Back to GetFilings.com
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, 2003.
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 November 11, 2003 was 615,893 shares.
ENERGY CORPORATION OF AMERICA
TABLE OF CONTENTS
PAGES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2003 (Unaudited) and June 30, 2003. . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations
For the three months ended September 30, 2003 and 2002. . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flows
For the three months ended September 30, 2003 and 2002. . . . . . . . . 6
Unaudited Consolidated Statements of Comprehensive Income
For the three months ended September 30, 2003 and 2002. . . . . . . . . 7
Notes to Unaudited Consolidated Financial Statements. . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . 17
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 20
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 20
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
-2-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30,
2003 2003
--------------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,636 $ 4,831
Accounts receivable:
Oil and gas sales 7,678 10,380
Gas aggregation and pipeline 9,114 9,458
Other 7,449 4,616
--------------- ----------
Accounts receivable 24,241 24,454
Less allowance for doubtful accounts (1,280) (1,616)
--------------- ----------
Accounts receivable net of allowance 22,961 22,838
Deferred income tax asset 41 41
Deferred taxes, comprehensive income 385 787
Notes receivable, related party 1,596 1,609
Prepaid and other current assets 2,218 1,410
--------------- ----------
Total current assets 29,837 31,516
Property, plant and equipment, net of accumulated
depreciation and depletion of $132,871 and $128,765 252,369 253,270
OTHER ASSETS
Deferred financing costs, net of accumulated
amortization of $6,030 and $5,750 2,819 3,098
Notes receivable, related party 136 146
Other 7,776 7,804
--------------- ----------
Total other assets 10,731 11,048
--------------- ----------
TOTAL $ 292,937 $ 295,834
=============== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
ENERGY CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
- ----------------------------------------------------------------------------------------
SEPTEMBER 30, JUNE 30,
2003 2003
--------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 14,694 $ 13,734
Current portion of long-term debt 136 133
Funds held for future distribution 15,598 17,217
Income taxes payable 1,872 1,484
Accrued taxes other than income 8,884 9,643
Derivatives 168 810
Other current liabilities 1,429 1,421
--------------- ----------
Total current liabilities 42,781 44,442
LONG-TERM OBLIGATIONS:
Long-term debt 171,440 173,197
Gas delivery obligation and deferred revenue 2,812 2,917
Deferred income tax liability 20,376 20,376
Derivatives 828 1,319
Other 8,043 8,311
--------------- ----------
Total liabilities 246,280 250,562
COMMITMENTS AND CONTINGENCIES:
Minority Interest 1,580 1,594
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;
51,555 shares issued 5,642 5,092
Additional paid in capital 5,503 5,503
Retained earnings 45,438 45,150
Treasury stock and notes receivable arising from the
issuance of common stock (12,163) (11,824)
Accumulated other comprehensive loss (73) (973)
--------------- ----------
Total stockholders' equity 45,077 43,678
--------------- ----------
TOTAL $ 292,937 $ 295,834
=============== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
ENERGY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
------------------
2003 2002
-------- --------
REVENUES:
Oil and gas sales $14,141 $ 9,164
Gas aggregation and pipeline sales 15,509 11,922
Well operations and service revenues 1,391 1,467
Other - 36
-------- --------
Total revenues 31,041 22,589
-------- --------
COST AND EXPENSES:
Field operating expenses 2,717 2,485
Gas aggregation and pipeline cost 14,246 10,755
General and administrative 3,732 3,493
Taxes, other than income 938 632
Depletion and depreciation, oil and gas related 3,478 3,052
Depreciation of pipelines and equipment 1,026 1,037
Exploration and impairment 997 572
-------- --------
Total costs and expenses 27,134 22,026
-------- --------
Income from operations 3,907 563
OTHER (INCOME) EXPENSE:
Interest expense 3,807 4,700
(Gain) loss on sale of assets (5) 229
Interest income and other (805) (1,918)
-------- --------
Income (loss) before income taxes and minority interest 910 (2,448)
Income tax expense (benefit) 387 (824)
-------- --------
Income (loss) before minority interest 523 (1,624)
Minority interest, net of tax 64 62
-------- --------
NET INCOME (LOSS) $ 587 $(1,562)
======== ========
Basic and diluted earnings per common share:
Basic $ 0.91 $ (2.38)
======== ========
Diluted (see Note 4) $ 0.89 N/A
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
ENERGY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
- ---------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 587 $(1,562)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depletion, depreciation and amortization 4,504 4,088
(Gain) loss on sale of assets (5) 229
Gain on purchase of senior bonds (546) (1,765)
Exploration and impairment 871 487
Other, net 434 (466)
--------- --------
5,845 1,011
Changes in assets and liabilities:
Accounts receivable 27 1,425
Income taxes 387 (625)
Prepaid and other assets (795) (1,785)
Accounts payable 226 697
Funds held for future distribution (1,619) 132
Other (407) (1,069)
--------- --------
Net cash provided (used) by operating activities 3,664 (214)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (4,036) (4,802)
Proceeds from sale of assets 5 2,422
Notes receivable and other 13 (152)
--------- --------
Net cash used by investing activities (4,018) (2,532)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 10,279 10,000
Principal payments on long-term debt (11,465) (3,892)
Purchase of treasury stock (358) (207)
Dividends paid (297) (263)
--------- --------
Net cash used by financing activities (1,841) 5,638
--------- --------
Net decrease in cash and cash equivalents (2,195) 2,892
Cash and cash equivalents, beginning of period 4,831 17,775
--------- --------
Cash and cash equivalents, end of period $ 2,636 $20,667
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
ENERGY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30
----------------
2003 2002
------ --------
Net income (loss) $ 587 $(1,562)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment:
Current period change 143 (323)
Marketable securities:
Current period change - (6)
Reclassification to earnings - (16)
Oil and gas derivatives:
Current period transactions 731 (428)
Reclassification to earnings 26 75
------ --------
Other comprehensive income (loss), net of tax 900 (698)
------ --------
Comprehensive income (loss) $1,487 $(2,260)
====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
ENERGY CORPORATION OF AMERICA
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
1. Nature of Organization
Energy Corporation of America (the "Company") is a privately held energy
company engaged in the exploration, development, production, gathering and
marketing of natural gas and oil, primarily in the Appalachian Basin and
Gulf Coast region. The Company conducts business primarily through its
principal wholly owned subsidiaries, Eastern American Energy Corporation
("Eastern"), Westech Energy Corporation ("Westech"), and Westech Energy New
Zealand ("WENZ"). Eastern is one of the largest oil and gas operators in
the Appalachian Basin, including exploration, development and production,
and is engaged in the gathering and marketing of natural gas. Westech is
involved in oil and gas exploration and development in the California and
Gulf Coast regions of the United States. WENZ is involved in oil and gas
exploration and development in New Zealand. As used herein the "Company"
refers to the Company alone or together with one or more of its
subsidiaries.
2. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2003, 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
period ended September 30, 2003 are not necessarily indicative of the
results to be expected for the full year.
Certain amounts in the financial statements of prior periods have been
reclassified to conform to the current period presentation.
3. Note Repurchases
The Company purchased $2.04 million of its 9 1/2% Senior Subordinated Notes
("Notes") during the quarter ended September 30, 2003 in privately
negotiated transactions.
-8-
4. Earnings per Share
A reconciliation of the components of basic and diluted net income (loss)
per common share is as follows for the net income (loss) available to
common stockholders:
NET INCOME (LOSS)
(IN THOUSANDS) SHARES PER SHARE
------------------ ------- -----------
Three months ended September 30, 2003
Basic $ 587 645,909 $ 0.91
Diluted $ 587 660,175 $ 0.89
Three months ended September 30, 2002
Basic $ (1,562) 655,643 $ (2.38)
Diluted (a) $ (1,562) 655,643 N/A
(a) The effect of outstanding stock options was not included in the
computation of diluted earnings per share for the period ended September
30, 2002 because to do so would have been antidilutive.
5. 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 gas aggregation and pipeline
segment arise from the marketing of both Company and third party produced
natural gas volumes and revenues derived from gathering and pipeline
services (functions) provided for Company and third party natural gas. The
Company utilizes earnings before interest, taxes, depreciation, depletion,
amortization and exploration and impairment costs ("EBITDAX") to evaluate
the operations of each segment. Reconciliation of non-GAAP financial
measure is as follows (in thousands):
September 30, September 30,
2003 2002
-------------- --------------
Net income (loss) $ 587 $ (1,562)
Add:
Interest expense 3,807 4,700
Depletion, depreciation, amortization-o&g 3,478 3,052
Depletion, depreciation, amortization-other 1,026 1,037
Impairment & exploratory costs 997 572
Income tax expense (benefit) 387 (824)
-------------- ---------------
EBITDAX $ 10,282 $ 6,975
============== ===============
-9-
Summarized financial information for the Company's reportable segments for
operations is as follows (in thousands):
Exploration & Gas Aggregation
Production & Pipeline Other Consolidated
-------------- ----------------- ------- -------------
For the three months ended September 30, 2003
- ---------------------------------------------
Revenue from unaffiliated customers $ 15,532 $ 15,509 $ - $ 31,041
Depreciation, depletion, amortization 3,808 160 536 4,504
Exploration and impairment costs 981 16 - 997
Income (loss) from operations 3,478 614 (185) 3,907
Interest expense, net 5,698 (1,780) (191) 3,727
EBITDAX 9,426 753 103 10,282
Total assets 188,371 89,111 15,455 292,937
Capital expenditures 3,937 3 96 4,036
- ----------------------------------------------------------------------------------------------------------
For the three months ended September 30, 2002
- ---------------------------------------------
Revenue from unaffiliated customers $ 10,632 $ 11,922 $ 35 $ 22,589
Depreciation, depletion, amortization 3,355 203 531 4,089
Exploration and impairment costs 572 - - 572
Income (loss) from operations 563 454 (454) 563
Interest expense, net 5,256 (1,483) 769 4,542
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
- ----------------------------------------------------------------------------------------------------------
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
$6.2 million and $3.3 million as of September 30, 2003 and 2002.
6. Derivative Instruments
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, 2003, the Company had
recorded a $0.58 million other comprehensive loss, $0.39 million short-term
deferred tax asset, $0.17 million short-term derivative liability, $0.83
million long-term derivative liability, and $0.03 million in recognized
expense due to ineffectiveness. The estimated net amount of the existing
losses within other comprehensive income that are expected to be
reclassified into earnings within the next twelve months is approximately
$0.1 million. The Company has partially hedged its exposure to the
variability in future cash flows through June 2005.
-10-
7. 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.
8. Subsequent Event
During October, 2003, ECA offered its employees that were participants in
the 2003 Profit Sharing program, the opportunity to purchase Class A stock
having certain restrictions. Employees were awarded the right to purchase a
specified number of shares, with the restrictions expiring over a specified
period of time. Participants have until December 15, 2003 to purchase their
respective shares.
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.
-11-
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2003 AND 2002
- ---------------
The Company recorded net income of $0.6 million for the quarter ended
September 30, 2003 compared to a net loss of $1.6 million for the quarter ended
September 30, 2002. The increase in net income of $2.2 million is primarily
attributable to the net of a $8.5 million increase in revenues, $5.1 million
increase in costs and expenses, $0.9 million decrease in interest expense, $1.1
million decrease in interest income and other, $0.2 million decrease in loss on
sale of assets, and a $1.2 million increase in income tax expense.
-12-
Production, gas aggregation and pipeline volumes, revenue and average sales
prices for the quarters ended September 30 and their related variances are as
follows:
THREE MONTHS ENDED
SEPTEMBER 30 VARIANCE
---------------- -----------------
2003 2002 AMOUNT PERCENT
------- ------- ------- --------
Natural Gas
Production (Mmcf) 2,768 2,531 237 9.4%
Average sales price received ($/Mcf) 5.01 3.33 1.68 50.5%
------- ------- ------- --------
Sales ($ in thousands) 13,873 8,436 5,437 64.4%
Oil
Production (Mbbl) 33 30 3 10.0%
Average sales price received ($/Bbl) 27.79 23.17 4.62 19.9%
------- ------- ------- --------
Sales ($ in thousands) 917 695 222 31.9%
Hedging ($ in thousands) (745) (62) (683) 1101.6%
Other ($ in thousands) 96 95 1 1.1%
------- ------- ------- --------
Total oil and gas sales ($ in thousands) 14,141 9,164 4,977 54.3%
======= ======= ======= ========
Gas Aggregation Revenue
Volume (Mdth) 2,347 2,432 (85) -3.5%
Average sales price received ($ per Dth) 4.98 3.70 1.28 34.6%
------- ------- ------- --------
Sales ($ in thousands) 11,678 9,002 2,676 29.7%
Pipeline Revenue
Volume (Mdth) 1,411 1,479 (68) -4.6%
Average sales price received ($ per Dth) 2.72 1.97 0.75 38.1%
------- ------- ------- --------
Sales ($ in thousands) 3,831 2,920 911 31.2%
------- ------- ------- --------
Total Gas Aggregation and Pipeline
Revenues ($ in thousands) 15,509 11,922 3,587 30.1%
======= ======= ======= ========
Gas Aggregation Cost
Volume (Mdth) 2,347 2,432 (85) -3.5%
Average price paid ($ per Dth) 4.78 3.46 1.32 38.2%
------- ------- ------- --------
Cost ($ in thousands) 11,218 8,416 2,802 33.3%
Pipeline Gas Cost
Volume (Mdth) 1,115 1,184 (69) -5.8%
Average price paid ($ per Dth) 2.72 1.98 0.74 37.4%
------- ------- ------- --------
Cost ($ in thousands) 3,028 2,339 689 29.5%
------- ------- ------- --------
Total Gas Aggregation and
Pipeline Cost ($ in thousands) 14,246 10,755 3,491 32.5%
======= ======= ======= ========
-13-
REVENUES. Total revenues increased $8.5 million or 37.4% between the
---------
periods. The increase was due to a $5.0 million increase in oil and gas sales
and a $3.6 million increase in gas aggregation and pipeline sales. Well
operations and service revenues remained relatively constant.
Revenues from oil and gas sales increased a net of $5.0 million from $9.2
million for the quarter ended September 30, 2002 to $14.2 million for the
quarter ended September 30, 2003. Natural gas sales increased $5.4 million and
oil sales increased $0.2 million. The net increase in gas production revenue is
attributable to the increase in gas prices and an increase in gas production.
The price increase is a result of the rise in the related natural gas indexes
and the increase in production is primarily due to wells drilled in the Gulf
Coast region. Sales were reduced by recognized losses on related hedging
transactions and other revenue, which totaled a loss of $0.7 million for the
quarter ended September 30, 2003 compared to a gain of $0.3 million for the
quarter ended September 30, 2002.
Revenues from gas aggregation and pipeline sales increased $3.6 million
from $11.9 million during the period ended September 30, 2002 to $15.5 million
in the period ended September 30, 2003. Gas aggregation revenue increased $2.7
million primarily as a result of an increase in the average sales price that
corresponds to the rise in the related natural gas price indexes for this period
compared to the prior period. Offsetting this increase in average sales price
was a decrease in gas volumes aggregated for sale. Pipeline revenue, which has a
sales and gathering component, increased $0.9 million primarily as a result of
an increase in the average sales price that corresponds to the rise in the
related natural gas price indexes for this period compared to the prior period.
Pipeline volumes declined compared to the prior period primarily due to natural
production declines on the system.
COSTS AND EXPENSES. The Company's costs and expenses increased $5.1
---------------------
million between the periods primarily as a net result of a $3.5 million increase
in gas aggregation and pipeline costs, $0.4 million increase in depreciation,
depletion, and amortization costs, $0.3 million increase in general and
administrative expenses, $0.4 million increase in exploration and impairment
costs, $0.3 million increase in taxes other than income, and a $0.2 million
increase in field and lease operating expense.
Gas aggregation and pipeline costs increased $3.5 million. Gas aggregation
costs increased $2.8 million and pipeline costs increased $0.7 million. The
increase in costs is primarily attributable to the increase in average price of
gas that corresponds to the rise in the related natural gas indexes offset by a
decrease in volume for this period compared to the prior period.
Depletion, depreciation, and amortization expenses increased $0.4 million
primarily due to an increase in the depletion rate as well as an increase in
production.
General and administrative expenses increased $0.3 million as compared to
the same period in the prior year primarily as a result of increased
compensation costs.
Exploration and impairment costs increased $0.4 million primarily due to an
increase in dry hole expense related to exploratory wells drilled in the
Appalachian Basin and the West in the current period compared with no related
exploratory dry hole expenses in the prior period.
Taxes other than income increased $0.3 million due to the increase in oil
and gas sales for the current year as compared to the same period in the prior
year. Wellhead oil and gas sales revenue, on which production taxes are based,
was higher for the current year.
Field and lease operating expenses increased $0.2 million primarily as a
result of an increase in the number of producing wells in the Gulf Coast region
together with increases in several lease operating expenses in the East region.
-14-
INTEREST EXPENSE. Interest expense decreased $0.9 million when comparing
-----------------
the periods primarily due to the repurchase of $61.9 million face value of the
Company's senior notes since September 30, 2002.
INTEREST INCOME AND OTHER. Other income decreased $1.1 million when
------------------------------
comparing the periods. This decrease between the periods is mainly attributable
to a decrease in recognized gains on the purchase of senior bonds.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company's financial condition has improved since June 30, 2003, but at
the same time, there has been a slight decrease in the Company's liquidity.
Stockholders' equity has increased from $43.7 million at June 30, 2003 to $45.1
million at September 30, 2003. The Company's working capital of a negative $12.9
million at June 30, 2003 remained a negative $12.9 million at September 30,
2003. However, the Company's cash decreased from $4.8 million at June 30, 2003
to $2.6 million at September 30, 2003. The Company's cash at November 12, 2003
was $2.0 million. The change in cash during the quarter of approximately $2.2
million resulted from various operating, investing and financing activities of
the Company. The activities were primarily comprised of: the borrowing of
approximately $0.3 million under the Company's $50 million revolving Credit
Agreement (the "Agreement"); the investment of approximately $4.0 million in
property, plant and equipment; payments of approximately $1.5 million for the
purchase of a portion of the Company's outstanding Notes; payments of
approximately $0.7 million for the acquisition of treasury stock and dividends;
and approximately $3.7 million of cash provided by operations during the
quarter.
At September 30, 2003, the Company's principal source of liquidity
consisted of $2.6 million of cash, $0.9 million available under an unsecured
credit facility currently in place, plus amounts available under the Foothill
Capital Corporation Agreement. Foothill Capital Corporation is now known as
Wells Fargo Foothill, Inc. ("Foothill"). At September 30, 2003, $1.1 million
was outstanding or committed under the short-term credit facility and $39.5
million was outstanding under the Agreement.
On July 10, 2002, the Company entered into the Agreement with 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 certain 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, 2003, there are $36.8 million in outstanding borrowings under the Agreement.
In addition, the Company is making a $6.2 million interest payment on the Notes
on November 17, 2003, which will further increase the amount borrowed 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 estimated to be greater than 2.5 to 1.
-15-
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. EBITDAX,
before inclusion of the gain on the purchase of the Company's Notes, for fiscal
year 2003 was $37.2 million. EBITDAX for fiscal years 2002 and 2001 was $19.7
million and $33.7 million, respectively. Management anticipates that EBITDAX
from oil and gas operations for fiscal year 2004 will approximate $50 million.
The Company's ability to achieve EBITDAX of $50 million from oil and gas
operations for fiscal year 2004 is highly dependant on product price and
continued drilling success. For fiscal 2004, the Company is using an average
price assumption of over $5 per Mcfe and production of approximately 14.0 Bcfe,
which is an increase of approximately 35% in the production amount of
approximately 10.4 Bcfe in fiscal year 2003. There can be no assurance given
that the Company will be able to achieve these goals. Although cash provided
from oil and gas operations may not be sufficient to fully fund the Company's
fiscal year 2004 projected interest charges of over $15 million, capital
expenditures program of $32 million, and other uses, management believes that
cash generated from continuing oil and gas operations, together with the
liquidity provided by existing cash balances, permitted borrowings and the cash
proceeds resulting from the sale of certain assets, will be sufficient to
satisfy commitments for capital expenditures, debt service obligations, working
capital needs and other cash requirements for the next fiscal year.
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 Notes 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.
The Company believes that its existing capital resources and its expected
fiscal year 2004 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.
-16-
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 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 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.
Ineffectiveness is recorded in current earnings. The Company does not hold or
issue derivative instruments for trading purposes. The Company currently has
elected to enter into derivative hedge transactions and fixed price physical
delivery contracts on its estimated production covering approximately 60% to 70%
for the fiscal year ending June 30, 2004; and 35% to 45% for the fiscal year
ending June 30, 2005.
As of September 30, 2003, the Company's open gas derivative instruments and
fixed price delivery contracts were as follows:
Total Average
Market Volumes Contract Unrealized
Time period Index (MMBtu) Price (Gains) Losses
- --------------------------------- ------ ---------- --------- ----------------
Derivatives
Natural Gas Swaps
October 2003 - June 2004 NYMEX 822,000 $ 4.05 $ 683,883
February 2004 - March 2004 NYMEX 60,000 6.23 (62,153)
July 2004 - June 2005 NYMEX 3,240,000 4.54 962,665
---------- ----------------
Unrealized (Gains) Losses 4,122,000 $ 1,584,395
---------- ================
Physical Contracts
Fixed Price Delivery Contracts
October 2003 - June 2004 4,953,500 $ 4.50
July 2004 - October 2004 338,250 4.85
----------
Total Hedged Production 9,413,750
==========
-17-
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, pricing, and the percentage of gas
production hedged under physical delivery contracts and derivative instruments
remain at September 2003 levels, a 10% change in the average unhedged prices
realized would change the Company's gas and oil revenues by approximately $0.2
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. 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, 2003 level, a 10% change in rates would have a $0.3 million
impact on interest expense on an annual basis. The Company has not attempted to
hedge the interest rate risk associated with its debt.
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, 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
-18-
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 (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 alleged 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 voluntarily
dismiss the appeal without prejudice. This motion was granted and the matter
was remanded to the District Court. The District Court entered a Stipulation
and Final Judgment on December 3, 2002 and a Judgment Order dated December 4,
2002. This discussion is qualified in its entirety by the foregoing Stipulation
and Final Judgment dated December 3, 2002 and the Judgment Order dated December
4, 2002, which have been previously filed and are incorporated herein by
reference.
On December 9, 2002, certain Noteholders filed a Notice of Appeal to the
United States Court of Appeals for the Fourth Circuit from the Stipulation and
Final Judgment Order dated December 3, 2002, and the Judgment order entered on
December 4, 2002. Briefing was completed and oral arguments were heard on
September 25, 2003. The Company is awaiting the Court's decision.
The Company and Prudential Securities Incorporated ("Prudential") have been
in a long-standing dispute related to certain fees. The Company has denied
Prudential's allegations, and is of the opinion that the matter is not material
regardless of the outcome.
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
-19-
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) Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K:
None
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 13th day of November 2003.
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
-20-