<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000, 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: 000-24881
--------
Pennaco Energy, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 88-0384598
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1050 17TH STREET, SUITE 700
DENVER, COLORADO 80265-2076
(Address of principal executive offices) (Zip Code)
(303) 629-6700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 / /
As of November 8, 2000, the registrant had 19,624,940 shares of Common Stock
outstanding.
<PAGE>
PENNACO ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION.......................................... 3
Item 1. Financial Statements........................................... 3
Balance Sheet as of
September 30, 2000 and December 31, 1999....................... 3
Statement of Operations for the three months and nine months
ended September 30, 2000 and 1999.............................. 4
Statement of Cash Flows for the nine months
ended September 30, 2000 and 1999.............................. 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 17
PART II. OTHER INFORMATION.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURES................................................................ 20
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENNACO ENERGY, INC.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................................................... $ 804 $ 2,908
Accounts receivable:
Gas sales....................................................................... 5,927 1,649
Joint interest owners and other................................................. 10,412 3,562
Inventory.......................................................................... 2,452 1,715
Prepaid expenses and other current assets.......................................... 386 425
-------- -------
Total current assets........................................................... 19,981 10,259
-------- -------
Property and equipment, at cost:
Natural gas properties, using the successful efforts method of accounting.......... 116,461 49,349
Other property and equipment....................................................... 1,425 772
-------- -------
117,886 50,121
Less accumulated depletion, depreciation and amortization.......................... (4,325) (873)
-------- -------
Net property and equipment...................................................... 113,561 49,248
-------- -------
Other assets........................................................................ 988 150
-------- -------
$134,530 $59,657
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable:
Gas sales....................................................................... $ 2,231 $ 696
Trade and other................................................................. 15,171 8,121
Accrued interest................................................................... 1,115 11
Other accrued liabilities.......................................................... 1,293 1,058
-------- -------
Total current liabilities...................................................... 19,810 9,886
-------- -------
Long-term liabilities:
Bank debt......................................................................... 52,400 -
Other............................................................................. 1,914 -
-------- -------
Total long-term liabilities................................................... 54,314 -
-------- -------
Deferred income taxes............................................................... 2,968 810
-------- -------
Commitments.........................................................................
Stockholders' equity:
Common stock, $.001 par value (Authorized 50,000,000 shares; issued and
outstanding 19,625,000 shares at September 30, 2000 and 18,813,000 shares at
December 31, 1999)............................................................... 20 19
Additional paid-in capital......................................................... 50,887 48,241
Retained earnings.................................................................. 6,531 701
-------- -------
Total stockholders' equity..................................................... 57,438 48,961
-------- -------
$134,530 $59,657
======== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PENNACO ENERGY, INC.
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenue:
Natural gas revenue..................................... $15,010 $ 1,121 $32,660 $ 1,749
------- ------- ------- -------
Operating expenses:
Lease operating......................................... 2,080 287 5,204 457
Gathering, compression and transportation............... 3,149 502 8,119 818
Production taxes........................................ 1,031 70 2,163 122
Exploration............................................. 223 286 720 394
Depletion, depreciation and amortization................ 1,430 196 3,444 344
General and administrative.............................. 1,304 1,315 3,911 3,740
------- ------- ------- -------
Total expenses..................................... 9,217 2,656 23,561 5,875
------- ------- ------- -------
Income (loss) from operations............................. 5,793 (1,535) 9,099 (4,126)
------- ------- ------- -------
Other income (expense):
Interest income......................................... 18 23 71 262
Interest expense........................................ (200) (62) (200) (62)
Gain on sale of properties.............................. - - - 12,431
------- ------- ------- -------
Total other income (expense)....................... (182) (39) (129) 12,631
------- ------- ------- -------
Income (loss) before income taxes......................... 5,611 (1,574) 8,970 8,505
Income tax benefit (expense).............................. (1,964) 563 (3,140) (3,049)
------- ------- ------- -------
Net income (loss)......................................... $ 3,647 $(1,011) $ 5,830 $ 5,456
======= ======= ======= =======
Earnings (loss) per share:
Basic................................................... $.19 $(.07) $.30 $.36
======= ======= ======= =======
Diluted................................................. $.17 $(.07) $.27 $.31
======= ======= ======= =======
Weighted average common shares outstanding:
Basic................................................... 19,554 15,291 19,280 15,131
======= ======= ======= =======
Diluted................................................. 21,979 15,291 21,517 17,632
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PENNACO ENERGY, INC.
STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
-------- ---------
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 5,830 $ 5,456
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of properties...................................................... - (12,431)
Depletion, depreciation and amortization......................................... 3,444 344
Stock option compensation........................................................ - 11
Deferred income tax expense...................................................... 3,140 2,413
Changes in operating assets and liabilities:
Increase in accounts receivable................................................ (11,128) (3,249)
Increase in inventory.......................................................... (737) (1,663)
Decrease in prepaid expenses and other current assets.......................... 39 100
Increase in other assets....................................................... (838) (90)
Increase in accounts payable, accrued interest and other liabilities........... 9,924 4,671
Increase in other non-current liabilities...................................... 1,914 -
-------- ---------
Net cash provided by (used in) operating activities............................ 11,588 (4,438)
-------- ---------
Cash flows from investing activities:
Capital expenditures................................................................... (67,757) (28,551)
Proceeds from sale of properties....................................................... - 20,058
-------- ---------
Net cash used in investing activities.......................................... (67,757) (8,493)
-------- ---------
Cash flows from financing activities:
Borrowing of long-term debt............................................................ 77,240 12,920
Payments of long-term debt............................................................. (24,840) (515)
Repayment of bridge loan............................................................... - (5,600)
Proceeds from exercise of stock options and warrants................................... 1,665 1,608
-------- ---------
Net cash provided by financing activities...................................... 54,065 8,413
-------- ---------
Net decrease in cash and cash equivalents............................................... (2,104) (4,518)
Cash and cash equivalents at beginning of period........................................ 2,908 5,623
-------- ---------
Cash and cash equivalents at end of period.............................................. $ 804 $ 1,105
======== =========
Supplemental disclosures of cash flow information:
Cash paid for interest................................................................. $ 1,144 $ 22
======== =========
Cash paid for income taxes............................................................. $ - $ 570
======== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PENNACO ENERGY, INC.
September 30, 2000
Notes to Financial Statements
(unaudited)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Pennaco Energy, Inc. (the "Company") is an independent exploration and
production company. The Company's current operations are completely focused on
the acquisition, exploration, development and production of natural gas from
coal bed methane properties located in the Powder River Basin in northeastern
Wyoming and southeastern Montana. The Company was incorporated on January 26,
1998 under the laws of the state of Nevada and in 2000 reincorporated in
Delaware. The Company is headquartered in Denver, Colorado.
From its inception through March 31, 1999 the Company's activities were
limited to organizational activities, prospect development activities,
acquisition of leases and option rights, and commencement of its drilling
program. In April 1999 the Company began producing gas from certain of its gas
properties in the Gillette Area of Wyoming.
The accompanying financial statements are unaudited; however, 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 September 30, 2000, and the
results of its operations for the three-month and nine-month periods ended
September 30, 2000 and 1999. 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 year ended December 31, 1999. 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 acquiring, drilling and
equipping successful exploratory wells are capitalized. Geological and
geophysical costs, delay and surface rentals, and drilling costs of unsuccessful
exploratory wells and pilot drilling projects 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 recorded in 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. 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.
<PAGE>
Pennaco Energy, Inc.
Notes to Financial Statements
(continued)
Capitalized costs of unproved properties are assessed periodically and a
provision for impairment is recorded, if necessary, through a charge to
operations. During the three months and nine months ended September 30, 2000,
the Company capitalized interest of $925,000 and $1,862,000, respectively which
was incurred to carry unproved properties that are under development. No
interest was capitalized during the three months and nine months ended September
30, 1999.
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.
The Company's natural gas revenues are reported net of transportation
expenses incurred on gas delivered and sold downstream of the Company's typical
point of sale, which is currently at Glenrock, Wyoming.
(3) EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings (loss) per share--
Net income (loss)........................................... $ 3,647 $(1,011) $ 5,830 $ 5,456
======= ======= ======= =======
Denominator for basic earnings (loss) per share--
Weighted average shares-basic............................... 19,554 15,291 19,280 15,131
Effect of dilutive securities:
Stock options........................................... 2,364 - 2,179 2,243
Warrants................................................ 61 - 58 258
------- ------- ------- -------
Denominator for diluted earnings (loss) per share--
Adjusted weighted average shares-diluted................ 21,979 15,291 21,517 17,632
======= ======= ======= =======
Basic earnings (loss) per share................................ $ .19 $ (.07) $ .30 $ .36
======= ======= ======= =======
Diluted earnings (loss) per share.............................. $ .17 $ (.07) $ .27 $ .31
======= ======= ======= =======
</TABLE>
Potentially dilutive common shares attributable to outstanding options and
warrants to purchase 6,000 and 4,159,000 common shares were excluded from the
calculation of diluted earnings (loss) per share for the three months ended
September 30, 2000 and 1999 respectively, and 24,000 and 156,000 common shares
were excluded from such calculation for the nine months ended September 30, 2000
and 1999, respectively, as their effect was antidilutive.
<PAGE>
Pennaco Energy, Inc.
Notes to Financial Statements
(continued)
(4) LONG-TERM DEBT
On July 23, 1999 the Company entered into a revolving line of credit with
US Bank National Association ("USB") which, as amended, provides for loans of up
to $125,000,000 limited to a borrowing base, as determined by USB, of
$70,000,000. The borrowing base will be redetermined based on January 1, 2001
reserves, with the capacity for expansion as the Company's reserve base expands
further. The credit facility is secured by mortgages on substantially all of the
Company's properties. The credit facility provides for a revolving period ending
on June 30, 2002, after which the loan is to be repaid over 48 months. The
credit facility contains certain covenants, including restrictions on
indebtedness, requirements with respect to working capital and tangible net
worth. Interest is payable at a variable rate based on LIBOR or the prime rate.
(5) FINANCIAL HEDGES AND OTHER FINANCIAL INSTRUMENTS
The Company's financial results are affected when prices for natural gas
fluctuate. Such effects can be significant. To manage the risks related to
commodity prices and to reduce the impact of fluctuations in prices, the Company
may from time to time enter into long-term sales contracts and financial
instruments. Under its strategy, the Company may enter into energy swaps, put
options, basis locks or other financial instruments. The Company uses its
hedging strategy to minimize its exposure to gas price changes. The Company
uses the hedge or deferral method of accounting for these activities and as a
result, gains and losses on the related instruments are recorded as changes in
the realized prices of the commodities. When exposure to changing gas prices is
not substantially eliminated, the Company will record all payments made or
received as well as the changes in the fair market value of the financial
instruments as other income (expense).
Put Options
The Company purchased a "put option" which establishes a floor price of
$3.10 per MMBtu (CIG Rocky Mountain price) for approximately 7.5 Bcf of
production from August 1, 2000 through March 31, 2001. This put option contract
places no limit on the upside price for the Company's gas production. The cost
of the put options totaled $866,000. If the monthly closing price of CIG Rocky
Mountain gas index is below the floor price then the Company receives proceeds
equal to the difference between the floor price and the closing price. To the
extent the put options qualify as a hedge of the Company's gas sales, the cost
of the put option and proceeds, if any, received on the exercise of such are
recorded as an adjustment of natural gas revenues over the period the hedged
production is produced. To the extent the put options do not qualify as a hedge
of the Company's gas sales, the cost of the put option and proceeds, if any, as
well as changes in the fair market value of the put options, are charged to
other income (expense).
<PAGE>
Pennaco Energy, Inc.
Notes to Financial Statements
(continued)
Basis Lock
The Company has entered into contracts which have locked-in the NYMEX to
CIG Rocky Mountain basis differential ("basis locks") beginning in November 2000
for each of the following: 20 MMcf per day at $0.51 per Mcf for three years, 15
MMcf per day at $0.50 per Mcf for two years and 10 MMcf per day at $.34 per Mcf
for three months. In a basis lock, the Company enters into a contract with
another party which provides for the Company to receive (pay) funds if the
closing CIG Rocky Mountain basis differential for the given month is higher
(lower) than the contract differential. This will protect the Company from basis
expansion over the next two to three years, as interstate pipeline
infrastructure expands to keep pace with growing Rocky Mountain gas supply. To
the extent the basis lock is entered into with an energy swap (discussed below)
and therefore, effectively hedges the Company's exposure to gas price
fluctuations, the payments made or received in connection with the basis lock
will be recorded as an adjustment to natural gas revenues. The change in the
fair market value of basis lock contracts entered into with no corresponding
energy swap as well as any payments made or received in connection therewith,
will be recorded as other income (expense).
Energy Swaps
The Company has fixed the price on a portion of its production over the
next 18 months using "energy swaps". In an energy swap, the Company enters into
a contract with a counterparty which provides for the Company to receive (pay)
funds if the NYMEX closing price for natural gas for the given month is lower
(higher) than the contract price. The Company will record as an adjustment to
natural gas revenues any proceeds received or payments made by the Company in
connection with the energy swaps. Utilizing the energy swaps in connection with
the basis locks as shown in the table below, the Company has fixed the price on
certain of its future gas production. For November 2000, the Company has fixed
the price on 35 MMcf per day at $4.91 per Mcf CIG. For the period December 2000
through March 2001, the Company has fixed 25 MMcf per day at $4.92 per Mcf CIG.
For the period April through October 2001, the Company has fixed 30 MMcf per day
at $4.19 per Mcf CIG. Finally, for the period November 2001 through March 2002,
the Company has fixed 12.5 MMcf per day at $4.15 per Mcf CIG.
All of the above transactions are financial in nature. The Company's
physical production is expected to be delivered and sold into CIG index-related
markets.
<PAGE>
<TABLE>
<CAPTION>
Pennaco Energy, Inc. - Hedging and Other Financial Instrument Summary
Average $ per Mcf*
Nov Dec Jan-Mar Apr-Oct Nov 2001- Apr-Oct Nov 2002-
2000 2000 2001 2001 Mar 2002 2002 Oct 2003
------- ------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Price Contracts
---------------------
Volume (MMcfd) 35 25 25 30 12.5 - -
NYMEX Price $ 5.42 $ 5.43 $ 5.43 $ 4.70 $ 4.66 $ - $ -
Basis Lock ($0.51) ($0.51) ($0.51) ($0.51) ($0.51) $ - $ -
------- ------- ------- ------- ------- ------- -------
CIG Price $ 4.91 $ 4.92 $ 4.92 $ 4.19 $ 4.15 $ - $ -
Basis Lock Contracts - In addition to above volumes
---------------------------------------------------
Volume (MMcfd) 10 20 20 5 22.5 35 20
Basis Lock $ 0.34 $ 0.43 $ 0.43 $ 0.51 $ 0.51 $ 0.51 $ 0.51
Floor Price Contracts (Puts)
----------------------------
Volume (MMcfd) 50 50 30 - - - -
CIG Price $ 3.10 $ 3.10 $ 3.10 $ - $ - $ - $ -
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*based on 1 MMbtu to 1 Mcf
<PAGE>
PENNACO ENERGY, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
-------
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of 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-Q,
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 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.
The Company is an independent energy company entirely focused on the
acquisition, exploration, development, and production of natural gas from coal
bed methane properties located in the Powder River Basin of northeastern Wyoming
and southeastern Montana. The Company is one of the largest holders of oil and
gas leases covering coal bed methane properties in the Powder River Basin.
As of November 8, 2000, the Company owned oil and gas lease rights with
respect to approximately 834,200 gross acres and 395,600 net acres in the Powder
River Basin. Of these amounts, 667,200 gross acres and 283,200 net acres
represent the Company's portion of the leasehold interests contained in an area
of mutual interest, or AMI, shared with CMS Oil and Gas Company, a wholly owned
subsidiary of CMS Energy Corporation.
Pennaco acquired 45,900 net acres of undeveloped CBM leases in the nine
months ended September 30, 2000 at a cost of $20,400,000 or an average of $445
per acre. Over 50% of the acquired leases are located in the Company's new
House Creek Project in the Gillette Area, outside of the Pennaco/CMS AMI. Over
50% of the leases are on fee and state acreage and the balance is on federal
acreage. Pennaco also acquired 36 CBM wellbores and surface facilities in the
House Creek Project, at a cost of approximately $2,700,000.
<PAGE>
Pennaco Energy, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
On November 15, 1998, the Company initiated its drilling program and had
drilled 1,267 gross (908 net) wells by November 8, 2000. The Company has
drilled and operates 668 gross (581 net) wells in the Gillette Area with an
average 87% working interest, 38 gross (38 net) wells in the Felix Project in
the Northern Fairway Area with a 100% working interest and 227 gross (122 net)
wells in the AMI with an average 54% working interest. The Company has also
participated in 334 gross (167 net) wells drilled and operated by CMS in the AMI
with an average 50% working interest net to Pennaco. The Company plans to drill
a total of 500 net wells during 2000 with expected drilling and facilities costs
of approximately $55,000,000. The Company has drilled 454 of these net wells
through November 8, 2000. The number of locations actually drilled will depend
on future operating results, availability of capital, and the Company's ability
to obtain the requisite regulatory approvals from state and federal agencies.
As of November 8, 2000, the Company's gross gas production totaled 95
MMcf per day from two primary areas - the Company's Gillette Area and the
Pennaco/CMS AMI. In the Gillette Area, production was 72 MMcf per day (59 MMcf
per day net to the Company's average 82% working interest) from 500 wells that
have been hooked up to date, which is an average of 144 Mcf per day per well.
Another 36 wells in the Gillette Area are connected and dewatering, but not yet
producing gas. In the Pennaco/CMS AMI, production was 23 MMcf per day (12 MMcf
per day net to the Company's average 50% working interest) from 262 producing
wells, which is an average of 88 Mcf per day per well.
Combined, the Company's net working interest production as of November
8, 2000 is 71 MMcf per day or 52 MMcf per day net after royalty and fuel usage.
Since early November 1999, the Company's net working interest gas production has
increased by 255% from 20 MMcf per day to 71 MMcf per day and the number of
producing wells has increased from 122 to 762 wells. The Company has an
additional 149 gross (102 net) wells that are connected to gathering systems and
dewatering but not yet producing gas and 225 gross (145 net) wells that are in
the process of being connected to gathering and water handling systems. These
374 not-yet producing gross (247 net) wells should contribute significantly to
Pennaco's future production growth.
<PAGE>
Pennaco Energy, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
RESULTS OF OPERATIONS
---------------------
As reflected in the following unaudited quarterly statement of
operations data and summary production, price and cost data shown below, the
Company's operating activities for the three months ended September 30, 2000,
have grown significantly over the past four quarters.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------
(in thousands, except per share amounts)
September 30, December 31, March 31, June 30, September 30,
1999 1999 2000 2000 2000
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Natural gas revenue............................... $ 1,121 $ 2,801 $ 6,199 $ 11,451 $ 15,010
------------- ------------ ------------- ------------ ------------
Operating expenses:
Lease operating................................. 287 500 1,240 1,884 2,080
Gathering, compression, and transportation...... 502 1,153 2,191 2,779 3,149
Production taxes................................ 70 162 377 755 1,031
Exploration..................................... 286 324 217 280 223
Depletion, depreciation and amortization........ 196 467 822 1,192 1,430
General and administrative...................... 1,315 1,497 1,284 1,323 1,304
------------- ------------ ------------- ------------ ------------
Total expenses............................... 2,656 4,103 6,131 8,213 9,217
------------- ------------ ------------- ------------ ------------
Income (loss) from operations.................... (1,535) (1,302) 68 3,238 5,793
------------- ------------ ------------- ------------ ------------
Other income (expense):
Interest income................................. 23 108 35 18 18
Interest expense................................ (62) - - - (200)
Gain on sale of properties...................... - 168 - - -
------------- ------------ ------------- ------------ ------------
Total other income (expense)................. (39) 276 35 18 (182)
------------- ------------ ------------- ------------ ------------
Income (loss) before income taxes................. (1,574) (1,026) 103 3,256 5,611
Income tax benefit (expense)...................... 563 444 (36) (1,140) (1,964)
------------- ------------ ------------- ------------ ------------
Net income (loss)................................. $ (1,011) $ (582) $ 67 $ 2,116 $ 3,647
============= ============ ============= ============ ============
Earnings (loss) per share:
Basic........................................... $ (.07) $ (.03) $ - $ .11 $ .19
============= ============ ============= ============ ============
Diluted......................................... $ (.07) $ (.03) $ - $ .10 $ .17
============= ============ ============= ============ ============
Weighted average common shares outstanding:
Basic........................................... 15,291 17,989 18,910 19,380 19,554
============= ============ ============= ============ ============
Diluted......................................... 15,291 17,989 21,209 21,786 21,979
============= ============ ============= ============ ============
<CAPTION>
SUMMARY PRODUCTION, PRICE AND COST DATA:
Natural gas sales volume for period (MMcf).......... 743 1,604 3,145 4,055 4,653
Average daily natural gas sales volume (MMcf)....... 8 17 35 45 51
Average realized gas price (per Mcf)................ $ 1.51 $ 1.75 $ 1.97 $ 2.82 $ 3.23
Lease operating expense (per Mcf)................... $ 0.39 $ 0.31 $ 0.39 $ 0.46 $ 0.45
Gathering, compression and transportation (per Mcf). $ 0.68 $ 0.72 $ 0.70 $ 0.69 $ 0.68
Depletion, depreciation and amortization (per Mcf).. $ 0.26 $ 0.29 $ 0.26 $ 0.29 $ 0.31
</TABLE>
<PAGE>
Pennaco Energy, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Financial Results for the Three Months Ended September 30, 2000:
The Company reported net income of $3,647,000 or $0.17 per share (all per
share amounts noted herein are on a diluted basis) for the three months ended
September 30, 2000 compared to a net loss of $1,011,000 or $0.07 per share for
the three months ended September 30, 1999. The Company had income from
operations of $5,793,000 for the three months ended September 30, 2000. This
compares to a loss from operations of $1,535,000 for the same period in 1999.
The Company's natural gas revenues have increased quarter-to-quarter due to
the increased volume of gas sales resulting from the Company's increase in the
number of producing wells and the increase in the sales price received by the
Company for its natural gas. The Company had net gas sales during the three
months ended September 30, 2000 of 4.7 billion cubic feet (Bcf), or 51 million
cubic feet (MMcf) per day, over six times the 8 MMcf per day of gas sales in the
comparable prior year period and a 13% increase over the 45 MMcf per day of net
gas sales in the three months ended June 30, 2000. The quarterly average
realized gas price for the three months ended September 30, 2000 was $3.23 per
thousand cubic feet (Mcf), a 114% increase over the $1.51 per Mcf realized in
the prior year period and a 15% increase over the $2.82 realized in the three
months ended June 30, 2000. While the Company had no hedging activity in the
second or third quarter 2000, hedging activities reduced the average realized
price for the prior year period by $0.55 per Mcf. Natural gas revenues for the
three months ended September 30, 2000 were $15,010,000, over thirteen times the
$1,121,000 in revenues for the prior year period and a 30% increase over the
$11,451,000 in the three months ended June 30, 2000.
Lease operating expense was $0.45 per Mcf for the three months ended
September 30, 2000 as compared to $0.39 for the prior year period and $0.46 for
three months ended June 30, 2000. The increase over the prior year period was
primarily due to continued heavy use of portable diesel-fired generators to
produce electricity for the Company's downhole water pumps. As a result of the
expanding power grid in the Company's operating areas, the Company plans to
reduce the number of generators under contract in the field. This should result
in a decrease in lease operating expense per Mcf over the next several quarters
as the Company increases the proportion of its producing wells connected to the
local electric power grid.
Gathering, compression and transportation expense was $0.68 per Mcf for the
three months ended September 30, 2000, flat with the $.68 per Mcf in the prior
year period. Production taxes increased to $0.22 per Mcf for the three months
ended September 30, 2000 compared to $0.09 per Mcf in the prior year period,
principally as a result of the 114% increase in the average realized gas price.
Depreciation, depletion and amortization was $0.31 per Mcf for three months
ended September 30, 2000, compared to $0.26 per Mcf for prior year period,
primarily due to higher capital costs for water handling operations.
<PAGE>
Pennaco Energy, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
General and administrative expenses were $1,304,000 or $0.28 per Mcf for
the three months ended September 30, 2000, almost unchanged from $1,315,000 in
the prior year period and $1,323,000 for the quarter ended June 30, 2000, but a
reduction of 15% on a per-unit basis from $0.33 per Mcf for the three months
ended June 30, 2000 due to economies of scale from higher gas production
volumes.
Financial Results for the Nine Months Ended September 30, 2000
The Company reported net income of $5,830,000 or $0.27 per share for the
nine months ended September 30, 2000, as compared to $5,456,000 or $0.31 per
share for the comparable prior year period. The prior year period included a
pre-tax gain on sale of properties of $12,431,000 in connection with the closing
of the CMS transaction. With respect to gas production, revenues and expenses,
a comparison of the nine months ended September 30, 2000, to the prior year
period is not meaningful since Pennaco's first gas sales did not occur until
late April 1999.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company had capital expenditures of approximately $67,757,000 during
the nine months ended September 30, 2000, including $23,144,000 for leasehold
acquisitions and for the purchase of 36 CBM wellbores, $27,809,000 for drilling
activities, $16,159,000 for water discharge, power and pipeline facilities, and
$645,000 for other property and equipment. A portion of the water discharge,
power and pipeline facilities are associated not only with wells drilled in 1999
and 2000, but also with future wells to be drilled over the next two years
throughout the Gillette Area and the Northern Fairway Area. Such capital
expenditures were financed by a combination of bank borrowings and cash flow
from operations.
The Company's capital spending budget for 2000 is currently $80,000,000.
The Company plans to finance the year 2000 budget through a combination of cash
flow from operations and bank borrowings. The Company plans to spend a total of
$25,000,000 on lease acquisitions which will add to near-term drilling inventory
and $55,000,000 to drill 500 net wells and to construct facilities. Of these
500 net wells, 432 were drilled as of September 30, 2000. The wells will be a
combination of joint Pennaco/CMS wells drilled in the AMI and Pennaco wells
drilled primarily in its Gillette Area.
On July 23, 1999 the Company entered into a revolving line of credit with
US Bank National Association. US Bank increased the Company's borrowing base to
$70,000,000 in October 2000, under the existing $125,000,000 credit facility, as
a result of the Company's successful drilling and production activities since
December 31, 1999. The Company's bank debt totaled $52,400,000 as of September
30, 2000.
<PAGE>
Pennaco Energy, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Should the Company's cash flow from operations or availability under its
revolving credit agreement 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (Statement No. 133), effective beginning with the first
quarter of fiscal years beginning after June 30, 2000. Statement No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company has determined that Statement No. 133 will have
an impact on its financial statements.
<PAGE>
Pennaco Energy, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk, including the effects of adverse
changes in commodity prices and interest rates as discussed below.
Commodity Price Risk
The Company's financial results are affected when prices for natural gas
fluctuate. Such effects can be significant. To manage the risks related to
commodity prices and to reduce the impact of fluctuations in prices, the Company
may from time to time enter into long-term sales contracts and financial
instruments. Under its strategy, the Company may enter into energy swaps, put
options, basis locks or other financial instruments. The Company uses its
hedging strategy to minimize its exposure to gas price changes. The Company
uses the hedge or deferral method of accounting for these activities and, as a
result, gains and losses on the related instruments are recorded as changes in
the realized prices of the commodities. When exposure to changing gas prices is
not substantially eliminated, the Company will record all payments made or
received as well as the changes in the fair market value of the financial
instruments as other income (expense).
Put Options
The Company purchased a "put option" which establishes a floor price of
$3.10 per MMBtu (CIG Rocky Mountain price) for approximately 7.5 Bcf of
production from August 1, 2000 through March 31, 2001. This put option contract
places no limit on the upside price for the Company's gas production. The cost
of the put options totaled $866,000. If the monthly closing price of CIG Rocky
Mountain gas index is below the floor price then the Company receives proceeds
equal to the difference between the floor price and the closing price. To the
extent the put options qualify as a hedge of the Company's gas sales, the cost
of the put option and proceeds, if any, received on the exercise of such are
recorded as an adjustment of natural gas revenues over the period the hedged
production is produced. To the extent the put options do not qualify as a hedge
of the Company's gas sales, the cost of the put option and proceeds, if any, as
well as changes in the fair market value of the put options, are charged to
other income (expense).
Basis Lock
The Company has entered into contracts which have locked-in the NYMEX to
CIG Rocky Mountain basis differential ("basis locks") beginning in November 2000
for each of the following: 20 MMcf per day at $0.51 per Mcf for three years, 15
MMcf per day at $0.50 per Mcf for two years and 10 MMcf per day at $.34 per Mcf
for three months. In a basis lock, the Company enters into a Pennaco Energy,
Inc.
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(continued)
contract with another party which provides for the Company to receive (pay)
funds if the closing CIG Rocky Mountain basis differential for the given month
is higher (lower) than the contract differential. This will protect the Company
from basis expansion over the next two to three years, as interstate pipeline
infrastructure expands to keep pace with growing Rocky Mountain gas supply. To
the extent the basis lock is entered into with an energy swap (discussed below)
and therefore, effectively hedges the Company's exposure to gas price
fluctuations, the payments made or received in connection with the basis lock
will be recorded as an adjustment to natural gas revenues. The change in the
fair market value of basis lock contracts entered into with no corresponding
energy swap as well as any payments made or received in connection therewith,
will be recorded as other income (expense).
Energy Swaps
The Company has fixed the price on a portion of its production over the
next 18 months using "energy swaps". In an energy swap, the Company enters into
a contract with a counterparty which provides for the Company to receive (pay)
funds if the NYMEX closing price for natural gas for the given month is lower
(higher) than the contract price. The Company will record as an adjustment to
natural gas revenues any proceeds received or payments made by the Company in
connection with the energy swaps. Utilizing the energy swaps in connection with
the basis locks as shown in the table below, the Company has fixed the price on
certain of its future gas production. For November 2000, the Company has fixed
the price on 35 MMcf per day at $4.91 per Mcf CIG. For the period December 2000
through March 2001, the Company has fixed 25 MMcf per day at $4.92 per Mcf CIG.
For the period April through October 2001, the Company has fixed 30 MMcf per day
at $4.19 per Mcf CIG. Finally, for the period November 2001 through March 2002,
the Company has fixed 12.5 MMcf per day at $4.15 per Mcf CIG.
Interest Rate Risk
The Company's credit facility is secured by mortgages on substantially all
of the Company's properties. The credit facility provides for a revolving period
ending on June 30, 2002, after which the loan is to be repaid over 48 months.
The credit facility contains certain covenants, including restrictions on
indebtedness, requirements with respect to working capital and tangible net
worth. Interest is payable at a variable rate based on LIBOR or the prime rate.
The Company's exposure to changes in interest rates results from such borrowing
with floating interest rates. At the present time, the Company has no financial
instruments in place to manage the long-term impact of changes in interest
rates.
<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 three months ended September
30, 2000.
<PAGE>
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
undersigned thereunto duly authorized.
PENNACO ENERGY, INC.
November 8, 2000 By: /s/ Paul M. Rady
----------------------------------------
Paul M. Rady, President and Chief
Executive Officer
November 8, 2000 By: /s/ Glen C. Warren, Jr.
----------------------------------------
Glen C. Warren, Jr., Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
November 8, 2000 By: /s/ Charles E. Brammeier
------------------------------------------
Charles E. Brammeier, Controller
