could adversely affect our ability to operate.

 

Our operations are dependent upon a relatively small group of key executives consisting of Marshall T. Reynolds, our Chairman and Chief Executive Officer, and Jack M. Reynolds, a director and our President.  We believe that our success depends on the continued service of our executive management team.  Although we currently intend to retain our existing management , we cannot assure you that such individuals will remain with us for the immediate or foreseeable future.  We do not have employment contracts with any of our current executives.  The unexpected loss of the services of one or more of these executives could have a detrimental effect on us.

 

Our initial stockholders, including our officers and directors, control a substantial interest in us and this may influence certain actions requiring a stockholder vote.

 

Our initial stockholders (including all of our officers and directors) collectively own approximately 50.4% of our issued and outstanding shares of common stock  (including shares underlying warrants that are currently exerciseable).  Since the Officers and Directors own a significant  portion of the shares outstanding, they have a significant influence over any items that might require a shareholder vote.

 

Failure to maintain a current prospectus relating to the common stock underlying our warrants may allow our warrants to expire worthless.

 

No warrants will be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the warrants is current and the common stock has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of our warrants.  Under the terms of a warrant agreement between Continental Stock Transfer & Trust Company, New York, New York, as warrant agent, and us, we have agreed only to use our best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the warrants until the expiration of the warrants.  However, we cannot assure you that we will be able to maintain a current prospectus.  In the absence of an effective registration statement, we have no obligation to settle the warrants in cash, and the warrants may expire unexecuted or unredeemed.  The warrants may be deprived of any value and the market for the warrants may be limited if the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside.

 

Our outstanding warrants may have an adverse effect on the market price of our common stock and make it more difficult to effect a business combination using our common stock as consideration.

 

In connection with our initial public offering and the private placement, as part of the units, we issued warrants to purchase 20,276,923 shares of common stock. We also issued an option to purchase up to 450,000 units to Ferris, Baker Watts, Incorporated, which, if exercised, will result in the issuance of an additional 900,000 warrants. To the extent we issue shares of common stock to effect a business combination, the potential for the issuance of substantial numbers of additional shares upon exercise of these warrants and the option could make us a less attractive acquisition vehicle in the eyes of a target business as such securities, when exercised, will increase the number of issued and outstanding shares of our common stock and reduce the value of any shares issued to complete the business combination. Accordingly, our warrants and the option may make it more difficult to effectuate a business combination or increase the cost of the target business. Additionally, the sale, or even the possibility of sale, of the shares underlying the warrants and the option could have an adverse effect on the market price for our securities or on our ability to obtain future public financing. If and to the extent these warrants and the option are exercised, you may experience dilution to your holdings.

 

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If our initial stockholders exercise their registration rights, it may have an adverse effect on the market price of our common stock and the existence of these rights may make it more difficult to effect a business combination.

 

Our initial stockholders may request that we register the resale of the 2,150,000 shares of common stock they acquired prior to our initial public offering and our five directors (as well as a sixth individual) may request us to register for resale of the shares of common stock  underlying the 3,076,923 warrants they purchased in the private placement at any time. If our initial stockholders exercise their registration rights with respect to all of their initial shares of common stock as well as have the securities underlying their warrants registered, then there will be an additional 5,226,923 shares of common stock eligible for trading in the public market. The presence of this additional number of shares of common stock eligible for trading in the public market may have an adverse effect on the market price of our common stock. In addition, the existence of these rights may make it more difficult to effectuate a business combination or increase the cost of the target business, as the stockholders of the target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential future effect their exercise may have on the trading market for our common stock.

 

Our operating companies are subject to the business cycles of their customers and accordingly downturns in the cycles for any of the customers could result in lower performance

 

Our operating companies  rely on the various projects put out for bid by their customers.  Accordingly, should there be a downturn in their business or their abilities to finance projects, it could have a negative affect on the performance of the operating companies and therefore Energy  Services.

 

ITEM 2.    Properties

 

We maintain our executive offices at 100 Industrial Lane, Huntington, West Virginia 25702.  We consider our current office space adequate for our current operations.

 

ITEM 3.    Legal Proceedings

 

At September 30, 2008, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

 

ITEM 4.     Submission of Matters to a Vote of Security Holders

 

On August 15, 2008, we held a special meeting of stockholders at which the following matters were considered and voted upon:

 

	●	Proposal 1:  the adoption and approval of the transactions contemplated by the Merger Agreement, dated as of January 22, 2008, by and between the Company and ST Pipeline, Inc.;
	●	Proposal 2:  the adoption and approval of the transactions contemplated by the Merger Agreement, dated as of February 21, 2008, by and between the Company and C.J. Hughes Construction Company, Inc.;
	●	Proposal 3:  the approval of an amendment to Energy Services’ certificate of incorporation to change the Company’s name to “Energy Services of America Corporation.”
	●	Proposal 4:  the approval of an amendment to the Company’s certificate of incorporation to remove Article V from the certificate of incorporation after the closing of the acquisitions, as Article V will no longer be applicable to the Company.; and
	●	Proposal 5:  the approval of a proposal to adjourn or postpone the special meeting, if necessary for the purpose of soliciting additional proxies.

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The votes for the proposals above were as follows:

		For				Against				Abstain
Proposal 1			7,453,900				1,622,600				25,503
Proposal 2			7,453,900				1,622,600				25,503
Proposal 3			7,446,220				1,574,038				81,745
Proposal 4			7,452,790				1,545,668				103,545
Proposal 5			7,878,484				1,172,674				50,845

PART II

 

ITEM 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a)      Our units, common stock and warrants are listed on the American Stock Exchange under the symbols ESA.U, ESA and ESA.WS, respectively.  Prior to October 3, 2006, only the units traded on the American Stock Exchange.  The following table sets forth the range of high and low sales prices for the units, common stock and warrants during each of the last two fiscal years.

 

Units

 

Fiscal 2007		High				Low				Dividends
Quarter ended December 31, 2006		$	6.35			$	5.75			$	–
Quarter ended March 31, 2007			6.75				6.17				–
Quarter ended June 30, 2007			7.46				6.45				–
Quarter ended September 30, 2007			7.34				6.00				–

Fiscal 2008		High				Low				Dividends
Quarter ended December 31, 2007		$	6.92			$	6.57			$	–
Quarter ended March 31, 2008			7.46				6.15				–
Quarter ended June 30, 2008			7.45				6.70				–
Quarter ended September 30, 2008			9.09				6.50				–

Common Stock

Fiscal 2007		High				Low				Dividends
Quarter ended December 31, 2006		$	5.40			$	5.25			$	–
Quarter ended March 31, 2007			5.85				5.35				–
Quarter ended June 30, 2007			5.93				5.50				–
Quarter ended September 30, 2007			5.80				5.54				–

Fiscal 2008		High				Low				Dividends
Quarter ended December 31, 2007		$	5.80			$	5.61			$	–
Quarter ended March 31, 2008			5.87				5.65				–
Quarter ended June 30, 2008			5.92				5.56				–
Quarter ended September 30, 2008			5.90				5.20				–

 

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Warrants

Fiscal 2007		High				Low				Dividends
Quarter ended December 31, 2006		$	0.55			$	0.27			$	–
Quarter ended March 31, 2007			0.71				0.44				–
Quarter ended June 30, 2007			0.93				0.56				–
Quarter ended September 30, 2007			0.91				0.57				–

Fiscal 2008		High				Low				Dividends
Quarter ended December 31, 2007		$	0.68			$	0.58			$	–
Quarter ended March 31, 2008			0.92				0.20				–
Quarter ended June 30, 2008			0.89				0.35				–
Quarter ended September 30, 2008			1.27				0.54				–

As of September 30, 2008, there was one holder of record of our units, twenty one holders of record of our common stock and seven holders of record of our warrants.

 

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We have not paid any cash dividends on our common stock to date. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends will be within the discretion of our then board of directors. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.          

 

 

(c)       Energy Services of America Corp. did not repurchase any shares of its common stock during the relevant period, other than the redemption of  1,622,456  shares undertaken in connection with the acquisitions.  The shares were repurchased between August 19 and August 27 at a price of $5.9976  per share for an aggregate purchase price of $9,730,936.

 

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ITEM 6.    Selected Financial Data    

 

Not required for smaller company filer

 

ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the “Unaudited Pro Forma Consolidated Financial information “ appearing in this section of this annual report as well as the historical financial statements and related notes contained elsewhere herein.  Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.

 

Forward Looking Statements

 

Within Energy Services’ financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.  You can identify these statements by the fact that they do not relate strictly to historical or current facts.  They use words such as “anticipate,” “estimate,” “project,” “forecast,” “may,” “will,” “should,” “could,” “expect,” “believe,” “intend” and other words of similar meaning.

These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond  Energy Services' control.  Energy Services has based its forward-looking statements on management’s beliefs and assumptions based on information available to management at the time the statements are made.  Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and that any or all of Energy Services’ forward-looking statements may turn out to be wrong.  They can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.

All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report.  In addition,  Energy Services does not undertake and expressly disclaim any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.

Overview

 

Energy Services was  formed on March 31, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business.  It operated as a “Blank Check Company” until August 15, 2008 at which time it completed the acquisitions of ST Pipeline, Inc. and C J Hughes Construction Company, Inc.  S.T. Pipeline and C.J. Hughes are considered predecessor companies to Energy Services.  The discussion of financial condition and  operating results include the results of the two predecessors prior to the acquisition.  This discussion is based in part on pro-forma income statement information.  The Company acquired  ST Pipeline for $16.2 million in cash and $3.0 million in a promissory note.  The C J Hughes purchase price totalled $34 million, one half of  which  was in cash and one half in Energy Services common stock.    The acquisitions are accounted for under the purchase method and the financial results of both acquisitions are included in the results of Energy Services from the date of acquisition.

 

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Since the acquisitions,  Energy Services has been engaged in one segment of  operations which is the providing of contracting services for  energy related companies.   Currently Energy Services primarily services the Gas, Oil and Electrical industries though it does some other incidental work.  For the Gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities  for utility companies and private natural gas companies.   Energy Services is involved in the construction of both interstate and intrastate  pipelines, with an emphasis on the latter.   For the Oil  industry the Company provides a variety of services relating to pipeline, storage facilities and plant work.  For the Electrical industry, the Company provides a full range of electrical installations and repairs including substation and switchyard services, site preparation, packaged buildings, transformers and other ancillary work  with regards thereto.   Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.  The majority of the Company’s  customers are located in West Virginia, Virginia, Ohio, Kentucky and North Carolina.  The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as building and replacing gas line services to individual customers of the various utility companies.     The Company  had consolidated operating revenues of $28.5 million for the year ended  September  30, 2008 of which   13%  was attributable to electrical customers,  81% to natural gas customers, 2%  for the oil industry, 3% for governmental entities and 1% for all other customers.

Energy Services’ customers include many of the leading companies in the industries it serves, including Marathon Ashland Petroleum LLC, Spectra Energy, Equitable Resources, Hitachi and Nisource.  The Company enters into various types of contracts, including competitive unit price, cost-plus (or time and materials basis) and fixed price (lump sum) contracts.  The terms of the contracts will vary from job to job and customer to customer though most contracts are on the basis of either unit pricing in which the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project.  Most of the Company’s projects are completed within one year of the start of the work.  On occasion, the Company’s customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed.

The Company generally recognizes revenue on unit price and cost-plus contracts when units are completed or services are performed.  Fixed price contracts usually results in recording revenues as work on the contract progresses on a percentage of completion basis.  Under this accounting method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract.  Many contacts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.

 

 

Seasonality: Fluctuation of  Results

 

Our revenues and results of operations can and usually are subject to seasonal variations.  These variations are the result of weather, customer spending patterns, bidding seasons and holidays.  The first quarter of the calendar year is typically the lowest in terms of revenues because inclement weather conditions causes delays in production and customers usually do not plan  large projects during that time.   While  usually better than the first quarter,  the second quarter often has some inclement weather which  can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs.  The third quarter usually is least impacted by weather and usually has the largest number of projects underway.  The fourth quarter is usually lower than the third due to the various holidays.  Many projects are completed in the fourth quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.

In addition to  the fluctuations discussed above,  the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations.  As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.

 

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Accordingly,  our operating results in any particular quarter or year may not be indicative of the results that can be expected for any other quarter or any other year.  You should read “Understanding Gross Margins” and “Outlook” below for discussions of trends and challenges that may affect our financial condition and results of operations.

Understanding Gross Margins

 

Our gross margin is gross profit expressed as a percentage of revenues.  Cost of  revenues consists primarily of salaries, wages and  some  benefits to employees, depreciation, fuel and other equipment, equipment rentals, subcontracted services,  portions of insurance, facilities expense, materials and parts and supplies.  Various factors, some controllable, some not impact our gross margin on a quarterly or annual basis.

Seasonal.  As discussed above, seasonal patterns can have a significant impact on gross margins.   Usually, business is slower in the winter months versus the warmer months.

Weather.  Adverse or favorable weather conditions can impact gross margin in a given period.   Periods of wet weather, snow or rainfall, as well severe temperature extremes  can severely impact production and therefore negatively impact revenues and margins.  Conversely, periods of dry weather with moderate temperatures can positively impact revenues and margins due to the opportunity for increased production and efficiencies.

 

Revenue Mix. The mix of revenues between customer types and types of work for various customers will impact  gross margins.  Some projects will have more margins while others that are extremely competitive in bidding may have narrower margins.

Service and Maintenance versus installation.    In general, installation work has a higher gross margin than maintenance work.  This is due to the fact that installation work usually is more of a fixed price nature and therefore has higher risks involved.  Accordingly, a higher portion of the revenue mix from installation work typically will result in higher margins.

Subcontract work.  Work that is subcontracted to other service providers generally has lower gross margins.  Increases in subcontract work as a percentage of total revenues in a given period  may contribute to a decrease in gross margin.

Materials versus Labor.  Typically materials supplied on projects have smaller margins than labor.  Accordingly, projects with a higher material cost in relation to the entire job will have a  lower overall margin.

Depreciation. Depreciation is included in our cost of revenue.  This is a common practice in our industry, but can make comparability to other companies difficult.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees, general liability insurance and miscellaneous other expenses.

Results of Operations

 

The following table sets forth the Pro Forma Statements of  operations data and such data as a percentage of revenues for the years indicated (dollars in thousands)  This information is based upon and should be read in conjunction with the more detailed information included in the section titled “Unaudited Pro Forma Consolidated Financial Information”.

 

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		Year ended								Year ended
		September 30,								September 30,
		2008				Percent				2007				Percent
Contract Revenues		$	208,240				100.0	%		$	133,091				100.0	%
Cost of Revenues			176,166				84.6	%			115,393				86.7	%
Gross Profit			32,074				15.4	%			17,698				13.3	%
General and administrative expenses			6,913				3.3	%			4,660				3.5	%
Income from operations before taxes			25,160				12.1	%			13,038				9.8	%
Interest Income			349				0.2	%			448				0.3	%
Interest Expense			(1,662	)			-0.8	%			(1,454	)			-1.1	%
Other Income (Expense)			1,233				0.6	%			259				0.2	%
Income before Income taxes			25,080				12.0	%			12,290				9.2	%
Income taxes			10,078				4.8	%			5,171				3.9	%
Net Income		$	15,002				7.2	%		$	7,120				5.3	%
Earnings Per Share - Basic		$	1.24							$	0.59
Earnings Per Share - Diluted		$	1.03							$	0.51

UNAUDITED  PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following tables set forth summary financial information for our pro forma consolidated results for the years ended September 30, 2008 and September 30, 2007.  The information is presented to show what the consolidated income statements would have looked like had the transactions with ST Pipeline and CJ Hughes  been completed at the beginning of each of those years.   The information  includes such adjustments as deemed necessary to reflect the transactions in  a proper manner.   This information should be read in conjunction with the notes thereto as well as the financial statements for the various entities included elsewhere in this document.

The unaudited pro forma information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations that we would have reported had the merger transactions been completed as of the date presented and should not be taken as representative of our future consolidated results of operations.

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Energy Services  of America Corporation

ST Pipeline, Inc./C J Hughes

Pro Forma Combined, Condensed, Consolidated  Statement of Income

Year ended September 30, 2008

(Unaudited)

 

						ST Pipeline				ST Pipeline								C J Hughes				C J Hughes
		Energy Services of				January 1, 2008-				October 1- December				ST Pipeline				January 1, 2008-				October 1- December				C J Hughes
		America Corporation				August 15, 2008				31 2007				Pro Forma Adjustments				August 15, 2008				31 2007				Pro Forma Adjustments				Redemption Adjustments				Pro Forma Combined
		Audited				Audited				Unaudited								Audited				Unaudited												Unaudited
Contract Revenues		$	28,517,688			$	37,410,877			$	37,520,704							$	79,217,380			$	25,573,278											$	208,239,927
Cost of Revenues			23,830,404				30,676,571				22,409,225			$	1,210,813	(1)			74,794,447				22,428,832			$	816,113	(1)							176,166,405
Gross Profit			4,687,284				6,734,306				15,111,479				(1,210,813	)			4,422,933				3,144,446				(816,113	)			-				32,073,522
General and administrative expenses			1,350,246				996,049				419,290								3,473,283				674,345												6,913,213
																																			-
Net income( loss) from operations			3,337,038				5,738,257				14,692,189				(1,210,813	)			949,650				2,470,101				(816,113	)			-				25,160,309
Interest Income			1,585,074				34,675				-				(513,160	)(2)			-				91,897				(543,081	)(2)			(306,545	)(5)			348,860
Interest Expense			(220,274	)			(142,940	)			-				(225,000	)(3)			(707,622	)			(366,488	)											(1,662,324	)
Other Income (Expense)			111,301				932,101				204,133								164,709				(178,747	)											1,233,497
Income before income taxes			4,813,139				6,562,093				14,896,322				(1,948,973	)			406,737				2,016,763				(1,359,194	)			(306,545	)			25,080,342
Income taxes			2,001,981				-								7,803,777	(4)			-				-				395,109	(4)			(122,618	)(6)			10,078,249
Net Income		$	2,811,158			$	6,562,093			$	14,896,322			$	(9,752,750	)		$	406,737			$	2,016,763			$	(1,754,303	)		$	(183,927	)		$	15,002,093

Weighted average shares outstanding - basic			10,750,000																								2,964,763				(1,622,456	)			12,092,307
Weighted average shares - diluted			13,160,643																								2,964,763				(1,622,456	)			14,502,950
Net income per share - basic		$	0.26																															$	1.24
Net income per share - diluted		$	0.21																															$	1.03

 

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Energy Services  of America Corporation

ST Pipeline, Inc./C J Hughes

Pro Forma Combined, Condensed, Consolidated  Statement of Income

Year ended September 30, 2007

(Unaudited)

 

										Net change												Net change
						ST Pipeline				removing Oct 1-Dec												removing Oct 1-Dec
		Energy Services of				Year ended December				31 2007,				ST Pipeline				C J Hughes December				31 2007,				C J Hughes
		America Corporation				31. 2007				adding 2006				Pro Forma Adjustments				31. 2007				adding 2006				Pro Forma Adjustments				Redemption Adjustments				Pro Forma Combined
		Audited				Audited				Unaudited								Audited				Unaudited
Contract Revenues						$	100,385,098				(27,441,017	)						$	75,305,234			$	(15,158,476	)										$	133,090,839
Cost of Revenues							70,948,130				(13,291,520	)		$	1,210,813	(1)			68,096,279				(12,387,188	)		$	816,113	(1)							115,392,627
Gross Profit							29,436,968				(14,149,497	)			(1,210,813	)			7,208,955				(2,771,288	)			(816,113	)			-				17,698,212
General and administrative expenses		$	385,773				1,547,125				(1,400	)							3,218,114				(489,242	)											4,660,370
																																			-
Net income( loss) from operations			(385,773	)			27,889,843				(14,148,097	)			(1,210,813	)			3,990,841				(2,282,046	)			(816,113	)			-				13,037,842
Interest Income			2,612,835				45,939				1,088				(843,961	)(2)			-				28,962				(893,170	)(2)			(504,154	)(5)			447,539
Interest Expense							(298,799	)			(28,067	)			(225,000	)(3)			(1,063,198	)			160,666												(1,454,398	)
Other Income (Expense)							307,524				(13,829	)							118,135				(152,681	)											259,149
Income before income taxes			2,227,062				27,944,507				(14,188,905	)			(2,279,774	)			3,045,778				(2,245,099	)			(1,709,283	)			(504,154	)			12,290,131
Income taxes			846,000				-				-				4,590,331	(4)			275,000				-				(339,101	)(4)			(201,662	)(6)			5,170,568
Net Income		$	1,381,062			$	27,944,507			$	(14,188,905	)		$	(6,870,105	)		$	2,770,778			$	(2,245,099	)		$	(1,370,182	)		$	(302,493	)		$	7,119,563
Weighted average shares outstanding			10,750,000																								2,964,763				(1,622,456	)			12,092,307
Weighted average shares - diluted			12,688,930																								2,964,763				(1,622,456	)			14,031,307
Net income per share - basic		$	0.13																															$	0.59
Net income per share - diluted		$	0.11																															$	0.51

 

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Notes to pro forma income statements

 

(1)	These adjustments represent the added depreciation created from the mark to market of the fixed assets of ST Pipeline and CJ Hughes as required by purchase accounting
(2)	These adjustments reflect the interest income lost from the cash payments made to the shareholders of ST Pipeline and CJ Hughes, etc. had the transaction been completed at the beginning of each period and therefore not earning interest.
(3)	This adjustment is to reflect the added interest cost that would have occurred relating  to the notes issued to the Shareholders of  ST Pipeline had the transaction been in place for the respective periods
(4)	ST Pipeline and CJ Hughes were both Sub S corporations and therefore had no Federal income taxes.  These entries are to reflect the estimated taxes for these companies had they been a part of Energy Services during the respective periods.
(5)	In accordance with the bylaws of Energy Services, shareholders had the right to vote against the transactions and request their shares be redeemed.  These entries reflect the lost interest income from the purchase of those shares so redeemed.
(6)	These entries are to reflect the tax savings related to the interest income lost on the payments to redeem shares.

2008 compared to 2007- Pro Forma basis

Revenues.  Revenues increased by $75.1  million or 56.5% to $208.2 million for the year ended September 30, 2008.  This increase was primarily due to an increase in revenues as the result of the added revenues from Nitro Electric which was acquired by CJ Hughes in May of 2007 and accordingly revenues were only included from that time forward. .

 Cost of Revenues.  Cost of revenues increased by $60.8 million or 52.7%  to $176.2 million for the year ended September 30, 2008.  The driver of this increase was primarily the Nitro Electric acquisition by CJ Hughes in May of 2007 and the inclusion of that information from that time forward in 2007

Gross Profit.  Gross profits for 2008 were $32.1 Million.    This was an increase of $14.4 million or 81.2% over the 2007 gross profit of $17.7 million.  As explained above this was a result of Nitro Electric performance only being included from May of 2007 forward.

Selling general and administrative expenses. Selling, general and administrative increased by $2.2 million (48.3%)to $6.9 million for the year ended September 30, 2008.  This increase was primarily driven by the acquisition of Nitro Electric by CJ Hughes and the inclusion of Nitro performance from that time forward.

Income from Operations.  Income from operations increased $12.1 million or 93% to $25.2  million for the year ended  September 30, 2008 from $13.0 million for the year ended September  30, 2007.   This is  a function of the previous categories.

Interest Income.  Interest income was about  even with the prior year at $349,000  for 2008 and $448,000 for 2007.

Interest Expense Interest Expense increased  by $208,000  to $1.7 million at September 30, 2008.  This increase was  driven primarily  by added borrowings on lines of credit and for equipment purchases.

 

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Other Income.  Other income increased by $974,000 to $1.2 million for the year ended September 30, 2008 over the 2007 amount of $259,000.  This increase was driven by the rental of equipment to outside parties.

Net Income. Net Income increased by $7.8 million or 110.7% to $15.0 million  for the year ended September  30, 2008 from a net income of $7.1 million for the year ended  September 30, 2007.  The increase occurred due to the various changes as previously discussed.

2008  for Energy Services

Energy  Services for 2008 had sales of $28.5 million, a net income of $2.8 million which resulted in earnings per share of $0.26  basic and $0.21 fully diluted.  These results included  results from the acquired companies from August 15, 2008 through September 30, 2008.  The results also included $1.6 million in interest income from the trust fund which was disbursed as discussed in the financial conditions section.

Comparison of Financial Condition

 

The Company had total assets at September 30,  2008 of  $133.7 million.  Some of the primary components of the balance sheet were  accounts receivable which totaled $38.6 million up $8.4 million from  the prior year balances of the operating companies.  Other major categories of assets at September 30, 2008 included cash of $13.8 million and fixed assets of $33.3 million.  Liabilities totaled $73.4 million up $15.2 million from 2007.  This increase was primarily due to borrowings to fund the purchase of fixed assets.

At the end of 2007, the  Company had $50.7 million of funds in a trust account being held for the completion of  acquisitions totaling at least 80% of the funds.  That balance grew to $51.5 million by August 15, 2008.  Upon completion of the ST Pipeline and CJ Hughes acquisitions on August 15, 2008, the Company disbursed those funds with $33.2 million in cash going to the acquired companies’ shareholders, $9.7 million to redeem those Energy Services shareholders electing redemption, $1.0 million to pay the underwriting deferred fee and the remaining $7.5 million to the Company  to be used for general corporate purposes.

Stockholders’ Equity. Stockholders’ Equity rose from $40.0 million at September 30, 2007 to $60.4 million at  September 30, 2008 due to  a combination of the additional shares issued with regards to the C. J. Hughes Acquisition and the Net Income for the year.

Liquidity and Capital Resources

 

Cash Requirements

We anticipate that our cash and cash equivalents on hand at September 30, 2008  which totaled  $13.8 million  along with  our credit facilities available to us  and our anticipated future cash flows from operations will provide sufficient cash to meet our operating needs.  However, with the current energy shortage nationwide and the increased demand for our services, we could be faced with needing significant additional working capital.  Also,  current general credit tightening  resulting from the general banking and other economic contraction that has occurred in the second half of 2008, has impaired the availability of credit facilities for  future operational needs.  A prolonged restriction in borrowing capacity may   limit the growth ability of the Company.

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Sources and uses of Cash

 

As of September 30, 2008, we had $13.8 million in cash ,  working capital of $17.4 million and long term debt  net of current maturities of $25.9 million.   The maturities of the total long term debt is as follows

2009				2010				2011
$	11,239,357				6,985,979				1,661,923

Off-Balance Sheet transactions

 

Due to the nature of our industry, we often  enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets.  Though for the most part not material in nature, some of these are:

Leases

 

 Our work often requires us to lease various facilities, equipment and vehicles.  These leases usually are short term in nature, one year or less though at times we may enter into longer term leases when warranted.  By leasing equipment, vehicles and facilities, we are able to reduce are capital outlay requirements for equipment vehicles and facilities that we may only need for short periods of time.   The Company currently rents two pieces of  real estate from stockholders-directors of the company under long-term lease agreements.  The one agreement calls for monthly rental payments of $5,000  and extends through January 1, 2012.  The second agreement is for the Company’s headquarter offices and is rented from a corporation in which two of the Company’s directors are shareholders.   The agreement began November 1, 2008 and runs through 2011 with options to renew past that.  It calls for a monthly rental of $7,500 per month.

Letters of Credit

Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or  to secure  payments to subcontractors, vendors, etc. on various customer projects.   At September 30, 2008, the Company was contingently liable on an irrevocable  Letter of  Credit  for $950,542 to guarantee payments of insurance premiums to  the group captive insurance company through which the Company obtains its general liability insurance.

Performance Bonds

Some customers, particularly new ones or governmental agencies require us to post bid bonds,  performance bonds and payment bonds.   These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors.  If we fail to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond.  We must reimburse the insurer for any expenses or outlays it is required to make.  Depending upon the size and conditions of a particular contract, we may be required to post letters of credit or other collateral in favor of the insurer.   Posting of these letters or other collateral will reduce our borrowing capabilities.   Historically, the company has never had a payment made by an insurer under these circumstances and do not anticipate any claims in the foreseeable future.    At September 30, 2008, we had $26.1 million bonds issued by the insurer outstanding.

 

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Concentration of Credit Risk

In the ordinary course of business the company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies,  general contractors, and various commercial and industrial customers located within the United States.    Consequently, we are subject to potential credit risk related to business and economic factors that would affect these companies.  However, we generally have certain statutory lien rights  with respect to services provided.  Under certain circumstances such as foreclosure, we may take title to the underlying assets in lieu of cash in settlement of receivables.  The company had only two customers that exceeded ten percent of  revenues for the year ended September 30, 2008.  This was  Equitable Resources and Spectra  which accounted for 69% of revenues.

Litigation

The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business.  These actions typically seek, among other things, compensation for alleged personally injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief.  With  respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.  We do not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Related Party Transactions

In the normal course of business, we enter into transactions from time to time with related parties.  These transactions typically would not be material in nature and would usually would relate to real estate,  vehicle or equipment rentals.

Inflation

Due to relatively low levels of inflation during the years ended September 30, 2007 and 2008, inflation did not have a significant effect on our results.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” SFAS No. 157 defines fair value, establishes methods used to measure fair value and expands disclosure requirements about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal periods, as it relates  to financial assets and liabilities that are carried at fair value.  SFAS No. 157 also requires certain tabular disclosures related to results of applying SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS No. 142, “Goodwill and Other Intangible Assets”.  On February  12, 2008, the FASB provided a one year deferral for the implementation of SFAS No. 157 for non-financial assets and liabilities  Based on the assets and liabilities on our balance sheet as of September 30, 2008, we do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.  SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items at fair value that are not currently required to be measured.  Unrealized gains and losses on items for which the fair value option has been  elected are reported in earnings.  SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  Based on the assets and liabilities on our balance sheet as of September 30, 2008, we do not expect the adoption of SFAS No. 159 to have any  impact on our consolidated financial position, results of operations or cash flows.

 

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During December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations”.  SFAS No. 141 (R ) is effective for fiscal years beginning after December 15, 2008.  Earlier application is prohibited.  Assets and liabilities that arose from business combinations which occurred prior to the adoption of FASB No. 141 ( R) should not be adjusted upon the adoption of SFAS No. 141 (R).  SFAS No. 141 ( R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the business combination; establishes the acquisition date as the measurement date to determine the fair value of all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.  As it relates to recognizing all  (and only) the assets acquired and liabilities assumed in a business combination, costs an acquirer expects but is not obligated to incur in the future to exit an activity of an acquiree or to terminate or relocate an acquiree’s employees are not liabilities at the acquisition date but must be expensed in accordance with other applicable generally accepted accounting principles.  Additionally, during the measurement period, which should not exceed one year from the acquisiton date, any adjustments that are needed to assets acquired and liabilities assumed to reflect new information obtained about facts and circumstances that existed as of that date will be adjusted retrospectively.  The acquirer will be required to expense all acquisition- related costs in the periods such costs are incurred other than costs to issue debt or equity securities.  SFAS No. 141 ( R) will have no impact on our consolidated financial position, results of operations or cash flows at the date of adoption, but it could have a material impact on our consolidated financial position, results of operations or cash flows in the future when it is applied to acquisitions which occur in the fiscal year beginning October 1 , 2009.

 

In April 2008, the FASB issued staff position FSP 142-3, “Determination of the Useful Life of Intangible Assets”.  FSP142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful  life of a recognized intangible asset under SFAS NO. 142.  The intent of FSP 142-3 is to improve the consistency  between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value and to enhance existing disclosure requirements relating to intangible assets.  FSP 142-3 is effective for fiscal years beginning after December 15, 2008 and should be applied prospectively to intangible assets acquired after the effective date.  Early adoption is prohibited.  Accordingly, we will adopt FSP 142-3 on October 1, 2009.   We do not expect FSP 142-3 to have an impact on our consolidated financial position, results of operations or cash flows at the date of adoption, but it could have a material impact on our consolidated financial position, results of operations or cash flows in future periods.

Critical Accounting Policies

The discussion and analysis of the Company’s financial condition and results of operations are based  on our pro forma consolidated financial statements, which have been prepared in accordance with  accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period.  We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  There can be no assurance that actual results will not differ from those estimates.  Management  believes the following accounting policies affect our more significant judgments and  estimates used in the preparation of  our consolidated financial statements.

 

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Revenue Recognition We recognize revenue when services are performed except when work is being performed under a fixed price contract.  Revenue from fixed price contracts are recognized under the percentage of completion  method, measured by the percentage of costs incurred to date to total estimated costs for each contract.  Such contracts generally provide that the customer accept completion of progress to date and compensate us for services rendered, measured typically in terms of units installed, hours expended or some other measure of progress.   Contract costs typically include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Costs.  Provisions for the total estimated losses  on uncompleted contracts are made in the period in which such losses are determined.   Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income and their effects are recognized in the period in which the revisions are determined.

Self Insurance The Company is insured  at one subsidiary for general liability insurance through a captive insurance company.  While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs, the Company does have to maintain a letter of credit to guarantee payments of premiums.  Should the Captive experience severe losses over an extended period, it could have a detrimental affect on the Company.

Current and Non Current Accounts Receivable and Provision for Doubtful Accounts   The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful.  Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others,  our customer’s access to capital, our customer’s willingness  or ability to pay, general economic conditions and the ongoing relationship with the customer.  While most of our Customers are large well capitalized  companies, should they experience material changes in their revenues and cash flows or incur other  difficulties and not be able to pay the amounts owed, this  could cause reduced cash flows and losses in excess of our current reserves.  At September 30, 2008, the management review deemed that the allowance for doubtful accounts was adequate to cover any anticipated losses.

 

Outlook

 

The following statements  are based on current expectations.  These statements are forward looking, and actual results may differ materially.

Recently  our customers have been experiencing high demand for their products, particularly Natural Gas.  Accordingly, we normally would expect to  see projected spending for our customers  on their transmission and distribution systems increasing dramatically over the next few years.  However, with the current uncertainty in the economy the demand for the customer’s project could wane and also their ability to fund planned projects could be reduced.    The Company’s  backlog at  September 30, 2008 was $41 million and  while adding additional business projects appears likely, no assurances can be given that the Company will be successful in  bidding on projects that become available.  Moreover, even if the Company obtains contracts, there can be no guarantee  that the projects will go forward if  the current economic instability continues.

If the increased demand experienced in fiscal  2008 continues, we believe that  the Company will continue to have opportunities to continue to improve both revenue volumes and the  margins thereon.  However, as noted above, if the current economic conditions persist, growth could be limited.

If growth continues , we will be required to make additional capital expenditures for equipment to keep up with that need.  Currently, it is anticipated that in fiscal 2009, the Company’s   needed capital expenditures will be between $2.0 and $4.0 million dollars.  However, if  the customer demands continue to grow, this number could change dramatically.  Significantly higher capital expenditure requirements could of course put a strain on the Company’s cash flows and require additional borrowings.

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ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks, primarily related to increases in fuel prices and adverse changes in interest rates, as discussed below.

 

Interest Rate.  Our exposure to market rate risk for changes in interest rates relates to our borrowings from banks.   Some of our loans have variable  interest rates.  Accordingly, as rates rise, our interest cost would rise.   We do not feel that this risk is significant,

 

ITEM 8.    Financial Statements and Supplementary Data

 

Financial Statements are included as Exhibit 13 to this Annual Report on Form 10-K.

 

ITEM 9.    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

    We have engaged Arnett & Foster, Certified Public Accountants, P.L.L.C. (“Arnett & Foster”) as our new independent registered public accounting firm, effective October 1, 2008.  We continued our relationship with Castaing, Hussey & Lolan LLC, CPAs (“CHL”) as its independent registered public accounting firm through the preparation and filing on August 13, 2008 of the Company’s Form 10-Q for the quarter period ended June 30, 2008.  On October 1, 2008, the Company notified CHL that it was dismissing CHL as principal accountants.

CHL’s reports on our consolidated financial statements as of and for the years ended September 30, 2007 and 2006 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.  Arnett & Foster has been engaged to audit our consolidated financial statements as of and for the year ending September 30, 2008.  The engagement of Arnett & Foster was approved by our Audit Committee.

In connection with the audits of the two fiscal years ended September 30, 2007 and the subsequent interim period, there were (1) no disagreements with CHL on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to the satisfaction of CHL, would have caused them to make reference to the subject matter of the disagreements in connection with their opinion and (2) no reportable events.

Arnett & Foster was engaged by the Company on October 1, 2008 to audit the consolidated financial statements of the Company as of and for the year ending September 30, 2008.  During the period beginning October 1, 2006 through the date of this Report, the Company did not consult with Arnett & Foster regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

 

ITEM 9A.   Controls and Procedures

 

(a)  Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services of America Corporation files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

 

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(b)  Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has used the framework set forth in the report entitled “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent fiscal year.

	/s/ Marshall  T. Reynolds
	Marshall T. Reynolds
	Chairman and Chief Executive Officer
	/s/ Larry A. Blount
	Larry A. Blount
	Chief Financial Officer

(c)  Changes in Internal Controls over Financial Reporting

With the acquisition of the two operating companies in the fourth quarter of the Company’s fiscal year, the Company has had to evaluate the controls at those companies and also the process of bringing those companies into Energy Services.  Management believes that there are no material weaknesses in the internal controls of the two operating companies  that will materialy affect Energy Services of America Corporation’s internal control over financial reporting.

ITEM 9B.   Other Information

 

None.

 

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PART III

 

ITEM 10.   Directors, Executive Officers and Corporate Governance

 

Directors and Officers

 

Our directors and executive officers at September 30, 2008 are as follows:

 

Name		Age		Position
Marshall T. Reynolds		71		Chairman of the Board, Chief Executive Officer
Jack M. Reynolds		43		Director
Edsel R. Burns		57		Director and President
Neal W. Scaggs		71		Director
Joseph L. Williams		63		Director
Richard A. Adams		40		Director
Keith Molihan		66		Director
James Shafer		65		Director
Douglas Reynolds		32		Director
Eric Dosch		30		Director
Larry A. Blount		59		Chief Financial Officer and Secretary

 

Marshall T. Reynolds has served as our Chairman of the Board of Directors and Chief Executive Officer since our inception. Mr. Reynolds has served as Chief Executive Officer and Chairman of the Board Directors of Champion Industries, Inc., a commercial printer, business form manufacturer and supplier of office products and furniture, from 1992 to the present, and sole shareholder from 1972 to 1993; President and General Manager of The Harrah & Reynolds Corporation, from 1964 (and sole shareholder since 1972) to present; Chairman of the Board of Directors of Portec Rail Products, Inc.; Chairman of the Board of Directors of the Radisson Hotel in Huntington, West Virginia; and Chairman of the Board of Directors of McCorkle Machine and Engineering Company in Huntington, West Virginia. Mr. Reynolds also serves as a Director of the Abigail Adams National Bancorp, Inc. in Washington, D.C.; Chairman of the Board of Directors of First Guaranty Bank in Hammond, Louisiana; and Chairman of the Board of Directors of Premier Financial Bancorp, Inc. in Huntington, West Virginia. Mr. Reynolds is the father of Jack Reynolds and Douglas Reynolds.

 

Jack Reynolds  served as President, Chief Financial Officer and a member of our Board of Directors of from  our inception through October 1, 2008.  Mr. Reynolds has been a Vice President of Pritchard Electric Company since 1998.  Pritchard is an electrical contractor providing electrical services to both utility companies as well as private industries.  Mr. Reynolds also serves as a Director of Citizens Deposit Bank of Vanceburg, Kentucky.

 

Edsel R. Burns has been a Director since our inception and was appointed  President of the Company on October 1, 2008.  Mr. Burns was President and Chief Executive Officer of C. J. Hughes Construction Company, Inc. from September of 2002 to October 1, 2008.  From January 2002 to September of 2002, Mr. Burns was self-employed as an independent financial consultant to banks. From June of 2001 to December 2001, Mr. Burns was the Chief Financial Officer for Genesis Health Systems, a holding company for a collaborative group of three hospitals, two in Huntington, West Virginia and one in Point Pleasant, West Virginia.  Mr. Burns is a Certified Public accountant and is a member of the American Institute of Certified Public Accountants as well as the West Virginia and Ohio societies of CPAs.  He also is on the Board of Directors of Premier Financial Bancorp, Inc.

 

Neal W. Scaggs has been a Director since our inception.  Mr. Scaggs has been president of Basiden Brothers, Inc. (retail and wholesale hardware) from 1963 to the present.  Mr. Scaggs is on the Boards of Directors of Premier Financial Bancorp, Inc., Champion Industries, Inc. and Portec Rail Products, Inc.

 

Joseph L. Williams has been a Director since our inception.  Mr. Williams is the Chairman, President and Chief Executive Officer of Basic Supply Company, Inc., which he founded in 1977.  Mr. Williams was one of the organizers and is a Director of First Sentry Bank, Huntington, West Virginia.  Mr. Williams also serves as a Director of Abigail Adams National Bancorp, Inc., in Washington, D.C.  Mr. Williams is also Chairman, President and Chief Executive Officer of Consolidated Bank & Trust Co., in Richmond, Virginia. Mr. Williams is a Director of the West Virginia Capital Corporation and the West Virginia Governor’s Workforce Investment Council. He is a former Director of Unlimited Future, Inc. (a small business incubator) and a former Member of the National Advisory Council of the U.S. Small Business Administration.  Mr. Williams is a former Mayor and City Councilman of the City of Huntington, West Virginia.  He is a graduate of Marshall University with a degree in finance and is a member  of  its Institutional Board of Governors.

 

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Richard A. Adams, Jr. was appointed to the Board of Directors on August 15, 2008.  Mr. Adams has been the President of United Bank, Inc., a subsidiary of United Bankshares, Inc. since 2007. Prior to his appointment as President, Mr. Adams was the Executive Vice President of United Bank, Inc.  He is also Executive Vice President of United Bankshares, Inc., a multi-state bank holding company doing business in Ohio, West Virginia, Virginia, Maryland and Washington, D.C.

 

Keith Molihan was appointed to the Board of Directors on August 15, 2008.  Mr. Molihan is a retired executive director of the Lawrence County Community Action Organization.  Mr. Molihan has served as Chairman of the Board of Directors of Ohio River Bank, Chairman of the Board of Directors of Farmers Bank of Eminence Kentucky and Chairman of the Board EMEGA Turbine Technology, as well as President of the Lawrence County Ohio Port Authority and President of the Southeast Ohio Emergency Medical organization.

 

James Shafer was elected to the Board on November 19, 2008.  Mr. Shafer is president and until its sale to Energy Services was the owner of S.T.Pipeline.

 

Douglas Reynolds was elected to the Board on November 19, 2008.  Mr. Reynolds is an attorney for Reynolds & Brown, PLLC.  Mr. Reynolds is the President of the Transylvania Corporation and is Chairman of C.J. Hughes Construction Company, and a director of The Harrah and Reynolds Corporation, and Portec Rail Products, Inc.  Mr. Reynolds is a graduate of Duke University and holds a law degree from West Virginia University.  Mr. Reynolds is the son  of Director Marshall T. Reynolds and brother of Jack M. Reynolds.

 

Eric Dosch was elected to the Board on November 19, 2008.  Mr. Dosch has served as credit department manager with First Guaranty Bank located in Hammond, Louisiana since December 2005.  Prior to that time Mr. Dosch served as credit officer with First Guaranty Bank since October 2003.  Prior to his association with First Guaranty Bank, Mr. Dosch was an analyst with Livington & Jefferson, a private asset management firm located in Cincinnati, Ohio.

 

Larry A. Blount was appointed as Chief Financial Officer and Secretary of the Company on October 1, 2008..  Mr. Blount graduated from West Virginia State University with a Bachelor of Science degree in Business Administration and Accounting.  He is also a Certified Public Accountant.  Mr. Blount was employed by Union Boiler Company, in various capacities, including Staff Accountant, Internal Auditor, Chief Accountant and Controller, from 1980-1996.  From 1996-2003 he was Controller and Vice-president of Accounting and Finance for Williams Group International.  He served as Divisional Accounting Manager for Alberici Constructors from 2003-2005.  From 2005-2007, Mr. Blount served as Vice President, Chief Financial Officer, Secretary and Treasurer for Nitro Electric Company.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Our executive officers and directors and beneficial owners of greater than 10% of the outstanding shares of common stock are required to file reports with the Securities and Exchange Commission disclosing beneficial ownership and changes in beneficial ownership of our common stock.  Securities and Exchange Commission rules require disclosure if an executive officer, director or 10% beneficial owner fails to file these reports on a timely basis.  Based on our review of ownership reports required to be filed for the year ended September 30, 2008, no executive officer, director or 10% beneficial owner of our shares of common stock failed to file ownership reports on a timely basis.

 

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Code of Ethics

 

Energy Services of America Corp. has adopted a Code of Ethics that applies to Energy Services of America Corp.’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions.  The Code of Ethics is filed as Exhibit 14 to this Form 10-K.  A copy of the Code will be furnished without charge upon written request to the Secretary, Energy Services of America Corp.,  100 Industrial Lane, Huntington, West Virginia.

 

Board Committees

 

Our board of directors has an audit committee. Our board of directors has adopted a charter for this committee as well as a code of ethics that governs the conduct of our officers and employees.

 

Audit Committee

 

Our audit committee consisted of Messrs. Burns, Scaggs, and Williams until the completion of the acquisition  of ST Pipeline and CJ Hughes.  Following the completion of the acquisitions , the audit committee consisted of Messers Scaggs, Williams, Adams and Molihan with Mr. Scaggs acting as the chairman of the committee. The independent directors we appoint to our audit committee are independent members of our board of directors, as defined by the rules of the SEC. Each member of our audit committee is financially literate, and our board of directors has determined that Mr. Adams qualifies as an audit committee financial expert; as such term is defined by SEC rules.

 

The audit committee reviews the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee also recommends the firm selected to be our independent registered public accounting firm, reviews and approves the scope of the annual audit, reviews and evaluates with the independent public accounting firm our annual audit and annual consolidated financial statements, reviews with management the status of internal accounting controls, evaluates problem areas having a potential financial impact on us that are brought to the committee’s attention by management, the independent registered public accounting firm or the board of directors, and evaluates all of our public financial reporting documents.

 

Other Committees

 

Our board has determined that the independent members of our board of directors will perform the duties of the nominating committee and the compensation committee of the board of directors. As a result, the independent directors will (i) identify individuals qualified to become members of the board of directors and recommend to the board of directors the nominees for election to the board of directors, (ii) recommend director nominees for each committee to the board of directors, (iii) identify individuals to fill any vacancies on the board of directors, (iv) discharge the board of directors’ responsibilities relating to compensation of our directors and officers and (v) review and recommend to the board of directors, compensation plans, policies and benefit programs, as well as approve chief executive officer compensation.

 

Nomination of Directors

 

The Company has not undertaken any material changes with respect to the procedures for election of directors since its last disclosure of these procedures.

 

ITEM 11.   Executive Compensation   

 

No executive officer or director has received any cash compensation for services rendered during the year ended September 30, 2008.

 

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Compensation Committee Interlocks and Insider Participation

 

The compensation committee is comprised of our independent directors.  Under the board’s policies, Mr. Marshall Reynolds, Mr. Jack Reynolds, and any other director who is also an executive officer, will not participate in the Board of Directors’ determination of compensation for their respective offices in the future if compensation is given to executive officers.

 

Report of the Compensation Committee on Executive Compensation

 

As of the end of fiscal 2008, no compensation has been paid to any executive officer.  Consequently, the independent members of the Board of Directors have not met in their capacity as the Compensation Committee and have not formulated any policies on executive compensation.  If we offer compensation in the future to our executive officers, including our Chief Executive Officer, we will adopt standards and policies to govern compensation.

 

ITEM 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth information regarding the beneficial ownership of our common stock as of September 30, 2008 by:

 

	●	each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
	●	each of our officers and directors; and
	●	all our officers and directors as a group.

 

Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them.

 

Name and Address of Beneficial Owner(1)		Amount and Nature of Beneficial Ownership(2)				Percent of Class
Marshall T. Reynolds			4,661,864	(3)			30.20	%
Jack M. Reynolds			506,924	(4)			4.17	%
Edsel R. Burns			861,415	(5)			7.08	%
Larry A. Blount			—				—
Neal W. Scaggs			431,415	(6)			3.55	%
Joseph L. Williams			184,424	(7)			1.52	%
Richard M. Adams			—				—
Keith Molihan			—				—
Douglas Reynolds			1,284,815				10.56	%
Eric Dosch			---				---	%
James Shafer			9,800				.08	%
All directors and officers as a group (11 individuals
			7,930,857	(8)			50.44	%

 

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(1)

The business address of each person is 100  Industrial Lane, Huntington, West Virginia 25702.

(2)

In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner for purposes of this table of any shares of common stock if he has sole or shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the date as of which beneficial ownership is being determined. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. Includes all shares held directly as well as by spouses and minor children, in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or shared voting and investment power.

 

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(3)	Includes 3,342,303 shares underlying warrants .
(4)	Includes 76,924 shares underlying warrants .
(5)	Includes 76,924 shares underlying warrants .
(6)	Includes 76,924 shares underlying warrants .
(7)	Includes 76,924 shares underlying warrants .
(8)	Includes shares underlying warrants .

ITEM 13.   Certain Relationships and Related Transactions, and Director Independence

 

Transactions with Certain Related Persons

 

The Company Leases it’s headquarter Offices from a corporation in which two directors, Douglas Reynolds and Jack Reynolds are significant shareholders.  One of the Company’s  subsidiaries, ST Pipeline, leases it’s offices from Director James Shafer.  Management feels that the rentals are comparable to similar rates for similar space in independent transactions.   From time to time, the Company may purchase office supplies or furniture from Chapman Printing, Co. which is owned in part by Marshall Reynolds.

 

We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged.

 

Board Independence

 

The Board of Directors consists of a majority of “independent directors” within the meaning of the American Stock Exchange corporate governance listing standards.  The Board of Directors has determined that Messrs. Adams, Dosch,  Molihan,  Scaggs and Williams are “independent directors” within the meaning of such standards.

 

The Board of Directors has adopted a policy that the independent directors of the Board of Directors shall meet in executive sessions periodically, which meetings may be held in conjunction with regularly scheduled board meetings.  Three executive sessions were held during the fiscal year ended September 30, 2007 and three were held during the fiscal year ended September 30, 2008..

 

ITEM 14.   Principal Accountant Fees and Services

 

Castaing Hussey & Lolan, LLC

 

Audit Fees

During the fiscal year ended September 30, 2007, we paid Castaing, Hussey & Lolan, LLC. (Castaing) $13,965 for the services they have performed in connection with the audit of our financial statements included in this Annual Report on Form 10-K and the review of the quarterly financial statements contained in  Form 10Q for the year ended September 30, 2007.  During the year ended September 30, 2008, we paid Castaing $17,025 for services provided in conjunction with filing of the Company’s Forms 10-Q and the definitive proxy statement for the approval of the acquisition proposals.

 

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Audit-Related Fees

During fiscal 2007  Castaing  did not render any audit assurance and related services reasonably related to the performance of the audit or review of financial statements.  During Fiscal 2008 Castaing was paid $4,860 for acquisition related accounting services.

 

Tax Fees

During the fiscal years ended September 30, 2007 and 2008, we paid Castaing $2,170 and $1,555, respectively  for tax compliance services.

All Other Fees

During fiscal 2008 and 2007, there were no fees billed for products and services provided by Castaing  other than those set forth above.

 

Arnett and Foster, P.L.L.C.

 

Audit Fees

During the fiscal year ended September 30, 2008, we  paid no fees to Arnett & Foster relating to the Audits of the Company for the year ended September 30, 2008.   We have paid $5,000 in fees since September 30, 2008 relating to the 2008 Audit.

Audit- Related Fees

During fiscal 2008, Arnett and Foster did not render any audit assurance and related services reasonably related to the performance of the audit or review of financial statements

Tax Fees

During  fiscal 2008 Arnett and Foster provided no tax services to the Company.

All Other Fees

During fiscal 2008 there were no other fees billed by Arnett and Foster for products and services provided by our independent registered public accounting firm other than those set forth above.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services.  Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget.  The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary.  The independent registered public accounting firm and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date.  All of the fees paid in the audit-related, tax and all other categories were approved per the pre-approval policies.

Changes in Independent Registered Public Accountants

We have engaged Arnett & Foster, Certified Public Accountants, P.L.L.C. (“Arnett & Foster”) as our new independent registered public accounting firm, effective October 1, 2008.  We continued our relationship with Castaing, Hussey & Lolan LLC, CPAs (“CHL”) as its independent registered public accounting firm through the preparation and filing on August 13, 2008 of the Company’s Form 10-Q for the quarter period ended June 30, 2008.  On October 1, 2008, the Company notified CHL that it was dismissing CHL as principal accountants.

 

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CHL’s reports on our consolidated financial statements as of and for the years ended September 30, 2007 and 2006 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.  Arnett & Foster has been engaged to audit our consolidated financial statements as of and for the year ending September 30, 2008.  The engagement of Arnett & Foster was approved by our Audit Committee.

In connection with the audits of the two fiscal years ended September 30, 2007 and the subsequent interim period, there were (1) no disagreements with CHL on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements, if not resolved to the satisfaction of CHL, would have caused them to make reference to the subject matter of the disagreements in connection with their opinion and (2) no reportable events.

Arnett & Foster was engaged by the Company on October 1, 2008 to audit the consolidated financial statements of the Company as of and for the year ending September 30, 2008.  During the period beginning October 1, 2006 through the date of this Report, the Company did not consult with Arnett & Foster regarding any of the matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K.

 

ITEM 15.   Exhibits and Financial Statement Schedules

 

The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:

	(a)(1)	Financial Statements
		Energy Services of America Corporation
	●	Report of Independent Registered Public Accounting Firm	F-1
	●	Report of Castaing, Hussey & Lolan, LLC Independent Registered Public Accounting Firm	F-2
	●	Balance Sheets, September 30, 2007 and September 30, 2008	F-3
	●	Statements of Income, Period Ended September 30, 2007 and September 30, 2008	F-4
	●	Statements of Shareholders’ Equity, Period Ended September 30, 2007 and September 30, 2008	F-5
	●	Statements of Cash  flows, Period Ended September 30, 2007 and September 30, 2008	F-6
	●	Notes to Financial Statements.	F-7
		C.J. Construction Company, Inc.
	●	Report of Independent  Public Accounting Firm	G-1
	●	Balance Sheet, August 15, 2008 and December 31, 2007	G-2
	●	Statement of Income, Period Ended August 15, 2008 and December 31 , 2007	G-3
	●	Statement of Shareholders’ Equity, Period Ended August 15, 2008 and December 31, 2007	G-4
	●	Statement of Cash Flows, Period Ended August 15, 2008 and December 31, 2007	G-5
	●	Notes to Financial Statements.	G-6
		S.T. Pipeline, Inc.
	●	Report of Independent  Public Accounting Firm	H-1
	●	Balance Sheets, August 15, 2008 and December 31, 2007	H-2
	●	Statementsof Income and  Retained Earnings , Period Ended August 15, 2008 and December 31, 2007	H-3
	●	Statements of Cash Flows, Period Ended August 15, 2008 and December 31, 2007	H-4
	●	Notes to Financial Statements.	H-5

 

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	(a)(2)	Financial Statement Schedules
		No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
	(a)(3)	Exhibits

 

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation.*
3.2	Bylaws.*
3.3	Certificate of Amendment to the Registrant’s Certificate of Incorporation.*
4.1	Specimen Unit Certificate.*
4.2	Specimen Common Stock Certificate.*
4.3	Specimen Warrant Certificate.*
4.4	Form of Unit Purchase Option.*
4.5	Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant.*
10.1	Letter Agreements among the Registrant, Ferris, Baker Watts, Incorporated, and Officers and Directors.*
10.2	Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant.*
10.3	Form of Stock Escrow Agreement between the Registrant, Continental Stock Transfer & Trust Company and the Initial Stockholders.*
10.4	Form of Letter Agreement between Chapman Printing Co. and the Registrant regarding administrative support.*
10.5	Advance Agreement between the Registrant and Marshall T. Reynolds, dated March 31, 2006.*
10.6	Form of Amended Registration Rights Agreement among the Registrant and the Initial Stockholders.*
10.7	Warrant Placement Agreement between Marshall T. Reynolds, Edsel Burns, Douglas Reynolds, Jack Reynolds, Neal Scaggs, Joseph Williams and Ferris, Baker Watts, Incorporated.*
14	Code of Ethics*
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

______________________________

*	Incorporated by reference to the Registration Statement on Form S-1 of Energy Services of America Corp. (file no. 333-133111), originally filed with the Securities and Exchange Commission on April 7, 2006, as amended.
	(b)	The exhibits listed under (a)(3) above are filed herewith.
	(c)	Not applicable.

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