UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 June 30, 2002
------------------------------------------------
[ ] 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 1-3793
--------------
CANADA SOUTHERN PETROLEUM LTD.
.................................................................................
(Exact name of registrant as specified in its charter)
NOVA SCOTIA, CANADA 98-0085412
.................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
#505, 706 - 7th Avenue, S.W., Calgary, Alberta, Canada T2P 0Z1
................................................................................
(Address of principal executive offices) (Zip Code)
(403) 269-7741
................................................................................
(Registrant's telephone number, including area code)
................................................................................
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (l) 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
Indicate the number of shares outstanding of the issuer's classes of
common stock as of the latest practicable date:
Limited Voting Shares, par value $1.00 (Canadian) per share 14,417,770
shares outstanding as of August 12, 2002.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
JUNE 30, 2002
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements Page
----
Consolidated balance sheets at June 30, 2002 and
December 31, 2001 3
Consolidated statements of income and deficit for
the three and six months ended June 30, 2002 and 2001 4
Consolidated statements of cash flows for the three
and six months ended June 30, 2002 and 2001 5
Notes to consolidated financial statements 6
Supplementary Oil and Gas Data 11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosure About Market Risk 20
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
18
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Expressed in Canadian dollars)
June 30, December 31,
-------- ------------
2002 2001
---- ----
Assets (unaudited) (Note)
Current assets
Cash and cash equivalents $ 16,196,576 $ 13,104,666
Accounts receivable 2,676,862 3,008,632
Other assets 280,671 322,747
------------ ------------
Total current assets 19,154,109 16,436,045
---------- ----------
Oil and gas properties and equipment
(full cost method) 6,998,297 8,151,670
Future tax asset - 500,000
----------- -----------
Total assets $26,152,406 $25,087,715
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 380,818 $ 696,576
Accrued liabilities 933,184 881,948
---------- ----------
Total current liabilities 1,314,002 1,578,524
--------- ---------
Future income tax payable 215,000 -
Future site restoration costs 421,467 263,340
--------- ----------
Total long term liabilities 636,467 263,340
------ ----------
Contingencies (Note 6) - -
Shareholders' Equity (Note 3)
Limited Voting Shares, par value
$1 per share
Authorized -100,000,000 shares
Outstanding -14,417,770 shares 14,417,770 14,417,770
Contributed surplus 27,271,833 27,271,833
---------- ----------
Total capital 41,689,603 41,689,603
Deficit (17,487,666) (18,443,752)
------------ ------------
Total shareholders' equity 24,201,937 23,245,851
------------ ------------
Total liabilities and shareholders' equity $26,152,406 $25,087,715
=========== ===========
Note: The balance sheet at December 31, 2001 has been derived from
the audited consolidated financial statements at that date.
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Expressed in Canadian dollars)
(unaudited)
Three months ended Six months ended
----------------------------- ---------------------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Proceeds from carried interests $ 2,013,785 $ 5,761,057 $ 3,921,615 $ 6,105,613
Gas sales 361,955 593,327 740,540 1,665,356
Oil and liquid sales 55,741 67,675 92,535 82,750
Interest and other income 89,799 58,474 159,494 79,892
---------- ---------- ----------- -----------
Total revenues 2,521,280 6,480,533 4,914,184 7,933,611
---------- ---------- ----------- -----------
Costs and expenses:
General and administrative 471,860 414,517 805,410 779,573
Legal 301,555 166,712 617,424 474,759
Lease operating costs 171,845 60,872 305,602 152,942
Depletion, depreciation
and amortization 598,000 370,100 1,230,000 438,202
Site restoration costs 77,000 12,000 158,000 14,000
Foreign exchange loss (gain) 123,369 6,367 119,188 (19,569)
--------- --------- ----------- ------------
Total costs and expenses 1,743,629 1,030,568 3,235,624 1,839,907
--------- --------- ----------- -----------
Income before income taxes 777,651 5,449,965 1,678,560 6,093,704
Income tax provision (228,474) (847,000) (722,474) (904,700)
------------ ------------- ------------ ------------
Net Income 549,177 4,602,965 956,086 5,189,004
Deficit - beginning of period (18,036,843) (28,040,214) (18,443,752) (28,626,253)
------------- ------------- -------------- -------------
Deficit - end of period $(17,487,666) $(23,437,249) $(17,489,666) $(23,437,249)
============= ============= ============= =============
Average number of shares outstanding 14,417,770 14,337,345 14,417,770 14,324,184
========== ========== ========== ==========
(basic & diluted)
Net income per share
(basic & diluted) $.04 $.32 $.07 $.36
==== ==== ==== ====
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(unaudited)
Three months ended Six months ended
------------------ ----------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Cash flows from operating activities:
Net income $549,177 $4,602,965 $956,086 $5,189,004
Adjustments to reconcile net income to net
cash provided from operating activities
Depletion depreciation, and amortization 598,000 382,100 1,230,000 452,202
Income taxes 233,000 847,000 715,000 904,700
Future site restoration costs 77,000 (1,000) 158,000 (8,917)
--------- ---------- --------- ----------
Funds provided from operations 1,457,177 5,831,065 3,059,086 6,536,989
Change in current assets and liabilities:
Accounts and interest receivable (331,052) (252,061) 331,770 (730,472)
Other assets 73,730 (13,257) 42,076 704
Accounts payable (294,328) (31,147) (315,758) 221,566
Accrued liabilities (16,502) (27,112) 51,236 86,298
-------- -------- ------ ------
Net cash provided from operations 889,025 5,507,488 3,168,410 6,115,085
------- --------- --------- ---------
Cash flows from investing activities:
Additions to oil and gas properties 8,506 (307,671) (76,627) (342,920)
Proceeds from sale of properties - 801,227
- -
Site restoration expenditures - - 127 -
-------------- -------------- ------------- --------------
Net cash provided from (used in) investing
activities 8,506 (307,671) (76,500) 458,307
-------------- --------------- -------------- --------------
Cash flows from financing activities:
Exercise of stock options - 409,395 - 626,395
-------------- -------------- -------------- --------------
Net cash from financing activities - 409,395 - 626,395
-------------- -------------- -------------- --------------
Increase in cash and cash equivalents 897,531 5,609,212 3,091,910 7,199,787
Cash and cash equivalents at the
beginning of period 15,299,045 2,750,606 13,104,666 1,160,031
-------------- -------------- ------------- --------------
Cash and cash equivalents at the
end of period $16,196,576 $8,359,818 $16,196,576 $8,359,818
============== ============== ============= ==============
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART 1 FINANCIAL INFORMATION
June 30, 2002
(Expressed in Canadian Dollars)
(unaudited)
Item 1. Financial Statements - Notes
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
including the accounts of Canada Southern Petroleum Ltd. and its wholly owned
subsidiaries, Canpet Inc. and C.S. Petroleum Limited have been prepared in
accordance with Canadian generally accepted accounting principles. The effect of
differences between these principles and accounting principles generally
accepted in the United States (U.S. GAAP) is discussed in Note 7. These
financial statements conform in all material respects with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. All
such adjustments are of a normal recurring nature. Operating results for the
three and six month periods ended June 30, 2002 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2002. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
Note 2. Revenue Recognition
Canada Southern recognizes revenue on its working and royalty interest
properties from the production of oil and gas in the period the oil and gas
units are sold.
Revenue under carried interest agreements is recorded in the period
when the net proceeds become receivable, measurable and collection is reasonably
assured. Under the carried interest agreements Canada Southern receives oil and
gas revenues net of operating and capital costs incurred by the working interest
participants. The time the net revenues become receivable and collection is
reasonably assured depends on the terms and conditions of the relevant
agreements and the practices followed by the operator. As a result, net revenues
may lag the production month by one or more months.
On September 14, 2001, the trial court in Calgary issued its written
reasons for its decision in the Kotaneelee litigation and on November 1, 2001
the Court finalized its judgment. The judgment affirms that, although the
defendants have a continuing contractual obligation (but not a fiduciary
obligation) to develop the Kotaneelee gas field and market the field's gas at
the earliest feasible date, they did not breach their contractual obligation to
market the gas. The Court also ordered that the field's carried interest account
be reduced by $5,297,000 and declared that gas produced at the field is not
subject to processing fees. Although the Court did not quantify the amount
payable to Canada Southern as a result of the processing fee declaration and the
adjustment of the carried interest account, Canada Southern has calculated
that amount to be approximately $25 million before any applicable taxes. The
trial court determined that the issue of whether interest accrued on the carried
interest account had been abandoned. The trial court retained jurisdiction on
the issue of taxable costs, but the Court has expressed a desire to defer its
consideration of costs until the Court of Appeal rules on appeals taken by the
parties. Canada Southern has not recorded the above estimated $25 million amount
due because the decision has been appealed and collection of the amount is not
assured.
Note 3. Limited Voting Shares and Stock Options
During January 2002, options to purchase 100,000 Limited Voting Shares
at $7.53 per share were granted for a period of five years. During April 2002, a
director of the Company was granted a five year option to purchase 50,000 shares
at $6.81 per share. The options were immediately vested and exercisable. During
June 2002, options to purchase 75,000 shares expired.
Summary of Options Outstanding at June 30, 2002
Option Prices
Years granted Expiration Dates Total Exercisable ($)
- ------------- ---------------- ------------ ----------- -------
1999 Jan. 2004 322,700 322,700 7.00
2001 Nov. 2006 45,000 15,000 6.81
2002 Jan. 2007 100,000 100,000 7.53
2002 April 2007 50,000 50,000 6.81
------- -------
Total - June 30, 2002 517,700 487,700
======= =======
Options Reserved for Future Grants 380,134
- ---------------------------------- =======
Effective January 1, 2001, the Company prospectively adopted the new
recommendation of Canadian Institute of Chartered Accountants with respect to
stock based compensation. These recommendations are essentially consistent with
the requirements of FASB Statement No. 123, and require the pro forma disclosure
of the effect on net earnings and earnings per share had stock options granted
to directors and employees been expensed based on their fair value on the date
of grant. The Company already complies with these pro forma disclosure
requirements pursuant to FASB Statement No. 123 in its annual financial
statements.
Note 4. Earnings per share
In 2001, Canada Southern, in accordance with the standards issued by
the Canadian Institute of Chartered Accountants, retroactively adopted the
treasury method of earnings per share (EPS). The new methodology establishes
dilution assuming proceeds from the exercise of dilutive options are used to
purchase shares at the average market price. The previous methodology assumed
proceeds were used to repay debt. There is no change in prior period's EPS, as
the effect of the exercise of stock options would have been anti-dilutive.
Item 1. Financial Statements - Notes (Cont'd)
Note 5. Income Taxes
At June 30, 2002, the Company had unused Canadian tax pools deductible in
future periods of approximately $6.65 million and a future tax liability of
$215,000 representing the tax effect of the excess of the carrying value of the
related properties and equipment over the tax pools. The components of income
tax for the three and six month periods ended June 30, 2002 and 2001 are as
follows:
Three months ended Six months ended
----------------------------------- -------------------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Current income tax $ (4,526) $ - $ 7,474 $ -
Future income tax 233,000 847,000 715,000 904,700
------- --------- ------- ---------
Total $ 228,474 $ 847,000 $ 722,474 $ 904,700
======== ========= ======== =========
Income tax expense for the three and six months ended June 30, 2001
were reduced by the utilization of net operating losses of prior years for which
the benefits had not previously been recognized.
Note 6. Litigation
On September 14, 2001, the trial court in Calgary issued its written
reasons for its decision in the Kotaneelee litigation and on November 1, 2001
the Court finalized its judgment. The judgment affirms that, although the
defendants have a continuing contractual obligation (but not a fiduciary
obligation) to develop the Kotaneelee gas field and market the field's gas at
the earliest feasible date, they did not breach their contractual obligation to
market the gas. The Court also ordered that the field's carried interest account
be reduced by $5,297,000 and declared that gas produced at the field is not
subject to processing fees. Although the Court did not quantify the amount
payable to Canada Southern as a result of the processing fee declaration and the
adjustment of the carried interest account, Canada Southern has calculated that
amount to be approximately $25 million before any applicable taxes. The trial
court determined that the issue of whether interest accrued on the carried
interest account had been abandoned. The trial court retained jurisdiction on
the issue of taxable costs, but the Court has expressed a desire to defer its
consideration of costs until the Court of Appeal rules on appeals taken by the
parties. Canada Southern has not recorded the above estimated $25 million amount
due because the decision has been appealed and collection of the amount is not
assured.
Under Canadian law, certain costs (known as taxable costs) of the
litigation may be assessed against the non-prevailing party. Effective September
1, 1998, the Alberta Rules of Court were amended to provide for a material
increase in the costs which may be awarded to the prevailing party in matters
before the Court.
The trial was lengthy, complicated and costly to all parties and Canada
Southern expects that the parties who ultimately prevail in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The Court has very broad discretion as to whether to award costs and
disbursements and as to the calculation of any amounts to be awarded.
Accordingly, Canada Southern is unable to determine whether, in the event that
Canada Southern does not ultimately prevail on its claims in the litigation,
costs will be assessed against Canada Southern or in what amounts. However,
since the costs incurred by the defendants have been substantial, and since the
Court has broad discretion in the awarding of costs, an award of costs to the
defendants potentially could be material. As of June 30, 2002, Canada Southern
had expended in excess of $15.1 million on the litigation and believes the
defendants have expended substantially more than that amount. A cost award
against Canada Southern could be of sufficient magnitude to necessitate a sale
of Canada Southern's assets or a debt or equity financing to fund such an award.
There are no assurances that any such sale or financing would be consummated.
Note 7. U. S. GAAP - Other Comprehensive Income
---------------------------------------
Classifications within other comprehensive income include foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. During 1998, the
Company wrote down the value of its interest in the Tapia Canyon, California
heavy oil project to a nominal value. During August 1999, the project was sold
and the Company received shares of stock in the purchaser. The purchaser has
become a public company (Sefton Resources, Inc), which is listed on the London
Stock Exchange (trading symbol SER). At June 30, 2002, the Company owned
approximately 4% of Sefton Resources, Inc. with a fair market value of $73,000
and a carrying value of $1.00. The shares of Sefton Resources, Inc. were
restricted and could not be sold before December 2001. The shares are also
subject to a lock-in agreement that restricts the ability of the Company to
dispose of its holding on the open market.
Under U.S. GAAP, the Sefton Resources shares would be classified as
available-for-sale securities and recorded at fair value at June 30, 2002. This
would result in other comprehensive income (loss) for the three and six month
periods ended June 30, 2002. In addition, the balance sheet would reflect
Marketable Securities in the amount of $73,000 (December 31, 2001 - $427,000)
with a corresponding credit to Shareholders' Equity - Accumulated other
comprehensive income in the same amount.
Three months ended Six months ended
--------------------------------- -----------------------
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Other comprehensive
income (loss) $ (190,000) $739,000 $ (354,000) $ 739,000
=========== =========== =========== =========
Note 8. U.S. Accounting Developments
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations". This statement requires the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of the fair value of a liability can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The requirements are effective for
fiscal years beginning on or after June 15, 2002. The effect of this
pronouncement on the financial position of Canada Southern and the resulting
Canadian and U.S. GAAP differences, if any, are yet to be determined.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment of long-lived assets. Statement No.
144 is effective for the 2002 fiscal year and is not expected to have a material
impact on the Canada Southern's financial position.
Note 9. Comparative Amounts
Certain amounts for the 2001 period Consolidated Statements of
Operations and Deficit have been reclassified to conform to the classifications
in the 2002 period.
Note 10. Accounts Receivable
Accounts receivable is comprised of normal trade accounts from various
industry partners in the Company's oil and gas properties as follows:
June 30, 2002 December 31,2001
------------- ----------------
Kotaneelee partners $1,815,809 $2,174,333
Anadarko Canada 451,862 362,613
Others 409,191 471,686
------------ ------------
Total $2,676,862 $3,008,632
========== ==========
Supplementary Oil and Gas Data
------------------------------
Six month periods ended June 30,
--------------------------------
Total Sales Volumes (before royalties) 2002 2001 Change % Change
- -------------------------------------- ---- ---- ------ --------
Carried interests (mcf) 1,706,475 935,973 770,502 82
Carried interests (bbls) 115 233 (118) (51)
Gas (mcf) 309,298 196,209 113,089 58
Oil and liquids (bbls) 4,663 2,262 2,401 106
boe's (6 mcf = 1boe) 340,740 191,192 149,548 78*
boe's per day 1,883 1,056 827 78*
mcfe's (1 bbl = 6 mcfe) 2,044,443 1,147,152 897,291 78*
mcfe's per day 11,295 6,338 4,957 78*
As a result of applying the Company's revenue recognition policy, only
three months production volumes were recorded during the 2001 period in
comparison to the six months of production volumes recorded during the 2002
period.
The corporate sales mix between oil and gas is as follows:
Sales Mix Percent
Gas (mcf) 99 99 - -
Oil and liquids (mcfe) 1 1 - -
The corporate netback analysis for carried interest sales is as follows:
Netback Analysis
- ----------------
Carried interests (per mcfe)
Sales 3.41 8.92 (5.51) (62)
Royalties (.38) (1.23) .85 (69)
----- ------ ------
Net Sales 3.03 7.69 (4.66) (61)
Lease operating expenses (.21) (.15) (.06) 40
Transportation (.45) (.31) (.14) 45
Processing - (.69) .69 (100)
Carried interest capital (.07) (.02) (.05) 250
----- ------ -----
Field netback 2.30 6.52 (4.22) (65)
==== ==== ======
The corporate netback analysis for working interest sales is
as follows:
Working interests (per mcfe)
Sales 3.23 11.84 (8.61) (73)
Royalties (.76) (2.95) 2.19 (74)
----- ------ ----
Net Sales 2.47 8.89 (6.42) (72)
Lease operating expenses (.91) (.78) (.13) 17
----- ----- -----
Field netback 1.56 8.11 (6.55) (81)
==== ==== =====
Definition of Terms
boe = barrels of oil equivalent mcfe = thousand cubic feet equivalent
mcf = thousand cubic feet bbl = barrel of oil
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in nature
are intended to be, and are hereby identified as, "forward looking statements"
for purposes of the "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that forward looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements Among these risks and uncertainties are uncertainties as to the
costs, length and outcome of the Kotaneelee litigation, pricing and production
levels from the properties in which Canada Southern has interests, and the
extent of the recoverable reserves at those properties.
Liquidity and Capital Resources
At June 30, 2002, Canada Southern had approximately $16.2 million of
cash and cash equivalents. These funds are expected to be used for general
corporate purposes, including the continuation of the Kotaneelee field
litigation and for limited exploration and development until the completion of
the litigation.
Net cash flow provided from operations during 2002 was $3,168,000
compared to the net cash flow provided from operations of $6,115,000 during
2001.
Decrease in income from operations $ (3,478,000)
Net changes in accounts receivable and other 1,103,000
Net changes in current liabilities (572,000)
------------
Decrease in net cash provided by operations $ (2,947,000)
=============
The majority of the carried interest properties in British Columbia
were converted to working interests in 2001. At this time, Canada Southern has
not budgeted any significant capital expenditures for the year 2002.
Canada Southern's Kotaneelee carried interest account reached
undisputed pay out status on January 19, 2001. Canada Southern received its
first payment of net production proceeds from the Kotaneelee gas field during
May 2001.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
On September 14, 2001, the trial court in Calgary issued its written
reasons for its decision in the Kotaneelee litigation and on November 1, 2001
the Court finalized its judgment. The judgment affirms that, although the
defendants have a continuing contractual obligation (but not a fiduciary
obligation) to develop the Kotaneelee gas field and market the field's gas at
the earliest feasible date, they did not breach their contractual obligation to
market the gas. The Court also ordered that the field's carried interest account
be reduced by $5,297,000 and declared that gas produced at the field is not
subject to processing fees. Although the Court did not quantify the amount
payable to Canada Southern as a result of the processing fee declaration and the
adjustment of the carried interest account, Canada Southern has calculated that
amount to be approximately $25 million before any applicable taxes. The trial
court determined that the issue of whether interest accrued on the carried
interest account had been abandoned. The trial court retained jurisdiction on
the issue of taxable costs, but the Court has expressed a desire to defer its
consideration of costs until the Court of Appeal rules on appeals taken by the
parties. Canada Southern has not recorded the above estimated $25 million amount
due because the decision has been appealed and collection of the amount is not
assured.
The trial was lengthy, complicated and costly to all parties and Canada
Southern expects that the parties who ultimately prevail in the litigation will
argue for a substantial assessment of costs against the non-prevailing party or
parties. The Court has very broad discretion as to whether to award costs and
disbursements and as to the calculation of any amounts to be awarded.
Accordingly, Canada Southern is unable to determine whether, in the event that
Canada Southern does not ultimately prevail on its claims in the litigation,
costs will be assessed against Canada Southern or in what amounts. However,
since the costs incurred by the defendants have been substantial, and since the
Court has broad discretion in the awarding of costs, an award of costs to the
defendants potentially could be material. As of June 30, 2002, Canada Southern
had expended in excess of $15.1 million on the litigation and believes the
defendants have expended substantially more than that amount. A cost award
against Canada Southern could be of sufficient magnitude to necessitate a sale
of Canada Southern's assets or a debt or equity financing to fund such an award.
There are no assurances that any such sale or financing would be consummated.
Canada Southern has established a provision for its potential share of
future site restoration costs. The estimated amount of these costs, which totals
approximately $1,373,000 is being provided for on a unit of production basis in
accordance with existing legislation and industry practice. At June 30, 2002,
Canada Southern had accrued $421,000 of these costs with $952,000 remaining to
be accrued in the future. The estimated costs of abandoning carried interest
wells are not included in future site restoration costs. The Company expects
that these costs would be paid by the working interest partners and charged to
the carried interest account.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd)
Results of Operations
Three months ended June 30, 2002 vs. June 30, 2001
A comparison of the results from 2002 and 2001 is as follows:
2002 2001 Net Change
-------------- -------------- --------------
Revenues $ 2,521,000 $ 6,481,000 $ (3,960,000)
Costs and expenses (1,743,000) (1,031,000) (712,000)
Income tax provision (229,000) (847,000) 618,000
---------- ----------- ------------
Net income $ 549,000 $ 4,603,000 $ (4,054,000)
=========== =========== =============
Net income per share
(basic and diluted) $.04 $.32 $(.28)
==== ==== ======
Net cash flow from operations per
share (basic and diluted) $.06 $.38 $(.32)
==== ==== ======
Proceeds from carried interests decreased 65% to $2,014,000 during 2002
from $5,761,000 in 2001. Canada Southern's carried interest account in the
Kotaneelee gas field reached undisputed pay out status on January 19, 2001.
Canada Southern received its first payment of net production proceeds from the
field during May 2001. Effective for the production period beginning September
2001, the defendants are no longer deducting a processing fee on the monthly
payments of carried interest revenues. The following is a comparison of the
proceeds from carried interests for the years indicated:
Three months ended June 30,
---------------------------
2002 2001
------------ ------------
Kotaneelee gas field $2,011,000 $5,759,000
Other properties 3,000 2,000
---------- ----------
Total $2,014,000 $5,761,000
========== ==========
Sales gas from the Kotaneelee field is approximately 80% of total
monthly production. Because of the uncertainties as to production rates, natural
gas prices and future capital expenditures, Canada Southern is unable to
accurately predict the amount of future net production proceeds that it may
receive from the field. In addition, water production increased during 2001 and
2002 and the producing field may require the drilling of another water disposal
well. If water production were to continue to increase, future gas production
from the field could be adversely impacted.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd))
Production from the Kotaneelee field during 2002 compared to 2001 was
as follows:
2002 2001
---- ----
Month Mmcf/d Mmcf/d
April 39.4 47.7
May 38.1 46.8
June 36.7 41.8
During the 2001 period, proceeds from carried interests included
$315,000 of carried interest revenues relating to production periods prior to
January 1, 2001 from the Buick Creek, Wargen and Clarke Lake properties, which
were converted to working interests effective January 1, 2001.
The volumes in thousand cubic feet (mcf) and the average price of gas
per mcf sold during the periods indicated were as follows:
Three months ended June 30,
---------------------------
2002 2001
---- ----
Average price Average price
mcf/bbls per mcf/bbl Total mcf/bbls per mcf/bbl Total
-------- ----------- ------------------ -------- ----------- ----------
Gas sales (mcf) 827,065 $ 3.62 $2,998,000 902,571 $ 8.66 $7,820,000
Liquids (bbls) 72 $27.78 2,000 39 $51.28 2,000
Royalty (329,000) (987,000)
Operating costs (170,000) (113,000)
Processing fees - (648,000)
Transportation (418,000) (293,000)
Capital costs (69,000) (20,000)
----------- -----------
Total $ 2,014,000 $ 5,761,000
=========== ===========
Gas sales decreased 39% to $362,000 in 2002 from $593,000 in the 2001
period. There was a 130% increase in the number of units sold and a 70% decrease
in the average price for gas. The volumes in thousand cubic feet ("mcf") and the
average price of gas per mcf sold during the periods indicated were as follows:
Three months ended June 30,
---------------------------
2002 2001
---- ----
Average price Average price
mcf per mcf Total mcf per mcf Total
--- ------- ----- --- ------- -----
Gas sales 145,829 $3.30 $ 481,000 63,529 $10.89 $ 692,000
Royalties deducted (119,000) (99,000)
--------- ---------
Total $ 362,000 $593,000
------- --------
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd))
Oil and liquid sales decreased by 18% in 2002 to $56,000 compared to
$68,000 in 2001. Since Canada Southern sold most of its producing oil properties
in 2000, future oil sales are expected to be minimal unless additional producing
properties are drilled or purchased. Crude oil unit sales in barrels (bbls)
(before deducting royalties) and the average price per barrel sold during the
periods indicated were as follows:
Three months ended June 30,
---------------------------
2002 2001
---- ----
Average price Average price
bbls per bbl Total bbls per bbl Total
---- ------- ----- ---- ------- -----
Crude oil sales 2,707 $28.44 $ 77,000 1,527 $39.95 $ 61,000
Royalties deducted (21,000) (10,000)
---------- --------
Total $ 56,000 $ 51,000
======== ========
Interest and other income increased 55% in 2002 from $58,000 in 2001 to
$90,000 in the 2002 period because more funds were available for investment.
General and administrative costs increased 14% in 2002 to $472,000 from
$415,000 in 2001 primarily because of increases in directors' fees and expenses,
insurance and shareholder mailing costs.
Legal expenses increased 81% during 2002 to $302,000 from $167,000
during 2001. These expenses are related primarily to the cost of the Kotaneelee
litigation. On February 6, 2001, presentation of evidence to the trial court was
concluded, and as a result the legal expenses were reduced in 2001. The appeal
of the trial court's decision is expected to increase legal expenses in 2002.
Lease operating costs increased 182% from $61,000 in 2001 to $172,000
in the 2002 period because of the increase in production volumes.
Depletion, depreciation and amortization expense increased 62% in 2002
to $598,000 from $370,000 in 2001. The increase is associated with the
Kotaneelee gas field production.
Site restoration costs increased by 542% to $77,000 in 2002 compared
with $12,000 in the 2001 period because of the increase in production volumes.
A foreign exchange loss of $123,000 was recorded in 2002, compared to a
loss of $6,000 in 2001 on the Company's U.S. dollar investments. The value of
the Canadian dollar was U.S. $.66 at June 30, 2002 compared to U.S. $.63 at
March 31, 2002.
An income tax provision of $228,000 was recorded in 2002 compared to an
income tax provision of $847,000 in 2001. During the 2002 period, the Company
exhausted its tax loss carry forwards not previously recorded which resulted in
an effective tax rate of 29%. During the 2001 period, the effective tax rate
of 16% was caused by utilizing tax loss carry forwards not previously recorded
which resulted in a tax provision of $847,000.
Six months ended June 30, 2002 vs. June 30, 2001
A comparison of revenues, costs and expenses, net loss and earnings per
share for 2002 and 2001 is as follows:
2002 2001 Net Change
--------------- -------------- -------------
Revenues $ 4,914,000 $ 7,934,000 $ (3,020,000)
Costs and expenses (3,236,000) (1,840,000) (1,396,000)
Income tax provision (722,000) (905,000) 183,000
----------- ----------- -----------
Net income $ 956,000 $ 5,189,000 $ (4,233,000)
========= =========== ============
Net income per share (basic and
diluted) $.07 $.36 $(.29)
==== ==== ======
Net cash flow from operations per
share (basic and diluted) $.22 $.43 $(.21)
==== ==== ====
Proceeds from carried interests decreased 36% to $3,922,000 during 2002
from $6,106,000 in 2001. Canada Southern's carried interest account in the
Kotaneelee gas field reached undisputed pay out status on January 19, 2001.
Canada Southern received its first payment of net production proceeds from the
field during May 2001. Effective for the production period beginning September
2001, the defendants are no longer deducting a processing fee on the monthly
payments of carried interest revenues. As a result of applying the Company's
revenue recognition policy, only three months revenue was recorded during the
2001 period in comparison to the six months of revenue recorded during the 2002
period. The following is a comparison of the proceeds from carried interests for
the years indicated:
Six months ended June 30,
2002 2001
------------- --------
Kotaneelee gas field $3,918,000 $ 5,759,000
Other properties 4,000 347,000
------------ -----------
Total $3,922,000 $ 6,106,000
========== ===========
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd))
Sales gas from the Kotaneelee field is approximately 80% of total
monthly production. Because of the uncertainties as to production rates, natural
gas prices and future capital expenditures, Canada Southern is unable to
accurately predict the amount of future net production proceeds that it may
receive from the field. In addition, water production increased during 2001 and
2002 and the producing field may require the drilling of another water disposal
well. If water production were to continue to increase, future gas production
from the field could be adversely impacted.
Production from the Kotaneelee field during 2002 compared to 2001 was
as follows:
2002 2001
---- ----
Month Mmcf/d Mmcf/d
January 41.9 52.9
February 40.5 54.6
March 39.0 50.5
April 39.4 47.7
May 38.1 46.8
June 36.7 41.8
During the period 2001 proceeds from carried interests included
$315,000 of carried interest revenues relating to production periods prior to
January 1, 2001 from the Buick Creek, Wargen and Clarke Lake properties, which
were converted to working interests effective January 1, 2001.
The volumes in thousand cubic feet (mcf) and the average price of gas
per mcf sold during the periods indicated were as follows:
Six months ended June 30,
-------------------------
2002 2001
---- ----
Average price Average price
mcf/bbls per mcf/bbl Total mcf/bbls per mcf/bbl Total
-------- ----------- ------------------ -------- ----------- ----------
Gas sales (mcf) 1,706,475 $ 3.41 $5,811,000 935,973 $ 8.92 $8,347,000
Liquids (bbls) 115 $34.78 4,000 233 $47.21 11,000
Royalty (650,000) (1,154,000)
Operating costs (357,000) (136,000)
Processing fees - (649,000)
Transportation (763,000) (293,000)
Capital costs (123,000) (20,000)
----------- -----------
Total $ 3,922,000 $ 6,106,000
=========== ===========
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd))
Gas sales decreased 55% to $741,000 in 2002 from $1,665,000 in the 2001
period. There was a 58% increase in the number of units sold and a 73% decrease
in the average price for gas. The volumes in thousand cubic feet ("mcf") and the
average price of gas per mcf sold during the periods indicated were as follows:
Six months ended June 30,
-------------------------
2002 2001
---- ----
Average price Average price
mcf per mcf Total mcf per mcf Total
--- ------- ----- --- ------- -----
Gas sales 309,298 $3.11 $ 963,000 196,209 $11.39 $ 2,234,000
Royalties deducted (222,000) (569,000)
--------- ---------
Total $ 741,000 $1,665,000
========= ==========
Oil and liquid sales increased by 12% in 2002 to $93,000 compared to
$83,000 in 2001. Since Canada Southern sold most of its producing oil properties
in 2000, future oil sales are expected to be minimal unless additional producing
properties are drilled or purchased. Crude oil unit sales in barrels (bbls)
(before deducting royalties) and the average price per barrel sold during the
periods indicated were as follows:
Six months ended June 30,
-------------------------
2002 2001
---- ----
Average price Average price
bbls per bbl Total Bbls per bbl Total
---- ------- ----- ---- ------- -----
Crude oil sales 4,663 $27.24 $ 127,000 2,262 $41.56 $ 94,000
Royalties deducted (34,000) (11,000)
---------- --------
Total $ 93,000 $ 83,000
======== ========
Interest and other income increased 99% in 2002 from $80,000 in 2001 to
$159,000 in the 2002 period because more funds were available for investment as
a result of the payments received from the Kotaneelee gas field.
General and administrative costs increased 3% in 2002 to $805,000 from
$780,000 in 2001.
Legal expenses increased 30% during 2002 to $617,000 from $475,000
during 2001. These expenses are related primarily to the cost of the Kotaneelee
litigation. On February 6, 2001, presentation of evidence to the trial court was
concluded, and as a result the legal expenses were reduced in 2001. The appeal
of the trial court's decision is expected to increase legal expenses in 2002.
Lease operating costs increased 100% from $153,000 in 2001 to $306,000
in the 2002 period because of the increase in production volumes.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Cont'd))
Depletion, depreciation and amortization expense increased 181% in 2002
to $1,230,000 from $438,000 in 2001. The increase is associated with the
Kotaneelee gas field production.
Site restoration costs increased by 1029% to $158,000 in 2002 compared
with $14,000 in the 2001 period because of the increase in production volumes.
A foreign exchange loss of $120,000 was recorded in 2002, compared to a
gain of $20,000 in 2001 on the Company's U.S. dollar investments. The value of
the Canadian dollar was U.S. $.66 at June 30, 2002 compared to U.S. $.63 at
December 31, 2001.
An income tax provision of $722,000 was recorded in 2002 compared to an
income tax provision of $905,000 in 2001. During the 2002 period, the Company
exhausted its tax loss carry forwards not previously recorded which resulted in
an effective tax rate of 43%. During the 2001 period, the effective tax rate of
15% was caused by utilizing tax loss carry forwards not previously recorded
which resulted in a tax provision of $905,000.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company does not have any significant exposure to market risk as
the only market risk sensitive instruments are its investments in marketable
securities which are classified as cash and cash equivalents. Since the Company
expects to hold the investments to maturity, the maturity value should be
realized. At June 30, 2002, the carrying value of its investments in United
States dollar accounts was approximately $2.5 million, which was approximately
equal to fair value and face value of the investments.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
PART II - OTHER INFORMATION
June 30, 2002
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 11, 2002, the Company held its Annual General
Meeting of Shareholders.
(b) Myron Kanik was re-elected a director of the Company
for a five year term expiring at the 2007 Annual
General Meeting. The vote was as follows:
For 265,836
Withheld 20,892
(c) The firm of Ernst & Young LLP was appointed as the
Company's independent auditors for the year ending
December 31, 2002. The vote was as follows:
For 273,313
Against 2,593
Abstain 10,822
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 (1) Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley act of
2002 by Randy Denecky
(b) Reports on Form 8-K
On April 30, 2002, the Company reported that Mr.
Myron Kanik, former Deputy Minister of the Alberta Department
of Energy, had been elected a director of the Company to fill
a vacancy created by the resignation of Ben A. Anderson in
January 2002. The Company also announced that its Annual
General Meeting of Shareholders would be held on Tuesday, June
11, 2002.
CANADA SOUTHERN PETROLEUM LTD.
FORM 10-Q
JUNE 30, 2002
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.
CANADA SOUTHERN PETROLEUM LTD.
------------------------------
Registrant
Date: August 12, 2002 By /s/ Randy Denecky
----------------------------
Randy Denecky
President, Treasurer and Chief
Financial and Accounting Officer