UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2000.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 001-13171
EVERGREEN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0834147
--------------------------------- -----------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1401 17TH STREET SUITE 1200
DENVER, COLORADO 80202
--------------------------------- -----------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (303) 298-8100
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. /X/ YES / / NO
As of November 10, 2000, 18,016,051 shares of the Registrant's Common Stock, no
par value, were outstanding.
EVERGREEN RESOURCES, INC.
INDEX
Page
Number
-------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999..................................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999.................................. 4-5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999......................................... 6
Consolidated Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 2000 and 1999................... 7
Notes to Consolidated Financial Statements................................... 8-11
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 12-17
Quantitative and Qualitative Disclosure
About Market Risk......................................................... 18
PART II. OTHER INFORMATION..................................................... 19-20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- -----------
(Unaudited)
(IN THOUSANDS)
ASSETS
Current:
Cash and cash equivalents $ 1,955 $ 651
Accounts receivable 9,348 5,021
Other current assets 1,215 749
--------- ---------
TOTAL CURRENT ASSETS 12,518 6,421
--------- ---------
Property and equipment, at cost, based on full-cost accounting
for oil and gas properties 420,103 199,179
Less accumulated depreciation, depletion and amortization 30,173 24,845
--------- ---------
NET PROPERTY AND EQUIPMENT 389,930 174,334
--------- ---------
Designated cash 1,772 2,313
Other assets 15,884 1,301
--------- ---------
$ 420,104 $ 184,369
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,864 $ 3,659
Amounts payable to oil and gas property owners 2,003 1,424
Accrued expenses and other 4,529 1,400
--------- ---------
TOTAL CURRENT LIABILITIES 13,396 6,483
Production taxes payable 1,772 2,313
Deferred revenue 980 --
Other long-term liability 35,000 --
Notes payable 87,083 15,500
Deferred income tax liability 11,198 6,563
--------- ---------
TOTAL LIABILITIES 149,429 30,859
--------- ---------
Series A redeemable preferred stock 100,000 --
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value; shares
authorized, 25,000; 100 outstanding -- --
Common stock, $.01 stated value; shares authorized,
50,000; shares issued and outstanding 15,158 and 14,621 152 146
Additional paid-in capital 159,042 147,326
Retained earnings 12,725 6,205
Accumulated other comprehensive loss (1,244) (167)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 170,675 153,510
--------- ---------
$ 420,104 $ 184,369
========= =========
See accompanying notes to consolidated financial statements.
3
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
September 30,
2000 1999
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues:
Natural gas revenues $12,047 $ 5,807
Interest and other 241 48
------- -------
Total revenues 12,288 5,855
------- -------
Expenses:
Lease operating expenses 2,192 1,285
Production taxes 544 100
Depreciation, depletion and amortization 2,190 1,171
General and administrative expenses 1,219 859
Interest expense 873 83
Other expense 16 --
------- -------
Total expenses 7,034 3,498
------- -------
Income before income taxes 5,254 2,357
Income tax provision - deferred 2,049 919
------- -------
Net income 3,205 1,438
Preferred stock dividends 792 --
------- -------
Net income attributable to common stock $ 2,413 $ 1,438
======= =======
Basic income per common share $ 0.16 $ 0.10
======= =======
Diluted income per common share $ 0.15 $ 0.09
======= =======
See accompanying notes to consolidated financial statements.
4
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
September 30,
2000 1999
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Revenues:
Natural gas revenues $27,696 $15,519
Interest and other 403 162
------- -------
Total revenues 28,099 15,681
------- -------
Expenses:
Lease operating expenses 5,265 3,410
Production taxes 1,197 338
Depreciation, depletion and amortization 4,754 3,469
General and administrative expenses 3,121 2,193
Interest expense 1,675 1,624
Other expense 100 --
------- -------
Total expenses 16,112 11,034
------- -------
Income from continuing operations before income taxes 11,987 4,647
Income tax provision - deferred 4,675 1,806
------- -------
Income from continuing operations 7,312 2,841
Discontinued operations:
Gain on disposal of discontinued operations, net -- 452
------- -------
Net income 7,312 3,293
Preferred stock dividends 792 --
------- -------
Net income attributable to common stock $ 6,520 $ 3,293
======= =======
Basic income per common share:
From continuing operations $ 0.44 $ 0.23
From discontinued operations -- 0.04
------- -------
Basic income per common share $ 0.44 $ 0.27
======= =======
Diluted income per common share:
From continuing operations $ 0.41 $ 0.22
From discontinued operations -- 0.03
------- -------
Diluted income per common share $ 0.41 $ 0.25
======= =======
See accompanying notes to consolidated financial statements.
5
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2000 1999
-------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 7,312 $ 3,293
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, depletion and amortization 4,754 3,599
Deferred income taxes 4,635 1,806
Gain on disposal of discontinued operations, net -- (452)
Other 330 414
Changes in operating assets and liabilities:
Accounts receivable (4,346) 1,029
Other current assets (467) (846)
Accounts payable 1,444 315
Accrued expenses and other 1,202 323
Deferred revenue 980 --
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,844 9,481
-------- --------
Cash flows from investing activities:
Investment in property and equipment (86,321) (33,840)
Proceeds from the sale of investment -- 2,259
Decrease in designated cash 541 666
Change in production taxes payable (541) (666)
Increase in other assets (97) (283)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (86,418) (31,864)
-------- --------
Cash flows from financing activities:
Net proceeds from (payments on) notes payable 71,583 (37,139)
Proceeds from sale of common stock, net 298 65,509
Principal payments on capital lease obligations -- (4,029)
Debt issue costs (475) (74)
Cash held from operating oil and gas properties 579 (1,530)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 71,985 22,737
-------- --------
Effect of exchange rate changes on cash (107) 7
-------- --------
Increase in cash and cash equivalents 1,304 361
Cash and cash equivalents, beginning of the period 651 1,334
-------- --------
Cash and cash equivalents, end of the period $ 1,955 $ 1,695
======== ========
See accompanying notes to consolidated financial statements.
6
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(IN THOUSANDS)
2000 1999 2000 1999
------- ------- ------- -------
Net income attributable to common stock $ 2,413 $ 1,438 $ 6,520 $ 3,293
Foreign currency translation adjustments (361) 347 (1,077) (144)
------- ------- ------- -------
Comprehensive income $ 2,052 $ 1,785 $ 5,443 $ 3,149
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
7
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000
(UNAUDITED)
1. Basis of Presentation
Evergreen Resources, Inc. ("Evergreen" or the "Company") is an independent
energy company engaged in the development, production, operation,
exploration, and acquisition of oil and gas properties. Evergreen's primary
focus is on developing and expanding its coal bed methane properties
located on approximately 240,000 gross acres in the Raton Basin in southern
Colorado. The Company also holds exploration licenses on approximately
470,000 acres onshore in the United Kingdom, an interest in a consortium
exploring offshore in the Falkland Islands, an oil and gas exploration
contract in northern Chile and exploratory acreage in northwestern
Colorado. Evergreen operates all of its own producing properties.
The financial statements include the accounts of Evergreen and its
wholly-owned subsidiaries: Evergreen Operating Corporation ("EOC"),
Evergreen Resources (UK) Ltd., Powerbridge, Inc., Evergreen Well Service
Company, Primero Gas Marketing Company, EnviroSeis, LLC, XYZ Minerals,
Inc. and Long Canyon Gas Company, LLC. All significant intercompany
balances and transactions have been eliminated in consolidation.
The Company has a 40% ownership in Argos Evergreen Limited, a Falkland
Islands company which owns offshore drilling rights in the North Falklands
basin. This investment is accounted for by the equity method of accounting.
Effective February 1999, the Company sold its 49% interest in Maverick
Stimulation Company, LLC ("Maverick") which had previously been accounted
for using the equity method of accounting.
Effective September 1, 2000, Evergreen acquired interests in
approximately 24,000 gross acres of producing coal bed methane
properties in the Raton Basin for $176 million from an affiliate of KLT
Gas, Inc., which is an indirect wholly owned subisidiary of Kansas City
Power & Light Company ("KLT"). The total consideration consisted of
approximately $70 million in cash, $100 million in mandatory redeemable
preferred stock (see Note 6 for further discussion) and $6 million in
the Company's common stock.
The accompanying financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 1999. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments necessary to present fairly
the Company's financial position as of September 30, 2000 and 1999 and the
results of its operations and cash flows for the three and nine months then
ended. Management believes all such adjustments are of a normal recurring
nature. The results of operations for interim periods are not necessarily
indicative of results to be expected for a full year.
2. Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Such capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, drilling,
completing and equipping oil and gas wells including salaries, benefits and
other internal costs directly attributable to the activities. Costs
associated with production and general corporate activities are expensed in
the period incurred. Interest costs related to unproved properties and
properties under development are also capitalized to oil and gas
properties. Normal dispositions of oil and gas properties are accounted for
as adjustments of capitalized costs, with no gain or loss recognized.
8
Depreciation, depletion, and amortization of proved oil and gas properties
is computed on the units-of-production method based upon estimates of
proved reserves with oil and gas being converted to a common unit of
measure based on the relative energy content. Unproved oil and gas
properties, including any related capitalized interest expense, are not
amortized, but are assessed for impairment either individually or on an
aggregated basis.
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended September 30,
2000 1999
--------------------------------- --------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Per- Per-
Weighted Share Weighted Share
Income Shares Amt. Income Shares Amt.
------- ------ ------- ------- ------ --------
Basic income per common share: $ 2,413 14,975 $ 0.16 $ 1,438 14,441 $ 0.10
======= ====== ======= ======= ====== ========
Diluted income per common share:
Net income $ 2,413 14,975 $ 1,438 14,441
Stock options -- 820 -- 828
Contingent shares - KLT (Note 4) -- 123 -- --
------- ------ ------- ------
$ 2,413 15,918 $ 0.15 $ 1,438 15,269 $ 0.09
======= ====== ======= ======= ====== ========
Nine Months Ended September 30,
2000 1999
--------------------------------- --------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Per- Per-
Weighted Share Weighted Share
Income Shares Amt. Income Shares Amt.
------- ------ ------- ------- ------ --------
Basic income per common share:
Net income from continuing operations $ 6,520 14,929 $ 0.44 $ 2,841 12,390 $ 0.23
====== ======
Discontinued operations, net -- 14,929 -- 452 12,390 0.04
------- ====== ------- ------- ====== --------
$ 6,520 14,929 $ 0.44 $ 3,293 12,390 $ 0.27
======= ====== ======= ======= ====== ========
Diluted income per common share:
Net income from continuing operations $ 6,520 14,929 $ 2,841 12,390
Stock options -- 734 -- 725
Contingent shares - KLT (Note 4) -- 123 -- --
------- ------ ------- ------
$ 6,520 15,786 $ 0.41 $ 2,841 13,115 $ 0.22
====== ======
Discontinued operations, net -- 15,786 -- 452 13,115 0.03
------- ====== ------- ------- ====== --------
$ 6,520 15,786 $ 0.41 $ 3,293 13,115 $ 0.25
======= ====== ======= ======= ====== ========
9
4. Property Acquisition
Effective September 1, 2000, Evergreen acquired interests in approximately
24,000 gross acres of producing coal bed methane properties in the Raton
Basin for $176 million from an affiliate of KLT Gas, Inc., which is an
indirect wholly owned subsidiary of Kansas City Power & Light Company
("KLT"). The total consideration consisted of approximately $70 million
in cash, $100 million in mandatory redeemable preferred stock (see Note 6
for further discussion) and $6 million in the Company's common stock.
The Company paid $35 million at closing and the remaining $35 million on
October 2, 2000. As of September 30, 2000, this amount is included in
other long term liability in the accompanying consolidated balance
sheets.
The acquired properties, estimated to contain 153 billion cubic feet (BCF)
of proved gas reserves, are located in the southern Colorado portion of the
Raton Basin. As of the closing date, September 20, 2000, the acquired
properties were generating daily net sales of 28 million cubic feet
(MMcf) of gas from a total of 151 net wells.
The number of shares of the Company's common stock issued upon the closing
of the acquisition was 201,748 and was calculated based on a per-share
price equal to the average closing price of the Company's common stock
during the fifteen-trading-day period ending on the day prior to the
closing.
In addition to the consideration paid at the closing of the acquisition,
Evergreen may be required on January 5, 2001, to deliver additional shares
of its common stock valued at $4 million, in the event the average of the
monthly settle prices for the 2001 NYMEX natural gas futures contracts
equals or exceeds $4.465 per MMBtu. The number of shares of stock issuable
would be calculated based on a per-share price equal to the average closing
price of the Company's common stock during the fifteen-trading-day period
ending on the day prior to the date of delivery of such stock. As
additional purchase consideration, Evergreen is required to pay a
monthly net profits interest payment estimated at approximately $500,000
through the earlier of the redemption of the preferred stock (see Note 6)
or January 1, 2003. The purchase allocation is preliminary and the final
purchase price will be determined upon completion of management's review
and resolution of these purchase contingencies.
To provide the cash portion of the purchase price for this acquisition, the
Company drew on its credit facility, as discussed in Note 5.
The accompanying consolidated statements of income for the three and
nine months endeded September 30, 2000 include activity from the KLT
property acquisition for the month of September 2000.
The following unaudited pro forma consolidated results of operations are
presented as if the KLT property acquisition had occurred at the
beginning of the periods presented.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share amounts)
Net revenue $17,797 $ 9,404 $44,357 $24,209
Net income $ 5,255 $ 1,449 $10,484 $ 1,872
Net income (loss) attributable
to common stock $ 2,879 $ (926) $ 3,358 $(5,253)
Income (loss) per common share
Basic $ 0.19 $ (0.06) $ 0.22 $ (0.42)
Diluted $ 0.18 $ (0.06) $ 0.21 $ (0.39)
5. Financing Agreement
The Company renegotiated it's credit facility in September 2000.
Evergreen currently has a $150 million revolving credit facility with a
bank group consisting of Hibernia National Bank, BNP-Paribas, Wells Fargo
Bank Texas, NA, BankOne, NA, Fleet National Bank and Bank of Scotland ("the
Banks"). This line of credit is available through July 1, 2003, and
advances are limited to the borrowing base (which is currently $150
million) that is to be redetermined semi-annually by the bank group based
upon reserve evaluations of the Company's oil and gas properties. At the
Company's election, it may use either LIBOR plus a margin of 1.125% to
1.50% or the prime rate plus a margin of 0% to .25%, with margins on both
rates determined on the average outstanding borrowings under the credit
facility. No more than four LIBOR tranches can be outstanding at any time
under the credit facility. An average annual commitment fee of .375% is
charged quarterly for any unused portion of the credit line. The agreement
is collateralized by all domestic oil and gas properties and guaranteed by
substantially all of the Company's subsidiaries. The credit agreement
contains certain net worth, leverage and ratio requirements. The Company
has received commitments from the Banks to increase its credit facility to
$200 million and expects to complete this increase by December 1, 2000.
10
6. Redeemable Preferred Stock
In connection with the KLT property acquisition, discussed above, the
Company's Board of Directors authorized and issued 100,000 shares of Series
A redeemable preferred stock $1 par value, with a liquidation preference of
$1,000 per share. The preferred stock earns dividends at a rate of 9.5%
until December 31, 2000. From January 1, 2001 to March 31, 2001, the
dividend rate would be 21.5%, and after April 1, 2001, the dividend rate
would be 27.5%. The preferred stock is not convertible, and has voting
rights only with respect to (1) certain extraordinary corporate
transactions such as a merger, consolidation or sale of all or
substantially all of the Company's assets; (2) the issuance of debt or
equity securities that are senior to or on par with the preferred stock;
(3) the redemption of the Company's common stock or any other stock ranking
junior to or on par with the preferred stock; (4) the payment of dividends
with respect to the Company's common stock; and (5) certain other matters
that would affect its holders. In addition to the special voting rights
provided above, the holders of the preferred stock shall also have the
right to vote as a separate class on any matter if required by the Colorado
Business Corporation Act or any successor statute.
Evergreen may redeem all preferred stock for an amount equal to the
liquidation preference of $1,000 per share plus an amount equal to all
dividends, if any, accumulated and unpaid whether or not declared or
earned, including any dividends therein calculated through the date of
redemption. A mandatory redemption may occur, at the option of the
holders, at any time after June 30, 2001, or earlier if the Company
completes a stock offering, meeting certain conditions. The offering
described in Note 8 qualifies as such an offering.
7. Discontinued Operations
Effective February 18, 1999, Evergreen sold its 49% interest in Maverick to
the managing members of Maverick for $2.26 million. The sale resulted in a
gain net of tax of approximately $452,000 or $0.03 per diluted share. This
transaction has been accounted for as a discontinued operation and the
results of operations have been excluded from continuing operations in the
consolidated statements of income.
8. Subsequent Event
On November 8, 2000, the Company completed a public offering of its shares,
whereby it sold 2,840,000 shares at $29.375 per share. Proceeds, net of
underwriters' commissions and estimated expenses of $4.7 million, were
$78.7 million all of which was used to repay outstanding indebtedness under
Evergreen's credit facility, including indebtedness incurred in connection
with the Company's recent acquisition of the KLT properties in the Raton
Basin.
Evergreen has also granted the underwriters an option, exercisable until
December 4, 2000, to purchase up to an additional 426,000 shares for the
purpose of covering over-allotments, if any. The offering was lead
managed by A. G. Edwards & Sons, Inc. and co-managed by ING Barings,
PaineWebber Incorporated, Howard Weil, a division of Legg Mason Wood
Walker, Inc., Brean Murray & Co. and Hibernia Southcoast Capital.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding, among other
items, (i) the Company's growth strategies, (ii) anticipated trends in the
Company's business and its future results of operations, and (iii) market
conditions in the oil and gas industry. These forward-looking statements are
based largely on the Company's expectations and are subject to a number of
risks and uncertainties, many of which are beyond the Company's control. Such
risks and uncertainties include, among other things, a decline in natural gas
production, a decline in natural gas prices, incorrect estimations of
required capital expenditures, increases in the cost of drilling, completion
and gas gathering, an increase in the cost of production and operations, an
inability to meet growth projections, and/or changes in general economic
conditions. These and other risks and uncertainties, which are described in
more detail in the Company's Annual Report on Form 10-K and the Company's
Prospectus Supplement dated November 2, 2000, included in its Registration
Statement on Form S-3 (Registration No. 333-78203) filed with the Securities
and Exchange Commission, could cause actual results and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.
GENERAL
Evergreen is an independent energy company engaged in the development,
production, operation, exploration and acquisition of oil and gas properties.
Evergreen's primary focus is on developing and expanding its coal bed methane
properties located on approximately 240,000 gross acres in the Raton Basin in
southern Colorado. The Company also holds exploration licenses on approximately
470,000 acres onshore in the United Kingdom, an interest in a consortium
exploring offshore in the Falkland Islands, an oil and gas exploration contract
in northern Chile and exploratory acreage in northwestern Colorado. Evergreen
operates all of its producing properties.
DEVELOPMENTS
GENERAL
The Company's common stock began trading on the New York Stock Exchange ("NYSE")
on September 8, 2000. Prior to that time, the Company's shares traded on the
Nasdaq Stock Market under the ticker symbol "EVER." The Company's common stock
on the NYSE is listed under the new ticker symbol "EVG."
RATON BASIN
As of November 9, 2000, Evergreen had 489 net producing gas wells. Current net
daily gas sales are at approximately 76 million cubic feet ("MMcf").
During the quarter ended September 30, 2000, the Company drilled 18 Vermejo coal
formation wells, 3 Raton coal formation wells and 2 monitor wells. During the
first nine months of 2000, Evergreen drilled a total of 66 Vermejo coal
formation wells, 12 Raton coal formation wells and 2 monitor wells.
Due to increasing production in the Raton Basin, Colorado Interstate Gas
Company ("CIG") completed a 20-inch loop of its Picketwire Lateral pipeline,
which became operational on November 1,
12
2000. This pipeline increased takeaway capacity by 34 MMcf per day to 134
MMcf per day. Evergreen's current firm transportation commitments, including
a recent increase and commitments assumed with the KLT property acquisition,
are 74 MMcf of gross gas sales per day, increasing to 85 MMcf per day
starting November 1, 2000. Other projects are scheduled by CIG to further
increase takeaway capacity in 2001. The Company has committed to an
additional 40 MMcf per day, subject to a ramp-up schedule increasing 5 MMcf
per day every four months starting October 1, 2001 through February 2004.
Thus, the Company's total transportation obligations committed to will
increase in increments to 125 MMcf per day by February 2004. If Evergreen is
unable to fulfill its transportation commitments, amounts paid will be
credited toward future transportation costs through August 2006.
The Company enters into contractual obligations that require future physical
delivery of its natural gas production to attempt to manage price risk with
regard to a portion of its natural gas production. As of September 30, 2000
the Company had entered into contracts to sell approximately 45 million
British thermal units ("MMBtu") per day through October 31, 2000 at average
net prices in excess of $2.00 per thousand cubic feet ("Mcf"), 10 MMBtu per
day at a net price of $2.10 per Mcf for the period of October 1, 2000 through
December 31, 2000, and 10 MMBtu per day at NYMEX less $0.20 and 10 MMBtu per
day at a net price of $2.28 per Mcf for the period of November 1, 2000
through October 1, 2001. The Company has also extended a contract to sell 10
MMBtu per day from November 1, 2000 through March 31, 2003 for the lesser of
the current market price or a net price of $2.45 per Mcf. In consideration
for this contract, the Company will receive $1,762,000 over the 12 month
period ended October 31, 2000, which will be amortized as revenue pro-rata
over the contract term including the extended term through March 2003. As of
September 30, 2000, the Company has received $1,468,000, of which $980,000
has been recognized as deferred revenue and will be recorded as revenue in
future periods.
UNITED KINGDOM
In April, 2000, Evergreen started the development of its coal bed methane gas
properties in the United Kingdom. A total of 9 wells have been drilled to
date, of which 5 were coal bed methane ("CBM") wells and 4 were mine-gas
interaction and gob gas wells. Total well depth ranged from 2,213 feet to
3,960 feet for CBM wells and 1,485 feet to 2,156 feet for the mine-gas
interaction and gob gas wells. Total coal thickness ranged from 75 feet to 97
feet of coal. Through November 3, 2000, the Company fracture stimulated the 5
CBM wells using its own pumping equipment in conjunction with a new
completion technology utilizing "coiled tubing." Management believes this is
the first time that nitrified foam fracs using coiled tubing technology have
been used in the U.K. Coiled tubing completions isolate individual coal seams
that are to be fraced versus fracing a group of coals using current
technology. Coiled tubing also provides for a better in-zone propped fracture
with increased length at lower overall costs.
The Company anticipates its evaluation of the results of the drilling program
will be completed sometime in early 2001. If the project is successful,
management believes initial gas sales could begin by the end of 2001. During
2000, the Company estimates that it will spend approximately $12 million for
the U.K. program. This includes the purchase of the well service fracture
stimulation equipment of approximately $3 million and the drilling and
completing of 11 coal bed methane, mine-gas interaction and gob gas wells.
13
RESULTS OF OPERATIONS-THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
The following table sets forth certain operating data of the Company for the
periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------ ------ ------- ------
Natural gas production (MMcf) 5,001 3,549 12,578 9,910
Average realized sales price per Mcf $ 2.41 $ 1.64 $ 2.20 $ 1.57
Cost per Mcf:
Lease operating expense $ 0.44 $ 0.36 $ 0.42 $ 0.34
Production taxes $ 0.11 $ 0.03 $ 0.10 $ 0.03
Depreciation, depletion and amortization $ 0.44 $ 0.33 $ 0.38 $ 0.35
General and administrative $ 0.24 $ 0.24 $ 0.25 $ 0.22
The Company reported net income of $2,413,000 or $0.15 per diluted common
share for the three months ended September 30, 2000, compared to net income
of $1,438,000 or $0.09 per diluted common share for the same period in 1999.
For the nine months ended September 30, 2000, the Company reported net income
of $6,520,000 or $0.41 per diluted common share compared to net income of
$3,293,000 or $0.25 per diluted common share in 1999. The nine months
earnings in 1999 included a one-time, after tax gain of $452,000 or $0.03 per
diluted share, resulting from the sale of Evergreen's 49% interest in
Maverick. The increases in net income during the three and nine months ended
September 30, 2000, as compared to the prior year were attributable primarily
to increases in gas sales volumes and prices.
Natural gas revenues increased to $12,047,000 during the three months ended
September 30, 2000, from $5,807,000 for the same period in the prior year.
During the nine months ended September 30, 2000, natural gas revenues
increased to $27,696,000 from $15,519,000 for the same period in the prior
year. The increases in natural gas revenues for the three and nine month
periods ended September 30, 2000 compared to the same period in 1999 were due
to 41% and 27% increases in natural gas sales volumes and 47% and 40%
increases in natural gas prices, respectively. At September 30, 2000, the
number of net producing Raton Basin wells increased to 473 from 220 at
September 30, 1999. The increase in the number of producing wells in 2000 as
compared to 1999 is due to the drilling of 78 new wells in 2000 and the
acquisition of 151 net producing wells in the Raton Basin.
Lease operating expenses for the three months ended September 30, 2000 were
$2,192,000 or $0.44 per Mcf compared to $1,285,000 or $0.36 per Mcf for the
same period in 1999. During the nine months ended September 30, 2000, lease
operating expenses were $5,265,000 or $0.42 per Mcf as compared to $3,410,000
or $0.34 per Mcf for the same period in the prior year. The increase in lease
operating expense in 2000 as compared to 1999 was due to the increase in the
number of producing wells, increases in field personnel and contract labor
and work-over costs related to well repairs and maintenance costs for
compressors. Production taxes increased for the three months ended September
30, 2000 to $544,000 or $0.11 per Mcf as compared to $100,000 or $0.03 per
Mcf for the same period in 1999, due to higher natural gas prices. For the
nine months ended September 30, 2000, production taxes were $1,197,000 or
$0.10 per Mcf as compared to $338,000 or $0.03 per Mcf for the same period in
the prior year. In addition, the 1999 property tax expense was reduced due to
a refund of property taxes that was received in 1999 as a result of the
reduction in the ad-valorem tax rates for prior years.
Depreciation, depletion and amortization expense for the three months ended
September 30, 2000, was $2,190,000 compared to $1,171,000 for the same period in
1999. On an equivalent Mcf basis, depreciation, depletion and amortization
expense was $0.44 per Mcf for the three months ended
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September 30, 2000 and $0.33 per Mcf for the same period in the prior year.
During the nine months ended September 30, 2000, depreciation, depletion and
amortization expense was $4,754,000 or $0.38 per Mcf as compared to $3,469,000
or $0.35 per Mcf for the same period in the prior year. The increase in the cost
per Mcf for the three and nine months in 2000 as compared to 1999 was due
primarily to the KLT property acquisition.
General and administrative expenses were $1,219,000 during the three months
ended September 30, 2000, as compared to $859,000 during the same period in
1999. For the nine months ended September 30, 2000, general and administrative
expenses were $3,121,000 as compared to $2,193,000 for the same period in the
prior year. The increase over 1999 was due to the increase in administrative
staff, salaries, and related benefits and other corporate expenses as a result
of the significant growth of the Company. Also, through March 1999, EOC operated
properties for various third party working interest owners. In January 1999, the
working interest owners sold those properties. As such EOC did not receive
overhead payments for the operation of those properties after March 1999, which
increased the Company's general and administrative expenses by $192,000 for the
nine months ended September 30, 2000 as compared to the same period in 1999.
Interest expense for the three months ended September 30, 2000, was $873,000
compared to $83,000 for the same period in 1999. During the nine months ended
September 30, 2000, interest expense was $1,675,000 compared to $1,624,000 in
the same period in the prior year. The increase in interest expense in 2000
was due to higher average debt balances in the three and nine months ended
September 30, 2000 compared to the same periods in 1999. In June 1999, the
Company paid-off all outstanding debt with proceeds received from the public
offering of common stock completed in June 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had a $150 million revolving line of
credit with a bank group consisting of Hibernia National Bank, BNP Paribas,
Wells Fargo Bank of Texas, NA, Bank One, Fleet National Bank, and Bank of
Scotland ("the Banks"). The line is available through July 2003. Advances
pursuant to this line of credit are limited to a borrowing base, which is
presently $150 million. At the Company's election, it may use either the
London interbank offered rate, or LIBOR, plus a margin of 1.125% to 1.50% or
the prime rate plus a margin of 0% to 0.25%, with margins on both rates
determined on the average outstanding borrowings under the credit facility.
No more than four LIBOR tranches can be outstanding at any one time under the
credit facility. The borrowing base is redetermined semi-annually by the
Banks based upon reserve evaluations of the Company's oil and gas properties.
An average annual facility fee of 0.375% is charged quarterly for any unused
portion of the credit line. The agreement is collateralized by all domestic
oil and gas properties and also contains certain net worth, leverage and
ratio requirements. At September 30, 2000, $87.1 million was outstanding
under the credit facility, with a current average interest rate of 7.75%. On
November 9, 2000, the Company paid off $79 million with the proceeds from the
offering as described below. As of November 10, 2000, the Company has
outstanding approximately $48 million. The Company has received commitments
from the Banks to increase its credit facility to $200 million and expects
to complete this increase by December 1, 2000.
On November 8, 2000, the Company completed a public offering of its common
stock, whereby it sold 2,840,000 shares at $29.375 per share. Proceeds, net
of underwriters' commissions and estimated expenses of $4.7 million, were
$78.7 million all of which was used to repay outstanding indebtedness under
Evergreen's credit facility, including indebtedness incurred in connection
with the Company's recent acquisition of the KLT properties in the Raton
Basin.
Evergreen has also granted the underwriters an option, exercisable until
December 4, 2000, to purchase up to an additional 426,000 shares for the
purpose of covering over-allotments, if any. The offering was lead managed by
A. G. Edwards &
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Sons, Inc. and co-managed by ING Barings, PaineWebber Incorporated, Howard
Weil, a division of Legg Mason Wood Walker, Inc., Brean Murray & Co. and
Hibernia Southcoast Capital.
In connection with the KLT property acquisition, the Company paid
approximately $70 million in cash ($35 million was paid on September 20,
2000, and $35 million was paid on October 2, 2000) borrowed under its credit
facility, $100 million in mandatory redeemable preferred stock and $6 million
in Evergreen common stock. In addition to the consideration paid at the
closing of the acquisition, the Company will be required on or before January
5, 2001 to deliver additional shares of common stock valued at $4 million, in
the event the average of the monthly settle prices for the 2001 NYMEX natural
gas contracts equals or exceeds $4.465 per MMBtu. As additional purchase
consideration, the Company is required to pay a monthly net profits interest
payment estimated at approximately $500,000 through the earlier of the
redemption of the preferred stock or January 1, 2003. The purchase allocation
is preliminary and will be finalized upon completion of management's review
and resolution of these purchase contingencies.
In connection with the acquisition, the Company issued 100,000 shares of
mandatory redeemable preferred stock, with an aggregate liquidation value of
$100 million. Each share has a liquidation and redemption value of $1,000,
plus accrued dividends. Evergreen can elect to redeem the stock at any time,
and the holder can require Evergreen to redeem it at any time after June 30,
2001, or earlier if the Company completes a stock offering meeting certain
conditions. The offering described above qualifies as such an offering. The
preferred stock earns dividends from September 1, 2000 at an annual rate of
9.5% until December 31, 2000. From January 1, 2001 to March 31, 2001, the
annual dividend rate would be 21.5%, and after March 31, 2001, the annual
dividend rate would be 27.5%. The preferred stock has voting rights in
specified circumstances and is not convertible.
During the nine months ended September 30, 2000, the Company spent a total of
approximately $53 million on capital expenditures, excluding the KLT property
acquisition. Activities during this period included: the drilling of 78 Raton
Basin wells, the addition of a new compressor, the completion of the Cottontail
Pass Unit 24" line and other large diameter pipe, the purchase of fracture
stimulation equipment to be used in the U.K. drilling program and the costs
incurred in the drilling of 5 CBM wells, 3 mine-gas interaction wells and 1 gob
gas well in the U.K.
The Company's capital expenditure budget for the last three months of 2000 is
approximately $29 million, of which the Company expects to use approximately
$4 million to drill 22 Raton Basin wells, approximately $16 million for
compression and gathering projects and approximately $4 million for well
completion and testing in its U.K. project.
The Company expects the increased gas production from the KLT property
acquisition to significantly increase cash flows in the fourth quarter of
2000 and in 2001. As a result of its increased reserves from the acquisition,
the Company will increase its bank credit facility up to $200 million by
December 1, 2000. The increase in the bank credit facility and the proceeds
from the recently completed offering will enable Evergreen to fund the
redemption of the mandatory redeemable preferred stock and its ongoing
drilling projects in the Raton Basin and the United Kingdom.
Cash flows provided by operating activities were $15,844,000 for the nine months
ended September 30, 2000, as compared to cash flows provided by operating
activities of $9,481,000 for the same period in 1999. The increase was primarily
due to the increase in natural gas production and natural gas prices in 2000.
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Cash flows used in investing activities were $86,418,000 during the nine months
ended September 30, 2000, versus $31,864,000 for the same period in 1999. The
increase in 2000 was primarily due to the costs associated with the continued
development of the Raton Basin, including an upgrade of the gas collection
system and the KLT property acquisition.
Cash flows provided by financing activities were $71,985,000 during the nine
months ended September 30, 2000, as compared to $22,737,000 in the same period
during 1999. The increase was primarily due to increased borrowings on the
Company's line of credit as a result of higher capital expenditures and the KLT
property acquisition in 2000 as compared to 1999. In June 1999, the Company
paid off all outstanding debt with proceeds received from the public offering of
common stock completed in June 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133, amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management believes the adoption of this statement will not
have a material impact on the Company's financial statements.
In 1999, the SEC issued Staff Accounting Bulletin No. 101, which deals with
revenue recognition and is effective in the fourth quarter of 2000. The Company
does not expect its adoption to have a material effect on the Company's
financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44"), which was
effective July 1, 2000, except that certain conclusions in this
Interpretation which cover specific events that occur after either December
15, 1998 or January 12, 2000 are recognized on a prospective basis from July
1, 2000. This Interpretation clarifies the application of APB Opinion 25 for
certain issues related to stock issued to employees. The Company adopted this
interpretation on July 1, 2000. The adoption of FIN 44 had no material impact
on the Company's financial condition, results of operations or cash flows.
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
COMMODITY RISK. The Company's major market risk exposure is in the pricing
applicable to the Company's gas production. Realized pricing is primarily
driven by the prevailing price for crude oil and spot prices applicable to
the Company's United States natural gas production. Historically, prices
received for gas production have been volatile and unpredictable. Pricing
volatility is expected to continue.
The Company periodically enter into contractual obligations that require
future delivery of the Company's natural gas production to attempt to manage
price risk with regard to a portion of the Company's natural gas production.
A 10% improvement in year-end spot market prices would not have affected the
Company's physical gas contracts in place as those contracts were lower than
the spot plus 10%. A 10% decline in mid-year spot market prices on mid-year
production not covered under contractual obligations would reduce 2000
revenues, assuming production volumes remain the same.
INTEREST RATE RISK. At November 9, 2000, the Company has long-term debt
outstanding of $48 million. The interest rates on the outstanding debt range
from LIBOR plus 1.125% to prime. Interest rates are variable, however, they
may be fixed at the Company's option for periods of time between 30 to 90
days. A 10% increase in short-term interest rates on the floating-rate debt
outstanding at November 9, 2000 would equal approximately 78 basis points.
Such an increase in interest rates would not materially impact our 2000
interest expense assuming borrowed amounts remain outstanding at current
levels.
FOREIGN CURRENCY RISK. The Company's net assets, revenue and expense accounts
from the Company's U.K. subsidiary are based on the U.S. dollar equivalent of
such amounts measured in the British pound sterling. Assets and liabilities
of the U.K. subsidiaries are translated to U.S. dollars using the applicable
exchange rate as of the end of a reporting period. Revenues, expenses and
cash flow are translated using the average exchange rate during the reporting
period.
The Company has not had any significant operations in the United Kingdom for
the past several years. In 2000, the Company started a drilling program
consisting of 5 conventional coal bed methane wells and 4 interaction and gob
gas wells. Any significant change in the exchange rate for the pound sterling
would have an impact on the cost of the drilling program.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except as described below, there are no material pending legal proceedings to
which the Company or any of its subsidiaries is a party to or which any of
their property is subject.
On July 13, 1998, a localized group of citizens, Southern Colorado C.U.R.E.,
filed a lawsuit against EOC under the citizen suit provision of the Clean Water
Act in the U.S. District Court for the District of Colorado, related to EOC's
water production associated with coal bed methane drilling operations in the
Raton Basin near Trinidad, Colorado. EOC also coordinated with the EPA and the
State of Colorado in the investigation of certain practices in connection with
these operations. On January 7, 2000, EOC entered into a Compliance Order on
Consent with the Colorado Department of Public Health and Environment ("CDPHE")
that resolved water quality/ discharge issues between the CDPHE and EOC. As a
result, as anticipated, the U.S. District Court granted the Company's Motion to
Dismiss the citizen suit, with prejudice, on the grounds that the Consent Order
moots the federal case and bars C.U.R.E. from seeking further penalties for the
same alleged violations. The only outstanding matter related to this case
pertains to the assertion by C.U.R.E. that it is entitled to attorneys fees,
which the Company disputes and has vigorously contested. Management believes
that in the event attorney fees are granted, it would not have a material
adverse effect on the Company's operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As of September 20, 2000, the Company issued 201,748 shares of common stock
and 100,000 shares of mandatory redeemable preferred stock to a limited
liability company, believed to be an accredited investor, in connection with
an acquisition of property interests in the Raton Basin. The Company issued
these shares of common stock and preferred stock in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 2.1 - Agreement for Purchase and Sale dated September 19, 2000, by
and between Apache Canyon Gas, L.L.C., as Seller and Evergreen Resources,
Inc. as Buyer (Incorporated by reference to Exhibit 2.1 to the Company's
Form 8-K filed on October 5, 2000).
Exhibit 2.2 - Agreement for Purchase and Sale dated September 19, 2000 by
and between Apache Canyon Gas, L.L.C., as Seller and Evergreen Resources,
Inc. as Buyer (Incorporated by reference to Exhibit 2.2 to the Company's
Form 8-K filed on October 5, 2000).
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERGREEN RESOURCES, INC.
(Registrant)
Date: November 14, 2000 By: /s/ Kevin R. Collins
-----------------------------------
Kevin R. Collins
VP - Finance, Chief Financial Officer
and Secretary (Principal Financial
and Accounting Officer)
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