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UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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.
or
[ ] 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: 333-29001-01
ENERGY CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
WEST VIRGINIA 84-1235822
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
4643 SOUTH ULSTER STREET, SUITE 1100
DENVER, COLORADO 80237
(Address of principal executive offices and zip code)
(303) 694-2667
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) 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.
Yes X No
--- ---
The number of shares of the Registrant's common stock, par value $1.00 per
share, outstanding at
September 30, 2002 was 623,773 shares.
ENERGY CORPORATION OF AMERICA
TABLE OF CONTENTS
PAGES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2002 (unaudited) and June 30, 2002. . . . . . . . . . 3
Unaudited Condensed Consolidated Statements of Operations
For the three months ended September 30, 2002 and 2001. . . . . . . . 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended September 30, 2002 and 2001. . . . . . . . 6
Unaudited Condensed Consolidated Statements of Comprehensive Income
For the three months ended September 30, 2002 and 2001. . . . . . . . 7
Notes to Unaudited Condensed Consolidated Financial Statements . . . . . 8
Item 2. Management's Discussion and Analysis of Results of Operation and
Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . 14
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . .. 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . 17
-2-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
- ----------------------------------------------------------------------------------------
SEPTEMBER 30 JUNE 30
2002 2002
(UNAUDITED) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 20,667 $ 17,775
Accounts receivable, net of allowance for doubtful
accounts of $1,344 and $1,366. . . . . . . . . . . . . . 16,745 18,165
Gas inventory . . . . . . . . . . . . . . . . . . . . . . . 117 199
Deferred income tax asset . . . . . . . . . . . . . . . . . 2,237 2,237
Prepaid and other current assets. . . . . . . . . . . . . . 3,649 6,085
------------- --------
Total current assets . . . . . . . . . . . . . . . . . . 43,415 44,461
------------- --------
Property, plant and equipment, net of accumulated
depreciation and depletion of $117,924 and $116,294 . . . . 242,852 244,155
------------- --------
OTHER ASSETS
Deferred financing costs, net of accumulated
amortization of $4,043 and $3,722. . . . . . . . . . . . 4,587 3,617
Notes receivable. . . . . . . . . . . . . . . . . . . . . . 1,735 1,756
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,806 10,747
------------- --------
Total other assets . . . . . . . . . . . . . . . . . . . 17,128 16,120
------------- --------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,395 $304,736
============= ========
* Condensed from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial
statements.
-3-
ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------
SEPTEMBER 30 JUNE 30
2002 2002
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses . . . . . . . . . . . $ 16,634 $ 15,683
Current portion of long-term debt . . . . . . . . . . . . . 124 121
Funds held for future distribution. . . . . . . . . . . . . 11,545 11,414
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . 5,743 8,221
Other current liabilities . . . . . . . . . . . . . . . . . 7,634 7,258
-------------- ---------
Total current liabilities. . . . . . . . . . . . . . . . 41,680 42,697
LONG-TERM OBLIGATIONS
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . 202,977 198,701
Gas delivery obligation and deferred revenue. . . . . . . . 4,322 5,886
Deferred income tax liability . . . . . . . . . . . . . . . 9,887 9,887
Other long-term obligation. . . . . . . . . . . . . . . . . 8,408 8,689
-------------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . 267,274 265,860
-------------- ---------
Minority Interest. . . . . . . . . . . . . . . . . . . . . . . 1,678 1,732
-------------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; 2,000,000 shares
authorized; 730,039 shares issued. . . . . . . . . . . . 730 730
Class A stock, no par value; 100,000 shares authorized;
45,582 shares issued . . . . . . . . . . . . . . . . . . 5,092 5,092
Additional paid in capital. . . . . . . . . . . . . . . . . 5,503 5,503
Retained earnings . . . . . . . . . . . . . . . . . . . . . 34,599 36,422
Treasury stock and notes receivable arising from the
issuance of common stock . . . . . . . . . . . . . . . . (10,606) (10,426)
Accumulated comprehensive income (loss) . . . . . . . . . . (875) (177)
-------------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . 34,443 37,144
-------------- ---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,395 $304,736
============== =========
* Condensed from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial
statements.
-4-
ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
2002 2001
REVENUES:
Oil and gas sales . . . . . . . . . . . . . . . $ 9,164 $ 11,510
Gas marketing and pipeline sales. . . . . . . . 11,922 10,479
Well operations and service revenues. . . . . . 1,467 1,405
Other revenue . . . . . . . . . . . . . . . . . 36 -
-------------- -----------
22,589 23,394
-------------- -----------
COST AND EXPENSES:
Field operating expenses. . . . . . . . . . . . 2,485 2,509
Gas marketing and pipeline cost . . . . . . . . 10,755 10,040
General and administrative. . . . . . . . . . . 3,560 3,524
Taxes, other than income. . . . . . . . . . . . 632 522
Depletion and depreciation, oil and gas related 3,052 3,331
Depreciation of pipelines and equipment . . . . 856 745
Exploration and impairment. . . . . . . . . . . 572 779
-------------- -----------
21,912 21,450
-------------- -----------
Income from operations. . . . . . . . . . . . . 677 1,944
OTHER (INCOME) EXPENSE
Interest expense. . . . . . . . . . . . . . . . 4,881 4,895
Interest income and other . . . . . . . . . . . (1,756) (687)
-------------- -----------
Loss from operations before income taxes . . . . . (2,448) (2,264)
Income tax benefit . . . . . . . . . . . . . . . . (824) (747)
-------------- -----------
Loss from operations before minority interest. . . (1,624) (1,517)
Minority interest. . . . . . . . . . . . . . . . . (62) -
-------------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . $ (1,562) $ (1,517)
============== ===========
Basic and diluted earnings per common share:
Net loss. . . . . . . . . . . . . . . . . . . . $ (2.38) $ (2.30)
============== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations. . . . . . . . . . . . . . . . . . . . . . . . . . $(1,562) $ (1,517)
Adjustments to reconcile net loss to net cash used by operating activities:
Depletion, depreciation and amortization . . . . . . . . . . . . . . . . 4,088 4,260
Impairment and exploratory expense . . . . . . . . . . . . . . . . . . . 487 614
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,002) (1,037)
-------- ---------
1,011 2,320
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,425 3,099
Gas inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 682
Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . (2,492) (1,052)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 697 396
Funds held for future distributions. . . . . . . . . . . . . . . . . . . 132 (3,656)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,069) (16,358)
-------- ---------
Net cash used by operating activities. . . . . . . . . . . . . . . . . . (214) (14,569)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment. . . . . . . . . . . . . . . (4,802) (5,549)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . . . . . . . 2,422 116
Notes receivable and other. . . . . . . . . . . . . . . . . . . . . . . . . (152) (751)
-------- ---------
Net cash used by investing activities. . . . . . . . . . . . . . . . . . (2,532) (6,184)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 10,000
Principal payment on long-term debt . . . . . . . . . . . . . . . . . . . . (3,892) (37)
Purchase of treasury stock and other financing activities . . . . . . . . . (207) (210)
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (263) (265)
-------- ---------
Net cash provided (used) by financing activities . . . . . . . . . . . . 5,638 (512)
-------- ---------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . 2,892 (21,265)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . 17,775 80,336
-------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . $20,667 $ 59,071
======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
-6-
ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
2002 2001
Net loss . . . . . . . . . . . . . . . . . . . $(1,562) $(1,517)
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment:
Current period change. . . . . . . . . . (323) (722)
Marketable securities:
Current period change. . . . . . . . . . (6) (61)
Reclassification to earnings . . . . . . (16)
Oil and Gas derivatives:
Current period transactions. . . . . . . (428) 1,590
Reclassification to earnings . . . . . . 75 (1,934)
-------- --------
Other comprehensive loss, net of tax . . . . . (698) (1,127)
-------- --------
Comprehensive loss . . . . . . . . . . . . . . $(2,260) $(2,644)
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-7-
ENERGY CORPORATION OF AMERICA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. Nature of Organization
Energy Corporation of America (the "Company") was formed in June 1993 through an
exchange of shares with the common stockholders of Eastern American Energy
Corporation ("Eastern American"). The Company is an independent energy company.
All references to the "Company" include Energy Corporation of America and its
consolidated subsidiaries.
The Company, through its wholly owned subsidiary Eastern American, is engaged in
exploration, development and production, transportation and marketing of natural
gas primarily within the Appalachian Basin states of West Virginia,
Pennsylvania, Kentucky, Virginia and Ohio.
The Company, through its wholly owned subsidiaries Westech Energy Corporation
and Westech Energy New Zealand, is engaged in the exploration for and production
of oil and natural gas primarily in Texas, California and New Zealand.
2. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002, which contains a summary of major accounting
policies followed in preparation of its consolidated financial statements.
These policies were also followed in preparing the quarterly report included
herein.
Management of the Company believes that all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation of the results of
such interim periods have been made. The results of operations for the periods
ended September 30, 2002 are not necessarily indicative of the results to be
expected for the full year.
Subsequent to September 30, 2002, the Company has redeemed $42.5 million of its
9 1/2% senior subordinated debt in privately negotiated transactions.
Certain amounts in the financial statements of prior periods have been
reclassified to conform to the current period presentation.
3. Earnings per Share
A reconciliation of the components of basic and diluted net loss per common
share is as follows for the loss from continuing operations available to common
shareholders:
Loss Shares Per Share
------------ ------- ----------
Three months ended September 30, 2002 $(1,562,000) 655,643 (2.38)
------------
Three months ended September 30, 2001 (1,517,000) 660,438 (2.30)
------------
The effect of outstanding stock options was not included in the computation of
diluted earnings per share because to do so would have been antidilutive.
-8-
4. Industry Segments
The Company's reportable business segments have been identified based on the
differences in products and service provided. Revenues for the exploration and
production segment are derived from the production and sale of natural gas and
crude oil. Revenues for the marketing and pipeline segment arise from the
marketing of both Company and third party produced natural gas volumes and the
related transportation. The Company utilizes earnings before interest, taxes,
depreciation, depletion, amortization and exploration and impairment costs
("EBITDAX") to evaluate the operations of each segment.
Summarized financial information for the Company's reportable segments for
continuing operations is as follows (in thousands):
Exploration & Marketing &
Production Pipeline Other Consolidated
-------------- ------------- --------- -------------
For the three months ended September 30, 2002
---------------------------------------------
Revenue to unaffiliated customers . . . . . $ 10,632 $ 11,922 $ 35 $ 22,589
Depreciation, depletion, amortization . . . 3,355 203 350 3,908
Exploration and impairment costs. . . . . . 572 572
Income (loss) from operations . . . . . . . 567 454 (344) 677
Interest expense. . . . . . . . . . . . . . 3,752 43 1,086 4,881
EBITDAX . . . . . . . . . . . . . . . . . . 5,003 622 1,350 6,975
Total assets. . . . . . . . . . . . . . . . 184,781 76,284 42,330 303,395
Capital expenditures. . . . . . . . . . . . 4,593 36 173 4,802
- -------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2001
- ----------------------------------------------
Revenue to unaffiliated customers . . . . . $ 12,915 $ 10,479 $ 23,394
Depreciation, depletion, amortization . . . 3,716 228 133 4,077
Exploration and impairment costs. . . . . . 779 779
Income (loss) from operations . . . . . . . 2,304 (332) (29) 1,943
Interest expense. . . . . . . . . . . . . . 3,313 30 1,552 4,895
EBITDAX . . . . . . . . . . . . . . . . . . 7,296 (98) 288 7,486
Total assets. . . . . . . . . . . . . . . . 151,874 74,165 130,757 356,796
Capital expenditures. . . . . . . . . . . . 5,260 44 245 5,549
Income (loss) from operations represents revenues less costs which are directly
associated with such operations. Revenues are priced and accounted for
consistently for both unaffiliated and intersegment sales. The 'Other' column
includes corporate-related items, including corporate debt and non-reportable
segments. Included in the total assets of the exploration and production
segment are net long-lived assets located in New Zealand of $3.3 million and
$3.2 million as of September 30, 2002 and 2001.
5. Derivative Instruments and Hedging Activities
The Company periodically hedges a portion of its gas production through futures
and swap agreements. The purpose of the hedges is to provide a measure of
stability in the volatile environment of oil and gas prices and to manage its
exposure to commodity price risk under existing sales commitments. All of the
Company's price swap agreements in place are designated as cash flow hedges. At
September 30, 2002, the Company had recorded a $0.07 million OCI loss, $0.03
million long term derivative asset, $0.04 million short term derivative tax
asset and $0.14 million short term derivative liability. The estimated net
amount of the existing losses within other comprehensive income that are
expected to be reclassified into earnings within the next 12 months is
approximately $0.05 million. The Company has partially hedged its exposure to
the variability in future cash flows through June 2004.
-9-
6. Contingencies
In addition to the matters discussed in Legal Proceedings at Part II, Item 1,
the Company is involved in various other legal actions and claims arising in the
ordinary course of business. While the outcome of the lawsuits against the
Company cannot be predicted with certainty, management does not expect these
matters to have a material adverse effect on the Company's operations or
financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
--------------------------------------------------------------
OPERATIONS AND FINANCIAL CONDITION
----------------------------------
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
This discussion and analysis of financial condition and results of
operations, and other sections of this Form 10-Q, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates, intentions and projections about the oil and gas
industry, the economy and about the Company itself. Words such as
"anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is
likely," "plans," "predicts," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements under the
Private Securities Litigation Reform Act of 1995. The Company cautions that
these statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict with regard
to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. Furthermore, the Company
undertakes no obligation to update, amend or clarify forward-looking statements,
whether as a result of new information, future events or otherwise.
Important factors that could cause actual results to differ materially from
the forward-looking statements include, but are not limited to, weather
conditions, changes in production volumes, worldwide demand and commodity prices
for petroleum natural resources, the timing and extent of the Company's success
in discovering, acquiring, developing and producing oil and natural gas
reserves, risks incident to the drilling and operation of oil and natural gas
wells, future production and development costs, foreign currency exchange rates,
the effect of existing and future laws, governmental regulations and the
political and economic climate of the United States and New Zealand, the effect
of hedging activities, and conditions in the capital markets.
The following should be read in conjunction with the Company's Financial
Statements and Notes (including the segment information) at Part I, Item 1.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2002 AND 2001
- ---------------
The Company recorded a net loss from operations of $1.6 million for the
quarter ended September 30, 2002 compared to a net loss of $1.5 million in 2001.
The increase in net loss of $0.1 million is attributed to the net of a $0.8
million decrease in revenue, a $0.5 million increase in operating expenses, a
$1.1 million increase in interest income and other non-operating income, and a
$0.1 million increase in minority interest and income tax benefits.
-10-
Production, marketing and pipeline volumes, revenue and average sales
prices for the quarters ended September 30 and their related variances are as
follows:
Variance
--------------------
2002 2001 Amount Percent
---------- --------- ---------- --------
Natural Gas
Production (Mmcf). . . . . . . . . . . . . . . . 2,530.6 2,566.5 (35.9) -1.4%
Average sales price received ($per Mcf). . . . . 3.33 2.88 0.45 15.6%
---------- --------- ---------- --------
Sales ($in thousands). . . . . . . . . . . . . . 8,435.8 7,391.7 1,044.1 14.1%
Oil
Production (Mbbl). . . . . . . . . . . . . . . . 29.6 39.3 (9.7) -24.7%
Average sales price received ($per Bbl). . . . . 23.47 22.86 0.61 2.7%
---------- --------- ---------- --------
Sales ($in thousands). . . . . . . . . . . . . . 695.0 897.2 (202.2) -22.5%
Hedging. . . . . . . . . . . . . . . . . . . . . . (62.5) 3,123.3 (3,185.8) -102.0%
Other. . . . . . . . . . . . . . . . . . . . . . . 96.1 97.5 (1.4) -1.4%
---------- --------- ---------- --------
Total oil and gas sales ($in thousands). . . . . . $ 9,164.4 $11,509.7 $(2,345.3) -20.4%
========== ========= ========== ========
Marketing Revenue
Volume (Mdth). . . . . . . . . . . . . . . . . . 2,431.6 2,443.0 (11.4) -0.5%
Average sales price received ($per Dth). . . . . 3.70 3.25 0.45 13.8%
---------- --------- ---------- --------
Sales ($in thousands). . . . . . . . . . . . . . 9,001.8 7,934.0 1,067.8 13.5%
Pipeline Revenue
Volume (Mdth). . . . . . . . . . . . . . . . . . 1,478.6 1,464.3 14.3 1.0%
Average sales price received ($per Dth). . . . . 1.97 1.74 0.23 13.2%
---------- --------- ---------- --------
($in thousands). . . . . . . . . . . . . . . . . 2,919.9 2,545.0 374.9 14.7%
--------
Total marketing and pipeline sales ($in thousands) $11,921.7 $10,479.0 $ 1,442.7 13.8%
========== ========= ========== ========
Marketing Cost
Volume (Mdth). . . . . . . . . . . . . . . . . . 2,431.6 2,442.5 (10.9) -0.4%
Average price paid ($per Dth). . . . . . . . . . 3.46 3.24 0.22 6.8%
---------- --------- ---------- --------
Cost ($in thousands) . . . . . . . . . . . . . . 8,416.9 7,905.2 511.7 6.5%
Pipeline Cost
Volume (Mdth). . . . . . . . . . . . . . . . . . 1,183.7 1,230.7 (47.0) -3.8%
Average price paid ($per Dth). . . . . . . . . . 1.98 1.73 0.25 14.5%
---------- --------- ---------- --------
Cost ($in thousands) . . . . . . . . . . . . . . 2,338.5 2,135.0 203.5 9.5%
---------- --------- ---------- --------
Total marketing and pipeline cost ($in thousands). $10,755.4 $10,040.2 $ 715.2 7.1%
========== ========= ========== ========
REVENUES. Total revenues decreased $0.8 million or 3.4% between the
--------
quarters. The net decrease was due to a 13.8% increase in gas marketing and
pipeline sales and a 20.4% decrease in oil and gas sales. Well operations and
service revenues and other operating revenue remained relatively constant.
Revenues from gas marketing and pipeline sales increased $1.4 million from
$10.5 million during the period ended September 30, 2001 to $11.9 million in the
period ended September 30, 2002. Gas marketing revenue increased $1.1 million.
The price increase corresponds with related gas indexes. Pipeline revenue, which
has a sale and transportation component, increased $0.3 million. The gas
marketing and pipeline volumes remained relatively constant.
-11-
Revenues from oil and gas sales decreased a net of $2.3 million from $11.5
million for the quarter ended September 30, 2001 to $9.2 million for the quarter
ended September 30, 2002. Natural gas sales increased $1.0 million and oil
sales declined $0.2 million. The net increase for production revenue is
attributed to the following variances; gas price increase $1.1 million, gas
production decrease $0.1 million and oil production decrease $0.2 million. The
price increase corresponds with related indexes. The increased production
revenue was offset by recognized losses on related hedging transactions, which
totaled a loss of $0.1 million for the quarter ended September 30, 2002 compared
to a gain of $3.1 million for the quarter ended September 30, 2001. The average
price per Mcfe, after hedging, was $3.38 and $4.11 for the quarters ended
September 30, 2002 and 2001.
COSTS AND EXPENSES. The Company's costs and expenses increased $0.5 million
-------------------
or 2.2% between the periods primarily as a net result of a 7.1% increase in gas
marketing and pipeline costs, a 21.1% increase in taxes other than income, a
4.1% decrease in depreciation, depletion and amortization expenses and a 26.6%
decrease in exploration and impairment costs. Field and lease operating
expenses and general and administrative expenses remained relatively constant.
Gas marketing and pipeline costs increased $0.7 million. Gas marketing cost
increased $0.5 million. The price increase corresponds with related indexes.
Pipeline costs increased $0.2 million.
Taxes other than income increased $0.1 million due to increased oil and gas
prices. Production taxes are based on wellhead prices and are not affected by
hedging activity.
Depreciation, depletion and amortization expenses decreased $0.2 million.
The decrease is primarily related to decreased production volumes, no longer
depleting a fully depleted well and reduced property costs in Texas due to year
end impairment.
Exploration and impairment expenses decreased $0.2 million. The decrease is
primarily due to reduced seismic and delay rental payments during the current
quarter.
OTHER NON-OPERATING INCOME. Other non-operating income increased $1.1
----------------------------
million when comparing the periods. This is primarily the result of a gain of
$1.8 million recognized on the early retirement of the Company's Senior
Subordinated Notes. The gain was partially offset by losses related to the sale
of property of approximately $0.2 million and $0.5 million less interest income
due to decreased cash balances.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
The Company's financial condition has continued to decline since June 30,
2002. Stockholders' equity has decreased from $37.1 million at June 30, 2002 to
$34.4 million at September 30, 2002. The Company's working capital of $1.8
million at June 30, 2002 remained at $1.7 million at September 30, 2002. The
Company's cash increased from $17.8 million at June 30, 2002 to $20.7 million at
September 30, 2002. The Company's cash at November 12, 2002 was $2.4 million.
The change in cash during the quarter of approximately $2.9 million resulted
from various financing, operating and capital expenditure activities of the
Company. The activities were primarily comprised of: the borrowing of
approximately $10.0 million under the Company's $50 million revolving Credit
Agreement (the "Agreement"); proceeds from the sale of assets of approximately
$2.4 million; the net investment of approximately $4.8 million in property,
plant and equipment; payments of approximately $3.9 million for the purchase of
certain of the Company's outstanding Notes; payments of approximately $0.5
million for the acquisition of treasury stock and dividends; and the use of
approximately $0.2 million of cash by operations during the quarter.
-12-
On June 21, 2002 Moody's Investors Service ("Moody's") downgraded the
Company's debt rating. With a negative outlook, Moody's downgraded to Caa3 from
Caa1 the Company's 9.5% Senior Subordinated Notes ("Notes") due 2007. Moody's
stated that; "Further ratings actions are possible upon review of ECA's fiscal
year-end June 30, 2002 reserve replacements after a year of heavy reinvestment,
funded with cash-on-hand, and depending on whether ECA incurs additional secured
debt to fund its drilling program." Moody's also stated that; "The downgrades
reflect insufficient cash flow to cover interest expense and reserve replacement
capital expenditures; asset coverage that is below the par value of the bonds;
and declining production in spite of heavy FYE 2001 and FYE 2002 reinvestment in
reserve acquisitions and development and exploration drilling." This could
negatively impact the Company's ability to raise capital in the future or
increase the cost of such capital. The Company's total proved reserves
decreased by 9.5% in the fiscal year ended June 30, 2002. At July 1, 2002,
total proved reserves were 201,051 Mmcfe compared to total proved reserves at
July 1, 2001 of 222,254 Mmcfe.
At September 30, 2002, the Company's principal source of liquidity
consisted of $20.7 million of cash, plus amounts available under the Agreement
and $2 million available under an unsecured short-term credit facility currently
in place. At September 30, 2002, $10 million was outstanding under the Agreement
and no amounts were outstanding or committed under the short-term credit
facility.
On July 10, 2002, the Company entered into the Agreement with Foothill
Capital Corporation ("Foothill"). Depending on its level of borrowing under the
Agreement, the applicable interest rates are based on Wells Fargo's prime rate
plus 0.50% to 2.50%. The Agreement expires on July 10, 2005. The Agreement is
secured by approximately 80% of the existing proved producing oil and gas assets
of the Company. The Agreement, among other things, restricts the ability of the
Company and its subsidiaries to incur new debt, grant additional security
interests in its collateral, engage in certain merger or reorganization
activities, or dispose of certain assets. Upon the occurrence of an event of
default, the lenders may terminate the Agreement and declare all obligations
thereunder immediately due and payable. As of November 12, 2002, there are $24.6
million in outstanding borrowings under the Agreement. Under the Indenture for
the Company's Notes, the Company is restricted from incurring additional debt in
excess of the $50 million available under the Agreement unless the Company's
fixed charge coverage ratio, as defined in the Indenture, is at least 2.5 to 1.
Currently, the Company's fixed charge coverage ratio is less than 2.5 to 1.
The Company's net cash requirements will fluctuate based on timing and the
extent of the interplay of capital expenditures, cash generated by continuing
operations, cash generated by the sale of assets and interest expense.
Management anticipates that EBITDAX, before inclusion of anticipated gain on the
sale of assets and anticipated gain on the early retirement of the Company's
Notes, for fiscal year 2003 will approximate $33 million; however, such results
will not be sufficient to fully fund fiscal year 2003 projected interest charges
of over $18 million and fund the Company's anticipated fiscal year 2003 capital
expenditures program of $39 million. The Company's ability to achieve the
projected results for fiscal year 2003 is highly dependant on product price and
drilling success. The Company's price assumption is approximately $4 per Mcf for
the sale of natural gas and the Company's assumption for gas production is
approximately 12.8 Bcf, which is an increase of 20% over production of
approximately 10.6 Bcf in fiscal year 2002. There can be no assurance given that
the Company will be able to achieve these goals. EBITDAX for fiscal years 2002,
2001 and 2000 was $19.7 million, $33.7 million and $4.1 million, respectively.
Although cash provided from oil and gas operations will not be sufficient to
fully fund the Company's fiscal year 2003 projected interest charges, capital
expenditures program, and other uses, management believes that cash generated
from continuing oil and gas operations, together with the liquidity provided by
existing cash balances and working capital, permitted borrowings and the cash
proceeds resulting from the sale of certain operating assets as well as the
divestment of certain non-core assets, will be sufficient to satisfy commitments
for capital expenditures, debt service obligations, working capital needs and
other cash requirements for the next year.
-13-
In order to reduce future cash interest payments, as well as future amounts
due at maturity or upon redemption, the Company may, from time to time, purchase
its outstanding debt securities in open market purchases and/or privately
negotiated transactions. The Company will evaluate any such transactions in
light of then existing market conditions, taking into account its liquidity,
uses of capital and prospects for future access to capital. The amounts
involved in any such transaction, individually or in the aggregate, may be
material. Since September 30, 2002, the Company has continued to purchase
certain of its outstanding debt securities in privately negotiated transactions.
The Company believes that its existing capital resources and its expected
fiscal year 2003 results of operations and cash flows from operating activities
will be sufficient for the Company to remain in compliance with the requirements
of its Notes. However, since future results of operations, cash flow from
operating activities, debt service capability, levels and availability of
capital resources and continuing liquidity are dependent on future weather
patterns, oil and gas commodity prices and production volume levels, future
exploration and development drilling success and successful acquisition
transactions, no assurance can be given that the Company will remain in
compliance with the requirements of its Notes. See Part II Item 1 "Legal
Proceedings" for a discussion related to the Company's receipt of Notice of
Default from certain holders of the Notes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
-----------------------------------------------------
ABOUT MARKET RISK
-----------------
COMMODITY RISK
- ---------------
The Company's operations consist primarily of exploring for, producing,
aggregating and selling natural gas and oil. Contracts to deliver gas at
pre-established prices mitigate the risk to the Company of falling prices but at
the same time limit the Company's ability to benefit from the effects of rising
prices. The Company occasionally uses derivative instruments to hedge its
commodity price risk. The Company hedges a portion of its projected natural gas
production through a variety of financial and physical arrangements intended to
support natural gas prices at targeted levels and to manage its exposure to
price fluctuations. The Company may use futures contracts, swaps, options and
fixed price physical contracts to hedge its commodity prices. Realized gains and
losses from the Company's price risk management activities are recognized in oil
and gas sales when the associated production occurs. Unrecognized gains and
losses are included as a component of other comprehensive income. The Company
does not hold or issue derivative instruments for trading purposes. The Company
has elected to enter into hedge transactions, covering approximately 21.7% of
its natural gas production through June 2004.
Notwithstanding the above, the Company's future cash flows from gas and oil
production are exposed to significant volatility as commodity prices change.
Assuming total oil and gas production and the percentage of gas production
hedged under physical delivery contracts remain at September 2002 levels, a 10%
change in the average unhedged prices realized during the year would change the
Company's gas and oil revenues by approximately $0.75 million on a quarterly
basis.
INTEREST RATE RISK
- --------------------
Interest rate risk is attributable to the Company's debt. The Company
utilizes United States dollar denominated borrowings to fund working capital and
investment needs. As of September 30, 2002, all but $10 million of the
Company's debt has fixed interest rates. There is inherent rollover risk for
borrowings as they mature and are renewed at current market rates. The extent
of this risk is not predictable because of the variability of future interest
rates and the Company's future financing needs. Assuming the variable interest
debt remained at the September 30, 2002 level, a 10% change in rates would have
a negligible affect on interest expense for the quarter. The Company has not
attempted to hedge the interest rate risk associated with its debt.
-14-
FOREIGN CURRENCY EXCHANGE RISK
- ---------------------------------
Some of the Company's transactions are denominated in New Zealand dollars. For
foreign operations with the local currency as the functional currency, assets
and liabilities are translated at the period end exchange rates, and statements
of income are translated at the average exchange rates during the period. Gains
and losses resulting from foreign currency translation are included as a
component of other comprehensive income.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, the
Company has evaluated the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days of the filing date of this
quarterly report and, based on their evaluation, our principal executive officer
and principal financial officer have concluded that these controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. Disclosure controls and procedures
are our controls and other procedures that are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Securities Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed, in June 2001, the Company filed a lawsuit against
Oracle Corporation for breach of contract, breach of warranty and rescission
with respect to a software package purchased from Oracle and the failed
implementation thereof. Oracle answered the complaint substantially denying all
of the Company's allegations and filed a counterclaim against the Company
alleging that it is owed approximately $1.2 million for prior services. In
November 2001, the Company amended its Complaint against Oracle to add a count
for fraud. Extensive discovery has been conducted by the parties. The Company
intends to aggressively prosecute its case against Oracle as well as defend
against the counterclaim of Oracle. This case is scheduled for trial in January
2003.
As previously disclosed, on December 27, 2001, the Company received a
Notice of Default from certain holders of its $200 million 9-1/2% Senior
Subordinate Notes due 2007 (the "Notes") alleging a default under Section 4.9 of
the Indenture pursuant to which the Notes were issued. The alleged default
related to the proper calculation of Net Proceeds of an Asset Sale, particularly
with respect to the deduction for taxes paid or payable as a result of such
sale. On December 28, 2001, the Company filed a declaratory judgment action in
the United States District Court for the Southern District of West Virginia
-15-
(the "Court") against the holders of the Notes who issued the Notice of Default
(the "Noteholders"), asking the Court to confirm the proper calculation of Net
Proceeds of an Asset Sale under the Indenture. On January 25, 2002, the Court
entered an order denying the Noteholders' Motion to Dismiss and granting the
Company's Motion for Partial Summary Judgment, which order approved the
Company's methodology in calculating taxes paid or payable in connection with an
Asset Sale. On February 28, 2002, the Noteholders filed an answer and
counterclaim in the declaratory judgment action. The counterclaim alleges that
the Company's sale of Mountaineer in August of 2000 constituted a sale of
substantially all assets of the Company, as opposed to an Asset Sale, and
invoked certain obligations under the Indenture to repurchase the outstanding
Notes. On March 25, 2002, the Company filed its Second Motion for Partial
Summary Judgment, asserting that the Noteholders were barred from asserting the
counterclaim. On June 3, 2002, the United States District Court for the Southern
District of West Virginia entered an order granting the Company's Second Motion
for Partial Summary Judgment, which order dismissed the Noteholders' claim on
the basis of judicial admissions and equitable estoppel. On May 22, 2002, the
Noteholders filed a "Motion for Reconsideration of the Court's January 25, 2002
Order and Permission to Take Limited Discovery in Order to Supplement the
Record". The Court entered an Order dated July 19, 2002, denying the
Noteholders' Motion for Reconsideration. On July 27, 2002, the Noteholders filed
a Notice of Appeal in the United States Court of Appeals for the Fourth Circuit.
The Noteholders subsequently filed a motion to dismiss the appeal with the
Fourth Circuit. This motion was granted and the matter is still pending before
the District Court.
The Company is involved in various other legal actions and claims arising
in the ordinary course of business. While the outcome of these other lawsuits
against the Company cannot be predicted with certainty, management does not
expect these matters to have a material adverse effect on the Company's
operations or financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) None
b) None
-16-
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 under
signed thereunto, duly authorized, in the City of Denver, State of Colorado, on
the 14th day of November 2002.
ENERGY CORPORATION OF AMERICA
By: /s/John Mork
-----------------------------------
John Mork
Chief Executive Officer and Director
By: /s/Michael S. Fletcher
-----------------------------------
Michael S. Fletcher
Chief Financial Officer
-17-
CERTIFICATION PURSUANT TO SECTION 302 UNDER THE SECURITIES ACT OF 1934
FORM OF 302 CERTIFICATION (10-Q)
I, John Mork, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy Corporation
of America;
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. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we 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. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
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. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ John Mork
-----------------------------------
John Mork
Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 UNDER THE SECURITIES ACT OF 1934
FORM OF 302 CERTIFICATION (10-Q)
I, Michael S. Fletcher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Energy Corporation
of America;
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. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we 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. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
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. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Michael S. Fletcher
-----------------------------------
Michael S. Fletcher
Chief Financial Officer
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of Energy Corporation of America, a West Virginia
corporation (the "Company"), hereby certifies, to such officer's knowledge,
that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the
"Report") of the Company fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: November 14, 2002 /s/ John Mork
-----------------------------------
John Mork
Chief Executive Officer
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of the Report
or as a separate disclosure document.
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code), the
undersigned officer of Energy Corporation of America, a West Virginia
corporation (the "Company"), hereby certifies, to such officer's knowledge,
that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the
"Report") of the Company fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Dated: November 14, 2002 /s/ Michael S. Fletcher
-----------------------------------
Michael S. Fletcher
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of the Report
or as a separate disclosure document.