UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission file number 1-3793
--------------
CANADA SOUTHERN PETROLEUM LTD.
.................................................................................
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA 98-0085412
.................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
#505, 706 - 7th Avenue, S.W., Calgary, Alberta, Canada T2P 0Z1
.................................................................................
(Address of principal executive offices) (Zip Code)
(403) 269-7741
.................................................................................
(Registrant's telephone number, including area code)
.................................................................................
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes |_| No
Indicate the number of shares outstanding of the issuer's classes of
common stock as of the latest practicable date:
Limited Voting Shares, par value $1.00 (Canadian) per share 14,417,770
shares outstanding as of November 12, 2002.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
SEPTEMBER 30, 2002
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
----
Consolidated balance sheets at September 30, 2002
and December 31, 2001 3
Consolidated statements of operations and deficit
for the three and nine months ended September 30, 2002 and 2001 4
Consolidated statements of cash flows for the three
and nine months ended September 30, 2002 and 2001 5
Notes to consolidated financial statements 6
Supplementary Oil and Gas Data 14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosure About Market Risk 25
Item 4 Controls and Procedures 25
PART II - OTHER INFORMATION
Item 5 Other Information 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
Rule 13a-14 Certifications 28
Sarbanes-Oxley Act Certification 29
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
September 30, December 31,
------------- ------------
2002 2001
---- ----
Assets (unaudited) (Note)
Current assets
Cash and cash equivalents $ 18,813,137 $ 13,104,666
Accounts receivable (Note 3) 1,435,501 3,008,632
Other assets 463,787 322,747
----------- ------------
Total current assets 20,712,425 16,436,045
Oil and gas properties and equipment
(full cost method) 6,589,854 8,151,670
Future tax asset - 500,000
------------ ------------
Total assets $ 27,302,279 $ 25,087,715
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 394,960 $ 696,576
Accrued liabilities 1,097,999 881,948
----------- -----------
Total current liabilities 1,492,959 1,578,524
Future income tax payable 604,000 -
Future site restoration costs 495,467 263,340
----------- -----------
Total liabilities 2,592,426 1,841,864
----------- -----------
Contingencies and Commitments (Note 7) - -
Shareholders' Equity (Note 4)
Limited Voting Shares, par value
$1 per share
Authorized -100,000,000 shares
Outstanding -14,417,770 shares 14,417,770 14,417,770
Contributed surplus 27,271,833 27,271,833
----------- -----------
Total capital 41,689,603 41,689,603
Deficit (16,979,750) (18,443,752)
----------- -----------
Total shareholders' equity 24,709,853 23,245,851
----------- ------------
Total liabilities and shareholders' equity $ 27,302,279 $ 25,087,715
============ ============
Note: The balance sheet at December 31, 2001 has been derived from
the audited consolidated financial statements at that date.
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in Canadian dollars)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Proceeds from carried interests $ 1,741,624 $ 3,951,318 $ 5,663,239 $ 10,056,931
Natural gas sales 290,606 234,094 1,031,146 1,899,450
Oil and liquid sales 39,398 27,133 131,933 109,883
Interest and other income 134,627 89,853 294,121 169,745
----------- ---------- ----------- -----------
Total revenues 2,206,255 4,302,398 7,120,439 12,236,009
----------- ---------- ----------- -----------
Costs and expenses:
General and administrative 353,900 258,204 1,159,310 1,037,777
Legal 107,512 145,469 724,936 620,228
Lease operating costs 309,311 91,256 614,913 244,198
Depletion, depreciation
and amortization 596,000 492,100 1,826,000 930,302
Site restoration costs 74,000 35,000 232,000 49,000
Foreign exchange gain (140,259) (30,362) (21,071) (49,931)
----------- ----------- ------------ -----------
Total costs and expenses 1,300,464 991,667 4,536,088 2,831,574
----------- ----------- ------------ -----------
Income before income taxes 905,791 3,310,731 2,584,351 9,404,435
Income tax provision (Note 6) (397,875) (271,000) (1,120,349) (1,175,700)
----------- ----------- ----------- -----------
Net Income 507,916 3,039,731 1,464,002 8,228,735
Deficit - beginning of period (17,487,666) (23,437,249) (18,443,752) (28,626,253)
------------ ------------ ------------ - ------------
Deficit - end of period $(16,979,750) $(20,397,518) $(16,979,750) $(20,397,518)
============= ============= ============= =============
Average number of shares outstanding
Basic 14,417,770 14,401,120 14,417,770 14,349,530
========== ========== ========== ==========
Diluted 14,417,770 14,536,297 14,417,770 14,469,543
========== ========== ========== ==========
Net income per share
(basic and diluted) $.04 $.21 $.10 $.57
==== ==== ==== ====
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Cash flows from operating activities:
Net income $ 507,916 $ 3,039,731 $ 1,464,002 $ 8,228,735
Adjustments to reconcile net income to net cash
provided from operating activities
Depletion depreciation, and amortization 596,000 492,100 1,826,000 930,302
Future income tax provision 389,000 271,000 1,104,000 1,175,700
Site restoration costs 74,000 35,000 232,000 49,000
---------- ---------- ---------- -----------
Funds provided from operations 1,566,916 3,837,831 4,626,002 10,383,737
Change in current assets and liabilities:
Accounts receivable 1,241,361 (62,689) 1,573,131 (793,161)
Other assets (183,116) (63,732) (141,040) (63,028)
Accounts payable 14,142 117,628 (301,616) 339,194
Accrued liabilities 164,815 (196,532) 216,051 (110,234)
---------- ---------- ---------- -----------
Net cash provided from operations 2,804,118 3,632,506 5,972,528 9,756,508
---------- ---------- ---------- -----------
Cash flows from investing activities:
Additions to oil and gas properties (187,557) (41,928) (264,184) (384,848)
Proceeds from sale of properties - - - 801,227
Site restoration expenditures - (3,783) 127 (12,700)
----------- ------------ ---------- ----------
Net cash provided from (used in) investing
activities (187,557) (45,711) (264,057) 403,679
----------- ----------- ----------- ----------
Cash flows from financing activities:
Exercise of stock options - 268,800 - 895,195
----------- --------- ---------- ---------
Net cash from financing activities - 268,800 - 895,195
----------- --------- ---------- ---------
Increase in cash and cash equivalents 2,616,561 3,855,595 5,708,471 11,055,382
Cash and cash equivalents at the
beginning of period 16,196,576 8,359,818 13,104,666 1,160,031
---------- ---------- ---------- ----------
Cash and cash equivalents at the
end of period $ 18,813,137 $ 12,215,413 $ 18,813,137 $ 12,215,413
=========== =========== =========== ===========
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART 1 FINANCIAL INFORMATION
September 30, 2002
(Expressed in Canadian Dollars)
(unaudited)
Item 1. Financial Statements - Notes
Note 1. Basis of Presentation
- ------- ---------------------
The accompanying unaudited consolidated financial statements including
the accounts of Canada Southern Petroleum Ltd. and its wholly owned
subsidiaries, Canpet Inc. and C.S. Petroleum Limited, have been prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"). The effect of differences between these principles and accounting
principles generally accepted in the United States (U.S. GAAP) is discussed in
Note 8. These financial statements conform in all material respects with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. All such adjustments are of a normal recurring nature. Operating
results for the three and nine month periods ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. These unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
Note 2. Summary of Significant Accounting Policies
- ------- ------------------------------------------
Oil and Gas Properties and Equipment
Canada Southern, which is engaged primarily in one industry, the
exploration for and the development of oil and gas properties in Canada, follows
the full cost method of accounting for oil and gas properties, whereby all costs
associated with the exploration for and the development of oil and gas reserves
are capitalized. Such costs include land acquisition, drilling, geological,
geophysical and overhead expenses. Canada Southern's cost center is Canada.
Canada Southern periodically reviews the costs associated with
undeveloped properties and mineral rights to determine whether they are likely
to be recovered. When such costs are not likely to be recovered, such costs are
transferred to the depletable pool of oil and gas costs.
The net carrying cost of Canada Southern's oil and gas properties in
producing cost centers is limited to an estimated recoverable amount. This
amount is the aggregate of future net revenues from proved reserves and the
costs of undeveloped properties, net of impairment allowances, less future
general and administrative costs, financing costs and income taxes. Future net
revenues are calculated using year end prices that are not escalated or
discounted. For Canadian GAAP future net revenues are undiscounted, whereas, for
U.S. GAAP future net revenues are discounted at 10%.
Gains or losses are not recognized upon disposition of oil and gas
properties unless crediting the proceeds against accumulated costs would result
in a change in the rate of depletion of 20% or more.
Item 1. Financial Statements - Notes (Cont'd)
Note 2. Summary of Significant Accounting Policies (Cont'd)
---------------------------------------------------
Depletion is provided on costs accumulated in producing cost centers
including production equipment using the unit of production method. For purposes
of the depletion calculation, gross proved oil and gas reserves as determined by
outside consultants are converted to a common unit of measure on the basis of
their approximate relative energy content. Depreciation has been computed for
equipment, other than production equipment, on the straight-line method based on
estimated useful lives of four to ten years.
Substantially all of Canada Southern's exploration and development
activities related to oil and gas are conducted jointly with others and the
consolidated financial statements reflect only Canada Southern's proportionate
interest in such activities.
Revenue Recognition
Canada Southern recognizes revenue on its working and royalty interest
properties from the production of oil and natural gas in the period the oil and
natural gas units are sold.
Revenue under carried interest agreements is recorded in the period
when the net proceeds become receivable, measurable and collection is reasonably
assured. Under the carried interest agreements Canada Southern receives oil and
natural gas revenues net of operating and capital costs incurred by the working
interest participants. The time the net revenues become receivable and
collection is reasonably assured depends on the terms and conditions of the
relevant agreements and the practices followed by the operator. As a result, net
revenues may lag the production month by one or more months.
On September 14, 2001, the trial court in Calgary issued its written
reasons for its decision in the Kotaneelee litigation and on November 1, 2001
the trial court finalized its judgment. The judgment affirms that, although the
defendants have a continuing contractual obligation (but not a fiduciary
obligation) to develop the Kotaneelee gas field and market the field's natural
gas at the earliest feasible date, they did not breach their contractual
obligation to market the gas. The trial court also ordered that the field's
carried interest account be reduced by $5,297,000 and declared that natural gas
produced at the field is not subject to processing fees. Although the trial
court did not quantify the amount payable to Canada Southern as a result of the
processing fee declaration and the adjustment of the carried interest account,
Canada Southern has calculated that amount to be approximately $25,000,000
(including interest due) before reduction of any applicable taxes. Canada
Southern has not recorded the
Item 1. Financial Statements - Notes (Cont'd)
Note 2. Summary of Significant Accounting Policies (Cont'd)
---------------------------------------------------
above estimated $25,000,000 amount due because the decision has been appealed
and collection of the amount is not assured.
Site Restoration
Canada Southern has established a policy to accrue for its potential
share of future site restoration costs for all working interest properties held.
The estimated amount of these costs, which totals approximately $1,374,000 is
being provided for on a unit of production basis in accordance with existing
legislation and industry practice. At September 30, 2002, Canada Southern had
accrued $495,000 of these costs with $878,000 remaining to be accrued in the
future. The estimated costs of abandoning carried interest wells are not
included in future site restoration costs. The Company expects that these costs
would be paid by the working interest partners and charged to the carried
interest account. Refer to Note 9 for Accounting Developments.
Note 3. Accounts Receivable
- ------- -------------------
Accounts receivable is comprised of normal trade accounts from various
industry partners in the Company's oil and gas properties as follows:
September 30, 2002 December 31, 2001
------------------ -----------------
Kotaneelee partners $ 1,006,973 $ 2,174,333
Anadarko Canada 99,650 362,613
Others 328,878 471,686
----------- -----------
Total $ 1,435,501 $ 3,008,632
=========== ===========
Note 4. Limited Voting Shares and Stock Options
- ------- ---------------------------------------
During January and April 2002 stock options to purchase 100,000 and
50,000 Limited Voting Shares at $7.53 and $6.81 per share respectively were
granted to directors for a period of five years. These options were immediately
vested and exercisable. During June 2002, stock options to purchase 75,000
shares expired.
Item 1. Financial Statements - Notes (Cont'd)
Note 4. Limited Voting Shares and Stock Options (Cont'd)
------------------------------------------------
Summary of Options Outstanding at September 30, 2002
Option Prices
Years granted Expiration Dates Total Exercisable ($)
- ------------- ---------------- ------------ ----------- -------
1999 Jan. 2004 322,700 322,700 7.00
2001 Nov. 2006 45,000 15,000 6.81
2002 Jan. 2007 100,000 100,000 7.53
2002 April 2007 50,000 50,000 6.81
-------- --------
Total - September 30, 2002 517,700 487,700
======== ========
Options Reserved for Future Grants 380,134
========
Effective January 1, 2001, the Company prospectively adopted the new
recommendation of Canadian Institute of Chartered Accountants with respect to
stock based compensation. These recommendations are essentially consistent with
the requirements of FASB Statement No. 123, and require the pro forma disclosure
of the effect on net earnings and earnings per share had stock options granted
to directors and employees been expensed based on their fair value on the date
of grant. The Company already complies with these pro forma disclosure
requirements pursuant to FASB Statement No. 123 in its annual financial
statements.
Pro forma information regarding net income and earnings per share has
been determined as if Canada Southern had accounted for its stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The valuation assumed no expected
dividend. The assumptions used in the valuation model for the 2002 interim
periods were: risk free interest rate - 4.65%, expected life - 5 years and
expected volatility - 0.688.
Because Canada Southern's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For the purpose of pro forma disclosures, the estimated fair value of
the stock options is expensed in the period over which they vest. Canada
Southern's pro forma information is as follows:
Item 1. Financial Statements - Notes (Cont'd)
Note 4. Limited Voting Shares and Stock Options (Cont'd)
------------------------------------------------
Three months ended, September 30, 2002
Amount Per Share
Net income as reported - September 30,2002 $507,916 $.035
Stock option expenses (17,050) .001
-------- -------
Pro forma net income - September 30,2002 $490,866 $.034
======== =====
Nine months ended, September 30, 2002
Amount Per Share
Net income as reported - September 30,2002 $1,464,002 $.10
Stock option expenses (824,352) (.06)
-------- -----
Pro forma net income - September 30,2002 $ 639,650 $.04
======== =====
Note 5. Earnings per share
------------------
In 2001, Canada Southern, in accordance with the standards issued by
the Canadian Institute of Chartered Accountants, retroactively adopted the
treasury method of earnings per share (EPS). The new methodology establishes
dilution assuming proceeds from the exercise of dilutive options are used to
purchase shares at the average market price. The previous methodology assumed
proceeds were used to repay debt. There is no change in prior period's EPS, as
the effect of the exercise of stock options would have been anti-dilutive.
Note 6. Income Taxes
- ------- ------------
At September 30, 2002, the Company had unused Canadian tax pools
deductible in future periods of approximately $5,100,000 and a future tax
liability of $604,000 representing the tax effect of the excess of the carrying
value of the related properties and equipment over the tax pools. The components
of income tax for the three and nine month periods ended September 30, 2002 and
2001 are as follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Current income tax $ 8,875 $ - $ 16,349 $
-
Future income tax 389,000 271,000 1,104,000 1,175,700
---------- ---------- ------------ ------------
Total $ 397,875 $ 271,000 $ 1,120,349 $ 1,175,700
========= ========= =========== ===========
Income tax expense for the three and nine months ended September 30,
2001 were reduced by the utilization of net operating losses of prior years for
which the benefits had not previously been recognized.
Note 7. Contingencies and Commitments
- ------- -----------------------------
Litigation
On September 14, 2001, the trial court in Calgary issued its written
reasons for its decision in the Kotaneelee litigation and on November 1, 2001
the trial court finalized its judgment.
The judgment affirms that, although the defendants have a continuing
contractual obligation (but not a fiduciary obligation) to develop the
Kotaneelee gas field and market the field's natural gas at the earliest feasible
date, they did not breach their contractual obligation to market the gas. The
trial court also ordered that the field's carried interest account be reduced by
$5,297,000 and declared that natural gas produced at the field is not subject to
processing fees. Although the trial court did not quantify the amount payable to
Canada Southern as a result of the processing fee declaration and the adjustment
of the carried interest account, Canada Southern has calculated that amount to
be approximately $25,000,000 (including interest due) before reduction of any
applicable taxes. Canada Southern has not recorded the above estimated
$25,000,000 amount due because the decision has been appealed and collection of
the amount is not assured.
The trial court determined that the issue of whether interest accrued
on the carried interest account had been abandoned by the defendants.
Under Canadian law, certain costs (known as "taxable costs") of the
litigation may be assessed against the non-prevailing party. Effective September
1, 1998, the Alberta Rules of Court were amended to provide for a material
increase in the costs which may be awarded to the prevailing party in matters
before the trial court. In the Kotaneelee litigation, the trial court retained
jurisdiction on the issue of taxable costs, but has expressed a desire to defer
the consideration of costs until the Court of Appeal rules on appeals taken by
the parties.
The trial was lengthy, complicated and costly to all parties and Canada
Southern expects that the parties who ultimately prevail in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The trial court has very broad discretion as to whether to award costs
and disbursements and as to the calculation of any amounts to be awarded.
Accordingly, Canada Southern is unable to determine whether, in the event that
Canada Southern does not ultimately prevail on its claims in the litigation,
costs will be assessed against Canada Southern or in what amounts. However,
since the costs incurred by the defendants have been substantial, and since the
trial court has broad discretion in the awarding of costs, an award of costs to
the defendants potentially could be material. As of September 30, 2002, Canada
Southern had expended in excess of $15,200,000 on the litigation and believes
the defendants have expended substantially more than that amount. A cost award
against Canada Southern could be of sufficient magnitude to necessitate a sale
of Canada Southern's assets or a debt or equity financing to fund such an award.
There are no assurances that any such sale or financing would be consummated.
Facilities and Operations
Prior to January 2001, Canada Southern held a significant portion of
its oil and gas properties in North East British Columbia in the form of carried
interests. In approximately January 2001 the operators recovered all of their
costs from the carried interest account through related net production revenue
(payout occurred). Effective January 1, and April 1, 2001, Canada Southern
converted certain of these properties into a working interest position.
When development of these properties occurred, the operators charged
certain facility and pipeline infrastructure construction costs to the carried
interest account. As a result of payout and conversion, Canada Southern has paid
for and therefore believes that it should be recognized as an owner of these
facilities.
The operator of the Buick Creek property in British Columbia is
presently in the process of having Canada Southern recognized as an owner of the
production facilities. When the process has been completed, Canada Southern will
be responsible for the payment of approximately $675,000 for its share of
facility improvements that were completed in December 2001. This amount has been
included in oil and gas properties and accrued liabilities since December 31,
2001.
Canada Southern may also be invoiced for additional operating and or
capital costs at Buick Creek and certain other areas. Possible amounts are
currently undeterminable and may be material.
Item 1. Financial Statements - Notes (Cont'd)
Note 8. U. S. GAAP - Other Comprehensive Income
- ------- ---------------------------------------
Classifications within other comprehensive income include foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. During 1998, the
Company wrote down the value of its interest in the Tapia Canyon, California
heavy oil project to a nominal value. During August 1999, the project was sold
and the Company received shares of stock in the purchaser. The purchaser has
become a public company (Sefton Resources, Inc.), which is listed on the London
Stock Exchange (trading symbol "SER"). At September 30, 2002, the Company owned
approximately 3% of Sefton Resources, Inc. with a fair market value of $114,000
and a carrying value of $1.00. The shares of Sefton Resources, Inc. were
restricted and could not be sold before December 2001. The shares are also
subject to a lock-in agreement that restricts the ability of the Company to
dispose of its holding on the open market.
Under U.S. GAAP, the Sefton Resources Inc. shares would be classified
as available-for-sale securities and recorded at fair value at September 30,
2002 and 2001. This would result in other comprehensive income (loss) for the
three and nine month periods ended September 30, 2002 and 2001. In addition, the
balance sheet would reflect Marketable Securities in the amount of $114,000
(December 31, 2001 - $427,000) with a corresponding credit to Shareholders'
Equity - Accumulated other comprehensive income in the same amount.
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Other comprehensive
income (loss) $ 40,723 $ (92,000) $ (312,926) $ 647,000
========== ========== =========== =========
Note 9. Accounting Developments
- ------- -----------------------
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations." This statement, effective in U.S. GAAP, for fiscal
years beginning on or after June 15, 2002, requires the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of the fair value of a liability
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. Similar standards are expected to
be introduced within Canadian GAAP effective for fiscal 2004. The effect of this
pronouncement on the financial position of Canada Southern and the resulting
Canadian and U.S. GAAP differences, if any, are yet to be determined.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment of long-lived assets. Statement No.
144 is effective for the 2002 fiscal year and will not have a material impact on
Canada Southern's financial position.
Note 10. Comparative Amounts
- -------- -------------------
Certain amounts for the 2001 period Consolidated Statements of
Operations and Deficit and Consolidated Statement of Cash Flows have been
reclassified to conform to the classifications in the 2002 period.
Supplementary Oil and Gas Data
------------------------------
Nine months ended September 30,
-------------------------------
Total Sales Volumes (before royalties) 2002 2001 Change % Change
- -------------------------------------- ---- ---- ------ --------
Carried interests (mcf) 2,523,258 1,939,186 584,072 30%*
Carried interests (bbls) 477 321 156 49*
Natural gas (mcf) 445,852 292,890 152,962 52*
Oil and liquids (bbls) 6,213 3,289 2,924 89*
boe's (6 mcf = 1boe) 501,542 375,623 125,919 34*
boe's per day 1,837 1,376 461 34*
mcfe's (1 bbl = 6 mcfe) 3,009,250 2,253,736 755,514 34*
mcfe's per day 11,023 8,255 2,768 34*
* As a result of applying the Company's revenue recognition policy, only six
months' sales volume from Kotaneelee, and none from Siphon were recorded during
the 2001 period in comparison to the nine months of sales volumes recorded
during the 2002 period.
The corporate sales mix between oil and gas is as follows:
----------------------------------------------------------
Sales Mix Percent
- -----------------
Natural gas (mcf) 99% 99% - -
Oil and liquids (mcfe) 1 1 - -
The corporate netback analysis for carried interest sales is as follows:
------------------------------------------------------------------------
Netback Analysis
- ----------------
Carried interests (per mcfe)
Sales $ 3.28 $ 7.27 $ (3.99) (55)%
Royalties (.37) (.91) .54 (59)
------- ------- ------
Net Sales 2.91 6.36 (3.45) (54)
Lease operating expenses (.17) (.13) (.04) 31
Transportation (.45) (.34) (.11) 32
Processing - (.70) .70 (100)
Carried interest capital (.05) (.01) (.04) 400
------ ------ ------
Field netback $ 2.24 $ 5.18 $ (2.94) (57)
====== ====== ========
The corporate netback analysis for working interest sales is as follows:
------------------------------------------------------------------------
Working interests (per mcfe)
- ----------------------------
Sales $ 3.20 $ 8.55 $ (5.35) (63)%
Royalties (.80) (2.14) 1.34 (63)
------ ------ ------
Net Sales 2.40 6.41 (4.01) (63)
Lease operating expenses (1.27) (.76) (.51) (67)
------ ------ -------
Field netback $ 1.13 $ 5.65 $ (4.52) (80)
====== ====== =======
Definition of Terms
-------------------
boe = barrels of oil equivalent mcfe = thousand cubic feet of natural gas equivalent
mcf = thousand cubic feet of natural gas bbl = barrel of oil
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as, "forward looking statements"
for purposes of the "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements. Among these risks and uncertainties are uncertainties as to the
costs, length and outcome of the Kotaneelee litigation, pricing and production
levels from the properties in which Canada Southern has interests, and the
extent of the recoverable reserves at those properties.
Liquidity and Capital Resources
At September 30, 2002, Canada Southern had approximately $18,800,000 of
cash and cash equivalents. These funds are expected to be used for general
corporate purposes, including the continuation of the Kotaneelee field
litigation and for limited exploration and development until the completion of
the litigation.
Net cash flow provided from operations during 2002 was $5,972,528
compared to the net cash flow provided from operations of $9,756,508 during
2001.
Decrease in funds provided from operations $ (5,757,735)
Net changes in accounts receivable and other 2,288,280
Net changes in current liabilities (314,525)
-------------
Decrease in net cash provided by operations $ (3,783,980)
=============
The majority of the carried interest properties in British Columbia
were converted to working interests in 2001. At this time, Canada Southern has
not budgeted any significant capital expenditures for the year 2002.
Canada Southern's Kotaneelee carried interest account reached
undisputed pay out status on January 19, 2001. Canada Southern received its
first payment of net production proceeds from the Kotaneelee gas field during
May 2001.
On September 14, 2001, the trial court in Calgary issued its written
reasons for its decision in the Kotaneelee litigation and on November 1, 2001
the trial court finalized its judgment. The judgment affirms that, although the
defendants have a continuing contractual obligation (but not a fiduciary
obligation) to develop the Kotaneelee gas field and market the field's natural
gas at the earliest feasible date, they did not breach their contractual
obligation to market the gas. The trial court also ordered that the field's
carried interest account be reduced by $5,297,000 and declared that natural gas
produced at the field is not subject to processing fees. Although the trial
court did not quantify the amount payable to Canada Southern as a result of the
processing fee declaration and the adjustment of the carried interest account,
Canada Southern has calculated that amount to be approximately $25,000,000
(including interest due) before reduction of any applicable taxes. Canada
Southern has not recorded the above estimated $25,000,000 amount due because the
decision has been appealed and collection of the amount is not assured.
The trial court determined that the issue of whether interest accrued
on the carried interest account had been abandoned by the defendants.
Under Canadian law, certain costs (known as "taxable costs") of the
litigation may be assessed against the non-prevailing party. Effective September
1, 1998, the Alberta Rules of Court were amended to provide for a material
increase in the costs which may be awarded to the prevailing party in matters
before the trial court. In the Kotaneelee litigation, the trial court retained
jurisdiction on the issue of taxable costs, but has expressed a desire to defer
the consideration of costs until the Court of Appeal rules on appeals taken by
the parties.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
The trial was lengthy, complicated and costly to all parties and Canada
Southern expects that the parties who ultimately prevail in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The trial court has very broad discretion as to whether to award costs
and disbursements and as to the calculation of any amounts to be awarded.
Accordingly, Canada Southern is unable to determine whether, in the event that
Canada Southern does not ultimately prevail on its claims in the litigation,
costs will be assessed against Canada Southern or in what amounts. However,
since the costs incurred by the defendants have been substantial, and since the
trial court has broad discretion in the awarding of costs, an award of costs to
the defendants potentially could be material. As of September 30, 2002, Canada
Southern had expended in excess of $15,200,000 on the litigation and believes
the defendants have expended substantially more than that amount. A cost award
against Canada Southern could be of sufficient magnitude to necessitate a sale
of Canada Southern's assets or a debt or equity financing to fund such an award.
There are no assurances that any such sale or financing would be consummated.
Canada Southern has established a provision for its potential share of
future site restoration costs. The estimated amount of these costs, which totals
approximately $1,374,000 is being provided for on a unit of production basis in
accordance with existing legislation and industry practice. At September 30,
2002, Canada Southern had accrued $495,000 of these costs with $878,000
remaining to be accrued in the future. The estimated costs of abandoning carried
interest wells are not included in future site restoration costs. The Company
expects that these costs would be paid by the working interest partners and
charged to the carried interest account.
Results of Operations
Three months ended September 30, 2002 vs. September 30, 2001
A comparison of the results from 2002 and 2001 is as follows:
2002 2001 Net Change
------------ ------------ -------------
Revenues $ 2,206,255 $ 4,302,398 $ (2,096,143)
Costs and expenses (1,300,464) (991,667) (308,797)
Income tax provision (397,875) (271,000) (126,875)
------------- ------------- --------------
Net income $ 507,916 $ 3,039,731 $ (2,531,815)
=========== =========== =============
Net income per share
(basic and diluted) $.04 $.21 $(.17)
==== ==== ======
Net cash flow from operations per
share (basic and diluted) $.19 $.25 $(.06)
==== ==== ======
Proceeds from carried interests decreased 56% to $1,742,000 during 2002
from $3,951,000 in 2001. Canada Southern's carried interest account in the
Kotaneelee gas field reached undisputed pay out status on January 19, 2001.
Canada Southern received its first payment of net production proceeds from the
field during May 2001. Effective for the production period beginning September
2001, the defendants are no longer deducting a processing fee on the monthly
payments of carried interest revenues.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
The following is a comparison of the proceeds from carried interests for the
periods indicated:
Three months ended
September 30,
-------------
2002 2001
----------- -----------
Kotaneelee natural gas field $ 1,473,008 $ 3,948,030
Other properties 268,616 3,288
----------- -----------
Total $ 1,741,624 $ 3,951,318
=========== ===========
Natural gas sales from the Kotaneelee field are approximately 80% of
total monthly production. Because of the uncertainties as to production rates,
natural gas prices and future capital expenditures, Canada Southern is unable to
accurately predict the amount of future net production proceeds that it may
receive from the field. In addition, water production increased during 2001 and
2002 and the producing field may require the drilling of another water disposal
well. To alleviate the concern of water disposal capacity the operator improved
the water handling capabilities of the surface equipment during the first
quarter 2002. If water production were to continue to increase, future natural
gas production from the field could be adversely impacted.
Three months ended September 30, 2002 vs. September 30, 2001 (Cont'd)
Natural gas production in millions of cubic feet per day ("Mmcf/d")
from the Kotaneelee field during 2002 compared to 2001 was as follows:
2002 2001
---- ----
Month Mmcf/d Mmcf/d
----------- ------ ------
July 37.3 46.2
August 33.8 43.6
September 24.8* 42.5
* As a result of scheduled repairs and maintenance to the third party
Duke/Westcoast Fort Nelson natural gas plant, production volumes at Kotaneelee
were restricted from August 27 to September 21, 2002. The Fort Nelson gas plant
resumed normal operations on September 22, 2002.
During the 2002 period, proceeds from carried interests included
$266,747 of carried interest revenues relating to periods prior to April 1,
2001, the date on which the Siphon property was converted to a working interest
from a carried interest.
The volumes in thousand cubic feet ("mcf") and barrels ("bbls") (before
deducting royalties) and the average price of natural gas per mcf and liquids
per bbl sold from carried interest properties during the periods indicated were
as follows:
Three months ended September 30,
--------------------------------
2002 2001
---- ----
Average price Average price
mcf/bbls per mcf/bbl Total mcf/bbls per mcf/bbl Total
-------- ----------- ------------------ -------- ----------- ----------
Natural
gas sales (mcf) 816,783 $ 3.02 $2,469,897 1,003,213 $ 5.73 $ 5,746,369
Liquids (bbls) 362 $ 20.72 7,499 88 $ 39.82 3,504
Royalty (292,909) (607,851)
Operating costs (74,743) (107,763)
Processing fees - (703,862)
Transportation (361,289) (372,535)
Capital costs (6,831) (6,544)
------------ -----------
Total $ 1,741,624 $ 3,951,318
=========== ===========
Natural gas sales increased 24% to $291,000 in 2002 from $234,000 in
the 2001 period. There was a 41% increase in the number of units sold and an 8%
decrease in the average price for natural gas. The increase in the number of
units sold over the 2001
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Three months ended September 30, 2002 vs. September 30, 2001 (Cont'd)
comparative period is from sales at Wargen and Siphon. Wargen volumes increased
as a result of new royalty production from a farm-out well drilled by a third
party in the first quarter of 2002. In accordance with the Company's revenue
recognition policy there were no revenues recorded in the 2001 period at Siphon.
The volumes in thousand cubic feet ("mcf") (before deducting royalties)
and the average price of natural gas per mcf sold during the periods indicated
were as follows:
Three months ended September 30,
--------------------------------
2002 2001
---- ----
Average price Average price
mcf per mcf Total mcf per mcf Total
--- ------- ----- --- ------- -----
Natural gas sales 136,554 $ 2.97 $ 405,968 96,673 $ 3.24 $ 313,064
Royalties deducted (115,362) (78,970)
--------- ---------
Total $ 290,606 $234,094
========= ========
Oil and liquid sales increased by 44% in 2002 to $39,000 compared to
$27,000 in 2001. Since Canada Southern sold most of its producing oil properties
in 2000, future oil sales are expected to be minimal unless additional producing
properties are drilled or purchased. Crude oil and natural gas liquid unit sales
in barrels ("bbls") (before deducting royalties) and the average price per
barrel sold during the periods indicated were as follows:
Three months ended September 30,
--------------------------------
2002 2001
---- ----
Average price Average price
bbls per bbl Total bbls per bbl Total
---- ------- ----- ---- ------- -----
Liquid sales 1,549 $ 34.28 $ 53,099 1,013 $ 33.95 $ 34,395
Royalties deducted (13,701) (7,262)
-------- --------
Total $ 39,398 $ 27,133
======== ========
Interest and other income increased 50% in 2002 from $90,000 in 2001 to
$135,000 in the 2002 period because more funds were available for investment.
General and administrative costs increased 37% in 2002 to $354,000 from
$258,000 in 2001 primarily because of additional directors' fees and expenses
and increases in insurance and shareholder mailing costs.
Legal expenses decreased 26% during 2002 to $108,000 from $145,000
during 2001. These expenses are related primarily to the cost of the Kotaneelee
litigation. On February 6, 2001, presentation of evidence to the trial court was
concluded. During the three month period in 2002 litigation counsel prepared
appeal briefs. The appeal of the trial court's decision is expected to increase
legal expenses for the remainder of 2002 and the first quarter of 2003.
Lease operating costs increased 239% from $91,000 in 2001 to $309,000
in the 2002 period. The increase is due mainly to repairs and maintenance of gas
processing facilities during a natural gas plant turnaround at Siphon, and
repairs to a shut-in natural gas well at Clarke Lake. Additional operating
expenses were also recorded in connection with third party adjustments to gas
plant operating expenses at certain of the Company's properties.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Depletion, depreciation and amortization expense increased 21% in 2002
to $596,000 from $492,000 in 2001. The increase is mainly associated with the
Kotaneelee gas field.
Site restoration costs increased by 111% to $74,000 in 2002 compared
with $35,000 in the 2001 period because of the increase in production volumes
and revisions to site restoration cost estimates.
A foreign exchange gain of $140,000 was recorded in 2002, compared to a
gain of $30,000 in 2001 on the Company's U.S. dollar investments. The value of
the Canadian dollar was U.S. $.63 at September 30, 2002 (U.S. $.63 at September
30, 2001) compared to U.S. $.66 at June 30, 2002 (U.S. $.66 at June 30, 2001).
A future income tax provision of $389,000 was recorded in 2002 compared
to a future income tax provision of $271,000 in 2001. During the 2002 period,
the Company exhausted its tax loss carry forwards not previously recorded which
resulted in an effective tax rate of 43%. During the 2001 period, the effective
tax rate of 8% was caused by utilizing tax loss carry forwards not previously
recorded which resulted in a tax provision of $271,000.
Nine months ended September 30, 2002 vs. September 30, 2001
A comparison of revenues, costs and expenses, net loss and earnings per share for 2002 and 2001 is as follows:
2002 2001 Net Change
------------ -------------- -------------
Revenues $ 7,120,439 $ 12,236,009 $ (5,115,570)
Costs and expenses (4,536,088) (2,831,574) (1,704,514)
Income tax provision (1,120,349) (1,175,700) 55,351
------------- -------------- -------------
Net income $ 1,464,002 $ 8,228,735 $ (6,764,733)
============ ============= ==============
Net income per share (basic
and diluted) $.10 $.57 $(.47)
==== ==== ======
Net cash flow from operations per
share (basic and diluted) $.41 $.67 $(.26)
==== ==== ======
Proceeds from carried interests decreased 44% to $5,663,000 during 2002
from $10,057,000 in 2001. Canada Southern's carried interest account in the
Kotaneelee gas field reached undisputed pay out status on January 19, 2001.
Canada Southern received its first payment of net production proceeds from the
field during May 2001. Effective for the production period beginning September
2001, the defendants are no longer deducting a processing fee on the monthly
payments of carried interest revenues. As a result of applying the Company's
revenue recognition policy, only six months revenue was recorded during the 2001
period in comparison to the nine months of revenue recorded during the 2002
period. The decrease in the current period carried interest proceeds are
directly related to lower daily production volumes and a lower gas price when
compared to the 2001 period.
The following is a comparison of the proceeds from carried interests for the
period indicated:
Nine months ended September 30,
---------------------------------
2002 2001
------------ -------------
Kotaneelee natural gas field $ 5,390,960 $ 9,706,961
Other properties 272,279 349,970
----------- ------------
Total $ 5,663,239 $ 10,056,931
=========== ============
Natural gas sales from the Kotaneelee field are approximately 80% of
total monthly production. Because of the uncertainties as to production rates,
natural gas prices and future capital expenditures, Canada Southern is unable to
accurately predict the amount of future net production proceeds that it may
receive from the field. In addition, water production increased
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Nine months ended September 30, 2002 vs. September 30, 2001 (Cont'd)
during 2001 and 2002 and the producing field may require the drilling of another
water disposal well. To alleviate the concern of water disposal capacity the
operator improved the water handling capabilities of the surface equipment
during the first quarter 2002. If water production were to continue to increase,
future natural gas production from the field could be adversely impacted.
Natural gas production in millions of cubic feet per day ("Mmcf/d")
from the Kotaneelee field during 2002 compared to 2001 was as follows:
2002 2001
---- ----
Month Mmcf/d Mmcf/d
----------- ------ ------
January 41.9 52.9
February 40.5 54.6
March 39.0 50.5
April 39.4 47.7
May 38.1 46.8
June 37.4 41.8
July 37.3 46.2
August 33.8 43.6
September 24.8* 42.5
* As a result of scheduled repairs and maintenance to the third party
Duke/Westcoast Fort Nelson natural gas plant, production volumes at Kotaneelee
were restricted from August 27 to September 21, 2002. The Fort Nelson gas plant
resumed normal operations on September 22, 2002.
During the 2002 period, proceeds from carried interests included
$266,747 of carried interest revenues relating to periods prior to April 1,
2001, the date on which the Siphon property was converted to a working interest
from a carried interest.
During the 2001 period, proceeds from carried interests included
$315,000 of carried interest revenues relating to production periods prior to
January 1, 2001 from the Buick Creek, Wargen and Clarke Lake properties, which
were converted to working interests effective January 1, 2001.
Nine months ended September 30, 2002 vs. September 30, 2001 (Cont'd)
The volumes in thousand cubic feet ("mcf") and barrels ("bbls") (before
deducting royalties) and the average price of natural gas per mcf and liquids
per bbl sold from carried interest properties during the periods indicated were
as follows:
Nine months ended September 30,
-------------------------------
2002 2001
---- ----
Average price Average price
mcf/bbls per mcf/bbl Total mcf/bbls per mcf/bbl Total
-------- ----------- ------------------ -------- ----------- ----------
Natural
gas sales (mcf) 2,523,258 $ 3.28 $ 8,281,307 1,939,186 $ 7.27 $ 14,093,358
Liquids (bbls) 477 $ 23.40 11,162 321 $ 45.31 14,544
Royalty (943,082) (1,762,240)
Operating costs (431,846) (244,007)
Processing fees - (1,352,370)
Transportation (1,124,723) (665,694)
Capital costs (129,579) (26,660)
----------- -----------
Total $ 5,663,239 $ 10,056,931
=========== ============
Natural gas sales decreased 46% to $1,031,000 in 2002 from $1,899,000
in the 2001 period. There was a 52% increase in the number of units sold and a
65% decrease in the average price for natural gas. The increase in the number of
units sold over the 2001 comparative period is mainly from sales at Wargen and
Siphon. Wargen volumes increased as a result of new royalty production from a
farm-out well drilled by a third party in the first quarter of 2002. In
accordance with the Company's revenue recognition policy there were no revenues
recorded in the 2001 period at Siphon.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Nine months ended September 30, 2002 vs. September 30, 2001 (Cont'd)
The volumes in thousand cubic feet ("mcf") (before deducting royalties)
and the average price of natural gas per mcf sold during the periods indicated
were as follows:
Nine months ended September 30,
-------------------------------
2002 2001
---- ----
Average price Average price
mcf per mcf Total mcf per mcf Total
--- ------- ----- --- ------- -----
Natural gas sales 445,852 $ 3.07 $ 1,368,929 292,890 $ 8.70 $ 2,547,342
Royalties deducted (337,783) (647,892)
----------- -----------
Total $ 1,031,146 $ 1,899,450
=========== ===========
Oil and liquid sales increased by 20% in 2002 to $132,000 compared to
$110,000 in 2001. Since Canada Southern sold most of its producing oil
properties in 2000, future oil sales are expected to be minimal unless
additional producing properties are drilled or purchased. Crude oil and natural
gas liquids unit sales in barrels ("bbls") (before deducting royalties) and the
average price per barrel sold during the periods indicated were as follows:
Nine months ended September 30,
-------------------------------
2002 2001
---- ----
Average price Average price
bbls per bbl Total bbls per bbl Total
---- ------- ----- ---- ------- -----
Liquid sales 6,213 $ 28.89 $ 179,465 3,289 $ 38.98 $ 128,201
Royalties deducted (47,532) (18,318)
--------- ----------
Total $ 131,933 $ 109,883
========= =========
Interest and other income increased 73% in 2002 from $170,000 in 2001
to $294,000 in the 2002 period because more funds were available for investment
as a result of the payments received from the Kotaneelee gas field.
General and administrative costs increased 11% in 2002 to $1,159,000
from $1,038,000 in 2001 primarily because of additional directors' fees and
expenses and increases in insurance and shareholder mailing costs.
Legal expenses increased 17% during 2002 to $725,000 from $620,000
during 2001. These expenses are related primarily to the cost of the Kotaneelee
litigation. On February 6, 2001, presentation of evidence to the trial court was
concluded. During the nine month period in 2002 litigation counsel prepared
appeal briefs. The appeal of the trial court's decision is expected to increase
legal expenses for the remainder of 2002 and the first quarter of 2003.
Lease operating costs increased 152% from $244,000 in 2001 to $615,000
in the 2002 period. The increase is due mainly to repairs and maintenance of
natural gas processing facilities during a gas plant turnaround at Siphon, and
repairs to a shut-in natural gas well at Clarke Lake. Additional operating
expenses were also recorded in connection with third party adjustments to gas
plant operating expenses at certain of the Company's properties.
Depletion, depreciation and amortization expense increased 96% in 2002
to $1,826,000 from $930,000 in 2001. The increase is mainly associated with the
Kotaneelee gas field.
Site restoration costs increased by 373% to $232,000 in 2002 compared
with $49,000 in the 2001 period because of the increase in production volumes
and revisions of site restoration cost estimates.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Nine months ended September 30, 2002 vs. September 30, 2001 (Cont'd)
A foreign exchange gain of $21,000 was recorded in 2002, compared to a
gain of $50,000 in 2001 on the Company's U.S. dollar investments. The value of
the Canadian dollar was U.S. $.63 at September 30, 2002 (U.S. $.63 at September
30, 2001) compared to U.S. $.63 at December 31, 2001. (U.S. $.67 at December
2000).
A future income tax provision of $1,104,000 was recorded in 2002
compared to a future income tax provision of $1,176,000 in 2001. During the 2002
period, the Company exhausted its tax loss carry forwards not previously
recorded which resulted in an effective tax rate of 43%. During the 2001 period,
the effective tax rate of 13% was caused by utilizing tax loss carry forwards
not previously recorded which resulted in a tax provision of $1,176,000.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not have any significant exposure to market risk as
the only market risk sensitive instruments are its investments in marketable
securities which are classified as cash and cash equivalents because they have
original maturities of three months or less. Since the Company expects to hold
the investments to maturity, the maturity value should be realized. At September
30, 2002, the carrying value of its investments in United States dollar accounts
was approximately $2,600,000, which was approximately equal to fair value and
face value of the investments.
Item 4. Controls and Procedures
I, Randy Denecky, the principal executive officer and the principal
financial officer have evaluated the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) adopted under the
Securities Act of 1934) within the ninety (90) day period prior to the date of
this report and have concluded:
1. That the Company's disclosure controls and procedures are adequately
designed to ensure that material information relating to the Company, including
its consolidated subsidiaries, is timely made known to such officers by others
within the Company and its subsidiary, particularly during the period in which
this quarterly report is being prepared; and
2. That there were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of my evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
28
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART II - OTHER INFORMATION
September 30, 2002
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 (1) Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 executed by Randy Denecky.
(b) Reports on Form 8-K
None
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
SEPTEMBER 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANADA SOUTHERN PETROLEUM LTD.
Registrant
Date: November 12, 2002 By /s/ Randy Denecky
------------------------------------------
Randy Denecky
President, Treasurer and Chief
Financial and Accounting Officer
Canada Southern Petroleum Ltd.
Rule 13a-14 Certification
I, Randy Denecky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Canada Southern
Petroleum Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of my most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Randy Denecky
Randy Denecky
President, Treasurer, and Chief Financial
and Accounting Officer