U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
COMMISSION FILE NO. 0-20975
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TENGASCO, INC. AND SUBSIDIARIES
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
TENNESSEE 87B0267438
------------------------------- --------------------------------------
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
603 MAIN AVENUE, SUITE 500, KNOXVILLE, TN 37902
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(Address of principal executive offices)
(865-523-1124)
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 9,960,326 common shares at September
30, 2001.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
TENGASCO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
* Condensed Consolidated Balance Sheets as of September 30,
2001 and December 31, 2000..................................... 3-4
* Condensed Consolidated Statements of Loss for the three
and nine months ended September 30, 2001 and 2000.............. 5
* Condensed Consolidated Statements of Stockholders'
Equity for the nine months ended September 30, 2001............ 6
* Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000.................. 7
* Notes to Condensed Consolidated Financial Statements........... 8-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........12-17
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK............................ 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................... 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............... 19
ITEM 6. EXHIBITS AND 8-K REPORTS................................ 19
* Signature...................................................... 20
2
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2001 December 31, 2000
-------------------- -------------------
(UNAUDITED)
Current Assets:
Cash and cash equivalents $ 918,947 $ 1,603,975
Trade accounts receivable, net 1,046,527 684,132
Accounts receivable 150,000 0
Well participants receivable 80,874 65,254
Other current assets 301,345 251,345
---------------------- --------------------
Total current assets 2,497,693 2,604,706
Oil and gas properties, net (on the basis of full cost
accounting) 13,368,909 9,790,047
Completed pipeline facilities, net 14,704,636 4,200,000
Pipeline facilities, under construction, at cost 0 6,847,038
Property and equipment, net 1,626,651 1,677,432
Other 55,613 105,501
---------------------- --------------------
$ 32,253,502 $ 25,224,724
====================== ====================
See accompanying notes to condensed consolidated financial statements
3
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2001 2000
------------- ------------
(UNAUDITED)
Current liabilities
Current maturities of long-term debt-related party $ 500,000 $ 500,000
Current maturities of long-term debt 2,514,648 1,608,486
Accounts payable-trade 952,836 1,016,462
Accrued interest payable 213,856 56,657
Accrued dividends payable 112,458 78,778
Accrued liabilities 60,588 52,640
------------ ------------
Total current liabilities 4,354,386 3,313,023
Long-term debt-related parties,
less current maturities 4,805,728 4,845,000
Long-term debt, less current maturities 1,276,405 2,263,599
------------ ------------
Total long-term debt 6,082,133 7,108,599
------------ ------------
Total liabilities 10,436,519 10,421,622
------------ ------------
Preferred Stock
Convertible redeemable preferred; redemption value
$5,622,900 and $3,938,900; 56,229 and 39,389
shares outstanding; respectively 5,622,900 3,938,900
------------ ------------
Stockholders' Equity
Common stock, $.001 par value, 50,000,000 shares
authorized; 9,960,326 and 9,295,558
shares outstanding; respectively 9,962 9,296
Common stock dividend distributable (498,016 shares) 498 0
Additional paid-in capital 38,445,159 25,941,709
Accumulated deficit (22,261,536) (15,086,803)
------------ ------------
Total stockholders' equity 16,194,083 10,864,202
------------ ------------
$32,253,502 $25,224,724
============ ============
See accompanying notes to condensed consolidated financial statements
4
TENGASCO, INC. AND SUBSIDIAIRES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
2001 2000 2001 2000
---------- ----------- ------------- -----------
Oil and gas revenues $ 2,433,758 $ 1,666,583 $ 5,745,144 $ 4,116,778
Equipment sales 150,000 0 150,000 0
------------- ------------- ------------- -------------
Total revenues 2,583,758 1,666,583 5,895,144 4,116,778
------------- ------------- ------------ -------------
Costs and other deductions
Production costs and taxes 1,112,471 664,526 2,463,401 1,920,087
Depletion, depreciation
and amortization 217,551 63,000 486,008 189,000
Interest expense 248,328 95,686 577,342 299,844
General and administrative
costs 763,569 679,479 2,567,876 1,794,501
Legal and accounting 58,436 78,983 321,916 278,124
------------- ------------- ------------ -------------
Total costs and other deductions 2,400,355 1,581,674 6,416,543 4,481,556
------------- ------------- ------------ -------------
Net income (loss) 183,403 84,909 (521,399) (364,778)
------------- ------------- ------------ -------------
Dividends on preferred stock 112,458 66,845 278,725 178,778
------------- ------------- ------------ -------------
Net income (loss) attributable
to common shareholders $ 70,945 $ 18,064 $ (800,124) $ (543,556)
------------- ------------- ------------ -------------
Net income (loss) attributable
to common shareholders
Per share basic and diluted $ 0.01 $ 0.00 $ (0.08) $ (0.06)
------------- ------------- ------------ -------------
Weighted average shares
outstanding 10,393,140 9,318,097 10,303,126 9,153,935
------------- ------------- ------------ -------------
See accompanying notes to condensed consolidated financial statements
5
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Common Stock Additional
------------ Dividend Paid In Accumulated
Shares Amount Distributable Capital Deficit
---------- --------- --------------- ----------- -----------
Balance December 31, 2000 9,295,558 $ 9,296 0 $ 25,941,709 $ (15,086,803)
Common stock issued
with 5% stock dividend 0 0 498 6,374,111 (6,374,609)
Common stock issued in
private placements, net 358,733 359 0 3,640,840 0
Common stock issued on
conversion of debt 33,872 34 0 221,967 0
Common stock issued as a
charitable donation 1,159 1 0 14,776 0
Stock options exercised 258,657 259 0 2,180,768 0
Conversion of preferred stock
to common stock 12,347 13 0 70,988 0
Dividends on convertible
redeemable preferred stock 0 0 0 0 (278,725)
Net loss for the nine months
ended September 30, 2001 0 0 0 0 (521,399)
--------- -------- ---- -------------- -------------
Balance, September 30, 2001 9,960,326 $ 9,962 $498 $ 38,445,159 $ (22,261,536)
========= ======== ==== ============== =============
See accompanying notes to condensed consolidated financial statements
6
TENGASCO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine For the Nine
Months Ended Months Ended
September 30, 2001 September 30, 2000
(UNAUDITED) (UNAUDITED)
----------- -----------
Operating activities
Net loss $ (521,399) $ (364,778)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depletion, depreciation and amortization 486,008 189,000
Compensation paid in stock options 55,200 0
Changes in assets and liabilities
Accounts receivable (528,015) (156,101)
Other current assets (50,000) (73,103)
Accounts payable (63,626) (232,661)
Accrued liabilities 7,948 (133,617)
Accrued Interest payable 157,199 0
-------------- ---------------
Net cash used in operating activities (370,667) (771,260)
-------------- ---------------
Investing activities
Net additions to oil and gas properties (3,871,362) (796,682)
Net additions to pipeline facilities and other
property and equipment (3,800,325) (3,060,741)
Decrease in restricted cash 0 625,000
Other assets 49,888 23,000
-------------- ---------------
Net cash used in investing activities (7,621,799) (3,209,423)
-------------- ---------------
Financing activities
Proceeds from borrowings 1,000,000 3,945,595
Repayments of borrowings (1,120,304) (2,081,434)
Dividends paid on convertible redeemable preferred stock (245,045) (178,781)
Proceeds from private placements of common stock ,net,
and exercise of stock options 6,003,805 2,696,700
Proceeds from private placements of preferred stock 1,755,000 1,950,000
-------------- ---------------
Net cash provided by financing activities 7,393,456 6,332,080
-------------- ---------------
Net change in cash and cash equivalents (685,028) 2,351,397
Cash and cash equivalents, beginning of period 1,603,975 420,590
-------------- ---------------
Cash and cash equivalents, end of period $ 918,947 $ 2,771,987
============== ===============
See accompanying notes to condensed consolidated financial statements
7
Tengasco, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Item 210 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September
30, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. For further
information, refer to the Company's consolidated financial statements
and footnotes thereto for the year ended December 31, 2000, included
in the Company's annual report on Form 10-KSB.
(2) During 2000, the Company acquired debt financing in the amount of
$3,850,000 from two members of the board of directors, one affiliate,
and two shareholders in order to complete construction of its pipeline
from Swan Creek to Kingsport. The terms of the debt provide for the
directors to receive a throughput fee once production begins. This fee
is to continue until the debt is repaid. The throughput fee is 10
cents per MMBtu delivered through the pipeline in proportion to the
director's proportion of total debt. The volume delivered shall be
calculated on a monthly basis. The original agreement provided for
quarterly interest payments to begin June 2001. The holders of the
note agreed to extend the interest repayment term to commence on July
15, 2001. All other terms of the agreement remain in effect. Principle
and interest payments are being made monthly over the next fifty-four
months. All payments are current.
During 2000, the Company acquired debt financing from a major
officer/stockholder in the amount of $995,000 in order to purchase a
drilling rig.
During 2000 the Company paid approximately $270,000 in consulting fees
and commissions on equity transactions to a member of the Board of
Directors.
During the second quarter 2001 the Company acquired debt financing
from a major stockholder in the amount of $1,000,000. This note
evidencing this indebtness provides for monthly interest payment due
beginning July 1, 2001 at the annual stated rate of 15% with the total
principle due April 26, 2002.
See note 10 for subsequent payoff of debt
(3) During the third quarter of 2001, the Company sold two fully
depreciated compressors to Miller Petroleum, Inc. ("Miller") a joint
venturer with the Company, for $150,000. In exchange for this
equipment, the Company agreed to accept 150,000 shares of Miller's
stock which had an approximate stock price of $1 per share. The
Company recorded a receivable for $150,000 until the stock was legally
transferred on October 16, 2001.
8
(4) In accordance with SFAS No. 128, "Earnings Per Share", basic and
diluted loss per share are based on 10,393,140 weighted average shares
outstanding for the quarter ended September 30, 2001 and 9,318,097
weighted average shares outstanding for the quarter ended September
30, 2000. Weighted average shares outstanding for the nine month
periods ended September 30, 2001 and 2000, were 10,303,126 and
9,153,935 respectively. These figures have been retroactively adjusted
to reflect the 5% stock dividend declared on August 1, 2001 which is
distributable on October 1, 2001 (see Note 9). During the three and
nine month periods ended September 30, 2001, potential weighted
average common shares outstanding were approximately 1,084,000 and
1,230,000 shares, respectively. During the three and nine month
periods ended September 30, 2000, potential weighted average common
shares outstanding were approximately 900,000 and 920,000 shares,
respectively. These shares are not included in the computation of the
diluted loss per share amount because the Company was in a net loss
position and their effect would have been antidilutive for the
nine-month periods ended September 30, 2001 and 2000.
(5) SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective for all fiscal years beginning
after June 15, 2000 (as amended by FAS 138). This statement requires
recognition of all derivative contracts as either assets or
liabilities in the balance sheet and the measurement of them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing
of any gains or losses on the hedge with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the
period of change. Historically, the Company has not entered into any
material derivative contracts either to hedge existing risks or for
speculative purposes. The adoption of the new standard on January 1,
2001 did not affect the Company's financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101 "Revenue Recognition in Financial Statements" which outlines the
basic criteria that must be met to recognize revenue and provided
guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the
SEC. Adoption of SAB No. 101 did not have a material impact on the
Company's financial position or its results of operations.
9
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations" and SFAS No 142. "Goodwill and Other Intangible Assets".
SFAS No. 141 addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business
combination and SFAS No. 142 addresses this initial recognition and
measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other
assets. These standards require all future business combinations to be
accounted for using the purchase method of accounting. Goodwill will
no longer be amortized but instead will be subject to impairment tests
at least annually. The Company is required to adopt SFAS No 141 and
142 on a prospective basis as of January 1, 2002, however, certain
provisions of these new Standards may also apply to any acquisitions
concluded subsequent to September 30, 2001. Presently, the adoption of
these new standards has not affected the Company's financial condition
or results of operations.
(6) During the nine months ended September 30, 2001, the Company converted
$222,000 of debt through the issuance of 33,872 shares of common
stock. Additionally, the Company donated 1,159 shares of common stock
to a charitable organization during this period. The donation,
totaling $14,777 was recorded as a charitable contribution and is
included in general and administrative expenses in the accompanying
consolidated statement of loss for the nine months ended September 30,
2001. During the nine months ended September 30, 2001 the Company
converted 710 shares of preferred stock to common stock totaling
$71,000. During the nine months ended September 30, 2001, the Company
sold certain equipment in exchange for 150,000 shares of the
purchaser's stock. The sale was recorded at $150,000.
(7) During the nine months ended September 30, 2001, the Stock Option
Committee had granted 75,000 options to purchase the Company's common
stock at prevailing market prices. The options were granted to
employees and directors of the Company under the terms of the
Tengasco, Inc. Stock Incentive Plan.
Additionally, the Company extended the exercise period of one
employee's stock option who was retiring resulting in recorded
compensation of $55,200 during the nine months ended September 30,
2001.
(8) During the second quarter of 2001, the Company sold 17,550 shares of
its Series B 8% Cumulative Convertible Preferred stock ($100 par
value) pursuant to a private placement offering which terminated on
June 15, 2001. The funds raised through this offering, net of issuance
cost will be used for the Company's drilling program in the Swan Creek
field, the exploration of new geological structures, and working
capital, as the Company deems appropriate.
(9) On August 1, 2001 Tengasco announced a 5% stock dividend distributable
on October 1, 2001 to shareholders of record of the Company's common
stock on September 4, 2001. Based on the number of common shares
outstanding on the record date, the Company expects to issue 498,016
new shares.
10
The fair market value of the additional shares issued, aggregating
$6,374,609, was charged to accumulated deficit, and common stock
dividend distributable and additional paid-in-capital were increased
by $498 and $6,374,111, respectively. All references in the
accompanying financial statements to the number of common shares and
per share amounts are based on the increased number of shares giving
retroactive effect to the stock dividend.
(10) On November 8, 2001, the Company signed a credit facility with the
Energy Finance Division of Bank One, N.A. in Houston, Texas whereby
Bank One has extended to the Company a revolving line of credit of up
to $35 million. The initial borrowing base under the facility is $10
million and the borrowing base will be adjusted upon periodic review
by Bank One of the Company's oil and gas reserves. The interest rate
is the Bank One base rate plus one-quarter percent which at the
present time is 5.25%. On November 9, 2001, funds from this credit
line were used to (1) refinance existing indebtedness on the Company's
Kansas properties ($1,427,309.25); (2) to repay the internal financing
provided by directors and shareholders on the Company's recently
completed 65-mile Tennessee intrastate pipeline system
($3,895,490.83); (3) to prepay a note payable to Spoonbill, Inc. in
the amount of $1,080,833.34; (4) to prepay a purchase money note due
to M.E. Ratliff, the Company's chief executive officer, for purchase
by the Company of a drilling rig and related equipment in the amount
of $1,003,844.44; and (5) to prepay in full the remaining principal of
the working capital loan due December 31, 2001 to Edward W.T. Gray
III, a director of the Company, in the amount $304,444.44. All of
these obligations incurred interest at a rate substantially greater
than the rate being charged by Bank One under the credit facility.
Together with attorney fees, mortgage taxes in Kansas and Tennessee,
and related fees, the total drawn on November 9, 2001 from the credit
facility was $7,901,776.65.
(11) Certain comparative amounts have been reclassified to conform to the
current period presentations.
11
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
The Company is in the business of exploring for, producing and transporting oil
and natural gas in Tennessee and Kansas and marketing gas for others in
Tennessee. The Company has 243 oil and gas wells in Kansas and has 34 natural
gas and 10 oil wells in Tennessee.
With the completion of its 65 mile pipeline, the Company is now delivering its
gas to Eastman Chemical Company ("Eastman"), BAE SYSTEMS at the Holston Army
Ammunition Plant and anticipates being eventually able to sell substantially all
of its natural gas production from the Swan Creek Field. Deliveries of natural
gas to BAE SYSTEMS at the Holston facility commenced on April 4, 2001. Initial
deliveries of gas to Eastman were made on May 21, 2001. The Company is presently
selling an average of approximately 5,000 MMBTU of gas per day, which is
slightly lower than in the prior quarter and than what was anticipated as a
result of a temporary reduction in gas flow caused by larger amounts of
condensate in the pipeline than anticipated. The Company is currently reworking
the configuration of the compressors and installing equipment to remove the
condensate and sell it. It is anticipated that the installation will be
completed by November 30 and gas sales should rise to a level of 6,000 MMBTU
within a short period and gradually to 10,000 MMBTU. The condensate, which at
present is produced at the rate of approximately 20 barrels per day, is to be
sold at the same price the Company receives for its crude oil. The Company
anticipates that purchases under the agreement with BAE SYSTEMS will ultimately
be 1,800 MMBTU of gas per day as that company's production requirements
increase. The Company is currently supplying all of the natural gas requirements
of BAE SYSTEMS and cannot determine at this time what their ultimate production
schedule and thus their natural gas requirements may be.
On November 8, 2001, the Company signed a credit facility with the Energy
Finance Division of Bank One, N.A. in Houston, Texas whereby Bank One has
extended to the Company a revolving line of credit of up to $35 million. The
initial borrowing base under the facility is $10 million and the borrowing base
will be adjusted upon periodic review by Bank One of the Company's oil and gas
reserves. The interest rate is the Bank One base rate plus one-quarter percent
which at the present time is 5.25%. On November 9, 2001, funds from this credit
line were used to (1) refinance existing indebtedness on the Company's Kansas
properties ($1,427,309.25); (2) to prepay the internal financing provided by
directors and shareholders on the Company's recently completed 65-mile Tennessee
intrastate pipeline system ($3,895,490.83); (3) to prepay a note payable to
Spoonbill, Inc. in the amount of $1,080,833.34; (4) to prepay a purchase money
note due to M.E. Ratliff, the Company's chief executive officer, for purchase by
the Company of a drilling rig and related equipment in the amount of
$1,003,844.44; and (5) to prepay in full the remaining principal of the working
capital loan due December 31, 2001 to Edward W.T. Gray III, a director of the
Company, in the amount of $304,444.44. All of these obligations incurred
interest at a rate substantially greater than the rate being charged by Bank One
under the credit facility. Together with attorney's fees, mortgage taxes in
Kansas and Tennessee, and related fees, the total drawn on November 9, 2001 from
the credit facility was $7,901,776.65.
12
The Company's plan of operations for the period ending December 31, 2002 calls
for the drilling of a minimum of 30 additional wells in the Swan Creek Field at
a cost of approximately $250,000 per well. During the first nine months of 2001,
the Company drilled 12 wells in the Swan Creek Field, all of which were
successful resulting in 9 additional gas wells and 3 additional oil wells. The
Company anticipates that as a result of sales of natural gas from its Swan Creek
Field and the acquisition of the Bank One line of credit it will have sufficient
funds to complete the drilling program.
The Company's present plan of operations also includes contracting for sales of
additional volumes of natural gas not only to Eastman and BAE Systems as their
needs increase, but to other industrial customers in the Kingsport, Tennessee
area. Negotiations with such additional potential customers are in the
preliminary stages. Other large industrial customers in Kingsport presently
served by an interstate pipeline include Willamette Paper, General Shale (brick
manufacturer) and AFG Glass.
The aggregate requirement of these potential customers exceeds the requirements
of Eastman. The Company has not entered into any contracts for sales to any of
these potential customers, and no assurances can be made that such contracts
will be agreed upon. However, the Company plans to fully exploit this
significant market potential in the Kingsport area for serving large volume
industrial customers assuming that sufficient volumes of natural gas can be
produced and transported through the Company's pipeline. In addition, the
Company's subsidiary, Tengasco Pipeline Corporation, has entered into a
franchise agreement with the City of Kingsport that grants it authority for
twenty years to construct facilities and to sell and distribute natural gas to
all classes of customers listed herein. The franchise agreement is subject to
approval by the Tennessee Regulatory Authority. The Company expects to file for
approval shortly and anticipates that such approval will be granted.
The Company's wholly owned subsidiary, Tengasco Pipeline Corporation, installed
and operates a new natural gas utility service to residential, commercial and
industrial users in Hancock County, Tennessee for the Powell Valley Utility
District. The Powell Valley District previously had no natural gas facilities.
The system was installed in the year 2000 and deliveries of gas to customers in
Sneedville began in the first quarter of 2001. Revenues to date from sales of
gas have been limited due to the small number of initial residential customers.
The system will be gradually expanded over time to serve as many of the 6,900
residential and commercial customers in the county as may be economically
possible. The system is currently being extended approximately two miles in
order to serve a new industrial customer in the Sneedville industrial park.
The Company plans to drill five new wells in Ellis and Rush Counties, Kansas on
its existing Kansas leases during the remainder of this calendar year in
response to drilling activity in the area establishing new areas of production.
During this quarter, the Company successfully drilled the Dick No. 7 well in
Kansas and completed the well as an oil well. The Company is also engaged, for a
fee, to gather the gas produced from wells owned by others located in Kansas
adjacent to the Company's wells and near the Company's gathering lines.
13
The Company's plans for its Kansas properties include maintaining the current
productive capacity of its existing wells through normal workovers and
maintenance of the wells, performing gathering or sales services for adjacent
producers, and expanding the Company's own productions through drilling
additional wells. In addition, there are several capital development projects
that the Company is considering with respect to the Kansas Properties which
include recompletion of wells and major workovers to increase current
production. These projects when completed are expected to increase production in
Kansas.
The Company's plan of operation also includes exploration in six or more
additional major geological structures in the East Tennessee area that are
similar to the Swan Creek structure and which the Company's geology staff
indicate have a high probability of producing hydrocarbons.
The Company has either acquired seismic data on these structures from third
party sources, or is conducting its own seismic studies with its own trucks and
equipment. The seismic data is being analyzed at facilities of the University of
Tennessee as part of the strategic alliance between the Company and the
University of Tennessee. The seismic analysis is continuing and related leasing
activities have begun based on initial analysis of seismic results. The analysis
should be completed in approximately six months, and the Company plans to
conduct exploration activities in these new areas.
On August 10, 2001, the Company and Penn Virginia Oil & Gas Corporation, a
subsidiary of Penn Virginia Corporation entered into a joint operating agreement
to explore, drill, and develop a certain area of mutual interest in East
Tennessee and southern Virginia. The area of mutual interest is in addition to
the six areas described above identified as potentially productive. Both
companies will share equally all lease acquisition costs, seismic exploration
and analysis costs, drilling and operating costs, as well as the proceeds from
production. Penn Virginia is named as the initial operator under the joint
operating agreement. Penn Virginia has begun the seismic program and drilling
operations will be based on the results of seismic analysis. While the Company
anticipates the possibility of significant production as a result of this
venture, no assurances can be made at this time of the amount of reserves that
may be discovered or produced in the course of this venture.
The Company has no plans, at present, to increase the number of its employees
significantly.
This plan of operations is based upon many variables and estimates, all of which
may change or prove to be other than or different from information relied upon.
The information contained in this Report, in certain instances, includes certain
forward-looking statements. When used in this document, the words budget,
budgeted, anticipate, expects, estimates, believes, goals or projects and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements.
14
Important factors that could cause actual results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, the following: production variances from expectations, volatility of oil and
gas prices, the need to develop and replace reserves, the substantial capital
expenditures required for the drilling of wells and the related need to fund
such capital requirements through commercial banks and/or public securities
markets, environmental risks, drilling and operating risks, risks related to
exploration and development drilling, the uncertainty inherent in estimating
future oil and gas production or reserves, uncertainty inherent in litigation,
competition, government regulation, and the ability of the Company to implement
its business strategy, including risks inherent in integrating acquisition
operations into the Company's operations.
Results of Operations and Financial Condition
Comparison of the Quarters Ending September 30, 2001 and 2000
The Company recognized $2,433,758 in oil and gas revenues from its Kansas
Properties and the Swan Creek Field during the third quarter of 2001 compared to
$1,666,583 in the third quarter of 2000. This increase in revenues was due
primarily to gas production from the Swan Creek Field in the third quarter. The
Swan Creek Field produced 434,557 MCF of gas, resulting in $1,090,000 of net
revenues. Although production was approximately the same during the quarters
ending September 30, 2001 and 2000, Kansas oil revenues were down approximately
$87,000 and gas revenues were down approximately $123,000 in the third quarter
of 2001 due to a decrease in oil prices from the third quarter of 2000. Oil
prices in the third quarter of 2000 were approximately $29.50 per BBL and gas
prices were approximately $4.10 per MCF whereas the prices in the third quarter
of 2001 were approximately $24.25 per BBL and gas prices were approximately
$2.70 per MCF. Additionally, during the three months ended September 30, 2001,
the Company sold two fully depreciated compressors, resulting in other income of
$150,000.
The Company realized net income attributable to common shareholders of $70,945
($.01 per share of common stock) during this period compared to a net income in
the third quarter of 2000 to common shareholders of $18,064 ($.00 per share of
common stock).
Production costs and taxes in the third quarter of 2001 of $1,112,471 were
higher when compared to $664,526 in the third quarter of 2000. The increase is
primarily due to production cost, severance taxes and gas royalties resulting
from the increased production from the Swan Creek Field.
Depreciation, Depletion and Amortization expense for the third quarter of 2001
was $217,551, compared to $63,000 in the third quarter of 2000. This increase
was primarily due to depreciation being taken on the Company's completed 65-mile
pipeline for the first time in the year 2001. Other increases include increases
in depletion and an increase in depreciation on additional equipment purchased
in late 2000.
Interest expense for the third quarter of 2001 was $248,328 as compared to
$95,686 in the third quarter of 2000. This increase was due to additional
interest cost associated with necessary financing for the completion of Phase II
of the Company's 65-mile pipeline.
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General and Administrative Expenses for the third quarter of 2001 increased
$84,090 from $679,479 in the third quarter of 2000. Most of this cost increase
was to expand insurance coverage including blowout insurance for the Company and
also for the Company's medical insurance plan.
Legal and accounting fees decreased $20,547 from the third quarter of 2000 as
several legal matters were settled late in the year 2000.
During the three months ended September 30, 2001, the Company incurred $398,479
of additional capitalized costs associated with the completion of the Swan Creek
Pipeline.
Comparison of the Nine Month Periods Ending September 30, 2001 and 2000.
The Company recognized $5,745,144 in oil and gas revenues from the Kansas and
Swan Creek oil and gas fields during the nine months ended September 30, 2001
compared to $4,116,778 for the nine months ended September 30, 2000. This
$1,778,366 increase in revenues was due primarily to gas production from the
Swan Creek Field in the second and third quarters of 2001. In the nine months
ended September 30, 2001, the Swan Creek Field produced 646,958 MCF of gas,
resulting in $1,800,491 of net revenues. Kansas gas revenues for the nine months
ended September 30, 2001 were approximately $276,000 higher than those for the
nine-month period ended September 30, 2000. This change was due to an increase
in price per MCF from the nine months ended September 30, 2000; all of the
increase was in the first quarter of 2001 as prices were down in the second and
third quarters of 2001. Although production was approximately the same during
the nine months ending September 30, 2001 and 2000, Kansas oil and Swan Creek
oil revenues were down approximately $300,000 in the nine months ended September
30, 2001 compared to the same period in 2000 due to price decreases.
Additionally, during the three months ended September 30, 2001, the Company sold
two fully depreciated compressors, resulting in other income of $150,000.
Although the Company's nine month revenues increased from the nine months ended
September 30, 2000, the Company incurred a net loss available to holders of
common stock of $800,124 (0.08 per share of common stock) compared to a net loss
available to holders of common stock of $543,556 ($0.06 per share of common
stock) for the nine months ended September 30, 2000.
The increase in the loss was due to the following factors:
Production costs and taxes for the first nine-months of 2001 of $2,463,401
were higher compared to $1,920,087 in the first nine months of 2000. The
increase is primarily due to production costs, severance taxes, and gas
royalties resulting from the increased production from the Swan Creek
Field. Also, during the first nine months of 2001 the Company incurred
additional maintenance costs in Swan Creek in connection with the
preparation of production beginning in April of 2001.
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Depreciation, Depletion and Amortization expenses for the nine months ended
2001 were $486,008, compared to $189,000 for the first nine months of 2000.
Approximately $147,000 of this increase was due to depreciation being taken
on the pipeline for the first time in the second and third quarters of
2001. Other increases include an increase in depletion and an increase in
depreciation on additional equipment purchased in late 2000.
Interest expense for the nine months ending September 30, 2001 was
$577,342, as compared to $299,844 in 2000. This increase is due to
additional interest cost associated with financing for the completion of
Phase II of the Company's 65-mile pipeline. This increase was reduced by
interest cost of approximately $148,000 which was capitalized in the first
three months of 2001 during construction of the pipeline.
General and Administrative Expenses for the first nine months of 2001
increased $773,375 from $1,794,501 in the first nine months of 2000.
Approximately $320,000 of this increase was due to an increase in insurance
to expand coverage including blowout insurance for the Company and
approximately $196,000 was attributable to public relations costs
associated with producing the annual report, the proxy statement and press
releases. The Company also incurred a $55,200 compensation adjustment
resulting from the extension of the exercise period for options granted to
an employee. Engineering service and professional fees increased
approximately $100,000 for reserve analysis.
Legal and accounting fees increased $43,792 for the first nine months of
2001. The increase was for additional services provided by our auditors
associated with year-end filings, the proxy statement and the annual
reports.
During the nine months ended September 30, 2001, the Company incurred $3,724,479
of additional capitalized costs associated with the Swan Creek Pipeline.
On March 8, 2001, the pipeline was ready for its intended use; accordingly,
pipeline facilities under construction were reclassified to completed pipeline
facilities on the accompanying condensed consolidated balance sheet at September
30, 2001.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK:
The Company has risk exposure for interest rates on its outstanding debt. A
significant portion of the Company's long-term debt is based upon published
prime rates. Interest rates have recently been somewhat volatile, and although
it is difficult to predict future fluctuations of interest rates volatility is
expected to continue.
The Company's major market risk exposure is in the pricing applicable to its
natural gas and crude oil production. Historically, prices received for gas
production have been volatile and unpredictable. For example, gas prices as of
December 31, 2000 was $9.77 per MCF compared to $2.70 per MCF in the third
quarter of 2001. Pricing volatility is expected to continue.
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ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2001, 358,733 shares of restricted
common stock were sold in a private placement (of which 111,111 shares were
issued during the third quarter), 33,872 shares were issued pursuant to the
conversion of convertible notes (of which 11,804 shares were issued during the
third quarter), 258,657 shares of common stock were issued pursuant to the
exercise of options (of which 46,300 was in the third quarter), the majority of
which were granted under the Tengasco, Inc. Stock Incentive Plan and 12,347
shares were issued pursuant to the conversion of 710 shares of preferred stock
to common stock in the second quarter.
During the second quarter of 2001, the Company sold 17,550 shares of its Series
B 8% Cumulative Convertible Preferred stock ($100 par value) pursuant to a
private placement offering which terminated on June 15, 2001. The funds raised
through this offering, net of issuance cost will be used for the Company's
drilling program in the Swan Creek fields, the exploration of new geological
structures, and working capital, as the Company deems appropriate.
ITEM 6 EXHIBITS AND 8-K REPORTS.
During the quarter ending September 30, 2001 the Company did not file any
Reports on Form 8-K.
The following exhibits are filed herewith:
EXHIBITS 10.21 Credit Agreement - Reducing Revolving Line of Credit Up to
$35,000,000 from Bank One, N.A. to Tengasco, Inc., Tennessee Land & Mineral
Corporation and Tengasco Pipeline Corporation dated November 8, 2001.
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PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On October 10, 2001 an arbitration hearing was held by the American Arbitration
Association between the Company's wholly owned subsidiary, Tengasco Pipeline
Corporation ("TPC"), and King Pipeline & Utility Company ("King"), the
contractor for the construction of Phase II of the Company's pipeline. The
arbitration was held to resolve disputes concerning final billings by King for
the pipeline construction. King made four claims, seeking (1) payment for straw
matting done by King on slopes calculated at two dollars per square foot; (2) to
retain payment it had received for clearing and grubbing charges; (3) the
release of a currently retained sum of $46,585, to which TPC made no claim,
presently being held in escrow pending outcome of ongoing litigation between
King and King's boring subcontractor; and (4) payment of $94,000 billed by King
for alleged extra work it performed in trenching at a depth deeper than called
for by the contract.
On October 31, 2001 the arbitrator issued his award finding that King was
entitled to recover the sum of $266,390.66 for straw matting work performed by
King, calculated at $2 per square foot as sought by King; that King was entitled
to retain the $72,500 payment made to it by TPC for clearing and grubbing work,
and that the retained sum be released from escrow. The arbitrator denied all
relief sought by King for extra charges in the amount of $94,000 for deeper
trenching, and awarded King its attorney's fees of approximately $14,000. The
Company is examining the possibility of appeal of the award, since the Company
believes that the arbitrator's ruling is not supported by the record presented.
However, available grounds for appeal appear extremely limited and it is
therefore unlikely that an appeal will occur. In the event an appeal is
unavailable and payment is made to satisfy the award, then based on the evidence
presented at the arbitration hearing, the Company and TPC intend to seek
recovery of the payments made to King as an additional element of damages being
sought from Caddum, Inc., the project engineer, in an action now pending in the
United States District Court for the Eastern District of Tennessee entitled C.H.
FENSTERMAKER & ASSOCIATES, INC. V. TENGASCO, INC. No. 3:01-CV-2.
Any settlements paid to King would be an addition to completed pipeline
facilities.
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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 hereto duly authorized.
Dated: November 14, 2001 TENGASCO, INC.
By: /s/ Harold G. Morris
----------------------------
Harold G. Morris, President
By: /s/ Mark A. Ruth
----------------------------
Mark A. Ruth,
Chief Financial Officer
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