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 DECEMBER 31, 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
February 8, 2005 was 601,613 shares.
ENERGY CORPORATION OF AMERICA
TABLE OF CONTENTS
PAGES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
December 31, 2004 and June 30, 2004 . . . . . . . . . . . . . . . . . . 3
Unaudited Condensed Consolidated Statements of Operations
For the three and six months ended December 31, 2004 and 2003 . . . . . 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the six months ended December 31, 2004 and 2003 . . . . . . . . . . 6
Unaudited Condensed Consolidated Statements of Comprehensive Income . . .
For the three and six months ended December 31, 2004 and 2003 7
Notes to Unaudited Condensed Consolidated Financial Statements. . . . . . 8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . 24
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . 26
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
- 2 -
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY CORPORATION OF AMERICA
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
2004 2004
-------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,325 $ 5,821
Accounts receivable:
Oil and gas sales 10,992 8,632
Gas aggregation and pipeline 14,328 9,079
Other 4,066 4,000
-------------- ----------
Accounts receivable 29,386 21,711
Less allowance for doubtful accounts (898) (1,022)
-------------- ----------
Accounts receivable, net of allowance 28,488 20,689
Deferred income tax asset 612 2,087
Deferred taxes - other comprehensive loss 563 2,889
Notes receivable, related party 54 59
Derivatives 1,650 -
Prepaid and other current assets 2,164 4,141
-------------- ----------
Total current assets 38,856 35,686
Property, plant and equipment, net of accumulated
depreciation and depletion of $150,475 and $143,846 254,927 246,391
OTHER ASSETS:
Deferred financing costs, net of accumulated
amortization of $7,446 and $6,833 2,126 2,015
Notes receivable, related party 369 113
Derivatives 428 -
Other 5,940 6,007
-------------- ----------
Total other assets 8,863 8,135
-------------- ----------
TOTAL $ 302,646 $ 290,212
============== ==========
The accompanying notes are an integral part of the condensed consolidated financial
statements.
- 3 -
ENERGY CORPORATION OF AMERICA
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
2004 2004
-------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,149 $ 14,823
Current portion of long-term debt 152 1,145
Funds held for future distribution 19,746 16,701
Income taxes payable 2,349 128
Accrued taxes, other than income 10,022 9,289
Derivatives 1,350 7,303
Other current liabilities 1,798 3,562
-------------- ----------
Total current liabilities 44,566 52,951
LONG-TERM OBLIGATIONS:
Long-term debt 179,124 162,894
Deferred trust revenue 2,318 2,511
Deferred income tax liability 16,739 19,552
Derivatives 154 -
Other long-term obligations 7,867 8,447
-------------- ----------
Total liabilities 250,768 246,355
Minority Interest 1,375 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; 69,893 and 68,237 shares issued 8,264 8,027
Additional paid-in capital 5,503 5,503
Retained earnings 51,935 48,200
Treasury stock and notes receivable arising from the
issuance of common stock (15,438) (14,954)
Deferred compensation on restricted stock (1,677) (1,887)
Accumulated other comprehensive income (loss) 1,186 (3,257)
-------------- ----------
Total stockholders' equity 50,503 42,362
-------------- ----------
TOTAL $ 302,646 $ 290,212
============== ==========
The accompanying notes are an integral part of the condensed consolidated financial
statements.
- 4 -
ENERGY CORPORATION OF AMERICA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
2004 2003 2004 2003
----------- ----------- --------- -----------
REVENUES:
Oil and gas sales $ 16,562 $ 14,379 $ 29,902 $ 28,520
Gas aggregation and pipeline sales 18,891 14,567 34,940 30,076
Well operations and service revenues 1,319 1,277 2,664 2,669
Other - 48 467 48
----------- ----------- --------- -----------
Total revenues 36,772 30,271 67,973 61,313
----------- ----------- --------- -----------
COST AND EXPENSES:
Field operating expenses 2,795 2,993 5,616 5,710
Gas aggregation and pipeline cost of sales 17,529 13,750 32,132 27,996
General and administrative 3,720 3,757 7,351 7,489
Taxes, other than income 1,314 895 2,246 1,834
Depletion and depreciation of oil and gas properties 3,132 3,439 5,966 6,917
Depreciation of pipelines, other property and equipment 1,049 1,023 2,081 2,049
Exploration and impairment 481 1,624 2,434 2,621
Gain on sale of assets (2,104) (103) (2,917) (108)
----------- ----------- --------- -----------
Total costs and expenses 27,916 27,378 54,909 54,508
----------- ----------- --------- -----------
Income from operations 8,856 2,893 13,064 6,805
OTHER (INCOME) EXPENSE:
Interest expense 3,171 3,782 6,388 7,588
Interest income and other 1,078 (271) 1,357 (1,075)
----------- ----------- --------- -----------
Income before income taxes and minority interest 4,607 (618) 5,319 292
Income tax expense (benefit) 1,281 (229) 1,012 158
----------- ----------- --------- -----------
Income (loss) before minority interest 3,326 (389) 4,307 134
Minority interest 62 41 120 105
----------- ----------- --------- -----------
NET INCOME (LOSS) $ 3,388 $ (348) $ 4,427 $ 239
=========== =========== ========= ===========
The accompanying notes are an integral part of the condensed consolidated financial statements.
- 5 -
ENERGY CORPORATION OF AMERICA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- ------------------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31
----------------------
2004 2003
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,427 $ 239
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depletion, depreciation and amortization 8,047 8,967
Gain on sale of assets (2,917) (108)
(Gain) loss on redemption of senior bonds 249 (546)
Deferred income taxes (1,337) -
Exploration and impairment 2,387 2,578
Other, net 182 548
--------- -----------
11,038 11,678
Changes in assets and liabilities:
Accounts receivable (7,800) 3,810
Income taxes payable 2,222 172
Prepaid and other assets (1,514) (949)
Accounts payable and accrued expenses (5,336) (6,275)
Funds held for future distribution 3,045 (3,610)
Other (2,297) 647
--------- -----------
Net cash provided (used) by operating activities (642) 5,473
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (17,616) (7,745)
Proceeds from sale of assets 3,895 620
Notes receivable and other (251) (6)
--------- -----------
Net cash used by investing activities (13,972) (7,131)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 109,691 21,026
Principal payments on long-term debt (94,453) (19,598)
Purchase of treasury stock and other financing activities (505) (531)
Proceeds from issuance of stock - 257
Dividends paid (615) (595)
--------- -----------
Net cash provided by financing activities 14,118 559
--------- -----------
Net decrease in cash and cash equivalents (496) (1,099)
Cash and cash equivalents, beginning of period 5,821 4,831
--------- -----------
Cash and cash equivalents, end of period $ 5,325 $ 3,732
========= ===========
The accompanying notes are an integral part of the condensed consolidated financial
statements.
- 6 -
ENERGY CORPORATION OF AMERICA
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
2004 2003 2004 2003
----------- ----------- --------- -----------
Net income (loss) $ 3,388 $ (348) $ 4,427 $ 239
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment:
Current period change 582 750 916 893
Oil and gas derivatives:
Current period transactions 2,913 (683) 1,005 126
Reclassification to earnings 1,762 (227) 2,655 (279)
Interest rate hedging:
Current period transactions (134) - (134) -
Reclassification to earnings - - - -
----------- ----------- --------- -----------
Other comprehensive income (loss), net of tax 5,123 (160) 4,442 740
----------- ----------- --------- -----------
Comprehensive income (loss) $ 8,511 $ (508) $ 8,869 $ 979
=========== =========== ========= ===========
The accompanying notes are an integral part of the condensed consolidated financial statements.
- 7 -
ENERGY CORPORATION OF AMERICA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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. Those 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 December 31, 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.
Recent Accounting Pronouncements - On December 16, 2004, the
Financial Accounting Standards Board ("FASB") published Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment
("SFAS 123R"). SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards,
stock appreciation rights, and employee share purchase plans. The
provisions of SFAS 123R are effective as of the first interim period that
begins after June 15, 2005. Accordingly, the Company will implement the
revised standard in the first quarter of fiscal year 2006. Currently, the
Company accounts for its share-based payment transactions under the
provisions of APB 25, which does not necessarily require the recognition
of compensation cost in the financial statements. Management is assessing
the implications of this revised standard and the effect of the adoption
of SFAS 123R will have on our financial position, results of operations,
or cash flow.
3. Note Repurchases
The Company purchased $34.0 million of its 9 1/2% Senior Subordinated
Notes ("Notes") during the six months ended December 31, 2004 pursuant to
an Asset Sale Offer as defined in the Indenture for the Notes. The Company
purchased $2.04 million
- 8 -
of its Notes during the six months ended December 31, 2003 in
privately negotiated transactions.
4. Industry Segments
The Company's reportable business segments have been identified based
on the differences in products and service provided. Revenues for the
exploration and production segment are derived from the production and
sale of natural gas and crude oil. Revenues for the 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.
Summarized financial information for the Company's reportable
segments for operations is as follows (in thousands) for the three months
ended December 31, 2004 and 2003:
Exploration & Gas Aggregation
Production & Pipeline Other Consolidated
-------------- ----------------- -------- -------------
For the three months ended December 31, 2004
- --------------------------------------------
Revenue from unaffiliated customers $ 17,881 $ 18,891 $ - $ 36,772
Depreciation, depletion, amortization 3,545 152 484 4,181
Exploration and impairment costs 481 - - 481
Interest expense, net 5,558 (2,065) (345) 3,148
EBITDAX 13,200 556 (1,254) 12,502
Total assets 176,653 108,955 17,038 302,646
Capital expenditures 10,360 95 309 10,764
========================================================================================================
For the three months ended December 31, 2003
- --------------------------------------------
Revenue from unaffiliated customers $ 15,657 $ 14,566 $ 48 $ 30,271
Depreciation, depletion, amortization 3,770 158 534 4,462
Exploration and impairment costs 1,624 - - 1,624
Interest expense, net 5,628 (1,817) (85) 3,726
EBITDAX 9,969 300 (978) 9,291
Total assets 179,105 89,842 18,627 287,574
Capital expenditures 3,660 7 42 3,709
========================================================================================================
- 9 -
Reconciliation of EBITDAX is as follows (in thousands) for the three
months ended December 31, 2004 and 2003:
Three Months Ended
December 31, December 31,
2004 2003
------------- --------------
Net income (loss) $ 3,388 $ (348)
Add:
Interest expense 3,171 3,782
Depletion and depreciation of oil and gas properties 3,132 3,439
Depreciation of pipelines, other property and equipment 1,049 1,023
Exploration and impairment 481 1,624
Income tax expense (benefit) 1,281 (229)
------------- --------------
EBITDAX $ 12,502 $ 9,291
============= ==============
Summarized financial information for the Company's reportable
segments for operations is as follows (in thousands) for the six months
ended December 31, 2004 and 2003:
Exploration & Gas Aggregation
Production & Pipeline Other Consolidated
-------------- ----------------- -------- -------------
For the six months ended December 31, 2004
- ------------------------------------------
Revenue from unaffiliated customers $ 32,566 $ 34,940 $ 467 $ 67,973
Depreciation, depletion, amortization 6,783 306 958 8,047
Exploration and impairment costs 2,434 - - 2,434
Interest expense, net 11,014 (4,098) (585) 6,331
EBITDAX 22,561 1,384 (1,637) 22,308
Total assets 176,653 108,955 17,038 302,646
Capital expenditures 16,704 197 715 17,616
======================================================================================================
For the six months ended December 31, 2003
- ------------------------------------------
Revenue from unaffiliated customers $ 31,188 $ 30,076 $ 49 $ 61,313
Depreciation, depletion, amortization 7,577 319 1,070 8,966
Exploration and impairment costs 2,605 16 - 2,621
Interest expense, net 11,325 (3,597) (276) 7,452
EBITDAX 19,395 1,055 (878) 19,572
Total assets 179,105 89,842 18,627 287,574
Capital expenditures 7,598 10 137 7,745
======================================================================================================
- 10 -
Reconciliation of EBITDAX is as follows (in thousands) for the six
months ended December 31, 2004 and 2003:
Six Months Ended
December 31, December 31,
2004 2003
------------- -------------
Net income $ 4,427 $ 239
Add:
Interest expense 6,388 7,588
Depletion and depreciation of oil and gas properties 5,966 6,917
Depreciation of pipelines, other property and equipment 2,081 2,049
Exploration and impairment 2,434 2,621
Income tax expense 1,012 158
------------- -------------
EBITDAX $ 22,308 $ 19,572
============= =============
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
$10.3 million and $6.9 million as of December 31, 2004 and 2003 with no
significant revenues recorded for the three or six months ended December
31, 2004 and $0.2 million recorded for the three months ended December 31,
2003 and $0.3 million recorded for the six months ended December 31, 2003.
5. Derivative Instruments
The Company periodically hedges a portion of its gas production
through futures, swaps, floors and collar 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 swap, floor and
collar agreements in place are designated as cash flow hedges, except for
one swap agreement designated as a fair value hedge.
For swaps in place at December 31, 2004, the Company had recorded a
$0.9 million other comprehensive loss, $0.6 million short-term deferred
tax asset, $1.3 million short-term derivative liability, and $0.2 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 within the next twelve months is approximately
$0.8 million. The Company has partially hedged its exposure to the
variability in future cash flows through March 2006.
For floors and collars in place at December 31, 2004, the Company had
recorded a $0.2 million other comprehensive gain, $0.1 million short-term
deferred tax liability, $1.6 million short-term derivative asset, and $0.2
million long-term derivative asset. No amount of the existing gains within
other comprehensive income is expected to be reclassified into earnings
within the next twelve months. The Company has partially hedged its
exposure to the variability in future cash flows through March 2006.
- 11 -
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%. At December 31, 2004, the Company has recorded a $0.1 million other
comprehensive loss, $0.1 million short-term deferred tax asset, $0.1
million short-term derivative asset, and $0.2 million long-term derivative
asset. No amount of the existing losses within other comprehensive income
that are expected to be reclassified into earnings within the next twelve
months. The Company has partially hedged its exposure to the variability
in future cash flows through July 2007.
6. Commitments and Contingencies
The Company is involved in legal actions and claims arising in the
ordinary course of business. While the outcome of these 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 December 31, 2004, the Company's remaining
repurchase obligation under the Agreement is approximately $2.6 million of
which $1.4 million was classified as a liability and the remaining $1.2
million is included in stockholders' equity as third parties have agreed
to purchase such amount.
During June 2004, the Company sold its membership interest in
Breitburn Energy Company, LLC and established a $1.8 million reserve
against items for which the Company was required to indemnify the buyer
for a period of 180 days after closing pursuant to the agreement. This
requirement was fulfilled during the quarter ended December 31, 2004 with
no such claims from the buyer and was recorded as gain on sale of assets.
7. Related Party Transaction
Pursuant to an Agreement dated December 31, 2004, the Company
advanced $0.3 million to a certain officer bearing 5% interest. The
principal amount is due in full, unless paid sooner, on December 31, 2008
and is secured by a stock pledge agreement.
8. Income Taxes
The Company is currently under examination by the U.S. Internal
Revenue Service of its federal income tax returns for the tax years ending
June 30, 2002 and 2003. At December 31, 2004, the Company recorded a $2.3
million current income taxes payable and corresponding reduction to
deferred tax liability resulting from a deferral in the timing of certain
deductions arising from
- 12 -
abandoned properties. Management of the Company continues to believe
that it has adequately provided for any potential tax liability that may
be ultimately assessed by the IRS.
9. Debt
The Company has an unsecured revolving line of credit totaling $3.0
million with a financial institution with an interest rate of prime plus
0.25%. Based upon the original terms of the agreement, the line was to
reduce by $1.0 million in November 2004 and expire on June 30, 2005. The
unsecured revolving line of credit was renegotiated during the quarter
ended December 31, 2004 to extend the terms of the agreement. Under the
new agreement the Company has an unsecured line of credit totaling $3.0
million, which reduces by $1.0 million in June 2005 and expires on April
1, 2007.
- 13 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
----------------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
This discussion and analysis of financial condition and results of
operations, and other sections of this Form 10-Q, contain forward-looking
statements that are based on management's beliefs, assumptions, current
expectations, estimates, intentions and projections about the oil and gas
industry, the economy and about the Company itself. Words such as
"anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is
likely," "plans," "predicts," "projects," variations of such words and similar
expressions are intended to identify such forward-looking statements under the
Private Securities Litigation Reform Act of 1995. The Company cautions that
these statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict with regard
to timing, extent, likelihood and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what may be expressed or
forecasted in such forward-looking statements. Furthermore, the Company
undertakes no obligation to update, amend or clarify forward-looking statements,
whether as a result of new information, future events or otherwise.
Important factors that could cause actual results to differ materially from
the forward-looking statements include, but are not limited to, weather
conditions, changes in production volumes, worldwide demand and commodity prices
for petroleum natural resources, the timing and extent of the Company's success
in discovering, acquiring, developing and producing oil and natural gas
reserves, risks incident to the drilling and operation of oil and natural gas
wells, future production and development costs, foreign currency exchange rates,
the effect of existing and future laws, governmental regulations and the
political and economic climate of the United States and New Zealand, the effect
of hedging activities, and conditions in the capital markets.
The following should be read in conjunction with the Company's Financial
Statements and Notes (including the segment information) at Part I, Item 1.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
AND 2003
--------
The Company recorded net income of $3.4 million for the quarter ended
December 31, 2004 compared to net loss of $0.3 million for the quarter ended
December 31, 2003. The increase in net income of $3.7 million is primarily
attributable to the net of a $6.5 million increase in revenues, a $0.5 million
increase in costs and expenses, a $0.6 million decrease in interest expense, a
$1.3 million decrease in interest income and other, and a $1.5 million increase
in income tax expense.
- 14 -
Production, gas aggregation and pipeline volumes, revenue and average
sales prices for the quarters ended December 31 and their related variances are
as follows:
THREE MONTHS ENDED
DECEMBER 31 VARIANCE
--------------------- -----------------
2004 2003 AMOUNT PERCENT
---------- --------- ------- --------
Natural Gas
Production (Mmcf) 2,557 2,781 (224) -8.1%
Average sales price received ($/Mcf) 7.35 4.77 2.58 54.1%
---------- --------- ------- --------
Sales ($in thousands) 18,785 13,266 5,519 41.6%
Oil
Production (Mbbl) 18 30 (12) -40.0%
Average sales price received ($/Bbl) 44.78 27.80 16.98 61.1%
---------- --------- ------- --------
Sales ($in thousands) 806 834 (28) -3.4%
Hedging gain (loss) (3,118) 190 (3,308) -1741.1%
Other 89 89 - 0.0%
---------- --------- ------- --------
Total oil and gas sales ($in thousands) 16,562 14,379 2,183 15.2%
========== ========= ======= ========
Aggregation Revenue
Volume (Million Mmbtu) 1,884 2,147 (263) -12.2%
Average sales price received ($/Mmbtu) 7.12 5.17 1.95 37.7%
---------- --------- ------- --------
Sales ($in thousands) 13,408 11,091 2,317 20.9%
Pipeline Revenue
Volume (Million Mmbtu) 2,202 1,404 798 56.8%
Average sales price received ($/Mmbtu) 2.49 2.48 0.01 0.4%
---------- --------- ------- --------
Sales ($in thousands) 5,483 3,476 2,007 57.7%
---------- --------- ------- --------
Total aggregation and pipeline sales ($in thousands) 18,891 14,567 4,324 29.7%
========== ========= ======= ========
Aggregation Gas Cost
Volume (Million Mmbtu) 1,884 2,147 (263) -12.2%
Average price paid ($/Mmbtu) 6.85 5.10 1.75 34.3%
---------- --------- ------- --------
Cost ($in thousands) 12,914 10,956 1,958 17.9%
Pipeline Gas Cost
Volume (Million Mmbtu) 976 1,166 (190) -16.3%
Average price paid ($/Mmbtu) 4.73 2.40 2.33 97.1%
---------- --------- ------- --------
Cost ($in thousands) 4,615 2,794 1,821 65.2%
---------- --------- ------- --------
Total aggregation and pipeline cost ($in thousands) 17,529 13,750 3,779 27.5%
========== ========= ======= ========
REVENUES. Total revenues increased $6.5 million between the periods. The
--------
increase was due to a $2.2 milion increase in oil and gas sales and a $4.3
million increase in gas aggregation and pipeline sales. Well operations and
service revenues remained relatively constant.
- 15 -
Revenues from oil and gas sales increased a net of $2.2 million from $14.4
million for the quarter ended December 31, 2003 to $16.6 million for the quarter
ended December 31, 2004. Natural gas sales increased $5.5 million. The net
increase in natural gas sales is attributable to an increase in gas prices,
offset by a decrease in gas production. The price increase corresponds with the
rise in the related natural gas indexes. The decrease in production is
primarily due to wells sold in California and certain pipeline curtailments in
the Appalachian Basin. Gas sales were reduced by recognized losses on related
hedging transactions and other revenue, which totaled a loss of $3.0 million for
the quarter ended December 31, 2004 compared to a gain of $0.3 million for the
quarter ended December 31, 2003.
Revenues from gas aggregation and pipeline sales increased $4.3 million
from $14.6 million during the period ended December 31, 2003 to $18.9 million in
the period ended December 31, 2004. Gas aggregation revenue increased $2.3
million primarily because of an increase in average sales prices and corresponds
to the rise in related gas indexes for this period compared to the prior period.
Offsetting this increase in sales prices was a decrease in gas volumes due to
curtailments and natural production declines. Pipeline revenue, which has a
sales and gathering component, increased $2.0 million primarily because of an
increase in the average sales price related to the non-gathering volumes and an
increase in revenue related to the gathering component for this period compared
to the prior period. The increase in revenues and volumes related to the
gathering component primarily is the result of the acquisition of a 100-mile
long natural gas gathering system located in northeastern West Virginia
finalized during the first quarter of the current fiscal year. The increase in
the average sales price related to the non-gathering volumes corresponds to the
increase in related gas indexes for the period as compared to the prior period.
COSTS AND EXPENSES. The Company's costs and expenses increased $0.5
--------------------
million between the periods primarily as a net result of a $0.2 million
decrease in field and lease operating expense, a $3.8 million increase in gas
aggregation and pipeline costs, a $0.4 million increase in taxes other than
income, a $0.3 million decrease in depreciation, depletion, and amortization
costs for oil and gas properties, a $1.1 million decrease in exploration and
impairment costs, and a $2.0 million increase in gain on sale of property as
further described below.
Field and lease operating expense decreased $0.2 million from $3.0 million
during the period ended December 31, 2003 to $2.8 million in the period ended
December 31, 2004. This decrease is a result of decrease in operating expenses
in New Zealand and due to wells sold in California.
Gas aggregation and pipeline costs increased $3.8 million from $13.8
million during the period ended December 31, 2003 to $17.5 million in the
period ended December 31, 2004. Gas aggregation costs increased $2.0 million
and pipeline costs increased $1.8 million. The increase in costs is primarily
attributable to the increase in the average purchase price 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. Pipeline costs increased $1.8
million. The increase in costs is primarily attributable to an increase in the
average purchase price, which corresponds to the rise in the related natural
gas indexes, offset by a decline in gas volumes.
Taxes other than income increased $0.4 million during the period to $1.3
million. This increase is primarily the result of an increase in wellhead oil
and gas sales during the period compared to the prior period. Production taxes
are based on wellhead oil and gas sales, which were higher this period compared
to the prior period.
Depletion and depreciation for oil and gas properties decreased $0.3
million primarily due to a decrease in oil and gas production.
- 16 -
Exploration and impairment costs decreased $1.1 million and is primarily
the result of a decline in dry hole expense during the period compared to the
prior period.
Gain on sale of assets increased $2.0 million primarily due to the
recognition of $1.8 million gain in the current period, related to the reversal
of a reserve established at June 30, 2004, against items for which the Company
was required to indemnify the buyer of the Company's membership interest in
Breitburn Energy Company, LLC ("BEC") for a period of 180 days after closing of
the agreement. The Company also sold certain field equipment in the Appalachian
Basin 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 resulting in a decrease in the average interest rate paid on outstanding
debt.
INTEREST INCOME AND OTHER. Other income decreased $1.3 million when
----------------------------
comparing the periods and is primarily attributable to an accrual of a
contingent liability and profit sharing costs recorded in the current period.
INCOME TAX. Income tax expense increased by $1.5 million to an income tax
-----------
expense of $1.3 million as compared to an income tax benefit for the prior
period of $0.2 million. The increase is primarily due to the increase in income
before taxes of $5.2 million and the adjustment of the tax contingency balance
of $0.6 million for items that are closed or no longer applicable. At December
31, 2004, the Company recorded a $2.3 million current income taxes payable and
corresponding reduction to deferred tax liability resulting from a deferral in
the timing of certain deductions arising from abandoned properties due to the
current IRS examination of the Company's federal income tax returns for the tax
years ending June 30, 2002 and 2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
- --------------------------------------------------------------------------------
AND 2003
- --------
The Company recorded net income of $4.4 million for the six months ended
December 31, 2004 compared to net income of $0.2 million for the six months
ended December 31, 2003. The increase in net income of $4.2 million is
primarily attributable to the net of a $6.7 million increase in revenues, $0.4
million increase in costs and expenses, $1.2 million decrease in interest
expense, $2.4 million decrease in interest income and other, and a $0.8 million
increase in income tax expense.
- 17 -
Production, gas aggregation and pipeline volumes, revenue and average sales
prices for the six months ended December 31 and their related variances are as
follows:
SIX MONTHS ENDED
DECEMBER 31 VARIANCE
-------------------- -------------------
2004 2003 AMOUNT PERCENT
-------- ---------- --------- --------
Natural Gas
Production (Mmcf) 4,979 5,549 (570) -10.3%
Average sales price received ($/Mcf) 6.70 4.89 1.81 37.0%
-------- ---------- --------- --------
Sales ($ in thousands) 33,372 27,139 6,233 23.0%
Oil
Production (Mbbl) 33 63 (30) -47.6%
Average sales price received ($/Bbl) 42.85 27.79 15.06 54.2%
-------- ---------- --------- --------
Sales ($ in thousands) 1,414 1,751 (337) -19.2%
Hedging loss (5,053) (555) (4,498) -810.5%
Other 169 185 (16) -8.6%
-------- ---------- --------- --------
Total oil and gas sales ($ in thousands) 29,902 28,520 1,382 4.8%
======== ========== ========= ========
Aggregation Revenue
Volume (Million Mmbtu) 3,821 4,494 (673) -15.0%
Average sales price received ($/Mmbtu) 6.48 5.07 1.41 27.8%
-------- ---------- --------- --------
Sales ($ in thousands) 24,744 22,769 1,975 8.7%
Pipeline Revenue
Volume (Million Mmbtu) 4,143 2,815 1,328 47.2%
Average sales price received ($/Mmbtu) 2.46 2.60 (0.14) -5.4%
-------- ---------- --------- --------
Sales ($ in thousands) 10,196 7,307 2,889 39.5%
-------- ---------- --------- --------
Total aggregation and pipeline sales ($in thousands) 34,940 30,076 4,864 16.2%
======== ========== ========= ========
Aggregation Gas Cost
Volume (Million Mmbtu) 3,821 4,494 (673) -15.0%
Average price paid ($/Mmbtu) 6.21 4.93 1.28 26.0%
-------- ---------- --------- --------
Cost ($ in thousands) 23,722 22,174 1,548 7.0%
Pipeline Gas Cost
Volume (Million Mmbtu) 2,121 2,281 (160) -7.0%
Average price paid ($/Mmbtu) 3.96 2.55 1.41 55.3%
-------- ---------- --------- --------
Cost ($ in thousands) 8,408 5,822 2,586 44.4%
-------- ---------- --------- --------
Total aggregation and pipeline cost ($ in thousands) 32,132 27,996 4,134 14.8%
======== ========== ========= ========
REVENUES. Total revenues increased $6.7 million between the periods. The
--------
increase was due to a $1.4 million increase in oil and gas sales, $4.9 million
increase in gas aggregation and pipeline sales and a $0.4 million increase in
other revenues. Well operations and service revenues remained relatively
constant.
- 18 -
Revenues from oil and gas sales increased a net of $1.4 million from $28.5
million for six months ended December 31, 2003 to $29.9 million for the six
months ended December 31, 2004. Natural gas sales increased $6.2 million and
oil sales decreased $0.3 million. The net increase in natural gas sales is the
result of an increase in average gas prices, offset by a decline in production.
The price increase corresponds with the rise in related natural gas indexes.
The production decline is primarily due to the sale of several California
properties and certain pipeline curtailments in the Appalachian Basin. Gas
sales were reduced by recognized losses on related hedging transactions and a
decrease in other revenue, which totaled a loss of $4.9 million for the six
months ended December 31, 2004 compared to a loss of $0.4 million for the six
months ended December 31, 2003.
Revenues from gas aggregation and pipeline sales increased $4.9 million
from $30.0 million for the six months ended December 31, 2003 to $34.9 million
for the six months ended December 31, 2004. Gas aggregation revenue increased
$2.0 million because of an increase in average sales prices, offset by a
decrease in gas volumes due to curtailments and natural production declines.
The increase in average sales price corresponds to the rise in related natural
gas price indexes for this period compared to the prior period. Pipeline
revenue, which has a sales and gathering component, increased $2.9 million from
$7.3 million to $10.2 million primarily because of an increase in the average
sales price related to the non-gathering volumes and an increase in revenue
related to the gathering component for this period compared to the prior
period. The increase in revenues and volumes related to the gathering component
primarily is the result of the acquisition of a 100-mile long natural gas
gathering system located in northeastern West Virginia finalized during the
first quarter of the current fiscal year. The increase in the average sales
price related to non-gathering volumes corresponds to the increase in related
natural gas indexes for the period as compared to the prior period.
Other revenues increased $0.4 million between periods. This increase is
the result of the company receiving a partnership distribution from a limited
partnership in which the Company owns an interest.
COSTS AND EXPENSES. The Company's costs and expenses increased $0.4
--------------------
million between the periods primarily as a net result of a $4.1 million
increase in gas aggregation and pipeline costs, $0.1 million decrease in
general and administrative costs, $0.4 million increase in taxes other than
income, a $1.0 million decrease in depreciation, depletion, and amortization
costs for oil and gas properties, a $0.2 million decrease in exploration and
impairment costs, and a $2.8 million increase in gain on sale of assets.
Gas aggregation and pipeline costs increased $4.1 million. Gas aggregation
costs increased $1.5 million and is primarily the result of an increase in the
average price of gas that corresponds to the rise in the related natural gas
indexes, offset by a decline in gas volumes for this period compared to the
prior period. Pipeline costs increased $2.6 million and is primarily the result
of an increase in the average purchase price that corresponds to the rise in
the related natural gas indexes, offset by a decline in volumes.
Taxes other than income increased $0.4 million due to an increase in
wellhead sales in the period compared to the prior period. Production taxes are
based on wellhead oil and gas sales, which where higher during the period
compared to the prior period.
Depletion and depreciation of oil and gas properties decreased $1.0
million due to a decrease in production.
Gain on sale of assets increased $2.8 million primarily due to the
recognition of $1.8 million gain in the current period, related to the reversal
of a reserve established at June 30, 2004, against items for which the Company
was required to indemnify the buyer of the Company's membership interest in
- 19 -
Breitburn Energy Company, LLC ("BEC") for a period of 180 days after closing of
the agreement. The Company also realized a gain on the sale of undeveloped
acreage and certain field equipment in the Appalachian Basin during the current
period.
INTEREST EXPENSE. Interest expense decreased $1.2 million when comparing
------------------
the periods primarily due to the purchase of a portion of the Company's senior
notes resulting in a decrease in the average interest rate paid on outstanding
debt.
INTEREST INCOME AND OTHER. Other income decreased $2.4 million when
----------------------------
comparing the periods and is primarily attributable to a decrease in recognized
gains on the purchase of senior bonds, an accrual of a contingent liability and
profit sharing costs recorded in the current period.
INCOME TAX. Income tax expense increased by $0.8 million to an income tax
-----------
expense of $1.0 million as compared to income tax expense for the prior period
of $0.2 million. The increase is primarily due to the increase in income before
taxes of $5.0 million and the adjustment of the tax contingency balance of $1.2
million for items that are closed or no longer applicable. At December 31,
2004, the Company recorded a $2.3 million current income taxes payable and
corresponding reduction to deferred tax liability resulting from a deferral in
the timing of certain deductions arising from abandoned properties due to the
current IRS examination of the Company's federal income tax returns for the tax
years ending June 30, 2002 and 2003.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The Company's financial condition and liquidity have improved since June 30
2004. Stockholders' equity has increased from $42.4 at June 30, 2004 to $50.5
at December 31, 2004. The Company's cash decreased from $5.8 million at June
30, 2004 to $5.3 million at December 31, 2004. The Company's cash at February
8, 2005 was $1.6 million. The change in cash during the six months of
approximately $0.5 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 $0.6 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 $17.6 million; proceeds from the sale of assets of approximately
$3.9 million; payments of approximately $1.1 million for the acquisition of
treasury stock and dividends; and approximately $0.6 million of cash used 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.
- 20 -
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.
The Company has an unsecured revolving line of credit totaling $3.0 million
with a financial institution with an interest rate of prime plus 0.25%. Based
upon the original terms of the agreement, the line was to reduce by $1.0 million
in November 2004 and expires on June 30, 2005. The unsecured revolving line of
credit was renegotiated during the quarter ended December 31, 2004 to extend the
terms of the agreement. Under the new agreement the Company has an unsecured
line of credit totaling $3.0 million, which reduces by $1.0 million in June 2005
and expires on April 1, 2007.
At December 31, 2004, the Company's principal source of liquidity
consisted of $5.3 million of cash, $0.3 million available under an unsecured
credit facility currently in place, plus amounts available under the revolving
loan of the Restated Credit Agreement. At December 31, 2004, $1.0 million was
outstanding and $1.7 million was committed through letters of credit under the
credit facility, $35.4 million was outstanding on the revolving loan and $50
million was outstanding on the term loan under the Restated Credit Agreement.
As of February 8, 2005, there is $50 million in outstanding borrowings
under the term loan and $29.4 million in outstanding borrowings under the
revolving loan. Additional borrowings must comply with the terms of the
Indenture and the Restated Credit Agreement.
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.
- 21 -
Management utilizes earnings before interest, taxes, depreciation,
depletion, amortization and exploration and impairment cost ("EBITDAX") to
evaluate the operation of each business segment. Additionally, EBITDAX and
similar measures are utilized by the Company's lenders to evaluate the business
and in calculating various financial coverages required in the debt agreements.
Reconciliation of the non-GAAP financial measure is as follows (in thousands):
Twelve Months Ended
June 30, June 30, June 30,
2004 2003 2002
---------- ---------- ----------
Net income (loss) $ 4,295 $ 9,844 $ (26,180)
Add:
Interest expense 15,069 16,383 19,671
Depletion and depreciation of oil and gas properties 13,300 12,140 12,362
Depreciation of pipelines, other property and equipment 4,190 4,294 2,933
Exploration and impairment 10,796 11,729 27,694
Income tax expense (benefit) (4,722) 6,073 (16,822)
Less:
Change in accounting principle, net of tax 0 (73) 0
Gain on redemption of senior bonds 513 23,672 0
---------- ---------- ----------
EBITDAX $ 42,415 $ 36,864 $ 19,658
========== ========== ==========
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. 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 $40.7 million, debt service obligations,
working capital needs and other cash requirements for the current 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 2005 results of operations and cash flows from operating activities
will be sufficient for the Company to remain in
- 22 -
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.
- 23 -
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 on its estimated production
covering approximately 60% to 70% for the fiscal year ending June 30, 2005; and
50% to 60% for the fiscal year ending June 30, 2006. As of December 31, 2004,
the Company's open gas derivative instruments as follows:
Total Average
Market Volumes Contract / Strike Unrealized
Time period Index (MMBtu) Price (Gains) Losses
- -------------------------------------------------------------------------------------------
Derivatives
Natural Gas Swaps
January 2005 - February 2005 NYMEX 200,000 $ 6.14 $ 8,409
January 2005 - March 2005 NYMEX 360,000 5.57 219,974
January 2005 - March 2005 NYMEX 270,000 5.61 154,263
January 2005 - March 2005 NYMEX 450,000 8.48 (1,019,819)
January 2005 - March 2005 NYMEX 270,000 9.32 (832,290)
January 2005 - June 2005 NYMEX 1,620,000 4.47 2,660,278
July 2005 - March 2006 NYMEX 900,000 6.25 279,668
----------- ----------------
4,070,000 $ 1,470,483
=========== ================
Floors
Apil 2005 - June 2005 NYMEX 1,200,000 $ 6.00 $ (199,206)
July 2005 - March 2006 NYMEX 2,160,000 6.00 108,734
----------- ----------------
3,360,000 $ (90,472)
=========== ================
Collars
----------- ----------------
July 2005 - March 2006 NYMEX 3,420,000 $ 5.50 - 8.70 $ (185,606)
=========== ================
----------------
Total Hedged Production 10,850,000 $ 1,194,405
=========== ================
- 24 -
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 December 2004 levels, a 10% change in the average unhedged prices
realized would change the Company's gas and oil revenues by approximately $0.4
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. 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 December 31, 2004 level, a 10% change
in rates would have a $0.2 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 as of the end of the period covered by 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.
- 25 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions and claims arising in the ordinary
course of business. While the outcome of these 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
- 26 -
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 8th day of February 2005.
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
- 27 -
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 15 U.S.C. SEC. 7241 AND 17 C.F.R. 240.13A-14(A)
I, John Mork, certify that:
1. I have reviewed this Form 10-Q of Energy Corporation of America (the
"Company");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this report any change in the company's internal
control over financial reporting that occurred during the company's
most recent fiscal quarter (the company's first fiscal quarter) that
has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the company's auditors and the audit committee of the company's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation
of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's internal
control over financial reporting.
Date: February 8, 2005
/s/ John Mork
---------------------------------------
JOHN MORK
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 15 U.S.C. SEC. 7241 AND 17 C.F.R. 240.13A-14(A)
I, Michael S. Fletcher, certify that:
1. I have reviewed this Form 10-Q of Energy Corporation of America (the
"Company");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the company as of, and for, the periods presented in this report;
4. The company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation;
and
(c) Disclosed in this report any change in the company's internal
control over financial reporting that occurred during the company's
most recent fiscal quarter (the company's first fiscal quarter) that
has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting; and
5. The company's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the company's auditors and the audit committee of the company's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation
of internal control over financial reporting which are reasonably
likely to adversely affect the company's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the company's internal
control over financial reporting.
Date: February 8, 2005
/s/ Michael S. Fletcher
----------------------------------------
MICHAEL S. FLETCHER
Chief Financial Officer