UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2003 | ||
or | ||
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 001-14256
Westport Resources Corporation
Nevada
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13-3869719 | |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer Identification No.) |
1670 Broadway Street, Suite 2800
(303) 573-5404
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
67,347,957 shares of the issuers common stock, par value $0.01 per share, were outstanding as of November 3, 2003.
WESTPORT RESOURCES CORPORATION
TABLE OF CONTENTS
Page | ||||||
PART I FINANCIAL INFORMATION | 1 | |||||
Item 1.
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Financial Statements
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1 | ||||
Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and December 31,
2002
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1 | |||||
Consolidated Statements of Operations for the
three months and nine months ended September 30, 2003 and
2002 (unaudited)
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2 | |||||
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 (unaudited)
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3 | |||||
Notes to Consolidated Financial Statements
(unaudited)
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4 | |||||
Item 2.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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25 | ||||
Item 3.
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Quantitative and Qualitative Disclosures about
Market Risk
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40 | ||||
Item 4.
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Controls and Procedures
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40 | ||||
PART II OTHER INFORMATION | 41 | |||||
Item 1.
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Legal Proceedings
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41 | ||||
Item 2.
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Changes in Securities and Use of Proceeds
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41 | ||||
Item 3.
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Defaults Upon Senior Securities
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42 | ||||
Item 4.
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Submission of Matters to a Vote of Security
Holders
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42 | ||||
Item 5.
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Other Information
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42 | ||||
Item 6.
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Exhibits and Reports on Form 8-K
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42 | ||||
Signatures | 44 |
i
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements |
WESTPORT RESOURCES CORPORATION
September 30, | December 31, | ||||||||||
2003 | 2002 | ||||||||||
(Unaudited) | |||||||||||
(In thousands, | |||||||||||
except share data) | |||||||||||
ASSETS | |||||||||||
Current Assets:
|
|||||||||||
Cash and cash equivalents
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$ | 127,378 | $ | 42,761 | |||||||
Accounts receivable, net
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83,542 | 73,549 | |||||||||
Derivative assets
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6,609 | 14,861 | |||||||||
Prepaid expenses
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15,659 | 13,358 | |||||||||
Total current assets
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233,188 | 144,529 | |||||||||
Property and equipment, at cost:
|
|||||||||||
Oil and natural gas properties, successful
efforts method:
|
|||||||||||
Proved properties
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2,325,242 | 2,138,471 | |||||||||
Unproved properties
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93,697 | 104,430 | |||||||||
2,418,939 | 2,242,901 | ||||||||||
Less accumulated depletion, depreciation and
amortization
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(659,239 | ) | (481,396 | ) | |||||||
Net oil and gas properties
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1,759,700 | 1,761,505 | |||||||||
Field services assets
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39,446 | 39,185 | |||||||||
Less accumulated depreciation
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(838 | ) | | ||||||||
Net field services assets
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38,608 | 39,185 | |||||||||
Building and other office furniture and equipment
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10,708 | 9,686 | |||||||||
Less accumulated depreciation
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(4,425 | ) | (3,933 | ) | |||||||
Net building and other office furniture and
equipment
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6,283 | 5,753 | |||||||||
Other assets:
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|||||||||||
Long-term derivative assets
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26,160 | 14,824 | |||||||||
Goodwill
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244,640 | 246,712 | |||||||||
Other assets
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19,086 | 21,033 | |||||||||
Total other assets
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289,886 | 282,569 | |||||||||
Total assets
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$ | 2,327,665 | $ | 2,233,541 | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY | |||||||||||
Current Liabilities
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|||||||||||
Accounts payable
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$ | 50,239 | $ | 51,158 | |||||||
Accrued expenses
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55,219 | 39,209 | |||||||||
Ad valorem taxes payable
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19,431 | 8,988 | |||||||||
Derivative liabilities
|
63,389 | 56,156 | |||||||||
Income taxes payable
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11,077 | 86 | |||||||||
Current asset retirement obligation
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7,968 | | |||||||||
Total current liabilities
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207,323 | 155,597 | |||||||||
Long-term debt
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726,469 | 799,358 | |||||||||
Deferred income taxes
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133,997 | 124,530 | |||||||||
Long term derivative liabilities
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35,360 | 21,305 | |||||||||
Long term asset retirement obligation
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50,812 | 745 | |||||||||
Total liabilities
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1,153,961 | 1,101,535 | |||||||||
Stockholders equity:
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|||||||||||
6 1/2% convertible preferred stock,
$.01 par value; 10,000,000 shares authorized;
2,930,000 issued and outstanding at September 30, 2003 and
December 31, 2002, respectively
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29 | 29 | |||||||||
Common stock, $0.01 par value; 100,000,000
authorized; 67,306,590 and 66,823,830 shares issued and
outstanding at September 30, 2003 and December 31,
2002, respectively
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673 | 668 | |||||||||
Additional paid-in capital
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1,157,661 | 1,150,345 | |||||||||
Treasury stock-at cost; 38,326 and
33,617 shares at September 30, 2003 and
December 31, 2002, respectively
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(576 | ) | (469 | ) | |||||||
Retained earnings
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57,101 | 2 | |||||||||
Accumulated other comprehensive income:
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|||||||||||
Deferred hedge loss, net
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(41,023 | ) | (18,408 | ) | |||||||
Cumulative translation adjustment
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(161 | ) | (161 | ) | |||||||
Total stockholders equity
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1,173,704 | 1,132,006 | |||||||||
Total liabilities and stockholders equity
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$ | 2,327,665 | $ | 2,233,541 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
WESTPORT RESOURCES CORPORATION
For the Three | For the Nine | |||||||||||||||||||
Months Ended | Months Ended | |||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Operating revenues:
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||||||||||||||||||||
Oil and natural gas sales
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$ | 201,701 | $ | 105,423 | $ | 615,704 | $ | 294,612 | ||||||||||||
Hedge settlements
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(22,091 | ) | (1,849 | ) | (85,976 | ) | 1,509 | |||||||||||||
Gathering income
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1,074 | | 3,066 | | ||||||||||||||||
Commodity price risk management activities:
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||||||||||||||||||||
Non-hedge settlements
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1,250 | | 1,973 | 822 | ||||||||||||||||
Non-hedge change in fair value of derivatives
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4,810 | (663 | ) | 8,032 | (8,885 | ) | ||||||||||||||
Gain (loss) on sale of operating assets, net
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21 | 137 | 6,487 | (1,731 | ) | |||||||||||||||
Net revenues
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186,765 | 103,048 | 549,286 | 286,327 | ||||||||||||||||
Operating costs and expenses:
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||||||||||||||||||||
Lease operating expenses
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24,038 | 23,477 | 76,406 | 67,381 | ||||||||||||||||
Production taxes
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11,204 | 5,209 | 35,626 | 16,845 | ||||||||||||||||
Transportation costs
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3,202 | 2,179 | 10,580 | 5,952 | ||||||||||||||||
Gathering expenses
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525 | | 2,173 | | ||||||||||||||||
Exploration
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13,571 | 3,596 | 39,242 | 21,638 | ||||||||||||||||
Depletion, depreciation and amortization
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67,824 | 47,686 | 195,925 | 147,066 | ||||||||||||||||
Impairment of proved properties
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| | 977 | | ||||||||||||||||
Impairment of unproved properties
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2,605 | 2,788 | 17,778 | 9,078 | ||||||||||||||||
Stock compensation expense, net
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603 | 1,860 | 2,753 | 1,954 | ||||||||||||||||
General and administrative
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7,364 | 5,650 | 22,135 | 17,079 | ||||||||||||||||
Total operating expenses
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130,936 | 92,445 | 403,595 | 286,993 | ||||||||||||||||
Operating income (loss)
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55,829 | 10,603 | 145,691 | (666 | ) | |||||||||||||||
Other income (expense):
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||||||||||||||||||||
Interest expense
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(15,457 | ) | (7,542 | ) | (44,857 | ) | (23,891 | ) | ||||||||||||
Interest income
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129 | 172 | 510 | 373 | ||||||||||||||||
Change in fair value of interest rate swap
|
| | | 226 | ||||||||||||||||
Loss on debt retirement
|
| | (920 | ) | | |||||||||||||||
Other
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165 | 176 | 498 | 497 | ||||||||||||||||
Income (loss) before income taxes
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40,666 | 3,409 | 100,922 | (23,461 | ) | |||||||||||||||
Benefit (provision) for income taxes:
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||||||||||||||||||||
Current
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(12,407 | ) | | (12,407 | ) | | ||||||||||||||
Deferred
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(2,436 | ) | (1,244 | ) | (24,429 | ) | 8,563 | |||||||||||||
Total benefit (provision) for income taxes
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(14,843 | ) | (1,244 | ) | (36,836 | ) | 8,563 | |||||||||||||
Net income (loss) before cumulative effect of
change in accounting principle
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25,823 | 2,165 | 64,086 | (14,898 | ) | |||||||||||||||
Cumulative effect of change in accounting
principle (net of tax effect of $1,962)
|
| | (3,414 | ) | | |||||||||||||||
Net income (loss)
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25,823 | 2,165 | 60,672 | (14,898 | ) | |||||||||||||||
Preferred stock dividends
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(1,191 | ) | (1,191 | ) | (3,573 | ) | (3,572 | ) | ||||||||||||
Net income (loss) available to common stockholders
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$ | 24,632 | $ | 974 | $ | 57,099 | $ | (18,470 | ) | |||||||||||
Weighted average number of common shares
outstanding:
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||||||||||||||||||||
Basic
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67,235 | 52,144 | 67,036 | 52,118 | ||||||||||||||||
Diluted
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68,210 | 52,646 | 67,929 | 52,118 | ||||||||||||||||
Net income (loss) per common share:
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||||||||||||||||||||
Basic:
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||||||||||||||||||||
Net income (loss) before cumulative effect of
change in accounting principle
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$ | .37 | $ | .02 | $ | .90 | $ | (.35 | ) | |||||||||||
Cumulative effect of change in accounting
principle
|
| | (.05 | ) | | |||||||||||||||
Net income (loss) available to common stockholders
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$ | .37 | $ | .02 | $ | .85 | $ | (.35 | ) | |||||||||||
Diluted:
|
||||||||||||||||||||
Net income (loss) before cumulative effect of
change in accounting principle
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$ | .36 | $ | .02 | $ | .89 | $ | (.35 | ) | |||||||||||
Cumulative effect of change in accounting
principle
|
| | (.05 | ) | | |||||||||||||||
Net income (loss) available to common stockholders
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$ | .36 | $ | .02 | $ | .84 | $ | (.35 | ) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
WESTPORT RESOURCES CORPORATION
For the Nine Months | |||||||||||
Ended September 30, | |||||||||||
2003 | 2002 | ||||||||||
(In thousands) | |||||||||||
(Unaudited) | |||||||||||
Cash flows from operating activities:
|
|||||||||||
Net income (loss)
|
$ | 60,672 | $ | (14,898 | ) | ||||||
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
|||||||||||
Depletion, depreciation and amortization
|
195,925 | 147,066 | |||||||||
Exploratory dry hole costs
|
26,332 | 12,359 | |||||||||
Impairment of proved properties
|
977 | | |||||||||
Impairment of unproved properties
|
17,778 | 9,078 | |||||||||
Deferred income taxes
|
24,429 | (8,563 | ) | ||||||||
Stock compensation expense
|
2,753 | 1,954 | |||||||||
Change in fair value of derivatives
|
2,137 | 8,992 | |||||||||
Amortization of deferred financing fees
|
908 | 782 | |||||||||
Gain on sale of operating assets, net
|
(6,487 | ) | 1,731 | ||||||||
Cumulative change in accounting principle, net of
tax
|
3,414 | | |||||||||
Other
|
(133 | ) | 20 | ||||||||
Changes in assets and liabilities, net of effects
of acquisitions:
|
|||||||||||
Decrease (increase) in accounts receivable
|
(17,346 | ) | 17,893 | ||||||||
Increase in prepaid expenses
|
(1,928 | ) | (2,219 | ) | |||||||
Decrease in net derivative liabilities
|
(15,568 | ) | (7,187 | ) | |||||||
Decrease in accounts payable
|
(843 | ) | (15,136 | ) | |||||||
Increase in ad valorem taxes payable
|
10,443 | 2,161 | |||||||||
Increase (decrease) in income taxes payable
|
10,991 | (44 | ) | ||||||||
Increase in accrued expenses
|
17,711 | 6,669 | |||||||||
Decrease in other liabilities
|
(827 | ) | (818 | ) | |||||||
Net cash provided by operating activities
|
331,338 | 159,840 | |||||||||
Cash flows from investing activities:
|
|||||||||||
Additions to property and equipment
|
(194,537 | ) | (104,918 | ) | |||||||
Proceeds from sales of assets
|
13,352 | 10,552 | |||||||||
Acquisitions of oil and gas properties and
purchase price adjustments
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9,416 | (168,528 | ) | ||||||||
Other
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| (81 | ) | ||||||||
Net cash used in investing activities
|
(171,769 | ) | (262,975 | ) | |||||||
Cash flows from financing activities:
|
|||||||||||
Proceeds from issuance of common stock
|
4,557 | 1,074 | |||||||||
Proceeds from issuance of long-term debt
|
151,875 | 155,000 | |||||||||
Repayment of long term debt
|
(226,311 | ) | (45,000 | ) | |||||||
Preferred stock dividends paid
|
(3,572 | ) | (3,572 | ) | |||||||
Repurchase of common stock
|
(106 | ) | (61 | ) | |||||||
Loss on retirement of debt
|
(920 | ) | | ||||||||
Gain on interest swap cancellation
|
| 3,705 | |||||||||
Financing fees
|
(475 | ) | (322 | ) | |||||||
Net cash provided by (used in) financing
activities
|
(74,952 | ) | 110,824 | ||||||||
Net increase in cash and cash equivalents
|
84,617 | 7,689 | |||||||||
Cash and cash equivalents, beginning of period
|
42,761 | 27,584 | |||||||||
Cash and cash equivalents, end of period
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$ | 127,378 | $ | 35,273 | |||||||
Supplemental cash flow information:
|
|||||||||||
Cash paid for interest
|
$ | 34,006 | $ | 23,862 | |||||||
Cash paid for income taxes
|
$ | 3 | $ | 44 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
WESTPORT RESOURCES CORPORATION
1. | Organization and Nature of Business |
On August 21, 2001, the stockholders of each of Westport Resources Corporation, a Delaware corporation (Old Westport), and Belco Oil & Gas Corp., a Nevada corporation (Belco), approved the Agreement and Plan of Merger dated as of June 8, 2001 (the Merger Agreement), between Belco and Old Westport. Pursuant to the Merger Agreement, Old Westport was merged with and into Belco (the Merger), with Belco surviving as the legal entity and changing its name to Westport Resources Corporation (the Company or Westport). The Merger was accounted for as a purchase transaction for financial accounting purposes. Because former Old Westport stockholders owned a majority of the outstanding Westport common stock immediately after the Merger, the Merger was accounted for as a reverse acquisition in which Old Westport purchased Belco. Westport began consolidating the results of Belco with its results as of the August 21, 2001 closing date. Business activities of the Company include oil and natural gas exploitation, acquisition and exploration activities, primarily in the Rocky Mountains, the Gulf Coast, the West Texas/ Mid-Continent area and the Gulf of Mexico.
2. | Unaudited Consolidated Financial Statements |
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position of the Company as of September 30, 2003 and the results of its operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the Securities and Exchange Commissions rules and regulations. Certain amounts reported in the prior year consolidated financial statements have been reclassified to correspond to the current year presentation. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. Management believes the disclosures made are adequate to ensure that the information is not misleading, and suggests that these financial statements be read in conjunction with the Companys December 31, 2002 audited financial statements set forth in the Companys Form 10-K.
3. | Debt |
Long-term debt consisted of:
September 30, | December 31, | |||||||
2003 | 2002 | |||||||
(In thousands) | ||||||||
8 1/4% Senior Subordinated
Notes Due 2011
|
$ | 726,469 | (1) | $ | 591,771 | (2) | ||
8 7/8% Senior Subordinated Notes due
2007
|
| 127,587 | (3) | |||||
Revolving Credit Facility due on
December 16, 2006
|
| 80,000 | ||||||
726,469 | 799,358 | |||||||
Less current portion
|
| | ||||||
$ | 726,469 | $ | 799,358 | |||||
(1) | The balance of the 8 1/4% Senior Subordinated Notes Due 2011 as of September 30, 2003 reflects the aggregate face amount of $700 million plus $14.7 million related to the premium recorded in connection with the issuance of 8 1/4% Senior Subordinated Notes Due 2011 on December 17, 2002 and April 3, 2003 (see 8 1/4% Senior Subordinated Notes Due 2011 below) and an increase of $11.8 million related to fair market value adjustments recorded as a result of the Companys interest rate swaps accounted for as fair value hedges. See Interest Rate Swaps Hedges below. |
(2) | The balance of the 8 1/4% Senior Subordinated Notes Due 2011 as of December 31, 2002 reflects an increase of $8.9 million related to the premium recorded in connection with the issuance of 8 1/4% Senior Subordinated Notes Due 2011 on December 17, 2002 (see 8 1/4% Senior Subordinated |
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notes Due 2011 below) and an increase of $7.9 million related to fair market value adjustments recorded as a result of the Companys interest rate swaps accounted for as fair value hedges. The face amount of the notes at December 31, 2002 was $575.0 million. See Interest Rate Swaps Hedges below. | |
(3) | There was no balance outstanding with respect to the 8 7/8% Senior Subordinated Notes due 2007 as of September 30, 2003, since all of these notes were redeemed on May 5, 2003. The balance of the 8 7/8% Senior Subordinated Notes due 2007 as of December 31, 2002 reflects an increase of $3.5 million related to the gain on the cancellation of the fair market value hedge, which is amortized over the life of the notes. The face amount of the 8 7/8% Senior Subordinated Notes due 2007 at December 31, 2002 was $122.7 million. See 8 7/8% Senior Subordinated Notes due 2007 below. |
Revolving Credit Facility |
On December 17, 2002, the Company entered into a new credit facility (the Revolving Credit Facility) with JPMorgan Chase Bank, Credit Suisse First Boston Corporation and certain other lenders party thereto to replace the Companys previous revolving credit facility. The Revolving Credit Facility provides for a maximum committed amount of $600 million and an initial borrowing base of approximately $470 million. The facility matures on December 16, 2006. In the past, the Company made borrowings under the Revolving Credit Facility to refinance its outstanding indebtedness under the previous revolving credit facility and to pay general corporate expenses.
Advances under the Revolving Credit Facility are in the form of either an ABR loan or a Eurodollar loan. The interest on an ABR loan is a fluctuating rate based upon the highest of:
| the rate of interest announced by JPMorgan Chase Bank, as its prime rate; | |
| the secondary market rate for three month certificates of deposits plus 1%; or | |
| the Federal funds effective rate plus 0.5% |
plus a margin of 0% to 0.625%, in each case, based upon the ratio of total debt to EBITDAX, as defined below, and the ratings of the Companys senior unsecured debt as issued by Standard and Poors Rating Group and Moodys Investor Services, Inc. EBITDAX is a financial measure calculated on the basis of methodologies other than GAAP. For purposes of the Revolving Credit Facility, EBITDAX is defined to mean net income of the Company and its restricted subsidiaries determined on a consolidated basis in accordance with GAAP, plus (a) to the extent deducted from revenues in determining consolidated net income, (i) the aggregate amount of consolidated interest expense, (ii) the aggregate amount of letter of credit fees paid, (iii) the aggregate amount of income tax expense and (iv) all amounts attributable to depreciation, depletion, exploration, amortization and other non-cash charges and expenses, minus (b) to the extent included in revenues in determining consolidated net income, all non-cash extraordinary income, in each case determined on a consolidated basis in accordance with GAAP and without duplication of amounts.
The interest on a Eurodollar loan is a fluctuating rate based upon the rate at which Eurodollar deposits in the London interbank market are quoted plus a margin of 1.000% to 1.875% based upon the ratio of total debt to EBITDAX and the ratings of the Companys senior unsecured debt as issued by Standard and Poors Rating Group and Moodys Investor Service, Inc.
The Revolving Credit Facility contains various covenants and default provisions applicable to the Company and its restricted subsidiaries, including two financial covenants that require the Company to maintain a current ratio of not less than 1.0 to 1.0 and a ratio of EBITDAX to consolidated interest expense for the preceding four consecutive fiscal quarters of not less than 3.0 to 1.0. Commitment fees under the Revolving Credit Facility range from 0.25% to 0.5% on the average daily amount of the available unused borrowing capacity based on the rating of the Companys senior unsecured debt as issued by
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Standard and Poors Rating Group and Moodys Investor Service, Inc. The Company was in compliance with such covenants at September 30, 2003.
Under the terms of the Revolving Credit Facility the Company must meet certain tests before it is able to declare or pay any dividend on (other than dividends payable solely in equity interests of the Company other than disqualified stock), or make any payment of, or set apart assets for a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of equity interests of the Company or any of its restricted subsidiaries, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Company or any restricted subsidiary. Other covenants include restrictions on incurring additional indebtedness, liens, and guarantee obligations; limitations on fundamental changes and sales of assets; restrictions on making certain investments, loans or advances; limitations on optional redemption of subordinated indebtedness; restrictions on transacting with affiliates, changing lines of business and entering into certain hedging agreements; and limitations on sale and leasebacks and use of proceeds.
As of September 30, 2003, the Company had no outstanding indebtedness and had letters of credit of approximately $40.4 million outstanding under the Revolving Credit Facility. Available unused borrowing capacity was approximately $429.6 million. The letters of credit were issued primarily in connection with the margin requirements of the Companys oil and natural gas derivative contracts. At September 30, 2003, the Revolving Credit Facility limited the outstanding letters of credit to $200 million.
8 1/4% Senior Subordinated Notes due 2011 |
On April 3, 2003, the Company issued $125 million in additional principal amount of the 8 1/4% Senior Subordinated Notes Due 2011 pursuant to Rule 144A and Regulation S under the Securities Act of 1933 (the Securities Act) at a price of 106% of the principal amount, with accrued interest from November 1, 2002. The 2003 notes were issued as additional debt securities under the indenture pursuant to which, on November 5, 2001, the Company issued $275 million of 8 1/4% Senior Subordinated Notes Due 2011 and on December 17, 2002, the Company issued $300 million of 8 1/4% Senior Subordinated Notes Due 2011. All of the 2001 and 2002 notes were subsequently exchanged on March 14, 2002 and March 12, 2003, respectively, for equal principal amounts of notes having substantially identical terms and registered under the Securities Act. The proceeds from the 2003 notes were used to fund the redemption of the Companys 8 7/8% Senior Subordinated Notes due 2007 (described below) on May 5, 2003 and to reduce the indebtedness under the Revolving Credit Facility. We have agreed to file an exchange offer registration statement, or under certain circumstances, a shelf registration statement, pursuant to a registration rights agreement relating to the 2003 notes. On June 4, 2003, the Company filed the exchange offer registration statement, as amended on September 12, 2003, relating to the 2003 notes. In the event the Company fails, among other things, to effect the registration statement or consummate the exchange offer relating to the 2003 notes on a timely basis, the Company will pay additional interest on such notes. See Note 9 Subsequent Events below.
The notes are senior subordinated unsecured obligations of the Company and are guaranteed on a senior subordinated basis by some of its existing and future restricted subsidiaries. The notes mature on November 1, 2011. The Company pays interest on the notes semi-annually on May 1 and November 1. The Company is entitled to redeem the notes in whole or in part on or after November 1, 2006 for the redemption price set forth in the notes. Prior to November 1, 2006, the Company is entitled to redeem the notes, in whole but not in part, at a redemption price equal to the principal amount of the notes plus a premium. There is no sinking fund for the notes.
The indenture governing the 8 1/4% Senior Subordinated Notes Due 2011 limits the activity of the Company and its restricted subsidiaries. The provisions of such indenture limit the ability of the Company and its restricted subsidiaries to incur additional indebtedness; pay dividends on capital stock or redeem, repurchase or retire such capital stock or subordinated indebtedness; make investments; incur liens; create
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
any consensual limitation on the ability of the Companys restricted subsidiaries to pay dividends, make loans or transfer property to the Company; engage in transactions with the Companys affiliates; sell assets, including capital stock of the Companys subsidiaries; and consolidate, merge or transfer assets. During any period that these notes have investment grade ratings from both Moodys Investors Service, Inc. and Standard and Poors Ratings Group and no default has occurred and is continuing, the foregoing covenants will cease to be in effect with the exception of covenants that contain limitations on liens and on, among other things, certain consolidations, mergers and transfers of assets. The 8 1/4% Senior Subordinated Notes Due 2011 do not currently qualify as investment grade.
8 7/8% Senior Subordinated Notes due 2007 |
In connection with the Merger, the Company assumed $147 million face amount, $149 million fair value, of Belcos 8 7/8% Senior Subordinated Notes due 2007. On November 1, 2001, approximately $24.3 million face amount of these notes was tendered to the Company pursuant to the change of control provisions of the related indenture. The tender price was equal to 101% of the principal amount of each note plus accrued and unpaid interest as of October 29, 2001. Including the premium and accrued interest, the total amount paid to repay the tendered notes was $24.8 million. The Company used borrowings under its previous revolving credit facility to fund the repayment. No gain or loss was recorded in connection with the redemption as the fair value of the 8 7/8% Senior Subordinated Notes recorded in connection with the Merger equaled the redemption cost. On May 5, 2003, the Company redeemed the remaining outstanding 8 7/8% Senior Subordinated Notes due 2007 in the aggregate principal amount of approximately $123 million. Including the premium and accrued interest, the total amount paid to redeem these notes was $129.7 million. The redemption was funded with the proceeds from the offering of $125 million aggregate principal amount of the Companys 8 1/4% Senior Subordinated Notes Due 2011, issued on April 3, 2003. The remaining proceeds were used to reduce indebtedness under the Revolving Credit Facility. The Company recorded a $0.9 million loss in connection with the redemption of the 8 7/8% Senior Subordinated Notes due 2007.
Interest Rate Swaps-Hedges |
The following table summarizes the interest rate swap contracts the Company currently has in place:
Notional Amount | Transaction Date | Expiration Date | Current Estimated Rate | |||||
$ | 100 million | November 2001 | November 1, 2011 | LIBOR + 2.42% | ||||
$ | 50 million | January 2003 | November 1, 2011 | LIBOR + 3.37% | ||||
$ | 40 million | January 2003 | November 1, 2011 | LIBOR + 3.55% | ||||
$ | 50 million | January 2003 | November 1, 2011 | LIBOR + 3.42% |
The Company entered into the interest rate swap contracts above to hedge the fair value of a portion of the 8 1/4% Senior Subordinated Notes Due 2011. Because these swaps meet the conditions to qualify for the short cut method of assessing effectiveness under the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, the change in the fair value of the notes is assumed to equal the change in the fair value of the interest rate swap. As such, there is no ineffectiveness assumed to exist between the interest rate swap and the notes.
The interest rate swaps are fixed for floating swaps in that the Company receives the fixed rate of 8.25% and pays the floating rate. The floating rate is redetermined every six months based on the London Interbank Offered Rate (LIBOR) in effect at the contractual reset date. When LIBOR plus the applicable margin shown above is less than 8.25%, the Company receives a payment from the counterparty equal to the difference in rate times the notional amount. When LIBOR plus the applicable margin shown above is greater than 8.25%, the Company pays the counterparty the difference in rate times the notional amount. As of September 30, 2003, the Company recorded a derivative asset of $11.8 million related to the interest rate swap designated as a fair value hedge, with a corresponding debt increase. Based on the
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fair value of the interest rate swaps at September 30, 2003, the Company could expect to receive approximately $1.5 million per year through 2011.
In September 2002, the Company terminated an interest rate swap on the 8 7/8% Senior Subordinated Notes due 2007 resulting in the receipt of a $3.7 million fair value gain, which was added to the outstanding balance of the notes and was amortized until May 5, 2003, the date of redemption of all of the Companys outstanding 8 7/8% Senior Subordinated Notes due 2007. See 8 7/8% Senior Subordinated Notes due 2007 discussed above.
4. | Commodity Derivative Instruments and Hedging Activities |
The Company periodically enters into commodity price risk management (CPRM) transactions to manage its exposure to oil and gas price volatility. The Company typically hedges between 20% and 40% of its expected production, one to two years into the future. Currently, the Company has approximately 60-70% of expected production hedged in 2003 to protect cash flow and return expectations on the significant assets acquired by the Company in late 2002. CPRM transactions may take the form of futures contracts, swaps or options. All CPRM data is presented in accordance with the requirements of SFAS No. 133 which the Company adopted on January 1, 2001. Accordingly, unrealized gains and losses related to the change in fair market value of derivative contracts which qualify and are designated as cash flow hedges are recorded as other comprehensive income or loss and such amounts are reclassified to oil and gas sales revenues as the associated production occurs. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current income or expense in the consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts can be utilized as an effective component of CPRM activities.
For the nine months ended September 30, 2003 and 2002, the Company reclassified approximately $86.0 million of hedging losses and $1.5 million of hedging gains, respectively, out of accumulated other comprehensive income into oil and gas sales revenues. The hedging losses and gains reclassified to revenues include cash losses of $88.6 million and $4.6 million for the nine months ended September 30, 2003 and 2002, respectively.
The Company recorded non-hedge CPRM settlement gains of $2.0 million and $0.8 million for the nine months ended September 30, 2003 and 2002, respectively. The Company also recorded unrealized gain (loss) in fair value of non-hedge derivatives of $8.0 million, which included $1.4 million ineffectiveness loss, and ($8.9) million, which included $0.2 million ineffectiveness loss, for the nine months ended September 30, 2003 and 2002, respectively. The non-hedge CPRM settlements include cash losses of $0.8 million and $1.3 million for the nine months ended September 30, 2003 and 2002, respectively.
As of September 30, 2003, the Company had the following CPRM transactions in place covering hedge and non-hedge positions:
| 1.2 Mmbbls of oil and 18.8 Bcf of natural gas subject to CPRM contracts for the remainder of 2003. Of these contracts, all of the oil and 16.0 Bcf of the natural gas contracts are subject to weighted average NYMEX floor prices of $23.20 per barrel and $3.78 per Mmbtu and weighted average NYMEX ceiling prices of $25.29 per barrel and $4.20 per Mmbtu, respectively, excluding the effect, if any, of the three-way floor price. Of the remaining 2003 natural gas CPRM contract settlements, 1.8 Bcf are calculated based on the Northwest Pipeline Rocky Mountain Index (NWPRM) at weighted average NWPRM floor and ceiling prices of $3.00 and $3.29, respectively, and 0.9 Bcf are calculated based on the Colorado Interstate Gas Index (CIG) at a weighted average swap price of $3.59. In addition, included in the 16.0 Bcf of natural gas contracts are basis swaps covering 3.4 Bcf of natural gas for 2003 that lock in the pricing differential between |
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NYMEX and NWPRM at a weighted average price differential of $0.67 per Mmbtu, 0.9 Bcf of natural gas for 2003 that lock in the pricing differential between NYMEX and CIG at a weighted average price differential of $0.95 per Mmbtu and 1.2 Bcf of natural gas for 2003 that lock in the pricing differential between CIG and NWPRM at a weighted average price differential of $0.42 per Mmbtu. | ||
| 3.3 Mmbbls of oil and 56.6 Bcf of natural gas subject to CPRM contracts for 2004. Of these contracts, all of the oil and 45.7 Bcf of the natural gas contracts are subject to weighted average floor prices of $24.35 per barrel and $4.02 per Mmbtu and weighted average NYMEX ceiling prices of $25.38 per barrel and $4.20 per Mmbtu, respectively, excluding the effect, if any, of the three-way floor price. The remaining 2004 natural gas CPRM contract settlements are calculated based on the NWPRM Index with a weighted average swap price of $3.33 per Mmbtu. In addition, included in the 45.7 Bcf of natural gas contracts are basis swaps covering 3.7 Bcf of natural gas for 2004 that lock in the pricing differential between NYMEX and NWPRM at a weighted average price differential of $0.66 per Mmbtu and 5.5 Bcf of natural gas for 2004 that lock in the pricing differential between NYMEX and CIG at a weighted average price differential of $0.77. | |
| 1.1 Mmbbls of oil and 23.7 Bcf of natural gas subject to CPRM contracts for 2005 with a weighted average NYMEX floor price of $25.00 per barrel and $4.22 per Mmbtu and weighted average NYMEX ceiling price of $28.33 per barrel and $4.72 per Mmbtu. Included in the 23.7 Bcf of natural gas contracts are basis swaps covering 3.7 Bcf of natural gas for 2005 that lock in the pricing differential between NYMEX and NWPRM at a weighted average price differential of $0.78 Mmbtu. | |
| 0.4 Mmbbls of oil and 3.7 Bcf of natural gas subject to CPRM contracts for 2006 with a weighted average NYMEX floor price of $25.00 per barrel and $4.00 per Mmbtu and weighted average NYMEX ceiling price of $29.00 per barrel and $6.00 per Mmbtu. |
The tables below provide details about the volumes and prices of all open CPRM hedge and non-hedge commitments as of September 30, 2003:
2003 | 2004 | 2005 | 2006 | ||||||||||||||||
Hedges
|
|||||||||||||||||||
Gas
|
|||||||||||||||||||
NYMEX Price Swaps Sold receive fixed
price (thousand Mmbtu)(1)
|
8,098 | 25,620 | 16,425 | | |||||||||||||||
Average price, per Mmbtu
|
$ | 4.01 | $ | 4.22 | $ | 4.35 | $ | | |||||||||||
NWPRM Price Swaps Sold receive fixed
price (thousand Mmbtu)(2)
|
| 10,980 | | | |||||||||||||||
Average price, per Mmbtu
|
$ | | $ | 3.33 | $ | | $ | | |||||||||||
CIG Price Swaps Sold receive fixed
price, per Mmbtu(3)
|
920 | | | | |||||||||||||||
Average price, per Mmbtu
|
$ | 3.59 | $ | | $ | | $ | | |||||||||||
NYMEX Collars Sold (thousand Mmbtu)(4)
|
5,870 | 16,380 | 7,300 | | |||||||||||||||
Average floor price, per Mmbtu
|
$ | 3.61 | $ | 3.70 | $ | 3.93 | $ | | |||||||||||
Average ceiling price, per Mmbtu
|
$ | 4.29 | $ | 4.00 | $ | 5.54 | $ | | |||||||||||
NWPRM Collars Sold (thousand Mmbtu)(5)
|
1,840 | | | | |||||||||||||||
Average flooring price, per Mmbtu
|
$ | 3.00 | $ | | $ | | $ | | |||||||||||
Average ceiling price, per Mmbtu
|
$ | 3.29 | $ | | $ | | $ | |
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2003 | 2004 | 2005 | 2006 | |||||||||||||||||
NYMEX Three-way Collars (thousand Mmbtu)(4)(6)
|
2,024 | 3,660 | | 3,650 | ||||||||||||||||
Average floor price, per Mmbtu
|
$ | 3.39 | $ | 4.00 | $ | | $ | 4.00 | ||||||||||||
Average ceiling price, per Mmbtu
|
$ | 4.73 | $ | 5.00 | $ | | $ | 6.00 | ||||||||||||
Three-way average floor price, per Mmbtu
|
$ | 2.22 | $ | 3.15 | $ | | $ | 3.10 | ||||||||||||
Basis Swaps versus NYMEX(7)
|
||||||||||||||||||||
NWPRM (thousand Mmbtu)
|
3,374 | 3,660 | 3,650 | | ||||||||||||||||
Average differential price, per Mmbtu
|
$ | 0.67 | $ | 0.66 | $ | 0.78 | $ | | ||||||||||||
CIG (thousand Mmbtu)
|
920 | 5,490 | | | ||||||||||||||||
Average differential price, per Mmbtu
|
$ | 0.95 | $ | 0.77 | $ | | $ | | ||||||||||||
Oil
|
||||||||||||||||||||
NYMEX Price Swaps Sold receive fixed
price (Mbbls)(1)
|
152 | 2,196 | | | ||||||||||||||||
Average price, per bbl
|
$ | 21.39 | $ | 24.61 | $ | | $ | | ||||||||||||
NYMEX Collars Sold (Mbbls)(4)
|
495 | | | | ||||||||||||||||
Average floor price, per bbl
|
$ | 24.95 | $ | | $ | | $ | | ||||||||||||
Average ceiling price, per bbl
|
$ | 26.45 | $ | | $ | | $ | | ||||||||||||
NYMEX Three-way Collars (Mbbls)(4)(6)
|
501 | 1,098 | 1,095 | 365 | ||||||||||||||||
Average floor price, per bbl
|
$ | 23.17 | $ | 23.83 | $ | 25.00 | $ | 25.00 | ||||||||||||
Average ceiling price, per bbl
|
$ | 26.30 | $ | 26.92 | $ | 28.33 | $ | 29.00 | ||||||||||||
Three-way average floor price, per bbl
|
$ | 18.90 | $ | 19.00 | $ | 21.55 | $ | 21.75 | ||||||||||||
Non-Hedges
|
||||||||||||||||||||
Gas
|
||||||||||||||||||||
Basis Swaps, Index versus Index(8)
|
||||||||||||||||||||
NWPRM versus CIG (thousand Mmbtu)
|
1,240 | | | | ||||||||||||||||
Average differential price, per Mmbtu
|
$ | 0.42 | $ | | $ | | $ | | ||||||||||||
Oil
|
||||||||||||||||||||
NYMEX Price Swaps Sold, receive fixed price
(Mbbls)(1)
|
75 | | | | ||||||||||||||||
Average price, per bbl
|
$ | 18.86 | $ | | $ | | $ | | ||||||||||||
Estimated fair value of oil and gas
derivatives as of September 30, 2003 (in
thousands)
|
$ | (20,178 | ) | $ | (50,752 | ) | $ | (6,158 | ) | $ | (727 | ) |
(1) | For any particular NYMEX swap sold transaction, the counterparty is required to make a payment to Westport in the event that the NYMEX Reference Price for any settlement period is less than the swap price for such hedge, and Westport is required to make a payment to the counterparty in the event that the NYMEX Reference Price for any settlement period is greater than the swap price for such hedge. |
(2) | For any particular NWPRM swap sold transaction, the counterparty is required to make a payment to Westport in the event that the NWPRM Index Price for any settlement period is less than the swap price for such hedge, and Westport is required to make a payment to the counterparty in the event that the NWPRM Index Price for any settlement period is greater than the swap price for such hedge. |
(3) | For any particular CIG swap sold transaction, the counterparty is required to make a payment to Westport in the event that the CIG Index Price for any settlement period is less than the swap price |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for such hedge, and Westport is required to make a payment to the counterparty in the event that the CIG Index Price for any settlement period is greater than the swap price for such hedge. | |
(4) | For any particular NYMEX collar transaction, the counterparty is required to make a payment to Westport if the average NYMEX Reference Price for the reference period is below the floor price for such transaction, and Westport is required to make payment to the counterparty if the average NYMEX Reference Price is above the ceiling price of such transaction. |
(5) | For any particular NWPRM collar transaction, the counterparty is required to make a payment to Westport if the average NWPRM Index Price for the reference period is below the floor price for such transaction, and Westport is required to make payment to the counterparty if the average NWPRM Index Price is above the ceiling price of such transaction. |
(6) | Three way collars are settled as described in footnote (4) above, with the following exception: if the NYMEX Reference Price falls below the three-way floor price, the average floor price is reduced by the amount the NYMEX Reference Price is below the three-way floor price. For example, if the NYMEX Reference Price is $18.00 per bbl during the term of the 2003 three-way collars, then the effective average floor price would be $22.27 per bbl. |
(7) | For any particular basis swap versus NYMEX, the counterparty is required to make a payment to Westport in the event that the difference between the NYMEX Reference Price and the applicable published index (NWPRM or CIG) for any settlement period is greater than the swap differential price for such hedge, and Westport is required to make a payment to the counterparty in the event that the difference between the NYMEX Reference Price and the applicable published index (NWPRM or CIG) for any settlement period is less than the swap differential price for such hedge. |
(8) | These basis swaps are based on the difference between CIG and NWPRM indices. The counterparty is required to make a payment to Westport in the event that CIG plus the swap differential price exceeds NWPRM for any settlement period, and Westport is required to make a payment to the counterparty in the event that the CIG price plus the swap differential price is less than NWPRM for any settlement period. |
5. | Earnings Per Share and Other Comprehensive Income (Loss) |
Earnings per Share |
Basic earnings per share are computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period, excluding treasury shares.
Diluted earnings per share are computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of convertible preferred stock and stock options.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following sets forth the calculation of basic and diluted earnings per share:
For the Three Months | For the Nine Months | |||||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||
Net income (loss) per share:
|
||||||||||||||||||
Net income (loss) before cumulative effect of
change in accounting principle
|
$ | 25,823 | $ | 2,165 | $ | 64,086 | $ | (14,898 | ) | |||||||||
Cumulative change in accounting principle
|
| | (3,414 | ) | | |||||||||||||
Net income (loss)
|
25,823 | 2,165 | 60,672 | (14,898 | ) | |||||||||||||
Preferred stock dividends
|
(1,191 | ) | (1,191 | ) | (3,573 | ) | (3,572 | ) | ||||||||||
Net income (loss) available to common stockholder
|
$ | 24,632 | $ | 974 | $ | 57,099 | $ | (18,470 | ) | |||||||||
Weighted average common shares outstanding
|
67,235 | 52,144 | 67,036 | 52,118 | ||||||||||||||
Add dilutive effects of employee stock options
|
975 | 502 | 893 | | ||||||||||||||
Weighted average common shares outstanding
including the effects of dilutive securities
|
68,210 | 52,646 | 67,929 | 52,118 | ||||||||||||||
Basic earnings (loss) per share common before
cumulative effect of change in accounting principle
|
$ | 0.37 | $ | 0.02 | $ | 0.90 | $ | (.35 | ) | |||||||||
Basic earnings (loss) per common share
|
$ | 0.37 | $ | 0.02 | $ | 0.85 | $ | (.35 | ) | |||||||||
Diluted earnings (loss) per common share before
cumulative effect of change in accounting principle
|
$ | 0.36 | $ | 0.02 | $ | 0.89 | $ | (.35 | ) | |||||||||
Diluted earnings (loss) per common share
|
$ | 0.36 | $ | 0.02 | $ | 0.84 | $ | (.35 | ) | |||||||||
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Comprehensive Income (Loss) |
The Company follows SFAS No. 130, Reporting Comprehensive Income, which establishes standards for reporting comprehensive income. In addition to net income, comprehensive income includes all changes in equity during a period, except those resulting from investments and distributions to the owners of the Company. The components of other comprehensive income for the nine months ended September 30, 2003 and 2002, respectively, are as follows:
For the Nine Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||
September 30, 2003 | September 30, 2002 | ||||||||||||||||||||||||
Tax | Tax | ||||||||||||||||||||||||
Before | (Expense) | Net of | Before | (Expense) | Net of | ||||||||||||||||||||
Tax | Benefit | Tax | Tax | Benefit | Tax | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Net income (loss) available to common stockholders
|
$ | 93,935 | $ | (36,836 | ) | $ | 57,099 | $ | (27,033 | ) | $ | 8,563 | $ | (18,470 | ) | ||||||||||
Other comprehensive income Change in fair value
of derivative hedging instruments
|
(121,590 | ) | 44,380 | (77,210 | ) | (21,370 | ) | 7,800 | (13,570 | ) | |||||||||||||||
Enron non-cash settlements reclassified to income
|
(1,535 | ) | 560 | (975 | ) | (1,411 | ) | 515 | (896 | ) | |||||||||||||||
Hedge settlements reclassified to income
|
87,511 | (31,941 | ) | 55,570 | (98 | ) | 36 | (62 | ) | ||||||||||||||||
Comprehensive income (loss)
|
$ | 58,321 | $ | (23,837 | ) | $ | 34,484 | $ | (49,912 | ) | $ | 16,914 | $ | (32,998 | ) | ||||||||||
6. | Stock Compensation |
The Company has elected to continue following Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and has elected to adopt the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure Had compensation costs for the Companys options been determined based on the fair value at the grant dates consistent with SFAS No. 123, the Companys net income would have been decreased and the net loss would have been increased to the pro forma amounts indicated below:
For the Three Months | For the Nine Months | ||||||||||||||||
Ended September 30, | Ended September 30 | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||
Net income (loss) available to common stockholders
|
|||||||||||||||||
As reported
|
$ | 24,632 | $ | 974 | $ | 57,099 | $ | (18,470 | ) | ||||||||
Pro forma
|
23,760 | (90 | ) | 52,455 | (23,775 | ) | |||||||||||
Basic net income (loss) per common share
|
|||||||||||||||||
As reported
|
$ | 0.37 | $ | 0.02 | $ | 0.85 | $ | (0.35 | ) | ||||||||
Pro forma
|
0.35 | 0.00 | 0.78 | (0.46 | ) | ||||||||||||
Diluted net income (loss) per common share
|
|||||||||||||||||
As reported
|
$ | 0.36 | $ | 0.02 | $ | 0.84 | $ | (0.35 | ) | ||||||||
Pro forma
|
0.35 | 0.00 | 0.77 | (0.46 | ) |
7. | Recent Accounting Pronouncements |
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of liabilities for retirement obligations of acquired assets. SFAS No. 143 is effective for fiscal years beginning
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
after June 15, 2002. The Company adopted SFAS No. 143 on January 1, 2003 and recorded a cumulative effect of a change in accounting principle on prior years of $3.4 million, net of tax effects, related to the depreciation and accretion expense that would have been reported had the fair value of the asset retirement obligations, and corresponding increase in the carrying amount of the related long-lived assets, been recorded when incurred. The Companys asset retirement obligations arise from the plugging and abandonment liabilities for its oil and gas wells and offshore platform facilities. On January 1, 2003 the Company also recorded $58.7 million of asset retirement obligations (using a 7.6% discount rate), an increase in the carrying amount of its oil and gas properties of $49.6 million and a decrease to accumulated depreciation of $3.8 million. Changes to the Companys asset retirement obligations from January 1 to September 30 of 2003 are presented below:
2003 | ||||
(In thousands) | ||||
Asset retirement obligation January 1
|
$ | 58,735 | ||
Accretion
|
3,156 | |||
Additions
|
438 | |||
Settlements
|
(3,549 | ) | ||
Asset retirement obligation
September 30
|
58,780 | |||
Less: Current asset retirement obligation
|
(7,968 | ) | ||
Long-term asset retirement obligation
|
$ | 50,812 | ||
The Companys current and long-term asset retirement obligations are included in current asset retirement liabilities and long-term asset retirement liabilities, respectively, on the accompanying September 30, 2003 consolidated balance sheet.
The pro forma effects of the application of SFAS No. 143, as if the Statement had been adopted net of tax on January 1, 2002 (rather than January 1, 2003), are presented below:
Pro Forma for the | Pro Forma for the | ||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||
Net income (loss) available to common stockholders
|
|||||||||||||||||
As reported
|
$ | 24,632 | $ | 974 | $ | 57,099 | $ | (18,470 | ) | ||||||||
Pro forma
|
24,632 | 726 | 60,513 | (21,884 | ) | ||||||||||||
Basic net income (loss) per common share
|
|||||||||||||||||
As reported
|
$ | 0.37 | $ | 0.02 | $ | 0.85 | $ | (0.35 | ) | ||||||||
Pro forma
|
0.37 | 0.01 | 0.90 | (0.42 | ) | ||||||||||||
Diluted net income (loss) per common share
|
|||||||||||||||||
As reported
|
$ | 0.36 | $ | 0.02 | $ | 0.84 | $ | (0.35 | ) | ||||||||
Pro forma
|
0.36 | 0.01 | 0.89 | (0.42 | ) |
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. Prior to the adoption of the provisions of SFAS No. 145, GAAP required that gains or losses on the early extinguishment of debt be classified in a companys periodic consolidated statements of operations as extraordinary gains or losses, net of associated income taxes, below the determination of income or loss from continuing operations. SFAS No. 145 changes GAAP to require, except in the case of events or transactions of a highly unusual and infrequent nature, gains or losses from the early extinguishment of debt be classified as components of a companys income or loss from continuing operations. The Company adopted the provisions of
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS No. 145 on January 1, 2003. In May 2003, the Company recorded a $0.9 million loss in connection with the early extinguishment of debt in 2003.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 has not had an effect on the Companys financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-based Compensation Transition and Disclosure. SFAS No. 148 amends FASB No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. The provisions of SFAS No. 148 has no material impact on the Company, as the Company does not plan to adopt the fair-value method of accounting for stock options at the current time.
In November 2002, the FASB issued Financial Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements Nos. 5, 57, and 107 and rescission of FASB Interpretation No. 34 (FIN 45). FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantors fiscal year-end. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 has not had any effect on the Companys financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities an interpretation of ARB No. 51 (FIN 46). FIN 46 is an interpretation of Accounting Research Bulletin 51, Consolidated Financial Statements, and addresses consolidation by business enterprises of variable interest entities (VIEs). The primary objective of FIN 46 is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights. Such entities are known as VIEs. FIN 46 requires an enterprise to consolidate a VIE if that enterprise has a variable interest that will absorb a majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or both. An enterprise shall consider the rights and obligations conveyed by its variable interests in making this determination. This guidance applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. At this time, the Company does not have a VIE.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company adopted SFAS No. 149 on July 1, 2003 and does not expect a material impact on its financial condition and results of operations.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 changes the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. FASB No. 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has not had any effect on the Companys financial position or results of operations.
8. | Segment Information |
The Company operates in four geographic divisions: Northern (Rocky Mountains); Western (Uinta Basin); Southern (Permian Basin, Mid-Continent and Gulf Coast) and Gulf of Mexico (offshore). The Western division was formed on December 17, 2002 as a result of the acquisition of certain natural gas properties and midstream gathering and compression assets located in the Uinta Basin from certain affiliates of El Paso Corporation. All four areas are engaged in the production, development, acquisition and exploration of oil and natural gas properties. The Company evaluates segment performance based on the profit or loss from operations before income taxes. Corporate general and administrative expenses are allocated to the four geographic divisions. Consolidated and segment financial information are as follows:
For the Nine Months Ended September 30, | ||||||||||||||||||||||||
Gulf of | Corporate & | |||||||||||||||||||||||
Northern | Western | Southern | Mexico | Unallocated | Consolidated | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
2003
|
||||||||||||||||||||||||
Revenues
|
$ | 135,937 | $ | 94,038 | $ | 223,707 | $ | 173,548 | $ | (77,944 | )(1) | $ | 549,286 | |||||||||||
DD&A
|
30,671 | 18,899 | 69,106 | 76,757 | 492 | 195,925 | ||||||||||||||||||
Impairment of proved properties
|
106 | | 188 | 683 | | 977 | ||||||||||||||||||
Impairment of unproved properties
|
3,045 | 61 | 2,460 | 12,212 | | 17,778 | ||||||||||||||||||
Profit (loss)
|
56,406 | 48,524 | 87,406 | 34,553 | (81,198 | ) | 145,691 | |||||||||||||||||
Expenditures for assets, net
|
29,513 | 42,886 | 43,006 | 68,693 | 1,023 | 185,121 | ||||||||||||||||||
2002
|
||||||||||||||||||||||||
Revenues
|
$ | 90,486 | $ | | $ | 108,737 | $ | 93,658 | $ | (6,554 | )(1) | $ | 286,327 | |||||||||||
DD&A
|
34,100 | | 55,893 | 56,744 | 329 | 147,066 | ||||||||||||||||||
Impairment of unproved properties
|
3,842 | | 2,095 | 3,141 | | 9,078 | ||||||||||||||||||
Profit (loss)
|
13,944 | | 1,398 | (7,056 | ) | (8,952 | ) | (666 | ) | |||||||||||||||
Expenditures for assets, net
|
62,657 | | 150,261 | 59,236 | 1,292 | 273,446 |
(1) | Corporate and unallocated revenues consist of non-hedge and hedge settlements, and non-hedge change in fair value of derivatives. |
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Three Months Ended September 30, | ||||||||||||||||||||||||
Gulf of | Corporate & | |||||||||||||||||||||||
Northern | Western | Southern | Mexico | Unallocated | Consolidated | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
2003
|
||||||||||||||||||||||||
Revenues
|
$ | 42,949 | $ | 34,726 | $ | 70,421 | $ | 55,950 | $ | (17,281 | )(1) | $ | 186,765 | |||||||||||
DD&A
|
9,949 | 7,108 | 23,704 | 26,884 | 179 | 67,824 | ||||||||||||||||||
Impairment of unproved properties
|
983 | 61 | 1,060 | 501 | | 2,605 | ||||||||||||||||||
Profit (loss)
|
16,923 | 20,039 | 22,943 | 13,994 | (18,070 | ) | 55,829 | |||||||||||||||||
Expenditures for assets, net
|
15,142 | 17,158 | 18,924 | 21,394 | 434 | 73,052 | ||||||||||||||||||
2002
|
||||||||||||||||||||||||
Revenues
|
$ | 33,006 | $ | | $ | 38,788 | $ | 33,766 | $ | (2,512 | )(1) | $ | 103,048 | |||||||||||
DD&A
|
11,597 | | 17,600 | 18,386 | 103 | 47,686 | ||||||||||||||||||
Impairment of unproved properties
|
840 | | 2 | 1,946 | | 2,788 | ||||||||||||||||||
Profit
|
7,492 | | 4,388 | 3,198 | (4,475 | ) | 10,603 | |||||||||||||||||
Expenditures for assets, net
|
5,372 | | 136,537 | 17,220 | 245 | 159,374 |
(1) | Corporate and unallocated revenues consist of non-hedge and hedge settlements, and non-hedge change in fair value of derivatives |
9. | Subsequent Events |
Revolving Credit Facility |
On October 15, 2003, the Revolving Credit Facility was amended, increasing the borrowing base from $470 million to $500 million. The amendment also eliminates the limit on the outstanding letters of credit, provided that the amount of letters of credit outstanding on any date does not exceed the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base then in effect, or if the borrowing base is not in effect on such date, the aggregate commitments under the Revolving Credit Facility. In addition, the amendment increased the basket allowed for purposes of providing cash collateral from $10 million to $20 million and deleted the requirement to file liens on properties if not rated BB+ and Ba1 at December 31, 2003.
8 1/4% Senior Subordinated Notes Due 2011 |
Pursuant to the registration rights agreement relating to the 8 1/4% Senior Subordinated Notes Due 2011 issued on April 3, 2003, the Company agreed, among other things, to file an exchange offer registration statement and have such registration statement declared effective by the SEC by not later than September 30, 2003. The Company filed an exchange offer registration statement relating to the 2003 notes on June 4, 2003, as amended on September 12, 2003.
The SEC is currently conducting an ordinary course review of the exchange offer registration statement and certain of the Companys periodic filings incorporated therein by reference. As part of ongoing discussions with the SEC, the Company has agreed to supplement or revise various accounting, engineering and other disclosures in some of these filings. The Company expects the SECs review to be completed during the fourth quarter of 2003, and currently believes that any supplemental or revised disclosures to be included in amendments to any of its filings will not be material or have a significant impact on its historical financial statements. It is possible that the SECs review will require the Company to make additional changes to its filings and the discussion herein reflects the Companys best current knowledge and understanding of the review process.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company will pay additional interest of 0.5% per annum on the 2003 notes, accruing from October 1, 2003 until such time as the SEC declares the registration statement relating to such notes effective and the Company consummates the exchange offer contemplated therein.
Agreement to Acquire South Texas Natural Gas Assets |
On November 6, 2003 the Company agreed to purchase from privately held United Resources oil and gas assets located in South Texas for a purchase price of approximately $350 million, subject to certain purchase price adjustments. The Company estimates the proved reserves of the properties as of December 1, 2003 to be approximately 211 Bcfe, of which 97% is natural gas and 60% is proved developed. The properties are currently producing approximately 78 Mmcfe/d of which the Company will operate approximately 86% of the net production once the transaction is consummated. The Company expects to close the transaction in December of 2003 using cash and borrowings under the Revolving Credit Facility to fund the acquisition.
10. | Condensed Consolidated Financial Statements of Subsidiary Guarantors |
On April 3, 2003 the Company issued $125 million of its 8 1/4% Senior Subordinated Notes Due 2011. These notes were issued as additional debt securities under an indenture, pursuant to which, on November 5, 2001 the Company issued $275 million of 8 1/4% Senior Subordinated Notes Due 2011 and on December 17, 2002, the Company issued $300 million of 8 1/4% Senior Subordinated Notes Due 2011. All of the 8 1/4% Senior Subordinated Notes Due 2011 are jointly and severally guaranteed, on a senior subordinated unsecured basis, by the following wholly-owned subsidiaries of Westport: Westport Finance Co., Jerry Chambers Exploration Company, Westport Argentina LLC, Westport Canada LLC, Westport Oil and Gas Company, L.P., Horse Creek Trading & Compression Company LLC, Westport Field Services, LLC, Westport Overriding Royalty LLC, WHG, Inc. and WHL, Inc. (collectively, the Subsidiary Guarantors). The guarantees of the Subsidiary Guarantors are subordinated to senior debt of the Subsidiary Guarantors.
Presented below are condensed consolidating financial statements for Westport and the Subsidiary Guarantors for the periods indicated therein.
18
WESTPORT RESOURCES CORPORATION
Parent | Subsidiary | ||||||||||||||||||
Company | Guarantors | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | |||||||||||||||||||
(Unaudited) | |||||||||||||||||||
ASSETS | |||||||||||||||||||
Current Assets:
|
|||||||||||||||||||
Cash and cash equivalents
|
$ | 8,959 | $ | 118,419 | $ | | $ | 127,378 | |||||||||||
Accounts receivable, net
|
19,706 | 63,836 | | 83,542 | |||||||||||||||
Intercompany receivable
|
1,322,418 | | (1,322,418 | ) | | ||||||||||||||
Derivative assets
|
6,609 | | | 6,609 | |||||||||||||||
Prepaid expenses
|
6,176 | 9,483 | | 15,659 | |||||||||||||||
Total current assets
|
1,363,868 | 191,738 | (1,322,418 | ) | 233,188 | ||||||||||||||
Property and equipment, at cost:
|
|||||||||||||||||||
Oil and natural gas properties, successful
efforts method:
|
|||||||||||||||||||
Proved properties
|
393,279 | 1,931,963 | | 2,325,242 | |||||||||||||||
Unproved properties
|
19,839 | 73,858 | | 93,697 | |||||||||||||||
Field services assets
|
| 39,446 | | 39,446 | |||||||||||||||
Building and other office furniture and equipment
|
673 | 10,035 | | 10,708 | |||||||||||||||
413,791 | 2,055,302 | | 2,469,093 | ||||||||||||||||
Less accumulated depletion, depreciation and
amortization
|
(186,858 | ) | (477,644 | ) | | (664,502 | ) | ||||||||||||
Net property and equipment
|
226,933 | 1,577,658 | | 1,804,591 | |||||||||||||||
Other assets:
|
|||||||||||||||||||
Long-term derivative assets
|
26,160 | | | 26,160 | |||||||||||||||
Goodwill
|
| 244,640 | | 244,640 | |||||||||||||||
Other assets
|
19,086 | | | 19,086 | |||||||||||||||
Total other assets
|
45,246 | 244,640 | | 289,886 | |||||||||||||||
Total assets
|
$ | 1,636,047 | $ | 2,014,036 | $ | (1,322,418 | ) | $ | 2,327,665 | ||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | |||||||||||||||||||
Current Liabilities:
|
|||||||||||||||||||
Accounts payable
|
$ | 5,965 | $ | 44,274 | $ | | $ | 50,239 | |||||||||||
Accrued expenses
|
30,388 | 24,831 | | 55,219 | |||||||||||||||
Ad valorem taxes payable
|
1 | 19,430 | | 19,431 | |||||||||||||||
Intercompany payable
|
| 1,322,418 | (1,322,418 | ) | | ||||||||||||||
Derivative liabilities
|
63,389 | | | 63,389 | |||||||||||||||
Income taxes payable
|
| 11,077 | | 11,077 | |||||||||||||||
Other current liabilities
|
4,047 | 3,921 | | 7,968 | |||||||||||||||
Total current liabilities
|
103,790 | 1,425,951 | (1,322,418 | ) | 207,323 | ||||||||||||||
Long-term debt
|
726,469 | | | 726,469 | |||||||||||||||
Deferred income taxes
|
(62,998 | ) | 196,995 | | 133,997 | ||||||||||||||
Long-term derivative liabilities
|
35,360 | | | 35,360 | |||||||||||||||
Other liabilities
|
15,882 | 34,930 | | 50,812 | |||||||||||||||
Total liabilities
|
818,503 | 1,657,876 | (1,322,418 | ) | 1,153,961 | ||||||||||||||
Stockholders equity:
|
|||||||||||||||||||
Preferred stock
|
29 | | | 29 | |||||||||||||||
Common stock
|
673 | 3 | (3 | ) | 673 | ||||||||||||||
Additional paid-in capital
|
958,505 | 199,153 | 3 | 1,157,661 | |||||||||||||||
Treasury stock
|
(576 | ) | | | (576 | ) | |||||||||||||
Retained earnings
|
(100,064 | ) | 157,165 | | 57,101 | ||||||||||||||
Accumulated other comprehensive income
|
(41,023 | ) | (161 | ) | | (41,184 | ) | ||||||||||||
Total stockholders equity
|
817,544 | 356,160 | | 1,173,704 | |||||||||||||||
Total liabilities and stockholders equity
|
$ | 1,636,047 | $ | 2,014,036 | $ | (1,322,418 | ) | $ | 2,327,665 | ||||||||||
19
WESTPORT RESOURCES CORPORATION
Parent | Subsidiary | ||||||||||||||||||
Company | Guarantors | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | |||||||||||||||||||
(Unaudited) | |||||||||||||||||||
Operating revenues:
|
|||||||||||||||||||
Oil and natural gas sales
|
$ | 129,283 | $ | 486,421 | $ | | $ | 615,704 | |||||||||||
Hedge settlements
|
(85,976 | ) | | | (85,976 | ) | |||||||||||||
Gathering and marketing income
|
| 3,066 | | 3,066 | |||||||||||||||
Non-hedge settlements
|
1,973 | | | 1,973 | |||||||||||||||
Non-hedge change in fair value of derivatives
|
8,032 | | | 8,032 | |||||||||||||||
Loss on sale of operating assets, net
|
3 | 6,484 | | 6,487 | |||||||||||||||
Net revenues
|
53,315 | 495,971 | | 549,286 | |||||||||||||||
Operating costs and expenses:
|
|||||||||||||||||||
Lease operating expense
|
9,590 | 66,816 | | 76,406 | |||||||||||||||
Production taxes
|
2 | 35,624 | | 35,626 | |||||||||||||||
Transportation costs
|
578 | 10,002 | | 10,580 | |||||||||||||||
Gathering and marketing expense
|
| 2,173 | | 2,173 | |||||||||||||||
Exploration
|
21,340 | 17,902 | | 39,242 | |||||||||||||||
Depletion, depreciation and amortization
|
61,021 | 134,904 | | 195,925 | |||||||||||||||
Impairment of proved properties
|
| 977 | | 977 | |||||||||||||||
Impairment of unproved properties
|
9,997 | 7,781 | | 17,778 | |||||||||||||||
Stock compensation expense
|
2,753 | | | 2,753 | |||||||||||||||
General and administrative
|
5,648 | 16,487 | | 22,135 | |||||||||||||||
Total operating expenses
|
110,929 | 292,666 | | 403,595 | |||||||||||||||
Operating income (loss)
|
(57,614 | ) | 203,305 | | 145,691 | ||||||||||||||
Other income (expense):
|
|||||||||||||||||||
Interest expense
|
(44,838 | ) | (19 | ) | | (44,857 | ) | ||||||||||||
Interest income
|
176 | 334 | | 510 | |||||||||||||||
Loss on debt retirement
|
(920 | ) | | | (920 | ) | |||||||||||||
Other
|
41 | 457 | | 498 | |||||||||||||||
Income (loss) before income taxes
|
(103,155 | ) | 204,077 | | 100,922 | ||||||||||||||
Provision for income taxes:
|
|||||||||||||||||||
Current
|
| (12,407 | ) | | (12,407 | ) | |||||||||||||
Deferred
|
37,652 | (62,081 | ) | | (24,429 | ) | |||||||||||||
Total provision for income taxes
|
37,652 | (74,488 | ) | | (36,836 | ) | |||||||||||||
Net income before cumulative change in accounting
principle
|
(65,503 | ) | 129,589 | | 64,086 | ||||||||||||||
Preferred stock dividends
|
(3,573 | ) | | | (3,573 | ) | |||||||||||||
Cumulative effect of change in accounting
principle
|
1,765 | (5,179 | ) | | (3,414 | ) | |||||||||||||
Net income available to common stockholders
|
$ | (67,311 | ) | $ | 124,410 | $ | | $ | 57,099 | ||||||||||
20
WESTPORT RESOURCES CORPORATION
Parent | Subsidiary | ||||||||||||||||||
Company | Guarantors | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | |||||||||||||||||||
(Unaudited) | |||||||||||||||||||
Cash flows from operating activities:
|
|||||||||||||||||||
Net income (loss)
|
$ | (63,738 | ) | $ | 124,410 | $ | | $ | 60,672 | ||||||||||
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|||||||||||||||||||
Depletion, depreciation and amortization
|
61,021 | 134,904 | | 195,925 | |||||||||||||||
Exploration dry hole costs
|
14,021 | 12,311 | | 26,332 | |||||||||||||||
Impairment of proved properties
|
| 977 | | 977 | |||||||||||||||
Impairment of unproved properties
|
9,997 | 7,781 | | 17,778 | |||||||||||||||
Deferred income taxes
|
(37,652 | ) | 62,081 | | 24,429 | ||||||||||||||
Stock compensation expense
|
2,753 | | | 2,753 | |||||||||||||||
Change in fair value of derivatives
|
2,137 | | | 2,137 | |||||||||||||||
Amortization of deferred financing fees
|
908 | | | 908 | |||||||||||||||
Loss on sale of operating assets, net
|
(3 | ) | (6,484 | ) | | (6,487 | ) | ||||||||||||
Cumulative change in accounting principal, net of
tax
|
(1,765 | ) | 5,179 | | 3,414 | ||||||||||||||
Other
|
(133 | ) | | | (133 | ) | |||||||||||||
Changes in asset and liabilities, net of effects
of acquisitions:
|
|||||||||||||||||||
Decrease (increase) in accounts receivable
|
8,174 | (25,520 | ) | | (17,346 | ) | |||||||||||||
Decrease (increase) in prepaid expenses
|
1,744 | (3,672 | ) | | (1,928 | ) | |||||||||||||
Decrease in net derivative liabilities
|
(15,568 | ) | | | (15,568 | ) | |||||||||||||
Increase (decrease) in accounts payable
|
(9,336 | ) | 8,493 | | (843 | ) | |||||||||||||
Increase in ad valorem taxes payable
|
3 | 10,440 | | 10,443 | |||||||||||||||
Increase (decrease) in income taxes payable
|
| 10,991 | | 10,991 | |||||||||||||||
Increase (decrease) in accrued expenses
|
16,620 | 1,091 | | 17,711 | |||||||||||||||
Decrease in other liabilities
|
(36 | ) | (791 | ) | | (827 | ) | ||||||||||||
Net cash provided by (used in) operating
activities
|
(10,853 | ) | 342,191 | | 331,338 | ||||||||||||||
Cash flows from investing activities:
|
|||||||||||||||||||
Additions to property and equipment
|
(60,797 | ) | (133,740 | ) | | (194,537 | ) | ||||||||||||
Proceeds from sales of assets
|
3 | 13,349 | | 13,352 | |||||||||||||||
Decrease in intercompany receivable
|
| (152,977 | ) | 152,977 | | ||||||||||||||
Acquisitions of oil and gas properties
|
| 9,416 | | 9,416 | |||||||||||||||
Net cash provided by (used in) investing
activities
|
(60,794 | ) | (263,952 | ) | 152,977 | (171,769 | ) | ||||||||||||
Cash flows from financing activities:
|
|||||||||||||||||||
Proceeds from issuance of common stock
|
4,557 | | | 4,557 | |||||||||||||||
Repurchase of common stock
|
(106 | ) | | | (106 | ) | |||||||||||||
Proceeds from issuance of long-term debt
|
151,875 | | | 151,875 | |||||||||||||||
Repayment of long term debt
|
(226,311 | ) | | | (226,311 | ) | |||||||||||||
Preferred stock dividends paid
|
(3,572 | ) | | | (3,572 | ) | |||||||||||||
Loss on retirement of debt
|
(920 | ) | | | (920 | ) | |||||||||||||
Financing fees
|
(475 | ) | | | (475 | ) | |||||||||||||
Decrease in intercompany payable
|
152,977 | | (152,977 | ) | | ||||||||||||||
Net cash provided by (used in) financing
activities
|
78,025 | | (152,977 | ) | (74,952 | ) | |||||||||||||
Net increase in cash and cash equivalents
|
6,378 | 78,239 | | 84,617 | |||||||||||||||
Cash and cash equivalents, beginning of period
|
2,581 | 40,180 | | 42,761 | |||||||||||||||
Cash and cash equivalents, end of period
|
$ | 8,959 | $ | 118,419 | $ | | $ | 127,378 | |||||||||||
21
WESTPORT RESOURCES CORPORATION
Subsidiary | ||||||||||||||||||||
Parent Company | Guarantors | Eliminations | Consolidated | |||||||||||||||||
(In thousands) | ||||||||||||||||||||
ASSETS | ||||||||||||||||||||
Current Assets:
|
||||||||||||||||||||
Cash and cash equivalents
|
$ | 2,581 | $ | 40,180 | $ | | $ | 42,761 | ||||||||||||
Accounts receivable, net
|
27,880 | 45,669 | | 73,549 | ||||||||||||||||
Intercompany receivable
|
1,475,393 | | (1,475,393 | ) | | |||||||||||||||
Derivative assets
|
14,861 | | | 14,861 | ||||||||||||||||
Prepaid expenses
|
7,922 | 5,436 | | 13,358 | ||||||||||||||||
Total current assets
|
1,528,637 | 91,285 | (1,475,393 | ) | 144,529 | |||||||||||||||
Property and equipment, at cost:
|
||||||||||||||||||||
Oil and natural gas properties, successful
efforts method:
|
||||||||||||||||||||
Proved properties
|
339,947 | 1,798,524 | | 2,138,471 | ||||||||||||||||
Unproved properties
|
29,252 | 75,178 | | 104,430 | ||||||||||||||||
Field services assets
|
| 39,185 | | 39,185 | ||||||||||||||||
Building and other office furniture and equipment
|
620 | 9,066 | | 9,686 | ||||||||||||||||
369,819 | 1,921,953 | | 2,291,772 | |||||||||||||||||
Less accumulated depletion, depreciation and
amortization
|
(131,946 | ) | (353,383 | ) | | (485,329 | ) | |||||||||||||
Net property and equipment
|
237,873 | 1,568,570 | | 1,806,443 | ||||||||||||||||
Other assets:
|
||||||||||||||||||||
Long-term derivative assets
|
14,824 | | | 14,824 | ||||||||||||||||
Goodwill
|
| 246,712 | | 246,712 | ||||||||||||||||
Other assets
|
21,033 | | | 21,033 | ||||||||||||||||
Total other assets
|
35,857 | 246,712 | | 282,569 | ||||||||||||||||
Total assets
|
$ | 1,802,367 | $ | 1,906,567 | $ | (1,475,393 | ) | $ | 2,233,541 | |||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||||
Current Liabilities:
|
||||||||||||||||||||
Accounts payable
|
$ | 15,301 | $ | 35,857 | $ | | $ | 51,158 | ||||||||||||
Accrued expenses
|
23,354 | 15,855 | | 39,209 | ||||||||||||||||
Ad valorem taxes payable
|
(2 | ) | 8,990 | | 8,988 | |||||||||||||||
Intercompany payable
|
| 1,475,393 | (1,475,393 | ) | | |||||||||||||||
Derivative liabilities
|
56,156 | | | 56,156 | ||||||||||||||||
Income taxes payable
|
| 86 | | 86 | ||||||||||||||||
Other current liabilities
|
| | | | ||||||||||||||||
Total current liabilities
|
94,809 | 1,536,181 | (1,475,393 | ) | 155,597 | |||||||||||||||
Long-term debt
|
799,358 | | | 799,358 | ||||||||||||||||
Deferred income taxes
|
(13,361 | ) | 137,891 | | 124,530 | |||||||||||||||
Long-term derivative liabilities
|
21,305 | | | 21,305 | ||||||||||||||||
Other liabilities
|
| 745 | | 745 | ||||||||||||||||
Total liabilities
|
902,111 | 1,674,817 | (1,475,393 | ) | 1,101,535 | |||||||||||||||
Stockholders equity:
|
||||||||||||||||||||
Preferred stock
|
29 | | | 29 | ||||||||||||||||
Common stock
|
668 | 3 | (3 | ) | 668 | |||||||||||||||
Additional paid-in capital
|
951,189 | 199,153 | 3 | 1,150,345 | ||||||||||||||||
Treasury stock
|
(469 | ) | | | (469 | ) | ||||||||||||||
Retained earnings
|
(32,753 | ) | 32,755 | | 2 | |||||||||||||||
Accumulated other comprehensive income
|
(18,408 | ) | (161 | ) | | (18,569 | ) | |||||||||||||
Total stockholders equity
|
900,256 | 231,750 | | 1,132,006 | ||||||||||||||||
Total liabilities and stockholders equity
|
$ | 1,802,367 | $ | 1,906,567 | $ | (1,475,393 | ) | $ | 2,233,541 | |||||||||||
22
WESTPORT RESOURCES CORPORATION
Subsidiary | |||||||||||||||||||
Parent Company | Guarantors | Eliminations | Consolidated | ||||||||||||||||
(In thousands) | |||||||||||||||||||
(Unaudited) | |||||||||||||||||||
Operating revenues:
|
|||||||||||||||||||
Oil and natural gas sales
|
$ | 52,007 | $ | 242,605 | $ | | $ | 294,612 | |||||||||||
Hedge settlements
|
1,509 | | | 1,509 | |||||||||||||||
Non-hedge settlements
|
822 | | | 822 | |||||||||||||||
Non-hedge change in fair value of derivatives
|
(8,885 | ) | | | (8,885 | ) | |||||||||||||
Loss on sale of operating assets, net
|
| (1,731 | ) | | (1,731 | ) | |||||||||||||
Net revenues
|
45,453 | 240,874 | | 286,327 | |||||||||||||||
Operating costs and expenses:
|
|||||||||||||||||||
Lease operating expense
|
10,306 | 57,075 | | 67,381 | |||||||||||||||
Production taxes
|
4 | 16,841 | | 16,845 | |||||||||||||||
Transportation costs
|
202 | 5,750 | | 5,952 | |||||||||||||||
Exploration
|
14,264 | 7,374 | | 21,638 | |||||||||||||||
Depletion, depreciation and amortization
|
32,014 | 115,052 | | 147,066 | |||||||||||||||
Impairment of unproved properties
|
2,182 | 6,896 | | 9,078 | |||||||||||||||
Stock compensation expense
|
1,954 | | | 1,954 | |||||||||||||||
General and administrative
|
4,501 | 12,578 | | 17,079 | |||||||||||||||
Total operating expenses
|
65,427 | 221,566 | | 286,993 | |||||||||||||||
Operating income
|
(19,974 | ) | 19,308 | | (666 | ) | |||||||||||||
Other income (expense):
|
|||||||||||||||||||
Interest expense
|
(23,663 | ) | (228 | ) | | (23,891 | ) | ||||||||||||
Interest income
|
100 | 273 | | 373 | |||||||||||||||
Change in fair value of interest rate swap
|
| 226 | | 226 | |||||||||||||||
Other
|
462 | 35 | | 497 | |||||||||||||||
Income before income taxes
|
(43,075 | ) | 19,614 | | (23,461 | ) | |||||||||||||
Provision for income taxes:
|
|||||||||||||||||||
Current
|
| | | | |||||||||||||||
Deferred
|
15,722 | (7,159 | ) | | 8,563 | ||||||||||||||
Total provision for income taxes
|
15,722 | (7,159 | ) | | 8,563 | ||||||||||||||
Net income
|
(27,353 | ) | 12,455 | | (14,898 | ) | |||||||||||||
Preferred stock dividends
|
(3,572 | ) | | | (3,572 | ) | |||||||||||||
Net loss available to common stock
|
$ | (30,925 | ) | $ | 12,455 | $ | | $ | (18,470 | ) | |||||||||
23
WESTPORT RESOURCES CORPORATION
Parent | Subsidiary | |||||||||||||||||||
Company | Guarantors | Eliminations | Consolidated | |||||||||||||||||
(In thousands) | ||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||
Cash flows from operating activities:
|
||||||||||||||||||||
Net income (loss)
|
$ | (27,353 | ) | $ | 12,455 | $ | | $ | (14,898 | ) | ||||||||||
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||||||||||
Depletion, depreciation and amortization
|
32,014 | 115,052 | | 147,066 | ||||||||||||||||
Exploration dry hole costs
|
7,102 | 5,257 | | 12,359 | ||||||||||||||||
Impairment of unproved properties
|
2,182 | 6,896 | | 9,078 | ||||||||||||||||
Deferred income taxes
|
(15,722 | ) | 7,159 | | (8,563 | ) | ||||||||||||||
Stock compensation expense
|
1,954 | | | 1,954 | ||||||||||||||||
Change in fair value of derivatives
|
8,992 | | | 8,992 | ||||||||||||||||
Amortization of derivative liabilities
|
(7,187 | ) | | | (7,187 | ) | ||||||||||||||
Amortization of financing fees
|
782 | | | 782 | ||||||||||||||||
Loss on sale of operating assets, net
|
| 1,731 | | 1,731 | ||||||||||||||||
Other
|
20 | | | 20 | ||||||||||||||||
Changes in asset and liabilities, net of effects
of Acquisitions:
|
||||||||||||||||||||
Decrease (increase) in accounts receivable
|
(701 | ) | 18,594 | | 17,893 | |||||||||||||||
Increase in prepaid expenses
|
(1,145 | ) | (1,074 | ) | | (2,219 | ) | |||||||||||||
Decrease in accounts payable
|
(626 | ) | (14,510 | ) | | (15,136 | ) | |||||||||||||
Increase (decrease) in ad valorem taxes payable
|
(1 | ) | 2,162 | | 2,161 | |||||||||||||||
Decrease in income taxes payable
|
| (44 | ) | | (44 | ) | ||||||||||||||
Increase in accrued expenses
|
1,798 | 4,871 | | 6,669 | ||||||||||||||||
Decrease in other liabilities
|
| (818 | ) | | (818 | ) | ||||||||||||||
Net cash provided by (used in) operating
activities
|
2,109 | 157,731 | | 159,840 | ||||||||||||||||
Cash flows from investing activities:
|
||||||||||||||||||||
Additions to property and equipment
|
(48,491 | ) | (56,427 | ) | | (104,918 | ) | |||||||||||||
Proceeds from sale of assets
|
| 10,552 | | 10,552 | ||||||||||||||||
Increase in intercompany receivable
|
(66,984 | ) | | 66,984 | | |||||||||||||||
Acquisitions of oil and gas properties
|
(328 | ) | (168,200 | ) | | (168,528 | ) | |||||||||||||
Other
|
| (81 | ) | | (81 | ) | ||||||||||||||
Net cash used in investing activities
|
(115,803 | ) | (214,156 | ) | 66,984 | (262,975 | ) | |||||||||||||
Cash flows from financing activities:
|
||||||||||||||||||||
Proceeds from issuance of common stock
|
1,074 | | | 1,074 | ||||||||||||||||
Repurchase of common stock
|
(61 | ) | | | (61 | ) | ||||||||||||||
Proceeds from long-term debt
|
155,000 | | | 155,000 | ||||||||||||||||
Repayment of long term debt
|
(45,000 | ) | | | (45,000 | ) | ||||||||||||||
Preferred stock dividend
|
(3,572 | ) | | | (3,572 | ) | ||||||||||||||
Gain on interest rate swap cancellation
|
3,705 | | | 3,705 | ||||||||||||||||
Financing fees
|
(322 | ) | | | (322 | ) | ||||||||||||||
Increase in intercompany payable
|
| 66,984 | (66,984 | ) | | |||||||||||||||
Net cash provided by (used in) financing
activities
|
110,824 | 66,984 | (66,984 | ) | 110,824 | |||||||||||||||
Net increase in cash and cash equivalents
|
(2,870 | ) | 10,559 | | 7,689 | |||||||||||||||
Cash and cash equivalents, beginning of period
|
13,804 | 13,780 | | 27,584 | ||||||||||||||||
Cash and cash equivalents, end of period
|
$ | 10,934 | $ | 24,339 | $ | | $ | 35,273 | ||||||||||||
24
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
General
The following information should be read in conjunction with our historical consolidated financial statements and related notes and other financial information included elsewhere in this report.
Critical Accounting Policies And Estimates
Our discussion and analysis of our financial condition and results of operation is based upon consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note 1 to our consolidated financial statements as set forth in our Annual Report on Form 10-K for the year ended December 31, 2002. In response to SEC Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates, including those related to oil and gas revenues, oil and gas properties, fair value of derivative instruments, income taxes and contingencies and litigation, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
| Revenue Recognition. We follow the sales method of accounting for oil and natural gas revenues. Under this method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. No receivables, payables or unearned revenue are recorded unless a working interest owners aggregate sales from the property exceed its share of the total reserves-in-place. If such a situation arises, the parties would likely cash balance. | |
| Successful Efforts Accounting. We account for our oil and natural gas operations using the successful efforts method of accounting. Under this method, all costs associated with property acquisition, successful exploratory wells and all development wells are capitalized. Items charged to expense generally include geological and geophysical costs, costs of unsuccessful exploratory wells and oil and natural gas production costs. All of our oil and natural gas properties are located within the continental United States, the Gulf of Mexico and Canada. | |
| Proved Reserve Estimates. Estimates of our proved reserves are prepared in accordance with SEC guidelines. The accuracy of a reserve estimate is a function of: |
| the quality and quantity of available data; | |
| the interpretation of that data; | |
| the accuracy of various mandated economic assumptions; and | |
| the judgment of the persons preparing the estimate. |
Our proved reserve information included in this report is based on estimates prepared by Ryder Scott Company L.P. and our engineering staff. Estimates prepared by others may be higher or lower than our estimates.
Because these estimates depend on many assumptions, all of which may substantially differ from actual results, reserve estimates may be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate.
Our stockholders should not assume that the present value of future net cash flows is the current market value of our estimated proved reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from proved reserves on prices and costs as of the date of the
25
Our estimates of proved reserves directly impact depletion expense. If the estimates of proved reserves decline, the rate at which we record depletion expense increases, reducing net income. Such a decline may result from lower market prices or increases in costs, which may make it uneconomic to drill for and produce higher cost fields, or from poor property performance. In addition, the decline in proved reserve estimates may impact the outcome of our assessment of our oil and gas producing properties for impairment.
| Impairment of Proved Oil and Gas Properties. We review our long-lived proved properties to be held and used whenever management judges that events or circumstances indicate that the recorded carrying value of the properties may not be recoverable. Management assesses whether or not an impairment provision is necessary based upon managements outlook of future commodity prices and net cash flows that may be generated by the properties. Proved oil and gas properties are reviewed for impairment on a field-by-field basis, which is the lowest level at which depletion of proved properties is calculated. | |
| Impairment of Goodwill. Goodwill of a reporting unit is tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Management assesses whether or not an impairment provision is necessary based upon comparing the fair value of a reporting unit with its carrying value including goodwill. The factors used to determine fair value include estimates of reserves, future commodity prices, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected future cash flows. Management has chosen to use the traditional present value approach to determine the fair value as opposed to the expected present value method. In the traditional present value approach, a single set of estimated cash flows and a single interest rate (commensurate with the risk) are used to estimate fair value. In the expected present value approach, multiple cash flow scenarios reflecting the range of possible outcomes and a risk-free rate are used to estimate fair value. Using the expected present value method could result in different (and possibly higher) impairment charges than those calculated using the traditional present value method. | |
| Impairment of Unproved Oil and Gas Properties. Management periodically assesses individually significant unproved oil and gas properties for impairment, on a project-by-project basis. Managements assessment of the results of exploration activities, commodity price outlooks, planned future sales or expiration of all or a portion of such projects impact the amount and timing of impairment provisions. | |
| Commodity Derivative Instruments and Hedging Activities. We periodically enter into commodity derivative contracts and fixed-price physical contracts to manage our exposure to oil and natural gas price volatility. We primarily utilize basis swaps, price swaps, futures contracts or collars, which are generally placed with major financial institutions or with counterparties of high credit quality that we believe are minimal credit risks. The oil and natural gas reference prices of these commodity derivatives contracts are based upon crude oil and natural gas futures, which have a high degree of historical correlation with actual prices we receive. On January 1, 2001, we adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Under SFAS No. 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivatives fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the income statement. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current expense or income in the |
26
consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts can be utilized as an effective component of CPRM activities. | ||
| Asset Retirement Obligations. We computed the asset retirement obligation in accordance with SFAS No. 143, Accounting of Asset Retirement Obligations. SFAS No. 143 requires us to record the fair value of liabilities for retirement obligations of long-lived assets. Our asset retirement obligations arise from the plugging and abandonment liabilities for our oil and gas wells and offshore platform facilities. We estimated our liability based on the best information available to us at this time. Revisions to the liability could occur due to changes in actual plugging and abandonment costs. | |
| Valuation of Deferred Tax Assets. We computed income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset liability approach which results in the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities. SFAS No. 109 also requires the recording of a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. |
Recent Accounting Developments
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses accounting and reporting for business combinations and is effective for all business combinations initiated after June 30, 2001. SFAS No. 142 addresses the accounting and reporting for acquired goodwill and other intangible assets.
A reporting issue has arisen regarding the application of certain provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive industries, including oil and natural gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights associated with extracting oil and natural gas as intangible assets in the balance sheet, apart from other capitalized oil and natural gas property costs, and to provide specific footnote disclosures. Historically, we have included the costs of mineral/ drilling rights associated with extracting oil and natural gas as tangible assets and as a component of oil and natural gas properties. If it is ultimately determined that SFAS No. 142 requires oil and natural gas companies to classify costs of mineral rights associated with extracting oil and natural gas as a separate intangible asset line item on the balance sheet, we would be required to reclassify the amounts as follows:
September 30, | December 31, | |||||||||
2003 | 2002 | |||||||||
INTANGIBLE ASSETS:
|
||||||||||
Proved leasehold acquisition costs
|
$ | 1,130,566,094 | $ | 1,089,490,035 | ||||||
Unproved leasehold acquisition costs
|
93,696,642 | 104,430,055 | ||||||||
Total leasehold acquisition costs
|
1,224,262,736 | 1,193,920,090 | ||||||||
Less accumulated depletion
|
(214,847,596 | ) | (168,081,488 | ) | ||||||
Net leasehold acquisition costs
|
$ | 1,009,415,140 | $ | 1,025,838,602 | ||||||
Our cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with SFAS No. 144. Further, we do not believe the classification of the costs of mineral rights associated with extracting oil and natural gas as intangible assets would have any impact on our compliance with covenants under our debt agreements.
Overview
We are an independent energy company engaged in oil and natural gas exploitation, acquisition and exploration activities primarily in the United States. Our reserves and production operations are concentrated in the following diversified divisions: Northern (Rocky Mountains); Western (Uinta Basin); Southern (Permian Basin, Mid-Continent and Gulf Coast) and Gulf of Mexico (offshore). We focus on
27
Our results of operations are significantly impacted by the prices of oil and natural gas, which are volatile. The prices we receive for our oil vary from NYMEX prices based on the location and quality of the crude oil. The prices we receive for our natural gas are based on Henry Hub prices reduced by transportation expenses, regional basis differentials and processing fees.
Oil and natural gas production costs are composed of lease operating expense, production taxes and transportation costs. Lease operating expense consists of pumpers salaries, utilities, maintenance, workovers and other costs necessary to operate our producing properties. In general, lease operating expense per unit of production is lower on our offshore properties and does not fluctuate proportionately with our production. Production taxes are assessed by applicable taxing authorities as a percentage of revenues. However, properties located in Federal waters offshore are generally not subject to production taxes. Transportation costs are comprised of costs paid to a carrier to deliver oil or natural gas to a specified delivery point. In some cases we receive a payment from the purchasers of our oil and natural gas, which is net of gas transportation costs and in other instances we pay the costs of transportation.
Exploration expense consists of geological and geophysical costs, delay rentals and the cost of unsuccessful exploratory wells. Delay rentals are typically fixed in nature in the short term. However, other exploration costs are generally discretionary and exploration activity levels are determined by a number of factors, including oil and natural gas prices, availability of funds, quantity and character of investment projects, availability of service providers and competition.
Depletion of capitalized costs of producing oil and natural gas properties is computed using the units-of-production method based upon proved reserves. For purposes of computing depletion, proved reserves are redetermined twice each year. Because the economic life of each producing well depends upon the assumed price for production, fluctuations in oil and natural gas prices impact the level of proved reserves. Higher prices generally have the effect of increasing reserves, which reduces depletion, while lower prices generally have the effect of decreasing reserves, which increases depletion.
We assess our proved properties on a field-by-field basis for impairment, in accordance with the provisions of SFAS No. 144, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of, whenever events or circumstances indicate that the capitalized costs of oil and natural gas properties may not be recoverable. We estimate the expected future cash flows of our oil and gas properties on a field-by-field basis and compare such future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the oil and gas properties to fair value. The factors used to determine fair value include estimates of reserves, future commodity prices, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected future cash flows. Future changes on any of the above referenced factors could result in us recording proved property impairment charges in future periods. Management has chosen to use the traditional present value approach to determine the fair value as opposed to the expected present value method. In the traditional present value approach, a single set of estimated cash flow and a single interest rate (commensurate with the risk) are used to estimate fair value. In the expected present value approach, multiple cash flow scenarios reflecting the range of possible outcomes and a risk-free rate are used to estimate fair value. Using the expected present value method could result in different (and possibly higher) amounts for property impairments than those calculated using the traditional present value method.
We periodically assess our unproved properties to determine if any such properties require any impairment. Factors leading to recording unproved impairments include lease expirations and an assessment of the lack of exploration opportunities existing on a lease. Such assessment is based on, among other things, the fair value of properties located in the same area as the unproved property and our intent to pursue additional exploration opportunities on such property. Future changes in any of the above referenced factors could result in us recording unproved property impairment charges in future periods.
28
Stock compensation expense consists of non-cash charges resulting from the application of the provisions of FASB Interpretation No. 44 (FIN 44) to certain stock options granted to employees and issuance of restricted stock to certain employees. Under FIN 44 we are required to measure compensation cost on stock options that are considered to be variable awards until the date of exercise, forfeiture or expiration of such options. Compensation cost is measured for the amount of any increases in our stock price and recognized over the remaining vesting period of the options. Any decrease in our stock price will be recognized as a decrease in compensation cost limited to the amount of compensation cost previously recognized as a result of an increase in our stock price.
General and administrative expenses consist primarily of salaries and related benefits, office rent, legal fees, consultants, systems costs and other administrative costs incurred in our Denver, Dallas, Houston and other offices. While we expect such costs to increase with our growth, we expect such increases to be proportionately smaller than our production growth.
Basis of Presentation
On August 21, 2001, the stockholders of Belco approved an agreement and plan of merger, dated as of June 8, 2001, between Belco and Old Westport. Pursuant to this agreement, Old Westport was merged with and into Belco, with Belco surviving and changing its name to Westport Resources Corporation. The merger was accounted for as a purchase transaction for financial accounting purposes with Westport as the surviving accounting entity. Westport began consolidating the results of Belco with its results as of the August 21, 2001 closing date.
On March 1, 2002 we purchased producing oil and natural gas properties located in the Williston Basin in North Dakota and Montana for approximately $39 million. We operate over 70% of these properties. Operations from the properties were included in our results starting on March 1, 2002.
On September 30, 2002, we acquired oil and natural gas properties located in Southeast Texas for a total cash purchase price of approximately $122 million. We operate substantially all of these properties. Operations from the properties were included in our results starting on October 1, 2002.
On December 17, 2002, we acquired producing properties, undeveloped leasehold, gathering and compression facilities and other related assets in the Greater Natural Buttes area of Uintah County, Utah from certain affiliates of El Paso Corporation for approximately $507 million, subject to certain purchase price adjustments (the El Paso Acquisition). The Western Division is comprised substantially of these properties. Operations from these properties were included in our results starting on December 17, 2002.
Results of Operations
The following table sets forth certain operational data for the periods presented:
Summary Data
For the Three Months | For the Nine Months | ||||||||||||||||
Ended September 30, | Ended September 30, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(In thousands) | |||||||||||||||||
Production
|
|||||||||||||||||
Oil (Mbbls)
|
2,041 | 2,002 | 6,028 | 5,899 | |||||||||||||
Natural gas (Mmcf)
|
29,949 | 19,244 | 86,503 | 59,873 | |||||||||||||
Mmcfe
|
42,195 | 31,256 | 122,671 | 95,267 | |||||||||||||
Average Daily Production
|
|||||||||||||||||
Oil (Mbbls/d)
|
22.2 | 21.8 | 22.1 | 21.6 | |||||||||||||
Natural gas (Mmcf/d)
|
325.5 | 209.2 | 316.9 | 219.3 | |||||||||||||
Mmcfe/d
|
458.6 | 339.7 | 449.3 | 349.0 |
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For the Three Months | For the Nine Months | ||||||||||||||||
Ended September 30, | Ended September 30, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
(In thousands) | |||||||||||||||||
Average Prices
|
|||||||||||||||||
Oil (per bbl)
|
$ | 28.68 | $ | 26.06 | $ | 29.11 | $ | 22.92 | |||||||||
Natural gas (per Mcf)
|
4.78 | 2.77 | 5.09 | 2.66 | |||||||||||||
Price (per Mcfe)
|
4.78 | 3.37 | 5.02 | 3.09 | |||||||||||||
Hedging effect (per bbl)
|
(2.45 | ) | (.59 | ) | (3.17 | ) | 0.11 | ||||||||||
Hedging effect (per Mcf)
|
(0.57 | ) | (.03 | ) | (0.77 | ) | 0.01 | ||||||||||
Hedging effect (per Mcfe)
|
(0.52 | ) | (.06 | ) | (0.70 | ) | 0.02 | ||||||||||
Oil and natural gas sales
|
$ | 201,701 | $ | 105,423 | $ | 615,704 | $ | 294,612 | |||||||||
Lease operating expense
|
24,038 | 23,477 | 76,406 | 67,381 | |||||||||||||
Per Mcfe
|
0.57 | 0.75 | 0.62 | 0.71 | |||||||||||||
Production taxes
|
11,204 | 5,209 | 35,626 | 16,845 | |||||||||||||
Per Mcfe
|
0.27 | 0.17 | 0.29 | 0.18 | |||||||||||||
Transportation costs
|
3,202 | 2,179 | 10,580 | 5,952 | |||||||||||||
Per Mcfe
|
0.08 | 0.07 | 0.09 | 0.06 | |||||||||||||
General and administrative costs
|
7,364 | 5,650 | 22,135 | 17,079 | |||||||||||||
Per Mcfe
|
0.17 | 0.18 | 0.18 | 0.18 | |||||||||||||
Depletion, depreciation and amortization
|
67,824 | 47,686 | 195,925 | 147,066 | |||||||||||||
Per Mcfe
|
1.61 | 1.53 | 1.60 | 1.54 |
The discussion below includes a comparison of our results of operations for the three months and nine months ended September 30, 2003 and 2002, respectively.
Revenues. Oil and natural gas revenues for the three months ended September 30, 2003 increased by $96.3 million, or 91%, from $105.4 million to $201.7 million, compared to the three months ended September 30, 2002. Production from the acquired El Paso and Southeast Texas properties accounted for $51.8 million of the increase. The majority of the remaining increase in oil and natural gas revenues was due to increases of 10% and 73% in realized oil and natural gas prices, respectively, excluding the effects of hedging. Production volumes increased by 10.9 Bcfe, or 35%, from 31.3 Bcfe for the three months ended September 30, 2002 to 42.2 Bcfe for the three months ended September 30, 2003. Acquired El Paso and Southeast Texas properties accounted for 10.7 Bcfe of the increase. Approximately 0.9 Bcfe of the increase was attributable to a reversionary interest on certain Gulf of Mexico interests that were farmed out. Because of the terms of the farm out agreement, we do not anticipate recording more than 0.3 Bcfe per quarter related to this farmout in the future. Production volumes also increased due to drilling activity since September 30, 2002, which was offset by oil and natural gas production declines on existing wells. Hedging transactions decreased oil and natural gas revenues by $22.1 million, or $0.52 per Mcfe, for the three months ended September 30, 2003, and decreased oil and natural gas revenues by $1.8 million, or $0.06 per Mcfe, for the three months ended September 30, 2002. We typically hedge between 20% and 40% of our expected production one to two years into the future. We currently have approximately 60-70% of our expected 2003 production hedged to protect cash flow and return expectations on significant assets we acquired in late 2002.
Oil and natural gas revenues for the nine months ended September 30, 2003 increased by $321.1 million, or 109%, from $294.6 million to $615.7 million, compared to the nine months ended September 30, 2002. Production from the acquired El Paso, Southeast Texas and Williston Basin properties accounted for $150.6 million of the increase. The majority of the remaining increase in oil and natural gas revenues was due to increases of 27% and 91% in realized oil and natural gas prices, respectively, excluding the effects of hedging. Production volumes increased by 27.4 Bcfe, or 29%, from 95.3 Bcfe for the nine months ended September 30, 2002 to 122.7 Bcfe for the nine months ended September 30, 2003. Acquired El Paso, Southeast Texas and Williston Basin properties accounted for 30.1 Bcfe of the increase. Production volumes also increased due to drilling activity since September 30,
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Commodity Price Risk Management Activities. We recorded a gain of $4.8 million in the non-hedge change in fair value of derivatives for the three months ended September 30, 2003, compared to a $0.7 million loss for the three months ended September 30, 2002. We recorded a gain of $1.3 million in non-hedge settlements of derivatives for the three months ended September 30, 2003, as compared to nothing for the three months ended September 30, 2002. The gains and losses relate to settlements of derivatives and changes in fair value of derivatives that under SFAS No. 133 do not qualify for hedge accounting or were not originally designated as hedges plus any ineffectiveness related to our hedges.
We recorded a gain of $8.0 million in the non-hedge change in fair value of derivatives for the nine months ended September 30, 2003, compared to an $8.9 million loss for the nine months ended September 30, 2002. We recorded a gain of $2.0 million in non-hedge settlements of derivatives for the nine months ended September 30, 2003, as compared to a gain of $0.8 million for the nine months ended September 30, 2002. The gains and losses relate to settlements of derivatives and changes in fair value of derivatives that under SFAS No. 133 do not qualify for hedge accounting or were not originally designated as hedges plus any ineffectiveness related to our hedges.
Gain (Loss) on Sale of Operating Assets, Net. For the three months ended September 30, 2003 and 2002, we recorded net gains of $21,000 and $137,000, respectively, on sales of non-core onshore operating assets.
For the nine months ended September 30, 2003 and 2002, we recorded a net gain of $6.5 million and a net loss of $1.7 million, respectively, on sales of non-core onshore operating assets.
Gathering Income/ Expense. On December 17, 2002, as part of the El Paso Acquisition, we purchased gathering and compression facilities in the Greater Natural Buttes area in Utah. For the quarter ended September 30, 2003, we reported $1.1 million of gathering income and $0.5 million of gathering expense, or a margin of $0.6 million. The gathering income reflected in the consolidated statement of operations relates only to third-party natural gas flowing through our system. Intercompany sales of $1.7 million have been eliminated in our consolidated financial statements.
For the nine months ended September 30, 2003, we reported $3.1 million of gathering income and $2.2 million of gathering expense, or a margin of $0.9 million. The gathering income reflected in the consolidated statement of operations relates only to third-party natural gas flowing through our system. Intercompany sales of $4.7 million have been eliminated in our consolidated financial statements. In addition, for the nine months ended September 30, 2003, gathering income and expense includes marketing revenue of $740,000 and marketing expense of $679,000, or a margin of $61,000 which primarily occurred in the first quarter of 2003. We do not expect to continue to engage in these marketing activities.
Lease Operating Expense. Lease operating expense for the three months ended September 30, 2003 increased by $0.5 million, or 2%, from $23.5 million to $24.0 million, compared to the three months ended September 30, 2002. Lease operating expenses from the acquired El Paso and Southeast Texas properties accounted for $3.7 million of the increase. The increase in lease operating expenses was partially offset by a decrease in workovers of $2.3 million for the three months ended September 30, 2003, as compared to the three months ended September 30, 2002. On a per Mcfe basis, lease operating expense decreased from $0.75 to $0.57 from the 2002 to 2003 periods, respectively. The decrease on a per Mcfe basis was primarily due to a $0.07 per Mcfe decrease in workover activity in the Gulf of Mexico, Southern and Northern Divisions, compared to workovers performed during the comparable period of 2002. In addition, the El Paso natural gas properties located in the Western Division, which were acquired in December 2002, have lower lease operating costs per Mcfe than the properties in our other divisions.
Lease operating expense for the nine months ended September 30, 2003 increased by $9.0 million, or 13%, from $67.4 million to $76.4 million, compared to the nine months ended September 30, 2002. Lease operating expenses from the acquired El Paso, Southeast Texas and Williston Basin properties accounted
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Production Taxes. Production taxes for the three months ended September 30, 2003 increased by $6.0 million, or 115%, from $5.2 million to $11.2 million, compared to the three months ended September 30, 2002. Production taxes from the acquired El Paso and Southeast Texas properties accounted for $3.9 million of the increase. The remaining increase was primarily due to the increase in oil and natural gas prices. As a percent of sales, production taxes were 6% and 5% for the three months ended September 30, 2003 and 2002, respectively. On a per Mcfe basis, production taxes increased from $0.17 to $0.27 for the three months ended September 30, 2002 and 2003, respectively. The increase in production taxes on a per Mcfe basis was primarily due to the increase in oil and natural gas prices and the acquired onshore El Paso and Southeast Texas properties.
Production taxes for the nine months ended September 30, 2003 increased by $18.8 million, or 111%, from $16.8 million to $35.6 million, compared to the nine months ended September 30, 2002. Production taxes from the acquired El Paso, Southeast Texas and Williston Basin properties accounted for $12.4 million of the increase. The remaining increase was primarily due to the increase in oil and natural gas prices. Production taxes were 6% of sales in both of the nine months ended September 30, 2003 and 2002, respectively. On a per Mcfe basis, production taxes increased from $0.18 to $0.29 in the nine months ended September 30, 2002 and 2003, respectively. The increase in production taxes on a per Mcfe basis was primarily due to the increase in oil and natural gas prices and the acquired onshore El Paso, Southeast Texas and Williston Basin properties.
Transportation Costs. Transportation costs for the three months ended September 30, 2003 increased by $1.0 million, or 47%, from $2.2 million to $3.2 million, compared to the three months ended September 30, 2002. The acquired El Paso and Southeast Texas properties accounted for an increase of $0.9 million.
Transportation costs for the nine months ended September 30, 2003 increased by $4.6 million, or 78%, from $6.0 million to $10.6 million, compared to the nine months ended September 30, 2002. The acquired El Paso and Southeast Texas properties accounted for an increase of $3.8 million.
Exploration Costs. Exploration costs for the three months ended September 30, 2003 increased by $10.0 million, or 277%, from $3.6 million to $13.6 million, compared to the three months ended September 30, 2002. Exploration costs for the nine months ended September 30, 2003 increased by $17.6 million, or 81%, from $21.6 million to $39.2 million, compared to the nine months ended September 30, 2002. Exploration costs for the three and nine months ended September 30, 2003 and 2002, respectively, are presented in the table below.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
(In thousands) | ||||||||||||||||
Geological and geophysical costs
|
$ | 1,605 | $ | 358 | $ | 10,934 | $ | 7,024 | ||||||||
Unsuccessful property acquisitions
|
14 | 76 | 30 | 333 | ||||||||||||
Delay rentals
|
548 | 598 | 1,946 | 1,922 | ||||||||||||
Exploratory dry holes costs
|
11,404 | 2,564 | 26,332 | 12,359 | ||||||||||||
$ | 13,571 | $ | 3,596 | $ | 39,242 | $ | 21,638 |
The majority of the geological and geophysical costs pertain to the purchase of 3-D seismic data in the Southern Division for the three months ended September 30, 2003. For the three months ended
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For the nine months ended September 30, 2003, the geological and geophysical costs represent 3-D seismic data purchased in the Gulf of Mexico and Southern Divisions. For the nine months ended September 30, 2002, the geological and geophysical costs primarily relate to 3-D seismic data purchased in the Gulf of Mexico. Dry hole costs for the nine months ended September 30, 2003 resulted from five high cost unsuccessful exploratory wells drilled in the Gulf of Mexico, five in Texas, two in Wyoming and one each in Colorado and North Dakota. Dry hole costs for the nine months ended September 30, 2002 resulted from five unsuccessful exploratory wells drilled in the Gulf of Mexico and two onshore.
Depletion, Depreciation and Amortization (DD&A) Expense. DD&A expense increased $20.1 million for the three months ended September 30, 2003, from $47.7 million to $67.8 million, compared to the three months ended September 30, 2002. Depletion related to the acquired El Paso and Southeast Texas properties caused DD&A expense to increase $13.7 million. The remaining increase was primarily attributable to a loss of reserve volumes in the West Cameron 180/198 complex causing an increase in DD&A. On a per Mcfe basis, DD&A expense increased from $1.53 to $1.61 in the 2002 and 2003 periods, respectively. The increase was primarily due to the loss of reserve volumes in the West Cameron 180/198 complex.
DD&A expense increased $48.8 million for the nine months ended September 30, 2003, from $147.1 million to $195.9 million, compared to the nine months ended September 30, 2002. Depletion related to the acquired El Paso, Southeast Texas and Williston Basin properties caused DD&A expense to increase $38.5 million. The remaining increase was primarily attributable to a loss of reserve volumes in the West Cameron 180/198 complex causing an increase in the DD&A rate. On a per Mcfe basis, DD&A expense increased from $1.54 to $1.60 in the 2002 and 2003 periods, respectively. The increase was primarily due to the loss of reserve volumes in the West Cameron 180/198 complex.
Impairment of Proved Properties. No proved property impairments were recognized during the three-month periods ended September 30, 2003 or 2002 or the nine month period ended September 30, 2002. During the nine month period ended September 30, 2003, we recognized proved property impairments of $1.0 million. In the Gulf of Mexico, Southern and Northern Divisions we recorded impairments of $0.7 million, $0.2 million and $0.1 million, respectively, as a result of declines in oil and natural gas reserve values due to reserve volume reductions in underperforming fields.
Impairment of Unproved Properties. During the three month period ended September 30, 2003, we recognized unproved property impairments of $2.6 million due to expired leases and from an assessment of the lack of exploration opportunities existing on such properties. In the Gulf of Mexico, Northern and Southern Divisions we recorded impairments of $0.5 million, $1.0 million and $1.1 million, respectively. During the three months ended September 30, 2002, we recognized unproved property impairments of $2.8 million. The impairments consisted of $2.0 million and $0.8 million recorded in the Gulf of Mexico and Northern Divisions, respectively.
During the nine months ended September 30, 2003, we recognized unproved property impairments of $17.8 million due to expired leases and from an assessment relating to the lack of exploration opportunities existing on such properties. In the Gulf of Mexico, Northern and Southern Divisions we recorded impairments of $12.2 million, $3.0 million and $2.6 million, respectively. During the nine months ended September 30, 2002, we recognized unproved property impairments of $9.1 million. The impairments consisted of $3.9 million, $2.1 million and $3.1 million recorded in the Northern, Southern and Gulf of Mexico Divisions, respectively.
Stock Compensation Expense. During the three months ended September 30, 2003, we recorded $0.5 million of stock compensation expense related to certain stock options as a result of applying FIN 44 and recorded $0.1 million in expense related to the issuance of restricted stock. During the three months ended September 30, 2002, we reduced stock compensation expense related to certain stock options
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During the nine months ended September 30, 2003, we recorded $2.7 million of stock compensation expense related to certain stock options as a result of applying FIN 44 and recorded $0.1 million in expense related to the issuance of restricted stock. During the nine months ended September 30, 2002, we recorded $1.8 of stock compensation expense as a result of applying FIN 44 and recorded $0.2 million in expense related to the issuance of restricted stock.
General and Administrative (G&A) Expense. G&A expense increased $1.7 million, or 30%, for the three months ended September 30, 2003, from $5.7 million to $7.4 million, compared to the three months ended September 30, 2002. The majority of the increase was due to additional staff required for the El Paso Acquisition causing an increase in payroll costs such as salaries and benefits. G&A expense per Mcfe of production decreased from $0.18 for the third quarter of 2002 to $0.17 in the third quarter of 2003.
G&A expense increased $5.0 million, or 30%, for the nine months ended September 30, 2003, from $17.1 million to $22.1 million, compared to the nine months ended September 30, 2002. The majority of the increase was due to additional staff required for the El Paso Acquisition causing an increase in payroll costs such as salaries and benefits. G&A expense per Mcfe of production remained constant at $0.18 for the respective nine-month periods ended September 30, 2003 and 2002.
Other Income (Expense). Other income (expense) for the three months ended September 30, 2003 was ($15.2) million, compared to ($7.2) million for the three months ended September 30, 2002. Interest expense increased $7.9 million for the three months ended September 30, 2003, compared to the three months ended September 30, 2002, as a result of the increase in the debt balances relating to the El Paso and Southeast Texas acquisitions.
Other income (expense) for the nine months ended September 30, 2003 was ($44.8) million, compared to ($22.8) million for the nine months ended September 30, 2002. Interest expense increased $21.0 million for the nine months ended September 30 2003, compared to the nine months ended September 30, 2002, as a result of the increase in the debt balances relating to the El Paso and Southeast Texas acquisitions. We recorded a loss on debt retirement of $0.9 million related to the redemption of the 8 7/8% Senior Subordinated Notes due 2007 on May 5, 2003.
Income Taxes. We recorded income tax expense of $14.8 million, of which $12.4 is current and $2.4 is deferred, for the three months ended September 30, 2003 and $1.2 million deferred tax expense for the three months ended September 30, 2002. The effective tax rate in both third quarter periods was 36.5%. The increase in current tax expense in the third quarter of 2003 is due to higher realized oil and natural gas prices and our reaching the limit on the amount of net operating loss carry forwards that we can utilize in the fiscal year ending December 31, 2003.
We recorded income tax expense of $36.8 million, of which $12.4 is current and $24.4 is deferred, for the nine months ended September 30, 2003 and an $8.6 million deferred tax benefit for the nine months ended September 30, 2002. The effective tax rate in both nine-month periods was 36.5%. The increase in current tax expense in the nine-month period of 2003 is due to higher realized oil and natural gas prices and our reaching the limit on the amount of net operating loss carry forwards that we can utilize in the fiscal year ending December 31, 2003.
Net Income (Loss) before Cumulative Effect of Change in Accounting Principle. Net income for the three months ended September 30, 2003 was $25.8 million, compared to net income of $2.2 million for the three months ended September 30, 2002. The variance was primarily attributable to the increase in net revenues of $83.7 million, which was offset by increases of $13.6 million in income tax expense, $38.5 million in operating expenses and $8.0 million in other expense.
Net income for the nine months ended September 30, 2003 was $64.1 million, compared to net loss of $14.9 million for the nine months ended September 30, 2002. The variance was primarily attributable to the increase in net revenues of $263.0 million, which was offset by increases of $45.4 million in income tax expense, $116.6 million in operating expenses and $22.0 million in other expense.
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Cumulative Effect of Change in Accounting Principle. We adopted SFAS No. 143 on January 1, 2003 and recorded a cumulative effect of a change in accounting principle on prior years of $3.4 million, net of tax effects, related to the depreciation and accretion expense that would have been reported had the fair value of the asset retirement obligations, and corresponding increase in the carrying amount of the related long-lived assets, been recorded when incurred.
Liquidity and Capital Resources
Our principal uses of capital have been for the exploitation, acquisition and exploration of oil and natural gas properties.
Net cash provided by operating activities was $331.3 million for the nine months ended September 30, 2003, compared to $159.8 million for the nine months ended September 30, 2002. Operating cash flow in the nine month period increased compared to the respective prior period due to increased oil and natural gas prices and production.
Net cash used in investing activities was $171.8 million for the nine months ended September 30, 2003, compared to $263.0 million for the nine months ended September 30, 2002. Of this total for the nine months ended September 30, 2003, $194.5 million was used for exploitation and exploration activities offset by $9.4 million in acquisition purchase price adjustments and proceeds from sales of properties of $13.3 million. Investing activities for the nine months ended September 30, 2002 included $104.9 million for exploitation and exploration activities and $168.5 million for acquisitions, offset by proceeds from sales of properties of $10.6 million.
Net cash used in financing activities was $75.0 million for the nine months ended September 30, 2003, compared to $110.8 million provided for the nine months ended September 30, 2002. Financing activities for the nine months ended September 30, 2003 consisted of $226.3 million in repayment of long-term debt, a $3.6 million preferred stock dividend payment, $0.9 million loss on debt retirement, a payment of $0.5 million in financing fees and a $0.1 million repurchase of common stock, offset by $151.9 million from the issuance of 8 1/4% Senior Subordinated Notes Due 2011 and borrowing of long-term debt and $4.6 million from issuance of common stock. Financing activities for the nine months ended September 30, 2002 consisted of $155.0 million in borrowings utilized for acquisition and development of oil and natural gas properties, $3.7 million from the gain on the cancellation of the 8 7/8% fair value interest rate swap and $1.1 million from issuance of common stock, offset by $45.0 million in repayment of long-term debt, a $3.6 million preferred stock dividend payment and a payment of $0.3 million in financing fees.
Financing Activity
Revolving Credit Facility |
On December 17, 2002, we entered into the Revolving Credit Facility with JPMorgan Chase Bank, Credit Suisse First Boston Corporation and certain other lenders party thereto, as amended on October 15, 2003, to replace our previous revolving credit facility. The Revolving Credit Facility provides for a maximum committed amount of $600 million and an initial borrowing base of approximately $470 million. The facility matures on December 16, 2006. In the past, we made borrowings under the Revolving Credit Facility to refinance our outstanding indebtedness under our previous revolving credit facility and to pay general corporate expenses.
Advances under the Revolving Credit Facility are in the form of either an ABR loan or a Eurodollar loan. The interest on an ABR loan is a fluctuating rate based upon the highest of:
| the rate of interest announced by JPMorgan Chase Bank, as its prime rate; | |
| the secondary market rate for three month certificates of deposits plus 1%; or | |
| the Federal funds effective rate plus 0.5% |
plus a margin of 0% to 0.625%, in each case, based upon the ratio of total debt to EBITDAX, as defined below, and the ratings of our senior unsecured debt as issued by Standard and Poors Rating Group and
35
The interest on a Eurodollar loan is a fluctuating rate based upon the rate at which Eurodollar deposits in the London interbank market are quoted plus a margin of 1.000% to 1.875% based upon the ratio of total debt to EBITDAX and the ratings of our senior unsecured debt as issued by Standard and Poors Rating Group and Moodys Investor Service, Inc.
The Revolving Credit Facility contains various covenants and default provisions applicable to us and our restricted subsidiaries, including two financial covenants that require us to maintain a current ratio of not less than 1.0 to 1.0 and a ratio of EBITDAX to consolidated interest expense for the preceding four consecutive fiscal quarters of not less than 3.0 to 1.0. Commitment fees under the Revolving Credit Facility range from 0.25% to 0.5% on the average daily amount of the available unused borrowing capacity based on the rating of our senior unsecured debt as issued by Standard and Poors Rating Group and Moodys Investor Service, Inc.
Under the terms of the Revolving Credit Facility we must meet certain tests before we are able to declare or pay any dividend on (other than dividends payable solely in equity interests of the Company other than disqualified stock), or make any payment of, or set apart assets for a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of equity interests of us or any of our restricted subsidiaries, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Company or any restricted subsidiary. Other covenants include restrictions on incurring additional indebtedness, liens, and guarantee obligations; limitations on fundamental changes and sales of assets; restrictions on making certain investments, loans or advances; limitations on optional redemption of subordinated indebtedness; restrictions on transacting with affiliates, changing lines of business and entering into certain hedging agreements; and limitations on sale and leasebacks and use of proceeds.
As of September 30, 2003, we had no outstanding borrowings and had letters of credit of approximately $40.4 million outstanding under the Revolving Credit Facility. Available unused borrowing capacity was approximately $429.6 million. The letters of credit were issued primarily in connection with the margin requirements of our oil and natural gas derivative contracts. Prior to the October 15, 2003 amendment, the Revolving Credit Facility limited the outstanding letters of credit to $200 million. As of October 15, 2003, the Revolving Credit Facility no longer imposes a limit on the outstanding letters of credit, provided that the amount of the letters of credit outstanding on any date does not exceed the lesser of the aggregate commitments under the Revolving Credit Facility and the borrowing base then in effect, or if the borrowing base is not in effect on such date, the aggregate commitments under the Revolving Credit Facility. At November 3, 2003 we had no outstanding indebtedness and had letters of credit of approximately $33.7 million.
The October 15, 2003 amendment increased the borrowing base from $470 million to $500 million. The amendment also increased the basket allowed for purposes of providing cash collateral from $10 million to $20 million and deleted the requirement to file liens on properties if not rated BB+ and Ba1at December 31, 2003.
8 1/4% Senior Subordinated Notes Due 2011 |
On April 3, 2003, we issued an additional $125 million of our Senior Subordinated Notes Due 2011 pursuant to Rule 144A and Regulation S under the Securities Act at a price of 106% of the principal amount, with accrued interest from November 1, 2002. The 2003 notes were issued as additional debt
36
Pursuant to the registration rights agreement relating to the 8 1/4% Senior Subordinated Notes Due 2011 issued on April 3, 2003, we agreed, among other things, to file an exchange offer registration statement and have such registration statement declared effective by the SEC by not later than September 30, 2003. We filed an exchange offer registration statement relating to the 2003 notes on June 4, 2003, as amended on September 12, 2003.
The SEC is currently conducting an ordinary course review of the exchange offer registration statement and certain of our periodic filings incorporated therein by reference. As part of ongoing discussions with the SEC, we have agreed to supplement or revise various accounting, engineering and other disclosures in some of these filings. We expect the SECs review to be completed during the fourth quarter of 2003, and currently believe that any supplemental or revised disclosures to be included in amendments to any of our filings will not be material or have a significant impact on our historical financial statements. It is possible that the SECs review will require us to make additional changes to our filings and the discussion herein reflects our best current knowledge and understanding of the review process.
We will pay additional interest of 0.5% per annum on the 2003 notes, accruing from October 1, 2003 until such time as the SEC declares the registration statement relating to such notes effective and we consummate the exchange offer contemplated therein.
The indenture governing the 8 1/4% Senior Subordinated Notes Due 2011 limits what we and our restricted subsidiaries do, including:
| incur additional indebtedness; | |
| pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness; | |
| make investments; | |
| incur liens; | |
| create any consensual limitation on the ability of our restricted subsidiaries to pay dividends, make loans or transfer property to us; | |
| engage in transactions with our affiliates; | |
| sell assets, including capital stock of our subsidiaries; and | |
| consolidate, merge or transfer assets. |
During any period that the 8 1/4% Senior Subordinated Notes Due 2011 have investment grade ratings from both Moodys Investors Service, Inc. and Standard and Poors Ratings Group and no default has occurred and is continuing, the foregoing covenants will cease to be in effect with the exception of
37
8 7/8% Senior Subordinated Notes due 2007 |
In connection with the Merger, we assumed $147 million face amount of Belcos 8 7/8% Senior Subordinated Notes due 2007. On November 1, 2001, approximately $24.3 million face amount of the notes was tendered to us pursuant to the change of control provisions of the related indenture. The tender price was equal to 101% of the principal amount of each note plus accrued and unpaid interest as of October 29, 2001. Including the premium and accrued interest, the total amount paid was $24.8 million. We used borrowings under our previous revolving credit facility to fund the repayment. No gain or loss was recorded in connection with the redemption, as the fair value of the 8 7/8% Senior Subordinated Notes due 2007 recorded in connection with the Merger equaled the redemption cost. On May 5, 2003 we redeemed all of our outstanding 8 7/8% Senior Subordinated Notes due 2007 in the aggregate principal amount of approximately $123 million. Including the premium and accrued interest, the total amount paid was $129.7 million. The redemption was funded with the proceeds from the offering of $125 million of our 8 1/4% Senior Subordinated Notes Due 2011 issued on April 3, 2003. The remaining proceeds were used to reduce our indebtedness under the Revolving Credit Facility.
Agreement to Acquire South Texas Natural Gas Assets |
On November 6, 2003 we agreed to purchase from privately held United Resources oil and gas assets located in South Texas for a purchase price of approximately $350 million, subject to certain purchase price adjustments. We estimate the proved reserves of the properties as of December 1, 2003 to be approximately 211 Bcfe, of which 97% is natural gas and 60% is proved developed. The properties are currently producing approximately 78 Mmcfe/d of which we will operate approximately 86% of the net production once the transaction is consummated. We expect to close the transaction in December of 2003 using cash and borrowings under the Revolving Credit Facility to fund the acquisition.
Registration Rights and Voting Agreements |
On February 14, 2003, we entered into the third amended and restated shareholders agreement, dated as of February 14, 2003, among us, Medicor Foundation, also referred to as Medicor, Westport Energy LLC, also referred to as WELLC (and together with Medicor, the Medicor Group), ERI Investments, Inc., also referred to as ERI, and a group of former Belco stockholders, also referred to as the Belfer Group. On October 1, 2003, the shareholders agreement was terminated pursuant to a termination and voting agreement, also referred to as the voting agreement, among us, the Medicor Group, ERI and certain members of the Belfer Group, also referred to as the Belfer Parties. In connection with the termination of the shareholders agreement, we entered into a registration rights agreement dated as of October 1, 2003, with ERI, the Medicor Group and the Belfer Parties. On November 4, 2003, ERI merged with and into EQT Investments, LLC, also referred to as EQT. As a result of the merger, EQT succeeded to all of ERIs rights and obligations, including ownership of the shares of our common stock held by ERI prior to the merger and ERIs rights and obligations under the voting agreement and the registration rights agreement.
The registration rights agreement continues in effect substantially the same registration rights that the stockholders party thereto had under the above-referenced shareholders agreement. Under the terms of the registration rights agreement, if we propose to register any of our securities under the Securities Act of 1933, as amended, either for our own account or for the account of other holders of our securities, these stockholders are entitled to notice of such registration and to include in the registration shares of our common stock owned or controlled by them. The registration rights agreement also gives EQT (as successor to ERI), the Medicor Group and their respective permitted transferees three demand registration rights and members of the Belfer Group party to the agreement two demand registration rights. Each demand registration right gives the holder the power to require us to file, at our expense, a registration statement under the Securities Act with respect to such holders shares of common stock, and we are required to use all reasonable efforts to effect such registration.
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The registration rights agreement further provides each such stockholder the right to participate in a registration demanded by any other stockholder party thereto, and in that case, the demand will not count as a demand registration for purposes of the number of demand registration rights the demanding party has under the registration rights agreement. The registration rights agreement also grants each of these stockholders unlimited piggyback registration rights. In connection with the registration rights granted under the registration rights agreement, each of the stockholder parties has agreed to enter into holdback agreements if requested by the underwriters in underwritten offerings.
All of these registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in such registration and our right not to effect a requested demand registration within six months following a previous demand registration.
Under the voting agreement, each of EQT (as successor to ERI), the Medicor Group and the Belfer Parties has the right to nominate one candidate for election at our 2004 annual meeting of stockholders to serve as a Class 3 member of our board of directors until our annual meeting of stockholders in 2007, and each of these stockholders has agreed to vote the shares of our common stock owned or controlled by them for the election of each other stockholders director nominee.
Capital Expenditures |
We anticipate that our capital expenditures for 2003 will be approximately $270 million. We anticipate that our primary cash requirements for 2003 will include funding development projects, exploration and general working capital needs. For the first nine months of 2003, we had capital expenditures of $185.1 million excluding geological and geophysical costs incurred of $10.9 million.
We will continue to seek opportunities for acquisitions of proved reserves with substantial exploitation and exploration potential. The size and timing of capital requirements for acquisitions is inherently unpredictable and we therefore do not budget for them. We expect to fund our capital expenditure activities, which include acquisition, development of and exploration on our oil and natural gas properties, through cash flow from operations and available capacity under the Revolving Credit Facility.
We believe that borrowings under the Revolving Credit Facility, projected operating cash flows and cash on hand will be sufficient to meet the requirements of our business. However, future cash flows are subject to a number of variables including the level of production and oil and natural gas prices. We cannot assure you that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures or that increased capital expenditures will not be undertaken. Actual levels of capital expenditures may vary significantly due to a variety of factors, including but not limited to:
| drilling results; | |
| product prices; | |
| industry conditions and outlook; and | |
| future acquisition of properties. |
Special Note Regarding Forward-Looking Statements
Our disclosure and analysis in this report, including information incorporated by reference, includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to the financial condition, results of operations, plans, objectives, future performance and business of Westport and its subsidiaries. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as anticipate, estimate, expect, project, intend, plan, believe and other words and expressions of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this report that address activities, events or developments that we
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| amount, nature and timing of capital expenditures; | |
| projected drilling of wells; | |
| reserve estimates; | |
| timing and amount of future production of oil and natural gas; | |
| operating costs and other expenses; | |
| cash flow, anticipated liquidity and prospects for growth; | |
| estimates of proved reserves and exploitation and exploration opportunities; and | |
| marketing of oil and natural gas. |
These forward-looking statements are based on our expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. Any or all of our forward-looking statements in this report may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report, including the risks outlined under Risk Factors in our report on Form 10-K for the year ended December 31, 2002 will be important in determining future results. Actual future results may vary materially from those reflected in our forward-looking statements. Because of these factors, we caution that investors should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Our market risk exposures relate primarily to commodity prices and interest rates. We enter into various transactions involving commodity price risk management activities involving a variety of derivatives instruments to hedge the impact of crude oil and natural gas price fluctuations. In addition, we enter into interest rate swap agreements to reduce current interest burdens related to our fixed long-term debt.
The derivative commodity price instruments are generally put in place to limit the risk of adverse oil and natural gas price movements. However, such instruments can limit future gains resulting from upward favorable oil and natural gas price movements. Recognition of both realized and unrealized gains or losses is reported currently in our financial statements as required by existing generally accepted accounting principles.
As of September 30, 2003, we had substantial derivative financial instruments outstanding and related to our price risk management program. See Note 4 to our consolidated financial statements in Item 1 of this Report for additional details on our oil and natural gas related transactions in effect as of September 30, 2003. For more information on our interest rate swaps in effect as of September 30, 2003, see Note 3 to our consolidated financial statements in Item 1 of this Report.
Item 4. | Controls and Procedures |
Our management, with the participation of our Chairman of the Board and Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to (a) ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and
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There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
Westport Oil and Gas Company, L.P., our indirect wholly-owned subsidiary, is a defendant in a case brought in July 2001 against its predecessor, Belco Energy Corp., in the district court of Sweetwater County, Wyoming. The complaint seeks damages on behalf of a purported class of royalty owners for alleged improper deduction, valuation and reporting under the Wyoming Royalty Payment Act in connection with royalty payments made by Belco on production from wells it operates in the Moxa Arch area of the Green River Basin. Plaintiffs have advised us that they calculate the amount of damages allegedly owed by Belco to be approximately $1.2 million, which includes attorneys fees and litigation costs. We have denied liability for any of these damages and believe that we have valid defenses to plaintiffs claims. Class certification and discovery have been deferred pending the decision by the Wyoming Supreme Court in a case involving unrelated parties that may have a bearing on this case and other similar cases filed by plaintiffs against other oil and gas industry operators in the Green River Basin. Settlement discussions have occurred with plaintiffs. We believe that our potential liability with respect to this proceeding is not material in the aggregate to our financial position, results of operations or cash flows. Accordingly, we have not established a reserve for loss in connection with this proceeding.
Westport Oil and Gas Company, L.P. is also a party to an appeal filed by Uintah County, Utah, to the determination by the Utah State Tax Commission of the taxable value of our tangible real property in Uintah County for the 2003 tax year. This property was included in the assets we acquired in December 2002 from affiliates of El Paso Corporation. The Property Tax Division assessed a taxable value of $117.4 million for our tangible real property in Uintah County based upon the future net value of the proved producing reserves and a value for lease and well equipment. We believe that this assessment was in accordance with applicable regulations and historic practice. Uintah County appealed that assessment, claiming that the taxable value should be $517.0 million, which it claims to be the fair market value of the taxable property. The Countys figure is based on the adjusted purchase price of the El Paso assets. Such adjusted purchase price included significant proved undeveloped reserves and non-proved reserves, which are not generally subject to assessment under existing regulations and practice, as well as non-operated working interests and mid-stream assets, which are generally taxed to third-party operators or otherwise subject to separate assessment. We believe that Uintah Countys position is not consistent with applicable law or existing practice and that the original assessment of the Property Tax Division will be upheld. We have not established a reserve for loss in connection with this proceeding.
From time to time, we may be a party to various other legal proceedings. Except as discussed herein, we are not currently party to any material pending legal proceedings.
Item 2. | Changes in Securities and Use of Proceeds |
(a) During the quarter ended September 30, 2003, we issued 68,923 shares of our common stock, including 1,000 shares of restricted stock and issued 34,917 shares of our common stock in connection with the exercise of options granted pursuant to the 2000 Stock Incentive Plan. We also issued 3,506 shares of our common stock in connection with the exercise of options granted pursuant to the Belco 1996 Stock Incentive Plan and issued 29,500 shares of our common stock in connection with the exercise of options granted pursuant to the EPGC 2000 Stock Option Plan.
(b) On September 10, 2003 we paid the third quarter dividend for 2003 of $0.40625 per share per quarter on our 6 1/2% convertible preferred stock.
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(c) No equity securities of the Company were sold by the Company during the period covered by the report that were not registered under the Securities Act.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits and Reports on Form 8-K |
(a) Exhibits. The following exhibits are filed as part of this Form 10-Q with the Securities and Exchange Commission: |
2 | .1 | Agreement and Plan of Merger, dated as of March 9, 2000, by and among Westport Oil and Gas Company, Inc., Westport Energy Corporation, Equitable Production Company, Equitable Production (Gulf) Company and EPGC Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-1 (Registration No. 333-40422), filed on June 29, 2000). | ||
2 | .2 | Agreement and Plan of Merger, dated as of June 8, 2001, by and among Belco Oil & Gas Corp. and Westport Resources Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-4/A (Registration No. 333-64320), filed on July 24, 2001). | ||
3 | .1 | Amended Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the registration statement on Form 8-A/A, filed on August 31, 2001). | ||
3 | .2 | Certificate of Amendment to Amended Articles of Incorporation of the Company, dated March 5, 2003 (incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, filed on May 8, 2003). | ||
3 | .3* | Third Amended and Restated Bylaws of the Company, effective as of October 1, 2003. | ||
4 | .1 | Specimen Certificate for shares of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the registration statement on Form 8-A/A, filed on August 31, 2001). | ||
4 | .2 | Specimen Certificate for shares of 6 1/2% Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4 to the registration statement on Form 8-A/A, filed on August 31, 2001). | ||
4 | .3 | Certificate of Designations of 6 1/2% Convertible Preferred Stock, dated March 5, 1998 (incorporated by reference to Exhibit 4.1 to Belcos Current Report on Form 8-K, filed on March 11, 1998). | ||
4 | .4 | Third Amended and Restated Shareholders Agreement, dated as of February 14, 2003, among the Company, ERI Investments, Inc., Medicor Foundation, Westport Energy, LLC and certain stockholders named therein (incorporated by reference to Exhibit 4.3 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002, filed on March 10, 2003). | ||
4 | .5* | Termination and Voting Agreement, dated as of October 1, 2003, among the Company, ERI Investments, Inc., Medicor Foundation, Westport Energy, LLC and certain stockholders named therein. | ||
4 | .6* | Registration Rights Agreement, dated as of October 1, 2003, among the Company, ERI Investments, Inc., Medicor Foundation, Westport Energy, LLC and certain stockholders named therein. | ||
4 | .7 | Registration Rights Agreement, dated as of April 3, 2003, among the Company, subsidiary guarantors party thereto and Lehman Brothers Inc. (incorporated by reference to Exhibit 4.7 to the Companys registration statement on Form S-4 (File No. 333-105834), filed on June 4, 2003). |
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4 | .8 | Third Supplemental Indenture, dated as of April 3, 2003, among the Company, subsidiary guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.11 to the Companys registration statement on Form S-4 (File No. 333-105834), filed on June 4, 2003). | ||
10 | .1* | First Amendment to Credit Agreement, dated as of October 15, 2003, among the Company, subsidiary guarantors party thereto, JPMorgan Chase Bank, as administrative agent, and certain lenders named therein. | ||
31 | .1* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer of the Company. | ||
31 | .2* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer of the Company. | ||
32 | .1* | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer of the Company. | ||
32 | .2* | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer of the Company. |
* | Filed herewith. |
Reports on Form 8-K:
Current Report on Form 8-K (Item 12), filed on August 5, 2003. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESTPORT RESOURCES CORPORATION |
By: | /s/ DONALD D. WOLF |
|
|
Name: Donald D. Wolf | |
Title: Chairman of the Board | |
and Chief Executive Officer |
Date: November 14, 2003
By: | /s/ LON MCCAIN |
|
|
Name: Lon McCain | |
Title: Vice President, Chief Financial Officer | |
and Treasurer |
Date: November 14, 2003
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EXHIBIT INDEX
No. of | ||||
Exhibit | Description | |||
2 | .1 | Agreement and Plan of Merger, dated as of March 9, 2000, by and among Westport Oil and Gas Company, Inc., Westport Energy Corporation, Equitable Production Company, Equitable Production (Gulf) Company and EPGC Merger Sub Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-1 (Registration No. 333-40422), filed on June 29, 2000). | ||
2 | .2 | Agreement and Plan of Merger, dated as of June 8, 2001, by and among Belco Oil & Gas Corp. and Westport Resources Corporation (incorporated by reference to Exhibit 2.1 to the registration statement on Form S-4/A (Registration No. 333-64320), filed on July 24, 2001). | ||
3 | .1 | Amended Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the registration statement on Form 8-A/A, filed on August 31, 2001). | ||
3 | .2 | Certificate of Amendment to Amended Articles of Incorporation of the Company, dated March 5, 2003 (incorporated by reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 30, 2003, filed on May 8, 2003). | ||
3 | .3* | Third Amended and Restated Bylaws of the Company, effective as of October 1, 2003. | ||
4 | .1 | Specimen Certificate for shares of Common Stock of the Company (incorporated by reference to Exhibit 4.1 to the registration statement on Form 8-A/A, filed on August 31, 2001). | ||
4 | .2 | Specimen Certificate for shares of 6 1/2% Convertible Preferred Stock of the Company (incorporated by reference to Exhibit 4 to the registration statement on Form 8-A/A, filed on August 31, 2001). | ||
4 | .3 | Certificate of Designations of 6 1/2% Convertible Preferred Stock, dated March 5, 1998 (incorporated by reference to Exhibit 4.1 to Belcos Current Report on Form 8-K, filed on March 11, 1998). | ||
4 | .4 | Third Amended and Restated Shareholders Agreement, dated as of February 14, 2003, among the Company, ERI Investments, Inc., Medicor Foundation, Westport Energy, LLC and certain stockholders named therein (incorporated by reference to Exhibit 4.3 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002, filed on March 10, 2003). | ||
4 | .5* | Termination and Voting Agreement, dated as of October 1, 2003, among the Company, ERI Investments, Inc., Medicor Foundation, Westport Energy, LLC and certain stockholders named therein. | ||
4 | .6* | Registration Rights Agreement, dated as of October 1, 2003, among the Company, ERI Investments, Inc., Medicor Foundation, Westport Energy, LLC and certain stockholders named therein. | ||
4 | .7 | Registration Rights Agreement, dated as of April 3, 2003, among the Company, subsidiary guarantors party thereto and Lehman Brothers Inc. (incorporated by reference to Exhibit 4.7 to the Companys registration statement on Form S-4 (File No. 333-105834), filed on June 4, 2003). | ||
4 | .8 | Third Supplemental Indenture, dated as of April 3, 2003, among the Company, subsidiary guarantors party thereto and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.11 to the Companys registration statement on Form S-4 (File No. 333-105834), filed on June 4, 2003). | ||
10 | .1* | First Amendment to Credit Agreement, dated as of October 15, 2003, among the Company, subsidiary guarantors party thereto, JPMorgan Chase Bank, as administrative agent, and certain lenders named therein. | ||
31 | .1* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer of the Company. | ||
31 | .2* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer of the Company. | ||
32 | .1* | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer of the Company. | ||
32 | .2* | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer of the Company. |
* | Filed herewith. |