UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: MARCH 31, 2001.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number: 001-13171
EVERGREEN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0834147
-------------------------------------- --------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1401 17TH STREET SUITE 1200
DENVER, COLORADO 80202
----------------------------------- ---------------------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code: (303) 298-8100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
--- ---
As of May 9, 2001, 18,426,166 shares of the Registrant's Common Stock, no par
value, were outstanding.
EVERGREEN RESOURCES, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000................................................... 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2001 and 2000.................................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000........................................... 5
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2001 and 2000.............................. 6
Notes to Consolidated Financial Statements................................. 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 11
Quantitative and Qualitative Disclosure
About Market Risk......................................................... 17
PART II. OTHER INFORMATION..................................................... 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERGREEN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2001 December 31, 2000
-------------- -----------------
(unaudited)
(IN THOUSANDS)
ASSETS
Current:
Cash and cash equivalents $ 4,225 $ 4,034
Accounts receivable 13,861 15,194
Investment available for sale 14,000 --
Investment in affiliated company 1,587 --
Other current assets 5,196 1,156
--------- ---------
Total current assets 38,869 20,384
--------- ---------
Property and equipment, at cost, based on full-cost accounting
for oil and gas properties 466,336 446,001
Less accumulated depreciation, depletion and amortization 38,019 34,052
--------- ---------
Net property and equipment 428,317 411,949
--------- ---------
Designated cash 2,859 2,376
Other assets 3,762 16,036
--------- ---------
$ 473,807 $ 450,745
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,629 $ 5,408
Amounts payable to oil and gas property owners 4,633 3,183
Accrued expenses and other 6,159 4,943
--------- ---------
Total current liabilities 17,421 13,534
Production taxes payable and other 2,859 2,376
Deferred revenue 903 1,017
Notes payable 138,500 149,748
Deferred income tax liability 28,332 17,218
--------- ---------
Total liabilities 188,015 183,893
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value; shares authorized, 24,900;
none outstanding -- --
Common stock, $.01 stated value; shares authorized,
50,000; shares issued and outstanding 18,424 and 18,328 184 183
Additional paid-in capital 249,210 247,377
Retained earnings 35,234 20,268
Accumulated other comprehensive income (loss) 1,164 (976)
--------- ---------
Total stockholders' equity 285,792 266,852
--------- ---------
$ 473,807 $ 450,745
========= =========
See accompanying notes to consolidated financial statements.
3
EVERGREEN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended March 31,
2001 2000
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Natural gas revenues $37,789 $ 8,472
Interest and other 155 41
------- -------
Total revenues 37,944 8,513
------- -------
Expenses:
Lease operating expenses 2,665 1,535
Transportation costs 2,117 1,077
Production taxes 1,457 285
Depreciation, depletion and amortization 3,536 1,224
General and administrative expenses 1,433 982
Interest expense 2,487 307
Other expense 110 51
------- -------
Total expenses 13,805 5,461
------- -------
Income before income taxes 24,139 3,052
Income tax provision - deferred 9,173 1,190
------- -------
Net income $14,966 $ 1,862
======= =======
Basic income per common share $ 0.81 $ 0.13
======= =======
Diluted income per common share $ 0.78 $ 0.12
======= =======
See accompanying notes to consolidated financial statements.
4
EVERGREEN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2001 2000
--------- ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 14,966 $ 1,862
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, depletion and amortization 3,536 1,224
Deferred income taxes 9,173 1,190
Non-cash compensation and other 55 120
Changes in operating assets and liabilities:
Accounts receivable 1,315 695
Other current assets (383) (248)
Accounts payable (122) (1,160)
Accrued expenses 1,688 (113)
-------- --------
Net cash provided by operating activities 30,228 3,570
-------- --------
Cash flows from investing activities:
Investment in property and equipment (18,479) (10,182)
Designated cash (483) 246
Change in production taxes payable 483 (246)
Increase in investment in affiliated company (1,515) --
Increase in other assets (350) (79)
-------- --------
Net cash used by investing activities (20,344) (10,261)
-------- --------
Cash flows from financing activities:
Net proceeds from (payments on) notes payable (11,248) 7,000
Proceeds from sale of common stock, net 163 146
Increase in cash held from operating oil and gas properties and
other 1,427 510
-------- --------
Net cash (used) provided by financing activities (9,658) 7,656
-------- --------
Effect of exchange rate changes on cash (35) (2)
-------- --------
Increase in cash and cash equivalents 191 963
Cash and cash equivalents, beginning of the period 4,034 651
-------- --------
Cash and cash equivalents, end of the period $ 4,225 $ 1,614
======== ========
See accompanying notes to consolidated financial statements.
5
EVERGREEN RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31,
2001 2000
-------- --------
(IN THOUSANDS)
Net income $ 14,966 $ 1,862
-------- --------
Derivative instruments:
Cumulative effect of change in accounting principle (719) --
Unrealized gain on commodity price swaps 4,132 --
Reclassification adjustment into income 276 --
-------- --------
Derivative instruments before taxes 3,689 --
Income tax expense related to derivative instruments (1,402) --
-------- --------
Derivative instruments, net of taxes 2,287 --
-------- --------
Unrealized gain on available for sale investments, net of taxes of $539 879 --
Foreign currency translation adjustments (1,027) (171)
-------- --------
Comprehensive income $ 17,105 $ 1,691
======== ========
See accompanying notes to consolidated financial statements.
6
EVERGREEN RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2001
(UNAUDITED)
1. Basis of Presentation
Evergreen Resources, Inc. ("Evergreen" or the "Company") is an
independent energy company engaged in the development, production,
operation, exploration, and acquisition of oil and gas properties.
Evergreen's primary focus is on developing and expanding its coal bed
methane properties in the Raton Basin in southern Colorado consisting
of approximately 258,000 gross acres. The Company also holds
exploration licenses on approximately 470,000 acres onshore in the
United Kingdom, exploration licenses on approximately 1.1 million
acres of prospective tight gas sands property in Northern Ireland and
the Republic of Ireland, an interest in a consortium exploring offshore
in the Falkland Islands, an oil and gas exploration contract on
approximately 1.2 million acres in northern Chile and exploratory
acreage in northwestern Colorado. Evergreen operates substantially all
of its own producing properties.
The financial statements include the accounts of Evergreen and its
wholly-owned subsidiaries: Evergreen Operating Corporation, Evergreen
Resources (UK) Ltd., Powerbridge, Inc., Evergreen Well Service Company,
Primero Gas Marketing Company, Primero Gas Company, LLC, Long Canyon Gas
Company, LLC, EnviroSeis, LLC, and XYZ Minerals, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Company has a 40% ownership in Argos Evergreen Limited, a Falkland
Islands company which owns offshore drilling rights in the North Falklands
basin. This investment is accounted for by the equity method of
accounting.
The Company also has a 50% ownership in Lorencito Gas Gathering, L.L.C.
and a 47% working interest in the Lorencito Canyon properties
("Lorencito"). The Company and the other owner have entered into a
joint sales agreement to sell Lorencito and the associated leasehold
interests. The Company's share of the sales price is expected to
equal or exceed the September 2000 purchase price of $35 million.
Various companies have expressed an interest in purchasing this
property. For Consolidated Balance Sheet purposes, the Company
reclassified the investment in Lorencito to Current Assets under the
caption "Investment Available for Sale" as of March 31, 2001, and the
leasehold interests are classified under "Oil and Gas Properties."
The accompanying financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 2000. In the opinion of management, the accompanying
unaudited financial statements include all adjustments, consisting only of
normal recurring items, as well as the accounting change to adopt
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended, necessary
to present fairly the Company's financial position as of March 31, 2001
and 2000 and the results of its operations and cash flows for the three
months then ended. Certain reclassifications have been made to prior
periods to conform to the classifications used in the current period. The
results of operations for interim periods are not necessarily indicative
of results to be expected for a full year.
7
2. Accounting Change
Effective January 1, 2001, Evergreen adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB No. 133", and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded on
the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective portions
of changes in the fair value of the derivative are recorded in other
comprehensive income ("OCI") and are recognized in the income statement
when the hedged item affects earnings. Ineffective portions of changes in
the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS No. 133 resulted in a reduction to OCI on a pre-tax
basis of $719,000, or $446,000 after-tax for the cumulative effect of
change in accounting principle. The reduction to OCI at January 1, 2001 is
attributable to a commodity price swap agreement designated as a cash flow
hedge. The derivative loss included in OCI as of January 1, 2001 will be
reclassified into earnings during the twelve months ended December 31,
2001. See Note 5 for additional information on this agreement.
3. Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Such capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, drilling,
completing and equipping oil and gas wells, and include salaries, benefits
and other internal costs directly attributable to the activities. Costs
associated with production and general corporate activities are expensed
in the period incurred. Interest costs related to unproved properties and
properties under development are also capitalized to oil and gas
properties. Normal dispositions of oil and gas properties are accounted
for as adjustments of capitalized costs, with no gain or loss recognized.
Depreciation and depletion of proved oil and gas properties is computed on
the units-of-production method based upon estimates of proved reserves
with oil and gas being converted to a common unit of measure based on the
relative energy content. Unproved oil and gas properties, including any
related capitalized interest expense, are not amortized, but are assessed
for impairment either individually or on an aggregated basis.
8
4. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended March 31,
2001 2000
------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Per- Per-
Weighted Share Weighted Share
Income Shares Amt. Income Shares Amt.
------- -------- ------- ------- -------- -------
Basic income per common share:
Net income $14,966 18,367 $ 0.81 $ 1,862 14,868 $ 0.13
======= ======= ======= ======= ======= =======
Diluted income per common share:
Net income $14,966 18,367 $ 1,862 14,868
Stock options -- 944 -- 638
------- ------- ------- -------
$14,966 19,311 $ 0.78 $ 1,862 15,506 $ 0.12
======= ======= ======= ======= ======= =======
5. Derivatives and Hedging Activities
The Company may use derivative instruments to manage exposures to
commodity prices, foreign currency and interest rate risks. The Company's
objectives for holding derivatives are to minimize the risks using the
most effective methods to eliminate or reduce the impacts of these
exposures.
The Company sometimes enters into fixed-price physical delivery contracts
and commodity price swap derivatives to manage price risk with regard to a
portion of its natural gas production. Commodity price swap derivative
contracts are designated as cash flow hedges. As a cash flow hedge, the
effective portions of changes in the fair value of the derivative are
recorded in OCI and are recognized in the statement of income when the
associated production occurs and the resulting cash flows are reported as
cash flows from operations. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. To qualify as a cash
flow hedge, these swap contracts must be designated as cash flow hedges
and changes in their fair value must correlate with changes in the price
of anticipated future production such that the Company's exposure to the
effects of commodity price changes is reduced.
As of March 31, 2001, the Company had two outstanding commodity price swap
agreements. One contract was for 10 MMcf per day from January 1, 2001
through December 31, 2001 at a hedge price of $6.10 per Mcf and the other
contract was for 10 MMcf per day from February 1, 2001 through December
31, 2001 at a hedge price of $6.43 per Mcf. The contracts call for the
Company to receive or make payments based upon the differential between
the hedge price and the market gas price, as defined in the contracts, for
the notional quantity. At March 31, 2001, the unrealized gains for these
swap contracts were $2,287,000, net of taxes of $1,402,000, as determined
by calculating the net present value of the payment differential for the
aggregate remaining notional quantities based on quoted market prices,
adjusted for certain defined costs. The unrealized gain included in OCI as
of March 31, 2001 will be reclassified into earnings during the year ended
December 31, 2001. The Company recognized a $276,000 loss during the three
months ended March 31, 2001 and it is included in natural gas revenues in
the Consolidated Statements of Income.
The Company is exposed to credit risk in the event of nonperformance by
the counterparty in the commodity price swap contracts; however, the
Company does not anticipate nonperformance by the counterparty.
9
To limit the amount of exposure to interest rate fluctuations, in April
2001, the Company entered into an interest rate swap designated as a
cash flow hedge to manage fluctuations in cash flows resulting from
interest rate risk. The swap allows for strategies designed to protect
against interest rate fluctuations. The swap exchanges a series of
future cash payments, one on a fixed-rate basis and the other on a
floating rate-basis, to lock in a specific interest rate that is received
by the Company. The interest rate swap has a notional amount of
$25,000,000 at a LIBO rate of 4.4% and it is effective April 23, 2001
through April 23, 2002.
6. Investment in Affiliated Company
On February 9, 2001, Evergreen closed a transaction with KFx Inc.
("KFx") under which KFx sold to Evergreen a portion of its convertible
preferred stock investment in its Pegasus Technologies, Inc. subsidiary
("Pegasus"), representing an approximate 8.8% as converted interest in
Pegasus, for $1.5 million. KFx is obligated to repurchase this
preferred stock for $2 million on January 31, 2002, or January 31, 2003
under certain elections available to Evergreen to purchase from KFx an
additional interest in Pegasus. In certain circumstances, Evergreen can
elect to exchange this interest in Pegasus, valued at $2 million, and
any subsequently acquired interest in Pegasus, for common stock of KFx
at $3.65 per share, subject to certain adjustments. In addition,
Evergreen was provided with a five-year warrant to purchase 1 million
shares of KFx common stock at $3.65 per share, subject to certain
adjustments. This warrant is considered a derivative but no value has
been attributed to it as of March 31, 2001. The President and Chief
Executive Officer of Evergreen is also on the board of directors of KFx,
and the Chief Financial Officer of Evergreen has been appointed to the
Board of Directors of Pegasus.
7. Supplemental Disclosures of Cash Flow Information
Cash paid during the three months ended March 31, 2001 and 2000 for
interest was approximately $1,022,000 and $358,000. During the three
months ended March 31, 2001 and 2000, approximately $271,000 and $63,000
of interest paid was capitalized.
During the three months ended March 31, 2001 and 2000, there were
non-cash transactions resulting in increases in oil and gas properties
of approximately $2,827,000 and $8,704,000. Included in these
transactions are common stock issuances for mineral interests of
$925,000 and $5,423,000 for the three months ended March 31, 2001 and
2000. See Note 5 for additional non-cash transactions during the three
months ended March 31, 2001 and 2000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding, among other items,
(i) the Company's growth strategies, (ii) anticipated trends in the Company's
business and its future results of operations, (iii) market conditions in the
oil and gas industry, (iv) the ability of the Company to make and integrate
acquisitions and (v) the impact of government regulation. These forward-looking
statements are based largely on the Company's expectations and are subject to a
number of risks and uncertainties, many of which are beyond the Company's
control. Actual results could differ materially from those implied by these
forward-looking statements as a result of, among other things, a decline in
natural gas production, a decline in natural gas prices, incorrect estimations
of required capital expenditures, increases in the cost of drilling, completion
and gas collection, an increase in the cost of production and operations, an
inability to meet growth projections, or changes in general economic conditions.
These and other risks and uncertainties are described in more detail in the
Company's most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission. In light of these and other risks and uncertainties of
which the Company may be unaware or which the Company currently deems
immaterial, there can be no assurance that actual results will be as projected
in the forward-looking statements.
GENERAL
Evergreen is an independent energy company engaged in the operation,
development, production, exploration and acquisition of oil and gas
properties. Evergreen's primary focus is on developing and expanding its coal
bed methane properties located on approximately 258,000 gross acres in the
Raton Basin in southern Colorado. The Company also holds exploration licenses
on approximately 470,000 acres onshore in the United Kingdom, exploration
licenses on approximately 1.1 million acres of prospective tight gas sands
property in Northern Ireland and the Republic of Ireland, an interest in a
consortium exploring offshore in the Falkland Islands, an oil and gas
exploration contract on approximately 1.2 million acres in northern Chile and
exploratory acreage in northwestern Colorado. Evergreen operates
substantially all of its producing properties.
DEVELOPMENTS
IRISH PROJECT
In March and April 2001, Evergreen acquired a 100% working interest in 1,085,000
acres of prospective tight gas sand properties in Northern Ireland (605,000
acres) and in the Republic of Ireland (480,000 acres) for total consideration of
$1,250,000 (23,200 shares of Evergreen common stock valued at $750,000 and
$500,000 in cash).
Evergreen plans to initiate work on the Northern Ireland acreage in June 2001
and to drill four exploratory wells over the next 12 months. Evergreen also
plans to drill at least one exploratory well on the newly acquired acreage in
the Republic of Ireland this year; totalling five wells that the Company
plans to drill in the Northwest Carboniferous Basin over the 12-month period
beginning this June. The Company has selected seven drillsites for permitting
and has also identified numerous other locations for exploratory and
delineation drilling. Drilling objectives are multiple tight gas sands
contained in carboniferous formations at depths ranging from 2,000 feet to
4,500 feet. Potential well locations have been identified using data from
previously drilled wells, subsurface and surface geologic mapping,
11
and several hundred kilometers of seismic data. Total anticipated
expenditures for the work commitment for all five wells are estimated at $3.5
million.
DOMESTIC PROJECTS
In May 2001, Evergreen signed a purchase and sale agreement with Ocean Energy
and Union Oil of California to acquire a 100% working interest in about
48,000 acres of prospective coal bed methane properties in Alaska for
approximately $960,000 in cash. The acreage, which also contains deeper pay
potential in traditional natural gas reservoirs, is located about 30 miles
northwest of Anchorage.
In May 2001, Evergreen signed a work commitment with J.M. Huber Corp.
covering 29,000 acres of Raton Basin coal bed methane properties in Huerfano
County, Colorado. Under the agreement, Evergreen will spend a minimum of $2
million through March 31, 2002 to earn a 50% working interest in the
properties, which currently contain 15 shut-in wells. The properties are
located approximately 20 miles north of Evergreen's existing 258,000 acres of
coal bed methane properties in Las Animas County, Colorado. Evergreen's
planned expenditures will be primarily for drilling, completions, workovers,
equipment, fracture stimulations and overhead costs. The agreement was
effective as of January 1, 2001.
RESULTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2000
The following table sets forth certain unaudited operating data of the Company
for the periods presented ("Mcf" means thousand cubic feet and "MMcf" means
million cubic feet ):
Three Months Ended March 31,
2001 2000
----------------- ---------------
Natural gas production (MMcf) 6,961 3,685
Average realized sales price per Mcf $ 5.43 $ 2.30
Cost per Mcf:
Lease operating expense $ 0.38 $ 0.42
Transportation costs $ 0.30 $ 0.29
Production taxes $ 0.21 $ 0.08
Depreciation, depletion and amortization $ 0.51 $ 0.33
General and administrative $ 0.21 $ 0.27
The Company reported net income of $14,966,000 or $0.78 per diluted share for
the three months ended March 31, 2001, compared to net income of $1,862,000 or
$0.12 per diluted share for the same period in 2000.
Natural gas revenues increased to $37,789,000 during the three months ended
March 31, 2001, from $8,472,000 for the same period in the prior year. The
increase in natural gas revenues for the three-month period was due to an 89%
increase in sales volume and a 136% increase in average realized natural gas
prices to $5.43 in 2001 from $2.30 in 2000. Net gas sales in the first quarter
increased to 6.96 billion cubic feet ("Bcf") or an average of 77.3 MMcf per day,
from 3.69 Bcf or an average of 40.5 MMcf per day in the first quarter of 2000.
First quarter 2001 results were impacted favorably by Evergreen's acquisition of
adjacent producing properties from an affiliate of KLT Gas Inc., which was
effective September 1, 2000. These properties contributed approximately 27 MMcf
of gas per day to Evergreen's quarterly gas sales total.
12
Evergreen had 518 net producing gas wells connected to pipeline at March 31,
2001, including 151 net producing wells from the KLT acquisition. As of March
31, 2000, the Company was producing natural gas from a total of 269 net wells.
Evergreen drilled 28 coal bed methane wells in the Raton Basin during this
year's first quarter.
Evergreen's average realized net gas price of $5.43 per Mcf in the first
quarter represents a 136% improvement over last year's first quarter average
of $2.30 per Mcf. Approximately 41% of Evergreen's net production during the
first quarter was either sold under fixed-price contractual arrangements or
hedged using commodity price swaps, resulting in an average price of about
$4.41 per Mcf.
Lease operating expenses for the three months ended March 31, 2001 were
$2,665,000 or $0.38 per Mcf compared to $1,535,000 or $0.42 per Mcf for the
same period in 2000. The increase was due to the increase in the number of
producing wells and compressors. While overall expenses increased, on a per
Mcf basis, lease operating expenses decreased to $0.38 per Mcf for the three
months ended March 31, 2001 compared to $0.42 per Mcf for the same period in
2000. The decrease was due to higher production levels and operating
efficiencies, including a decrease in water handling costs from $0.09 per Mcf
in the first quarter of 2000 to $0.07 per Mcf for the first quarter in 2001
and a decrease in repairs and maintenance costs to $0.03 per Mcf for the
three months ended March 31, 2001 from $0.06 per Mcf for the same period in
2000, offset by $0.01 per Mcf increase in other costs, none of which were
material.
Transportation costs for the three months ended March 31, 2001 were
$2,117,000 or $0.30 per Mcf compared to $1,077,000 or $0.29 per Mcf for the
same period in 2000. Effective the fourth quarter of 2000, the accounting
classification of transportation costs was required to be included in
operating expenses versus netted against natural gas revenues. Accordingly,
natural gas revenues for the quarter ended March 31, 2000 have been increased
to reflect the reclassification of the transportation costs. The
reclassification has no effect on net income for the period.
Production taxes for the three months ended March 31, 2001 were $1,457,000 or
$0.21 per Mcf compared to $285,000 or $0.08 per Mcf in the first quarter of
2000. The increase was due to the increase in the average gas price in 2001
compared with 2000. As a percent of natural gas sales, production taxes for
the three months ended March 31, 2001 and 2000 were 3.8% and 3.4%
respectively.
Depreciation, depletion and amortization expense for the three months ended
March 31, 2001 was $ 3,536,000 compared to $1,224,000 for the same period in
2000. On an equivalent Mcf basis, depreciation, depletion and amortization
expense increased to $0.51 per Mcf in the three months ended March 31, 2001,
as compared to $0.33 per Mcf in the prior year. This increase was primarily
attributable to the September 2000 property acquisition which had an average
acquisition cost of $1.12 per Mcf.
Total general and administrative expense in the first quarter of 2001 increased
to $1,433,000 from $982,000 in last year's first quarter. The increase was due
to higher professional services, office expense, and computer expense as well as
additional administrative personnel and related benefit costs. However, due
to higher production, general and administrative expense on a per-unit of
production basis fell 22% to $0.21 per Mcf, down from $0.27 per Mcf in the first
quarter of 2000.
Interest expense in the first quarter of 2001 totaled $2,487,000 or $0.36 per
Mcf compared to $307,000 or $0.08 per Mcf in the first quarter of 2000. The
increase was due to higher bank borrowings following the property
acquisition in September 2000. Total long-term debt as of March 31, 2001 was
$138.5 million versus $22.5 million as of March 31, 2000.
The Company provided for deferred taxes for the quarter ended March 31, 2001 at
a rate of 38%. Based on projected taxable income, the Company estimates that
beginning with the quarter ending June 30, 2001, the net operating losses will
be fully utilized and cash payments for taxes will be required.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has a $200 million revolving credit facility with a bank
group consisting of Hibernia National Bank, BNP-Paribas, Wells Fargo Bank Texas,
NA, BankOne, NA, Fleet National Bank, Bank of Scotland and First Union National
Bank (the "Banks"). The credit facility is available through July 1, 2003.
Advances pursuant to this credit facility are limited to a borrowing base, which
is presently $200 million. The Company may elect to use either the London
interbank offered rate, or LIBO rate, plus a margin of 1.125% to 1.50% or the
prime rate plus a margin of 0% or 0.25%, with margins on both rates
determined on the average outstanding borrowings under the credit facility.
The borrowing base is redetermined semi-annually by the Banks based upon
reserve evaluations of Evergreen's oil and gas properties. An average annual
commitment fee of 0.375% is charged quarterly for any unused portion of the
credit line. The agreement is collateralized by substantially all domestic
oil and gas properties and guaranteed by substantially all of the Company's
subsidiaries. The credit agreement also contains certain net worth, leverage
and ratio requirements. At March 31, 2001, Evergreen had $138.5 million of
outstanding borrowings under this credit facility, with a current average
interest rate of approximately 6%.
To limit the amount of exposure to interest rate fluctuations, in April 2001,
the Company entered into an interest rate swap designated as a cash flow
hedge to manage fluctuations in cash flows resulting from interest rate
risk. The swap allows for strategies designed to protect against interest
rate fluctuations. The swap exchanges a series of future cash payments, one
on a fixed-rate basis and the other on a floating-rate basis, to lock in a
specific interest rate that is received by the Company. The interest rate
swap has a notional amount of $25,000,000 at a LIBO rate of 4.4% and it is
effective April 23, 2001 through April 23, 2002.
The Company's 2001 capital budget is estimated to be approximately $75
million. Of this total, approximately $58 million will be directed to
Evergreen's coal bed methane operations in the Raton Basin, which includes
about $23 million for infrastructure, approximately $27 million for the
drilling and completion of more than 120 wells, and about $8 million
primarily for recompletions and equipment. Approximately $5 million of the
2001 capital budget will be spent on the Company's coal bed methane project
in the United Kingdom, approximately $5 million on the Northern Ireland tight
gas sands project and the remaining $7 million largely will be used for
domestic and international exploration projects. The Company estimates that
based on projected production and current gas prices, the anticipated 2001
operating cash flows will exceed its estimated capital expenditures.
Capital additions in the first quarter totaled $20.3 million. These additions
included $5.9 million to drill and complete 28 Raton Basin gas wells, $7.0
million for the Raton Basin gas collection system, $2.1 million for domestic
exploration projects, and $1.0 million for international exploration
projects. The balance of first quarter expenditures was primarily related to
the Company's wholly-owned well service company.
The Company has recently reallocated its capital expenditures to accelerate
the Raton Basin development. The Company had anticipated drilling 120 wells
during 2001, but will increase this amount. Through May 9, 2001, the Company
has drilled a total of 49 wells in the Raton Basin this year.
The number of wells anticipated to be drilled in the United Kingdom has been
reduced to 5 or 6 wells in 2001 and the capital costs have also been reduced
from $10.5 million to $5.2 million. The reduction in the drilling program is due
to the regulatory environment, which includes delays in approvals from local
planning commissions for drilling permits.
Other domestic and international exploration projects have been reduced by $2.3
million to allow for additional drilling in the Raton Basin.
14
Cash flows provided by operating activities were $30,228,000 for the three
months ended March 31, 2001, as compared to $3,570,000 for the same period in
2000. The increase was primarily due to the significant increase in both natural
gas production and natural gas prices in 2001 as compared to 2000.
Cash flows used in investing activities were $20,344,000 during the three
months ended March 31, 2001, versus $10,261,000 in the first quarter of 2000.
The increase in 2001 was primarily due to the costs associated with the
drilling of 28 wells and the addition of various gas collection projects.
Cash flows used by financing activities were $9,658,000 during the three
months ended March 31, 2001, as compared to cash flows provided by financing
activities of $7,656,000 in the same period during 2000. The decrease was
primarily due to the repayment of borrowings on the Company's line of credit
made possible by the increased cash flows from operating activities in 2001.
The Company holds a 50% ownership interest in Lorencito Gas Gathering, LLC
and a 47% working interest in the Lorencito Canyon properties ("Lorencito").
The Company and the other owner have entered into a joint sales agreement to
sell Lorencito and the associated leasehold interests. The Company's share of
the sales price is expected to equal or exceed the September 2000 purchase
price of $35 million. Various companies have expressed an interest in
purchasing this property. These wells are non-operated wells and contribute
approximately 2 Mmcf per day (2.6%) to the Company's total net production or
180 Mmcf for the three months ended March 31, 2001. The sale of these
interests will not have a material effect on production or the results of
operations for the remainder of 2001. For Consolidated Balance Sheet
purposes, the Company reclassified the investment in Lorencito to Current
Assets under the caption "Investment Available for Sale" as of March 31, 2001
and the leasehold interests are classified under "Oil and Gas Properties".
Effective January 1, 2001, Evergreen adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities", as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are required
to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income ("OCI") and are recognized in the
income statement when the hedged item affects earnings. Ineffective portions
of changes in the fair value of cash flow hedges are recognized in earnings.
The adoption of SFAS No. 133 resulted in a cumulative effect of change in
accounting principle as a reduction to OCI on a pre-tax basis of $719,000, or
$446,000 after-tax. The reduction to OCI at January 1, 2001 is attributable
to the commodity price swap agreement. Subsequent to January 1, 2001, the
Company entered into a second commodity price swap agreement. See Note 5 to
the Consolidated Financial Statements for additional information on these
agreements.
Evergreen's production is generally sold at prevailing market prices. However,
the Company periodically enters into hedging transactions for a portion of its
production when market conditions are deemed favorable and natural gas prices
exceed the Company's minimum internal price targets. See "Item 3- Quantitative
and Qualitative Disclosure About Market Risk."
The Company's objective in entering into hedging transactions is to manage price
fluctuations and achieve a more predictable cash flow. These transactions limit
Evergreen's exposure to declines in prices, but also limit the benefits
Evergreen would realize if prices increase. As of March 31, 2001, the Company
has entered into the following fixed-price physical delivery contracts to sell
its gas production
15
(the Company's hedging contracts are denoted in MMBtu's, which convert on an
approximately 1-for-1 basis into Mcf):
- 10 MMcf per day from April 1, 2001 through October 31, 2001 at a price
of $2.65 per Mcf,
- 10 MMcf per day from April 1, 2001 through October 31, 2001 at a price
of NYMEX less $0.20 less fuel and transportation costs,
- a maximum of 4 MMcf per day from April 1, 2001 through April 30, 2003
at a price of $2.40 per Mcf plus transportation costs, and
- 10 MMcf per day from April 1, 2001 through March 31, 2003 for the
lesser of then current market price or a gross price of $2.45 per Mcf.
In consideration for the extension of the last contract described above,
Evergreen received $1,762,000 over the 12-month period ended October 31, 2000,
which is being amortized over the contract term. As of March 31, 2001, $903,000
was recognized as deferred revenue and will be recognized as revenue in future
periods.
As of March 31, 2001, the Company had two outstanding commodity price swap
agreements. One contract was for 10 MMcf per day from January 1, 2001 through
December 31, 2001 at a hedge price of $6.10 per Mcf and the other contract was
for 10 MMcf per day from February 1, 2001 through December 31, 2001 at a hedge
price of $6.43 per Mcf. The contracts call for the Company to receive or make
payments based upon the differential between the hedge price and the market gas
price, as defined in the contract, for the notional quantity. At March 31, 2001,
the unrealized gain for these swap contracts were $2,287,000, net of taxes of
$1,402,000, as determined by calculating the net present value of the payment
differential for the aggregate remaining notional quantities based on quoted
market prices, adjusted for certain defined costs.
On February 9, 2001, Evergreen closed a transaction with KFx Inc. ("KFx")
under which KFx sold to Evergreen a portion of its convertible preferred
stock investment in its Pegasus Technologies, Inc. subsidiary ("Pegasus"),
representing an approximate 8.8% as converted interest in Pegasus, for $1.5
million. KFx is obligated to repurchase this preferred stock for $2 million
on January 31, 2002, or January 31, 2003 under certain elections available to
Evergreen to purchase from KFx an additional interest in Pegasus. In certain
circumstances, Evergreen can elect to exchange this interest in Pegasus,
valued at $2 million, and any subsequently acquired interest in Pegasus, for
common stock of KFx at $3.65 per share, subject to certain adjustments. In
addition, Evergreen was provided with a five-year warrant to purchase 1
million shares of KFx common stock at $3.65 per share, subject to certain
adjustments. This warrant is considered a derivative but no value has been
attributed to it at March 31, 2001. The President and Chief Executive Officer
of Evergreen is also on the board of directors of KFx, and the Chief Financial
Officer of Evergreen has been appointed to the Board of Directors of Pegasus.
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
COMMODITY RISK. The Company's major market risk exposure is in the pricing
applicable to its gas production. Realized pricing is primarily driven by the
prevailing price for crude oil and spot prices applicable to Evergreen's United
States natural gas production. Historically, prices received for gas production
have been volatile and unpredictable. Pricing volatility is expected to
continue. Gas price realizations ranged from a monthly low of $4.79 per Mcf to a
monthly high of $10.02 per Mcf during the three months ended March 31, 2001.
The Company periodically enters into hedging activities on a portion of its
projected natural gas production through a variety of financial and physical
arrangements intended to support natural gas prices at targeted levels and to
manage its exposure to gas price fluctuations. Evergreen may use futures
contracts, swaps, options and fixed-price physical contracts to hedge its
commodity prices. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Note
5 to the Consolidated Financial Statements. Realized gains or losses from the
Company's price risk management activities are recognized in gas production
revenues. A 10 percent improvement in quarter-end spot market prices would not
have affected the Company's physical gas contracts as those contracts were lower
than the spot plus 10%. A 10% improvement in quarter-end spot market prices
would reduce the fair value of the commodity price swap contracts in place at
March 31, 2001, net of income taxes, by $1,746,000. Gains or losses on
derivative contracts are expected to be offset by sales at the spot market price
or to preserve the margin on existing physical gas contracts.
INTEREST RATE RISK. The Company has risk exposure for interest rates on its
outstanding debt. Historically, interest rates have been somewhat volatile.
Interest rate volatility is expected to continue. The Company may enter into
contractual obligations with a portion of its estimated outstanding debt to
attempt to manage interest rate risk. Evergreen has historically had a very
conservative capital structure. Due to the increased level of debt incurred
as a result of the property acquisition in September 2000, management
believes that it is appropriate to maintain the lowest interest rate possible.
At March 31, 2001, Evergreen had long-term debt outstanding of $138.5 million.
The interest rates on the outstanding debt range from LIBO rate plus 1.125% to
prime. Interest rates are variable, however, they may be fixed at Evergreen's
option for periods of time between 30 to 90 days. A 10% increase in short-term
interest rates on the floating-rate debt outstanding at March 31, 2001 would
equal approximately 70 basis points. Such an increase in interest rates would
increase Evergreen's 2001 interest expense by approximately $731,000, assuming
borrowed amounts remain outstanding at current levels.
To limit the amount of exposure to interest rate fluctuations, the Company,
in April 2001, entered into an interest rate swap to manage fluctuations in
cash flows resulting from interest rate risk. The swap allows for strategies
designed to protect against interest rate fluctuations. The swap exchanges a
series of future cash payments, one on a fixed-rate basis and the other on a
floating-rate basis, to lock in a specific interest rate that is received by
the Company. The interest rate swap has a notional amount of $25,000,000 at a
LIBO rate of 4.4% and it is effective April 23, 2001 through April 23, 2002.
FOREIGN CURRENCY RISK. Evergreen's net assets, revenue and expense accounts
from its U.K. subsidiary are based on the U.S. dollar equivalent of such
amounts measured in the British pound sterling. Assets and liabilities of the
U.K. subsidiary are translated to U.S. dollars using the applicable exchange
rate as of the end of a reporting period. Revenues, expenses and cash flow
are translated using the average exchange rate during the reporting period.
In 2000, the Company drilled 5 conventional coal bed methane wells and 4
interaction and gob gas wells in the U.K. Evergreen plans to drill up to an
additional 5 to 6 wells during 2001. Any significant change in the exchange
rate for the pound sterling would have an impact on the cost of the drilling
program.
17
In 2001, the Company plans on drilling 4 tight gas sands wells in Northern
Ireland and 1 tight gas sands well in the Republic of Ireland. The Company's
assets, revenue and expense accounts are based on the U.S. dollar equivalent of
such amounts measured in the British pound sterling and the Irish punt. The
assets and liabilities of these projects are translated to U.S. dollars using
the applicable exchange rate as of the end of a reporting period. Revenues,
expenses and cash flow will be translated using the average exchange rate for
the reporting period. Any significant change in the exchange rate for the pound
sterling and/or punt would have an impact on the cost of this drilling program.
The Company measures its exposure to market risk at any point in time by
comparing its open positions to a market risk of fair value. The market prices
the Company uses to determine fair value are based on management's best
estimates, which consider various factors including closing exchange prices,
volatility factors and the time value of money. At March 31, 2001, the Company
was exposed to some market risk on its long-term debt, foreign currency and
natural gas prices; however, management does not believe that such risk is
material.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or its
subsidiaries is a party or to which any of their property is subject.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 6, 2001, the Company issued 23,200 shares of common stock to three
individuals in connection with a mineral interest acquisition. Also, on March 6,
2001, the Company issued 12,930 shares of common stock to a corporation in
settlement of a previous net mineral interest acquisition. The Company in each
case issued the shares in reliance on the exemption from registration provided
in Section 4(2) of the Securities Act of 1933, as amended, based on the nature
of the acquiring parties and the nature of the negotiated transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K on March 8, 2001 to
announce that the Company's board of directors had approved an amendment
to the Company's Shareholder Rights Plan that increases the initial
exercise price for the rights issued pursuant to the plan from $42.50 to
$100.00 per share.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERGREEN RESOURCES, INC.
(Registrant)
DATE: May 14, 2001 By: /s/ Kevin R. Collins
---------------------------------------
Kevin R. Collins
VP - Finance, Chief Financial Officer and
Secretary (Principal Financial and
Accounting Officer)
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