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, 2004.
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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes[_] No [X]
The number of shares of the Registrant's common stock, par value $1.00 per
share, outstanding at November 8, 2004 was 602,082 shares.
ENERGY CORPORATION OF AMERICA
TABLE OF CONTENTS
PAGES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets
September 30, 2004 and June 30, 2004 . . . . . . . . . . . . . . . . . 3
Unaudited Consolidated Statements of Operations
For the three months ended September 30, 2004 and 2003 . . . . . . . . 5
Unaudited Consolidated Statements of Cash Flows
For the three months ended September 30, 2004 and 2003 . . . . . . . . 6
Unaudited Consolidated Statements of Comprehensive Income
For the three months ended September 30, 2004 and 2003 . . . . . . . . 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 . . . . . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 19
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,
2004 2004
--------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,734 $ 5,821
Accounts receivable:
Oil and gas sales 8,431 8,632
Gas aggregation and pipeline 8,672 9,079
Other 3,827 4,000
--------------- ----------
Accounts receivable 20,930 21,711
Less allowance for doubtful accounts (1,022) (1,022)
--------------- ----------
Accounts receivable, net of allowance 19,908 20,689
Deferred income tax asset 1,227 2,087
Deferred taxes - other comprehensive loss 3,559 2,889
Notes receivable, related party 49 59
Prepaid and other current assets 3,561 4,141
--------------- ----------
Total current assets 32,038 35,686
Property, plant and equipment, net of accumulated
depreciation and depletion of $147,148 and $143,846 248,093 246,391
OTHER ASSETS:
Deferred financing costs, net of accumulated
amortization of $7,263 and $6,833 2,298 2,015
Notes receivable, related party 113 113
Other 7,028 6,007
--------------- ----------
Total other assets 9,439 8,135
--------------- ----------
TOTAL $ 289,570 $ 290,212
=============== ==========
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,
2004 2004
--------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,959 $ 14,823
Current portion of long-term debt 1,148 1,145
Funds held for future distribution 16,039 16,701
Income taxes payable - 128
Accrued taxes, other than income 9,157 9,289
Derivatives 8,710 7,303
Other current liabilities 3,602 3,562
--------------- ----------
Total current liabilities 52,615 52,951
LONG-TERM OBLIGATIONS:
Long-term debt 163,745 162,894
Deferred trust revenue 2,418 2,511
Deferred income tax liability 18,465 19,552
Derivatives 265 -
Other long-term obligations 8,186 8,447
--------------- ----------
Total liabilities 245,694 246,355
Minority Interest 1,436 1,495
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $1.00; 2,000,000 shares
authorized; 730,039 shares issued 730 730
Class A non-voting common stock, no par value;
100,000 shares authorized; 68,438 shares issued 8,262 8,027
Additional paid-in capital 5,503 5,503
Retained earnings 48,932 48,200
Treasury stock and notes receivable arising from the
issuance of common stock (15,267) (14,954)
Deferred compensation on restricted stock (1,782) (1,887)
Accumulated other comprehensive loss (3,938) (3,257)
--------------- ----------
Total stockholders' equity 42,440 42,362
--------------- ----------
TOTAL $ 289,570 $ 290,212
=============== ==========
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,
------------------------
2004 2003
---------- ------------
REVENUES:
Oil and gas sales $ 13,341 $ 14,141
Gas aggregation and pipeline sales 16,049 15,509
Well operations and service revenues 1,345 1,391
Other 467 -
---------- ------------
Total revenues 31,202 31,041
---------- ------------
COST AND EXPENSES:
Field operating expenses 2,821 2,717
Gas aggregation and pipeline cost of sales 14,602 14,246
General and administrative 3,631 3,732
Taxes, other than income 932 938
Depletion and depreciation of oil and gas properties 2,835 3,478
Depreciation of pipelines, other property and equipment 1,032 1,026
Exploration and impairment 1,954 997
Gain on sale of assets (813) (5)
---------- ------------
Total costs and expenses 26,994 27,129
---------- ------------
Income from operations 4,208 3,912
OTHER (INCOME) EXPENSE:
Interest expense 3,217 3,807
Interest income and other 278 (805)
---------- ------------
Income before income taxes and minority interest 713 910
Income tax expense (benefit) (268) 387
---------- ------------
Income before minority interest 981 523
Minority interest 58 64
---------- ------------
NET INCOME $ 1,039 $ 587
========== ============
Basic and diluted earnings per common share:
Basic earnings per common share $ 1.65 $ 0.91
========== ============
Diluted earnings per common share (see Note 4) $ 1.62 $ 0.89
========== ============
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,
------------------------
2004 2003
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,039 $ 587
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depletion, depreciation and amortization 3,867 4,504
Gain on sale of assets (813) (5)
(Gain) loss on redemption of senior bonds 249 (546)
Deferred income taxes (268) -
Exploration and impairment 1,931 871
Other, net 152 434
---------- ------------
6,157 5,845
Changes in assets and liabilities:
Accounts receivable 781 27
Income taxes payable (128) 387
Prepaid and other assets (1,934) (795)
Accounts payable and accrued expenses (1,202) 226
Funds held for future distribution (662) (1,619)
Other (2,018) (407)
---------- ------------
Net cash provided by operating activities 994 3,664
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (6,851) (4,036)
Proceeds from sale of assets 3,536 5
Notes receivable and other 10 13
---------- ------------
Net cash used by investing activities from operations (3,305) (4,018)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 72,298 10,279
Principal payments on long-term debt (71,443) (11,465)
Purchase of treasury stock and other financing activities (323) (358)
Dividends paid (308) (297)
---------- ------------
Net cash provided (used) by financing activities from operations 224 (1,841)
---------- ------------
Net decrease in cash and cash equivalents (2,087) (2,195)
Cash and cash equivalents, beginning of period 5,821 4,831
---------- ------------
Cash and cash equivalents, end of period $ 3,734 $ 2,636
========== ============
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,
------------------------
2004 2003
----------- -----------
Net income $ 1,039 $ 587
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment:
Current period change 334 143
Oil and gas derivatives:
Current period transactions (1,907) 809
Reclassification to earnings 892 (52)
----------- -----------
Other comprehensive income (loss), net of tax (681) 900
----------- -----------
Comprehensive income $ 358 $ 1,487
=========== ===========
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, 2004
1. Nature of Organization
Energy Corporation of America (the "Company") is a privately held energy
company engaged in the exploration, development, production, gathering and
aggregation of natural gas and oil, primarily in the Appalachian Basin and
Gulf Coast regions in the United States and in New Zealand. The Company
conducts business primarily through its principal wholly owned subsidiaries
and is one of the largest oil and gas operators in the Appalachian Basin.
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, 2004, 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, 2004 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 $34.0 million of its 9 1/2% Senior Subordinated Notes
("Notes") during the quarter ended September 30, 2004 pursuant to an Asset
Sale Offer as defined in the Indenture for the Notes.
The Company purchased $2.04 million of its Notes during the quarter ended
September 30, 2003 in privately negotiated transactions.
- 8 -
4. Earnings per Share
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per
share has been computed based upon the weighted average shares outstanding.
Diluted earnings per share gives effect to outstanding stock options.
A reconciliation of the components of basic and diluted net income per
common share is as follows for the net income available to common
stockholders:
NET INCOME
(IN THOUSANDS) SHARES PER SHARE
--------------- ------- ----------
Three months ended September 30, 2004
Basic $ 1,039 630,655 $ 1.65
Diluted $ 1,039 640,165 $ 1.62
Three months ended September 30, 2003
Basic $ 587 645,909 $ 0.91
Diluted $ 587 660,175 $ 0.89
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 the related transportation. Management utilizes
earnings before interest, taxes, depreciation, depletion, amortization and
exploration and impairment costs ("EBITDAX") to evaluate the operations of
each segment. Reconciliation of the non-GAAP financial measure is as
follows (in thousands):
Three Months Ended
September 30, September 30,
2004 2003
--------------- --------------
Net income $ 1,039 $ 587
Add:
Interest expense 3,217 3,807
Depletion and depreciation of oil and gas properties 2,835 3,478
Depreciation of pipelines, other property and equipment 1,032 1,026
Exploration and impairment 1,954 997
Income tax expense (benefit) (268) 387
--------------- --------------
EBITDAX $ 9,809 $ 10,282
=============== ==============
- 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 quarter ended September 30, 2004
- ----------------------------------------
Revenue from unaffiliated customers $ 14,686 $ 16,049 $ 467 $ 31,202
Depreciation, depletion, amortization 3,239 154 474 3,867
Exploration and impairment costs 1,954 - - 1,954
Income (loss) from operations 3,952 632 (376) 4,208
Interest expense, net 5,457 (2,033) (241) 3,183
EBITDAX 9,362 828 (381) 9,809
Total assets 175,412 99,617 14,541 289,570
Capital expenditures 6,344 102 405 6,851
- ----------------------------------------------------------------------------------------------------
For the quarter 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 3,481 616 (185) 3,912
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
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 items related to non-reportable segments, including
drilling rig, corporate and elimination items. Included in the total assets
of the exploration and production segment are net long-lived assets located
in New Zealand of $7.5 million and $6.2 million as of September 30, 2004
and 2003 with no revenues recorded for the quarter ended September 30, 2004
and $0.2 million recorded for the quarter ended September 30, 2003.
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, 2004, the Company had
recorded a $5.4 million other comprehensive loss, $3.6 million short-term
deferred tax asset, $8.7 million short-term derivative liability, and $0.3
million long-term derivative liability. The estimated net amount of the
existing losses within other comprehensive income that are expected to be
reclassified into earnings
- 10 -
within the next twelve months is approximately $5.2 million. The Company
has partially hedged its exposure to the variability in future cash flows
through March 2006.
In August 2004, the Company entered into four interest rate cap agreements
with Foothill, in an effort to reduce the potential impact of increases in
interest rates on floating-rate long-term debt. The agreements range from
two to three years covering $40,000,000 in long-term debt and cap the one
month London Interbank Offered Rate ("Libor") at 3.5%.
7. Commitments and 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.
Pursuant to an Agreement dated December 28, 1998, the Company is required
to purchase all shares owned by Kenneth W. Brill upon notice by Mr. Brill's
estate or promptly after the passage of two years from Mr. Brill's death if
the estate does not sooner tender the shares. The Company entered into a
repurchase agreement on January 21, 2004 with the KWB Trust to define the
purchase price and establish the conditions for the repurchase of stock
owned by the Kenneth W. Brill, estate. The agreement outlines the
repurchase of 49,110 shares of stock by the Company or through third
parties, at an anticipated value of approximately $3.7 million over the
next five years, and provides for payments in twenty quarterly installments
on the majority of the shares to be repurchased. The repurchase of shares
is subject to certain restrictions in the Company's credit agreements. On
September 30, 2004, the Company's remaining repurchase obligation under the
Agreement is approximately $2.7 million of which $1.4 million was
classified as a liability and the remaining $1.3 million is included in
stockholders' equity as third parties have agreed to purchase such amount.
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
- 11 -
Company undertakes no obligation to update, amend or clarify forward-looking
statements, whether as a result of new information, future events or otherwise.
Important factors that could cause actual results to differ materially from
the forward-looking statements include, but are not limited to, weather
conditions, changes in production volumes, worldwide demand and commodity prices
for petroleum natural resources, the timing and extent of the Company's success
in discovering, acquiring, developing and producing oil and natural gas
reserves, risks incident to the drilling and operation of oil and natural gas
wells, future production and development costs, foreign currency exchange rates,
the effect of existing and future laws, governmental regulations and the
political and economic climate of the United States and New Zealand, the effect
of hedging activities, and conditions in the capital markets.
The following should be read in conjunction with the Company's Financial
Statements and Notes (including the segment information) at Part I, Item 1.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
2004 AND 2003
-------------
The Company recorded net income of $1.0 million for the quarter ended
September 30, 2004 compared to net income of $0.6 million for the quarter ended
September 30, 2003. The increase in net income of $0.4 million is primarily
attributable to the net of a $0.2 million increase in revenues, a $0.1 million
decrease in costs and expenses, a $0.6 million decrease in interest expense, a
$1.1 million decrease in interest income and other, and a $0.7 million decrease
in income tax expense.
- 12 -
Production, gas aggregation and pipeline volumes, revenue and average sales
prices for the quarters ended September 30 and their related variances are as
follows:
THREE MONTHS ENDED
SEPTEMBER 30 VARIANCE
---------------------- -----------------
2004 2003 AMOUNT PERCENT
---------- ---------- ------- --------
Natural Gas
Production (Mmcf) 2,422 2,768 (346) -12.5%
Average sales price received ($/Mcf) 6.02 5.01 1.01 20.2%
---------- ---------- ------- --------
Sales ($ in thousands) 14,587 13,873 714 5.1%
Oil
Production (Mbbl) 15 33 (18) -54.5%
Average sales price received ($/Bbl) 40.53 27.79 12.74 45.8%
---------- ---------- ------- --------
Sales ($ in thousands) 608 917 (309) -33.7%
Hedging (1,935) (745) (1,190) -159.7%
Other 81 96 (15) -15.6%
---------- ---------- ------- --------
Total oil and gas sales ($ in thousands) 13,341 14,141 (800) -5.7%
========== ========== ======= ========
Aggregation Revenue
Volume (Million Mmbtu) 1,937 2,347 (410) -17.5%
Average sales price received ($/Mmbtu) 5.85 4.98 0.87 17.5%
---------- ---------- ------- --------
Sales ($ in thousands) 11,336 11,678 (342) -2.9%
Pipeline Revenue
Volume (Million Mmbtu) 1,400 1,411 (11) -0.8%
Average sales price received ($/Mmbtu) 3.37 2.72 0.65 23.9%
---------- ---------- ------- --------
Sales ($ in thousands) 4,713 3,831 882 23.0%
---------- ---------- ------- --------
Total aggregation and pipeline sales ($ in thousands) 16,049 15,509 540 3.5%
========== ========== ======= ========
Aggregation Gas Cost
Volume (Million Mmbtu) 1,937 2,347 (410) -17.5%
Average price paid ($/Mmbtu) 5.58 4.78 0.80 16.7%
---------- ---------- ------- --------
Cost ($ in thousands) 10,808 11,218 (410) -3.7%
Pipeline Gas Cost
Volume (Million Mmbtu) 1,146 1,115 31 2.8%
Average price paid ($/Mmbtu) 3.31 2.72 0.59 21.7%
---------- ---------- ------- --------
Cost ($ in thousands) 3,794 3,028 766 25.3%
---------- ---------- ------- --------
Total aggregation and pipeline cost ($ in thousands) 14,602 14,246 356 2.5%
========== ========== ======= ========
REVENUES. Total revenues increased $0.2 million between the periods. The
--------
increase was due to a $0.5 million increase in gas aggregation and pipeline
sales, and a $0.5 million increase in other revenues. Offsetting the increase
was a $0.8 million decline in oil and gas sales. Well operations and service
revenues remained relatively constant.
- 13 -
Revenues from oil and gas sales decreased a net of $0.8 million from $14.1
million for the quarter ended September 30, 2003 to $13.3 million for the
quarter ended September 30, 2004. Natural gas sales increased $0.7 million and
oil sales decreased $0.3 million. The net increase in natural gas sales is
attributable to the increase in gas prices, offset by a decrease in gas
production. The price increase is a result of the rise in the related natural
gas indexes and the decrease in production is primarily due to wells sold in
California. Gas sales were reduced by recognized losses on related hedging
transactions and other revenue, which totaled a loss of $1.9 million for the
quarter ended September 30, 2004 compared to a loss of $0.6 million for the
quarter ended September 30, 2003.
Revenues from gas aggregation and pipeline sales increased $0.5 million
from $15.5 million during the period ended September 30, 2003 to $16.0 million
in the period ended September 30, 2004. Gas aggregation revenue decreased $0.3
million primarily as a result of a decrease in gas volumes aggregated for sale.
Offsetting this decrease in volume was 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 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 and due to
revenue, during the quarter ended September 30, 2004, related to the acquisition
of a 100-mile long natural gas gathering system located in northeastern West
Virginia. Pipeline volumes declined compared to the prior period primarily due
to natural production declines on the system.
Other revenues increased $0.5 million between periods. This increase is the
result of receiving a partnership distribution from a limited partnership in
which the Company owns an interest.
COSTS AND EXPENSES. The Company's costs and expenses decreased $0.1 million
------------------
between the periods primarily as a net result of a $0.1 million increase in
field and lease operating expense, a $0.4 million increase in gas aggregation
and pipeline costs, a $0.1 million decrease in general and administrative
expenses, $0.6 million decrease in depreciation, depletion, and amortization
costs for oil and gas properties, a $1.0 million increase in exploration and
impairment costs, and a $0.8 million increase in gain on sale of property.
Gas aggregation and pipeline costs increased $0.4 million. Gas aggregation
costs declined $0.4 million and pipeline costs increased $0.8 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 for oil and gas
properties decreased $0.6 million primarily due to a decrease in production and
a decrease in the average depletion rate.
Exploration and impairment costs increased $1.0 million primarily due to
costs related to an unsuccessful exploratory well drilled during the current
year and impairment related to the abandonment of a producing well.
Gain on sale of assets increased $0.8 million primarily as a result of the
gain recognized from the sale of undeveloped acreage in Pennsylvania during the
current period.
INTEREST EXPENSE. Interest expense decreased $0.6 million when comparing
------------------
the periods primarily due to the purchase of a portion of the Company's senior
notes and a decrease in the average interest rate paid on outstanding debt.
- 14 -
INTEREST INCOME AND OTHER. Other income decreased $1.1 million when
----------------------------
comparing the periods. This decrease is primarily attributable to a decrease in
recognized gains on the purchase of senior bonds.
INCOME TAX. Income tax expense decreased by $0.7 million to an income tax
-----------
benefit of $0.3 million as compared to an income tax expense for the prior
period of $0.4 million. The decrease is primarily due to the adjustment of the
tax contingency balance of $0.6 million for items that are closed or no longer
applicable and the decrease in income before income taxes of $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company's financial condition and liquidity have remained constant
since June 30, 2004. Stockholders' equity remained relatively constant at $42.4
million at June 30, 2004 and September 30, 2004. However, the Company's cash
decreased from $5.8 million at June 30, 2004 to $3.7 million at September 30,
2004. The Company's cash at November 8, 2004 was $0.3 million. The change in
cash during the quarter of approximately $2.1 million resulted from various
operating, investing and financing activities of the Company. The activities
were primarily comprised of: the borrowing of $50 million under the Company's
$50 million term loan of the Amended and Restated Credit Agreement (the
"Restated Credit Agreement"); the reduction of approximately $15.1 million under
the Company's $50 million revolving credit facility of the Restated Credit
Agreement; payments of $34 million for the purchase of a portion of the
Company's outstanding Notes; the investment of approximately $6.9 million in
property, plant and equipment; proceeds from the sale of assets of approximately
$3.5 million; payments of approximately $0.6 million for the acquisition of
treasury stock and dividends; and approximately $1.0 million of cash provided by
operations during the quarter.
As previously reported, on July 10, 2002, the Company entered into a $50
million revolving Credit Agreement with Foothill Capital Corporation, now Wells
Fargo Foothill, Inc. ("Foothill"). The Company and Foothill have entered into a
Restated Credit Agreement dated June 10, 2004. The Restated Credit Agreement
provides for the $50 million revolving credit facility to be extended and for
the Company to be provided with additional credit in the form of a single
advance term loan in the amount of $50 million. The term loan contains
requirements for principal payments of $1 million each at July 10, 2005, 2006
and 2007, with the remaining balance due on July 10, 2008. Depending on the
Company's level of borrowing under the Restated Credit Agreement, the applicable
interest rates for base rate loans are based on Wells Fargo's prime rate plus
0.25% to 0.75%. The Company has the ability under the Restated Credit Agreement
to designate certain loans as Libor Rate Loans at interest rates based upon the
rate at which dollar deposits are offered to major banks in the London interbank
market plus 2.25% to 2.75%. The Restated Credit Agreement expires on July 10,
2008.
The obligations under the Restated Credit Agreement are secured by certain
of the existing proved producing oil and gas assets of the Company. The Restated
Credit 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.
At September 30, 2004, the Company's principal source of liquidity
consisted of $3.7 million of cash, $0.8 million available under an unsecured
credit facility currently in place, plus $29.0 million available under the
revolving loan of the Restated Credit Agreement. At September 30, 2004, $1.0
million was outstanding and $1.2 million was committed through letters of credit
under the short-term credit facility, $21.0 million was outstanding on the
revolving loan and $50 million was outstanding on the term loan under the
Restated Credit Agreement.
- 15 -
As previously reported, the Company had been in litigation with certain
Holders (the "Noteholders") of its Notes. The dispute involved the calculation
of "Net Proceeds" of an "Asset Sale" as defined in the Indenture. A Settlement
Agreement dated February 24, 2004, was negotiated with the Noteholders to
resolve the dispute. In settlement of the dispute the Company agreed to
repurchase $38 million in Notes. The repurchase was effected by the Company
making Asset Sale Offers (as defined in the Indenture) totaling $38 million. The
Company made an initial Asset Sale Offer of $4 million, which was completed on
March 25, 2004. The Company consummated another Asset Sale Offer of $34 million
which was completed on July 29, 2004. The United States District Court for the
Southern District of West Virginia has entered a Dismissal Order dismissing the
litigation with prejudice. Upon the Company meeting all of the terms and
conditions of the Settlement Agreement it funded the $50 million term loan under
the Restated Credit Agreement.
As of November 8, 2004, there are $50 million in outstanding borrowings
under the term loan and $26.6 million in outstanding borrowings under the
revolving loan. Additional borrowings must comply with the terms of the
Indenture and the Restated Credit Agreement.
The Company's net cash requirements will fluctuate based on timing and the
extent of the interplay of capital expenditures, cash generated by 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
2004 was $42.4 million. EBITDAX for fiscal years 2003 and 2002, measured on a
similar basis, was $36.9 million and $19.7 million, respectively. Management
anticipates that EBITDAX from oil and gas operations for fiscal year 2005 will
approximate $44 million. The Company's ability to achieve EBITDAX of $44 million
from oil and gas operations for fiscal year 2005 is highly dependant on product
price and continued drilling success. There can be no assurance given that the
Company will be able to achieve these goals. EBITDAX is a non-GAAP financial
measure that the Company believes is useful in evaluating is debt service and
capital expenditure capacity. A reconciliation of EBITDAX to net income is
presented in Note 5 to the accompanying financial statements. Management
believes that cash generated from oil and gas operations, together with the
liquidity provided by existing cash balances and permitted borrowings, will be
sufficient to satisfy commitments for capital expenditures of $29.8 million,
debt service obligations, working capital needs and other cash requirements for
fiscal year 2005.
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 2005 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 and the Restated Credit Agreement. 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 and the Restated Credit
Agreement.
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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 40% to 50%
for the fiscal year ending June 30, 2005; and 50% to 60% for the fiscal year
ending June 30, 2006.
Total Average
Market Volumes Contract / Strike Unrealized
Time period Index (MMBtu) Price (Gains) Losses
- --------------------------------------------------------------------------------------------
Derivatives
Natural Gas Swaps
October 2004 - December 2004 NYMEX 13,000 $ 5.20 $ (21,554)
October 2004 - March 2005 NYMEX 720,000 5.57 1,230,036
December 2004 - February 2005 NYMEX 300,000 6.12 519,752
December 2004 - June 2005 NYMEX 1,890,000 4.53 5,941,827
October 2004 - March 2005 NYMEX 540,000 5.61 901,302
July 2005 - March 2006 NYMEX 900,000 6.25 381,614
----------- ----------------
Unrealized Losses 4,363,000 $ 8,952,977
----------- ================
Floors
July 2005 - March 2006 NYMEX 2,160,000 $ 6.00 -
Collars
July 2005 - March 2006 NYMEX 3,420,000 $ 5.50 - 8.70 -
Physical Contracts
Fixed Price Delivery Contracts
October 2004 85,250 $ 4.85
-----------
Total Hedged Production 10,028,250
===========
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 2004 levels, a 10% change in the average unhedged prices
realized would change the Company's gas and oil revenues by approximately $0.7
million on a quarterly basis.
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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. In August 2004, the Company entered into four
interest rate cap agreements with Foothill, in an effort to reduce the potential
impact of increases in interest rates on floating-rate long-term debt. The
agreements range from two to three years covering $40,000,000 in long-term debt
and cap the one month London Interbank Offered Rate ("Libor") at 3.5%. Assuming
the variable interest debt remained at the September 30, 2004 level, a 10%
change in rates would have a $0.1 million impact on interest expense on an
annual basis.
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 reported, the Company had been in litigation with certain
Holders of its $200,000,000 9 1/2% Senior Subordinated Notes due 2007 (the
"Noteholders") (the "Notes"). The dispute involved the calculation of the Net
Proceeds of an Asset Sale as defined in the Indenture dated May 23, 1997 between
the Company and The Bank of New York. The Company and the Noteholders have
settled
- 18 -
the dispute, as memorialized in the Settlement Agreement executed as of February
24, 2004, and attached to the Form 8-K filed by the Company on February 24, 2004
as Exhibit 99.11 (the "Settlement Agreement"). In settlement of the dispute the
Company agreed to repurchase $38 million in Notes. The Company has met its
obligations under the Settlement Agreement having finalized the first Asset Sale
Offer (as defined under the Indenture) in the amount of $4 million on March 24,
2004 and the second Asset Sale Offer in the amount of $34 million on July 29,
2004. The United States District Court for the Southern District of West
Virginia has entered a Dismissal Order dismissing the litigation with prejudice.
The Company is involved in various other legal actions and claims arising
in the ordinary course of business. While the outcome of these other lawsuits
against the Company cannot be predicted with certainty, management does not
expect these matters to have a material adverse effect on the Company's
operations or financial position.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 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
- 19 -
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 12th day of November 2004.
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 -