New Concept Energy, Inc. quarterly report, Q3 FY2012

New Concept Energy, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. The unaudited consolidated statements cover the Company and its majority-owned subsidiaries. New Concept Energy operates oil and gas properties in Ohio and West Virginia and a 114-resident retirement community in Oregon. The Company had 1,946,935 common shares outstanding as of November 14, 2012.

Financial Performance and Position

Metric	Three months ended September 30	Nine months ended September 30
Revenue	$976,000 vs. $1.003 million	$2.928 million vs. $3.025 million
Operating income (loss)	$(154,000) vs. $(87,000)	$(1.581) million vs. $(174,000)
Net income (loss)	$1.520 million vs. $(57,000)	$84,000 vs. $106,000
Net income (loss) per share	$0.78 vs. $(0.03)	$0.04 vs. $0.05
Net cash from operating activities	Not separately provided	$268,000 vs. $326,000

Third-quarter operating margin was approximately negative 15.8%; nine-month operating margin was approximately negative 54.0%.
Third-quarter net income was substantially driven by a $1.7 million gain from the settlement and recovery of a previously reserved related-party receivable. Nine-month net margin was approximately 2.9%.
Oil and gas revenue was $274,000 in the quarter and $889,000 year to date. Retirement-community revenue was $702,000 in the quarter and $2.039 million year to date.
At September 30, 2012, cash and cash equivalents were $235,000, compared with $109,000 at December 31, 2011. Current assets were $417,000 and current liabilities were $352,000, implying a current ratio of approximately 1.2.
Total assets were $12.521 million, including $9.856 million of oil and gas properties. Total liabilities were $5.959 million. Reported long-term obligations included $2.347 million of notes payable, a $2.770 million asset retirement obligation, and $490,000 of other long-term liabilities.
Cash flow from operations of $268,000 was offset partly by $150,000 of investing outflows and supplemented by $8,000 of financing inflows, producing a $126,000 increase in cash.

Material Changes Versus Prior Comparable Period

Quarterly revenue declined approximately 2.7%, while year-to-date revenue declined approximately 3.2%.
Quarterly oil and gas revenue fell by $39,000, principally because of lower natural gas prices. Year-to-date oil and gas revenue increased modestly as new wells added approximately $241,000, largely offset by approximately $225,000 of lower pricing.
Oil and gas operating expenses increased to $432,000 for the quarter from $325,000 and to $1.356 million year to date from $1.025 million. Lower gas prices reduced the estimated production life of the wells and accelerated depletion expense.
The Company recorded a $912,000 impairment of oil and gas properties in the first quarter of 2012 under the full-cost accounting ceiling test.
Retirement-community occupancy declined from 91% to 85%, although higher rates substantially offset the effect on revenue. Year-to-date retirement-community revenue decreased to $2.039 million from $2.152 million.
Corporate general and administrative expense increased to $402,000 year to date from $351,000, principally because of legal costs.
Interest income fell to zero from $360,000 year to date after the Company fully reserved a note receivable and accrued interest. Interest expense increased to $170,000 from $93,000 because of additional financing obtained in late 2011.
Accounts payable and accrued expenses declined substantially, and the $691,000 related-party payable reported at December 31, 2011 was no longer recorded at September 30, 2012.

Outlook, Risks, Contingencies, and Unusual Items

In April 2012, the Company entered into an agreement fixing its natural gas price at $4.53 per MCF for five years through April 2017. Despite the contracted price, the required accounting valuation resulted in the $912,000 oil and gas impairment.
The Company expects natural gas oversupply and depressed market prices to continue for some time. Results remain sensitive to production volumes, realized commodity prices, depletion estimates, and reserve valuations.
The Company recorded a $1.7 million gain after Pillar Income Asset Management agreed to relieve approximately $1.7 million of Company obligations, with a corresponding reduction to the amount owed by related party PIAMI. A separate agreement provides for a potential $1.25 million obligation from Reality Advisors, Inc.; no recovery of the remaining reserved PIAMI receivable will be recorded until collected.
The Company reevaluated the cost of plugging abandoned wells and concluded that its existing asset retirement reserve was sufficient after shifting to an in-house approach.
In the Carlton Energy litigation, the Texas Court of Appeals overturned a trial-court ruling favorable to the Company and imposed alter-ego liability in connection with a substantial judgment. The Company and other defendants petitioned the Texas Supreme Court for review and continue to dispute liability. The filing does not provide a clear recorded amount for any potential Carlton liability.
Chesapeake has a judgment against the Company related to disputed drilling costs. The Company has appealed, has recorded a $491,000 liability, and Chesapeake is withholding the Company’s share of production proceeds pending resolution.
Other identified risks include access to debt or equity financing, interest rates, retirement-community occupancy and pricing, labor and maintenance costs, competition, permitting and construction delays, and the ability to maintain cash flow.
Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting. Nearly all debt is at fixed rates, limiting interest-rate exposure.

Important Facts for Investors to Verify

Whether the $1.7 million related-party gain is sustainable or represents a nonrecurring transaction.
The collectability and ultimate accounting treatment of the remaining PIAMI receivable and the potential $1.25 million RAI obligation.
The outcome and potential exposure from the Carlton litigation, for which the filing text does not provide a clear recorded liability.
The status of the Chesapeake appeal, the $491,000 recorded liability, and withheld gas proceeds.
Whether the $4.53 per MCF gas-price agreement offsets reserve depletion, impairment, and production risks.
Current retirement-community occupancy, pricing, lease costs, and operating margins.
The Company’s ability to fund operations and required well-plugging obligations with only $235,000 of cash and $352,000 of current liabilities at quarter end.