SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------------
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number: 1-8490
ALAMCO, INC.
(Exact name of registrant as specified in its charter)
Delaware 55-0615701
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
200 West Main Street, Clarksburg, WV 26301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (304) 623-6671
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock - Par Value $.10 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of such stock on the American
Stock Exchange as of March 1, 1996, is set forth below:
Aggregate Market Value of the
Registrant's Voting Stock Held By
Class of Stock Non-Affiliates
--------------------------------- ---------------------------------
Common Stock, $.10 par value $41,121,302
The number of shares outstanding of the registrant's Common Stock as of
March 1, 1996 is 4,713,422 shares.
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Page 1 of 61
Index to Exhibits begins on page 57
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement in connection with its 1996
Annual Meeting of Stockholders, which is to be filed not later than
120 days after Registrant's fiscal year-end, is incorporated by
reference in Part III of this Report, except those portions of the
Proxy Statement specifically not incorporated by reference. The
report of the Compensation Committee of the Registrant's Board of
Directors and the Registrant's Performance Graph to be included
within the definitive Proxy Statement shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission or otherwise incorporated by reference in this Report.
PART I
Item 1. Business.
Alamco, Inc. (the "Company" or "Alamco") is an Appalachian-based
independent gas and oil producer actively engaged in the acquisition,
exploitation, exploration, development and production of domestic gas and oil.
Alamco's activities are conducted in West Virginia, Tennessee and Kentucky,
with an emphasis on producing natural gas for ultimate sale to customers in the
Northeast gas markets. Independent petroleum engineers estimate that the
Company's proved reserves totalled 137.1 equivalent billion cubic feet ("EBCF")
as of December 31, 1995, using a conversion of six thousand cubic feet of gas
to one barrel of oil. As of December 31, 1995, Alamco had an average ownership
interest of 86 percent in 1,156 gross wells and operated 97 percent of the
wells in which it had an ownership interest.
Alamco, a Delaware corporation, was organized in 1981 as the successor of
a privately held entity, Allegheny Land And Mineral Company ("Allegheny"),
which had been engaged in the gas and oil business since 1956, and to certain
interests in various gas and oil programs sponsored and/or operated by
Allegheny. Alamco's executive offices are located at 200 West Main Street,
Clarksburg, West Virginia 26301, and its telephone number is (304) 623-6671.
The Company and its subsidiaries currently employ approximately 96 persons on a
full time basis. The Company's Common Stock is listed on the American Stock
Exchange ("AMEX") under the trading symbol "AXO".
Certain statements contained in this report under various sections,
including but not limited to, "Management's Discussion and Analysis" and
"Markets and Customers", are forward-looking statements that involve risks and
uncertainties. Such statements are subject to important factors that could
cause actual results to differ from those contemplated by such statements.
These factors include, without limitation, the results of exploratory and
development drilling; the successful acquisition of producing properties; a
change in the price received for gas and/or oil; the demand for and supply of
gas and oil; the weather; pipeline capacity; general economic conditions;
governmental regulation; changes in interest rates; competitors of Alamco having
greater resources than those of the Company; or other unanticipated external
developments materially impacting the Company's operational and financial
performance.
BUSINESS STRATEGY
Alamco's business strategy is to build stockholder value through the
efficient growth of its gas and oil reserves and production in the Appalachian
Basin while pursuing complementary business lines. To accomplish this
strategy, the Company will continue to focus on increasing its gas and oil
reserves through development and exploratory drilling, property acquisitions,
and infrastructure development, including the installation of pipelines in areas
in Kentucky and Tennessee where successful exploration has occurred. Using this
strategy, the Company's reserves have increased in each of the past four years.
Estimated reserves of 137.1 EBCF at December 31, 1995, compare favorably to
estimated reserves of 128.0 EBCF, 88.0 EBCF and 64.1 EBCF as of December 31,
1994, 1993 and 1992, respectively.
The Company intends to continue to focus its activities in the Appalachian
Basin, which is geographically one of the largest and oldest gas and oil
producing regions in the United States. Alamco and other operators in the
Appalachian Basin have historically experienced high drilling success rates in
the formations in the Basin, with wells generally producing for more than 25
years, although at low production volumes. The Company has been nationally
recognized as a leader in finding reserves at a lower cost than its competitors
and will continue to strive to keep its finding costs low in this phase of
expansion of its gas and oil reserve base. Alamco may expand its area of
operations into other producing basins if management believes such an expansion
is beneficial to the Company.
The Company develops reserves by drilling wells and recompleting
previously drilled wells to prove the existence of gas and oil reservoirs.
Drilling activities are currently carried out in West Virginia, Tennessee and
Kentucky. Exploration, coupled with development of new discoveries and
infrastructure development in Kentucky and Tennessee, will further lay the
groundwork for long-term expansion of Alamco's gas and oil reserves.
Exploitation programs may add to the Company's reserves because of the
upward revision in the estimate of existing producing properties' reserves from
the prior year's reserve estimate. Upward revisions in prior years have been
due to, among other things, the Company's effort to maximize productive
capability through enhanced operating techniques and, thus, an increase in
ultimate recoverable reserves by reducing reservoir abandonment pressures and
increasing the well drainage area of its existing producing properties.
Alamco is focusing more on diversification of business lines by entering
into certain oil field-related service businesses. In addition to providing
these services for itself, the Company intends to make the services available to
others in the gas and oil industry. HAWG HAULING & DISPOSAL, INC. ("HAWG"), a
brine hauling and disposal service, is a wholly-owned subsidiary of the Company
and Phoenix-Alamco Ventures, a Limited Liability Company ("PAV"), which is owned
jointly by the Company and Phoenix Energy Sales Company ("Phoenix"), is engaged
in the marketing of Alamco's and other working interest owners' gas. Revenues
generated by HAWG and PAV were approximately 1 percent of total revenues in
1995. Alamco installed its first pipeline in 1995 from southern Kentucky into
Tennessee to interconnect with a local gas utility's distribution system. In
1996, Alamco plans to install a $1.6 million pipeline in Tennessee to enable the
Company to increase its flexibility in marketing gas and to improve gas sales
prices. The Company may also transport third-party gas in order to generate
additional revenues in the future.
Alamco actively pursues the acquisition of producing properties that will
enhance the Company's revenue base without proportional increases in overhead
costs. The Company focuses its attention on Appalachian Basin properties in
which it will have a significant ownership interest and will serve as operator.
In addition to the acquisition of properties owned and operated by third
parties, Alamco will continue to evaluate the purchase of outside investors'
interests in wells operated by the Company.
GAS AND OIL EXPLORATION AND DEVELOPMENT ACTIVITIES
At December 31, 1995, Alamco's proved reserves totalled 137.1 EBCF,
representing a 9.1 EBCF increase from year-end 1994 reserves. Based on these
reserve additions, the Company replaced 250 percent of the 5.9 EBCF it sold
during 1995. Alamco invested $7,501,000 in gas and oil exploration and
development activities during the year, including $1,384,000 in producing
property acquisitions. Internally generated cash flows and amounts drawn from
the Company's revolving credit facility with Bank One, Texas, N.A. ("Bank One")
funded the capital investment program.
DRILLING ACTIVITIES
Early in 1995, Alamco suspended drilling activities due to decreasing gas
prices and the potential risk that gas prices would remain low for an extended
period of time. During the summer of 1995, gas prices began to improve and
storage injections for the upcoming winter were running lower than the prior
year. This increased the probability of substantially higher gas prices in the
upcoming winter heating season, especially in the event of a normal or colder
than normal winter which did indeed occur. As a result of these factors, the
Company restarted its 1995 drilling program in early September.
A total of 11.5 EBCF was added to the Company's reserves as a result of
the 1995 drilling program. Alamco invested $5,385,000 or 72 percent of its gas
and oil exploration and development expenditures in the drilling of 15.5 net
wells, of which 14 net wells were successful. Alamco drilled seven, five and
four gross wells in West Virginia, Kentucky and Tennessee, respectively.
All of the wells drilled in West Virginia were drilled in the South Burns
Chapel Field in Monongalia and Preston Counties, including five wells drilled to
the deep Oriskany Formation and two wells to the shallower Fourth Sand.
Three of the five wells drilled in Kentucky were located in the Company's
South Key Rock Prospect. Alamco believes that it made a significant discovery
in the Big Lime formation with the first exploratory well drilled on the
prospect, which was followed by two development wells. The three wells in
aggregate have increased the Company's 1996 equivalent gas production levels
over 10 percent from 1995 average levels. The remaining two wells drilled in
Kentucky on the Douglas and Hoffman Prospects, both exploratory, resulted in dry
holes. The expenditures associated with these two unsuccessful exploratory
wells are reflected in Alamco's 1995 statement of income as exploration
expense.
All four of the wells drilled in Tennessee were drilled on the Company's
Carden Prospect. One of these wells produces oil from the Big Lime formation
while the remaining three continue to be evaluated for the feasibility of
commercial development of the Chattanooga Shale on the prospect.
The 14.0 net productive wells drilled in 1995 are a decrease from the 38.0
and 26.0 net wells drilled in 1994 and 1993, respectively. A number of
additional prospects have been identified on Company-held acreage in the South
Burns Chapel Field in West Virginia, in both the Days Chapel Field and the
Carden Prospect in Tennessee, and in the Key Rock Prospect in Kentucky. (See
"Future Activities").
DRILLING SUMMARY
Gross Wells Net Wells
Pro- Dry Total Pro- Dry Total
ductive ductive
1995 14 2 16 14.0 1.5 15.5
1994 38 9 47 38.0 8.7 46.7
1993 28 3 31 26.0 3.0 29.0
RECOMPLETION ACTIVITIES
Alamco invested $314,000, or 4 percent of its gas and oil exploration and
development expenditures, in five recompletion projects during 1995 as compared
to $266,000 and $119,000 in 1994 and 1993, respectively. One recompletion
attempt was successful. Four of the recompletion attempts were located in
Kentucky and one in West Virginia. The Company believes its inventory of wells
contains a significant number of recompletion candidates.
RECOMPLETION SUMMARY
Gross Wells Net Wells
Pro- Dry Total Pro- Dry Total
ductive ductive
1995 1 4 5 1.0 4.0 5.0
1994 2 3 5 2.0 3.0 5.0
1993 - 2 2 - 2.0 2.0
ACQUISITION ACTIVITIES
In 1995, Alamco invested $1,384,000, or 18 percent, of its gas and oil
development expenditures, in the acquisition of 77.1 net wells. The acquisition
activities added 5.5 EBCF to the Company's reserves. The program involved the
acquisition of outside investors' interests in wells operated by Alamco.
NET WELLS ACQUIRED
Third Party Outside Investors' Interest in
Operated Wells Alamco Operated Wells Total
1995 -- 77.1 77.1
1994 71.0 101.6 172.6
1993 -- 24.9 24.9
INFRASTRUCTURE DEVELOPMENT
To move the South Key Rock gas to market, the Company installed its first
pipeline from Southern Kentucky into Tennessee to interconnect with a local gas
utility's distribution system. Alamco invested $190,000, or 3 percent, of its
gas and oil development expenditures, to complete this pipeline.
GAS AND OIL PRODUCTION AND SALES
In 1995, gas sales accounted for 89 percent of Alamco's total gas and oil
sales. The average 1995 sales price received by the Company was $1.92 per MMBtu
($2.10 per MCF) for gas and $15.90 per barrel for oil. Gas prices were lower in
1995 than in recent years and financial results were adversely affected by these
prices. The following table sets forth the Company's sales volumes and other
information for each of the years ended December 31, 1995, 1994 and 1993.
PRODUCTION AND SALES STATISTICS
Year Ended December 31,
1995 1994 1993
Net Production:
Gas (MCF) 5,363,664 4,404,187 3,197,056
Oil (BBL) 87,573 67,749 37,409
Equivalent (MCF)(a) 5,889,102 4,810,681 3,421,510
Average Production Per Day:
Gas (MCF) 14,695 12,066 8,759
Oil (BBL) 240 186 102
Equivalent (MCF)(a) 16,135 13,180 9,374
Average Sales Price:
Per MCF of Gas $2.10 $2.50 $2.79
Per BBL of Oil $15.90 $14.52 $16.01
Average Cost of Production:
Per MCF of Gas $0.62 $0.60 $0.60
Per BBL of Oil $4.31 $3.67 $4.30
Average Cost of Production
Per Dollar of Sales:
Gas $0.30 $0.24 $0.21
Oil $0.27 $0.25 $0.27
(a) Oil production is converted to gas equivalents at a rate of 6 MCF per
barrel.
WELL TENDING SERVICES
In the aggregate, as of December 31, 1995, Alamco owns approximately 86
percent of all Company operated wells, with the remaining 14 percent being held
by outside investors. The Company charges a monthly fee for well operation
services and each outside investor pays a proportional share based on his
ownership percentage. For most of 1995, the monthly fees were $337 per well for
gas wells and $409 per well for oil wells compared to monthly charges in 1994 of
$323 per well for most gas wells and $392 per well for most oil wells. In 1995,
about 151 wells were not subject to the monthly operating fee due to temporary
abandonments. The well tending income which the Company generates from these
fees accounted for approximately 4.7 percent, 9.0 percent, and 18.3 percent of
the Company's revenues in 1995, 1994 and 1993, respectively. Well tending
income has decreased and is expected to continue to decrease as Alamco purchases
the interests of outside investors in Company operated wells.
Effective March 1, 1994, Alamco exchanged its interests in approximately
141 gross wells for outside investors' interests in approximately 237 gross
wells located in West Virginia. Well tending income was substantially reduced
because this like-kind exchange reduced the number of wells that the Company
operates for outside investors. Alamco believes, however, that this reduction
in well tending income will be offset over time by the effect of higher gas and
oil revenues attributable to the Company's greater ownership interest in the
wells.
BRINE HAULING AND DISPOSAL SERVICES
HAWG, a wholly-owned subsidiary, is a commercial brine hauling and
disposal service company originally formed to provide service for Company-
operated wells. The service entails, for a fee, the transportation of brine to
a central processing facility and injection of the brine into disposal wells.
The subsidiary now accepts brine, which is produced naturally with gas and oil,
from wells operated by the Company as well as from other operators in West
Virginia. HAWG currently operates two commercial disposal wells and facilities
in West Virginia and has preliminary plans to convert another in 1996. Alamco
invested $228,000 in converting one well and enhancing another in 1995. In
1995, HAWG provided 0.5 percent of Alamco's total revenues.
GAS MARKETING
As a response to the changing gas marketing environment, in October of
1993 the Company formed PAV with Phoenix, a gas marketing company. PAV provides
gas marketing services to Alamco and other interest owners in certain Alamco
operated wells. PAV has the exclusive right to market approximately 55 percent
of Alamco's West Virginia gas supply. PAV seeks diversification for Alamco's
gas sales to other marketing entities, local distribution companies and
industrial users with a combination of short-term deals (less than a month),
mid-term deals (one month to one year) and long-term deals (one year or more).
In 1995 and 1994, PAV provided 0.5 and 1.0 percent, respectively, of the
Company's total revenues.
While Alamco's share of the profits from PAV have not been significant,
the prices received for gas sales marketed through PAV have been on average
above that which the Company would likely have otherwise received.
FUTURE ACTIVITIES
In the future, Alamco intends to use internally generated cash flows and
amounts available under the Company's $30.0 million revolving bank credit
facility to fund the exploration and development of its gas and oil reserves and
property acquisitions. As of March 12, 1996, $14.6 million was available for
borrowing under this credit facility.
Alamco's 1996 capital investment program will ultimately depend upon the
market and prices received for natural gas, the success of its exploration and
development prospects, and the ability of the Company to capitalize on
acquisition opportunities that may arise during the year. Drilling activity
will be expanded in 1996 to an estimated 30 wells. Approximately 27 wells will
be drilled as development wells at South Burns Chapel in West Virginia and at
the Company's recent discoveries at the South Key Rock Prospect in Kentucky and
its Carden prospect in Tennessee. Up to three exploratory wells are anticipated
at prospects in Kentucky and Tennessee. Alamco plans to install a 17 mile
pipeline system that will connect most of its Kentucky and Tennessee wells and
transport the gas to a local gas utility, which is expected to result in higher
sales prices. Alamco will continue with its aggressive acreage acquisition
strategy in order increase its exposure to attractive exploratory and
development drilling. Alamco remains committed to the acquisition of producing
properties at favorable prices.
MARKETS AND CUSTOMERS
General.
Alamco operates exclusively in the gas and oil industry.
Sales through PAV and to Hope Gas, Inc. ("Hope") accounted for a
substantial portion of the Company's total 1995 gas and oil sales. Alamco sold
44.2 percent of its gas and oil sales through PAV to various marketers, local
distribution companies and commercial users. Additionally, sales to Hope
accounted for approximately 28.9 percent of the Company's total 1995 gas and oil
sales.
West Virginia Production.
Alamco's West Virginia production in 1995 was approximately 92 percent of
total Company gas and oil sales.
PAV. In 1993, Alamco entered into a three year gas marketing agreement
with PAV for all gas transported on the CNG Transmission Corporation ("CNG")
pipeline system and all gas on the Columbia Gas Transmission Corporation
("Columbia") pipeline system, which will expire on November 1, 1996. Volumes
sold in 1995 through PAV on the CNG and the Columbia systems totalled
approximately 2.7 BCF. The average price received from sales to PAV was $1.81
per MMBTU ($2.06 per MCF) in 1995. The Company is currently discussing a
possible extension of the agreement.
Hope. Hope purchases all of the Company's production from the South Burns
Chapel Field under two separate gas purchase agreements, with terms continuing
through October 31, 1999. Both agreements were renegotiated effective
November 1, 1995, and have price reopeners on October 31, 1998. Total volumes
sold to Hope in 1995 were approximately 1.7 BCF at an average price of $2.18 per
MMBtu ($2.18 per MCF). While the loss of this customer could have a material
adverse effect on the Company, management believes alternative customers could
be located.
Approximately 60 percent of the Company's production at South Burns Chapel
is sold at a fixed price, modified from the prior agreement under which prices
were based on an Appalachian index price. The remaining 40 percent of the South
Burns Chapel Field gas is sold at prices tied to a monthly Appalachian index.
Other. Effective March 1, 1995, Alamco permitted CNG to recommence
recoupment of gas from its Tallmansville, West Virginia Field as a result of a
$3,800,000 prepayment made in 1989 for 1,565,000 MMBTU of gas. This volumetric
obligation was fulfilled in December 1995. Since this recoupment was fulfilled,
the Company will sell the remaining gas from the Tallmansville Field to PAV.
Alamco sells its other West Virginia gas production to various purchasers
that are not significant to the Company's revenue base.
Tennessee Production.
Alamco's Tennessee production in 1995 was approximately 4 percent of total
Company gas and oil sales. The Company is currently selling the gas production
from its Tennessee operations at the Days Chapel Field to Equitable Resources
Marketing Company. This is a month-to-month contract with market-sensitive
pricing tied to Gulf Coast prices, less transportation and compression charges.
For 1995, the net-back price (reduced for transportation) on volumes of
approximately 291,000 MCF averaged $1.18 per MMBTU ($1.40 per MCF). The Company
believes that this price can be improved with the installation of a new pipeline
in this area. (See "Infrastructure Development").
Kentucky Production.
Alamco's Kentucky production in 1995 was approximately 4 percent of total
Company gas and oil sales. All of Alamco's production from its Kentucky
operations is sold on the spot market or under term contracts providing for
fixed or market-sensitive prices. Approximately 29 percent of the Company's
Kentucky production is sold to one buyer under a contract which dedicates the
gas for the life of the wells, but which still involves market-sensitive
pricing. Company sales of Kentucky production totalled 252,000 MCF and averaged
$1.55 per MMBTU ($1.77 per MCF) in 1995. Alamco installed a new pipeline in
Kentucky in 1995 which is expected to improve gas prices.
Principal Transporters.
Most of Alamco's gas is transported though the CNG, Hope, Columbia, Texas
Eastern and Wiser Oil Company pipeline systems which give Alamco access to major
Northeastern markets. With the exception of the Kentucky production, each of
the Company's major gas production areas and leases is in close proximity to at
least one of those pipelines. A relatively minor amount of the Company's gas is
transported on other pipeline systems.
Oil Sales.
Alamco's oil production is sold to various purchasers under agreements at
posted field prices. These sales, which accounted for 11 percent of the
Company's total gas and oil sales, averaged $15.90 per BBL in 1995.
Marketing Risks.
During the last several years, the gas industry has been adversely
affected by a surplus, which has tended to depress prices and has created
difficulty in estimating future prices. The Company is unable to predict with
certainty the future stability or direction of natural gas prices.
The availability of a ready market for Alamco's gas and oil depends on
numerous factors beyond its control, including, among other factors, the demand
for and supply of gas and oil; the weather; the proximity of the Company's
natural gas reserves to pipelines; the capacity of such pipelines; the
cooperation of pipeline owners; general economic conditions; fluctuations in
seasonal demand and the effects of inclement weather and governmental
regulation. In addition, under certain gas purchase arrangements the Company is
subject to the risk of periodic reduced purchases or access to pipelines. Any
significant reduction or curtailment of production for an extended period of
time could have a material adverse effect on Alamco's results of operations.
COMPETITION
Alamco operates in a highly competitive environment. Competition is
particularly intense with regard to the acquisition of producing properties and,
to a lesser extent, undeveloped acreage. Integrated and independent gas and oil
companies, partnerships and drilling programs, each with financial and human
resources substantially in excess of those available to the Company, compete
with Alamco, actively bidding for desirable gas and oil properties. The ability
of the Company to add to its reserves in the future will be dependent on its
ability to exploit its current lease holdings and its ability to select and
acquire suitable producing properties and prospects for future exploration and
development.
Similarly, there is intense competition not only from other gas production
entities, but also from other marketing firms, which have the capabilities to
seek out and serve various customers. Although the Company has historically
enjoyed a price premium over Gulf Coast gas production (as do others in the
Appalachian Basin) due to the proximity of its production to major Northeast
markets, deregulation of the industry and the advent of open access
transportation on interstate pipelines have until recently caused an erosion of
this premium. Colder than normal weather this winter (1995-1996) has caused the
price premium for Appalachian gas to increase substantially. There can be no
assurance, however, that this price premium will continue.
REGULATION
General. The gas and oil industry is extensively regulated by federal,
state and local authorities, with legislation affecting the industry under
constant review for changes and/or expansion, particularly with regard to
environmental issues. Numerous agencies, both federal and state, have issued
rules and regulations, some of which carry substantial penalties for failure to
comply, binding on the industry and its members. To date, these mandates have
had no material effect on the Company's capital expenditures, earnings or
competitive position. Inasmuch as new legislation affecting the gas and oil
industry is commonplace and existing laws and regulations are frequently amended
or reinterpreted, Alamco is unable to predict the future cost or impact of
complying with such laws and regulations.
Environmental. The Company's operations are subject to various federal
and state statutes, rules and regulations regarding the control of discharging
materials into, or otherwise protecting, the environment. These requirements
relate to drilling and production operations, activities in connection with
storage and transportation of gas and oil and facilities used for treating,
processing, injecting and handling the wastes therefrom. Additionally, in the
case of spills or other impermissible discharges of certain materials into the
environment, there are provisions for record keeping, notification and
reporting, as well as severe civil and criminal penalties for violations, and
potential liability for the costs of cleanup and any resultant damages.
Further, the possibility exists that certain gas and oil wastes may be
classified as hazardous or semi-hazardous, which could impose substantial
obligations on the Company. Alamco does not believe that its compliance with
current environmental laws constitutes a material expense. The Company has
retained the services of an independent environmental engineering firm to assist
with compliance matters on an as-needed basis. (See Part I, Item 3. Legal
Proceedings.)
Federal Regulation. As a result of the Wellhead Decontrol Act of 1989,
all price controls for various classifications of gas were terminated as of
January 1, 1993. This has had no impact on Alamco's gas sales since its
reserves were either previously deregulated or sold under contracts with
alternate pricing.
FERC Order 636, issued in 1992, generally required the unbundling or
separating of various components of pipelines services, i.e., gathering,
transportation, storage and sales. Thus far, it appears to have resulted in
increased competition in the marketing of natural gas and could cause increased
costs for services the Company uses and decreased costs for services utilized by
producers in the Gulf Coast and Southwest regions.
Occupational and Safety Regulations. Alamco is subject to the
requirements of the Occupational Safety and Health Act ("OSHA"), as well as
other state and local labor rules and regulations. The cost of compliance with
health and safety requirements has had no material impact on Alamco's aggregate
production expenses to date. Nevertheless, the Company is unable to predict the
cost of continued compliance.
State Regulation. State regulatory authorities have established laws,
rules and regulations requiring, among other matters, permits for drilling and
recompletion operations, drilling and operating bonds or bank letters of credit,
and reports concerning operations. Further, there are statutes and regulations
governing the unitization or pooling of oil and gas leases, the spacing of wells
and plugging requirements for abandoned wells. To date, these requirements have
had no material effect on the Company's operations and the cost of compliance
has been minimal. Future regulations could, however, increase the cost of the
Company's production operations.
Brine Hauling and Disposal Services. In order to comply in an economical
manner with regulations governing the disposal of salt water, Alamco began
operating its own salt water disposal well in 1992 to dispose of water from its
own wells. In 1993, the Company formed a new subsidiary, HAWG, which is
responsible for the transportation and disposal of the water. Since then, HAWG
has begun operating a second commercial disposal well with permits pending for
additional wells in West Virginia. HAWG has been expanding its marketing
efforts in order to add customers to dispose of other producers' water.
Currently, however, revenues which Alamco receives from HAWG are immaterial.
OPERATIONAL HAZARDS AND INSURANCE
Alamco's operations are subject to the usual hazards incident to the
exploration for and production of gas and oil, such as blowouts, cratering,
abnormally pressured formations, explosions, uncontrollable flows of oil, gas or
well fluids into the environment, fires, pollution and other environmental
hazards and risks. These hazards could result in substantial losses to the
Company due to personal injury and loss of life, severe damage to and
destruction of property and equipment, pollution or environmental damage or
suspension of operations.
Expenditures made in 1995 due to environmental claims which were
unreimbursed by insurance carriers were immaterial.
While Alamco maintains levels of insurance which it believes to be
customary in the industry, the Company's insurance does not cover every
potential risk associated with the drilling and production of gas and oil
wells. The occurrence of a significant adverse event, the risks of which are
not fully covered by insurance, could have a material adverse effect on the
Company's financial condition and results of operations. Moreover, no
assurance can be given that Alamco will be able to maintain adequate insurance
in the future at rates it considers reasonable.
Item 2. Properties.
Alamco's properties consist essentially of the working and royalty
interests owned by the Company in various gas and oil leases which are located
in West Virginia, Tennessee and Kentucky. Alamco's proved reserves for the
years ended December 31, 1995, 1994 and 1993 are presented below:
Year Ended December 31,
1995 1994 1993
Natural Gas (MMCF)
Developed 97,169 85,654 56,559
Undeveloped 30,124 33,971 26,059
Total Proved 127,293 119,625 82,618
Crude Oil (MBBL)
Developed 1,405 1,164 605
Undeveloped 231 235 292
Total Proved 1,636 1,399 897
These estimates are based primarily on the reports of independent
petroleum and geological engineers. Such reports are, by their very nature,
inexact and subject to changes and revisions. Proved developed reserves are
reserves expected to be recovered from existing wells with existing equipment
and operating methods. Proved undeveloped reserves are expected to be recovered
from new wells drilled to known reservoirs on undrilled acreage for which the
existence and recoverability of such reserves can be estimated with reasonable
certainty, or from existing wells where a relatively major expenditure is
required to establish production. No estimates of reserves have been included
in reports to any federal agency other than the Securities and Exchange
Commission and the Department of Energy (Note 14).
WELL COUNT
Alamco obtained gas and oil sales revenues from 1,005 wells as of December
31, 1995. The Company is the operator of an additional 151 wells that are
currently temporarily abandoned. The majority of Alamco's producing wells,
located in northern and central West Virginia, are shallow wells drilled to a
depth of up to 6,000 feet and are characterized by long producing lives with low
volume production from low permeability reservoirs with a thickness ranging from
10 to 40 feet. A typical shallow well will encounter commercial gas production
from between 4 and 10 separate and distinct production horizons. Approximately
936 of the Company's wells produce from one or more of these "blanket"
formations that cover large areas of northern and central West Virginia. Due to
mechanical and technical constraints, it is usually possible to produce only up
to three to five of these formations simultaneously, and, consequently, it is
necessary either to drill a twin well or recomplete the original well at a later
date in order to obtain production from the remaining formations.
A significant production horizon below 6,000 feet in Alamco's West
Virginia operations is the Oriskany/Huntersville Chert formation. Deeper wells
in this formation exhibit higher pressure and productivity than wells in the
shallow West Virginia formations and reservoirs have thicknesses of up to 125
feet.
Alamco's Tennessee production is from the Big Lime formation, an oil
reservoir that also produces casinghead gas. Big Lime wells are typically
characterized by low production volumes (5 to 35 barrels of production per day)
from low pressure and low permeability reservoirs varying in thickness from 10
to 40 feet. The Tennessee exploratory drilling program found production in the
Chattanooga Shale and the Company is still evaluating the long-term
commerciality of the shale.
In Kentucky, Alamco's production is from numerous zones, including the Big
Lime, Coniferous, Maxton and Knox formations. These oil and gas reservoirs,
like many other Appalachian formations, are characterized by low productive
volumes with long producing lives.
WELLS AT DECEMBER 31, 1995
Gross Wells Net Wells
Gas Oil Total Gas Oil Total
West Virginia 946 59 1,005 806.6 55.1 861.7
Tennessee 8 69 77 6.8 59.1 65.9
Kentucky 51 23 74 47.2 21.8 69.0
Total 1,005 151 1,156 860.6 136.0 996.6
Note: Many of Alamco's wells produce both gas and oil. For purposes of
computing the above data, the gas well versus oil well designations were
made on the basis of the type of artificial lift installed on the well.
PROSPECTS
Alamco's producing wells hold approximately 126,000 gross acres under
lease which the Company believes includes a substantial number of promising
development prospects. The prospects include continued development of the South
Key Rock Prospect in Kentucky, the Carden Chattanooga Shale Prospect in
Tennessee and the South Burns Chapel Field in West Virginia.
Also, at December 31, 1995, Alamco held leases which have not yet been
explored for the existence of gas and oil reservoirs. The Company may drill
wells on the acreage to determine the existence of productive reservoirs, sell
the leases to another gas and oil operator or abandon the acreage upon the
expiration of the lease term.
LEASE POSITION AT DECEMBER 31, 1995
Developed Acreage Undeveloped Acreage
Gross Net Gross Net
Acres Acres Acres Acres
West Virginia 77,908 65,776 16,748 15,239
Tennessee 6,156 6,156 9,264 9,264
Kentucky 42,059 42,059 35,451 35,451
Total 126,123 113,991 61,463 59,954
TITLE TO PROPERTIES
Substantially all of Alamco's property interests are held pursuant to
leases from third parties. Title to properties is subject to royalty,
overriding royalty, carried, net profits, working and other similar interests
and contractual arrangements customary in the gas and oil industry, liens
incident to operating agreements, liens relating to amounts owed to the
operator, liens for current taxes not yet due and other encumbrances. The
Company believes that such burdens neither materially detract from the value of
such properties nor from the respective interests therein, or materially
interfere with its use in the operation of the business.
As is customary in the industry, little investigation of record title is
made at the time of lease acquisition (other than a preliminary review of local
records) in regard to undeveloped properties. Investigations, including a title
opinion of local counsel, are generally made prior to the consummation of an
acquisition of larger producing properties and before commencement of drilling
operations.
OTHER PROPERTY
In addition to gas and oil properties, Alamco's property and equipment
includes field warehouses, service (workover) rigs and support vehicles. All of
the Company's assets collateralize its indebtedness under its revolving bank
credit facility. See Note 6 to the Company's Notes to Consolidated Financial
Statements. The Company's executive offices, approximately 20,000 square feet,
were purchased on January 5, and February 7, 1996 for $561,000 using funds
borrowed from the Bank One credit facility. Prior to the purchase, Alamco
leased the same executive offices.
Item 3. Legal Proceedings.
Alamco is not at this date a party to any pending legal proceeding, other
than ordinary, routine litigation incidental to the business of the Company and
its subsidiaries, none of which is material. See Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 4 for
information related to amounts received by the Company from Columbia arising out
of the settlement of various gas purchase claims.
On May 23, 1994, the United States Environmental Protection Agency (the
"EPA") issued an administrative complaint against the Company for alleged
violations of the Clean Water Act resulting from an oil discharge at Alamco's
Days Chapel Field in Claiborne County, Tennessee. The incident occurred in
December 1993 when vandals severed locks securing the valves on the Company's
oil storage tanks and discharged approximately 174 barrels of oil into a local
creek.
The EPA initially proposed that penalties of nearly $124,000 be assessed
against the Company. However, the Company contends that the asserted penalties
exceed the statutorily authorized limits. Settlement negotiations are ongoing
and Alamco believes that, due to meritorious defenses, any final penalties will
be substantially less than those proposed although no assurances can be given as
to the exact amount of any final penalties.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of Alamco's stockholders during
the quarter ended December 31, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position
John L. Schwager 47 President, Chief Executive Officer and Director
Executive Vice President, Chief Operating Officer
Richard R. Hoffman 45 and Director
Bridget D. Furbee 36 Vice President of Administration and Legal Affairs
No family relationship exists among any of the Company's executive officers or
directors.
John L. Schwager has been President and Chief Executive Officer of Alamco
since October 1987. Mr. Schwager was elected a director in 1986.
Richard R. Hoffman became Alamco's Executive Vice President and Chief
Operating Officer on December 13, 1990. Mr. Hoffman was elected a director in
1988.
Bridget D. Furbee has been Vice President, Administration and Legal
Affairs of Alamco since May 1994. Ms. Furbee served as Manager, Gas Marketing
and Legal Affairs from August 1992 through April 1994, and Gas Marketing/Office
Administration Manager from January 1985 through July 1992.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Alamco's Common Stock is listed on the American Stock Exchange under the
trading symbol "AXO". The following table sets forth for the periods indicated
the high and low sales price of the Common Stock for each quarter in 1995 and
1994.
1995 1994
Quarter High Low High Low
First 6-3/8 5-5/8 7-1/2 6-3/8
Second 8-3/4 6 7-3/4 6-1/8
Third 8-15/16 7-1/2 7-3/8 6-1/4
Fourth 8-1/2 7-5/8 6-3/4 5-1/2
As of March 1, 1996, there were approximately 1,349 holders of the
Company's voting Common Stock. Since its incorporation in 1981, Alamco has not
declared or paid any dividends with respect to the Company's Common Stock.
Alamco presently intends to retain its funds for operations and expansion of its
business and does not expect to pay any cash dividends in the foreseeable
future. While the Company is not currently prohibited in its credit agreement
with Bank One from paying cash dividends, certain financial covenants may,
however, restrict such payments in the future. Subject to the terms of the
credit agreement, the declaration and payment by Alamco of any dividends on its
Common Stock in the future and the amount thereof will, nevertheless, depend
upon the Company's operating results, financial condition, cash requirements,
future prospects, and other factors deemed relevant by the Company's Board of
Directors.
Item 6. Selected Financial Data
The information below should be read in conjunction with the Consolidated
Financial Statements and the related notes in Item 8 and in Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Year Ended December 31,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
STATEMENT OF INCOME
DATA:
Revenues (a) $18,539 $13,671 $11,900 $11,350 $9,653
Income (loss) from
operations 2,580 1,625 2,074 1,181 (180)
Income before
extraordinary
items and change in
DD&A accounting
principle 1,695 1,646 1,552 939 288
Extraordinary items (b) -- -- -- -- 404
Change in DD&A
accounting
principle (c) -- -- -- 1,058 --
------- ------- ------- ------- ------
Net income 1,695 1,646 1,552 1,997 692
------- ------- ------- ------- ------
Cash dividends -- -- -- -- --
BALANCE SHEET DATA:
Total assets $59,762 $56,058 $43,261 $40,237 $37,213
Working capital 827 835 1,321 2,475 2,214
Total long-term debt (d) 13,707 12,995 1,003 9,561 10,306
Stockholders' equity (d) 30,343 28,475 26,743 15,222 13,152
Year Ended December 31,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
PER SHARE DATA:
Income (loss) from
operations: $.55 $.35 $ .60 $ .46 ($.07)
Income before
extraordinary
items and
change in DD&A
accounting principle .55 .35 .45 .37 .11
Extraordinary items (b) -- -- -- -- .16
Change in DD&A
accounting
principle (c) -- -- -- .41 --
----- ----- ----- ----- -----
Net income $.36 $.35 $ .45 $ .78 $ .27
----- ----- ----- ----- -----
FINANCIAL RATIO DATA:
Book value per share
(c) and (d) $6.46 $6.12 $5.77 $5.94 $5.18
Total debt to
stockholders' equity (d) .4 .5 -- .6 .8
Current ratio 1.1 1.2 1.2 1.5 1.5
SELECTED PRODUCTION DATA:
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Production volumes
Gas (MMCF) 1,392 1,354 1,254 1,488
Oil (MBBL) 21 22 17 28
Average Product Price
Gas ($/MCF) $2.11 $1.99 $1.92 $2.33
Oil ($/BBL) $16.05 $16.50 $15.20 $15.74
1994
----
Production volumes
Gas (MMCF) 917 1,001 1,230 1,255
Oil (MBBL) 9 17 19 23
Average Product Price
Gas ($/MCF) $2.94 $2.60 $2.30 $2.30
Oil ($/BBL) $12.30 $14.68 $16.02 $14.08
Notes to Selected Financial Data:
(a) Revenues in 1995 include proceeds from the Columbia settlement in the
amount of $4,164,000. During 1994, Alamco acquired a total of 172.6 net
producing wells from various third parties. In October 1991, Alamco
acquired working and royalty interests in 88 wells from Phillips
Petroleum.
(b) Alamco recorded an extraordinary gain of $404,000 after considering
certain expenses and income tax benefits associated with the
extinguishment of debt in 1991.
(c) During 1992, Alamco changed its method of computing unit-of-production
depreciation from a well-by-well basis to a depositional group basis.
(d) In 1993, Alamco consummated a public offering in which 2,071,404 new
shares of Common Stock were issued. The Company used the proceeds from
the stock offering in 1993 to repay the then outstanding balance on its
revolving credit facility with Bank One.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of changes in the Company's financial
condition, including liquidity and capital resources, and results of operations
during the twelve-month periods ended December 31, 1995, 1994 and 1993 are
presented below.
RESULTS OF OPERATIONS
Year Ended December 31, 1995 vs.
Year Ended December 31, 1994
- --------------------------------
Alamco reported net income of $1,695,000 for the year ended December 31,
1995, an increase of $49,000, or 3.0 percent as compared to net income of
$1,646,000 in 1994. Income from operations for 1995 increased $955,000, or 58.8
percent, to $2,580,000 as compared to $1,625,000 for 1994.
Total revenues of $18,539,000 in 1995 were $4,868,000 or 35.6 percent
higher than total revenues of $13,671,000 in 1994.
Gas and oil sales totalled $12,636,000 in 1995, a $643,000, or 8.1
percent, increase over the same period last year. Higher gas and oil
sales volumes, resulting principally from the acquisition of producing
properties and the drilling of new wells, contributed $2,398,000 and
$288,000, respectively, and higher oil prices contributed $120,000 to the
increase but were offset by lower gas prices of $2,164,000. Gas and oil
sales volumes totalled 5,889,102 equivalent thousand cubic feet ("EMCF")
and 4,810,681 EMCF for the years ending December 31, 1995 and 1994,
respectively. Alamco received on average $2.10 per MCF and $15.90 per
barrel ("BBL") in 1995, compared to $2.50 per MCF and $14.52 per BBL last
year.
In July 1995, Hope informed the Company of a two week shut-in of
production volumes for system maintenance. In October 1994, Hope
requested temporary reductions in production volumes for approximately
four weeks due to oversupply of gas. The Company estimates revenues were
adversely affected $237,000 and $250,000 in 1995 and 1994, respectively,
due to these reductions in volumes.
Alamco reported revenues of $4,164,000 in December 1995 from the
settlement of claims with Columbia Gas Transmission Corporation
("Columbia"). (Note 4).
Well tending income decreased $289,000, or 23.4 percent, due principally
to the reduction in the number of wells the Company operates for outside
investors. Effective March 1, 1994, Alamco exchanged its interests in
approximately 141 gross wells for outside investors' interests in
approximately 237 gross wells. In addition, on August 1, 1994, but
effective January 1, 1994, Alamco acquired an outside owners'
approximately 80 percent interest in 114 gross wells. The Company
believes the reduction in well tending income, as a result of these
transactions, will be offset over time by the effect of higher gas and oil
revenues attributable to Alamco's greater ownership interest in the wells
(Note 2).
Other operating revenue increased $350,000 due primarily to the
recognition of income related to the transaction in which Alamco formed a
partnership with an East Coast financial institution (Note 3). The
partnership is structured so that the financial institution will be
allocated IRC Section 29 tax credits as a result of production from
properties contributed by the Company to the partnership. The financial
institution initially paid Alamco $1.0 million, less $100,000 for certain
expenses incurred by the financial institution. Alamco recognizes income
from this transaction as the tax credits are generated.
Total expenses in 1995 were $15,959,000, an increase of $3,913,000, or
32.5 percent, from expenses of $12,046,000 in 1994.
Operating expenses were higher by $1,252,000, or 22.9 percent, due
primarily to the acquisitions made, new wells drilled during 1995, higher
production related taxes and the write-off of certain land expenses
related primarily to the Company's unsuccessful effort to acquire the oil
and gas minerals underlying the Coopers Rock State Forest in Monongalia
County, West Virginia.
Alamco reported exploration expense of $641,000 in 1995 resulting from the
abandonment of the Douglas Prospect and a portion of the Hoffman Prospect
in Kentucky after drilling two unsuccessful exploratory wells. Alamco did
not drill any exploratory wells in 1994.
General and administrative expenses for 1995 were higher by $238,000, or
8.2 percent, as compared to last year due to, among other things, higher
employee-related costs.
Depreciation, depletion and amortization expense was higher by $748,000
due to, among other things, higher depletion expenses related to the
increased gas and oil investments and higher production levels. Higher
depreciation expenses associated with fixed assets also contributed to the
increase.
Interest expense for 1995 was $1,188,000, an increase of $1,034,000 over
the same period last year due primarily to the increased utilization of
the Company's revolving credit facility. During 1995, interest incurred
by the Company totalled $1,360,000, of which $172,000 was capitalized. In
1994 interest incurred was $471,000 of which $317,000 was capitalized.
Non-operating income in 1995 totalled $192,000, an increase of $37,000, as
compared to $155,000 for 1994, due principally to higher interest income in
1995.
Alamco's provision for income tax totalled $1,077,000 in 1995 as compared
to an income tax provision of $134,000 last year. The 1995 provision is made up
of the provision resulting from the Columbia settlement revenue of $1,627,000
and a tax benefit of $550,000 resulting from the current year loss from
operations, excluding Columbia.
Year Ended December 31, 1994 vs.
Year Ended December 31, 1993
- --------------------------------
Alamco reported net income of $1,646,000 for the year ended December 31,
1994, an increase of $94,000, or 6.1 percent, as compared to net income of
$1,552,000 in 1993. Income from operations for 1994 decreased $449,000, or
21.6 percent, to $1,625,000 as compared to $2,074,000 for 1993.
Total revenues of $13,671,000 in 1994 were $1,771,000, or 14.9 percent,
higher than total revenues of $11,900,000 in 1993.
Gas and oil sales totalled $11,993,000 in 1994 which represents a
$2,489,000 increase over the same period last year. Higher gas and oil
sales volumes, resulting principally from the acquisition of producing
properties and the drilling of new wells, contributed $3,362,000 and
$486,000, respectively, to the increase and were offset by lower gas
prices of $1,258,000 and lower oil prices of $101,000. Gas and oil sales
volumes totalled 4,810,681 EMCF and 3,421,510 EMCF for the years ending
December 31, 1994 and 1993, respectively. Alamco received on average
$2.50 per MCF and $14.52 per BBL in 1994, compared to $2.79 per MCF and
$16.01 per BBL last year.
In early September 1994, Hope informed the Company and other local
suppliers that its gas supply exceeded its sales market requirements,
which could create an imbalance with CNG, its pipeline transporter, and
requested a temporary reduction of production volumes for an unstated
period of time. The Company agreed to temporarily reduce its production
by approximately 50 percent beginning September 12, 1994. Beginning
October 21, 1994, all of the affected wells produced at unrestricted
levels. The Company estimates revenues were adversely affected by
$250,000 due to this reduction in volumes.
Well tending income decreased $940,000, or 43.3 percent, due principally
to the reduction in the number of wells the Company operates for outside
investors. Effective March 1, 1994, Alamco exchanged its interests in
approximately 141 gross wells for outside investors' interests in
approximately 237 gross wells. In addition, on August 1, 1994, but
effective January 1, 1994, Alamco acquired an outside owners'
approximately 80 percent interest in 114 gross wells. The Company
believes the reduction in well tending income, as a result of these
transactions, will be offset over time by the effect of higher gas and oil
revenues attributable to Alamco's greater ownership interest in the wells
(Note 2).
Other operating revenue increased $222,000 due primarily to the
recognition of income related to the transaction in which Alamco formed a
partnership with an East Coast financial institution (Note 3). The
partnership is structured so that the financial institution will be
allocated IRC Section 29 tax credits as a result of production from
properties contributed by the Company to the partnership. The financial
institution initially paid Alamco $1.0 million, less $100,000 for certain
expenses incurred by the financial institution. Alamco recognizes income
from this transaction as the tax credits are generated.
Total expenses in 1994 were $12,046,000, an increase of $2,220,000, or
22.6 percent, from expenses of $9,826,000 in 1993.
Operating expenses were higher by $1,199,000, or 28.1 percent, due
primarily to the significant property acquisitions made and new wells
drilled during 1994 and higher employee-related expenses due principally
to the expansion of the Company's drilling operations in 1994. Staff
levels have increased in those departments that identify and acquire
drilling prospects as well as the engineering staff which oversees the
drilling of the wells.
General and administrative expenses for 1994 were higher by $535,000, or
22.5 percent, as compared to last year due to, among other things, higher
business franchise taxes due to the increase in Alamco's equity as a
result of the 1993 stock offering. In addition, higher employee-related
costs as well as expenses associated with the Company's Stockholders'
Rights Plan contributed to the increase. Also, amounts paid under its
bank credit facility were higher due to increased commitment fees and
other fees which are based upon the unused portion of the Company's credit
facility.
Depreciation, depletion and amortization expense was higher by $717,000
due to, among other things, higher depletion expenses related to the
increased gas and oil investments and higher production levels. Higher
depreciation expenses associated with fixed assets also contributed to the
increase.
Interest expense for 1994 was $154,000, a decrease of $231,000 from the
same period last year due primarily to capitalization of interest expense
related to drilling activities. During 1994, interest incurred by the
Company totalled $471,000 of which $317,000 was capitalized.
Non-operating income in 1994 totalled $155,000, a decrease of $166,000, as
compared to $321,000 for 1993 due principally to the absence in 1994 of certain
asset sales and franchise tax adjustments.
Alamco's provision for income tax totalled $134,000 in 1994 as compared to
$843,000 last year. The reduction of $709,000 is due to, among other things, a
change in the effective state tax rate to reflect new business activities in
states with lower tax rates and recently implemented tax planning activities, an
increase in the deductions associated with percentage depletion and lower income
from operations.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At December 31, 1995, Alamco had working capital of
$827,000, as compared to $835,000 at December 31, 1994. Because the Bank One
credit facility agreement, as amended, calls for the payment of interest only
until July 1, 1998, current liabilities on the Company's December 31, 1995
balance sheet do not include any principal payments relative to the Bank One
credit facility.
Cash and cash equivalents totalled $3,297,000 at December 31, 1995. Of
this amount, approximately $694,000 was available for general corporate purposes
and the balance was held for third parties (Note 7). Operating activities
provided a net $8,359,000 while investing activities used a net $7,625,000.
Financing activities used a net $69,000.
Revolving Credit Facility. Currently, Alamco has in place a $30.0 million
revolving credit facility with Bank One (Note 6). As of March 12, 1996, $14.6
million was available for borrowing under the credit facility. The Company is
required to pay interest only until July 1, 1998, at which time all principal
and accrued interest are due and payable. Interest accrues and is paid monthly
at a rate of Bank One's prime rate plus one-fourth of one percent.
Alamco is not prohibited from paying dividends to its stockholders under
the Bank One credit agreement; however, certain other financial covenants, such
as debt coverage and equity covenants, may restrict the payment of cash
dividends. The Company presently intends to retain its funds for operations and
expansion of its business and does not expect to pay any cash dividends in the
foreseeable future.
Capital Expenditures and Commitments. Alamco's 1995 capital investments
totalled $7,931,000, including $6,769,000 for the acquisition of producing
properties and drilling of new wells. These activities were funded from
internal sources and the Bank One revolving credit facility. In the future, the
Company intends to continue to use internally generated cash flows and amounts
available under the credit facility to fund the exploration and development of
its gas and oil reserves and property acquisitions. (See Part I, Item 1.
"Business".)
Most of Alamco's capital spending is discretionary and the ultimate level
of spending will be dependent, among other things, on the Company's assessment
of the gas and oil business environment, the number of gas and oil prospects,
and gas and oil business opportunities in general. The level of Alamco's 1996
capital expenditures will to a great extent depend upon the gas prices received
by the Company. Based on current gas futures prices, Alamco plans to expand
annual drilling activities to an estimated 30 wells. Alamco will continue with
its enhancement program on existing wells, particularly the wells acquired in
Kentucky and where the Company has established a significant acreage position.
The Company plans to continue with its aggressive acreage acquisition strategy
and will position itself to increase both exploratory and development drilling.
Alamco remains committed to the acquisition of producing properties at favorable
prices.
Section 29 Tax Credits. Effective August 11, 1994, the Company, through a
series of transactions, formed a partnership with a major East Coast financial
institution (the "Institution"). The partnership is structured such that the
Institution will be allocated IRC Section 29 tax credits as a result of
production from properties contributed by Alamco to the partnership (Note 3).
The institution initially paid $1.0 million (reduced by $100,000 for certain
expenses incurred by the Institution), and will pay additional amounts, up to
$4.0 million, in installments prior to December 31, 2002, upon achieving certain
production minimums and satisfying other conditions. As part of the Section 29
tax credit transaction, the Company formed Alamco-Delaware, Inc. ("Aladel") as a
Delaware Investment Holding Company.
In early November 1995, Alamco acquired from an industry partner for
$1.35 million in cash, interests in 47 gross (30.7 net) oil and gas wells
and the remaining 53 percent of the gas gathering system that it did not own in
the Company's Days Chapel Field in Tennessee. This Transaction increased the
Company's ownership of the wells in the field from 48.4 percent to 83.0
percent. Alamco used funds available on its credit facility with Bank One to
complete the transaction.
Alamco also acquired in November 1995 for $1.22 million, four
partnerships' share of the Company's claim against Columbia (see Columbia
Litigation Claim below). The Company used funds available on its credit
facility with Bank One to complete the transaction.
Columbia Litigation Claim. In November 1995, Alamco received $7.6 million
on its and other interest owners' behalf from Columbia under Columbia's Second
Amended Plan of Reorganization, As Further Amended Dated July 17, 1995 (the
"Plan"). This amount represents 68.875 percent of the Company's $11 million
claim against Columbia arising from the settlement of various gas purchase
claims. The Plan provides for a potential additional distribution of up to
3.625 percent of the allowed claim in the future depending upon various
contingencies. Alamco's share of the claim was approximately 74 percent.
Quarterly Financial Data (Unaudited)
- ------------------------------------
The following table sets forth selected historical quarterly financial
data (unaudited) with respect to the Company for the quarters indicated in 1995
and 1994. Alamco's results of operations are generally subject to quarterly
variations due to, among other factors, weather conditions and other supply and
demand factors affecting the natural gas markets. Historically, the demand and
price paid for natural gas has increased in the cold winter months and decreased
in the warm summer months. Such quarterly data is not necessarily indicative of
the Company's future performance. Because of quarterly variations, Alamco
believes that its results of operation should be viewed on an annual basis.
(in thousands, except per share data)
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Sales and other operating
revenues (1) $3,460 $3,530 $3,149 $8,400
Gross profit (1) 883 892 392 4,747
Net income (loss) (1) (102) (75) (352) 2,224
Net income (loss) per share (1) ($0.02) ($0.02) ($0.08) $0.48
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
Sales and other operating
revenues $3,370 $3,208 $3,464 $3,629
Gross profit 1,347 1,128 1,161 1,051
Net income (2) 462 321 353 510
Net income per share (2) $0.10 $0.07 $0.08 $0.10
- ----------------------
(1) In the fourth quarter of 1995, Alamco recorded as revenue the proceeds
from the Columbia Settlement of $4,164,000. The tax effect of this one-
time event of $1,627,000 is included in the fourth quarter 1995 tax
provision of $1,364,000. Absent the Columbia Settlement, revenues in the
fourth quarter would have been $4,236,000 with a gross profit of $583,000,
a net loss of $313,000, and a net loss per share of $.07.
(2) In the fourth quarter of 1994, Alamco adjusted its provision for income
taxes by $256,000 to reflect a change in the effective state tax rate. In
addition, an increase in deductions associated with percentage depletion
and lower income from operations also reduced the income tax provision.
Item 8. Consolidated Financial Statements.
- ------- ----------------------------------
Index to Consolidated Financial Statements
------------------------------------------
Pages
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Independent Auditor's Report 29
Consolidated Statement of Income, for the
Years Ended December 31, 1995, 1994 and 1993 30
Consolidated Balance Sheet, as of December 31, 1995 and 1994 31-32
Consolidated Statement of Changes in Stockholders' Equity,
for the Years Ended December 31, 1995, 1994 and 1993 33
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993 34-35
Notes to Consolidated Financial Statements 36-53
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Alamco, Inc.
We have audited the accompanying consolidated balance sheet of Alamco, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the consolidated financial position of Alamco, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
600 Grant Street
Pittsburgh, Pennsylvania
February 28, 1996
ALAMCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31, 1995, 1994 and 1993
(In thousands, except share data)
===============================================================================
1995 1994 1993
---- ---- ----
Revenues:
Gas and oil sales $12,636 $11,993 $ 9,504
Agreements with gas purchasers
(Note 4) 4,164 -- --
Well tending income 943 1,232 2,172
Other revenue 796 446 224
------- ------- -------
Total revenues 18,539 13,671 11,900
------- ------- -------
Expenses:
Operating 6,713 5,461 4,262
Exploration 641 -- --
General and administrative 3,146 2,908 2,373
Depreciation, depletion, and
amortization 4,271 3,523 2,806
Interest 1,188 154 385
------- ------- -------
Total expenses 15,959 12,046 9,826
------- ------- -------
Income from operations 2,580 1,625 2,074
Other nonoperating income 192 155 321
------- ------- -------
Income before income tax 2,772 1,780 2,395
Provision for income taxes 1,077 134 843
------- ------- -------
Net income $ 1,695 $ 1,646 $ 1,552
======= ======= =======
Net income per share $0.36 $0.35 $0.45
===== ===== =====
Weighted average number of shares
outstanding 4,679,703 4,645,154 3,438,594
========= ========= =========
Accompanying notes are an integral part of the consolidated financial
statements.
ALAMCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
(In thousands)
===============================================================================
ASSETS 1995 1994
------ ---- ----
Current assets:
Cash and cash equivalents $ 3,297 $ 2,632
Accounts receivable, net of allowance of
$59-1995; $9-1994; 3,116 2,693
Due from partnerships and programs 72 140
Inventories and other current assets 368 428
------- -------
Total current assets 6,853 5,893
------- -------
Property and equipment:
Gas and oil producing properties
(Successful Efforts Method) 78,076 71,782
Other property and equipment 5,740 5,270
------- -------
83,816 77,052
Less accumulated depreciation,
depletion and amortization 32,201 28,487
------- -------
51,615 48,565
Other assets 1,294 1,600
------- -------
Total assets $59,762 $56,058
======= =======
(Continued)
Accompanying notes are an integral part of the consolidated financial
statements.
ALAMCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995 and 1994
(In thousands, except share data)
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------------------------------ ---- ----
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 33 $ 106
Accounts payable 1,026 1,325
Accrued expenses 1,545 1,398
Due working interest and royalty owners 3,309 1,064
Deferred revenue 113 1,165
------- -------
Total current liabilities 6,026 5,058
------- -------
Long-term debt and capital lease obligations 13,674 12,889
Due working interest and royalty owners 325 888
Deferred revenue 29 333
Deferred taxes 8,936 8,011
Other long-term liabilities 429 404
------- -------
Total liabilities 29,419 27,583
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share;
1,000,000 shares authorized, none issued -- --
Common stock, par value $0.10 per share;
15,000,000 shares authorized;
4,762,898 and 4,712,713 shares issued
and outstanding, respectively 476 471
Additional paid-in capital 31,243 31,039
Accumulated deficit (1,152) (2,847)
------- -------
30,567 28,663
Less treasury stock, at cost, 62,405 and 63,360
shares of common stock, respectively 224 188
------- -------
Total stockholders' equity 30,343 28,475
------- -------
Total liabilities and stockholders' equity $59,762 $56,058
======== =======
Accompanying notes are an integral part of the consolidated financial
statements.
ALAMCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(In thousands, except share data)
===============================================================================
Common Stock Additional Accumu- Treasury Stock
------------- Paid-in lated -----------------
Shares Dollars Capital Deficit Shares Dollars
------ ------- -------- -------- ------ -------
Balance
January 1, 1993 1,569,110 $157 $21,164 ($6,045) 38,949 $157
Acquisition of
treasury stock -- -- -- -- 50,000 129
Issuance of
treasury stock -- -- 10 -- (18,236) (86)
Public stock offering 3,105,000 310 9,741 -- -- --
Exercise of stock
options 29,567 3 66 -- 2,079 15
Net income -- -- -- 1,552 -- --
--------- ----- ------- ------- -------- -----
Balance
December 31, 1993 4,703,677 470 30,981 (4,493) 72,792 215
Issuance of treasury
stock -- -- 36 -- (10,370) (34)
Issuance of common stock 4,903 -- 32 -- -- --
Acquisition of
treasury stock -- -- -- -- 938 7
Exercise of stock options 4,133 1 10 -- -- --
Public stock offering-
additional costs -- -- (20) -- -- --
Net income -- -- -- 1,646 -- --
--------- ----- ------ ------ ------- -----
Balance
December 31, 1994 4,712,713 471 31,039 (2,847) 63,360 188
Issuance of common stock 4,585 -- 35 -- -- --
Issuance of treasury
stock -- -- 36 -- (10,370) (34)
Acquisition of
treasury stock -- -- -- -- 9,415 70
Exercise of stock
options 45,600 5 133 -- -- --
Net income -- -- -- 1,695 -- --
--------- ----- ------- -------- -------- -----
Balance
December 31, 1995 4,762,898 $476 $31,243 ($1,152) 62,405 $224
========= ===== ======= ======== ========= =====
Accompanying notes are an integral part of the consolidated financial
statements.
ALAMCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
===============================================================================
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income $1,695 $1,646 $1,552
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation, depletion and
amortization 4,271 3,523 2,806
Deferred taxes 925 201 744
Dry hole costs 641 -- --
Gain on asset sales (31) (76) (141)
Issuance of stock for employee
benefits and compensation expense 105 102 86
Other factors, net 7 12 13
Increase (decrease) in cash from
changes in:
Accounts receivable (423) 1,282 (275)
Due from partnerships and programs 68 18 97
Due working interest and royalty
owners 2,245 (1,674) (340)
Inventories and other current assets 60 (167) (105)
Accounts payable and accrued expenses (152) 897 438
Deferred revenue (1,052) 474 231
------ ------ ------
Net cash provided by
operating activities 8,359 6,238 5,106
------ ------ ------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 156 278 150
Payment for the acquisition of
producing properties (1,384) (6,234) --
Capital expenditures, including
dry hole costs (6,547) (10,500) (6,685)
Investment in limited partnership (5) (290) --
Other assets 155 (464) (161)
------ ------ ------
Net cash used in investing
activities (7,625) (17,210) (6,696)
------ ------ ------
(Continued)
Accompanying notes are an integral part of the consolidated financial
statements.
ALAMCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(In thousands)
===============================================================================
1995 1994 1993
---- ---- ----
Cash flows from financing activities:
Borrowings under line of credit $ 6,800 $13,300 $ 500
Payment on line of credit (6,000) (1,000) --
Principal payments on long-term debt
and capital lease obligations (95) (320) (9,098)
Acquisition of treasury stock (70) (7) (144)
Net proceeds from public offering of
common stock -- -- 9,948
Additional costs of public offering
of common stock -- (20) --
Proceeds from exercise of stock options 138 11 69
Other liabilities (842) (825) (1,012)
------ ------ ------
Net cash (used in) provided by
financing activities (69) 11,139 263
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 665 167 (1,327)
Cash and cash equivalents -
beginning of period 2,632 2,465 3,792
------ ------ ------
Cash and cash equivalents -
end of period $3,297 $2,632 $2,465
====== ====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $1,353 $216 $373
Income taxes 232 55 180
Supplemental Schedule of Non-Cash
Investment and Financing Activities:
Fixed assets acquired under capital
lease -- -- $27
Like-kind exchange of property -- $3,270 --
Accompanying notes are an integral part of the consolidated financial
statements.
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. These consolidated financial statements
include the combined accounts of Alamco and its subsidiaries, Alamco-Delaware,
Inc. ("Aladel"), HAWG HAULING & DISPOSAL, INC. ("HAWG") and Phoenix-Alamco
Ventures, a Limited Liability Company ("PAV"). Aladel and HAWG are wholly owned
subsidiaries of the Company. All significant intercompany balances have been
eliminated in consolidation.
Nature of Operations. Alamco, Inc. is an Appalachian-based independent gas
and oil producer actively engaged in the acquisition, exploitation, exploration,
development and production of domestic gas and oil. The Company's activities
are conducted in West Virginia, Tennessee and Kentucky, with an emphasis on
producing natural gas for ultimate sale to customers in the northeast gas
markets.
Revenue Recognition. Royalties, overrides and working interest revenues
are recognized based on production. No material difference would result if
revenues were recognized based on sales. Well tending income is recognized as
revenue as services are performed.
Cash and Cash Equivalents. The Company considers certificates of deposit,
U.S. government securities and other short-term securities with maturities of
three months or less as cash and cash equivalents.
Fair Value of Financial Instruments. The following methods and assumptions
were used by the Company in estimating the fair value of each class of financial
instruments for which it is practicable to estimate that value.
For cash and cash equivalents, receivables and payables, the carrying
amounts approximate fair value because of the short maturity of these instru-
ments. For long-term debt, including current maturities, the fair value of the
Company's long-term debt approximates historically recorded cost since interest
rates approximate market.
Off-Balance Sheet Risk. In accordance with industry practice, the Company
has gas and oil sales contracts with commitments to sell certain quantities of
gas and oil, primarily at market prices, for varying periods.
Use of Estimates. Preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Gas and Oil Producing Properties. The Company uses the successful efforts
method of accounting for gas and oil producing properties. Under the successful
efforts method, certain expenditures, such as geological and geophysical costs,
exploratory dry hole costs, delay rentals, and other costs directly related to
exploration are recognized currently as expenses. All direct costs relating to
property acquisitions, successful exploratory wells, all development costs, and
support equipment and facilities are capitalized and depreciated, depleted or
amortized using the units-of-production method. Production overhead and other
costs are expensed as incurred. Gas and oil producing properties also include
well equipment covered by capital lease obligations. Amortization of the lease
assets is included in depreciation, depletion and amortization expense.
Interest costs incurred in the drilling of wells are capitalized and amortized
using the units-of-production method. The Company capitalized interest costs of
$172,000 in 1995, $317,000 in 1994, and none in 1993. Interest incurred in 1995
was $1,360,000 and in 1994 was $471,000.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
This statement, which is effective for financial statements for years beginning
after December 15, 1995, was adopted by the Company in 1995. The Company has
evaluated the impact of SFAS 121 by comparing the carrying value of its long-
lived assets, consisting of gas and oil producing properties, other property and
equipment, and intangibles, to the estimated future cash flow from such assets
in order to determine whether the carrying value of such properties should be
reduced. No adjustments to carrying values of assets were necessary as of
December 31, 1995.
Other Property and Equipment. Other property and equipment are stated at
cost. Depreciation of other property and equipment is computed using the
straight-line method over estimated useful lives of three to forty years,
without considering the recoverable value of equipment salvageable from the
wells.
On an annual basis, the Company estimates the costs of future
dismantlement, restoration, reclamation and abandonment of its gas and oil
producing properties. Concurrently, the Company evaluates the estimated salvage
value of equipment recoverable upon abandonment. At December 31, 1995 the
Company's estimate of equipment salvage values is in excess of the costs of
future dismantlement, restoration, reclamation and abandonment.
Costs of individual gas and oil wells determined to be uneconomical are
charged to accumulated depreciation, depletion and amortization, with no gain or
loss being recognized until the depositional group in which the well is included
is abandoned. When other property and equipment are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is reflected in income for the period. The cost
of maintenance and repairs is expensed as incurred; significant renewals and
betterments are capitalized.
Intangible Assets. Intangible assets, which are reported in other assets
on the Company's balance sheet, consist of a non-compete and a consulting
agreement arising from the acquisition of 62 wells in Southeastern Kentucky.
The values assigned to intangible assets are being amortized on a straight line
basis over the life of the agreements which range from four to five years.
Covenant not to compete . . . . . . $312,000
Consulting agreement . . . . . . . . 390,000
Less accumulated amortization . . . (234,000)
--------
$468,000
========
Income Taxes. The Company accounts for certain income and expense items
differently for financial reporting purposes than for purposes of computing
income taxes currently payable. Deferred tax liabilities and assets are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. Deferred tax expense is the
result of changes in such basis differences and enacted rates.
Income Per Share. Income per share amounts are computed by dividing the
net income by the weighted average number of shares outstanding in 1995, 1994
and 1993.
2 - PROPERTY ACQUISITIONS AND WELL SWAP
In early November 1995, the Company acquired from an industry partner, for
$1.35 million in cash, interests in 47 gross (30.7 net) oil and gas wells and
the remaining 53 percent of the gas gathering system that it did not own in the
Company's Days Chapel Field in Tennessee. This transaction increased the
Company's ownership of the wells in the field from 48.4 percent to 83.0
percent. The Company used funds available under its credit facility with Bank
One to complete the transaction.
On March 31, 1994, the Company exchanged its interests (the "Well
Exchange") in 141 gross wells for outside investors' interests in 237 gross
wells. The exchange was effective March 1, 1994. The exchange has been treated
as a like-kind exchange and no gain or loss has been recognized on this
transaction.
In a separate transaction, the Company received a note in exchange for the
sale of operating rights in a number of wells. Further, the Company sold its
wholly-owned subsidiary, Interstate Resources, Inc. ("IRI"), in exchange for a
note. The sale of the Company's operating rights and IRI were to the same non-
affiliated party and combined into a single interest bearing note in the
principal amount of $272,000. The gain resulting from the sale of operating
rights and sale of IRI was deferred and is being recognized as principal
payments are received.
On July 18, 1994, the Company acquired certain gas and oil properties and
intangible assets located in Southeastern Kentucky for $2.5 million in cash
(Note 1). The Company acquired 62 wells (56.4 net wells) together with 34,000
gross acres (30,000 net acres) and became the operator of the wells.
On August 1, 1994, the Company acquired all of the interests held by a
number of limited partnerships in 114 West Virginia gas wells (91.2 net wells),
of which 102 were already operated by the Company (the "West Virginia
Acquisition"). The Company acquired these wells for a net $3.8 million in cash.
Also, on August 1, 1994 the Company acquired seven wells and 1,275 acres in
Whitley County, Kentucky, for $185,000. The Company became the operator
effective as of the purchase date.
The Company also acquired 2.5 net wells producing from the Oriskany
formation in the South Burns Chapel Field for $500 effective as of July 1, 1994.
These transactions have been accounted for under the purchase method and,
accordingly, the operating results for the transactions have been included in
the Company's consolidated operating results from the dates of the respective
acquisitions forward.
As the West Virginia Acquisition and the Well Exchange represent a
substantial majority of the assets acquired during 1994, the following summary,
prepared on a pro forma basis, presents the consolidated results of operations
as if the two transactions had been consummated as of January 1, 1994.
1994
(Unaudited and in
thousands of dollars,
except per share amount)
Revenues $14,340
Expenses 12,457
Income from operations 1,883
Net income 1,814
Net income per share $ 0.39
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
3 - SECTION 29 TAX CREDITS
The Company currently produces approximately 800,000 MMBtu per year of
natural gas that is eligible for a tax credit of $1.01 per MMBtu under Internal
Revenue Code ("IRC") Section 29. The tax credit applies to natural gas produced
from "nonconventional" fuel sources, as defined, including gas production from
Devonian Shale formations in certain West Virginia counties where the Company
has production operations. In addition to producing from certain
nonconventional fuel sources, the production must have been from wells drilled
between December 31, 1979 and December 31, 1992, and the gas must be sold before
December 31, 2002. The tax credit is allowed to reduce a taxpayer's regular tax
liability but may not be used to reduce a taxpayer's alternative minimum tax
("AMT") liability. The credits also must be used in the tax year in which they
are generated.
The Company is currently, and is projected to be in the future, an AMT
taxpayer and therefore is unable to fully use the tax credits to reduce its tax
liability. In order to receive benefit from these credits which would otherwise
expire unused, through a series of transactions, the Company formed a
partnership with a large East Coast financial institution (the "Institution").
The partnership is structured such that the Institution will be allocated IRC
Section 29 tax credits as a result of production from properties contributed by
the Company to the partnership. The Institution initially paid $1.0 million
(reduced by $100,000 for certain expenses incurred by the Institution), and will
pay additional amounts, up to $4.0 million, in installments prior to
December 31, 2002, upon achieving certain production minimums and satisfying
other conditions. The Company estimates that this transaction, which was
effective August 11, 1994, will allow it to realize $0.65 for each $1.00 in
available Section 29 tax credits generated by the producing properties.
As of August 11 1994, the effective date of the transaction, the Company
recognized $1.0 million in deferred revenues and will recognize income from this
transaction as the required gas production levels are achieved. In 1995 and
1994 the Company recognized $645,000 and $249,000, respectively, in income
relative to this transaction. Accordingly, as of December 31, 1995, the
Company's balance sheet includes $105,000 in deferred revenues, all of which is
current.
4 - SETTLEMENT OF COLUMBIA LITIGATION CLAIMS
The Company received in November 1995 the proceeds from the settlement of
its contract rejection claims from Columbia. The initial distribution was the
result of the confirmation by the U.S. Bankruptcy Court of Columbia's Plan of
Reorganization on November 15, 1995. The Company received proceeds of $7.6
million, of which its share was $5.6 million. The Company recognized revenue of
$4,164,000 in the fourth quarter of 1995, net of claims purchased from other
owners, and after tax income of $2,537,000 ($0.54 per share).
The Company could receive an additional settlement distribution from
Columbia of up to 3.625 percent of its original claim of $11,000,000 with the
Company's share being revenue of $295,000 and after tax income of $180,000
($0.04 per share). The timing and amount of this additional recovery is
contingent upon Columbia settling various outstanding claims with other gas
producers.
5 - PUBLIC STOCK OFFERING
On July 29, 1993, the Company consummated a public offering at a price to
the public of $5.50 per share for 2,700,000 shares of Common Stock, of which
2,000,000 shares were sold by the Company and 700,000 shares were sold by PNC.
The Company's net proceeds from this sale approximated $10.2 million before
considering expenses associated with the stock offering. The Company used
approximately $8.6 million of the net proceeds to repay its revolving credit
facility loan balance with Bank One.
On August 18, 1993, the underwriters exercised their option to purchase at
a price to the public of $5.50 per share an additional 405,000 shares, of which
the first 333,596 shares were sold by PNC and the remaining 71,404 shares were
newly issued shares sold by the Company. The aggregate 1,033,596 shares sold by
PNC represented all of the non-voting Class A Common Stock issued to PNC by the
Company as part of the 1988 debt restructuring. Upon the sale of the 1,033,596
shares in the stock offering, the shares automatically converted to voting
Common Stock on a one-for-one basis.
6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company has a $30.0 million revolving credit facility with Bank One
which calls for the payment of interest only until July 1, 1998 at which time
all outstanding principal and interest amounts are due. Interest accrues and is
paid monthly at a rate of Bank One's prime rate plus one-fourth of one percent.
During 1993, using a portion of the 1993 stock offering, the Company repaid all
amounts outstanding under the Bank One credit facility. As of December 31, 1995
the aggregate amount of borrowing under the Bank One revolving credit facility
was $13.6 million. Bank One's prime interest rate on December 31, 1995, was 8.5
percent.
The credit facility is subject to semiannual borrowing base revisions (in
March and September of each year) to be made in accordance with borrowing base
recalculations performed by Bank One. Revisions could result in the extension
of credit and repayment terms or, in the case of erosion of the borrowing base,
the reduction of outstanding principal amounts or the amount of the credit
facility. Based on the latest Bank One recalculation, performed in September
1995, the borrowing base is sufficient to allow full utilization of the maximum
$30.0 million credit facility.
In addition to interest payments, the Company is required to pay a
commitment fee equal to the difference between the facility amount and the
amount borrowed multiplied by one-half of one percent prorated into quarterly
payments. The agreement also contains covenants which, among other things,
require that the Company maintain specified levels of cash flow, stockholders'
equity and ratio of current assets to current liabilities. The credit facility
is collateralized by all of the Company's assets including the Company's gas and
oil reserves.
The aggregate maturities of long-term debt for each of the next five years
and thereafter are as follows (in thousands):
1996 $ 33
1997 37
1998 13,620
1999 17
2000 and thereafter 0
-------
$ 13,707
=======
The Company also leases certain equipment used in the production of gas and
oil under three lease programs with McJunkin. These equipment leases are for
varying terms with purchase options at the end of the lease term. In addition,
as part of a 1988 restructuring with McJunkin, the leases were amended to permit
the Company to extend the leases for varying periods with rentals due with
respect to the extension periods to be paid from a 2-1/2 percent working
interest of the Company on the wells where the leased equipment is situated.
The Company has extended the lease periods for all three programs through
November 30, 2002. Since rental payments due under such extensions are
contingent upon the proceeds of gas and oil production, such payments will be
expensed as incurred. There are no future minimum lease payments due.
7 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents totalled $3,297,000 at December 31, 1995. Of
this amount, approximately $694,000 was available for general corporate purposes
and the balance was held for third parties, including $372,000 in gas and oil
sales proceeds held for eventual distribution to outside working interests and
royalty owners, $1,928,000 representing the outside interests' estimated share
of Columbia settlement proceeds, $113,000 representing outside interests' share
of cash prepaid by CNG, and $190,000 withheld from outside working interests'
proceed distributions to be utilized for future ad valorem tax payments
(Note 8). The Company's cash balance at December 31, 1995 includes $2,962,000
invested in commercial paper, U.S. Government and Agency Securities and Bankers'
Acceptances, with an annualized 5.5 percent return.
8 - PLUGGING AND AD VALOREM TAX FUNDS
The Company retains a portion of outside investors' monthly gas and oil
production proceeds to be utilized for future well plugging and abandonment
costs and ad valorem tax payments. The funds, totalling $515,000 at
December 31, 1995, are invested in securities issued or guaranteed by the United
States Treasury in accounts segregated from those of the Company. Interest
earned on the funds accrues to the benefit of the working interest owners.
Included in other assets is $325,000 for future plugging and abandonments.
Corresponding amounts recorded in assets are included in liabilities.
9 - INCOME TAXES
The following table details the components of the Company's income tax
expense for the year 1993 through 1995.
1995 1994 1993
---- ---- ----
(In thousands)
Federal:
Current $137 ($67) $ 99
Deferred 789 397 618
---- ---- ----
Total Federal 926 330 717
---- ---- ----
State:
Current 15 -- --
Deferred 136 (196) 126
---- ---- ----
Total State 151 (196) 126
---- ---- ----
Total $1,077 $134 $843
===== ==== ====
Reconciliations of the income tax provision computed at the statutory rate
and the provision for income taxes as shown on the Statement of Income are
summarized below:
Year Ended December 31,
--------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Tax provision computed at statutory rate $942 $592 $814
State taxes 139 104 126
Change in effective state tax rate -- (255) --
Sale of partnership interest 249 -- --
Use of percentage depletion (1,029) (321) (103)
Valuation allowance 750 -- --
Other 26 14 6
---- ---- -----
Provision for income taxes $1,077 $134 $843
===== ==== =====
The 1994 change in effective state tax rate reflects the Company's new
business activities in states with lower tax rates and recently implemented tax
planning activities.
The components of the net deferred tax liability are as follows:
December 31,
----------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Depreciation, depletion and amortization $13,150 $12,293 $10,668
Percentage depletion carryover (750) -- --
Accounts receivable write-off (30) (30) (31)
Future litigation payments (39) (72) (126)
Sale of partnership interest (212) (293) --
Net operating loss carryforwards (1,553) (1,704) (490)
AMT credits (821) (746) (837)
ITC carryforwards (1,375) (1,394) (1,371)
Other (22) (43) (3)
Valuation allowance 750 -- --
------- ------ ------
Net deferred tax liability $8,936 $8,011 $ 7,810
======= ====== ======
The Company's investment tax credit carryforwards expire between the years
1996 and 2000. The Company has recorded a valuation allowance applicable to
these credits because the ability to use a portion of them is uncertain.
Prior to August 1994, the Company owned interests in 504 gas wells which
qualified for Devonian Shale tax credits. These credits which approximate $1.01
per MMBtu of qualified gas produced in 1995 can be applied to reduce regular
income taxes payable only in the years the gas is produced. Effective
August 11, 1994, the Company formed a partnership structured such that a large
East Coast financial institution will be allocated substantially all of the
Devonian Shale tax credits previously allocated to the Company (see Note 3). No
Devonian Shale tax credits were used by the Company in years 1995, 1994 or 1993.
Statement 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
10 - STOCKHOLDERS RIGHTS PLAN
On November 30, 1994, the Board of Directors of the Company adopted a
Preferred Stock Purchase Rights Plan (the "Rights Plan"). Under the Rights
Plan, the Board declared a dividend of one preferred share purchase Right for
each outstanding share of Alamco Common Stock. In the event that any entity
acquires 15% or more of the outstanding shares of Common Stock of the Company,
the Rights will become exercisable subject to the terms of the Rights Plan and
will entitle each holder of a Right (other than the acquiring person or group)
under certain circumstances to purchase that number of shares of Alamco Common
Stock having a market value equal to two times the exercise price of the Right.
Rights were distributed to stockholders of record at the close of business
on December 12, 1994. The Rights will trade with the Company's Common Stock
until the Rights become exercisable and no separate certificates will be issued
until that time. The rights will expire on December 12, 2004. The Rights Plan
is designed to enable the Company and its Board to develop and preserve long-
term value for stockholders and to protect stockholders in the event an attempt
is made to acquire control of the Company through certain coercive or unfair
tactics or without a bona fide offer at fair value to all of the stockholders of
the Company.
11 - SALES CONCENTRATION
The following table illustrates the Company's gas and oil sales
concentration with purchasers greater than 10 percent:
Purchasers 1995 1994 1993
PAV 44.2% 53.8% 0.0%
Hope 28.9% 28.2% 25.2%
CNG 7.1% 5.3% 24.1%
Phoenix 0.0% 0.0% 14.4%
Enron 0.0% 0.0% 14.2%
Phoenix-Alamco Ventures, a Limited Liability Company ("PAV"), which is
owned jointly by the Company and Phoenix Energy Sales Company, is engaged in the
marketing of Alamco's and other working interest owners' gas. PAV seeks
diversification for Alamco's gas sales to other marketing entities, local
distribution companies and industrial users with contracts of various
durations.
12 - COMMITMENTS AND CONTINGENCIES
CNG Agreement. In November 1989, CNG made a $3,800,000 prepayment for
1,565,000 MMBtu of gas to be produced from the Company's Tallmansville
production area. CNG has the right, within certain specified limitations, to
take deliveries of this gas up to December 31, 1999. As of December 31, 1995,
CNG has taken delivery of all of the Tallmansville gas for which it has
prepaid. The Company recognized its proportionate share of this deferred
revenue as volumes were recouped in accordance with the CNG Agreement.
13 - STOCK OPTIONS AND BENEFIT PLANS
Employee Stock Option Plans. Stock options have been granted to Company
employees through two stock option plans, the 1992 Employees' Stock Option Plan
(the "1992 Stock Option Plan") and the 1982 Employees' Stock Option Plan (the
"1982 Stock Option Plan").
The 1992 Stock Option Plan was established March 20, 1992 and amended on
March 24, 1995, to increase the number of shares available for issuance from
100,000 to 250,000. This plan provides for the grant to officers and other key
management employees of the Company of stock options covering an aggregate of up
to 250,000 shares of the Company's Common Stock. Options may be designated as
either non-qualified stock options or incentive stock options, the latter of
which must be exercised sequentially in grant date order. The Compensation
Committee of the Company's Board of Directors administers the 1992 Stock Option
Plan. The exercise price for each option granted must be equal to the fair
market value per share of the Company's Common Stock on the date of the granting
of the options (except when incentive stock options are granted to any person
who owns more than 10% of the total combined voting power of all classes of
stock of the Company, the exercise price of each option will be at least 110% of
the fair market value of the Common Stock). At December 31, 1995, there were
154,500 shares available for future grants.
The 1982 Stock Option Plan provided for the grant of stock options to
officers and other employees of the Company for up to 65,000 shares of the
Company's Common Stock. As of November 8, 1992, no additional options may be
granted from the 1982 Stock Option Plan. Options are designated as either non-
qualified stock options or incentive stock options. Information with respect to
the options granted under each plan follows:
1982 EMPLOYEES' 1992 EMPLOYEES'
STOCK OPTION PLAN STOCK OPTION PLAN
----------------- -----------------
Option Option
Number of Price Range Number of Price Range
Shares Per Share* Shares Per Share*
------ ---------- ------ ----------
Outstanding at January 1, 1993 50,500 $1.25--3.15 17,500 $4.875
Granted -- 36,000 6.75
Exercised 17,100 1.25--2.50 --
Canceled -- --
------ ------
Outstanding at December 31, 1993 33,400 1.875-3.15 53,500 4.875-6.75
------ ------
Granted -- 18,500 6.75
Exercised -- --
Canceled 19,900 1.875-3.15 7,500 4.875
------ ------
Outstanding at December 31, 1994 13,500 1.875-3.15 64,500 4.875-6.75
------ ------
Granted -- 35,000 8.00
Exercised 3,500 2.50 2,000 6.75
Canceled -- 4,000 6.75
------ ------
Outstanding at December 31, 1995 10,000 1.875-3.15 93,500 4.875-8.00
------ ------
Exercisable at December 31, 1995 10,000 1.875-3.15 36,164 4.875-6.75
------ ------
- ------------------------
*Reflects the option price range applicable to only those installments included
in the total number of shares with respect to which the options are or were
exercisable.
Non-Qualified Stock Options. At December 31, 1995, non-qualified stock
options granted outside of any stockholder-approved plan totalled 330,000 shares
of Common Stock and were held by 7 employees. No options were granted or
expired in 1995; 2,000 shares were cancelled in 1995. The stock option exercise
prices range from $1.875 to $6.75 per share. Employees exercised 40,100, 4,133
and no shares during 1995, 1994 and 1993, respectively, with option prices
ranging from $1.875 to $6.75 in 1995, and an option price of $3.15 in 1994. At
December 31, 1995, 263,332 shares were exercisable with the remaining stock
options becoming exercisable in November 1996.
The 1992 Equity Compensation Plan for Outside Directors. The 1992 Equity
Compensation Plan for Outside Directors (the "1992 Outside Directors' Plan") was
established March 20, 1992 and provides for a maximum number of 75,000 shares of
Common Stock from the Company's authorized and unissued shares of Common Stock
and/or treasury shares to be available for issuance, subject to adjustments in
certain instances. Outside Directors receive 50 percent of their annual
retainer in the form of Common Stock and may elect to receive any or all of the
remaining cash balance of their retainer in the form of Common Stock. In 1995,
4,585 shares were issued to directors at a market price of $7.75 per share. The
Company adopted the Alamco, Inc. Directors' Deferred Income Plan (the "Plan")
effective June 15, 1995, which permits eligible directors of the Company to
elect to defer receipt of future compensation that would otherwise be payable in
cash currently by the Company and have such deferred amounts credited to
individual bookkeeping accounts maintained by the Company in the names of the
participants.
Outside Directors' Stock Option Plan. The 1982 Outside Directors' Stock
Option Plan (the "Outside Directors' Plan") provided for the automatic grant of
options of the Company's Common Stock to non-employee Directors of the Company.
As of November 9, 1991, stock options may not be granted under the Outside
Directors' Plan. At December 31, 1995, 4,400 shares remain outstanding and
exercisable with option prices ranging from $2.50 to $3.875. No options were
exercised in 1995.
Employee Savings and Protection Plan. Effective October 1, 1987, the
Company instituted a 401(k) Plan titled the Alamco, Inc. Employee Savings and
Protection Plan. In addition to employee contributions, the Company contributed
cash and stock of approximately $117,000, $110,000 and $97,000 in 1995, 1994 and
1993, respectively.
14 - SUPPLEMENTAL INFORMATION RELATED TO GAS AND OIL PRODUCING ACTIVITIES
(Unaudited)
Costs incurred by the Company in gas and oil property acquisition,
exploration, and development are presented below:
Year Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Costs (capitalized or expensed) for:
Property acquisition $1,281 $ 6,740 $ 592
Exploration 641 -- --
Development 5,476 9,578 5,479
------ ------- ------
$7,398 $16,318 $6,071
------ ------- ------
Property acquisition costs include costs incurred to purchase, lease, or
otherwise acquire a property. Exploration costs include the costs of geological
and geophysical activity, dry holes, and drilling and equipping exploratory
wells. Development costs include costs incurred to gain access to and prepare
development well locations for drilling, to drill and equip development wells
and to provide facilities to extract, treat, gather, and store gas and oil, and
depreciation of support equipment used in development activities.
Aggregate capitalized costs for the Company related to gas and oil
exploration and production activities, with applicable accumulated depreciation,
depletion and amortization, are presented below:
1995 1994
----------------------
-----------------------
Accumu- Accumu-
lated lated
Cost DD&A Net Cost DD&A Net
---- ---- --- ---- ---- ---
(In thousands)
Proved developed
properties $78,076 $28,996 $49,080 $71,782 $25,880 $45,902
Pipelines and processing
equipment 1,924 671 1,253 1,734 562 1,172
Vehicles, machinery and
equipment consisting
principally of assets
used in gas and oil
producing activities 2,068 1,380 688 1,913 1,024 889
Buildings used in gas
and oil producing
activities 224 99 125 206 84 122
------- ------- ------- ------- ------- -------
$82,292 $31,146 $51,146 $75,635 $27,550 $48,085
------- ------- ------- ------- ------- -------
The results of operations for gas and oil producing activities are
presented below:
Year Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Gas and oil sales revenues $12,636 $11,993 $9,504
------ ------ ------
Expenses:
Production 4,194 3,287 2,259
Depreciation, depletion and amortization 3,467 2,790 2,734
Exploration 641 -- --
------ ------ ------
8,302 6,077 4,993
------ ------ ------
Results of operations for gas and oil
producing activities before provision
for income taxes 4,334 5,916 4,511
Provision for income tax 650 887 677
------ ------ ------
Results of operations for gas and oil
producing activities $3,684 $5,029 $3,834
------ ------ ------
Production expenses include those costs incurred to operate and maintain
productive wells and related equipment and include costs such as labor, repairs
and maintenance, materials, supplies, fuel consumed and other production taxes.
Depreciation, depletion and amortization expense includes those costs associated
with capitalized acquisition, exploration, and development costs including the
depreciation applicable to support equipment. Exploration expenses would
include the cost of exploratory dry holes, the geological and geophysical costs
associated with undeveloped properties and write-offs or amortization of lease
acquisition and other costs associated with undeveloped properties. The
provision for income taxes is computed considering the Company's status as an
alternative minimum tax payor.
The decrease in the results of operation for gas and oil producing
activities between 1995 and 1994 resulted from lower gas prices which was
partially offset by increased production from the Company's successful
acquisition and drilling programs.
The increase in the results of operations for gas and oil producing
activities between 1994 and 1993 resulted from higher gas and oil sales revenues
due primarily to the Company's successful 1994 acquisition and drilling
programs.
Estimates of net proved reserves of gas and oil for the Company, all of
which are within the United States, are as follows:
Year Ended December 31,
--------------------------------------------------
1995 1994 1993
------------ ----------- -----------
MCF BBL MCF BBL MCF BBL
--- --- --- --- --- ---
(In thousands)
Proved reserves,
beginning of year 119,625 1,399 82,617 897 58,830 881
Extensions, discoveries
and other additions 11,534 2 13,529 435 23,727 142
Acquisitions 3,242 376 16,888 131 988 5
Revisions of previous
estimates (1,744) (53) 10,995 4 2,269 (94)
Production (5,364) (88) (4,404) (68) (3,197) (37)
------- ----- ------ ----- ------ ---
Proved reserves,
end of year 127,293 1,636 119,625 1,399 82,617 897
------- ----- ------ ----- ------ ---
Proved developed
reserves 97,169 1,405 85,654 1,164 56,560 605
------- ----- ------ ----- ------ ---
These estimates are based primarily on the reports of independent petroleum
and geological engineers. Such reports are, by their very nature, inexact and
subject to changes and revisions. Proved reserves are the estimated quantities
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved reserves increased in 1995 and 1994 due to the
success of the Company's acquisition and development drilling programs.
Reserves were also added due to the inclusion of several additional drilling
prospects on existing company acreage and on acreage leased in 1994 and 1995.
The estimates include only those amounts considered to be proved reserves and do
not include additional amounts that may result from new discoveries in the
future. Proved developed reserves are those reserves that are expected to be
recovered through existing wells with existing equipment and operating methods.
The estimated future net cash flow and the present value of the proved
reserves before taxes are presented below.
Proved Proved Total
Developed Undeveloped Proved
--------- ----------- ------
(In thousands)
Estimated future net cash
flow attributable to
production during
1996 11,175 (2,721) 8,454
1997 9,839 (1,076) 8,763
1998 9,332 1,609 10,941
1999 8,871 2,504 11,375
2000 and thereafter 119,254 47,306 166,560
________ _______ _______
Total 158,471 47,622 206,093
Present value of future
cash flow 69,874 13,613 83,487
Estimated future net cash flow represents future cash inflows generated by
the sale of the proved reserves less estimated production and future development
cost. For production from wells under fixed priced gas purchase contracts, the
gas price used is the contractual gas price for the term of the contract. The
average gas price used is $2.50 per MCF and the average oil price used is $16.89
per barrel. Production costs are based on those in effect at December 31,
1995. The estimated future net cash flow is based on a large number of
estimates and arbitrary assumptions. Reserve quantities cannot be measured with
precision and their estimation requires many judgmental determinations and
frequent revisions. No assurance of levels of gas and oil prices and costs
can be given nor can assurance be given that proved reserves will be developed
within the periods indicated. Present value is calculated by discounting
estimated future net revenue by 10 percent.
Summarized in the following table is information for the Company with
respect to the standardized measure of discounted future net cash flows relating
to proved oil and gas reserves. Estimated future net cash flow represents
future cash inflows generated by the sale of the proved reserves less estimated
production and future development cost. Future income tax expenses are computed
by applying the statutory rate and tax laws applicable to the future pre-tax net
cash flows for each year, less the tax basis of the properties, and giving
effect to permanent differences and net operating loss, investment tax credit,
and percentage depletion carryforwards which exist as of the end of each year.
In addition, 504 of the Company's gas wells qualify for Devonian Shale tax
credits under Section 29 of the Internal Revenue Code. These tax credits, which
in 1995, 1994 and 1993, are approximately $1.010, $1.000 and $.977,
respectively, per MMBtu, of qualified gas produced, must be used in the year in
which they originated and cannot be carried forward or back. During 1994, the
Company entered into a transaction which allocated substantially all of its
Devonian Shale tax credits to a third party (Note 3). Therefore, no Devonian
Shale tax credits were included in the 1995 and 1994 tax calculations. For
1993, Devonian Shale tax credits expected to be generated from qualified wells
were reflected as reductions of future income tax expense on gas and oil
producing activities.
Year Ended December 31,
--------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Future cash inflows $344,066 $275,745 $225,423
Future production and development costs (137,973) (108,241) (82,499)
Future income tax expense (52,524) (42,915) (33,874)
-------- -------- --------
Future net cash flows 153,569 124,589 109,050
10% annual discount for estimated timing
of cash flows (90,378) (77,184) (65,395)
-------- -------- --------
Standardized measure of discounted
future net cash flows $ 63,191 $ 47,405 $ 43,655
-------- -------- --------
Approximately 93 percent of the Company's reserves are natural gas
reserves, the price for which has increased since year-end 1995. The following
table summarizes the principal sources of change in the standardized measure of
discounted future cash flows:
Year Ended December 31,
--------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Sales and transfers of gas and oil
produced, net of production costs ($8,442) ($8,706) ($7,245)
Net changes in prices, production and
development costs, and quality
estimates 41,458 26,825 48,702
Addition of proved undeveloped reserves 11,049 16,039 17,590
Development costs incurred during the
period (5,476) (9,578) (5,479)
Accretion of discount 7,718 6,540 3,967
Net change in income taxes (9,609) (9,041) (15,347)
Other, including changes in the discount
other than due to accretion (20,912) (18,329) (29,689)
------- ------- -------
$15,786 $ 3,750 $12,499
------- ------- -------
It is necessary to emphasize that the data presented above should not be
viewed as necessarily representing the expected cash flow from, or current value
of, existing proved reserves since the computations are based on a large number
of estimates and arbitrary assumptions. Reserve quantities cannot be measured
with precision and their estimation requires many judgmental determinations and
frequent revisions. The required projection of production and related
expenditures over time requires further estimates with respect to pipeline
availability, rates of demand, and governmental control, among other factors.
Furthermore, actual prices and costs are likely to be substantially different
from the current prices and costs utilized in the computation of reported
amounts. In addition, the reported data are applicable only to gas and oil
reserves classified as proved; no amounts are included with respect to
additional reserves that may become proved in the future. Any analysis or
evaluation of the reported amounts should give specific recognition to the
computational methods utilized and the limitations inherent therein.
Item 9. Changes In and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Incorporated by reference from the Company's Proxy Statement to be filed
not later than 120 days after the Company's 1995 fiscal year end.
Item 11. Executive Compensation
----------------------
Incorporated by reference from the Company's Proxy Statement to be filed
not later than 120 days after the Company's 1995 fiscal year end. The Report of
the Compensation Committee of the Board of Directors is not incorporated by
reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Incorporated by reference from the Company's Proxy Statement to be filed
not later than 120 days after the Company's 1995 fiscal year end.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Incorporated by reference from the Company's Proxy Statement to be filed
not later than 120 days after the Company's 1995 fiscal year end.
PART IV
Item 14. Exhibits and Reports on Form 8-K
--------------------------------
(a) 1. and 2. Financial Statements
--------------------
Financial Statements included in this report:
Alamco, Inc., a Delaware corporation
Independent Auditor's Report
Consolidated Statement of Income for the
Years Ended December 31, 1995, 1994 and 1993
Consolidated Balance Sheet as of December 31, 1995 and 1994
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Signatures
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
ALAMCO, INC.
(Registrant)
By: /s/ John L. Schwager
----------------------------------
John L. Schwager, President, Chief Executive
Officer, Principal Executive Officer and
Principal Financial Officer
Dated: March 18, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature and Title
---- -------------------
/s/ John L. Schwager
March 18, 1996 --------------------------
John L. Schwager
President, Chief Executive
Officer, Principal Executive Officer,
Principal Financial Officer and
Director
March 18, 1996 /s/ Robert S. Maust
--------------------------
Robert S. Maust
Director
March 18, 1996 /s/ James B. Gehr
----------------------------
James B. Gehr
Director
March 18, 1996
/s/ Richard R. Hoffman
--------------------------
Richard R. Hoffman
Executive Vice President, Chief
Operating Officer and Director
March 18, 1996 /s/ Stephen L. Barr
--------------------------
Stephen L. Barr
Director
March 18, 1996 /s/ James H. Weber
--------------------------
James H. Weber
Director
/s/ Thomas M. Levine
March 18, 1996 --------------------------
Thomas M. Levine
Director
INDEX TO EXHIBITS
The following exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated herein by reference:
Exhibit Prior Filing or Subsequential
No. Description Page No. Herein
3.1 Articles of Incorporation, as amended Filed herewith
3.2 By-laws, as amended Filed herewith
4.1 Form of Rights Agreement dated as of November Exhibit 4.1 to Current Report on Form 8-K
30, 1994 between Alamco, Inc. and Chemical dated November 30, 1994* (1)
Bank
4.2 Certificate of Designations, Preferences and Exhibit 4.2 to Current Report on Form 8-K
Rights of Series A Preferred Stock of Alamco, dated November 30, 1994* (1)
Inc.
10.1 Master Gas Purchase Contract between the Filed herewith
Company and Hope Gas, Inc. dated November 1,
1995
10.2 Letter Agreement between the Company and Hope Exhibit 10.3 to Annual Report on Form 10-K,
Gas, Inc. dated November 23, 1994 for Year Ended December 31, 1994*(1)
10.3 Memorandum of Agreement dated August 19, 1992, Exhibit 10.28 to Amendment No. 1 to
between the Company, Phillips Petroleum Registration Statement on Form S-2 filed on
Company and Hope Gas, Inc. July 15, 1993 at Registration No. 33-64234*
10.4 Marketing Agreement between the Company and Exhibit 10.2 to Quarterly Report on Form 10-
Phoenix-Alamco Ventures, a West Virginia Q for Quarter ended September 30, 1993* (1)
limited liability company dated October 28,
1993
10.5 Letter Agreement between the Company and CNG Exhibit 10.8 to Annual Report on Form 10-K
Transmission Corporation dated March 23, 1993 for Year Ended December 31, 1993* (1)
10.6 Stock Option Agreement dated December 13, 1990 Exhibit A to Exhibit 10.4 to Annual Report
between the Company and John L. Schwager on Form 10-K, for Year Ended December 31,
1990* (1) (2)
10.7 Amendment No. 1 dated April 15, 1992 to Stock Exhibit 4.5 to Registration Statement on
Option Agreement referred to in Exhibit 10.6 Form S-8 filed May 22, 1992 at Registration
No. 33-47194* (2)
10.8 Stock Option Agreement dated November 11, 1993 Exhibit 4.3 to Registration Statement on
between the Company and John L. Schwager Form S-8 filed February 18, 1994 at
Registration No. 33-75500* (2)
10.9 Nonstatutory Stock Option Agreement dated Exhibit 4.3 to Registration Statement on
November 1, 1994 between the Company and John Form S-8 filed November 16, 1994 at
L. Schwager Registration No. 33-86452* (2)
10.10 Employment Agreement between the Company and Exhibit 10.15 to Annual Report on Form 10-K
John L. Schwager dated January 1, 1995 for Year Ended December 31, 1994* (1) (2)
10.11 Stock Option Agreement dated November 11, 1993 Exhibit 4.4 to Registration Statement on
between the Company and Richard R. Hoffman Form S-8 filed February 18, 1994 at
Registration No. 33-75500* (2)
10.12 Employment Agreement between the Company and Exhibit 10.19 to Annual Report on Form 10-K,
Richard R. Hoffman dated January 1, 1995 for Year Ended December 31, 1994* (1) (2)
10.13 Employment Agreement between the Company and Exhibit 10.23 to Annual Report on Form 10-K,
Bridget D. Furbee dated January 1, 1995 for Year Ended December 31, 1994* (1) (2)
10.14 Restructuring Agreement with McJunkin Exhibit 28.03 to Report on Form 8-K dated
Corporation November 21, ~1988* (1)
10.15 Amended & Restated Credit Agreement among Filed herewith
Alamco, Inc., Alamco-Delaware, Inc. and Bank
One, Texas, N.A. dated October 1, 1995
10.16 Alamco, Inc. 1982 Employees' Stock Option Plan Exhibit 4.1 to Registration Statement on
Form S-8 filed October 9, 1987 at
Registration No. 33-17841* (2)
10.17 Alamco, Inc. 1982 Outside Directors' Stock Exhibit 4.2 to Registration Statement on
Option Plan Form S-8 filed October 9, 1987 at
Registration No. 33-17841* (2)
10.18 Form of Nonstatutory Stock Option Agreement Exhibit 4.3 to Registration Statement on
dated March 8, 1991, as amended by Amendment Form S-8 filed May 22, 1992 at Registration
No. 1 dated April 15, 1992 (for options No. 33-47192* (2)
granted to Richard R. Hoffman)
10.19 Alamco, Inc. 1992 Employees' Stock Option Plan Exhibit 4.3 to Registration Statement on
Form S-8 filed May 22, 1992 at Registration
No. 33-47193* (2)
10.20 Alamco, Inc. 1992 Equity Compensation Plan for Exhibit 4.3 to Registration Statement on
Outside Directors Form S-8 filed
May 22, 1992 at Registration No. 33-47195*
(2)
10.21 The First National Bank of Morgantown, N.A. Exhibit 10.19 to Annual Report on Form 10-K,
401(k) Trust Agreement for Year Ended December 31, 1992* (1) (2)
10.22 Alamco, Inc. Savings and Protection Plan, Exhibit 10.20 to Annual Report on Form 10-K,
effective as of October 1, 1987, as amended for Year Ended December 31, 1992* (1) (2)
and restated as of January 1, 1991
10.23 Amendment to the Alamco, Inc. Savings and Exhibit 10.21 to Annual Report on Form 10-K,
Protection Plan dated June 23, 1992 for Year Ended December 31, 1992* (1) (2)
10.24 Second Amendment to the Alamco, Inc. Savings Exhibit 10.32 to Annual Report on Form 10-K,
and Protection Plan effective January 1, 1993 for Year Ended December 31, 1993* (1) (2)
10.25 Third Amendment to the Alamco, Inc. Savings Exhibit 10.38 to Annual Report on Form 10-K,
and Protection Plan effective January 1, 1993 for Year Ended December 31, 1994* (1) (2)
10.26 Form of Indemnification Agreement (for Exhibit 10.25 to Registration Statement on
directors/officers to which John L. Schwager, Form S-2 filed on June 10, 1993 at
Richard R. Hoffman, Stephen L. Barr, James B. Registration No. 33-64234*
Gehr, Robert S. Maust, Thomas M. Levine and
James H. Weber are parties)
10.27 Form of Indemnification Agreement (for Exhibit 10.26 to Registration Statement on
officers only to which Bridget D. Furbee is a Form S-2 filed on June 10, 1993 at
party) Registration No. 33-64234*
10.28 Alamco, Inc. Directors Deferred Income Plan Filed herewith
effective June 15, 1995
21.1 Subsidiaries of the Company:
HAWG Hauling & Disposal, Inc., a
West Virginia corporation
Alamco-Delaware, Inc., a
Delaware corporation
Phoenix-Alamco Ventures, a
West Virginia limited liability
23.1 Independent Auditors Consent dated February Filed herewith
28, 1996
23.2 Independent Petroleum Engineers Consent dated Filed herewith
February 27, 1996
27 Financial Data Schedule Filed herewith
Note (1): Commission File No. 1-8490
Note (2): Indicates management contracts and compensation plans.