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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 0-18691
NORTH COAST ENERGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1594000
(State of incorporation) (I.R.S. Employer Identification No.)
1993 CASE PARKWAY
TWINSBURG, OHIO 44087-2343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 425-2330
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 .
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at June 30, 2002
- -------------------------------- ----------------------------------
Common Stock, $.01 par value 15,208,516
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
Page No.
-------
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets - 3
June 30, 2002 (Unaudited) and December 31, 2001
Unaudited Consolidated Statements of Income - 5
For the Three and Six Months Ended June 30, 2002 and 2001
Unaudited Consolidated Statements of Cash Flows - 6
For the Six Months Ended June 30, 2002 and 2001
Unaudited Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION 21
2
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
ASSETS June 30, December 31,
- ------ 2002 2001
------------------- -------------------
(Unaudited)
CURRENT ASSETS
Cash and equivalents $ 12,884,892 $ 22,035,924
Accounts receivable 6,233,122 6,006,622
Inventories 437,671 290,481
Prepaid drilling and other expenses 782,490 474,411
------------------- -------------------
Total current assets 20,338,175 28,807,438
PROPERTY AND EQUIPMENT, at cost
Land 222,822 222,822
Oil & gas properties (successful efforts) 134,237,969 121,195,745
Gathering systems 16,417,050 16,411,433
Vehicles 2,481,787 2,249,507
Furniture & fixtures 790,840 748,974
Buildings & improvements 1,865,936 1,862,382
------------------- -------------------
156,016,404 142,690,863
Less accumulated depreciation, depletion
and amortization 33,117,051 29,442,909
------------------- -------------------
122,899,353 113,247,954
OTHER ASSETS, net 1,664,757 2,734,966
TOTAL ASSETS $ 144,902,285 $ 144,790,358
=================== ===================
The accompanying notes are an integral part of these consolidated
financial statements.
3
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- ----------------------------------------------------------------------------- ------------------ ------------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 2,920,304 $ 3,395,272
Accrued expenses 6,717,705 6,906,337
Billings in excess of costs on uncompleted contracts 0 2,062,094
------------------ ------------------
Total current liabilities $ 9,638,009 $ 12,363,703
LONG-TERM DEBT, net of current portion
Affiliates 10,000,000 10,000,000
Non-affiliates 57,000,000 57,000,000
------------------ ------------------
67,000,000 67,000,000
ACCRUED PLUGGING LIABILITY 321,141 367,394
DEFERRED INCOME TAXES 7,351,131 5,680,027
STOCKHOLDERS' EQUITY
Series A, 6% Noncumulative Convertible Preferred 726 731
stock par value $.01 per share; 563,270 shares
authorized; 72,591 and 73,096 shares issued and outstanding
(aggregate liquidation value of $725,910)
Series B, Cumulative Convertible Preferred stock, par 0 2,329
value $.01 per share; 625,000 shares authorized;
0 and and 232,864 shares outstanding.
Undesignated Serial Preferred stock, par value $.01 0 0
per share; 811,730 shares authorized; no shares issued
or outstanding
Common Stock, par value $.01 per share; 60,000,000 152,085 152,080
shares authorized; 15,208,516 and 15,208,031 shares issued
and outstanding
Additional paid-in capital 47,889,110 50,213,422
Accumulated other comprehensive (loss) income (392,078) 579,630
Retained earnings 12,942,161 8,431,042
------------------ ------------------
Total stockholders' equity 60,592,004 59,379,234
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $144,902,285 $144,790,358
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
4
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2002 and 2001
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUE
Oil and gas production $ 8,663,655 $ 7,613,929 $ 17,051,770 $ 15,681,879
Drilling revenues 0 1,175,720 2,082,351 6,214,520
Well operating, gathering, and other 1,713,078 2,423,455 3,391,358 6,368,536
------------ ------------ ------------ ------------
10,376,733 11,213,104 22,525,479 28,264,935
COSTS AND EXPENSES
Oil and gas production expenses 2,025,199 2,196,366 3,943,679 4,905,314
Drilling costs 0 1,185,830 1,752,456 4,629,886
Well operating, gathering, and other 1,306,518 1,558,295 2,334,743 3,472,211
General and administrative expenses 1,064,343 966,852 1,974,076 2,111,262
Depreciation, depletion and amortization 2,099,758 1,912,918 4,205,734 3,326,046
------------ ------------ ------------ ------------
6,495,818 7,820,261 14,210,688 18,444,719
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 3,880,915 3,392,843 8,314,791 9,820,216
OTHER INCOME (EXPENSE)
Interest income 86,453 179,872 168,573 499,257
Interest expense (795,074) (1,327,061) (1,582,871) (2,892,555)
------------ ------------ ------------ ------------
(708,621) (1,147,189) (1,414,298) (2,393,298)
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,172,294 2,245,654 6,900,493 7,426,918
PROVISION FOR INCOME TAXES 1,063,000 713,000 2,331,209 2,463,000
------------ ------------ ------------ ------------
NET INCOME $ 2,109,294 $ 1,532,654 $ 4,569,284 $ 4,963,918
============ ============ ============ ============
NET INCOME APPLICABLE TO
COMMON STOCK (after dividends on
Cumulative Preferred Stock of $0 and $58,216 for
the three months ended June 30, 2002 and 2001
and $58,167 and $116,432 for the six months
ended June 30, 2002 and 2001, respectively $ 2,109,294 $ 1,474,438 $ 4,511,117 $ 4,847,486
============ ============ ============ ============
NET INCOME PER SHARE
(basic and diluted) $ 0.14 $ 0.10 $ 0.30 $ 0.32
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
5
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)
June 30, June 30,
2002 2001
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,569,284 $ 4,963,918
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 4,205,734 3,326,046
Deferred income taxes 2,273,799 2,462,954
Stock Bonus -- 14,648
Change in:
Accounts receivable (1,033,950) 50,014
Inventories and other current assets (455,269) 3,238,476
Other assets, net 450,655 510,857
Accounts payable and accrued expenses (1,364,206) 2,070,131
Billings in excess of costs on uncompleted contracts (2,062,094) (6,214,520)
------------ ------------
Total adjustments 2,014,669 5,458,606
------------ ------------
Net cash provided by operating activities 6,583,953 10,422,524
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (11,894,621) (7,341,105)
Proceeds on sale of property and equipment 1,275
Acquisition of property and equipment (1,456,833)
------------ ------------
Net cash used by investing activities (13,350,179) (7,341,105)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Preferred B Stock (2,326,640) --
Repayment of long term debt -- (3,362,821)
Dividends (58,166) (116,432)
------------ ------------
Net cash used by financing activities (2,384,806) (3,479,253)
DECREASE IN CASH AND EQUIVALENTS (9,151,032) (397,834)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 22,035,924 18,189,760
------------ ------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 12,884,892 $ 17,791,926
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,640,304 $ 2,484,846
Income taxes 32,012 --
The accompanying notes are an integral part of these consolidated
financial statements.
6
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Accounting Policies
A. General
The accompanying unaudited consolidated financial statements
included herein, have been prepared by North Coast Energy, Inc.
in accordance with accounting principles generally accepted in
the United States of America for interim financial information
and with instructions to Form 10-Q and Article 10 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 (consisting of normal recurring accruals)
considered necessary for fair presentation have been included.
These financial statements should be read in conjunction with the
financial statements and notes thereto which are in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
The balance sheet at December 31, 2001 presented in this report,
has been derived from the audited financial statements at that
date but does not include all of the information and footnotes
included in the Company's annual report on Form 10-K for the year
ended December 31, 2001.
The results of the operations for the interim periods may not
necessarily be indicative of the results to be expected for the
full year. In addition, the preparation of these financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. Per Share Amounts
The average number of shares used in computing basic and diluted
net income per share was 15,208,516 and 15,242,401 and 15,208,031
and 15,249,444 for the three months ended June 30, 2002 and 2001,
respectively and 15,208,340 and 15,241,991 and 15,207,493 and
15,248,432 for the six months ended June 30, 2002 and 2001,
respectively.
C. Reclassifications
Certain reclassifications were made to prior period financial
statement presentations to conform with current period
presentations.
Note 2. Preferred Dividends
The Company paid a dividend of $58,167 and $116,432 on the Cumulative
Convertible Series B Preferred Stock during the six months ended June
30, 2002 and 2001, respectively. All dividends in arrears attributable
to Series B Preferred were paid in December 2001. All Series B
Preferred Shares were redeemed on March 31, 2002.
7
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Related Party Transactions
Prior to January 2002, a large portion of the Company's revenues,
other than oil and gas production revenue, was generated from, or was
a result of, the organization and management of oil and gas
partnerships sponsored by the Company. The Company has since ceased to
offer oil and gas partnership investments. The Company believes that
the terms of any remaining related party transactions are consistent
with terms that could have been obtained from unaffiliated third
parties.
Accounts receivable from affiliates amounted to $699,020 and $985,559
at June 30, 2002 and December 31, 2001, respectively, consist
primarily of receivables paid on behalf of the partnerships that are
managed by the Company and for administrative fees charged to the
partnerships. During the six months ended June 30, 2002 and 2001, the
Company acquired limited partnership interests in oil and gas
partnerships that it had sponsored at a cost of approximately $290,000
and $676,000 respectively.
Note 4. Financial Instruments
Derivative Financial Instruments: The Company uses derivatives solely
for hedging purposes. The following is a summary of the Company's risk
management strategies and the effect of these strategies on the
Company's consolidated financial statements.
Cash Flow Hedging Strategy: The Company is exposed to commodity price
risks related to natural gas and oil. The Company's financial results
can be significantly impacted by changes in commodity prices. "Costless
collars" consist of a sold call option and a purchased put option such
that the combined revenue and cost of these individual transactions is
equal to or near zero. During 2001 and 2002, the Company entered into
the following costless collar arrangements:
Monthly Volume Price/Mcf
Term Mcf Floor Ceiling
---------------------------------------- -------------- ------------- ----------
January 1, 2002 to December 31, 2002 130,000 3.34 4.52
May 1, 2002 to December 31, 2002 139,000 3.29 4.62
November 1, 2002 to March 31, 2003 98,000 3.08 3.48
January 1, 2003 to December 31, 2003 98,000 3.33 4.45
January 1, 2003 to December 31, 2003 130,000 3.45 5.11
April 1, 2003 to December 31, 2003 135,000 4.07 5.23
January 1, 2004 to December 31, 2004 132,000 3.85 5.30
Gains or losses on the hedge relative to the market are recognized
monthly as additions to or subtractions from oil and gas sales. To
lessen its exposure to commodity price risk, NCE expects to continue to
sell natural gas under fixed
8
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Financial Instruments (Cont'd)
price contracts, on the spot market and to use financial hedging
instruments to realize a fixed price on a portion of its production.
The following table reflects the natural gas volumes and the weighted
average prices under financial hedges and fixed price contracts at June
30, 2002:
Fixed Price
Financial Hedges (Collars) Contracts
-------------------------------------------- --------------------
Estimated
Realizable Price (MCF) Estimated
NYMEX ---------------------- Realizable
Quarter Ending MMcf Price (DTH) Floor Cap MMcf Price (MCF)
-------------- ---- ----------- ----- --- ---- -----------
September 30, 2002 825 3.27 3.37 4.62 1,259 3.42
December 31, 2002 1,020 3.60 3.41 4.49 1,019 3.37
March 31, 2003 977 3.91 3.48 4.60 911 3.38
June 30, 2003 1,087 3.73 3.58 4.93 252 3.42
September 30, 2003 1,092 3.81 3.58 4.93 134 3.21
December 31, 2003 1,092 4.06 3.66 5.01 83 2.80
March 31, 2004 396 4.19 4.06 5.51 83 2.79
June 30, 2004 396 3.76 4.01 5.46 77 2.71
September 30, 2004 400 3.86 4.01 5.46 77 2.71
December 31, 2004 400 4.09 4.06 5.51 77 2.71
Interest Rate Swap: During 2001 and the first six months of 2002, the
Company entered into interest rate swap agreements that effectively
convert a portion of its variable-rate-long-term-debt to fixed rate
debt for periods of up to two years, thus reducing the impact of
interest rate changes on future income. At June 30, 2002, the following
contracts were outstanding:
LIBOR
Term Notional Rate All-In
Amount Fixed Rate Fixed
----------------------------------------------- --------------- ------------- --------------
January 1, 2002 to December 31, 2002 $20,000,000 2.7% 4.6%
January 1, 2002 to December 31, 2003 $20,000,000 3.5% 5.4%
January 1, 2003 to December 31, 2003 $20,000,000 4.2% 6.0%
9
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Financial Instruments (Cont'd)
On April 1, 2001, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS No.
133"), "Accounting for Derivative Instruments and Hedging Activities"
(as amended). SFAS 133 establishes accounting and reporting standards
for hedging activities and derivative instruments, including certain
derivative instruments embedded in other contracts.
The Company qualifies for special hedge accounting treatment under SFAS
133, whereby the fair value of the hedge is recorded in the balance
sheet as either an asset or liability and changes in fair value are
recognized in other comprehensive income until settled, when the
resulting gains and losses are recorded in earnings. Any hedge
ineffectiveness is charged to earnings. The Company believes that any
ineffectiveness of its hedges is immaterial. The effect on earnings and
other comprehensive income as a result of SFAS 133 will vary from
period to period and will be dependent upon prevailing oil and gas
prices and interest rates, the volatility of forward prices for such
commodities, the amount the Company hedges and the time periods covered
by such hedges.
The following tables summarize other comprehensive income of the
Company for the three and six months ended June 30, 2002 and 2001.
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Income $ 2,109,294 $ 1,532,654 $ 4,569,284 $ 4,963,918
Change in mark-to-market
hedge asset (liability) net
of deferred taxes:
Natural gas hedging (4,222) 1,805,000 (719,680) 1,805,000
Interest rate swaps (252,028) 0 (252,028) 0
----------- ----------- ----------- -----------
Comprehensive Income $ 1,853,044 $ 3,337,654 $ 3,597,576 $ 6,768,918
=========== =========== =========== ===========
10
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Accounting Standards
Effective January 1, 2002, the Company adopted the following standards:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations." SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method and further clarifies the
criteria to recognize intangible assets separately from goodwill.
In June 2001, FASB issued SFAS No.142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject
to periodic impairment tests. Other intangible assets will continue to
be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-lived Assets," which is effective the first quarter of
fiscal year 2002. SFAS No. 144 modifies and expands the financial
accounting and reporting for the impairment or disposal of long-lived
assets other than goodwill.
The adoption of the standards had no impact on the Company's financial
position or results of operations.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
North Coast Energy, Inc., a Delaware corporation ("NCE" or the
"Company"), is an affiliate of nv NUON ("NUON"), a limited liability company
organized under the laws of the Netherlands. NCE and its subsidiaries are
engaged in the acquisition and enhancement of developed producing natural gas
and oil properties and the exploration, development and production of
undeveloped natural gas and oil properties. NCE derives its revenues from its
own oil and gas production and turnkey drilling, well operations, gas gathering
and gas marketing services it provides for third parties.
The following tables review the results of operations of the Company for the
three and six months ended June 30, 2002 and 2001.
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ---------- ---------
PRODUCTION
Oil production (MBbls) 22 25 50 42
Gas production (MMcf) 2,280 1,957 4,510 3,949
Total production (Mmcfe) 2,413 2,108 4,808 4,199
AVERAGE PRICES
Oil (per Bbl) 22.47 23.18 19.81 24.17
Gas (per Mcf) 3.58 3.59 3.56 3.72
Average price per Mcfe 3.59 3.61 3.55 3.74
AVERAGE COSTS (per Mcfe)
Production expense (including 0.84 1.04 0.82 1.17
production taxes)
Depreciation, depletion & amortization 0.87 0.91 0.88 0.79
General and administrative expense 0.44 0.46 0.41 0.50
GROSS OPERATING MARGIN (per Mcfe) 2.75 2.57 2.73 2.57
MBbls: thousand barrels MMcf: Million cubic feet Mmcfe: Million cubic feet of
natural gas equivalent
Bbl: barrel Mcf: thousand cubic feet
Operating Margin (per Mcfe): Average Price less Production Expense (including
production taxes)
12
All items in the following table are calculated as a percentage of total
revenues.
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Oil and gas production 83% 68% 76% 55%
Drilling 0% 10% 9% 22%
Well operating, gathering, and other 17% 22% 15% 23%
------------ ------------ ------------ ------------
Total Revenues 100% 100% 100% 100%
Expenses:
Oil and gas production 20% 20% 18% 18%
Drilling costs 0% 11% 0% 16%
Well operating, gathering, and other 13% 14% 18% 12%
General and administrative 10% 8% 9% 7%
Depreciation, depletion, and amortization 20% 17% 19% 12%
Interest (net) 7% 10% 6% 8%
Income taxes 10% 6% 10% 9%
------------ ------------ ------------ ------------
Total Expenses 80% 86% 80% 82%
Net Income 20% 14% 20% 18%
============ ============ ============ ============
The following discussion and analysis reviews the results of operations and the
financial condition for the Company for three and six months ended June 30, 2002
and 2001. The review should be read in conjunction with the financial
information presented elsewhere herein.
13
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 TO JUNE 30, 2001
REVENUES
Oil and gas revenues increased $1,049,726 (14%) to $8,663,655 for the
three months ended June 30, 2002, from $7,613,929 for the three months ended
June 30, 2001. The increase in oil and gas revenues reflects higher volumes of
gas production partially offset by lower prices received for natural gas and
oil. The Company's production volumes for the three months ended June 30, 2002
were 2,412,522 MCFE (MCF equivalents) of natural gas compared to 2,108,150 MCFE
for the three months ended June 30, 2001. The Company recognizes a portion of
the wellhead price it receives as gas gathering and other revenues to offset a
portion of its costs related to its gathering systems and compression
facilities. Excluding the portion attributable to gas gathering and compression
revenues, the Company received an average price of $3.59 and $3.61 per MCFE for
oil and natural gas sold for the three months ended June 30, 2002 and 2001,
respectively.
Drilling revenues decreased $1,175,720 (100%) to $0 for the three
months ended June 30, 2002, compared to $1,175,720 for the three months ended
June 30, 2001. There were no wells drilled for third parties in the June 30,
2002 quarter compared to seven wells in 2001. This decrease results from the
Company's exodus from the drilling program business and its shift to its core
business of exploration and production.
Well operating, gathering and other revenue decreased $710,377 (29%) to
$1,713,078 for the three months ended June 30, 2002, compared to $2,423,455 for
the three months ended June 30, 2001. This decrease results from lower natural
gas gathering revenue (due to lower prices), and lower gas marketing revenues
due to a significant reduction in gas purchased and sold to third parties
because of reduced demand in 2002.
EXPENSES
Oil and gas production expenses decreased $171,167 (8%) to $2,025,199
for the three months ended June 30, 2002, from $2,196,366,for the three months
ended June 30, 2001, reflecting ongoing efficiencies in field operations and
lower production taxes resulting from lower prices.
Drilling costs decreased $1,185,830 (100%) to $0 for the three months
ended June 30, 2002, compared to $1,185,830 at June 30, 2001 due to no wells
being drilled for drilling programs in the second quarter ending June 30, 2002.
Well operating, gathering, and other decreased $251,777 (16%) for the
three months ended June 30, 2002 to $1,306,518 from $1,558,295 at June 30, 2001
primarily as a result of decreased costs and amounts of gas purchased and sold
to third parties.
General and administrative expenses increased $97,491 (10%) to
$1,064,343 for the three months ended June 30, 2002, from $966,852 for the three
months ended June 30, 2001 primarily due to compensation and benefit related
expenses.
The increase in depreciation, depletion and amortization (DD&A) of
$186,840 (10%) to $2,099,758 for the three months ended June 30, 2002, from
$1,912,918 for the three months ended June 30, 2001, is the result of increased
production volumes in the
14
quarter ending June 30, 2002. DD&A per unit of production decreased 4% to $0.87
per Mcfe in the quarter ending June 30, 2002.
For the three months ended June 30, 2002, net interest expense
decreased $438,568 to $708,621 compared to $1,147,189 for the three months ended
June 30, 2001. The decrease reflects lower interest rates on the Company's
long-term debt partially offset by lower interest income resulting from lower
rates earned on amounts invested in 2002 compared to 2001.
Net income for the three months ended June 30, 2002 increased $576,640
(38%) to $2,109,294 from $1,532,654 for the three months ended June 30, 2001 due
primarily to increased production volumes coupled with decreases in other areas
of expense. The Company's net income attributable to common stock was $2,109,294
($0.14/share) for the three months ended June 30, 2002, compared to $1,474,438
($0.10/share) for the three months ended June 30, 2001.
15
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 TO JUNE 30, 2001
REVENUES
Oil and gas revenues increased $1,369,891 (9%) to $17,051,770 for the
six months ended June 30, 2002, from $15,681,879 for the six months ended June
30, 2001. The increase in oil and gas revenues reflects higher volumes of gas
and oil production partially offset by lower prices received for natural gas and
oil. The Company's production volumes for the six months ended June 30, 2002
were 4,808,136 MCFE (MCF equivalents) of natural gas compared to 4,198,473 MCFE
for the six months ended June 30, 2001. The Company recognizes a portion of the
wellhead price it receives as gas gathering and other revenues to offset a
portion of its costs related to its gathering systems and compression
facilities. Excluding the portion attributable to gas gathering and compression
revenues, the Company received an average price of $3.55 and $3.74 per MCFE for
oil and natural gas sold for the six months ended June 30, 2002 and 2001,
respectively.
Drilling revenues decreased $4,132,169 (66%) to $2,082,351 for the six
months ended June 30, 2002, compared to $6,214,520 for the six months ended June
30, 2001. This decrease results from significantly less money raised in the
private drilling programs, reflecting the Company's exodus from the fund raising
business to focus on its core business of exploration and production.
Well operating, gathering and other revenue decreased $2,977,178 (47%)
to $3,391,358 for the six months ended June 30, 2002, compared to $6,368,536 for
the six months ended June 30, 2001. This decrease results from lower natural gas
gathering revenue (due to lower prices), and lower gas marketing revenues due to
a significant reduction in gas purchased and sold to third parties because of
reduced demand in 2002.
EXPENSES
Oil and gas production expenses decreased $961,635 (20%) to $3,943,679
for the six months ended June 30, 2002, from $4,905,314 for the six months ended
June 30, 2001, reflecting ongoing efficiencies in field operations and lower
production taxes resulting from lower average gas prices.
Drilling costs decreased $2,877,430 (62%) to $1,752,456 for the six
months ended June 30, 2002, compared to $4,629,886 at June 30, 2001, reflecting
the lower costs and a significantly reduced number of wells drilled and
completed for drilling programs.
Well operating, gathering, and other decreased $1,137,468 (33%) for the
six months ended June 30, 2002 to $2,334,743 from $3,472,211 at June 30, 2001
primarily as a result of decreased costs and amounts of gas purchased and sold
to third parties.
General and administrative expenses decreased $137,186 (6%) to
$1,974,076 for the six months ended June 30, 2002, from $2,111,262 for the six
months ended June 30, 2001. The decrease in G&A expense primarily reflects the
elimination of costs
16
incurred in the quarter ended March 31, 2001, associated with the business
process reengineering activities with business consultants and the
implementation of a new computer system.
The increase in depreciation, depletion and amortization (DD&A) of
$879,688 (26%) to $4,205,734 for the six months ended June 30, 2002, from
$3,326,046 for the six months ended June 30, 2001, is the result of higher
volumes of oil and gas produced during the six months ended June 30, 2002. DD&A
per unit of production increased 11% to $0.88 per Mcfe for the six months ended
June 30, 2002.
For the six months ended June 30, 2002, net interest expense decreased
$979,000 to $1,414,298 compared to $2,393,298 for the six months ended June 30,
2001. The decrease reflects lower interest rates on the Company's long-term debt
partially offset by lower interest income resulting from lower rates earned on
amounts invested in 2002 compared to 2001.
Net income for the six months ended June 30, 2002 decreased $394,634
(8%) to $4,569,284 from $4,963,918 for the six months ended June 30, 2001
primarily reflecting lower prices received as well as decreases in other areas
of income attributable to the Company's drilling and operating activities. The
Company's net income attributable to common stock was $4,511,117 ($0.30/share)
for the six months ended June 30, 2002, compared to $4,847,486 ($0.32/share) for
the six months ended June 30, 2001.
INFLATION AND CHANGES IN PRICES
Inflation affects the Company's operating expenses as well as interest
rates, both of which may have an effect on the Company's profitability. Oil and
gas prices have not followed inflation and have fluctuated during recent years
as a result of other forces such as OPEC, economic factors, demand for and
supply of natural gas in the United States and within the Company's regional
area of operation. Oil prices have increased as a result of continued production
quotas by members of OPEC, and the available supply of crude oil to world
markets. Natural gas prices have decreased during the six months ended June 30,
2002, compared to the natural gas prices for the six months ended June 30, 2001.
These decreases in price are attributed to higher storage supplies entering the
winter of 2001/2002, lower natural gas demand for industrial use and warm
weather curtailing demand for heating fuel in the United States in the June 2002
period. As a result of these market forces, the Company received an average
price of $19.81 per barrel of oil for the six months ended June 30, 2002
compared to $24.17 for the six months ended June 30, 2001. The Company received
an average price after recognition of a portion of the wellhead price in gas
gathering and other revenues of $3.56 per MCF for its natural gas for the six
months ended June 30, 2002, compared to $3.72 for the six months ended June 30,
2001. The Company cannot predict the future direction of oil and gas markets and
prices, as the forces noted above as well as other variables are subject to
change.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $10,700,166 at June 30, 2002,
compared to $16,443,735 at December 31, 2001. The decrease of $5,743,569 in
working capital at June 30, 2002 is due mainly to the use of cash in the
Company's drilling program, the acquisition of certain oil and gas properties
and the redemption of the Company's Series B Preferred Shares.
17
The following table summarizes the Company's financial position at June 30, 2002
and December 31, 2001 (amounts in thousands):
June 30, December 31,
2002 2002
----------------------- ---------------------
Amount % Amount %
---------- -------- --------- --------
Working Capital $ 10,700 8 $ 16,444 12
Property and equipment (net) 122,899 91 113,248 86
Other 1,655 1 2,735 2
-------- -------- -------- --------
Total $135,264 100 $132,427 100
======== ======== ======== ========
Long-term debt $ 67,000 49 $ 67,000 51
Deferred income taxes and other liabilities 7,672 6 6,048 4
Stockholders' equity 60,592 45 59,379 45
-------- -------- -------- --------
Total $135,264 100 $132,427 100
======== ======== ======== ========
The oil and gas exploration and development activities of NCE historically have
been financed through the drilling programs, internally generated funds, and
from bank and equity financing.
The following table summarizes the Company's Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 (amounts in thousands):
2002 2001
--------------- --------------------
Net cash provided by operating activities $ 6,584 $ 10,423
Net cash used by investing activities (13,350) (7,341)
Net cash used by financing activities (2,385) (3,480)
--------------- --------------------
Decrease in cash and equivalents $ (9,151) $ (398)
=============== ====================
As the above table indicates, the Company's cash provided by operating
activities was $6,583,953 and $10,422,524 for the six months ended June 30,
2002, and 2001, respectively. This decrease reflects a slightly lower level of
earnings combined with an increase in depreciation, depletion and amortization
expense, reduced activities associated with its drilling programs and changes in
accrued expenses. Net income decreased by $394,634, depreciation, depletion, and
amortization increased by $879,688, and reduced activities associated with its
drilling programs decreased approximately $2,400,000.
Net cash used for investing activities was $13,350,179 for the six
months ended June 30, 2002, compared to $7,341,105 for the six months ended June
30, 2001 reflecting the Company's increased drilling for its own account and the
acquisition of producing oil and gas properties.
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Net cash used in financing activities was $2,384,806 for the six months
ended June 30, 2002, and $3,479,253 for the six months ended June 30, 2001. The
amount used in 2002 was primarily for the redemption of the Company's Series B
Preferred Shares while the amount used in 2001 was primarily used for repayment
of long-term debt.
At June 30, 2002, the company has $8,000,000 available on its revolving
line of credit and cash balances totaling $12,884,892. The Company believes that
its cash, cash flow from operations and available borrowing capacity are
adequate to fund its planned capital expenditures and operations.
FORWARD LOOKING INFORMATION
The forward looking statements regarding future operations and
financial performance contained in this report involve risks and uncertainties
that include, but are not limited to the supply of and market demand for natural
gas and oil, levels of natural gas and oil production and cost of operations,
results of the Company's drilling, availability of capital to the Company,
uncertainties associated with reserve estimates, environmental risks and other
factors included in the Company's filings with the SEC. Actual results may
differ materially from forward-looking information included in this report.
19
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to commodity price interest rate and credit
risks. The Company's primary interest rate risk exposure results from floating
rate debt including debt under the Company's revolving Credit Facility and the
Subordinated Promissory Note between the Company and NUON. The Company is
exposed to commodity price risks related to natural gas and oil. The Company has
entered into contracts to reduce its exposure to these risks, as discussed in
the Company's financial statements filed herein. In addition, quantitative and
qualitative disclosures about market risk were included in the Company's form
10-K (Item 7A) and the financial statements included therein for the fiscal year
ended December 31, 2001.
20
NORTH COAST ENERGY, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibits
None
b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter for
which this report was filed.
21
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.
NORTH COAST ENERGY, INC.
August 1, 2002 /s/ Omer Yonel
---------------------------------------
Omer Yonel
President, Chief Executive Officer and
Director
NORTH COAST ENERGY, INC.
August 1, 2002 /s/ Dale E. Stitt
---------------------------------------
Dale E. Stitt
Chief Financial Officer and
Principal Accounting Officer
22