UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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: 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 No ___
The number of shares of the Registrant's common stock, par value $1.00 per
share, outstanding at
September 30, 2000 was 649,527 shares.
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ENERGY CORPORATION OF AMERICA
TABLE OF CONTENTS
PAGES
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2000 (unaudited) and June 30, 2000 3
Unaudited Condensed Consolidated Statements of Operations
For the three months ended September 30, 2000 and 1999 5
Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended September 30, 2000 and 1999 6
Unaudited Condensed Consolidated Statements of Comprehensive Income
For the three months ended September 30, 2000 and 1999 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
Exhibit Index 20
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------
<S> <C> <C>
SEPTEMBER 30 JUNE 30
2000 2000
(UNAUDITED) *
ASSETS
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . $ 197,957 $ 3,310
Accounts receivable, net of allowance for doubtful
accounts of $460 and $463. . . . . . . . . . . 17,659 14,467
Net utility assets held for sale 56,795
Gas in storage, at average cost. . . . . . . . . . 729 765
Prepaid and other current assets . . . . . . . . . 5,248 4,423
-------------- --------
Total current assets. . . . . . . . . . . . . . 221,593 79,760
-------------- --------
Property, plant and equipment, net of accumulated
depreciation and depletion of $94,377 and $92,106. 163,737 160,162
-------------- --------
OTHER ASSETS
Deferred financing costs, net of accumulated
amortization of $2,435 and $2,446 . . . . . . . 4,904 5,210
Notes receivable . . . . . . . . . . . . . . . . . 2,089 1,519
Other. . . . . . . . . . . . . . . . . . . . . . . 18,653 19,040
-------------- --------
Total other assets. . . . . . . . . . . . . . . 25,646 25,769
-------------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 410,976 $265,691
============== ========
<FN>
* Condensed from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
---------------------------------------------------------------------------------------
<S> <C> <C>
SEPTEMBER 30 JUNE 30
2000 2000
(UNAUDITED) *
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 19,283 $ 14,877
Short-term borrowings 2,000
Current portion of long-term debt. . . . . . . . . . . . 225 1,086
Funds held for future distribution . . . . . . . . . . . 6,313 6,280
Income taxes payable . . . . . . . . . . . . . . . . . . 54,415
Accrued taxes, other than income . . . . . . . . . . . . 12,278 6,539
-------------- ---------
Total current liabilities . . . . . . . . . . . . . . 92,514 30,782
LONG-TERM OBLIGATIONS
Long-term debt . . . . . . . . . . . . . . . . . . . . . 200,547 212,575
Gas delivery obligation and deferred trust revenue . . . 14,205 15,443
Deferred income tax liability. . . . . . . . . . . . . . 19,500
Other long-term obligation . . . . . . . . . . . . . . . 10,939 11,014
-------------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . 337,705 269,814
-------------- ---------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00; 2,000,000 shares
authorized; 730,000 and 718,000 shares issued . . . . 730 718
Class A stock, no par value; 100,000 shares authorized;
26,000 shares issued. . . . . . . . . . . . . . . . . 2,940 2,940
Additional paid in capital . . . . . . . . . . . . . . . 5,503 4,615
Retained earnings (deficit). . . . . . . . . . . . . . . 74,488 (4,833)
Treasury stock and notes receivable arising from the
issuance of common stock. . . . . . . . . . . . . . . (7,742) (7,429)
Accumulated comprehensive income (loss). . . . . . . . . (2,648) (134)
-------------- ---------
Total stockholders' equity (deficit). . . . . . . . . 73,271 (4,123)
-------------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 410,976 $265,691
============== =========
<FN>
* Condensed from audited consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial
statements.
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ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------------------------------------------------
<S> <C> <C>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30
2000 1999
REVENUES:
Gas marketing and pipeline sales. . . . . . . . . . . . . $17,607 $19,596
Oil and gas sales . . . . . . . . . . . . . . . . . . . . 7,720 5,867
Well operations and service revenues. . . . . . . . . . . 1,382 1,551
Other revenue . . . . . . . . . . . . . . . . . . . . . . 374
-------- --------
27,083 27,014
-------- --------
COST AND EXPENSES:
Gas marketing and pipeline cost . . . . . . . . . . . . . 16,886 19,112
Field operating expenses. . . . . . . . . . . . . . . . . 2,003 1,955
General and administrative. . . . . . . . . . . . . . . . 2,529 2,461
Taxes, other than income. . . . . . . . . . . . . . . . . 607 329
Depletion and depreciation, oil and gas related . . . . . 2,072 2,036
Depreciation of pipelines and equipment . . . . . . . . . 661 737
Exploration and impairment. . . . . . . . . . . . . . . . 852 1,201
-------- --------
25,610 27,831
-------- --------
Income (loss) from operations . . . . . . . . . . . . . . 1,473 (817)
-------- --------
OTHER (INCOME) EXPENSE
Interest. . . . . . . . . . . . . . . . . . . . . . . . . 5,373 5,338
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (998) (210)
-------- --------
Loss from continuing operations before income taxes. . . . . (2,902) (5,945)
Benefit from income taxes. . . . . . . . . . . . . . . . . . (1,055) (1,607)
-------- --------
Loss from continuing operations. . . . . . . . . . . . . . . (1,847) (4,338)
-------- --------
Disposal of utility operations:
Income (loss) from utility operations, net of income tax. (1,949) 33
Gain on sale of utility operations, net of income tax . . 86,457
-------- --------
Net income from disposal of utility operations. . . . . . 84,508 33
-------- --------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . $82,661 $(4,305)
======== ========
Basic and diluted earnings per common share:
Income (loss) from continuing operations. . . . . . . . . $ (2.77) $ (6.50)
Income (loss) from disposed utility operations. . . . . . (2.92) 0.05
Gain on disposal of utility . . . . . . . . . . . . . . . 129.62 -
-------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $123.93 $ (6.45)
======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations. . . . . . . . . . . . . . . . . . . . . . $ (1,847) $ (4,338)
Adjustment to reconcile net loss to net cash used by operating activities
Depletion, depreciation and amortization. . . . . . . . . . . . . . . . . . 3,039 2,973
Impairment expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 872
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (330) (160)
--------- ---------
1,549 (653)
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (299) (1,885)
Gas in storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9
Prepaid and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (543) 204
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,077 3,535
Funds held for future distributions. . . . . . . . . . . . . . . . . . . . . . 34 1,058
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,601) (832)
--------- ---------
Net cash provided by operating activities from continuing operations. . . . 252 1,436
Net cash provided (used) by operating activities from disposed operations . (5,687) (15,055)
--------- ---------
Net cash used by operating activities . . . . . . . . . . . . . . . . . . . (5,435) (13,619)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment . . . . . . . . . . . . . . . . (7,521) (3,274)
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . 589 34
Notes receivable and other . . . . . . . . . . . . . . . . . . . . . . . . . . (2,860) (1,252)
--------- ---------
Net cash used by investing activities from continuing operations. . . . . . (9,792) (4,492)
Net cash provided (used) by investing activities from disposed operations . 221,876 (15,724)
--------- ---------
Net cash provided (used) by investing activities. . . . . . . . . . . . . . 212,084 (20,216)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Principal payment on long-term debt. . . . . . . . . . . . . . . . . . . . . . (19,889) (3,270)
Principal payment on short-term borrowing. . . . . . . . . . . . . . . . . . . (2,000)
Purchase of treasury stock and other financing activities. . . . . . . . . . . (368) 2
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,340)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 -
--------- ---------
Net cash provided (used) by financing activities from continuing operations (18,542) (3,268)
Net cash provided by financing activities from disposed operations. . . . . 6,540 33,659
--------- ---------
Net cash provided (used) by financing activities. . . . . . . . . . . . . . (12,002) 30,391
--------- ---------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . 194,647 (3,444)
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . . . 3,310 12,163
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . . . . . . $197,957 $ 8,719
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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ENERGY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
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<S> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30
2000 1999
Net income (loss) . . . . . . . . . . . . . . . $82,661 $(4,305)
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment. . . 320 (134)
Marketable securities:
Unrealized period holding gain (loss) . . 87
O&G derivatives:
Net cumulative effect adjustment. . . . . (2,153)
Current period transactions . . . . . . . (1,462)
Reclassification to earnings. . . . . . . 560
-------- --------
Other comprehensive income (loss), net of tax . (2,648) (134)
-------- --------
Comprehensive income (loss) . . . . . . . . . . $80,013 $(4,439)
======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</TABLE>
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ENERGY CORPORATION OF AMERICA
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. Nature of Organization
Energy Corporation of America (the "Company") was formed in June 1993 through an
exchange of shares with the common stockholders of Eastern American Energy
Corporation ("Eastern American"). The Company is an independent energy company.
All references to the "Company" include Energy Corporation of America and its
consolidated subsidiaries.
Oil and Gas Exploration, Development, Production and Marketing - The Company,
-----------------------------------------------------------------
through its wholly owned subsidiary Eastern American, is engaged in exploration,
development and production, transportation and marketing of natural gas
primarily within the Appalachian Basin states of West Virginia, Pennsylvania and
Ohio.
The Company, through its wholly owned subsidiaries Westech Energy Corporation
and Westech Energy New Zealand, is engaged in the exploration for and production
of oil and natural gas primarily in the Rocky Mountains, New Zealand and
Australia.
2. Accounting Policies
Reference is hereby made to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, which contains a summary of major accounting
policies followed in preparation of its consolidated financial statements.
These policies were also followed in preparing the quarterly report included
herein.
Management of the Company believes that all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of the results of
such interim periods have been made. The results of operations for the period
ended September 30, 2000 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. In addition, due to
the sale of the utility operations, see Note 3, amounts in the financial
statements and related notes for all periods presented have been reclassified.
3. Disposal of Utility Operations
On August 18, 2000, the Company sold all of the stock of its wholly owned
natural gas distribution company, Mountaineer Gas Company and Subsidiaries
("Mountaineer") to a subsidiary of Allegheny Energy, Inc. ("Allegheny") for
approximately $325.7 million, which included the assumption of $100.1 million of
debt and payment of approximately $225.6 million to the Company. The Company
realized an after-tax gain of $86.5 million on this transaction. The use of the
net proceeds from the sale is subject to certain restrictions of the Company's
$200 million Senior Subordinated Notes (the "Notes").
-8-
<PAGE>
The utility operations have historically been reported as a separate segment.
As a result of the sale, its disposition is considered, for accounting purposes,
to be a discontinued operation. Accordingly, amounts in the financial
statements and related notes for all periods presented have been restated to
exclude the results of the utility operations.
The Company has also entered into a gas sale and purchase agreement with
Allegheny whereby the Company will begin the delivery of natural gas beginning
on or after July 1, 2001. The Company has received a $10 million prepayment
pursuant to the agreement, which is recorded as long term deferred revenue on
the balance sheet. Potentially, the Company has the ability to receive
additional prepayments up to $20 million, pending the ability to present a
letter of credit equal to the prepayment.
4. Earnings per Share
A reconciliation of the components of basic and diluted net loss per common
share is as follows:
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Per-Share
Loss Shares Amount
------------ ------- --------
Three months ended September 30, 2000
-------------------------------------------------
Basic and Diluted Earnings per Share
Loss from continuing operations available to
common shareholders . . . . . . . . . . . $(1,847,000) 667,009 $ (2.77)
Three months ended September 30, 1999
-------------------------------------------------
Basic and Diluted Earnings per Share
Loss from continuing operations available to
common shareholders . . . . . . . . . . . $(4,338,000) 666,968 $ (6.50)
</TABLE>
The effect of outstanding stock options during the current period was not
included in the computation of diluted earnings per share because to do so would
have been antidilutive.
5. Industry Segments
The Company's reportable business segments have been identified based on the
differences in products and service provided. Revenues for the exploration and
production segment are derived from the production and sale of natural gas and
crude oil. Revenues for the marketing and pipeline segment arise from the
marketing of both Company and third party produced natural gas volumes and the
related transportation. The Company utilizes earnings before interest, taxes,
depreciation, depletion, amortization and exploratory costs ("EBITDAX") to
evaluate the operations of each segment.
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Summarized financial information for the Company's reportable segments for
continuing operations is as follows (in thousands):
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Exploration Marketing
and and
Production Pipeline Other Consolidated
----------- ---------- -------- --------------
For the three months ended September 30, 2000
-----------------------------------------------------
Sales to unaffiliated customers. . . . . . . . . . $ 8,860 $ 17,607 $ 26,467
Intersegment revenues. . . . . . . . . . . . . . . 242 374 616
Depreciation, depletion, amortization. . . . . . . 2,396 244 93 2,733
Exploratory costs. . . . . . . . . . . . . . . . . 852 852
Operating profit (loss). . . . . . . . . . . . . . 2,083 32 (642) 1,473
Interest expense . . . . . . . . . . . . . . . . . 41 1 5,331 5,373
EBITDAX. . . . . . . . . . . . . . . . . . . . . . 5,308 (220) 967 6,055
Total assets . . . . . . . . . . . . . . . . . . . 119,306 73,863 213,444 406,613
Capital expenditures . . . . . . . . . . . . . . . 7,311 64 146 7,521
--------------------------------------------------------------------------------------------------------
For the three months ended September 30, 1999
-----------------------------------------------------
Sales to unaffiliated customers. . . . . . . . . . $ 7,418 19,596 27,014
Intersegment revenues. . . . . . . . . . . . . . . - -
Depreciation, depletion, amortization. . . . . . . 2,425 258 90 2,773
Exploratory costs. . . . . . . . . . . . . . . . . 1,201 1,201
Operating profit (loss). . . . . . . . . . . . . . 298 (177) (938) (817)
Interest expense . . . . . . . . . . . . . . . . . 14 5,324 5,338
EBITDAX. . . . . . . . . . . . . . . . . . . . . . 4,078 7 (718) 3,367
Total assets, net of utility assets held for sale. 123,848 61,351 28,393 213,592
Capital expenditures . . . . . . . . . . . . . . . 3,173 91 10 3,274
</TABLE>
Operating profit (loss) represents revenues less costs which are directly
associated with such operations. Revenues are priced and accounted for
consistently for both unaffiliated and intersegment sales. The 'Other' column
includes corporate-related items, including corporate debt, non-reportable
segments and elimination items. Included in the total assets of the exploration
and production segment are net long-lived assets located in New Zealand of $4.3
million and $3.0 million, as of September 30, 2000 and 1999, respectively and
net long-lived assets located in Australia as of September 30, 2000 totaled $0.5
million.
6. Derivative Instruments and Hedging Activities
As of July 1, 2000, the Company adopted Statement of Financial Accounting
Standards ('SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS No. 137 and No. 138. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. It
requires the recognition of all derivative instruments as assets or liabilities
in the Company's balance sheet and measurement of those instruments at fair
value. The accounting treatment of changes in fair value is dependent upon
whether or not a derivative instrument is designated as a hedge and if so, the
type of hedge. For derivatives designated as cash flow hedges, changes in fair
value are recognized in other comprehensive income until the hedged item is
recognized in earnings.
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The Company periodically hedges a portion of its oil and gas production through
futures and swap agreements. The purpose of the hedges is to provide a measure
of stability in the volatile environment of oil and gas prices and to manage its
exposure to commodity price risk under existing sales commitments. All of the
Company's price swap agreements in place are designated as cash flow hedges.
Adoption of SFAS No. 133, resulted in recording a $3.4 million, ($2.2 million
net of tax) decline in fair value to accumulated other comprehensive income,
consisting of $3.8 million to short term derivative liabilities, $0.4 million to
long term derivative liabilities and $0.8 million to short term derivative
assets. The estimated net amount of the existing losses within other
comprehensive income that are expected to be reclassified into earnings within
the next 12 months is approximately $4.8 million. The maximum length of time
over which the entity has hedged its exposure to the variability in future cash
flows is 13 months.
7. Debt
A rollforward of the debt from June 30, 2000 to September 30, 2000, is as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current
Portion Long Long Term Total Long
Term Debt Debt Term Debt
-------------- ----------- ------------
Balance at June 30, 2000. . . $ 1,086 $ 212,575 $ 213,661
Draw on revolving debt 7,000 7,000
Long term debt payment (19,889) (19,889)
Reclassify. . . . . . . . (861) 861 -
-------------- ----------- ------------
Balance at September 30, 2000 $ 225 $ 200,547 $ 200,772
============== =========== ============
</TABLE>
The Company's scheduled maturities of long term debt for each of the periods
indicated is as follows (in thousands):
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<CAPTION>
<S> <C>
For the Quarter Ending:
December 31, 2000 . . . . . $ 141
March 31, 2001. . . . . . . 28
June 30, 2001 . . . . . . . 28
September 30, 2001. . . . . 28
--------
Total current . . . . . . . 225
For the Fiscal Year Ending:
June 30, 2002 . . . . . . . 113
June 30, 2003 . . . . . . . 113
June 30, 2004 . . . . . . . 113
June 30, 2005 . . . . . . . 113
Thereafter. . . . . . . . . 200,095
--------
Total. . . . . . . . . . $200,772
========
</TABLE>
On August 18, 2000, the Company paid in full the $19.8 million then outstanding
under its revolving line of credit facility and gave notice of termination.
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<PAGE>
The Company's debt agreement related to the Notes contains certain restrictions
and conditions among which are limitations on indebtedness, dividends,
investments, and the use of proceeds from the sale of assets.
8. Contingencies
The Company is involved in various legal actions and claims arising in the
ordinary course of business. Management does not expect these matters to have a
material adverse effect on the Company's financial position.
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, Australia and New Zealand,
the effect of hedging activities, and conditions in the capital markets.
DISPOSAL OF UTILITY OPERATIONS
---------------------------------
On August 18, 2000, the Company sold all of the stock of its wholly owned
natural gas distribution company, Mountaineer to Allegheny for approximately
$325.7 million, which included the assumption of $100.1 million of debt and
payment of approximately $225.6 million to the Company. The Company realized an
after-tax gain of $86.5 million on this transaction.
-12-
<PAGE>
The financial statements have been reclassified to exclude the operating
results of this segment from continuing operations and for accounting purposes,
classify such results as discontinued operations (see Note 3). The following
discussion, unless otherwise noted, relates only to the Company's continuing
operations.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2000 AND 1999
---------------
The Company recorded a net loss from continuing operations of $1.8 million
for the three months ended September 30, 2000 compared to a net loss from
continuing operations of $4.3 million for the same period in 1999. The increase
in income of $2.5 million is attributed to the net of a $0.1 million increase in
revenue, a $2.2 million decrease in operating expenses, a $0.8 million increase
in other non-operating income and a $0.6 million decrease in income tax
benefits.
REVENUES. Total revenues increased $0.1 million or 0.3% between the periods.
--------
The net increase was due to a 10.2% decrease in gas marketing and pipeline
sales, a 31.6% increase in oil and gas sales, a 10.9% decrease in well operation
and service revenue and a 100% increase in other operating revenue.
Revenues from gas marketing and pipeline sales decreased $2.0 million from
$19.6 million during the period ended September 30, 1999 to $17.6 million during
the period ended September 30, 2000. The decrease in revenue is primarily
attributable to a 49.5% decline in marketed gas volumes from 6.3 Mmbtu to 3.2
Mmbtu, which was partially offset by a 67.5% increase in the average sales price
per Mmbtu from $2.71 for the quarter ended September 30, 1999 to $4.53 for the
quarter ended September 30, 2000. The decline in volumes for the quarter ended
September 30, 2000 was primarily attributable to the Company's decision to exit
the end-user market and not renew related contracts as they expired.
Revenues from oil and gas sales increased $1.8 million from $5.9 million
for the period ended September 30, 1999 to $7.7 million for the period ended
September 30, 2000. The increase in revenue is primarily attributable to a
57.3% increase in the average per barrel oil price from $17.25 to $27.15 and a
50.8% increase in the average per Mcf gas price from $2.70 to $4.06 between
September 30, 1999 and 2000. The Company's production volume for the three
months ended September 30, 2000 was 2.1 Bcfe, an increase of 4% as compared to
2.0 Bcfe produced in the three months ended September 30, 1999. The decline
rate for mature Appalachian Basin production from Devonian formations is
approximately 7% per year.
Revenues from well and service operations decreased $0.2 million from $1.6
million during the period ended September 30, 1999 to $1.4 million during the
period ended September 30, 2000. The decrease in revenue is primarily
attributable to the acquisition of outside partnership interests in Company
operated wells.
Revenues from other operations increased from zero during the period ended
September 30, 1999 to $0.4 million during the period ended September 30, 2000.
The increase in revenue is due to a management contract with Allegheny, whereby
the Company provides Mountaineer with management services.
COSTS AND EXPENSES. The Company's costs and expenses decreased $2.2
--------------------
million or 8.0% between the periods. The net decrease was due to an 11.7%
decrease in gas marketing and pipeline costs, an 84.5% increase in taxes other
than income and a 29.1% decrease in impairment and exploratory costs. Field
operating expenses, general and administrative expenses and depreciation,
depletion and amortization costs remained relatively constant between the
periods.
-13-
<PAGE>
Gas marketing and pipeline costs decreased $2.2 million primarily as a
result of a 49.5% decline in purchased gas volumes from 6.3 Mmbtu to 3.2 Mmbtu
from September 30, 1999 to September 30, 2000. Partially offsetting this
decline in volume was a 65.1% increase in the average price paid for gas
purchased, from $2.69 per Mmbtu to $4.44 per Mmbtu between periods.
Taxes other than income increased $0.3 million as a result of higher oil and gas
prices and volumes. The taxes are based on the wellhead price received and are
not affected by hedging activities.
Exploratory and impairment expenses decreased $0.3 million primarily due to
decreased Rocky Mountain drilling activity.
INTEREST EXPENSE. Interest expense remained relatively constant, when comparing
----------------
the periods ended September 30, 2000 to September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
The Company's financial condition changed significantly during the
three-month period ended September 30, 2000 ("current period"). The ratio of
current assets to current liabilities, excluding "net utility assets held for
sale" of $56.8 million at June 30, 2000, increased from 0.75:1 at June 30, 2000
to 2.4:1 at September 30, 2000.
The Company's cash increased from $3.3 million at June 30, 2000 to $198.0
million at September 30, 2000. The increase in cash during the quarter was a
result of the proceeds received from the sale of all of the stock of Mountaineer
on August 18, 2000 of approximately $222.7 million. This increase was offset
during the quarter by the net use of approximately $28 million of cash for
various activities of the Company. The activities were primarily comprised of;
the investment of approximately $9.8 million in property, plant and equipment
and other assets; the payment of approximately $14.9 million, net, in revolving
long-term debt and short-term debt; the payments of approximately $3.3 million
in dividends to stockholders and approximately $0.3 million for the acquisition
of treasury stock; offset by approximately $0.3 million of cash provided from
operations during the quarter.
At September 30, 2000, the Company's principal sources of liquidity consisted of
$198.0 million of cash, approximately $2.9 million to be received from Allegheny
pursuant to certain adjustments related to the sale of Mountaineer, plus $2
million available under a short-term credit facility currently in place. On
August 18, 2000, the Company paid in full the $19.8 million then outstanding
under its revolving line of credit facility. The Company also gave notice of
termination of the revolving credit facility, effective August 18, 2000. At
September 30, 2000, the Company had no amounts drawn under the short-term line
of credit facility.
Pursuant to the terms of the Company's $200 million Senior Subordinated
Notes (the "Notes") the Company has the option within 360 days of receipt of the
net proceeds from the sale of the stock of Mountaineer to apply such proceeds to
(a) reduce debt senior to or pari passu with the Notes (provided that in
connection with the reduction of pari passu debt, a pro rata portion of the
Notes is redeemed); (b) acquire a controlling interest in another business
engaged in either natural gas distribution or the exploration, development or
operation of oil, gas or other hydrocarbon properties (an "Energy Business");
(c) make capital expenditures in respect to the Company's or its restricted
subsidiaries' Energy Business; (d) purchase long term assets that are used or
useful in the Energy Business; or (e) repurchase the Notes. If the Company
elects not to apply all of the net proceeds in accordance with one of the above
options within 360 days of receipt of such proceeds, then with respect to those
net proceeds which were not applied to one of the above options, the Company
must make an offer to the holders of the Notes, (and holders of the pari passu
debt, to the extent required by the terms of the pari passu debt) to repurchase
the maximum principal amount of the Notes and any pari passu debt at an offer
price in cash equal to 100% of the principal amount thereof, plus accrued and
unpaid interest thereon to the date of the purchase.
-14-
<PAGE>
On November 9, 2000, the Company commenced a tender offer to purchase for cash
all of the Notes at a purchase price of $750 per $1,000 principal amount of
Notes plus accrued and unpaid interest. The offer to purchase the Notes will
expire on December 11, 2000. If all of the Notes are tendered the Company will
utilize $150 million of cash to make the purchases. In addition, the Company
would expect to pay an additional $20 million in income taxes on the gain on
this transaction. The Company is not able to predict the amount of Notes that
will be tendered.
To the extent that there are any net proceeds from the sale of the stock of
Mountaineer remaining after completion of the tender offer, it is the intention
of the Company to seek to reinvest such remaining net proceeds into Energy
Business assets. A component of the Company's reinvestment strategy will be to
expand its exploration and development activities, both domestically and
internationally. For fiscal year 2001, the Company plans to invest
approximately $42.4 million in capital projects. The fiscal year 2001 capital
expenditure program contemplates spending approximately $11.7 million on 27
gross (25 net) recompletions and 73 gross (60.3 net) development wells as well
as approximately $2.0 million on acquisitions of producing properties primarily
in the Appalachian Basin. In addition, the Company's fiscal year 2001 capital
spending program contemplates spending approximately $15.9 million (including
estimated completion costs) on exploratory drilling projects. These projects
include funding $12.1 million on domestic exploration drilling opportunities and
$3.8 million on international exploration drilling opportunities. This funding
program assumes drilling 14 gross (5.9 net) domestic exploration wells and 8
gross (4.6 net) international exploration wells. Other capital projects include
$5.1 million for seismic studies and for leasehold acquisitions plus $7.7
million for infrastructure projects. At September 30, 2000, the Company had
expended approximately $7.5 million of its fiscal year 2001 capital expenditure
program.
In addition to the Company's exploration and development drilling
activities associated with this reinvestment program, the Company will seek to
satisfy the reinvestment requirement by engaging in acquisitions of utility
assets or oil and natural gas reserves and properties. There can be no
assurance that the Company will be able to acquire exploration or development
drilling opportunities or to identify acquisition candidates in the required 360
day time period. Further, there can be no assurance that the drilling
activities associated with the reinvestment program will achieve commercial
success or that any future acquisitions made by the Company will achieve desired
profitability objectives.
Other than the reinvestment program described above, the timing of the Company's
capital expenditures is mostly discretionary with no material capital
expenditure commitments. However, the Company has designated certain projects
as non-deferrable commitments incurred in the normal course of business. These
include certain drilling obligations, primarily in New Zealand and Texas, of
less than $5 million, at September 30, 2000, and the satisfaction of the
obligations resulting from the draw down of $10.0 million under the gas purchase
and sale agreement. Consequently, the Company has a significant degree of
flexibility to adjust its level of its capital expenditures as circumstances
warrant.
The Company's cash requirements will fluctuate based on timing and the
extent of the interplay of the factors discussed above. Moreover, management
anticipates that although projected earnings from continuing operations before
interest charges, taxes, depreciation, depletion and amortization, and
impairment and exploratory costs ("EBITDAX") for fiscal year 2001 will increase
to $25.4 million from $4.2 million for fiscal year 2000, such results will not
be sufficient to fully fund fiscal year 2001 projected interest charges of $20.1
million and fund the Company's fiscal year 2001 capital expenditures program of
-15-
<PAGE>
$42.4 million. Based on such estimates, the Company may utilize a certain
portion of the proceeds from the sale of the stock of Mountaineer to make
capital expenditures, subject to limitations on such investments under the
Notes, if any, and may seek to raise additional capital or incur permitted
indebtedness. The availability and attractiveness of such sources of financing
will depend upon a number of factors, some of which will relate to the financial
condition and performance of the Company, and some of which will be beyond the
Company's control, such as prevailing interest rates, oil and gas prices,
weather patterns, credit agency rating reports and other market conditions. The
Company's liquidity is directly affected by such factors and the Company's cash
requirements will fluctuate based on the timing and the extent of the interplay
of these factors. However, management believes that cash generated from
continuing oil and gas operations, the use of net proceeds from the sale of the
stock of Mountaineer (as permitted under provisions of the related debt
agreements), together with the liquidity provided by existing cash balances,
permitted borrowings and by investments in new "Energy Business" assets, if any,
will be sufficient to satisfy commitments for capital expenditures, debt service
obligations, working capital needs and other cash requirements for the next
year.
The Company believes that its existing capital resources, its mitigating
management efforts, and its expected fiscal year 2001 results of operations and
cash flows from operating activities will be sufficient for the Company to
remain in compliance with the requirements of its Notes. However, since future
results of operations, cash flow from operating activities, debt service
capability, and levels and availability of capital resources and continuing
liquidity are dependent on future weather patterns, maintaining current levels
of oil and gas commodity sales prices and production volume levels, future
exploration and development drilling success and successful acquisition
transactions, no assurance can be given that the Company will not continue to
report substantial net losses from continuing operations or that debt service or
debt covenant violations will not occur. In such instances, the Company may
elect to increase permitted borrowing levels (see discussion above), restructure
debt agreements (including debt agreements with additional lenders), sell core
and non-core assets, defer discretionary capital expenditures, curtail certain
domestic and international oil and gas programs or take other actions necessary
to mitigate liquidity short-falls and debt agreement violations or acquire new
or additional capital resources, although no assurances can be given that such
actions will be successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
------- -----------------------------------------
ABOUT MARKET RISK
-----------------
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. All of the Company's debt has fixed interest
rates. The Company has not attempted to hedge the interest rate risk associated
with its debt.
COMMODITY RISK
---------------
The Company's operations consist primarily of exploring for, producing,
aggregating and selling natural gas and oil. The Company attempts to mitigate
its commodity price risk by entering into a mix of short, medium and long-term
supply contracts. 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 its commodity price risk.
Notwithstanding the above, the Company's future cash flows from gas and oil
production are exposed to significant volatility as commodity prices change.
-16-
<PAGE>
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 its 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. The Company does not
hold or issue derivative instruments for trading purposes. The Company has
elected to enter into swap transactions, covering approximately half of its
Appalachian natural gas.
FOREIGN CURRENCY TRANSLATION
------------------------------
Some transactions are denominated in New Zealand or Australian 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal actions that would materially affect the
Company's operations or financial statements.
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
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
99 Press Release
(b) Reports on Form 8-K
The Company filed a report on Form 8-K, Item 2, dated August 18, 2000 reporting
the sale of its utility operations, Mountaineer Gas Company, to Allegheny
Energy, Inc.
The Company filed a report on Form 8-K, Item 5, dated August 18, 2000 reporting
the decision to terminate its revolving credit facility with General Electric
Capital Corporation.
-18-
<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 under
signed thereunto, duly authorized, in the City of Denver, State of Colorado, on
the 14th day of November, 2000.
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
and Treasurer
-19-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
99 Press Release
-20-
<PAGE>
