<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q-SB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: March 31, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________to________
Commission file number 000-24881
PENNACO ENERGY, INC.
(Name of small business issuer in its charter)
NEVADA 88-0384598
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1050 17th Street, Suite 700, Denver, Colorado 80265
(Address of principal executive offices) (Zip Code)
(303) 629-6700
Registrant's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve (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 ninety (90) days.
Yes /X/ No / /
The registrant had no operating revenues in the quarter ended March 31, 1999.
As of May 13, 1999, the registrant had 15,144,179 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
(Check One): Yes / / No /X/
1
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PENNACO ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of
March 31, 1999 and December 31, 1998............................ 3
Statement of Operations for the three months
ended March 31, 1999, the period from
January 26, 1998 (inception) to March 31, 1998
and the cumulative period from January 26, 1998
(inception)to March 31, 1999..................................... 4
Statement of Cash Flows for the three months
ended March 31, 1999, the period from
January 26, 1998 (inception) to March 31, 1998
and the cumulative period from January 26, 1998
(inception)to March 31, 1999..................................... 5
Notes to Financial Statements.................................... 6-8
Item 2. Plan of Operation................................................ 9-10
PART II. OTHER INFORMATION................................................. 11
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
SIGNATURES
2
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PENNACO ENERGY, INC.
(A Development Stage Company)
Balance Sheet
(unaudited)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 10,428,937 5,622,776
Accounts receivable 341,107 374,728
Subscriptions receivable - 763,750
Assets held for sale 611,706 6,931,995
Drilling deposit 533,684 333,473
Inventory 812,574 231,116
Prepaid expenses and other current assets 115,506 151,858
----------------- -----------------
Total current assets 12,843,514 14,409,696
----------------- -----------------
Property and equipment, at cost:
Oil and gas properties, using the successful
efforts method of accounting (note 2):
Unproved 5,442,904 4,656,965
Proved 6,195,692 1,358,769
Other property and equipment 371,706 296,119
----------------- -----------------
12,010,302 6,311,853
Less accumulated depreciation (91,630) (61,607)
----------------- -----------------
Net property and equipment 11,918,672 6,250,246
----------------- -----------------
Deferred income tax asset 177,000 1,266,000
Other assets 99,795 99,795
----------------- -----------------
25,038,981 22,025,737
================= =================
Current liabilities:
Bridge loan payable (note 3) - 5,600,000
Lease acquisitions payable 152,110 618,586
Accounts payable and accrued liabilities 1,235,607 1,964,228
Income taxes payable 2,827,000 -
----------------- -----------------
Total current liabilities 4,214,717 8,182,814
----------------- -----------------
Stockholders' equity (note 4):
Common stock, $.001 par value. Authorized 50,000,000
shares; Issued and outstanding 15,144,179 shares at
March 31, 1999 and 14,795,179 at December 31, 1998 15,144 15,152
Additional paid-in capital 17,970,063 17,640,644
Retained earnings (deficit) accumulated during the
development stage 2,839,057 (3,812,873)
----------------- -----------------
Total stockholders' equity 20,824,264 13,842,923
----------------- -----------------
Commitments
25,038,981 22,025,737
================= =================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PENNACO ENERGY, INC.
(A Development Stage Company)
Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Period from Cumulative
January 26, 1998 January 26, 1998
Three Months ended (inception) to (inception) to
March 31, 1999 March 31, 1998 March 31, 1999
------------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue:
Interest income $ 109,403 458 164,689
------------------- ----------------- -----------------
Total revenue 109,403 458 164,689
Expenses:
Exploration 51,590 4,859 1,877,357
Depreciation and amortization 30,023 485 91,630
General and administrative 1,044,787 58,157 5,022,379
Interest expense - - 682,400
------------------- ----------------- -----------------
Total expenses 1,126,400 63,501 7,673,766
Gain on sale of properties 11,945,557 - 13,358,764
------------------- ----------------- -----------------
Income (loss) before income taxes 10,928,560 (63,043) 5,849,687
Income tax expense (3,916,000) - (2,650,000)
------------------- ----------------- -----------------
Net income (loss) $ 7,012,560 (63,043) 3,199,687
=================== ================= =================
Basic income (loss) per share $ .47 (0.01)
=================== =================
Diluted income (loss) per share $ .44 (0.01)
=================== =================
Weighted average common shares outstanding-basic 14,943,512 4,348,333
=================== =================
Weighted average common shares outstanding-diluted 16,081,739 4,348,333
=================== =================
</TABLE>
See accompanying notes to financial statements.
4
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PENNACO ENERGY, INC.
(A Development Stage Company)
Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Period from Cumulative
Three months January 26, 1998 January 26, 1998
ended (inception) to (inception) to
March 31, 1999 March 31, 1998 March 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,012,560 (63,043) 3,199,687
Adjustments to reconcile net loss to net cash used
in operating activities:
Gain on sale of properties (11,945,557) - (13,358,764)
Depreciation and amortization 30,023 485 91,630
Compensation relating to common stock and
warrants issued - - 1,340,000
Stock option compensation 10,870 - 460,870
Warrants issued for services - - 16,500
Income taxes payable 2,827,000 - 2,827,000
Deferred income tax expense (benefit) 1,089,000 - (177,000)
Changes in operating assets and liabilities: -
(Increase) decrease in accounts receivable 33,621 - (341,107)
Increase in inventory (581,458) - (812,574)
(Increase) decrease in prepaid expenses and other current
assets 36,352 - (115,506)
Increase in other assets - - (99,795)
Increase (decrease)in accounts payable and accrued
liabilities (728,621) 66,283 1,235,607
------------- ------------ --------------
Net cash provided (used) by operating activities (2,216,210) 3,725 (5,733,452)
Cash flows form investing activities:
Capital expenditures (6,657,370) (9,712,173) (25,855,809)
Proceeds from sale of properties 19,224,767 - 26,824,767
Drilling deposit, net (200,211) - (533,684)
Increase (decrease) in lease acquisitions payable (466,476) 8,826,368 152,110
------------- ------------ --------------
Net cash provided (used) by investing activities 11,900,710 (885,805) 587,384
------------- ------------ --------------
Cash flows from financing activities:
Proceeds from issuance of bridge loans - - 8,800,000
Repayment of bridge loan (5,600,000) - (8,800,000)
Proceeds from issuance of note payable - - 500,000
Repayment of note payable - - (500,000)
Proceeds from issuance of common stock, net of offering costs 721,661 2,065,497 15,575,005
------------- ------------ --------------
Net cash provided by financing activities (4,878,339) 2,065,497 15,575,005
Net increase in cash 4,806,161 1,183,417 10,428,937
Cash at beginning of period 5,622,776 - -
------------- ------------ -------------
Cash at end of period $ 10,428,937 1,183,417 10,428,937
============= ============ =============
Supplemental disclosures of cash flow information:
Cash paid for interest - - $ 682,400
============= ============ ==============
Cash paid for income taxes - - -
============= ============ ==============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PENNACO ENERGY, INC.
(A Development Stage Company)
March 31, 1999
Notes to Financial Statements
(unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Pennaco Energy, Inc. (the "Company") is an independent exploration and
production company primarily engaged in the acquisition and development of
natural gas production from coal bed methane properties in the Rocky
Mountain region of the United States. The Company was incorporated on
January 26, 1998 under the laws of the state of Nevada and its headquarters
are in Denver, Colorado.
The Company's activities to date have been limited to organizational
activities, prospect development activities, acquisition of leases and
option rights, and commencement of its drilling program. The Company
currently has oil and gas lease rights in the Powder River Basin in
northeastern Wyoming and southeastern Montana. As of March 31, 1999 the
Company had no revenue producing operations. Accordingly, the Company is
considered to be in the development stage.
The Company was incorporated as a wholly-owned subsidiary of International
Metal Protection Inc. ("International Metal"). Subsequently, all of the
outstanding shares of International Metal were exchanged for shares of the
Company and International Metal was merged into the Company. The 995,000
shares issued in the exchange were recorded at their par value of $.001 per
share as International Metal had no assets or liabilities at the date of
the merger. International Metal and its predecessor, AKA Video
Communications Inc., had been inactive for the two years ended December 31,
1997 and prior thereto.
In the opinion of management the accompanying financial statements reflect
all adjustments, consisting of normal recurring adjustments, necessary to
present fairly the Company's financial position as of March 31, 1999, and
the results of its operations for the three-month period ended March 31,
1999 and the period from January 26, 1998 (inception) to March 31, 1998.
The results of operations for interim periods are not necessarily
indicative of the results of operations for the full fiscal year. The
accounting policies followed by the Company are included in Note 1 to the
Financial Statements in the Company's Annual Report on Form 10-KSB for the
period from January 26, 1998 (inception) to December 31, 1998. These
financial statements should be read in conjunction with the Form 10-KSB.
(2) OIL AND GAS ACTIVITIES
The Company follows the successful efforts method of accounting for its oil
and gas activities. Accordingly, costs associated with the acquisition,
drilling and equipping of successful exploratory wells are capitalized.
Geological and geophysical costs, delay and surface rentals and drilling
costs of unsuccessful exploratory wells are charged to expense as incurred.
Costs of drilling development wells, both successful and unsuccessful, are
capitalized. Upon the sale or retirement of oil and gas properties, the
cost thereof and the accumulated depreciation and depletion are removed
from the accounts and any gain or loss is credited or charged to
operations. Upon the sale of a partial interest in an unproved property,
the proceeds are treated as a recovery of cost. If the proceeds exceed the
carrying amount of the property, a gain is recognized in operations.
Depletion of capitalized acquisition, exploration and development costs is
computed on the units-of-production method by individual fields as the
related proved reserves are produced.
Capitalized costs of unproved properties are assessed periodically and a
provision for impairment is recorded, if necessary, through a charge to
operations.
Proved oil and gas properties are assessed for impairment on a field-by-
field basis. If the net capitalized costs of proved oil and gas properties
exceeds the estimated undiscounted future net cash flows from the property
a provision for impairment is recorded to reduce the carrying value of the
property to its estimated fair value.
(3) CMS TRANSACTION
On October 23, 1998, the Company and CMS Oil and Gas Company signed a
definitive agreement (the "CMS Agreement") relating to the development of
the Company's Powder River Basin acreage (the "CMS Transaction"). Pursuant
to the terms of the CMS Agreement, CMS Oil and Gas Company acquired an
undivided 50% working interest in approximately 492,000 net acres of
Pennaco's leasehold position in the Powder River Basin for $28,000,000. The
Company acquired the leasehold position which was conveyed to CMS in the
CMS Transaction for approximately $7,000,000. The purchase price provided
for in the CMS Agreement was the result of arm's length negotiations
between the Company and CMS. The joint operating agreement between the
parties will be modeled after the 1989 AAPL Model Form of Joint Operating
Agreement. The CMS Agreement provides that the parties will in good faith
negotiate a development agreement for the exploration, development and
production of coal bed methane from the leases. The development agreement
will provide that each party will operate approximately 50% of the wells
drilled in the area of mutual interest. Pennaco and CMS have divided the
acreage in the area of mutual interest into project areas which will be
operated by one party or the
6
<PAGE>
other. As is customary in oil and gas leasehold transactions, the agreement
provides for the adjustment of the purchase price for title defects
discovered prior to closing and for the opportunity for one party to
participate in acquisitions made by the other party in the area of mutual
interest defined in the agreement. The agreement also provides for a
preferential purchase right to the other party in the event either CMS or
the Company attempts to sell a portion of its interest in the acreage
covered by the agreement. There is no preferential purchase right in the
event that either party enters into a merger, reorganization or
consolidation. All of the leases in the area of mutual interest are
dedicated to CMS Gas Transmission and Storage, an affiliate of CMS Oil and
Gas Company, for gathering, compression and transportation.
Pursuant to the terms of the CMS Agreement, CMS agreed to pay Pennaco
$5,600,000 of earnest money in the form of a non-interest bearing bridge
loan (the "CMS Bridge Loan") which was secured by substantially all of the
Company's oil and as leases. Approximately $3,200,000 of such amount was
paid directly to existing creditors of the Company. The CMS Transaction was
structured such that the conveyance of the working interests was to occur
at two separate closings. The first closing occurred on November 20, 1998,
and the second occurred on January 15, 1999. The Company received
$7,600,000 at the first closing and received $14,800,000 at the second
closing, less approximately $1,800,000 which was held in escrow subject to
customary closing adjustments. As of March 31, 1999, approximately
$1,200,000 was held in escrow pending CMS closing adjustments. The CMS
Bridge Loan was canceled at the second closing. Under the terms of the CMS
Agreement, CMS will pay the Company for its share of the costs of acquiring
any acreage in excess of the original 492,000 net acres. The joint venture
acreage in the area of mutual interest is approximately 560,000 net acres
as of January 15, 1999.
In the accompanying financial statements, the proceeds are treated as a
recovery of cost of the properties. A gain was recognized to the extent the
proceeds exceeded the carrying amount of the properties.
(4) Stockholders' Equity
In September 1998, the Company issued 980,000 units at $3.25 per unit. Each
unit consists of one share of common stock and one warrant for each two
shares issued. The warrants with an exercise price of $5.00 per share
expire on March 4, 1999. Proceeds to the Company were approximately
$3,165,000. Offering costs of $324,675 were charged to additional paid-in
capital.
Under the terms of the Company's September 1998 stock subscription
agreement, 235,000 units were placed in an escrow account. Subscription
payments of $763,750 were deposited into an escrow account representing the
aggregate purchase price of 235,000 units. Under the terms of the escrow
agreement the shares and the shares of common stock underlying the warrants
were to be registered for resale under the Securities Act of 1933 (the
"Act") with the Securities and Exchange Commission by December 31, 1998.
The Company has also undertaken to have the shares qualified by way of an
exemption order provided by the respective Securities Commissions in
Canada.
The escrow proceeds of $763,750 were deposited into an interest bearing
escrow account together with certificates representing the units to be
purchased. Under the terms of the subscription agreement, the registration
statement was required to be declared effective and the Canadian exemption
order was to be obtained on or before December 31, 1998. The registration
statement was not declared effective by this date. Accordingly, as of
December 31, 1998, the subscriber was entitled to elect to either purchase
the escrow units or receive a refund from the escrow account paid with
their subscription plus interest thereon, and an additional unit for each
10 units purchased in the offering. On February 28, 1999, virtually all of
the subscribers elected to purchase the escrow shares and all subscribers
received an additional unit for each 10 units purchased in the offering. As
a result, an additional 120,250 units were issued. These 120,250 units have
been reflected in the accompanying financial statements as an addition to
paid-in capital and as a reduction to retained earnings. Additionally,
222,500 units were issued from escrow and proceeds of $723,125 were
received by the Company from escrow. One subscriber elected not to purchase
escrow shares and instead received a refund from escrow of $40,625 which
represented 12,500 units, which were in turn not issued.
(5) Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Period from
Three Months January 26, 1998
Ended (inception) to
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Numerator for basic and diluted
income (loss) per share--
income (loss) available to common
stockholders $ 7,012,560 (63,043)
-------------------- --------------------
Denominator:
Denominator for basic income (loss) per share---
weighted average shares 14,943,512 4,348,333
Effect of dilutive securities:
Stock warrants 276,644 -
Stock Options 861,583 -
-------------------- --------------------
Denominator for diluted income (loss) per share---
share--adjusted weighted average
shares conversion 16,081,739 4,348,333
==================== ====================
Basic income (loss) per share $ .47 (0.01)
Diluted income (loss) per share $ .44 (0.01)
</TABLE>
Potentially dilutive common shares attributable to outstanding options to
purchase common shares of 608,000 and 1,000,000 options were antidilutive for
the three months ended March 31, 1999 and the period from January 26, 1998
(inception) to March 31, 1998, respectively.
7
<PAGE>
Item 2. Plan of Operation
This Quarterly Report on Form 10-QSB includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements other than statements of historical fact included in this
Form 10-QSB, including without limitation statements regarding planned
capital expenditures, the Company's financial position, business
strategy and other plans and objectives for future operations, are
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are
reasonable, it can give no assurance as that such expectations will
prove to have been correct. A number of risks and uncertainties could
cause actual results to differ materially from these statements,
including, without limitation, fluctuations in the price of natural
gas, the success rate of drilling efforts, expected production levels,
operating expenses, capital expenditures, completion of gathering and
pipeline projects and availability of equipment and personnel, as well
as other risk factors described from time to time in the Company's
documents and reports filed with the SEC. All subsequent written and
oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such
factors.
Pennaco Energy, Inc. is an independent, development stage
exploration and production company. The Company's current operations
are completely focused on the acquisition, development and production
of natural gas from coal bed methane ("CBM") properties in the Rocky
Mountain region of the United States. Pennaco is one of the largest
holders of oil and gas leases covering CBM properties in the Powder
River Basin in the northeastern Wyoming and southeastern Montana. As
of March 1, 1999, the Company owned oil and gas lease rights with
respect to approximately 311,800 net acres in the Powder River Basin.
The Company initiated its drilling program on November 15, 1998
and had drilled approximately 32 gross (30 net) wells as of December
31, 1998. Pennaco has operated all of its wells drilled to date. As of
March 31, 1999, the Company had drilled approximately 140 gross (123
net) CBM wells since the beginning of its drilling program, and plans
to drill approximately 330 net CBM wells in 1999. There can be no
assurances that the Company will have sufficient funds to drill all of
these wells, that it would be economic to do so or that these wells
will ultimately be productive.
At December 31, 1998, the Company estimated net proved reserves
of 18.1 Bcfe with present value of estimated future net revenues
before income taxes (utilizing a 10% discount rate) of $8.5 million
and a standardized measure of discounted future net cash flows of $6.1
million. Natural gas constituted 100% of the Company's estimated net
proved reserves, all of which were located in the Powder River Basin
and 30% of which were developed but non-producing at year-end. The
Company operates all of the wells on its proved developed non-
producing properties.
As a development stage company, the Company had no revenues from
operations in 1998 or in the three months ended March 31, 1999. During
the period from the Company's inception (January 26, 1998) through
March 31, 1999, the Company reported net income of $3,199,687. The
Company realized a gain on sale of properties of $13,358,764 based on
the $26,824,767 of proceeds received in the first and second closing
of the CMS Transaction which occurred on November 20, 1998 and January
15, 1999 respectively. Expenses incurred from the Company's inception
(January 26, 1998) through March 31, 1999 totaled $7,673,766,
including general and administrative expenses of $5,022,379 and
exploration expenses of $1,877,357, including geologic consulting
fees, geologic data and lease rentals. During the three month period
ended March 31, 1999, the Company reported net income of $7,012,560.
The Company realized a gain on sale of properties of $11,945,557
received in the second closing of the CMS Transaction which occurred
on January 15, 1999. Expenses incurred during the three month period
ended March 31, 1999 totaled $1,126,400 including general and
administrative expenses of $1,044,787 and exploration expenses of
$51,590, including geologic consulting fees, geologic data and lease
rentals.
Liquidity and Capital Resources
-------------------------------
The capital resources of the Company are limited. Until April
1999, the Company had not produced any revenues and its main source of
funds has been the sale of the Company's equity securities and the
proceeds from CMS Transaction. The Company had approximately $10.4
million in cash as of March 31, 1999.
On December 23, 1998, the Company and CMS Oil and Gas Company
announced the CMS Transaction. Pursuant to the terms of the CMS
Agreement, CMS paid Pennaco $5.6 million in the form of the CMS Bridge
Loan secured by substantially all of the Company's oil and gas leases.
Approximately $3.2 million of such amount was paid directly to
existing creditors of the Company. The Company used the balance for
general corporate purposes. The Company received $7.6 million at the
first closing on November 20, 1998 and $13.6 million at the second
closing on January 15, 1999. Additionally, approximately $1.8 million
which was deposited into an escrow account subject to customary
closing adjustments. The CMS Bridge Loan was canceled at the second
closing. As of May 12, 1999, approximately $0.3 million remained in
escrow pending closing adjustments for the CMS Transaction. While the
proceeds of the CMS transaction allowed the Company to repay its
current liabilities and should allow the Company to fund its planned
$18.4 million capital expenditure program for 1999, the Company will
require further funding, either from cash flow from operations, bank
credit facilities or the public markets, to meet its capital
expenditure plans for the year 2000 and beyond.
Should the Company's cash flow from operations continue to be
insufficient to satisfy its planned capital expenditure requirements,
there can be no assurance that additional debt or equity financing
will be available to meet these requirements. At present, there are no
agreements or understandings between the Company and its officers and
directors or affiliates and any investment banking firms with respect
to any debt or equity financings. The Company is currently pursuing a
bank credit facility commitment. There can be no assurances as to the
availability or borrowing capacity of such a bank facility.
Should the Company be able to obtain debt financing in the
future, its level will have several important effects on the Company's
future operations, including (1) a substantial portion of the
Company's cash flow could be dedicated to the payment of interest on
its indebtedness and would not be available for other purposes and (2)
the Company's ability to obtain additional financing in the future may
be impaired.
To address the operational and administrative requirements of the
Company's
8
<PAGE>
ongoing development activities, it is anticipated that during the next 12
months employee requirements will increase to approximately 18 employees.
Currently, the Company has 15 full-time employees.
The Company had capital expenditures of approximately $7.0 million in
the first quarter of 1999, including approximately $2.7 million for lease
acquisitions and $3.9 million for drilling activities. On February 4, 1999,
the Company announced a capital spending budget of $18.4 million for 1999,
all of which will be directed towards the Company's Powder River Basin CBM
project. The Company plans to spend approximately $9.4 million to drill
approximately 330 net wells in the Powder River Basin during 1999, although
there can be no assurance that it will have sufficient funds to drill all
of these wells, that it would be economic to do so or that these wells will
ultimately be productive. The wells will be a combination of joint
Pennaco/CMS wells drilled in the area of mutual interest and Pennaco wells
drilled primarily on a 100% working interest basis located outside of the
CMS area of mutual interest in the South Gillette Area. The balance of the
1999 capital budget, approximately $9.0 million, is allocated to lease
acquisition. The Company does not anticipate the need for additional
funding in order to execute the announced capital spending plan for 1999
based upon the Company's current cash position.
Year 2000
- ---------
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue. The Year 2000
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using '00'
as the year 1900 rather than the year 2000. This could result in a major
system failure or miscalculations.
The Company believes that Year 2000 problem will not pose material
operational problems for the Company and that it is adequately prepared for
the Year 2000. The Company's computer software provider has assured the
Company that all of the Company's software is Year 2000 compliant (i.e.
will function properly in the year 2000 and beyond). To the Company's
knowledge after investigation, no "imbedded technology" (such as microchips
in an electronic control system) of the Company poses a material Year 2000
problem.
Because the Company believes that it has no material internal Year
2000 problems, the Company has not and does not expect to expend a material
amount of funds to address Year 2000 issues. It is Company policy to
continue to review the year 2000 compliance of its supplier's, gas
purchasers and service providers; however, such monitoring does not involve
a significant cost to the Company.
In addition to the foregoing, the Company has contacted its major
vendors and is in the process of obtaining either oral or written
assurances from its major vendors that they have no material Year 2000
problems.
In the event that one or more of the Company's vendor provided systems
were to have a material Year 2000 problem, the Company believes that the
most reasonably likely worst case scenario would be a temporary delay in
revenue collection caused by an interruption in computerized billing and
not an interruption in the actual flow of the Company's coal bed methane,
which would have no substantial long-term impact on the Company's ability
to conduct operations.
Recent Developments
- -------------------
South Gillette Gathering and Transportation Agreements
The Company recently entered into an agreement with Bear Paw Energy,
Inc. ("Bear Paw Energy"), a subsidiary of TransMontaigne, Inc., under which
Bear Paw Energy will construct, own and operate gas gathering systems as
well as provide gas gathering and compression services to Pennaco in the
Company's South Gillette Area. On March 17, 1999, the Company entered into
an agreement with Western Gas Resources, Inc. ("Western Gas") whereby
Western Gas will compress and transport 11 MMcf per day of gas from the
Dopplebock compressor station located southwest of the Company's South
Gillette Area to the interconnect with Williston Basin Interstate Pipeline
("WBI") at Recluse, Wyoming. Pennaco has entered into two gas sale
contracts to sell a total of 10,000 MMBtu per day (approximately 11 MMcf
per day of wellhead production) of natural gas for 12 months beginning
April 1, 1999 to two gas purchasers deliverable at Recluse, Wyoming into
WBI. The company entered into agreements to purchase gas for the month of
April 1999 in order to meet its gas sales contract obligations prior to
commencement of gas production.
Initial Gas Production
Pennaco produced its first gas for sale in late April 1999. The
Company anticipates that its gas production will reach 11 MMcf per day by
the end of May 1999. Further production increases will be limited until
September 1999, when the Fort Union Gas Gathering System is scheduled to
commence operations at capacity of 450 MMcf per day.
CMS Gas Gathering and Transportation Agreements
On March 30, 1999, Pennaco and CMS announced that Pennaco has entered
into a gas gathering agreement with CMS Continental Natural Gas, Inc. ("CMS
Continental"), a wholly owned subsidiary of CMS Energy Corporation. Under
this agreement, CMS Continental will provide gas gathering services to
Pennaco and CMS Oil and Gas Company within the Pennaco/CMS area of mutual
interest, which excludes the South Gillette Area. CMS also announced plans
to construct a $190 million, 110 mile high pressure gathering pipeline
through the Pennaco/CMS jointly owned acreage located in the northern
portion of the Powder River Basin coal bed methane play, connecting at its
southern terminus with the Fort Union pipeline project which is scheduled
for completion in September 1999.
There can be no assurance that any of these gathering and pipeline systems
will ultimately be constructed or that they will be completed in the time-
frame currently anticipated.
9
<PAGE>
Stockholder Rights Plan
On February 24, 1999, the Board of Directors adopted a stockholder rights
plan pursuant to which the Company distributed a dividend of one right (a
"Right") for each outstanding share of Common Stock. The Rights have anti-
takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire the Company on terms not approved by the Board of
Directors, except pursuant to an offer conditioned on a substantial number of
Rights being acquired. Each Right entitles the registered holder to purchase
from the Company one half of a share of Common Stock at an exercise price of
$20, subject to adjustment. The description and terms of the Rights are set
forth in a Rights Agreement, dated as of February 24, 1999, between the Company
and Harris Trust and Savings Bank, as rights agent, a copy of which has been
filed with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A.
We currently maintain our principal executive offices at 1050 17th Street, Suite
700, Denver, Colorado 80265. Our telephone number is (303) 629-6700 and the
facsimile number is (303)629-6800. We also maintain an office at 3651 Lindell
Road, Suite A, Las Vegas, Nevada 89103 and a field office at 4988 S. Highway 14-
16, Suite 102, Gillette, Wyoming, 82716.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
11
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
PENNACO ENERGY, INC.
May 17, 1999 By: /s/ Paul M. Rady
-----------------------------------
Paul M. Rady, President and Chief
Executive Officer
May 17, 1999 By: /s/ Glen C. Warren, Jr.
-----------------------------------
Glen C. Warren, Jr. Executive Vice President
and Chief Financial Officer
12
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