U.S.
Securities and Exchange Commission
 Washington,
D.C. 20549
 
 
 Form
10-Q
 
 
 QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF
 THE
SECURITIES EXCHANGE ACT OF 1934
 
 
 For
the quarterly period ended September 30,
2009
 
 
 Commission
File No. 1-15555
 
  Tengasco,
Inc.
 (Exact
name of issuer as specified in its charter)
 
 
 Tennessee-
              87-0267438State
      or other jurisdiction of
                Incorporation
      or organization
              (IRS
      Employer Identification No.)
 10215
Technology Drive, Suite 301, Knoxville, TN 37932
 (Address
of principal executive offices)
 
 (865-675-1554)
 (Issuer’s
telephone number, including area code)
 
 
 Indicate
by check mark whether the issuer (1) has  filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
 Yes XNo__
  Indicate
by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer___
                Non-accelerated
      filer ___
                (Do
      not check if a smaller reporting company)
              Accelerated
      filer X___
                Smaller
      reporting company  ___
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes____ No X
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:  59,560,661
common shares at   November 2, 2009
 
 
  
  TABLE
OF CONTENTS
 
 FINANCIAL
      INFORMATION
              PAGEITEM
      1. FINANCIAL STATEMENTS*    Condensed
      Consolidated Balance Sheets as of September 30, 2009 and December 31,
      2008
              3*    Condensed
      Consolidated Statements of Operations for the three and nine months ended
      September 30, 2009 and 2008
              5*    Condensed  Consolidated
      Statement of Stockholders’ Equity for the nine months ended September 30,
      2009
              6*    Condensed
      Consolidated Statements of Cash Flows for the nine months
      ended  September 30, 2009 and 2008
              7*    Notes
      to Condensed  Consolidated Financial Statements
              8ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
              21ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
    RISK
              27ITEM
      4. CONTROLS AND PROCEDURES
              29OTHER
      INFORMATIONITEM
      1. LEGAL PROCEEDINGS
              30ITEM
      1A. RISK FACTORS
              30ITEM
      2. UNREGISTERD SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              30ITEM
      3. DEFAULTS UPON SENIOR SECURITIES
              30ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECRUTIY
      HOLDERS
              30ITEM
      5. OTHER INFORMATION
              30ITEM
      6. EXHIBITS
              32*SIGNATURES
              33
  2
 
 TENGASCO,
INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
  (in
      thousands, except per share and share data)
              
              September
      30, 2009
                (unaudited
              
              December
      31, 2008ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              508
              
              
              $   
                    
        245Accounts
      receivables
              
              
              1,026
              
              
              1,104Participants
      receivables
              
              
              22
              
              
              24Inventory
              
              
              520
              
              
              476Other
      current assets
              
              
              10
              
              
              10-Total
      current assets
              
              
              2,086
              
              
              1,859Restricted
      cash
              
              
              121
              
              
              121Loan
      fees
              
              
              146
              
              
              202Oil
      and gas properties, net (full cost accounting method)
              
              
              13,356
              
              
              14,142Pipeline facilities,
      net
              
              
              12,200
              
              
              12,380Other
      property and equipment, net
              
              
              353
              
              
              285Deferred
      tax asset
              
              
              9,101
              
              
              9,101Methane
      project
              
              
              4,541
              
              
              4,357Total
      assets
              
              $
              41,904
              
              $
              42,447
 
 See
accompanying notes to condensed consolidated financial statements
 
 
 
  3
 
 TENGASCO,
INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
  (in
      thousands, except per share and share data)
              
              September
      30, 2009
                (unaudited
              
              December
      31, 2008LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesCurrent
      maturities of long-term debt
              
              $
              130
              
              
              $   
                    
        75Accounts
      payable
              
              
              844
              
              
              701Other
      accrued liabilities
              
              
              375
              
              
              437Unrealized
      derivative liability
              
              
              157
              
              
              -Total
      current liabilities
              
              
              1,506
              
              
              1,213Asset
      retirement obligation
              
              
              602
              
              
              656Prepaid
      Revenues
              
              
              853
              
              
              853Long
      term debt, less current maturities
              
              
              10,073
              
              
              10,052Unrealized
      derivative liability
              
              
              405
              
              
              -Total
      liabilities
              
              
              14,097
              
              
              13,871Stockholders’
      equityCommon
      stock, $.001 par value; authorized 100,000,000
         shares; 59,360,661 and 59,350,661 shares issued and
         outstanding
              
              
              59
              
              
              59Additional
      paid-in capital
              
              
              55,155
              
              
              54,993Accumulated
      deficit
              
              
              (27,407)
              
              
              (26,476
              )Total
      stockholders’ equity
              
              
              27,807
              
              
              28,576Total
      liabilities and stockholders’ equity
              
              $
              41,904
              
              $
              42,447
  
 See
accompanying notes to condensed consolidated financial statements
 
 
  4
 
 TENGASCO,
INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
  For
      the Three Months Ended
                September 30,
              
              For
      the Nine Months Ended
                September 30,(in
      thousands, except per share and share data)
              2009
              2008
              
              2009
              
              2008Revenues
      and other incomeOil
      and gas revenues
              $     2,584
              $
           5,059
              
              $     6,834
              
              $     12,981Pipeline
      transportation  revenues
              1
              3
              
              5
              
              9Interest
      income
              -
              5
              
              1
              
              17Total
      revenues and other income
              2,585
              5,067
              
              6,840
              
              13,006Cost
      and other deductionsProduction
      costs and taxes
              1,352
              1,473
              
              3,726
              
              4,216Depletion,
      depreciation and amortization
              459
              552
              
              1,418
              
              1,491Interest
      expense
              166
              214
              
              475
              
              395General
      and administrative cost
              470
              419
              
              1,304
              
              1,228Public
      relations
              1
              2
              
              42
              
              40Professional
      fees
              24
              39
              
              244
              
              221Total
      cost and other deductions
              2,472
              2,699
              
              7,209
              
              7,591Income
      (loss) From Operations
              113
              2,368
              
              (369)
              
              5,415Deferred
      Tax Benefit
              -
              -
              
              -
              
              5,227Income
      Tax Expense
              -
              (805)
              
              -
              
              (1,845)Unrealized gain(loss) on
      derivatives
              (562)
              -
              
              (562)
              
              -Net
      income (loss
              $   (449)
              $    1,563
              
              $  (931)
              
              $
           8,797Net
      income (loss) per shareOperations
      Basic
              $   (0.01)
              $     0.03
              
              $     (0.02)
              
              $    (0.15)Operations
      Diluted
              $    (0.01)
              $     0.03
              
              $     (0.02)
              
              $    (0.14)Shares
      used in computing Earnings Per ShareBasic
              59,360,661
              59,296,242
              
              59,356,412
              
              59,214,498Diluted
              59,360,661
              61,600,242
              
              59,356,412
              
              61,518,498
 
 See
accompanying notes to condensed consolidated financial statements
 
 
 
  5
 
 TENGASCO,
INC.
 CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
 (Unaudited)
  
 Common
      StockShares
              Amount
              Additional Paid in Capital
              Accumulated Deficit
              Total(in
      thousands, except per share and share dataBalance
      at December 31,2008
              59,350,661
              $   59
              $      54,993
              $   (26,476)
              $   28,576Net
      Loss
              -
              -
              -
              (931)
              (931)Options
      & Compensation Expense
              -
              -
              159
              -
              159Shares
      Issued for Exercise of Options
              10,000
              -
              3
              -
              3Balance
      September 30, 2009
              59,360,661
              $  59
              $    55,155
              $
        (27,407)
              $   27,807
 
 See
accompanying notes to condensed consolidated financial statements
  
  6
 
 TENGASCO,
INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
  
 For
      the Nine Months Ended September 30,(in
      thousands)
              2009
              2008Operating
      activitiesNet Income
              $       (931)
              $      8,797Adjustments to reconcile net
      income to net cash
                Provided by operating
      activities:Depletion, depreciation, and
      amortization
              1,418
              1,491Accretion on asset retirement
      obligation
              (54)
              99(Gain)/loss
      on sale of vehicles/equipment
              -
              -Compensation and services paid in
      stock options
              159
              171Deferred tax
    benefit
              -
              (3,382)Unrealized gain (loss) on
      derivatives
              562
              -Changes in assets and
      liabilities:Accounts
    receivable
              78
              (1,074)Participant
      receivables
              2
              35Inventory
              (44)
              (72)Accounts payable
              143
              (28)Accrued
    liabilities
              (62)
              293Settlement
      on asset retirement obligations
              -
              (24)Net
      cash provided by operating activities
              1,271
              6,306Investing
      activitiesAdditions to other property
      & equipment
              -
              (66)Net additions to oil and gas
      properties
              (478)
              (10,075)Additions
      to Methane project
              (184)
              (2,695)Net
      cash used in investing activities
              (890)
              (12,839)Financing
      activitiesProceeds
      from exercise of options/warrants
              3
              72Proceeds
      from borrowings
              -
              5,765Loan
      fees
              -
              (69)Net
      cash provided by (used in) financing activities
              (118)
              5,687Net
      change in cash and cash equivalents
              263
              (846)Cash
      and cash equivalents, beginning of period
              245
              2,227Cash
      and cash equivalents, end of period
              $      508
              $      1,381Supplemental cash flow
      information:Interest
      paid
              $      475
              $295Supplemental
      non-cash investing and financing activities:Financed
      company vehicles
              $       197
              -
 
 See
accompanying notes to condensed consolidated financial statements
 
  7
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 (1)    Basis of
Presentation
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Item 210 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2009. For further information, refer to the Company’s
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
 
 
 (2)    Income
Taxes
 
 The
Company accounts for income taxes using the “asset and liability method.”
Accordingly, deferred tax liabilities and assets are determined based on the
temporary differences between the financial reporting and tax bases of assets
and liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.  Deferred tax assets arise
primarily from net operating loss carry-forwards and a ceiling test
write-down.  Management evaluates the likelihood of realization for
such assets at year-end providing a valuation allowance for any such amounts not
likely to be recovered in future periods. The Company currently has a net
operating loss carry-forward of $15.6 million.
 
 As of December 31, 2008, the Company
also had a deferred tax asset totaling $3.9 million related to a ceiling test
write-down of $11.6 million.  This deferred tax asset arose from
differences between the financial statement carrying value of the Company’s oil
and gas properties and their respective income tax bases (temporary differences)
after taking into consideration the reduced depletion expense from the ceiling
test write down.  To assess the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of this deferred tax asset will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment.   Management has determined that it is more likely
than not that all of this deferred tax asset will be realized.  The
$3.9 million deferred tax asset related to the ceiling test write-down is in
addition to the deferred tax assets resulting from the Company’s net operating
loss carry-forwards.The total deferred tax asset at September 30, 2009
is $9.1 million.
 
  8
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 (3)    Earnings per
Share
 
 In
accordance with Statement of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 260, Earnings Per Share, basic income
per share is based on 59,360,661 and 59,296,242 weighted average shares
outstanding for the quarters ended September 30, 2009, and September 30, 2008,
respectively and 59,356,412 and 59,214,498 for the nine months ended September
30, 2009 and September 30, 2008 respectively. Diluted earnings per common share
are computed by dividing income available to common shareholders by the
weighted-average number of shares of common stock outstanding during the period,
increased to include the number of additional shares of common stock that would
have been outstanding if the dilutive potential shares of common stock had been
issued. The dilutive effect of outstanding options is reflected in diluted
earnings per share for the three and nine months ended September 30, 2008.
Dilutive shares outstanding at September 30, 2009 were 2,234,000, related to
outstanding options. These shares were not included in the Earnings Per Share
for the first nine months of 2009 as they were anti-dilutive.
 
 
 (4)    Recent Accounting
Pronouncements
 
 In July
of 2009, the FASB issued FASB ASC 855-10-50, Subsequent Events which requires an
entity to recognize in the financial statements the effects of all subsequent
events that provide additional evidence about conditions that existed at the
date of the balance sheet, including the estimates inherent in the process of
the financial statements. The final rules were effective for interim and annual
periods issued after June 15, 2009. The Company has adopted the policy effective
September, 2009.There was no material effect on the Company’s consolidated
financial statements as a result of the adoption.
 
 In June
of 2009, the FASB issued FASB ASC 105, Codification which establishes FASB
Codification as the source of authoritative generally accepted accounting
pronouncements (GAAP) recognized by the FASB to be applied by nongovernmental
entities. The final rule was effective for interim and annual periods issued
after September 15, 2009. The Company has adopted the policy effective September
30, 2009. There was no material effect on the presentation of the Company’s
consolidated financial statements as a result of the adoption of ASC
105.
 
 In
December 2008, the SEC issued Release No. 33-8995, “Modernization of
Oil and Gas Reporting,” amending oil and gas reporting requirements under Rule
4-10 of Regulation S-X and Industry Guide 2 in Regulation S-K. The new
requirements provide for consideration of new technologies in evaluating
reserves, allow companies to disclose their probable and possible reserves to
investors, require reporting oil and gas reserves using an average price based
on the prior 12-month period rather than year-end prices, and revise the
disclosure requirements for oil and gas operations.  January 1, 2010
The Company will adopt the rule and reflect these changes on the Company’s
audited
  9
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  financial
statements for the year ended December 31,2009. At this time the Company is
still considering the effects, if any, on its financial statements as a result
of the adoption of Release No. 33-8995.
 
 In
September 2006, the FASB ASC 820, “Fair Value Measurements”, which applies under
most other accounting pronouncements that require or permit fair value
measurements. FASB ASC 820 provides a common definition of fair value as the
price that would be received to sell an asset or paid to transfer a liability in
a transaction between market participants. The new standard also provides
guidance on the methods used to measure fair value and requires expanded
disclosures related to fair value measurements. FASB ASC 820 had originally been
effective for financial statements issued for fiscal years beginning after
November 15, 2007, however the FASB has agreed on a one year deferral for all
non-financial assets and liabilities. The Company adopted FASB ASC 820 effective
January 1, 2008. Adoption of this statement did not have a material impact on
the Company’s financial condition, results of operations, and cash
flows.
 
 
 (5)
    Related Party
Transactions
 
 On
September 17, 2007, the Company entered into a drilling program with Hoactzin
Partners, L.P. (“Hoactzin”) for ten wells consisting of approximately three
wildcat wells and seven developmental wells to be drilled on the Company’s
Kansas Properties (the “Ten Well Program”). Peter E. Salas, the Chairman of the
Board of Directors of the Company, is the controlling person of Hoactzin. He is
also the sole shareholder and controlling person of Dolphin Management, Inc. the
general partner of Dolphin Offshore Partners, L.P., which is the Company’s
largest shareholder. Carlos P. Salas, a director of the Company, has an interest
in Hoactzin but is not a controlling person of Hoactzin. Under the terms of the
Ten Well Program, Hoactzin was to pay the Company $.4 million for each well in
the Ten Well Program completed as a producing well and $.25 million for each
well drilled that was non-productive. The terms of the Ten Well Program also
provide that Hoactzin will receive all the working interest in the ten wells in
the Program, but will pay an initial fee to the Company of 25% of its working
interest revenues net of operating expenses.  This is referred to as a
management fee but, as defined, is in the nature of a net profits
interest.  The fee paid to the Company by Hoactzin will increase to
85% of working interest revenues when and if net revenues received by Hoactzin
reach an agreed payout point of approximately 1.35 times Hoactzin’s purchase
price (the “Payout Point”) for its interest in the Ten Well
Program.
 
 In March
2008, the Company drilled and completed the tenth and final well in the Ten Well
Program. Of the ten wells drilled, nine were completed as oil producers and are
currently producing approximately 90 barrels per day in total. Hoactzin paid a
total of $3.85 million (the “Purchase Price”) for its interest in the Ten Well
Program resulting in
  10
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  the
Payout Point being determined as $5.2 million.  The amount paid by
Hoactzin for its interest in the Program wells exceeded the Company’s actual
drilling costs of approximately $2.8 million for the ten wells by more than $1
million.
 
 Although
production level of the Program wells will decline with time in accordance with
expected decline curves for these types of well, based on the drilling results
of the wells in the Ten Well Program and the current price of oil, the Program
wells would be expected to reach the Payout Point in approximately four years
solely from the oil revenues from the wells. However, under the terms of the
Company’s agreement with Hoactzin, reaching the Payout Point has been
accelerated by operation of a second agreement by which Hoactzin will apply 75%
of the net proceeds it receives from a methane extraction project discussed
below developed by the Company’s wholly-owned subsidiary, Manufactured Methane
Corporation, (“MMC”) to the Payout Point. Those methane project proceeds when
applied should result in the Payout Point being achieved sooner than the
estimated four year period based solely upon revenues from the Program wells.On
September 17, 2007, Hoactzin, simultaneously with subscribing to participate in
the Ten Well Program, pursuant to an additional agreement with the Company was
conveyed a 75% net profits interest in the methane extraction project developed
by “MMC” at the Carter Valley landfill owned and operated by Republic Services
in Church Hill, Tennessee (the "Methane Project"). Revenues from the Project
received by Hoactzin will be applied towards the determination of the Payout
Point (as defined above) for the Ten Well Program.  When the Payout
Point is reached from either the revenues from the wells drilled in the Ten Well
Program or the Methane Project or a combination thereof, Hoactzin’s net profits
interest in the Methane Project will decrease to a 7.5% net profits
interest.
 
 On
September 17, 2007, the Company also entered into an additional agreement with
Hoactzin providing that if the Program and the Methane Project interest in
combination failed to return net revenues to Hoactzin equal to 25% of the
Purchase Price it paid for its interest in the Ten Well Program by December 31,
2009, then Hoactzin would have an option to exchange up to 20% of its net
profits interest in the Methane Project for convertible preferred stock to be
issued by the Company with a liquidation value equal to 20% of the Purchase
Price less the net proceeds received at the time of any exchange. At the time
the agreement was negotiated, the Company's forecast of the probable results of
the projects indicated that there was little risk that the option to acquire
preferred stock would ever arise, so the Company placed no significant value to
the preferred stock option. By September 30, 2009 the amount of net revenues
received by Hoactzin from the Ten
WellProgram
has reduced the Company’s obligation to Hoaztzin for the amount of the funds it
had advanced for the Purchase Price from $3.85 million to $1.51 million. The
conversion option would be set at issuance of the preferred stock at the then
twenty business day trailing average closing price of Company stock on the
American Stock Exchange. Hoactzin has a similar option each year after 2009 in
which Hoactzin’s then-unrecovered Purchase Price at the beginning of the year is
not reduced
  11
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  20%
further by the end of that year, using the same conversion option calculation at
date of the subsequent year’s issuance if any.  The Company, however,
may in any year make a cash payment from any source in the amount required to
prevent such an exchange option for preferred stock from arising.  In
addition, the conversion right is limited to no more than 19% of the outstanding
common shares of the Company. In the event Hoactzin’s 75% net profits interest
in the Methane Project were fully exchanged for preferred stock, by definition
the reduction of that 75% interest to a 7.5% net profits interest that was
agreed to occur upon the receipt of 1.3547 of the Purchase Price by Hoactzin
could not happen because the larger percentage interest then exchanged, no
longer exists to be reduced.  Accordingly, Hoactzin would retain no
net profits interest in the Methane Project after a full exchange of Hoactzin’s
75% net profits interest for preferred stock.
 
 Under
this exchange agreement, if no proceeds at all were received by Hoactzin through
2009 or in any year thereafter (i.e. a worst-case scenario already highly
unlikely  in view of the success of the Program), then Hoactzin would
have an option to exchange 20% of its interest in the Methane Project in 2010
and each year thereafter for preferred stock with liquidation value of 100% of
the Purchase Price (not 135%) convertible at the trailing average price before
each year’s issuance of the preferred stock.  The maximum number of
common shares into which all such preferred stock could be converted cannot be
calculated given the formulaic determination of conversion price based on future
stock price.
 However,
revenues from the Ten Well Program have resulted in 61% of the Purchase Price
having already been reached. Accordingly, it is highly unlikely that any
requirement to issue preferred stock will arise in 2010 or any succeeding
years.
 
 
 (6)  Deferred Conveyance/Prepaid
Revenues
 
 The
Company has adopted a deferred conveyance/prepaid revenues presentation of the
transactions between the Company and Hoactzin Partners, L.P. on September 17,
2007 to more clearly present the effects of the three-part transaction
consisting of the Ten Well Program, the Methane Project and a contingent
exchange option agreement.  This deferred conveyance presentation for
the year 2008 will be compared to adjusted year-end 2007 figures for the
purposes of this comparison.
 
 To reflect the deferred conveyance , the Company has allocated $0.9 million of
the $3.85 million Purchase Price paid by Hoactzin for its interest in the Ten
Well Program to the Methane Project, based on a relative fair value calculation
of the Methane Project’s portion of the projected payout stream of the combined
two projects as seen at the inception of the agreement, utilizing then current
prices and anticipated time periods when the Methane Project would come on
stream.  The Ten Well Program at inception was $2.95 million and the
prepaid revenues were $0.9 million.
 
 The
Company has established separate deferred conveyance and prepaid revenue
accounts for the Ten Well Program and the Methane Project.  Release of
the deferred
  12
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  amounts
to the Ten Well Program will be made as proceeds are actually distributed to
Hoactzin.  Release will be made on the respective proceeds only as to
each project until either one or both satisfy the threshold amount that removes
the contingent equity exchange option.  All releases for periods
through December 31, 2008 are to the Ten Well Program as the Methane Project was
not online until and gas revenues were first received in 2009. The prepaid
revenues will be released using the units of production method.
 
 The
impact of the Hoactzin Agreement through December 31, 2008 is as follows. Of the
$3.85 million Purchase Price invested by Hoactzin in September 2007, a total of
$0.12 million was paid to Hoactzin by December 31, 2007 attributable to the
production of 1,403 barrels of oil in 2007 attributable to Hoactzin’s
interest.   All proceeds paid to Hoactzin in 2008 were from
Hoactzin’s interest in the Ten Well Program oil wells.  The volume
that is attributable to Hoactzin’s interest is 19,438 barrels for the yearly
production through December 31, 2008 for a total of $1.8 million in 2008.The
reserve information for the parties’ respective Ten Well Program interests
during calendar year 2008 are indicated in the table below. Reserve reports are
obtained annually and estimates related to those reports are updated upon
receipt of the report.   These calculations were made using the
2008 year-end price of $34.04 per barrel, as required by SEC regulations. It
should be noted that the table reflects reserve valuations based on
circumstances existing at December 31, 2008 when only the Program wells were
contributing to reaching the point when the Company receives a larger portion of
the production, sometimes referred to as the “flip point.” Hoactzin paid a
total Purchase Price of $3.85 million for its interest in the Ten Well Program
resulting in the Payout Point or “flip point” being determined as $5.2 million.
Because MMC’s contribution is expected to accelerate reaching payout point, the
Company’s reserves attributable to its interests will increase from those listed
in this table. . Additionally, the table below reflects eventual pay as
occurring through the realization  of proceeds at price levels
existing at December 31, 2008 when oil was approximately $34.00 per
barrel.
 
 
 Reserve
Information for Ten Well Program Interests
 For
Year Ended December 31, 2008
 
 Barrels
      Attributable
                to
      Party’s Interest
              Future
      Cash Flows Attributable to Party’s Interest
              Present
      Value of Future Cash Flows Attributable to Party’s
  InterestTengasco,
      Inc.
              64,360
              $2
      million
              $1.1
      millionHoactzin
      Partners, L.P
              128,270
              $3.1
      million
              $2
      million
  13
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  As of
year-end 2008 the original invested amount of $ $3.85 million has been reduced
by 50% to $ 2 million.  This amount is the total of the deferred
conveyance of $1.1 million and the prepaid revenue account of $0.9 million.
Hoactzin’s first right to convert its invested amount of $3.85 million into
preferred stock is only exercisable to the extent Hoactzin’s investment has not
been reduced by 25% by the end of 2009. For each year after 2010 in which
Hoactzin’s then-unrecovered invested amount at the beginning of the year is not
reduced 20% further by the end of that year, Hoactzin has a similar
option.  Consequently, Hoactzin is already precluded by these results
from any possibility of exercising its contingent option under the exchange
agreement to convert into preferred stock until the year ending December 31,
2011 at the earliest. All of the $1.9 million paid from the program has been
from the Ten Well Program and the deferred conveyance account has been reduced
from $3 million to $1.1 million.
 
 As noted,
in future periods, the Company anticipates that this Hoactzin investment will
continue to be further reduced by sales of oil produced from the Ten Well
Program, or methane produced from the Methane Project, or
both.   From inception of the project through December 31, 2009,
the Company projects that the original $3.85 million Purchase Price will be
reduced by 76% to $.9 million.  For the year ending December 31, 2010,
the amount is projected to be reduced to $0. As a result, Hoactzin’s contingent
option to exchange for preferred stock would fully terminate without any further
annual reduction tests.  These projections are based upon expected
production levels from the oil wells in the Ten Well Program and an estimated
400 Mcf/day production from the Methane Project using $40 oil prices and a $5
per Mcf gas sales price net of operating expenses.   The
projection will vary with the actual oil and gas prices, production volumes, and
expenses experienced in 2009 and 2010.  Based on these projections the
Company considers that it is a remote contingency that any right of Hoactzin to
elect to exchange its Methane Project interest for Company preferred stock will
ever arise. However, in the event of a conversion of Hoactzin’s Methane Project
interest for Company preferred stock as set out in limited circumstances in the
applicable agreement, and which the Company anticipates is highly unlikely,
there would be a debit to the deferred conveyance liability and the prepaid
revenue account for both the Ten Well Program and Methane Project because no
contingent option would remain on such a conversion and the Company would
simultaneously credit preferred stock in the converted amount.  In the
event of the termination of the option to convert into preferred stock because
the $3.85 million has been repaid from the Ten Well Program or Methane Project
or both, the applicable oil and gas properties will be deemed to have been fully
conveyed to Hoactzin and the Ten Well Program account, will be credited and the
liability will be removed, as at this time the price received for the program
will be fixed and determinable. Under this circumstance, the prepaid revenue
account would continue to be released under the units of production
method.
 
  14
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (7)
    Oil and Gas
Properties
 
 The
following table sets forth information concerning the Company’s oil and gas
properties (in thousands):
 
 September
      30, 2009
              December
      31, 2008Oil
      and gas properties, at cost
              $  23,070
              $  23,031Unevaluated
      properties
              1,243
              1,243Accumulated
      depreciation
              (10,957)
              (10,132)Oil
      and gas properties, net
              $  13,356
              $  14,142
 
 The
Company recorded $0.3 million and $0.8 million in depletion expense for the
first three and nine months ended September 30, 2009, respectively.
 
 
 (8)
    Asset Retirement
Obligation
 
 The
Company follows the requirements of FASB ASC 410, Asset Retirement Obligations
and Environmental Obligations. Among other things, FASB ASC 410 requires
entities to record a liability and corresponding increase in long-lived assets
for the present value of material obligations associated with the retirement of
tangible long-lived assets. Over the passage of time, accretion of the liability
is recognized as an operating expense and the capitalized cost is depleted over
the estimated useful life of the related asset.  The Company’s asset
retirement obligations relate primarily to the plugging, dismantling and removal
of wells drilled to date. The Company’s calculation of Asset Retirement
Obligation used a credit-adjusted risk free rate of 8%, an estimated useful life
of wells ranging from 30-40 years and an estimated plugging and abandonment cost
of  $5,000 per well. Management continues to periodically evaluate the
appropriateness of these assumptions.
 
 
 (9)
    Restricted
Cash
 
 As
security required by Tennessee oil and gas regulations, the Company placed $0.12
million in a Certificate of Deposit to cover future asset retirement obligations
for the Company’s Tennessee wells.
 
 
 (10)
    Bank
Loan
 
 On
December 17, 2007, Citibank assigned the Company’s revolving credit facility
with Citibank to Sovereign Bank of Dallas, Texas (“Sovereign”) as requested by
the Company. Under the facility as assigned to Sovereign, loans and letters of
credit are
  15
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  available
to the Company on a revolving basis in an amount outstanding not to exceed the
lesser of $20 million or the Company’s borrowing base in effect from time to
time. The Sovereign facility is secured by substantially all of the Company’s
producing and non-producing oil and gas properties and pipeline and the
Company’s Methane Project assets. The Company’s initial borrowing base with
Sovereign was set at $7.0 million, an increase from its borrowing base of $3.3
million with Citibank prior to the assignment.
 
 On June 2, 2008, the Company entered
into an amendment to its credit facility with Sovereign whereby the Company’s
borrowing base was raised by Sovereign as a result of its review of the
Company’s currently owned producing properties.  The borrowing base was
raised to $11 million effective June 2, 2008.  The Company had previously
utilized about $4.2 million of the facility, leaving approximately $6.8 million
then available for use by the Company upon this borrowing base increase. 
The Company used $5.35 million of the then available $6.8 million for the
purchase of the Riffe Field properties in Kansas.  The total borrowing by
the Company under the facility at year end 2008, and as of the date of this
Report, is $9.9 million.
 
 On February 5, 2009, the Company
amended its credit facility with Sovereign to provide for a monthly reduction of
the Bank’s commitment by $0.15 million per month for the five month period of
February through June 2009.  This commitment reduction is not a cash
payment obligation of the Company but has the effect of reducing the Company’s
available borrowing base in monthly increments of $0.15 million so that by June
2009 the Company’s available borrowing base under the Sovereign facility was to
be reduced by $0.75 million from $11.0 million to $10.25
million.
 
 On July
9, 2009, the Company’s borrowing base was increased from $10.25 million to $11.0
million under the revolving senior credit facility between the Company and
Sovereign. The Company’s borrowing base was increased on the completion of the
regular semiannual borrowing base review by Sovereign.  The $11.0
million borrowing base is again made subject to a monthly available-credit
reduction (MCR) of $0.15 million per month beginning August 5, 2009, so that by
the time of the next regular borrowing base review in six months, the borrowing
base will again be $10.25 million.
 
 As
of September 30, 2009, the Company was out of compliance on the Leverage Ratio
and Interest Coverage Ratio covenants under the credit facility. The Company was
in compliance with the remaining financial covenants under the credit
facility.  The noncompliance occurred primarily as a result of the low
commodity prices in the last quarter of 2008 and first and second quarters
of 2009 that are included in the covenant compliance
calculations.  The Company has received a waiver from Sovereign Bank
for breach of these covenants for the quarter ended September 30, 2009. The
Company may be out of compliance with one or more of the financial covenants in
the future periods based on current commodity prices, as the weak results
in the first and second quarters of 2009 will continnue to be a factor in the
covenant calculations through the first quarter of 2010.
  16
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  The
Company has discussed this possibility with Sovereign Bank and the
Company anticipates, but there can be no assurances, that Sovereign Bank
will waive the noncompliance of these  covenants should future breaches
occur.
 
 
 (11)
    Methane
Project
 
 On
October 24, 2006, the Company signed a twenty-year Landfill Gas Sale and
Purchase Agreement (the “Agreement”) with BFI Waste Systems of Tennessee, LLC
(“BFI”), an affiliate of Allied Waste Industries (“Allied”). In 2008 Allied
merged into Republic Services, Inc. (“Republic”). The Agreement was thereafter
assigned to the Company’s wholly-owned subsidiary, Manufactured Methane
Corporation (“MMC”), and provides that MMC will purchase all the naturally
produced gas stream presently being collected and flared at the Carter Valley
municipal solid waste landfill owned and operated by Republic in Church Hill,
Tennessee serving the metropolitan area of Kingsport, Tennessee. Republic’s
facility is located about two miles from the Company’s existing pipeline serving
Eastman Chemical Company (“Eastman”).  The Company has installed a
proprietary combination of advanced gas treatment technology to extract the
methane component of the purchased gas stream.  Methane is the principal
component of natural gas and makes up about half of the purchased raw gas stream
by volume.  The Company has constructed a small diameter pipeline to
deliver the extracted methane gas to the Company’s existing pipeline (the
“Methane Project”).
 
 The total
cost for the Methane Project including pipeline construction, was approximately
$4.5 million including costs for compression and interstage controls. The costs
of the Methane Project were funded primarily by (a) the money received by the
Company from Hoactzin to purchase its interest in the Ten Well Program which
exceeded the Company’s actual costs of drilling the wells in that Program by
more than $1 million; (b) cash flow from the Company’s operations; and (c) $0.8
million of the funds the Company borrowed under its credit facility with
Sovereign Bank. Methane gas produced by the project facilities was initially
mixed in the Company’s pipeline and delivered and sold to Eastman under the
terms of the Company’s existing natural gas purchase and sale agreement with
Eastman. At current gas production rates and expected extraction efficiencies,
the Company initially estimated it would deliver about 418 MCF per day of
additional gas to Eastman, which would substantially increase the current
volumes of natural gas being delivered to Eastman by the Company from its Swan
Creek field. The gas supply from this project is projected to grow over the
years as the underlying operating landfill continues to expand and generate
additional naturally produced gas, and for several years following the closing
of the landfill, currently estimated by Republic to occur between the years 2022
and 2026.
 
 As part
of the Methane Project agreement, the Company agreed to install a new force-main
water drainage line for Republic, the landfill owner, in the same
two-mile
  17
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  pipeline
trench as the gas pipeline needed for the project, reducing overall costs and
avoiding environmental effects to private landowners resulting from multiple
installations
 of
pipeline.  Republic has paid the additional material costs for
including the water line of approximately $0.7 million. Construction of the gas
pipeline needed to connect the facility with the Company’s existing natural gas
pipeline began in January 2008 and was completed in December 2008.  As
a certificated utility, the Company’s pipeline subsidiary, TPC, required no
additional permits for the gas pipeline construction.
 
 At
year-end 2008, MMC finalized steps necessary to declare the startup of
commercial gas production at the Carter Valley landfill in Church Hill,
Tennessee.  Initial volumes of methane were produced in late December 2008
and have occurred on an intermittent basis since that time as MMC implemented
the startup process. During the first two months of 2009, Eastman Chemical was
reviewing its current air quality permits with regard to MMC’s methane
production and deliveries were suspended during that review.  The Company
declared startup of commercial operations on April 1, 2009.  To date of
this report, MMC has produced approximately 20,065 mcf of methane gas that was
extracted from the landfill gas.
 
 On August
27, 2009, the Company entered into a five-year fixed price gas sales contract
with Atmos Energy Marketing, LLC, (“AEM”) in Houston, Texas, a nonregulated unit
of Atmos Energy Corporation (NYSE: ATO) for the sale of the methane component of
landfill gas produced by the Company’s subsidiary, Manufactured Methane
Corporation (“MMC”), at the Carter Valley Landfill in Church Hill,
Tennessee.   The agreement provides for the sale of up to 600
MMBtu per day.  The contract is effective beginning with September
2009 gas production and ends July 31, 2014.
 
 The
agreed contract price of over $6 per MMBtu was a premium to the current
five-year strip price for natural gas on the NYMEX futures market.  MMC’s
plant as designed is capable of producing a daily average of about 500 MMBtu of
methane per day from the Carter Valley landfill at current raw gas volumes,
equivalent to about 500,000 cubic feet of methane gas.  However, daily
production during September and October 2009 at MMC’s facility was intermittent
due to a combination of temporary factors.   Average daily
production for September and October 2009 was 248,000 cubic feet per day on the
twenty days the plant was in production.   The factors reducing
the number of producing days include system mechanical issues such as compressor
downtime, vacuum pump repairs, and insulation repair to thermal oxidizer,
damages caused by others to the landfill owner’s gas collection system, and
occasional inability of the receiving utility to physically accept the volumes
MMC produced.  The Company is addressing the mechanical issues, and
has made additions to the Company’s pipeline system that should reduce or
eliminate the purchaser’s occasional restrictions on purchased volumes by
providing additional delivery options for purchased methane.  The
Company anticipates that continuous production at design capacity will begin to
occur as the mechanical issues are addressed and these should be completed in
the near future.
 
  18
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 On September 17, 2007, Hoactzin,
simultaneously with subscribing to participate in the Ten Well Program (the
“Program”), pursuant to a separate agreement with the Company was conveyed a 75%
net profits interest in the Methane Project. The revenues from the Methane
Project received by Hoactzin are to be applied towards the determination of the
Payout Point (as defined above) for the Ten Well Program.  When the
Payout Point is reached from either the revenues from the wells drilled in the
Program or the Methane Project or a combination thereof, Hoactzin’s net profits
interest in the Methane Project will decrease to a 7.5% net profits
interest.   The Company believes that the application of revenues
from the methane project to reach the Payout Point could accelerate reaching the
Payout Point.  As stated above, the Purchase Price paid by Hoactzin
for its interest in the Program exceeded the Company’s anticipated and actual
costs of drilling the ten wells in the Program. Those excess funds provided by
Hoactzin were used to pay for approximately $1 million of equipment required for
the Methane Project, or about 25% of the Project’s capital costs.  The
availability of the funds provided by Hoactzin eliminated the need for the
Company to borrow those funds, to have to pay interest to any lending
institution making such loans or to dedicate Company revenues or revenues from
the Methane Project to pay such debt service.  Accordingly, the grant
of a 7.5% interest in the Methane Project to Hoactzin was negotiated by the
Company as a favorable element to the Company of the overall
transaction.
 
 
 (12)
  Black
Diamond Purchase
 
 Effective as of July 1, 2008, the
Company purchased from Black Diamond Oil, Inc. an expected 80 barrels per day of
oil producing properties and related leases and equipment in Rooks County,
Kansas for $5.35 million. The Company has acquired producing oil wells and
saltwater disposal wells, equipment, and the underlying working interests in
leases comprising what is known as the Riffe field that had been owned
by
 Black
Diamond for many years.  The purchase price was paid primarily from
borrowings under its credit facility with Sovereign and from cash on
hand.  Following the purchase, the Company had borrowed a total of
$9.9 million under its credit facility.
 
 
 (13)Derivatives
 
 On July
28, 2009 the Company entered into a two-year agreement on crude oil pricing
applicable to a portion of the Company’s crude oil production
volumes.  The agreement was effective beginning August 1, 2009. The
“costless collar” agreement has a $60.00 per barrel floor an $81.50 per barrel
cap on a volume of 9,500 barrels per month during the period from August 1, 2009
through December 31, 2010, and 7,375 barrels per month from January 1 through
July 31, 2011. The prices referenced in this agreement are WTI NYMEX. While the
agreement is based on WTI NYMEX prices, the Company receives a price based on
Kansas Common plus bonus, which results in approximately $7 per barrel less
than current WTI NYMEX prices. The average price per barrel received
by
  19
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  the
Company in the first quarter 2009 was $35.74, $52.52 for the second quarter
2009, and $60.96 for the third quarter 2009.
 
 This
agreement is primarily intended to help maintain and stabilize cash flow from
operations if lower oil prices return, while providing at least some upside if
prices increase above the cap.  If lower oil prices return, this
agreement may help to maintain the Company’s production levels of crude oil by
enabling the company to perform some ongoing polymer or other workover
treatments on then-existing producing wells in Kansas.
 
 Through
September 30, 2009, no settlement payment has been required uneder the agreement
as WTI NYMEX prices through that date remained within the collar.
 
 
 (14)  Fair Value
Measurements
 
 ASC 820,
Fair Value Measurements and Disclosures, establishes a framework for measuring
fair value. That framework provides a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markers for identical
assets and liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the fair value
hierarchy under FASB Statement No. 157 are described as follows:
 
 Level
1  Inputs to the valuation methodology are unadjusted quoted prices
for identical assets or liabilities in active markets that the Plan has the
ability to access.
 
 Level
2  Inputs to the valuation methodology include:
 
 ·
              Quoted
      prices for similar assets or liabilities in active markets; Quoted prices
      for identical or similar assets or liabilities in inactive
      markets;
 ·
              Inputs
      other than quoted prices that are observable for the asset or
      liability;
 ·
              Inputs
      that are derived principally from or corroborated by observable market
      data by correlation or other means.
 
 If the
asset or liability has a specified (contractual) term, the Level 2 input must be
observable for substantially the full term of the asset of
liability.
 
 Level
3  Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.
 
 The
asset’s or liability’s fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of
observable inputs
  20
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  and
minimize the use of unobservable inputs.Following is a description of
the valuation methodologies used for assets measured at fair value. Derivative
liabilities subject to fair value accounting arose during the third quarter of
2009.
 
 Derivative
liabilities: Valued at net market quotes for similar assets and liabilities in
an active market.
 
 The
methods described above may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, although the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting
date.
 
 The
following table sets forth by level, within the fair value hierarchy, the Plan’s
assets at fair value as of September 30, 2009. (in thousands)
 
 
 Level
      1
              
              Level
      2
              
              Level
      3Derivative
      liability
              -
              
              (562)
              
              -Total
      assests (liabilities at fair value
              $
      -
              
              $
      (562)
              
              $-
 
 
 
 ITEM   2.MANAGEMENT’S
DISCUSSION AND
 ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 Results of Operations and
Financial Condition
 
 During
the first nine months of 2009, the Company sold 175,948 gross barrels of oil
from its Kansas Properties comprised of 182 producing oil wells. Of the 175,948
gross barrels, 127,590 barrels were net to the Company after required payments
to all of the Drilling Program participants and royalty interests. The Company’s
sales for the first nine months of 2009 of 127,590 net barrels of oil compares
to 109,494 barrels sold to the Company’s interest in the first nine months of
2008. Although the Company’s production for the first nine months of 2009
increased by 17% from the first nine months in 2008, the Company’s net revenues
from the Kansas properties  decreased from $12.1 million in the first
nine months of 2008 to $6.2 million in the first nine months of 2009.. This
decrease was due to a drop in oil prices to an average of $49.74 per barrel in
2009 from an average of $106.53 per barrel in 2008. The Company’s sales from
Tennessee for the first nine months of 2009 included $0.2 million from oil
sales, $0.1 million from Swan Creek gas sales, and $0.1 million from
Manufactured Methane sales.
  21
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Comparison of the Quarters
Ended September 30, 2009 and 2008
 
 The
Company recognized $2.6 million in revenues during the third quarter of 2009
compared to $5.1 million in the third quarter of 2008. The decrease in revenues
was due to a sharp decrease in oil prices in 2009.  Oil prices in the
third quarter of 2009 averaged $60.96 per barrel compared to $110.85 per barrel
in the third quarter of 2008. The Company realized net income attributable to
common shareholders of $0.1 million or $0.00 per share of common stock during
the third quarter of 2009, compared to a net income in the third quarter of 2008
to common shareholders of $1.6 million or $0.03 per share of common stock. The
Company recorded non-cash income tax expense of $0.8 million for the second
quarter net income in 2008.
 
 Production
costs and taxes in the third quarter of 2009 decreased to $1.4 million from $1.5
million in the third quarter of 2008. This decrease is due to the Company’s
cost-cutting measures implemented in response to reduced oil prices as well as
lower production in the third quarter 2009 as compared to 2008.
 
 Depreciation,
depletion, and amortization expense in the third quarter of 2009 decreased to
$0.5 million from $0.6 million in the third quarter 2008.  The
depletion percentage has remained consistent with the total oil and gas
properties.
 
 Interest
expense was $0.2 million in both third quarter of 2009 and 2008.
 
 
 Comparison of the Nine
Months Ended September 30, 2009 and 2008
 
 The
Company recognized $6.8 million in revenues during the first nine months of 2009
compared to $13.0 million in the first nine months of 2008. The decrease in
revenues was due to a decrease in oil prices in 2009.  Oil prices in
the first nine months of 2009 averaged $49.74 per barrel compared to $106.53 per
barrel in the first nine months of 2008. The Company realized a net loss
attributable to common shareholders of $(0.4 million) or $(0.01) per share of
common stock during the first nine months of 2009, compared to a net income in
the first nine months of 2008 to common shareholders of $8.8 million or $0.15
per share of common stock. Approximately $3.4 million [38%] of this income was
attributable to the net effects of recognizing the Company’s deferred tax assets
in 2008. The Company recorded the remaining net operating loss carry forwards of
$5.2 million in the first nine months of 2008 and recorded non-cash income tax
expense of $1.8 million for the first nine months net income.
 
 Production
costs and taxes in the first nine months of 2009 decreased to $3.7 million from
$4.2 million in the first nine months of 2008. This decrease is due to the
Company’s cost-cutting measures implemented in response to reduced oil prices
during 2009. Depreciation, depletion, and amortization expense for the first
nine months of 2009
  22
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  was
$1.4 million compared to $1.5 million in the first nine months of 2008. The
depletion percentage has remained consistent with the total oil and gas
properties.
 
 Interest
expense for the first nine months of 2009 increased to $0.5 million from $0.4
million due to the additional borrowing for the Riffe field purchase in July
2008.
 
 
 Liquidity and Capital
Resources
 
 On
December 17, 2007, Citibank assigned the Company’s revolving credit facility
with Citibank to Sovereign Bank of Dallas, Texas (“Sovereign”) as requested by
the Company. Under the facility as assigned to Sovereign, loans and letters of
credit are available to the Company on a revolving basis in an amount
outstanding not to exceed the lesser of $20 million or the Company’s borrowing
base in effect from time to time. The Sovereign facility is secured by
substantially all of the Company’s producing and non-producing oil and gas
properties and pipeline and the Company’s Methane Project assets. The Company’s
initial borrowing base with Sovereign was set at $7.0 million, an increase from
its borrowing base of $3.3 million with Citibank prior to the
assignment.
 
 On June
2, 2008, the Company entered into an amendment to its credit facility with
Sovereign whereby the Company’s borrowing base was increased by the Bank as a
result of its review of the Company’s currently owned producing
properties.  The borrowing base was raised to $11 million effective June 2,
2008.  The Company had previously utilized about $4.2 million of the
facility, leaving approximately $6.8 million then available for use by the
Company upon this borrowing base increase.  The Company used $5.35 million
of the then available $6.8 million for the purchase of the Riffe Field
properties in Kansas.  The total borrowing by the Company under the
facility as of the date of this Report is $9.9 million.
 
 Effective
February 5, 2009, the Company amended its credit facility with Sovereign to
provide for a monthly reduction of the Bank’s commitment by $0.15 million per
month for the five month period of February through June 2008.  This
commitment reduction is not a cash payment obligation of the Company but had the
effect of reducing the Company’s available borrowing base in monthly increments
of $0.15 million so that by June 2009 the Company’s available borrowing base
under the Sovereign facility was reduced by $0.75 million from $11.0 million to
$10.25 million.
 
 On July
9, 2009 the Company’s borrowing base was increased from $10.25 million to $11.0
million under the revolving senior credit facility between the Company and
Sovereign. The Company’s borrowing base was increased on the completion of the
regular semiannual borrowing base review by Sovereign. The $11.0 million
borrowing base is again subject to a monthly available-credit reduction (MCR) of
$.15 million per month beginning August 5, 2009.  At September 30,
2009, the borrowing base was $10.7 million. As the borrowing base under the
Company’s Sovereign Bank revolving creditfacility is reduced, the Company would
be required to pay down its borrowings
  23
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  under the
revolving credit facility so that outstanding borrowings do not exceed the
reduced borrowing base. This could further reduce the cash available to the
Company for capital spending and, if the Company did not have sufficient capital
to reduce its borrowing level, could cause the Company to default under its
revolving credit facility with Sovereign Bank.
 
 As
of September 30, 2009, the Company was out of compliance on the Leverage Ratio
and Interest Coverage Ratio covenants under the credit facility. The Company was
in compliance with the remaining financial covenants under the credit
facility.  The noncompliance occurred primarily as a result of the low
commodity prices in the last quarter of 2008 and first quarter of 2009 that are
included in the covenant compliance calculations.  The Company has
received a waiver from Sovereign Bank for breach of these covenants for the
quarter ended September 30, 2009. It is possible that the Company may be out of
compliance with one or more of the financial covenants in the fourth quarter of
2009 or future quarters due to the volatility of oil or gas
prices.  The Company anticipates, but there can be no assurances, that
Sovereign Bank will waive the noncompliance of these covenants if such
noncompliance occurs in the fourth quarter of 2009 or future
quarters.
 
 
 Derivative
Activities
 
 On July
28, 2009 the Company entered into a two-year agreement on crude oil pricing
applicable to a portion of the Company’s crude oil production
volumes.  The agreement was effective beginning August 1, 2009. The
“costless collar” agreement has a $60.00 per barrel floor an $81.50 per
barrel cap on a volume of 9,500 barrels per month during the period from August
1, 2009 through December 31, 2010, and 7,375 barrels per month from January 1
through July 31, 2011.  To effectuate the collar the Company
entered into an International Swaps and Derivatives Master Agreement and an
intercreditor agreement among the Company, its subsidiaries, Macquarie Bank
Limited as counterparty, and Sovereign Bank of Dallas, Texas, the Company’s
senior lender.  The prices referenced in this agreement are WTI NYMEX.
While the agreement is based on WTI NYMEX prices, the Company receives a price
based on Kansas Common plus bonus, which results in approximately $7 per barrel
lower than NYMEX at current prices.
 
 The
Company pays no fee for this agreement.  If prices remain between the
floor and ceiling prices, no activity occurs under the agreement. If crude oil
prices fall below $60.00 per barrel, WTI NYMEX ,the counterparty will pay the
Company the excess of $60 per barrel over the WTI NYMEX  price (times the
number of barrels covered by the agreement).  If prices rise above
$81.50 per barrel WTI NYMEX , the Company will pay the counterparty the excess
of  the WTI NYMEX  price over $81.50 per barrel (times the number
of barrels covered by the agreement). The agreement is intended to provide
some protection to the Company from any
  24
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  return
to the levels of crude oil pricing as experienced in late 2008 and early 2009
when WTI NYMEX crude prices were in the $30 dollar per barrel range. The average
price per barrel received by the Company in the first quarter of 2009 was
$35.74, $52.52 for the second quarter 2009, and $60.96 for the third quarter
2009, however the Company's actual prices received per barrel are based on
Kansas Common plus bonus, which results in approximately $7 per barrel less than
current WTI NYMEX prices.  The agreement operates to provide
price support on the volumes when WTI NYMEX  prices for crude oil
are below $60.00 per barrel, but the upside potential on the volumes if WTI
NYMEX  prices exceed $81.50 is lost to the Company.  The
Company’s current average production is about 15,000 barrels per month, so the
downside protection on price would apply to only about two-thirds of current
production.  However, if WTI NYMEX  prices exceed $81.50 per
barrel, the Company will receive that upside benefit as to the remaining one
third of current production volumes that are above the agreement
volume.  This agreement is primarily intended to help maintain
and stabilize cash flow from operations if lower oil prices return, while
providing at least some upside if prices increase above the cap.  If
lower oil prices return, this agreement may help to maintain the Company’s
production levels of crude oil by enabling the company to perform some ongoing
polymer or other workover treatments on then-existing producing wells in
Kansas.
 
 At
September 30, 2009 the Company recorded a $(0.6 million)
unrealized  derivative loss. based on anticipated future performance
under the agreement. However, through September 30, 2009, no settlement
payment has been required under the agreement as WTI NYMEX  prices through
that date remained within the collar by the Company or the counter
party.
 
 
 Critical Accounting
Policies
 
 The Company prepares its Consolidated
Financial Statements in conformity with accounting principles generally accepted
in the United States of America, which requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates. The Company considers the
following policies to be the most critical in understanding the judgments that
are involved in preparing the Company’s financial statements and the
uncertainties that could impact the Company’s results of operations, financial
condition, and cash flows.
 
 
 Revenue
Recognition
 
 The
Company uses the sales method of accounting for natural gas and oil revenues.
Under this method, revenues are recognized based on actual volumes of oil and
gas sold to purchasers. Natural gas meters are placed at the customers’
locations and usage is billed monthly.
 
  25
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 Full Cost Method of
Accounting
 
 The
Company follows the full cost method of accounting for oil and gas property
acquisition, exploration, and development activities. Under this method, all
productive and non-productive costs incurred in connection with the acquisition
of, exploration for, and development of oil and gas reserves for each cost
center are capitalized. Capitalized costs include lease acquisitions, geological
and geophysical work, day rate rentals, and the costs of drilling, completing
and equipping oil and gas wells. However, 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. Gains or losses are recognized only upon
sales or dispositions of significant amounts of oil and gas reserves
representing an entire cost center. Proceeds from all other sales or
dispositions are treated as reductions to capitalized costs. The capitalized oil
and gas property, less accumulated depreciation, depletion and amortization and
related deferred income taxes, if any, are generally limited to an amount (the
ceiling limitation) equal to the sum of: (a) the present value of estimated
future net revenues computed by applying current prices in effect as of the
balance sheet date (with consideration of price changes only to the extent
provided by contractual arrangements) to estimated future production of proved
oil and gas reserves, less estimated future expenditures (based on current
costs) to be incurred in developing and producing the reserves using a discount
factor of 10% and assuming continuation of existing economic conditions; and (b)
the cost of investments in unevaluated properties are excluded from the costs
being amortized.
 
 
 Oil and Gas
Reserves/Depletion Depreciation & Amortization of Oil and Gas
Properties
 
 The capitalized costs of oil and gas
properties, plus estimated future development costs relating to proved reserves
and estimated costs of plugging and abandonment, net of estimated salvage value,
are amortized on the unit-of-production method based on total proved reserves.
The costs of unproved properties are excluded from amortization until the
properties are evaluated, subject to an annual assessment of whether impairment
has occurred.
 
 The Company’s proved oil and gas
reserves as of December 31, 2008 were determined by LaRoche Petroleum
Consultants, Ltd. Projecting the effects of commodity prices on production and
timing of development expenditures includes many factors beyond the Company’s
control.
 
 The
future estimates of net cash flows from the Company’s proved reserves and their
present value are based upon various assumptions about future production levels,
prices, and costs that may prove to be incorrect over time. Any significant
variance from
  26
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  assumptions
could result in the actual future net cash flows being materially different from
the estimates.
 
 
 Asset Retirement
Obligations
 
 The
Company is required to record the effects of contractual or other legal
obligations on well abandonments for capping and plugging
wells.  Management periodically reviews the estimate of the timing of
the wells’ closures as well as the estimated closing costs, discounted at the
credit adjusted risk free rate of 8%.  Quarterly, management accretes
the 8% discount into the liability and makes other adjustments to the liability
for well retirements incurred during the period.
 
 
 ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT  MARKET RISKS
 
 
 The Company’s Borrowing Base
under its Credit Facility may be reduced by Sovereign Bank
  The borrowing base under the Company’s
revolving credit facility with Sovereign Bank will be determined from time to
time by the lender, consistent with its customary natural gas and crude oil
lending practices.   Reductions in estimates of the Company’s
natural gas and crude oil reserves could result in a reduction in the Company’s
borrowing base, which would reduce the amount of financial resources available
under the Company’s revolving credit facility to meet its capital requirements.
Such a reduction could be the result of lower commodity prices or production,
inability to drill or unfavorable drilling results, changes in natural gas and
crude oil reserve engineering, the lender’s inability to agree to an adequate
borrowing base or adverse changes in the lender’s practices regarding estimation
of reserves.   If cash flow from operations or the Company’s
borrowing base decrease for any reason, the Company’s ability to undertake
exploration and development activities could be adversely
affected.   As a result, the Company’s ability to replace
production may be limited. In addition, if the borrowing base under the
Company’s Sovereign Bank revolving credit facility is reduced, the Company would
be required to pay down its borrowings under the revolving credit facility so
that outstanding borrowings do not exceed the reduced borrowing base. This could
further reduce the cash available to the Company for capital spending and, if
the Company did not have sufficient capital to reduce its borrowing level, could
cause the Company to default under its revolving credit facility with Sovereign
Bank.  As of September 30, 2009, the Company’s current borrowing base
is set at $10.7 million of which $9.9 million has been borrowed by the
Company.
  
  27
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
  
  Commodity
Risk
 
 The
Company’s major market risk exposure is in the pricing applicable to its oil and
gas production. Realized pricing is primarily driven by the prevailing worldwide
price for crude oil and spot prices applicable to natural gas production.
Historically, prices received for oil and gas production have been volatile and
unpredictable and price volatility is expected to continue. Monthly oil price
realizations ranged from a low of $31.69 per barrel to a high of $127.29 per
barrel during 2008 and an average of $49.74 per barrel for 2009. Gas price
realizations ranged from a monthly low of $6.47 per Mcf to a monthly high of
$13.21 per Mcf during 2008 and an average of $3.93 per Mcf for 2009. As
discussed above in detail in “Item 2, Derivative Activities, the Company entered
into a hedging agreement on July 28, 2009 limiting exposure to fluctuations in
oil prices for a two year period beginning August 1, 2009. As the agreement
applies to approximately two thirds of the Company’s oil production, it does not
protect against all oil pricing fluctuations.
 
 
 Interest Rate
Risk
 
 At
September 30, 2009, the Company had debt outstanding of $10.2 million including,
as of that date, $9.9 million owed on its credit facility with Sovereign. The
interest rate on the Sovereign credit facility is variable at a rate equal to
LIBOR plus 2.5%, however, the total rate shall not be lower than the greater of
prime plus 0.25% or 6% per annum.  The Company’s debt owed to other
parties of $0.3 million has fixed interest rates ranging from 5.5% to 8.25%.
Based on amounts borrowed under the Sovereign credit facility and LIBOR rates at
September 30, 2009, a 10% increase or decrease in the rates would have an annual
impact on interest expense or the Company’s cash flows of approximately $$0.06
million, assuming borrowed amounts under the Sovereign credit facility remained
at the same amount owed as of December 31, 2008. The Company did not have any
open derivative contracts relating to interest rates at December 31, 2008 or
September 30, 2009.
 
 
 Forward-Looking Statements
and Risk
 
 Certain
statements in this report, including statements of the future plans, objectives,
and expected performance of the Company, are forward-looking statements that are
dependent upon certain events, risks and uncertainties that may be outside the
Company's control, and which could cause actual results to differ materially
from those anticipated. Some of these include, but are not limited to, the
market prices of oil and gas, economic and competitive conditions, inflation
rates, legislative and regulatory changes, financial market conditions,
political and economic uncertainties of foreign governments, future business
decisions, and other uncertainties, all of which are difficult to
predict.
  28
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 There are
numerous uncertainties inherent in projecting future rates of production and the
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from estimates. The drilling of exploratory
wells can involve significant risks, including those related to timing, success
rates and cost overruns. Lease and rig availability, complex geology and other
factors can also affect these risks. Additionally, fluctuations in oil and gas
prices, or a prolonged period of low prices, may substantially adversely affect
the Company's financial position, results of operations, and cash
flows.
 
 
 ITEM
4.                      CONTROLS
AND PROCEDURES
 
 
 Evaluation of Disclosure
Controls and Procedures
 
 The
Company’s Chief Executive Officer and Principal Financial Officer, and other
members of management team have evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e))
of the Securities Exchange Act of 1934, as amended (the ‘Exchange Act”). Based
on such evaluation, the Company’s Chief Executive Officer and Principal
Financial Officer have concluded that the Company’s disclosure controls and
procedures, as of the end of the period covered by this Report, were adequate
and effective to provide reasonable assurance that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. The effectiveness of a system of
disclosure controls and procedures is subject to various inherent limitations,
including cost limitations, judgments used in decision making, assumptions about
the likelihood of future events, the soundness of internal controls, and fraud.
Due to such inherent limitations, there can be no assurance that any system of
disclosure controls and procedures will be successful in preventing all errors
or fraud, or in making all material information known in a timely manner to the
appropriate levels of management.
 
 
 Changes in Internal
Controls
 
 During
the period covered by this Report, there have been no changes to the Company’s
system of internal control over financial reporting that have materially
affected, or is reasonably likely to materially affect, the Company’s system of
controls over financial reporting.
 
 As part
of a continuing effort to improve the Company’s business processes management is
evaluating its internal controls and may update certain controls to accommodate
any modifications to its business processes or accounting
procedures.
 
  29
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  
 PART
II OTHER INFORMATION
 
 
 ITEM
1.                      
LEGAL PROCEEDINGS
 
 None.
 
 
 
 ITEM
1A.                      RISK
FACTORS
 
 There are no material changes from the
risk factors reported in Item 1A of the company’s Annual Report on Form 10-K for
the year ended December 31, 2008.
 
 
 ITEM
      2
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None.
 
 
 ITEM
3.                      DEFAULTS
UPON SENIOR SECURITIES
 
 None.
 
 
 ITEM
      4.      SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS
 
 None.
 
 
 ITEM
5.                      OTHER
INFORMATION
 
 On
September 24, 2009, Mark A. Ruth resigned as Chief Financial Officer of the
Company effective immediately. Mr. Ruth had served the Company in this capacity
since 1998.
 
 On
September 28, 2009, the Board of Directors appointed Michael J. Rugen as the new
Chief Financial Officer of the Company.  Mr. Rugen, 49 years old, is a
Certified Public Accountant (Texas) and has been involved in the financial
aspects of the oil and gas business since 1982. He holds a Bachelor of Science,
Business and Accounting from Indiana University.  From 1982 through
1998, he served in a variety of accounting and financial capacities at BHP
Petroleum in Houston and Denver, culminating in service as Finance Manager of
the Producing Asset team with responsibility for the Gulf of Mexico and Bolivian
financial operations of this international company.  From 1999 to
2007, Mr.
  30
 
 TENGASCO,
INC
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Rugen
provided financial consulting services with Jefferson Wells International and
UHY Advisors in Houston, and from 2007 until joining the Company served as Vice
President, Accounting and Finance, of Nighthawk Oilfield Services in
Houston.
 
 In
connection with Mr. Rugen’s appointment, he was awarded unvested options to
purchase 400,000 shares of the Company’s common stock under the Company’s
existing stock option plan at a price of $0.50 per share, which was the closing
price of the Company’s stock on September 28, 2009.  The options will
vest twenty percent each year commencing September 28, 2010 and on that date
thereafter through 2014.  The options will expire September 27, 2015.
In accepting the appointment, Mr. Rugen did not enter into any employment
agreement or contract with the Company.
 
 The
Company drilled one well in Kansas during the third quarter, the Albers A #2
which was completed in October 2009 as a disposal well to reduce the salt water
disposal costs associated with the 2008 Albers lease discovery wells. The
Company also polymered two wells early in the fourth quarter, the Stahl #5 and
the Liebenau #5.  The latter is a well acquired in the Riffe field
purchase last year. Daily production on the Stahl #5 had dropped to zero. After
the polymer application  this well returned to commercial production
of about 10 barrels per day.  The Liebenau #5 well increased
production to approximately 50 barrels per day at the time of this Report, from
approximately 7 barrels per day it was producing before the polymer
treatment.
  31
  
 ITEM
6.   EXHIBITS
 
 (a)
              The
      following exhibits are filed with this
report:
 
 31.1
Certification of the Chief Executive Officer, pursuant to Exchange Act Rule,
Rule 13a-14a/15d-14a.
 
 31.2
Certification of Chief Financial Officer, pursuant Exchange Act Rule, Rule
13a-14a/15d-14.
 
 32.1
Certification of the Chief Executive Officer, pursuant to 18 U.S.C Section 1350
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
 
 32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
 
  32
  
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
duly caused this report to be signed on its behalf by the undersigned hereto
duly authorized.
 
 Dated:
November 9, 2009
 
 TENGASCO,
INC.
 
 
 By:s/ Jeffrey R.
Bailey
 Jeffrey R. Bailey
 Chief Executive Officer
 
 
 
 By:s/ Michael J.
Rugen
 Michael J. Rugen
 Chief Financial
Officer
  33