Back to GetFilings.com

Table of Contents

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 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 0-18691

NORTH COAST ENERGY, INC.

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.

Table of Contents

NORTH COAST ENERGY, INC. AND SUBSIDIARIES

2

Table of Contents

NORTH COAST ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2002 and December 31, 2001

The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

NORTH COAST ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

NORTH COAST ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2002 and 2001
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

NORTH COAST ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three and Nine Months Ended September 30, 2002 and 2003
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

6

Table of Contents

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 U.S. Securities and Exchange Commission (“SEC”) 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.
			The accompanying financial statements should be read in connection with the “Notes to Consolidated Financial Statements” included in “Item 8. Financial Statements and Supplemental Data” in the Company’s 2001 Annual Report on Form 10-K filed with the SEC. Following is a discussion of the Company’s most critical accounting policies.
	B.		Successful Efforts Method of Accounting
			The Company utilizes the “successful efforts” method of accounting for oil and gas producing activities. Under the successful efforts method, property acquisition and development costs and certain productive exploration cost are capitalized while non-productive exploration costs, which include certain geological and geophysical costs, exploratory dry hole costs and costs of carrying and retaining unproved properties, are expensed as incurred.
			The major difference between the successful efforts method of accounting and the alternative full cost method is that under the full cost method of accounting such exploration costs and expenses are capitalized as assets, pooled with the costs of successful wells and charged against the net income (loss) of future periods as a component of depletion or impairment expense.

7

Table of Contents

Note 1. Summary of Accounting Policies (cont’d)

	C.		Oil and Gas Reserves
			The Company’s proved developed and proved undeveloped reserves are all located within the Appalachian Basin in the United States. The Company cautions that there are many uncertainties inherent in estimating proved reserve quantities and in projecting future production rates and the timing of development expenditures. In addition, estimates of new discoveries are more imprecise than those of properties with a production history. Accordingly, these estimates are expected to change as future information becomes available. Material revisions of reserve estimates may occur in the future, development and production of the oil and gas reserves may not occur in the periods assumed and actual prices realized and actual costs incurred may very significantly from assumptions used. Proved reserves represent estimated quantities of natural gas and oil that geological and engineering data demonstrate with reasonable certainty, to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made. Proved developed reserves are expected to be recovered through wells and equipment in place and under operating methods being utilized at the time the estimates were made. The accuracy of a reserve estimate is a function of the quality and quantity of available data, the accuracy of assumptions used and the judgment of the persons preparing the estimate.
			The Company’s proved reserve information is based on estimates it prepared. Estimates prepared by others may be higher or lower than the Company’s estimates. The Company’s estimates of proved reserves have been reviewed by independent petroleum engineers at each fiscal year end, most recently, December 31, 2001.
	D.		Capitalization, Depreciation, Depletion and Impairment of Long-Lived Assets
			Capitalized costs related to proved properties are depleted using the units-of-production method. Depreciation, depletion and amortization of proved oil and gas properties is calculated on the basis of estimated recoverable reserve quantities. These estimates can change based on economic or other factors. No gains or losses are recognized upon the disposition of oil and gas properties except in large or extraordinary transactions. Sales proceeds are credited to the carrying value of the properties. Maintenance and repairs are expensed, and expenditures which enhance the value of properties are capitalized.
			Unproved oil and gas properties are stated at cost and consist of undrilled leases. These costs are assessed periodically to determine when their value has been impaired, and if impairment is indicated, the costs are charged to expense.
			Gas gathering systems are stated at cost. Depreciation expense is computed using the straight-line method over an average 15 years.
			Other property and equipment are stated at cost. Depreciation of non-oil and gas properties is computed using the straight-line method over the useful lives of the assets ranging from 3 to 15 years for machinery and equipment and 30 years for buildings. When assets other than oil and gas

8

Table of Contents

Note 1. Summary of Accounting Policies (cont’d)

			properties are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is expensed as incurred, and significant renewals and betterments are capitalized.
			Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and the carrying amount of the asset. Fair value is based on management’s outlook of future oil and natural gas prices and estimated future cash flows to be generated by the assets, discounted at a market rate of interest.
	E.		Derivatives and Hedging
			The hedging relationship between the hedging instruments and hedged item must be highly effective. The Company measures effectiveness at least on a monthly basis. Ineffective portions of a derivative instrument’s change in fair value are immediately recognized in net income (loss). If there is a discontinuance of a cash flow hedge because it is probable that the original forecasted transaction will not occur, deferred gains or losses are recognized in earnings immediately.
	F.		Revenue Recognition
			Gas production revenue is recognized as production takes place. Oil production is recognized as oil is removed from the well site. Oil and gas marketing revenues are recognized when title passes. Oilfield service revenues are recognized when services have been provided.
	G.		Per Share Amounts
			The average number of shares used in computing basic and diluted net income per share was 15,208,516 and 15,241,877 and 15,208,031 and 15,244,894 for the three months ended September 30, 2002 and 2001, respectively, and 15,208,423 and 15,241,867 and 15,207,672 and 15,248,769 for the nine months ended September 30, 2002 and 2001, respectively.
	H.		Reclassifications
			Certain reclassifications were made to prior period financial statement presentations to conform with current period presentations.

9

Table of Contents

Note 2. Preferred Dividends

The Company paid a dividend of $58,167 and $174,648 on the Cumulative Convertible Series B Preferred Stock during the nine months ended September 30, 2002 and 2001, respectively. All dividends in arrears attributable to Series B Preferred Stock were paid in December 2001. All shares of Series B Preferred Stock were redeemed on March 31, 2002.

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 $1,005,890 and $985,559 at September 30, 2002 and December 31, 2001, respectively, consisting primarily of cash paid on behalf of the partnerships that are managed by the Company and for administrative fees charged to the partnerships. During the nine months ended September 30, 2002 and 2001, the Company acquired limited partnership interests in oil and gas partnerships that it had sponsored at a cost of approximately $295,000 and $1,590,000, respectively.
			In August 2002 the Company offered to purchase any and all partnership interests in 17 limited partnerships in which the company serves as Managing General Partner for approximately $1.8 million. At October 31, 2002, the majority of outstanding interests in 14 of the partnerships had voted in favor of selling all of the assets of the partnerships to the Company. These 14 partnerships will be terminated and the Company will acquire the remaining outstanding interests excluding the interests of those investors that elect to become working interest owners. At this time it is not possible to determine how many partners will elect to become working interest owners. Consequently, it is not possible to estimate the cost of the interests to be acquired or the oil and gas reserves associated with such interests. Termination of the partnerships and the acquisition of partnership interests, excluding the interests of those investors that elect to become working interest owners, is expected to take place in the fourth quarter of 2002.

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. 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:

10

Table of Contents

Note 4. Financial Instruments (cont’d)

			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, the Company expects to continue to sell natural gas under fixed 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 September 30, 2002:

11

Table of Contents

Note 4. Financial Instruments (cont’d)

Interest Rate Swaps: During 2001 and the first nine 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 September 30, 2002, the following contracts were outstanding:

			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.
			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. 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 natural 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 table summarizes other comprehensive income of the Company for the three and nine months ended September 30, 2002 and 2001.

12

Table of Contents

Note 5. Accounting Standards

			In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 rescinds SFAS 4, “Reporting Gains and Losses from Extinguishment of Debt,” SFAS 44, “Accounting for Intangible Assets of Motor Carriers” and SFAS 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements” and amends SFAS 13, “Accounting for Leases”. Statement 145 also makes technical corrections to other existing pronouncements. SFAS 4 required gains and losses from extinguishment of debt to be classified as an extraordinary item, net of the related income tax effect. As a result of the rescission of SFAS 4, the criteria for extraordinary items in APB Opinion No. 30, “Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” now will be used to classify those gains and losses. SFAS 145 is effective quarter ending September 30, 2002, for the Company’s financial position, results of operations and cash flows.
			In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The adoption of this standard is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

Note 6. Commitments and Contingencies

			The Company leases certain equipment used in its field operations under non-cancellable operating leases. Rents under existing leases are approximately $10,000 per month and continues in decreasing amounts until 2005.
			The Company has unlimited liability to third parties with respect to the operations of the partnerships it has sponsored and may be liable to limited partners for losses attributable to breach of fiduciary obligations. In certain partnerships, certain investors have participated as co-general partners in such partnerships. To make such investments more acceptable to potential investors (from a standpoint of risks to such investors), NCE has agreed to indemnify these investor-general partners from any partnership liability, which they may incur in excess of their capital contributions.
			From time to time and in the ordinary course of business, the Company may be subject to various claims, charges, and litigation. In the opinion of management, final judgments from such pending claims, charges, and litigation, if any, against the Company would not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Note 7. Industry Segment Information

The Company operates in one reportable industry segment as an independent energy company engaged in exploring for, developing and producing natural gas and oil reserves, acquiring and enhancing existing reserves and gathering and marketing natural gas and oil. The company’s operations are entirely within the United States.

13

Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

			Forward Looking Information
			The information in this document includes forward-looking statements that are made pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and projections about future events. Forward-looking statements, and the business prospects of the Company are subject to a number of risks and uncertainties, which may cause the Company’s actual results in future periods to differ from the forward-looking statements contained herein. These risks and uncertainties include, but are not limited to, the Company’s access to capital, the market demand for and prices of oil and natural gas, the Company’s oil and gas production and costs of operation, the results of the Company’s future drilling activities, the uncertainties of reserve estimates, general economic conditions, new legislation or regulation changes, changes in accounting principles, policies or guidelines and environmental risks. These and other risks are described in the Company’s 10-K and 10-Q reports and other filings with the SEC.

14

Table of Contents

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, well operating and gas gathering and marketing services it provides for third parties.

     The following tables review the results of operations of the Company for the three and nine months ended September 30, 2002 and 2001.

       Gross Operating Margin (per Mcfe): Average Price less Production Expense (including production taxes)

15

Table of Contents

All items in the following table are calculated as a percentage of total revenues.