UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 333-112653
ATLAS AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0404430
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
311 ROUSER ROAD
MOON TOWNSHIP, PA 15108
- ----------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (412) 262-2830
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
The number of outstanding shares of the registrant's common stock on February 1,
2005 was 13,333,333 shares.
ATLAS AMERICA, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - December 31, and September 30, 2004..................... 3
Consolidated Statements of Income Three Months Ended December 31, 2004 and 2003....... 4
Consolidated Statement of Changes in Stockholders' Equity
Three Months Ended December 31, 2004............................................. 5
Consolidated Statements of Cash Flows
Three Months Ended December 31, 2004 and 2003.................................... 6
Notes to Consolidated Financial Statements - December 31, 2004........................ 7 - 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 18 - 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 26 - 28
Item 4. Controls and Procedures............................................................... 28
PART II OTHER INFORMATION
Item 6. Exhibits.............................................................................. 29 - 30
SIGNATURES............................................................................................. 31
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ATLAS AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 29,159 $ 29,192
Accounts receivable................................................. 28,561 24,113
Prepaid expenses.................................................... 3,571 2,433
-------- --------
Total current assets............................................ 61,291 55,738
Property and equipment, net.............................................. 325,033 313,091
Other assets, net........................................................ 8,030 7,955
Intangible assets, net................................................... 7,010 7,243
Goodwill, net of accumulated amortization of $4,532...................... 37,470 37,470
-------- --------
$438,834 $421,497
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................... $ 2,621 $ 3,401
Accounts payable.................................................... 28,138 20,869
Liabilities associated with drilling contracts...................... 52,610 29,375
Accrued producer liabilities........................................ 10,881 8,815
Accrued liabilities................................................. 12,823 14,767
-------- --------
Total current liabilities....................................... 107,073 77,227
Long-term debt........................................................... 59,966 82,239
Advance from parent...................................................... 5,341 10,413
Deferred tax liability................................................... 22,828 21,442
Other liabilities........................................................ 6,340 6,949
Minority interest ....................................................... 135,040 132,224
Commitments and contingencies............................................ - -
Stockholders' equity:
Preferred stock, $0.01 par value: 1,000,000 authorized shares........ - -
Common stock, $0.01 par value: 49,000,000 authorized shares ........ 133 133
Additional paid-in capital........................................... 75,584 75,584
Accumulated other comprehensive loss................................. (202) (2,553)
Retained earnings.................................................... 26,731 17,839
-------- --------
Total stockholders' equity...................................... 102,246 91,003
-------- --------
$438,834 $421,497
======== ========
See accompanying notes to consolidated financial statements
3
ATLAS AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
2004 2003
------- -------
REVENUES
Well drilling............................................................. $30,558 $21,959
Gas and oil production.................................................... 14,659 10,196
Gathering, transmission and processing.................................... 43,782 1,599
Well services............................................................. 2,248 1,937
------- -------
91,247 35,691
COSTS AND EXPENSES
Well drilling............................................................. 26,573 19,095
Gas and oil production and exploration.................................... 1,802 1,685
Gathering, transmission and processing.................................... 35,680 596
Well services............................................................. 1,191 1,041
General and administrative................................................ 1,873 911
Depreciation, depletion and amortization.................................. 5,872 3,245
------- -------
72,991 26,573
OPERATING INCOME.......................................................... 18,256 9,118
OTHER INCOME (EXPENSE)
Interest expense.......................................................... (1,690) (487)
Minority interest in Atlas Pipeline Partners, L.P......................... (7,220) (1,271)
Arbitration settlement, net............................................... 4,446 -
Other, net................................................................ 102 168
------- -------
(4,362) (1,590)
Income from continuing operations before income taxes..................... 13,894 7,528
Provision for income taxes................................................ 5,002 2,635
------- -------
NET INCOME................................................................ $ 8,892 $ 4,893
======= =======
NET INCOME PER COMMON SHARE - BASIC
Net income per common share - basic..................................... $ 0.67 $ 0.46
======= =======
Weighted average common shares outstanding.............................. 13,333 10,688
======= =======
NET INCOME PER COMMON SHARE - DILUTED
Net income per common share - diluted................................... $ 0.67 $ 0.46
======= =======
Weighted average common shares outstanding.............................. 13,338 10,688
======= =======
See accompanying notes to consolidated financial statements
4
ATLAS AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2004
(in thousands, except share data)
(unaudited)
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Retained Stockholders'
Shares Amount Capital Income (Loss) Earnings Equity
---------- ------ ------- ------------- -------- --------
Balance, October 1, 2004.............. 13,333,333 $ 133 $75,584 $(2,553) $17,839 $ 91,003
Other comprehensive income............ - - - 2,351 - 2,351
Net income............................ - - - - 8,892 8,892
---------- ------ ------- ------- ------- --------
Balance, December 31, 2004............ 13,333,333 $ 133 $75,584 $ (202) $26,731 $102,246
========== ====== ======= ======= ======= ========
See accompanying notes to consolidated financial statements
5
ATLAS AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(unaudited)
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 8,892 $ 4,893
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion and amortization................................... 5,872 3,245
Amortization of deferred financing costs................................... 310 127
Non-cash loss on derivative value.......................................... 795 -
Non-cash compensation on long-term incentive plans......................... 416 -
Minority interest in Atlas Pipeline Partners, L.P.......................... 7,220 1,271
Gain on asset dispositions................................................. (24) (19)
Property impairments and abandonments...................................... - 6
Deferred income taxes...................................................... 725 2,635
Changes in operating assets and liabilities..................................... 29,219 22,547
-------- --------
Net cash provided by operating activities....................................... 53,425 34,705
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (16,882) (10,807)
Proceeds from sale of assets.................................................... 35 43
Increase in other assets........................................................ (327) (697)
-------- --------
Net cash used in investing activities........................................... (17,174) (11,461)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings...................................................................... 27,502 23,000
Principal payments on debt...................................................... (50,556) (35,014)
Payments to parent.............................................................. (9,349) (18,516)
Distributions paid to minority interests of Atlas Pipeline Partners, L.P........ (3,839) (1,682)
Increase in other assets........................................................ (42) (25)
-------- --------
Net cash used in financing activities........................................... (36,284) (32,237)
Decrease in cash and cash equivalents........................................... (33) (8,993)
Cash and cash equivalents at beginning of period................................ 29,192 25,372
-------- --------
Cash and cash equivalents at end of period...................................... $ 29,159 $ 16,379
======== ========
See accompanying notes to consolidated financial statements
6
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(unaudited)
NOTE 1 - MANAGEMENT'S OPINION REGARDING INTERIM FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Atlas
America, Inc. ("the Company") which is an 80.2% owned subsidiary of Resource
America, Inc. ("Resource America"). The Company's subsidiaries are all wholly
owned except for Atlas Pipeline Partners, L.P. ("Atlas Pipeline"). Atlas
Pipeline is a master limited partnership in which the Company had a 24% interest
and 39% interest at December 31, 2004 and 2003, respectively.
The consolidated financial statements and the information and tables
contained in the notes to the consolidated financial statements as of December
31, 2004 and for the three months ended December 31, 2004 and 2003 are
unaudited. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted in these
statements pursuant to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim financial
statements include all the necessary adjustments to fairly present the results
of the interim periods presented. The results of operations for the three months
ended December 31, 2004 may not necessarily be indicative of the results of
operations for the full fiscal year ending September 30, 2005.
Certain reclassifications have been made to the consolidated financial
statements as of September 30, 2004 and for the three months ended December 31,
2003 to conform to the presentation as of and for the three months ended
December 31, 2004.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Reference is hereby made to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 2004, which contains a summary of
significant accounting policies followed by the Company in the preparation of
its consolidated financial statements. These policies were also followed in
preparing the quarterly report included herein.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 (R) (revised 2004) Share-Based Payment, which is a
revision of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Statement 123 (R) supersedes Accounting
Principal Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
and amends Statement of Financial Accounting Standards (SFAS) No. 95, Statement
of Cash Flows. Generally, the approach to accounting in Statement 123 (R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. Currently the Company accounts for these payments under the intrinsic
value provisions of APB No. 25 with no expense recognition in the financial
statements. Statement 123 (R) is effective for the Company beginning July 1,
2005. The Statement offers several alternatives for implementation. At this
time, management has not made a decision as to the alternative it may select.
7
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - (CONTINUED)
In December 2004, the Emerging Issues Task Force ("EITF") of the FASB
released Issue No. 02-14, "Whether an Investor Should Apply the Equity Method of
Accounting to Investments Other Than Common Stock." The equity method of
accounting should be applied only when the investment is in common stock or
insubstance common stock. This pronouncement is effective for fiscal years
beginning after September 15, 2004. The adoption of this pronouncement did not
have an effect on the Company's financial condition or results of operations.
In December 2004, the EITF released Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments." The
release provides guidance for evaluating whether an investment is
other-than-temporarily impaired for reporting periods beginning after June 15,
2004. The adoption of this pronouncement did not have an effect on the Company's
financial condition or results of operations.
STOCK-BASED COMPENSATION
The Company accounts for its employees' participation in the stock
option plans of its ultimate parent, Resource America, in accordance with the
provisions of APB No. 25 and related interpretations. Compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. The Company adopted the disclosure
requirements of SFAS No. 123, as amended by the required disclosures of SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS 123 requires the disclosure of pro forma net income and earnings
per share as if the Company had adopted the fair value method for stock options
granted after June 30, 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values.
8
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STOCK-BASED COMPENSATION - (CONTINUED)
No stock-based employee compensation cost is reflected in net income of
the Company, as all options granted under those plans had an exercise price
equal to the market value of the underlying Resource America common stock on the
date of grant. The following table illustrates the effect on net income if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share data).
THREE MONTHS ENDED
DECEMBER 31,
------------------
2004 2003
------ ------
Net income, as reported................................................... $8,892 $4,893
Stock-based employee compensation expense reported in net income,
net of tax............................................................. - -
Less total stock-based employee compensation expense determined under
the fair value-based method for all awards, net of income taxes........ (136) (80)
------ ------
Pro forma net income...................................................... $8,756 $4,813
====== ======
Net income per common share:
Basic - as reported.................................................... $ .67 $ .46
Basic - pro forma...................................................... $ .66 $ .45
Diluted - as reported.................................................. $ .67 $ .46
Diluted - pro forma.................................................... $ .66 $ .45
SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers temporary investments with a maturity at the date
of acquisition of 90 days or less to be cash equivalents.
Supplemental disclosure of cash flow information (in thousands):
THREE MONTHS ENDED
DECEMBER 31,
------------------
2004 2003
------ ------
Cash paid during the period for:
Interest................................................................. $1,635 $ 406
Income taxes............................................................. $ - $ -
9
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income includes net income and all other changes in the
equity of a business during a period from transactions and other events and
circumstances from non-owner sources. These changes, other than net income, are
referred to as "other comprehensive income" and for the Company include only
changes in the fair value, net of taxes, of unrealized hedging gains and losses
(in thousands).
THREE MONTHS ENDED
DECEMBER 31,
------------------
2004 2003
------- ------
Net income................................................................ $ 8,892 $4,893
Other comprehensive loss:
Unrealized gain on natural gas futures and
options contracts, net of taxes of $1,351............................ 2,402 -
Less: reclassification adjustment for losses realized
in net income, net of taxes of $29................................... (51) -
------- ------
2,351 -
------- ------
Comprehensive income...................................................... $11,243 $4,893
======= ======
NOTE 4 - EARNINGS PER SHARE
Basic earnings per share is determined by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Earnings per share - diluted is computed by dividing net income by the sum of
the weighted average number of shares of common stock outstanding and dilutive
potential shares issuable during the period. Dilutive potential shares of common
stock consist of the excess of shares issuable under the terms of the Company's
stock option plan over the number of such shares that could have been reacquired
(at the weighted average price of shares during the period) with the proceeds
received from the exercise of the options.
The following table presents a reconciliation of the components used in
the computation of net income per common share-basic and net income per common
share-diluted (in thousands):
THREE MONTHS ENDED
DECEMBER 31,
-------------------
2004 2003
------- -------
Net income................................................................ $ 8,892 $ 4,893
======= =======
Weighted average common shares outstanding-basic.......................... 13,333 10,688
Dilutive effect of stock option and award plan............................ 5 -
------- -------
Weighted average common shares-diluted.................................... 13,338 10,688
======= =======
10
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 5 - DERIVATIVE INSTRUMENTS
Atlas Pipeline through its subsidiary, Atlas Pipeline Mid-Continent,
LLC ("APLMC"), acquired and/or entered into certain financial swap and option
instruments that are classified as cash flow hedges in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activity." APLMC entered
into these instruments to hedge the forecasted natural gas, natural gas liquids
and condensate sales against the variability in expected future cash flows
attributable to changes in market prices. The swap instruments are contractual
agreements between counterparties to exchange obligations of money as the
underlying natural gas, natural gas liquids and condensate is sold. Under these
swap agreements, APLMC receives a fixed price and pays a floating price based on
certain indices for the relevant contract period. The options fix the price for
APLMC within the puts purchased and calls sold.
Derivatives are recorded on the balance sheet as assets or liabilities
at fair value. For derivatives qualifying as hedges, the effective portion of
changes in fair value are recognized in stockholders' equity as Other
Comprehensive Income and reclassified to earnings as such transactions are
settled. For non-qualifying derivatives and for the ineffective portion of
qualifying derivatives, changes in fair value are recognized in earnings as they
occur. At December 31, 2004, APLMC reflected an unrealized net pre-tax commodity
hedging loss on its Balance Sheet of $2.6 million. Of the $2.6 million
unrealized pre-tax loss at December 31, 2004, $1.9 million of losses will be
reclassified to earnings over the next twelve month period and $708,000 in later
periods, if future prices remained constant. Actual amounts that will be
reclassified will vary as a result of future changes in prices. The Company
recognized a gain of $24,000 related to these hedging instruments in the three
months ended December 31, 2004. Ineffective gains or losses are recorded in
income while the hedge contract is open and may increase or decrease until
settlement of the contract. A hedging gain of $440,000 resulting from
ineffective hedges is included in income for the three months ended December 31,
2004.
A portion of the Company's future natural gas sales is periodically
hedged through the use of swap and collar contracts. Realized gains and losses
on these instruments are reflected in the contract month being hedged as an
adjustment to gas revenue.
11
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 5 - DERIVATIVE INSTRUMENTS - (CONTINUED)
As of December 31, 2004, Atlas Pipeline had the following natural gas
liquids, natural gas, and crude oil volumes hedged.
NATURAL GAS LIQUIDS FIXED - PRICE SWAPS
Production Average Fair Value
Period Volumes Fixed Price Liability(2)
--------------- ---------- ------------ --------------
(calendar year) (gallons) (per gallon) (in thousands)
2005 12,564,000 $ 0.550 $ (1,208)
2006 6,804,000 0.575 (500)
-------------
$ (1,708)
=============
NATURAL GAS FIXED - PRICE SWAPS
Production Average Fair Value
Period Volumes Fixed Price Liability(3)
--------------- ---------- ------------ --------------
(calendar year) (MMBTU)(1) (per MMBTU) (in thousands)
2005 970,000 $ 6.187 $ (71)
2006 450,000 5.920 (172)
-------------
$ (243)
=============
CRUDE OIL FIXED - PRICE SWAPS
Production Average Fair Value
Period Volumes Fixed Price Liability (3)
--------------- ---------- ------------ --------------
(calendar year) (barrels) (per barrel) (in thousands)
2006 18,000 $ 38.767 $ (36)
=============
CRUDE OIL OPTIONS
Production Average Fair Value
Period Option Type Volumes Strike Price Liability (3)
--------------- --------------- ---------- ------------ --------------
(calendar year) (barrels) (per barrel) (in thousands)
2005 Puts purchased 75,000 $ 30.00 $ -
2005 Calls sold 75,000 34.30 (640)
-------------
$ (640)
=============
Total liability $ (2,627)
=============
- ---------------------------
(1) MMBTU means Million British Thermal Units.
(2) Fair value based on APLMC internal model which forecasts forward natural
gas liquid prices as a function of forward NYMEX natural gas and light
crude prices.
(3) Fair value based on forward NYMEX natural gas and light crude prices, as
applicable.
12
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------- --------
Mineral interests:
Proved properties........................................................ $ 2,544 $ 2,544
Unproved properties...................................................... 1,002 1,002
Wells and related equipment.................................................. 195,947 184,046
Pipeline and compression facilities.......................................... 168,715 163,302
Rights-of-way................................................................ 14,128 14,702
Land, building and improvements.............................................. 7,537 7,213
Support equipment............................................................ 3,098 2,902
Other........................................................................ 4,465 4,227
-------- --------
397,436 379,938
Accumulated depreciation, depletion and amortization:
Oil and gas properties................................................... (68,785) (63,551)
Other.................................................................... (3,618) (3,296)
-------- --------
(72,403) (66,847)
-------- --------
$325,033 $313,091
======== ========
NOTE 7 - ASSET RETIREMENT OBLIGATIONS
The Company accounts for its estimated plugging and abandonment of its
oil and gas properties in accordance with SFAS 143, "Accounting for Asset
Retirement Obligations."
A reconciliation of the Company's liability for well plugging and
abandonment costs is as follows (in thousands):
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
2004 2003
-------- --------
Asset retirement obligations, beginning of period......................... $ 4,888 $ 3,131
Liabilities incurred...................................................... 650 30
Liabilities settled....................................................... (4) (28)
Accretion expense......................................................... 84 47
-------- --------
Asset retirement obligations, end of period............................... $ 5,618 $ 3,180
======== ========
The above accretion expense is included in depreciation, depletion and
amortization expense in the Company's consolidated statements of income and the
asset retirement obligation liabilities are included in other liabilities in the
Company's consolidated balance sheets.
13
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 8 - INCOME TAXES
The Company is included in the consolidated federal income tax return
of Resource America. Income taxes are calculated as if the Company had filed a
return on a separate company basis. The Company records deferred tax assets and
liabilities, as appropriate, to account for the estimated future tax effects
attributable to temporary differences between the financial statement and tax
bases of assets and liabilities and operating loss carryforwards, using
currently enacted tax rates. The deferred tax provision or benefit each year
represents the net change during that year in the deferred tax asset and
liability balances. Separate company state tax returns are filed in those states
in which the Company is registered to do business.
NOTE 9 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL
OTHER ASSETS
The following table provides information about other assets (in
thousands):
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------- --------
Deferred financing costs, net of accumulated amortization of
$1,390 and $1,080....................................................... $ 4,436 $ 4,704
Investments................................................................. 2,146 2,166
Other....................................................................... 1,448 1,085
-------- --------
$ 8,030 $ 7,955
======== ========
Deferred financing costs are amortized over the terms of the related
loan agreements.
INTANGIBLE ASSETS
Intangible assets consist of partnership management and operating
contracts acquired through acquisitions and recorded at fair value on their
acquisition dates. The Company amortizes contracts acquired on a declining
balance or straight-line methods over their respective estimated lives, ranging
from five to thirteen years. Amortization expense for the three months ended
December 31, 2004 and 2003 was $233,000 and $265,000, respectively. The
aggregate estimated annual amortization expense is approximately $848,000 for
each of the succeeding five-years ended December 31.
The following table provides information about intangible assets (in
thousands):
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------- --------
Partnership management and operating contracts.............................. $ 14,343 $ 14,343
Accumulated amortization.................................................... (7,333) (7,100)
-------- --------
Intangible assets, net...................................................... $ 7,010 $ 7,243
======== ========
14
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 10 - DEBT
Total debt consists of the following at the dates indicated (in
thousands):
DECEMBER 31, SEPTEMBER 30,
2004 2004
-------- --------
Revolving credit facilities................................................. $ 17,750 $ 25,000
Term loan................................................................... 44,250 60,000
Other debt.................................................................. 587 640
-------- --------
62,587 85,640
Less current maturities..................................................... 2,621 3,401
-------- --------
$ 59,966 $ 82,239
======== ========
Annual debt principal payments over the next five years ending December
31 are as follows (in thousands):
2005..................................... $ 2,621
2006..................................... 2,361
2007..................................... 10,060
2008..................................... 12,256
2009..................................... 35,289
NOTE 11 -ACQUISITION OF SPECTRUM BY ATLAS PIPELINE
On July 16, 2004, Atlas Pipeline acquired Spectrum Field Services, Inc.
(which changed its name to Atlas Pipeline Mid-Continent, LLC) for approximately
$142.4 million. The acquisition was accounted for using the purchase method of
accounting under SFAS No. 141 "Business Combinations." Atlas Pipeline is in the
process of evaluating certain estimates made in the purchase price and related
allocations; thus, the purchase price and allocations are both subject to
adjustment. The following summarized unaudited pro forma consolidated income
statement information for the three months ended December 31, 2003 assumes that
the acquisition occurred as of October 1, 2003. The Company has prepared these
pro forma financial results for comparative purposes only. These pro forma
financial results may not be indicative of the results that would have occurred
if Atlas Pipeline had completed this acquisition as of the periods shown below
or the results that will be attained in the future. The amounts presented below
are in thousands, except per share amounts:
15
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 11 -ACQUISITION OF SPECTRUM BY ATLAS PIPELINE - (CONTINUED)
Three Months Ended
December 31, 2003
-------------------------------------
Pro Forma Pro
As Reported Adjustment Forma
----------- ---------- -------
Revenues...................................................... $35,691 $22,534 $58,225
Net income.................................................... $ 4,893 $ (465) $ 4,428
Net income per common share - basic........................... $ .46 $ (.05) $ .41
Weighted average common shares - outstanding.................. 10,688 - 10,688
Net income per common share - diluted......................... $ .46 $ (.05) $ .41
Weighted average common shares................................ 10,688 - 10,688
Significant pro forma adjustments include revenues and costs and
expenses for the period prior to Atlas Pipeline's acquisition, interest and
depreciation expenses and the elimination of income taxes.
NOTE 12 - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company's operations include four reportable operating segments. In
addition to the reportable operating segments, certain other activities are
reported in the "Other energy" category. These operating segments reflect the
way the Company manages its operations and makes business decisions.
Mid-Continent and Appalachia are two segments within gathering, transmission and
processing that the Company evaluates separately. The Company does not allocate
income taxes to its operating segments.
Operating segment data for the periods indicated are as follows:
THREE MONTHS ENDED DECEMBER 31, 2004 (in thousands):
Revenues Depreciation, Other
from depletion significant
external Interest Interest and Segment items:
customers income expense amortization profit (loss) Segment assets
--------- -------- ------ ------------ ------------- --------------
Well drilling $30,558 $ - $ - $ - $ 3,678 $ 9,006
Production and exploration 14,659 - - 2,804 10,113 185,347
Mid- Continent 42,061 - 8 2,162 3,648 157,308
Appalachia 1,721 - - 545 70 39,351
Other(a) 2,248 113 1,682 361 (3,615) 47,822
------- -------- ------ ------------ ------- --------
Total $91,247 $ 113 $1,690 $ 5,872 $13,894 $438,834
======= ======== ====== ============ ======= ========
16
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 12 - OPERATING SEGMENT INFORMATION AND MAJOR CUSTOMERS - (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 2003 (in thousands):
Revenues Depreciation, Other
from depletion significant
external Interest Interest and Segment items:
customers income expense amortization profit (loss) Segment assets
--------- -------- ------- ------------ ------------- --------------
Well drilling $21,959 $ - $ - $ - $ 2,498 $ 7,715
Production and exploration 10,196 - - 2,210 6,184 149,924
Mid- Continent - - - - - -
Appalachia 1,599 - - 505 138 34,434
Other(a) 1,937 39 487 530 (1,292) 38,700
------- -------- ------ -------- ------- --------
Total $35,691 $ 39 $ 487 $ 3,245 $ 7,528 $230,773
======= ======== ====== ======== ======= ========
(a) Includes revenues and expenses from well services which do not meet the
quantitative threshold for reporting segment information and general
corporate expenses not allocable to any particular segment.
Segment operating profit (loss) represents total revenues less costs
and expenses attributable thereto, including interest and depreciation,
depletion and amortization, excluding general corporate expenses.
The Company's natural gas and natural gas liquids are sold under
contract to various purchasers. For the three months ended December 31, 2004,
sales to two of APLMC's purchasers accounted for 19% and 12% of the Company's
revenues. No other operating segments had revenues from a single customer which
exceeded 10% of total revenues.
NOTE 13 - SETTLEMENT OF ALASKA PIPELINE COMPANY ARBITRATION
In September 2003, Atlas Pipeline entered into an agreement with SEMCO
Energy, Inc. to purchase all of the stock of Alaska Pipeline Company. In order
to complete the acquisition, Atlas Pipeline needed the approval of the
Regulatory Commission of Alaska. The Regulatory Commission initially approved
the transaction, but on June 4, 2004, it vacated its order of approval based
upon a motion for clarification or reconsideration filed by SEMCO. On July 1,
2004, SEMCO sent Atlas Pipeline a notice purporting to terminate the
transaction. Atlas Pipeline pursued its remedies under the acquisition
agreement. In connection with the acquisition, subsequent termination, and
settlement of the legal action, Atlas Pipeline incurred costs of approximately
$1.1 million in the three months ended December 31, 2004 which are included in
arbitration settlement-net on the Company's statement of income. Atlas Pipeline
also incurred $3.0 million of costs in the year ended September 30, 2004. On
December 30, 2004, Atlas Pipeline entered into an agreement with SEMCO settling
all issues and matters related to SEMCO's termination of the sale of Alaska
Pipeline Company to Atlas Pipeline and SEMCO paid Atlas Pipeline $5.5 million,
also included in arbitration settlement-net.
17
ATLAS AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 2004
(unaudited)
NOTE 14 - BENEFIT PLANS
Atlas Pipeline has a Long-Term Incentive Plan for officers and
non-employee managing board members of its general partner and employees of the
general partner, consultants and joint venture partners who perform services for
Atlas Pipeline. Atlas Pipeline recognized $401,000 in compensation expense under
the plan related to grants of phantom units and their associated distributions
in the three months ended December 31, 2004. The fair market value associated
with these grants is $2.5 million which will be amortized into expense over the
vesting period of the units.
The Company has a Stock Incentive Plan for employees, consultants and
directors of the Company and its affiliates, in which a maximum of 1,333,333
shares are reserved for issuance. In May 2004, 4,835 deferred units representing
a right to receive a share of common stock over a 4-year vesting period (at an
average price at the date of grant of $15.50 per unit) were awarded to
non-employee directors of the Company under this plan. The fair value of the
grants awarded ($75,000 in total) will be charged to operations over the vesting
period. Units will vest sooner upon a change of control of the Company or death
or disability of a grantee, except that no units can vest before the date our
spin-off from Resource America is completed or abandoned. Upon termination of
service by a grantee, all unvested units are forfeited.
In May 2004, the Company entered into an employment agreement with the
Chairman of its Board pursuant to which the Company has agreed to provide him
with a supplemental employment retirement plan ("SERP") and with certain
financial benefits upon termination of his employment. During the three months
ended December 31, 2004, operations were charged $39,000 with respect to this
commitment.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES" "ANTICIPATES,"
"EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES MORE
PARTICULARLY DESCRIBED IN ITEM 1, UNDER THE CAPTION "RISK FACTORS", IN OUR
ANNUAL REPORT ON FORM 10-K FOR FISCAL 2004. THESE RISKS AND UNCERTAINTIES COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO FORWARD-LOOKING STATEMENTS WHICH WE MAY MAKE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-Q OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
OVERVIEW OF THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
During the three months ended December 31, 2004, our operations
continued to grow as we increased our total assets, revenues, number of wells
drilled and number of wells operated.
Our gross revenues depend, to a significant extent, on the price of
natural gas and oil which can fluctuate significantly. We seek to balance this
volatility with the more stable net income from our well drilling and well
servicing operations which are principally fee-based. Our well drilling
operations' gross margin was $4.0 million and $2.9 million for the three months
ended December 31, 2004 and 2003, respectively. Our gathering, transmission and
processing gross margin was $8.1 million and $1.0 million for the three months
ended December 31, 2004 and 2003, respectively.
Our business strategy for increasing our reserve base includes
acquisitions of undeveloped properties or companies with significant amounts of
undeveloped property. However, as a result of our agreements with Resource
America, Inc., our ultimate parent, relating to its proposed tax-free
distribution to its stockholders of the stock it owns in us, we will be limited
in our ability to issue voting securities, non-voting securities or convertible
debt and in making acquisitions or entering into mergers or other business
combinations that would jeopardize the tax-free status of the distribution until
such time that Resource America completes the spin-off or informs us that it
will not complete the distribution. At December 31, 2004, we had $65.6 million
available under our credit facility, which could be employed to finance such
acquisitions.
Our financial condition and results of operations have been affected by
initiatives taken by Atlas Pipeline Partners, L.P. In fiscal 2004, Atlas
Pipeline completed two public offerings of its common units, realizing $92.7
million of offering proceeds, net of expenses. The principal financial effect of
these offerings was an increase to the minority interest in our financial
statements.
In July 2004, Atlas Pipeline acquired Spectrum Field Services, Inc.
(which changed its name to Atlas Pipeline Mid-Continent, LLC ("APLMC") for
approximately $142.4 million, including the payment of anticipated taxes due as
a result of the transaction. This acquisition significantly increased Atlas
Pipeline's size and diversifies the natural gas supply basins in which it
operates and the natural gas midstream services it provides to its customers.
Spectrum was a privately owned natural gas gathering and processing company
headquartered in Tulsa, Oklahoma.
PROPOSED SPIN-OFF BY RESOURCE AMERICA
Resource America has advised us that it intends to spin-off its
remaining ownership interest in us to its common stockholders by means of a tax
free distribution of all of our common stock owned by it. Resource America has
sole discretion if and when to complete the distribution and its terms, and does
not intend to complete the distribution unless it receives a ruling from the
Internal Revenue Service and/or an opinion from its tax counsel as to the
tax-free nature of the distribution to Resource America and its stockholders for
U.S. federal income tax purposes. The Internal Revenue Service requirements for
tax-free distributions of this nature are complex and the Internal Revenue
Service has broad discretion, so there is significant uncertainty as to whether
Resource America will be able to obtain such a ruling. Because of this
uncertainty and the fact that the timing and completion of the distribution is
in Resource America's sole discretion, we cannot assure you that the
distribution will occur.
19
For the proposed distribution of Resource America's common stock in us
to its stockholders to be tax-free to them, Resource America must, among other
things, own at least 80% of all of our voting power at the time of the
distribution. Therefore, until such time that Resource America completes the
distribution or informs us that it will not complete the distribution, we will
be limited in our ability to issue voting securities, non-voting stock or
convertible debt without Resource America's prior consent, and Resource America
may be unwilling to give that consent. In addition, agreements that we entered
into with Resource America upon the closing of our initial public offering
prohibit us from making acquisitions or entering into mergers or other business
combinations that would jeopardize the tax-free status of the distribution.
SETTLEMENT OF ALASKA PIPELINE COMPANY ARBITRATION
In September 2003, Atlas Pipeline entered into an agreement with SEMCO
Energy, Inc. to purchase all of the stock of Alaska Pipeline Company. In order
to complete the acquisition, Atlas Pipeline needed the approval of the
Regulatory Commission of Alaska. The Regulatory Commission initially approved
the transaction, but on June 4, 2004 it vacated its order of approval based upon
a motion for clarification or reconsideration filed by SEMCO. On July 1, 2004,
SEMCO sent Atlas Pipeline a notice purporting to terminate the transaction.
Atlas Pipeline pursued its remedies under the acquisition agreement. In
connection with the acquisition, subsequent termination, and settlement of the
legal action, Atlas Pipeline incurred costs of approximately $1.1 million in the
three months ended December 31, 2004, which are included in arbitration
settlement-net on our statement of income. Atlas Pipeline also incurred and
expensed $3.0 million of costs in the year ended September 30, 2004. On December
30, 2004, Atlas Pipeline entered into a settlement agreement with SEMCO settling
all issues and matters related to SEMCO's termination of the sale of Alaska
Pipeline Company to Atlas Pipeline and SEMCO paid Atlas Pipeline $5.5 million
also included in arbitration settlement-net.
RESULTS OF OPERATIONS
WELL DRILLING
Our well drilling revenues and costs and expenses incurred represent
the billings and costs associated with the completion of wells for drilling
investment partnerships we sponsor. The following table sets forth information
relating to these revenues and the related costs, gross profit margins and
number of net wells drilled during the periods indicated (dollars in thousands):
THREE MONTHS ENDED
DECEMBER 31,
------------------
2004 2003
------ ------
Average drilling revenue per well......................................... $ 224 $ 198
Average drilling cost per well............................................ 195 172
------ ------
Average drilling gross profit per well.................................... $ 29 $ 26
====== ======
Gross profit margin....................................................... $3,985 $2,864
====== ======
Gross margin percent...................................................... 13% 13%
====== ======
Net wells drilled......................................................... 136 111
====== ======
20
Our well drilling gross margin was $4.0 million in the three months
ended December 31, 2004, an increase of $1.1 million (39%) from $2.9 million in
the three months ended December 31, 2003. In the three months ended December 31,
2004, the increase in gross margin was attributable to an increase in the number
of wells drilled ($734,000) and an increase in the gross profit per well
($388,000). Since our drilling contracts are on a "cost plus" basis (typically
cost plus 15%), an increase in our average cost per well also results in an
increase in our average revenue per well. The increase in our average cost per
well in the three months ended December 31, 2004 resulted from an increase in
the cost of tangible equipment used in the wells. In addition, it should be
noted that "Liabilities associated with drilling contracts" on our balance sheet
includes $48.7 million of funds raised in our drilling investment programs in
late fiscal 2004 and the three months ended December 31, 2004 that had not been
applied to drill wells as of December 31, 2004 due to the timing of drilling
operations, and thus had not been recognized as well drilling revenue. We expect
to recognize this amount as revenue in the remainder of fiscal 2005. Because we
raised $52.2 million in the first quarter of fiscal 2005 alone, we anticipate
drilling revenues and related costs to be substantially higher in fiscal 2005
than in fiscal 2004.
GAS AND OIL PRODUCTION
The following table sets forth information relating to our production
revenues, production volumes, sales prices, production costs and depletion:
THREE MONTHS ENDED
DECEMBER 31,
-------------------
2004 2003
------- ------
Production revenues (in thousands):
Gas (1)............................................................... $12,697 $9,066
Oil................................................................... $ 1,942 $1,123
Production volume:
Gas (mcf/day) (1) (2) (4)............................................. 20,286 19,479
Oil (bbls/day) ....................................................... 447 453
Total (mcfe/day) (4) ................................................ 22,968 22,197
Average sales prices:
Gas (per mcf) (4)..................................................... $ 6.80 $ 5.06
Oil (per bbl) (4)..................................................... $ 47.17 $26.94
Production costs (3):
As a percent of production revenues................................... 12% 16%
Per mcfe (4).......................................................... $ 0.83 $ 0.80
Depletion per mcfe (4).................................................... $ 1.28 $ 1.08
- ---------------------------
(1) Excludes sales of residual gas and sales to landowners.
(2) Our average sales price before the effects of hedging was $6.80 and $5.19
per mcf for the three months ended December 31, 2004 and 2003,
respectively.
(3) Production costs include labor to operate the wells and related equipment,
repairs and maintenance, materials and supplies, property taxes, severance
taxes, insurance, gathering charges and production overhead.
(4) "Mcf" and "mmcf" means thousand cubic feet and million cubic feet; "mcfe"
and "mmcfe" means thousand cubic feet equivalent and million cubic feet
equivalent, and "bbls" means barrels. Bbls are converted to mcfe using the
ratio of six mcfs to one bbl.
21
Our natural gas revenues were $12.7 million in the three months ended
December 31, 2004, an increase of $3.6 million (40%) from $9.1 million in the
three months ended December 31, 2003. The increase in the three months ended
December 31, 2004 was attributable to an increase in the average sales price of
natural gas of 34%, and an increase in the volume of natural gas produced of 4%.
The $3.6 million increase in natural gas revenues in the three months ended
December 31, 2004 as compared to the prior period consisted of $3.1 million
attributable to price increases and $506,000 attributable to volume increases.
Our oil revenues were $1.9 million in the three months ended December
31, 2004, an increase of $819,000 (73%) from $1.1 million in the three months
ended December 31, 2003, which is primarily due to an increase in the average
sales price of oil of 75% for the three months ended December 31, 2004. Oil
production volumes decreased 1% during the three months ended December 31, 2004
as compared to the three months ended December 31, 2003. The $819,000 increase
in oil revenues in the three months ended December 31, 2004 as compared to the
prior period consisted of $843,000 attributable to price increases, partially
offset by $24,000 attributable to volume decreases.
Our production costs were $1.7 million in the three months ended
December 31, 2004, an increase of $113,000 (7%) from $1.6 million in the three
months ended December 31, 2003. This increase includes normal operating expenses
and coincides with the increased production volumes we realized from an increase
in the number of wells we operate. The decrease in production costs as a percent
of production revenues in the three months ended December 31, 2004 as compared
to December 31, 2003 was a result of an increase in our average sales price
which more than offset the slight increase in production costs per mcfe.
GATHERING, TRANSMISSION AND PROCESSING
Our gathering, transmission and processing revenues were $43.8 million
in the three months ended December 31, 2004, of which $42.1 million was
associated with the operations of APLMC which was acquired on July 16, 2004.
Our gathering, transmission and processing expenses were $35.7 million,
of which $35.1 million were associated with the operations of APLMC.
WELL SERVICES
Our well services revenues were $2.2 million in the three months ended
December 31, 2004, an increase of $311,000 (16%) from $1.9 million in the three
months ended December 31, 2003. The increase resulted from an increase in the
number of wells operated for our investment partnerships due to additional wells
drilled in the twelve months ended December 31, 2004.
Our well services expenses were $1.2 million in the three months ended
December 31, 2004, an increase of $150,000 (14%) from $1.0 million in the three
months ended December 31, 2003. The increase was attributable to an increase in
wages and benefits associated with the increase in the number of wells we
operate for our investment partnerships.
OTHER REVENUES, COSTS AND EXPENSES
Our general and administrative expenses were $1.9 million in the three
months ended December 31, 2004, an increase of $962,000 from $911,000 for the
three months ended December 31, 2003. These expenses include, among other
things, salaries and benefits not allocated to a specific energy activity, costs
of running our energy corporate office, partnership syndication activities and
outside services. These expenses are partially offset by reimbursements we
receive from our drilling investment partnerships. The increase in the three
months ended December 31, 2004 as compared to the three months ended December
31, 2003 is attributable principally to the following:
22
o general and administrative expenses related to our APLMC
operations were $601,000 in the three months ended December 31,
2004; we acquired APLMC on July 16, 2004; and
o costs associated with Atlas Pipeline's long-term incentive plan
were $401,000 in the three months ended December 1, 2004; there
were no such expenses in the prior year period.
Our depletion of oil and gas properties as a percentage of oil and gas
revenues was 18% in the three months ended December 31, 2004 compared to 22% in
the three months ended December 31, 2003. Depletion expense per mcfe was $1.28
in the three months ended December 31, 2004, an increase of $.20 per mcfe (19%)
from $1.08 per mcfe in the three months ended December 31, 2003. Increases in
our depletable base and production volumes caused depletion expense to increase
$490,000 (22%) to $2.7 million in the three months ended December 31, 2004
compared to $2.2 million in the three months ended December 31, 2003. The
variances from period to period are directly attributable to changes in our oil
and gas reserve quantities, product prices and changes in the depletable cost
basis of our oil and gas properties.
Our interest expense was $1.7 million in the three months ended
December 31, 2004, an increase of $1.2 million from $487,000 in the three months
ended December 31, 2003. This increase resulted primarily from an increase in
outstanding borrowings due to funds borrowed by Atlas Pipeline for the
acquisition of APLMC.
In connection with the acquisition, subsequent termination, and
settlement of the legal action, Atlas Pipeline incurred costs of approximately
$1.1 million in the three months ended December 31, 2004, which are included in
arbitration settlement-net on our statement of income. Atlas Pipeline also
incurred $3.0 million of costs in the year ended September 30, 2004. On December
30, 2004, Atlas Pipeline entered into a settlement agreement with SEMCO settling
all issues and matters related to SEMCO's termination of the sale of Alaska
Pipeline Company to Atlas Pipeline and SEMCO paid Atlas Pipeline $5.5 million
also included in arbitration settlement-net.
During the twelve months ended December 31, 2004, our ownership
interest in Atlas Pipeline decreased from 39% to 24% as the result of the
completion by Atlas Pipeline of secondary offerings of its common units in April
and July 2004. Because we control the operations of Atlas Pipeline, we include
it in our consolidated financial statements and show the ownership by the public
as a minority interest. The minority interest in Atlas Pipeline's earnings was
$7.2 million for the three months ended December 31, 2004, as compared to $1.3
million for the three months ended December 31, 2003, an increase of $5.9
million. This increase was the result of an increase in the percentage interest
of public unitholders and an increase in Atlas Pipeline's net income due to $4.4
million in net arbitration proceeds, the operations of APLMC and increases in
transportation rates received. Atlas Pipeline's transportation rates vary, to a
significant extent, with the prices of natural gas and natural gas liquids,
which, on average, were higher in the three months ended December 31, 2004 than
December 31, 2003.
Our effective tax rate increased to 36% for the three months ended
December 31, 2004 as compared to 35% for the three months ended December 31,
2003 as a result of a reduction in statutory depletion benefits relative to
increased net income.
LIQUIDITY AND CAPITAL RESOURCES
General. We fund our exploration and production operations from a
combination of cash generated by operations, capital raised through drilling
investment partnerships and, if required, use of our credit facility. We fund
our gathering, transmission and processing operations, which are conducted
through Atlas Pipeline, through a combination of cash generated by operations,
Atlas Pipeline's credit facility and the sale of Atlas Pipeline's common units.
The following table sets forth our sources and uses of cash (in thousands):
23
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2004 2003
-------- --------
Provided by operations.................................................... $ 53,425 $ 34,705
Used in investing activities.............................................. (17,174) (11,461)
Used in financing activities.............................................. (36,284) (32,237)
-------- --------
Decrease in cash and cash equivalents..................................... $ (33) $ (8,993)
======== ========
We had $29.2 million in cash and cash equivalents on hand at both
December 31, 2004 and September 30, 2004. Our ratio of earnings from continuing
operations before income taxes, minority interest and interest expense to fixed
charges was 13.5 to 1.0 in the three months ended December 31, 2004 as compared
to 19.1 to 1.0 in the three months ended December 31, 2003. We had working
capital deficits of $45.8 million and $21.5 million at December 31, 2004 and
September 30, 2004, respectively. The decrease in our working capital reflects
an increase in our current assets of $5.6 million, offset by an increase in our
current liabilities of $29.8 million. The increase in our current assets is
primarily due to an increase in accounts receivable associated with APLMC.
The increase in our current liabilities is primarily due to the following:
o an increase in accrued expenses of $2.0 million associated with
natural gas and liquids, ad valorem taxes and hedging liabilities
associated with APLMC;
o an increase of $23.2 million in the remaining amount of our drilling
obligations related to our investment partnerships;
o an increase of $7.3 million in our trade accounts payable related to
an increase in drilling activity associated with our drilling
investment partnerships; and
o an decrease of $1.9 million in other accrued liabilities and $780,000
in the current portion of our debt.
Our long-term debt (including current maturities) was 62% of our total
equity at December 31, 2004 and 94% at September 30, 2004. This decrease is
attributable to net repayments on our debt of $23.1 million and an increase in
total stockholders' equity of $11.2 million during the three months ended
December 31, 2004.
In September 2004, the borrowing base under our credit facility was
increased to $75.0 million. In December 2004, the borrowing base under Atlas
Pipeline's revolving credit facility was increased to $90.0 million from $75.0
million as $15.0 million was repaid on the term portion of the facility. At
December 31, 2004, we had $65.6 million and $77.7 million available on our
credit facility and Atlas Pipeline's credit facility, respectively.
Cash flows from operating activities. Cash provided by operations is an
important source of short-term liquidity for us. It is directly affected by
changes in the price of natural gas and oil, interest rates and our ability to
raise funds for our drilling investment partnerships. Net cash provided by
operating activities increased $18.7 million in the three months ended December
31, 2004 to $53.4 million from $34.7 million in the three months ended December
31, 2003, substantially as a result of the following:
o Changes in operating assets and liabilities increased operating cash
flow by $6.7 million in the three months ended December 31, 2004,
compared to the three months ended December 31, 2003, primarily due
to increases during the three months ended December 31, 2004 of
accounts payable and accrued liabilities as compared to December 31,
2003. Our level of liabilities is dependent upon the remaining amount
of our drilling obligations at any balance sheet date, which is
dependent upon the timing of funds raised through our investment
partnerships;
24
o An increase in net income before depreciation and amortization of
$6.8 million in the three months ended December 31, 2004 as compared
to the prior year period principally a result of higher natural gas
prices and drilling profits;
o Changes in our deferred tax liability increased cash flow by $1.9
million as compared to the three months ended December 31, 2003; and
o An increase in minority interest of $5.9 million due to an increase
in Atlas Pipeline's earnings and our decreased ownership percentage
in Atlas Pipeline.
Cash flows from investing activities. Cash used in our investing
activities increased $5.7 million in the three months ended December 31, 2004 to
$17.2 million from $11.5 million in the three months ended December 31, 2003 as
a result of the following:
o Capital expenditures increased $6.1 million due to an increase in the
number of wells we drilled.
o Cash used in other assets decreased by $370,000 as compared to the
three months ended December 31, 2003.
Cash flows from financing activities. Cash used in our financing
activities increased $4.1 million in the three months ended December 31, 2004 to
$36.3 million from cash used of $32.2 million in the three months ended December
31, 2003, as a result of the following:
o Repayments of debt to our parent decreased by $9.2 million to $9.3
million in the three months ended December 31, 2004 from $18.5
million in the three months ended December 31, 2003;
o Net borrowings and principal payments decreased cash flows by $11.0
million in the three months ended December 31, 2004, as compared to
the prior year similar period; and
o Dividends paid to minority interests increased $2.2 million as a
result of higher earnings and more common units outstanding for Atlas
Pipeline as a result of its fiscal 2004 offering of common units.
Capital Requirements
During the three months ended December 31, 2004 and 2003, our capital
expenditures related primarily to investments in our drilling partnerships and
pipeline expansions, in which we invested $16.5 million and $10.2 million,
respectively. For the three months ended December 31, 2004 and the remaining
quarters of fiscal 2005, we funded and expect to continue to fund these capital
expenditures through cash on hand, borrowings under our credit facilities, and
from operations. We have established two credit facilities to facilitate the
funding of our capital expenditures. In September 2004, the borrowing base under
our credit facility was increased to $75.0 million from $65.0 million. In
December 2004, the borrowing base under Atlas Pipeline's credit facility was
increased to $90.0 million from $75.0 million.
The level of capital expenditures we must devote to our exploration and
production operations depends upon the level of funds raised through our
drilling investment partnerships. We have budgeted to raise up to $140 million
in fiscal 2005 through drilling partnerships. Through the three months ended
December 31, 2004 we had raised $52.2 million. We believe cash flows from
operations and amounts available under our credit facility will be adequate to
fund our contributions to these partnerships. However, the amount of funds we
raise and the level of our capital expenditures will vary in the future
depending on market conditions for natural gas and other factors.
25
We continuously evaluate acquisitions of gas and oil and pipeline
assets. In order to make any acquisition, we believe we will be required to
access outside capital either through debt or equity placements or through joint
venture operations with other energy companies. There can be no assurance that
we will be successful in our efforts to obtain outside capital. For a discussion
of limitations on our ability to issue equity or make certain acquisitions or
business combinations, see "-Overview of Three Months Ended December 31, 2004
and 2003 - Proposed Spin-off by Resource America."
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes our contractual obligations at December
31, 2004.
Payments Due By Period
(in thousands)
---------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual cash obligations: Total 1 Year Years Years Years
- ---------------------------- ------- -------- ------- ------- -------
Long-term debt.............................. $62,587 $ 2,621 $12,421 $47,545 $ -
Secured revolving credit facilities......... - - - - -
Operating lease obligations................. 1,864 1,336 406 120 2
Capital lease obligations................... - - - - -
Unconditional purchase obligations.......... - - - - -
Other long-term obligations................. - - - - -
------- -------- ------- ------- -------
Total contractual cash obligations.......... $64,451 $ 3,957 $12,827 $47,665 $ 2
======= ======== ======= ======= =======
Payments Due By Period
(in thousands)
---------------------------------------------
Less than 1 - 3 4 - 5 After 5
Other commercial commitments: Total 1 Year Years Years Years
- ---------------------------- ------- -------- ------- ------- -------
Standby letters of credit................... $ 3,987 $ 3,987 $ - $ - $ -
Guarantees.................................. - - - - -
Standby replacement commitments............. - - - - -
Other commercial commitments................ 8,592 8,592 - - -
------- -------- ------- ------- -------
Total commercial commitments................ $12,579 $12,579 $ - $ - $ -
======= ======== ======= ======= =======
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of our
assets, liabilities, revenues and cost and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to the provision for possible losses,
deferred tax assets and liabilities, goodwill and identifiable intangible
assets, and certain accrued liabilities. We base our estimates on historical
experience and on various other assumptions that we believe reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
For a detailed discussion on the application of policies critical to
our business operations and other accounting policies, see our September 30,
2004 Form 10K, Note 2 of the "Notes to Consolidated Financial Statements" and
Note 2 to our Consolidated financial statements included in this report.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about our potential
exposure to market risks. The term "market risk" refers to the risk of loss
arising from adverse changes in interest rates and oil and gas prices. The
disclosures are not meant to be precise indicators of expected future losses,
but rather indicators of reasonable possible losses. This forward-looking
information provides indicators of how we view and manage our ongoing market
risk exposures. All of our market risk sensitive instruments were entered into
for purposes other than trading.
GENERAL
We are exposed to various market risks, principally fluctuating
interest rates and changes in commodity prices. These risks can impact our
results of operations, cash flows and financial position. We manage these risks
through regular operating and financing activities and periodically use
derivative financial instruments.
The following analysis presents the effect on our earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on December 31, 2004. Only the potential impacts of hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact our business.
Interest Rate Risk. At December 31, 2004, the amount outstanding under
our credit facility had decreased to $7.8 million from $25.0 million at
September 30, 2004. The weighted average interest rate for this facility
increased from 4.1% at September 30, 2004 to 5.5% at December 31, 2004 due to a
larger portion of our borrowings being at the bank's prime rate.
At December 31, 2004, Atlas Pipeline had a $90.0 million revolving
credit facility ($10.0 million outstanding) and a $45.0 million term loan ($44.3
million outstanding) to fund the expansion of its existing gathering systems and
the acquisitions of other gas gathering systems. The weighted average interest
rate for these borrowings increased from 5.7% at September 30, 2004 to 8.1% at
December 31, 2004 due to a larger portion of our borrowings being at the bank's
prime rate.
Holding all other variables constant, if interest rates hypothetically
increased or decreased by 10%, our net annual income would change by
approximately $95,000.
Commodity Price Risk. Our major market risk exposure in commodities is
fluctuations in the pricing of our gas and oil production. Realized pricing is
primarily driven by the prevailing worldwide prices for crude oil and spot
market prices applicable to United States natural gas production. Pricing for
gas and oil production has been volatile and unpredictable for many years. To
limit our exposure to changing natural gas prices, we use hedges. Through our
hedges, we seek to provide a measure of stability in the volatile environment of
natural gas prices. Our risk management objective is to lock in a range of
pricing for expected production volumes.
We are exposed to commodity prices as a result of Atlas Pipeline being
paid for certain services in the form of commodities rather than cash. For
gathering services, we receive fees or commodities from the producers to bring
the raw natural gas from the wellhead to the processing plant. For processing
services, we either receive fees or commodities as payment for these services,
based on the type of contractual agreement. Based on our current contract mix,
we have a long NGL position and a long gas position. Based upon our portfolio of
supply contracts, a change in prices of 10% of NGLs, the average price of
natural gas and the average price of crude oil sold and processed by APLMC would
result in a change to our annual income of approximately $154,000.
27
Atlas Pipeline through its subsidiary, APLMC, acquired and/or entered
into certain financial swap and option instruments that are classified as cash
flow hedges in accordance with SFAS 133. APLMC entered into these instruments to
hedge the forecasted natural gas, natural gas liquids and condensate sales
against the variability in expected future cash flows attributable to changes in
market prices. The swap instruments are contractual agreements between
counterparties to exchange obligations of money as the underlying natural gas,
natural gas liquids and condensate is sold. Under these swap agreements, APLMC
receives a fixed price and pays a floating price based on certain indices for
the relevant contract period. The options fix the price for APLMC within the
puts purchased and calls sold.
Derivatives are recorded on the balance sheet as assets or liabilities
at fair value. For derivatives qualifying as hedges, the effective portion of
changes in fair value are recognized in stockholders' equity as other
comprehensive income and reclassified to earnings as such transactions are
settled. For non-qualifying derivatives and for the ineffective portion of
qualifying derivatives, changes in fair value are recognized in earnings as they
occur. At December 31, 2004, APLMC reflected an unrealized net pre-tax commodity
hedging loss on its Balance Sheet of $2.6 million. Of the $2.6 million
unrealized pre-tax loss at December 31, 2004, $1.9 million of losses will be
reclassified to earnings over the next twelve month period and $708,000 in later
periods, if future prices remained constant. Actual amounts that will be
reclassified will vary as a result of future changes in prices. We recognized a
gain of $24,000 related to these hedging instruments in the three months ended
December 31, 2004. Ineffective gains or losses are recorded in income while the
hedge contract is open and may increase or decrease until settlement of the
contract. A hedging gain of $440,000 resulting from ineffective hedges is
included in income for the three months ended December 31, 2004.
A portion of our future natural gas sales is periodically hedged
through the use of swap and collar contracts. Realized gains and losses on these
instruments are reflected in the contract month being hedged as an adjustment to
gas revenue.
As of December 31, 2004, Atlas Pipeline had the following natural gas
liquids, natural gas, and crude oil volumes hedged.
NATURAL GAS LIQUIDS FIXED - PRICE SWAPS
Production Average Fair Value
Period Volumes Fixed Price Liability(2)
------ ---------- ------------ --------------
(calendar year) (gallons) (per gallon) (in thousands)
2005 12,564,000 $ 0.550 $ (1,208)
2006 6,804,000 0.575 (500)
-----------
$ (1,708)
===========
NATURAL GAS FIXED - PRICE SWAPS
Production Average Fair Value
Period Volumes Fixed Price Liability(3)
------ ---------- ------------ --------------
(calendar year) (MMBTU)(1) (per MMBTU) (in thousands)
2005 970,000 $ 6.187 $ (71)
2006 450,000 5.920 (172)
-----------
$ (243)
===========
CRUDE OIL FIXED - PRICE SWAPS
Production Average Fair Value
Period Volumes Fixed Price Liability (3)
------ ---------- ------------ --------------
(calendar year) (barrels) (per barrel) (in thousands)
2006 18,000 $ 38.767 $ (36)
===========
28
CRUDE OIL OPTIONS
Production Average Fair Value
Period Option Type Volumes Strike Price Liability (3)
------ ----------- ---------- ------------ --------------
(calendar year) (barrels) (per barrel) (in thousands)
2005 Puts purchased 75,000 $ 30.00 $ -
2005 Calls sold 75,000 34.30 (640)
------------
$ (640)
============
Total liability $ (2,627)
============
- --------------------------
(1) MMBTU means Million British Thermal Units.
(2) Fair value based on APLMC internal model which forecasts forward Natural
gas liquid prices as a function of forward NYMEX natural gas and light
crude prices.
(3) Fair value based on forward NYMEX natural gas and light crude prices, as
applicable.
FirstEnergy Solutions and other third party marketers to which we sell
gas, also use financial hedges to hedge their pricing exposure and make price
hedging opportunities available to us. These transactions are similar to
NYMEX-based futures contracts, swaps and options, but also require firm delivery
of the hedged quantity. Thus, we limit these arrangements to much smaller
quantities than those projected to be available at any delivery point. For the
fiscal year ending September 30, 2005, we estimate approximately 50% of our
produced natural gas volumes will be sold in this manner, leaving our remaining
production to be sold at contract prices in the month produced or at spot market
prices. We also negotiate with certain purchasers for delivery of a portion of
natural gas we will produce for the upcoming twelve months. The prices under
most of our gas sales contracts are negotiated on an annual basis and are
index-based. Considering those volumes already designated for the fiscal year
ending September 30, 2005, and current indices, a theoretical 10% upward or
downward change in the price of a natural gas would result in approximately a 1%
change in our projected natural gas revenues.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Securities Exchange Act
of 1934 reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Under the supervision of our Chief Executive Officer and Chief
Financial Officer and with the participation of the disclosure committee of our
parent, we have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this report.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls over
financial reporting that has partially affected, or is reasonably likely to
materially affect, our internal control over financial reporting during our most
recent fiscal quarter.
29
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit No. Description
----------- -----------
10.1 First Amendment to Revolving Credit and Term Loan
Agreement, dated December 3, 2004, among
Atlas Pipeline Partners, L.P., Wachovia Bank,
National Association, et al.
31.1 Rule 13(a)-14(a)/15d-14(a) Certification.
31.2 Rule 13(a)-14(a)/15d-14(a) Certification.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.
30
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.
ATLAS AMERICA, INC.
(REGISTRANT)
Date: February 9, 2005 By: /s/ Freddie M. Kotek
--------------------
Freddie M. Kotek
Executive Vice President and
Chief Financial Officer
Date: February 9, 2005 By: /s/ Nancy J. McGurk
-------------------
Nancy J. McGurk
Senior Vice President and
Chief Accounting Officer
31