UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark one)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004 |
OR
o | 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 0-9592
RANGE RESOURCES CORPORATION
Delaware
34-1312571
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
777 Main Street, Suite 800
Ft. Worth, Texas
(Address of principal executive offices)
76102
(Zip Code)
Registrants telephone number, including area code: (817) 870-2601
Former name, former address and former fiscal year, if changed since last report: Not applicable
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 x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
56,945,673 Common Shares were outstanding on April 30, 2004.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The financial statements included herein should be read in conjunction with the latest Form 10-K for Range Resources Corporation (the Company or Range). The statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to fairly present the Companys financial position and results of operations. All adjustments are of a normal recurring nature unless otherwise noted. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission (the SEC) and do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements.
2
RANGE RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, | December 31, | |||||||
2004
|
2003
|
|||||||
(Unaudited) | ||||||||
Assets
|
||||||||
Current assets
|
||||||||
Cash and equivalents
|
$ | 913 | $ | 631 | ||||
Accounts receivable, net
|
34,895 | 37,745 | ||||||
IPF receivables (Note 2)
|
4,400 | 4,400 | ||||||
Unrealized derivative gain (Note 2)
|
21 | 116 | ||||||
Deferred tax asset (Note 13)
|
30,159 | 19,871 | ||||||
Inventory and other
|
9,774 | 3,329 | ||||||
|
|
|
||||||
|
80,162 | 66,092 | ||||||
|
|
|
||||||
IPF receivables (Note 2)
|
6,640 | 8,193 | ||||||
Unrealized derivative gain (Note 2)
|
23 | 250 | ||||||
Oil and gas properties, successful efforts method (Note 16)
|
1,374,697 | 1,362,811 | ||||||
Accumulated depletion and depreciation
|
(651,403 | ) | (639,429 | ) | ||||
|
|
|
||||||
|
723,294 | 723,382 | ||||||
|
|
|
||||||
Transportation and field assets (Note 2)
|
41,581 | 41,218 | ||||||
Accumulated depreciation and amortization
|
(19,702 | ) | (18,912 | ) | ||||
|
|
|
||||||
|
21,879 | 22,306 | ||||||
|
|
|
||||||
Other (Note 2)
|
10,322 | 9,868 | ||||||
|
|
|
||||||
|
$ | 842,320 | $ | 830,091 | ||||
|
|
|
||||||
Liabilities and Stockholders Equity
|
||||||||
Current liabilities
|
||||||||
Accounts payable
|
$ | 29,056 | $ | 32,105 | ||||
Asset retirement obligation (Note 3)
|
5,333 | 5,814 | ||||||
Accrued liabilities
|
12,114 | 14,700 | ||||||
Unrealized derivative loss (Note 2)
|
76,604 | 54,345 | ||||||
|
|
|
||||||
|
123,107 | 106,964 | ||||||
|
|
|
||||||
Senior debt (Note 6)
|
171,100 | 178,200 | ||||||
Non-recourse debt (Note 6)
|
67,500 | 70,000 | ||||||
Subordinated notes (Note 6)
|
110,011 | 109,980 | ||||||
|
10,843 | |||||||
Deferred taxes, net (Note 13)
|
15,374 | 10,843 | ||||||
Unrealized derivative loss (Note 2)
|
20,039 | 17,027 | ||||||
Deferred compensation liability (Note 11)
|
21,556 | 16,981 | ||||||
Asset retirement obligation (Note 3)
|
46,133 | 46,030 | ||||||
Commitments and contingencies (Note 8)
|
||||||||
Stockholders equity (Notes 9 and 10)
|
||||||||
Preferred stock, $1 par, 10,000,000 shares authorized, 5.9% cumulative
convertible preferred stock, 1,000,000 shares issued and outstanding
at March 31, 2004, and December 31, 2003 entitled in liquidation
to $50.0 million
|
50,000 | 50,000 | ||||||
Common stock, $.01 par, 100,000,000 shares authorized,
56,891,566 and 56,409,791 issued and outstanding, respectively
|
569 | 564 | ||||||
Capital in excess of par value
|
402,509 | 399,662 | ||||||
Retained earnings (deficit)
|
(118,129 | ) | (124,011 | ) | ||||
Stock held by employee benefit trust, 1,673,001 and 1,671,386
shares, respectively, at cost (Note 11)
|
(8,705 | ) | (8,441 | ) | ||||
Deferred compensation
|
(773 | ) | (856 | ) | ||||
Accumulated other comprehensive income (loss) (Note 2)
|
(57,971 | ) | (42,852 | ) | ||||
|
|
|
||||||
|
267,500 | 274,066 | ||||||
|
|
|
||||||
|
$ | 842,320 | $ | 830,091 | ||||
|
|
|
See accompanying notes.
3
RANGE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share data)
Three Months Ended March 31,
|
||||||||
2004
|
2003
|
|||||||
Revenues
|
||||||||
Oil and gas sales
|
$ | 65,368 | $ | 54,330 | ||||
Transportation and gathering
|
467 | 1,027 | ||||||
Loss on retirement of securities (Note 18)
|
| (315 | ) | |||||
Other
|
(2,302 | ) | 849 | |||||
|
|
|
||||||
|
63,533 | 55,891 | ||||||
|
|
|
||||||
Expenses
|
||||||||
Direct operating
|
9,995 | 9,552 | ||||||
Production and ad valorem taxes
|
4,250 | 3,476 | ||||||
Exploration
|
3,567 | 2,453 | ||||||
General and administrative (Note 11)
|
8,821 | 4,846 | ||||||
Interest expense and dividends on trust preferred
|
4,145 | 5,544 | ||||||
Depletion, depreciation and amortization
|
22,248 | 20,967 | ||||||
|
|
|
||||||
|
53,026 | 46,838 | ||||||
|
|
|
||||||
Income before income taxes and accounting change
|
10,507 | 9,053 | ||||||
Income taxes (Note 13)
|
||||||||
Current
|
| 4 | ||||||
Deferred
|
3,887 | 4,086 | ||||||
|
|
|
||||||
|
3,887 | 4,090 | ||||||
|
|
|
||||||
Income before cumulative effect of change in
accounting principle
|
6,620 | 4,963 | ||||||
Cumulative effect of change in accounting principle
(net of taxes of $2.4 million) (Note 3)
|
| 4,491 | ||||||
|
|
|
||||||
Net income
|
6,620 | 9,454 | ||||||
Preferred dividends (Note 9)
|
(738 | ) | | |||||
|
|
|
||||||
Net income available to common shareholders
|
$ | 5,882 | $ | 9,454 | ||||
|
|
|
||||||
Earnings Per Common Share (Note 14):
|
||||||||
Net income available to common shareholders before
change in accounting principle
|
$ | 0.11 | $ | 0.10 | ||||
Cumulative effect of change in accounting principle
|
| 0.08 | ||||||
|
|
|
||||||
Net income per common share-basic
|
$ | 0.11 | $ | 0.18 | ||||
|
|
|
||||||
Earnings per common share
|
$ | 0.10 | $ | 0.09 | ||||
Cumulative effect of change in accounting principle
|
| 0.08 | ||||||
|
|
|
||||||
Net income per common share diluted
|
$ | 0.10 | $ | 0.17 | ||||
|
|
|
See accompanying notes.
4
RANGE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended March 31,
|
||||||||
2004
|
2003
|
|||||||
Cash flows from operations
|
||||||||
Net income
|
$ | 6,620 | $ | 9,454 | ||||
Adjustments to reconcile net income to
net cash provided by operations:
|
||||||||
Cumulative effect of change in accounting principle, net
|
| (4,491 | ) | |||||
Deferred income tax expense
|
3,887 | 4,086 | ||||||
Depletion, depreciation and amortization
|
22,248 | 20,967 | ||||||
Unrealized hedging (gains) losses
|
755 | (733 | ) | |||||
Allowance for bad debts
|
529 | 334 | ||||||
Exploration expense
|
1,219 | 384 | ||||||
Amortization of deferred issuance costs and discount
|
204 | 229 | ||||||
Loss on retirement of securities
|
| 315 | ||||||
Deferred compensation adjustments
|
4,558 | 564 | ||||||
Loss (gain) on sale of assets and other
|
193 | (87 | ) | |||||
Changes in working capital:
|
||||||||
Accounts receivable
|
2,964 | (18,725 | ) | |||||
Inventory and other
|
(6,444 | ) | (390 | ) | ||||
Accounts payable
|
(2,242 | ) | 922 | |||||
Accrued liabilities
|
(2,269 | ) | 3,236 | |||||
|
|
|
||||||
Net cash provided by operations
|
32,222 | 16,065 | ||||||
|
|
|
||||||
Cash flows from investing
|
||||||||
Oil and gas properties
|
(22,841 | ) | (20,216 | ) | ||||
Field service assets
|
(445 | ) | (1,141 | ) | ||||
Acquisitions
|
(3,287 | ) | (5,988 | ) | ||||
IPF
|
1,021 | 3,097 | ||||||
Asset sales
|
2,323 | 292 | ||||||
|
|
|
||||||
Net cash used in investing
|
(23,229 | ) | (23,956 | ) | ||||
|
|
|
||||||
Cash flows from financing
|
||||||||
Borrowings on credit facilities
|
37,500 | 37,100 | ||||||
Repayments on credit facilities
|
(47,100 | ) | (29,100 | ) | ||||
Other debt repayments
|
| (236 | ) | |||||
Payment of dividends
|
(1,302 | ) | | |||||
Issuance of common stock
|
2,191 | 181 | ||||||
|
|
|
||||||
Net cash provided by (used in) financing
|
(8,711 | ) | 7,945 | |||||
|
|
|
||||||
Increase in cash and equivalents
|
282 | 54 | ||||||
Cash and equivalents, beginning of period
|
631 | 1,334 | ||||||
|
|
|
||||||
Cash and equivalents, end of period
|
$ | 913 | $ | 1,388 | ||||
|
|
|
See accompanying notes.
5
RANGE RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, in thousands)
Three Months Ended | ||||||||
March 31,
|
||||||||
2004
|
2003
|
|||||||
Net income
|
$ | 6,620 | $ | 9,454 | ||||
Net deferred hedge gains (losses), net of tax:
|
||||||||
Hedging gains (losses) included in net income
|
(10,645 | ) | (16,829 | ) | ||||
Unrealized deferred hedging gains (losses)
|
(4,521 | ) | 1,548 | |||||
Unrealized gains (losses) on securities held by the deferred compensation plan
|
47 | (21 | ) | |||||
|
|
|
||||||
Comprehensive income (loss)
|
$ | (8,499 | ) | $ | (5,848 | ) | ||
|
|
|
See accompanying notes.
6
RANGE RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) ORGANIZATION AND NATURE OF BUSINESS
The Company is engaged in the exploration, development and acquisition of oil and gas properties primarily in the Southwestern, Gulf Coast and Appalachian regions of the United States. The Company seeks to increase its reserves and production primarily through drilling and complementary acquisitions. The Company holds its Appalachian oil and gas assets through a 50% owned joint venture, Great Lakes Energy Partners L.L.C. (Great Lakes). Range is a Delaware Corporation whose common stock is listed on the New York Stock Exchange.
The Company operates in an environment with numerous financial and operating risks, including, but not limited to, the inherent risks of the search for, development and production of oil and gas, the ability to sell production at prices which provide an attractive return, the highly competitive nature of the industry, and the ability to drill and acquire reserves on an attractive basis. The Companys ability to expand its reserve base is, in part, dependent on obtaining sufficient capital through internal cash flow, borrowings or the issuance of debt or equity securities. A material drop in oil and gas prices or a reduction in production and reserves would reduce its ability to fund capital expenditures through internally generated cash flow.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company, wholly-owned subsidiaries and a 50% pro rata share of the assets, liabilities, income and expenses of Great Lakes. Liquid investments with maturities of 90 days or less are considered cash equivalents. Certain reclassifications have been made to the presentation of prior periods to conform to current year presentation. These financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal recurring nature unless disclosed otherwise.
Revenue Recognition
The Company recognizes revenues from the sale of products and services in the period delivered. Payments received at Independent Producer Finance (IPF) relating to return on investment are recognized as income with remaining receipts reducing receivables. Although receivables are concentrated in the oil and gas industry, the Company does not view this as an unusual credit risk. The Company provides for allowance for doubtful accounts for specific receivables judged unlikely to be collected based on the age of the receivable, the Companys experience with the debtor, potential offsets to the amount owed and economic conditions. The Company had allowances for doubtful accounts relating to its exploration and production of $1.0 million in each of the periods ended at March 31, 2004 and December 31, 2003, respectively.
Oil and Gas Properties
The Company follows the successful efforts method of accounting. Exploratory drilling costs are capitalized pending determination of whether a well is successful. Exploratory wells subsequently determined to be dry holes are charged to expense. Costs resulting in exploratory discoveries and all development costs, whether successful or not, are capitalized. Geological and geophysical costs, delay rentals and unsuccessful exploratory wells are expensed. Depletion is provided on the unit-of-production method. Oil and NGLs are converted to gas equivalent basis (mcfe) at the rate of six mcf per barrel. The depletion, depreciation and amortization (DD&A) rates were $1.38 and $1.51 per mcfe in the quarters ended March 31, 2004 and 2003, respectively. Unproved properties had a net book value of $10.3 million and $12.2 million at March 31, 2004 and December 31, 2003, respectively.
The Companys long-lived assets are reviewed for impairment quarterly for events or changes in circumstances that indicate that the carrying amount of an asset may not be recoverable in accordance with Statement
7
of Financial Accounting Standards No. 144 Accounting for Impairment or Disposal of Long-Lived Assets. The review is done by determining if the historical cost of proved properties less the applicable accumulated DD&A is less than the estimated expected undiscounted future cash flows. The expected future cash flows are estimated based on managements plans to continue to produce and develop proved reserves. Expected future cash flow from the sale of production of reserves is calculated based on estimated future prices. Management estimates prices based upon market related information including published futures prices. The estimated future level of production is based on assumptions surrounding future levels of prices and costs, field decline rates, market demand and supply, and the economic and regulatory climates. When the carrying value exceeds such cash flows, an impairment loss is recognized for the difference between the estimated fair value and the carrying value of the assets.
Transportation and Field Assets
The Companys gas transportation and gathering systems are generally located in proximity to certain of its principal fields. Depreciation on these systems is provided on the straight-line method based on estimated useful lives of 10 to 15 years. The Company receives third party income for providing certain field services which are recognized as earned and are recorded as an offset to direct operating expenses. These revenues approximated $500,000 in each of the three month periods ended March 31, 2004 and 2003. Depreciation on the field assets is calculated on the straight-line method based on estimated useful lives of five to seven years. Buildings are depreciated over 10 to 15 years.
Independent Producer Finance
Historically, IPF acquired dollar denominated overriding royalties in oil and gas properties from small producers. The royalties are accounted for as receivables because the investment is recovered from a percentage of revenues until a specified return is received. Payments received that relate to the return on investment are recognized as income with the remaining receipts reducing receivables. Currently, all receipts are being recognized as a return of capital except for income received on investments having a zero book balance. Receivables classified as current represent the return expected within 12 months. The receivables are evaluated quarterly and provisions for uncollectible amounts are established based on a valuation of the royalty interest in the oil and gas properties. At March 31, 2004, the receivable balance was $16.5 million offset by a valuation allowance of $5.5 million for a net receivable balance of $11.0 million. At December 2003, the receivable balance was $22.2 million offset by a valuation allowance of $9.6 million for a net receivable balance of $12.6 million. The decline in the valuation allowance from December 2003 is due to the sale of certain investments, where the receivable amounts and the valuation allowance amounts were eliminated. The receivables are non-recourse and are from small operators who have limited access to capital and the property interests backing the receivables frequently lack diversification. During the first quarter of 2004, IPF revenues of $33,000 were offset by $171,000 of interest and administrative expenses and a $529,000 increase in the valuation allowance. During the same period of the prior year, revenues of $539,000 were offset by $359,000 of interest and administrative expenses, and a $259,000 increase in the valuation allowance. Since 2001, IPF has not entered into any new investment agreements and therefore, the portfolio has declined due to collections.
Other Assets
The cost of issuing debt is capitalized and included in other assets on the Companys Consolidated Balance Sheets. These costs are generally amortized over the expected life of the related securities. When a security is retired prior to maturity, related unamortized costs are expensed. At March 31, 2004 and December 31, 2003, these capitalized costs totaled $2.2 million and $2.4 million, respectively. At March 31, 2004, other assets included $2.2 million unamortized debt issuance costs, $578,000 of long-term deposits, $1.9 million of marketable securities held in a deferred compensation plan and a $5.6 million insurance claim receivable related to certain offshore properties. The insurance claim is under normal review by the insurance carrier and, therefore, full collection of the receivable is not assured.
Gas Imbalances
The Company uses the sales method to account for gas imbalances, recognizing revenue based on cash received rather than gas produced. A liability is recognized when the imbalance exceeds the estimate of remaining reserves. Gas imbalances at March 31, 2004 and December 31, 2003 were not significant.
8
Derivative Financial Instruments and Hedging
The Company enters into contracts to reduce the impact of volatile oil and gas prices. These contracts generally qualify as cash flow hedges; however, certain of the contracts have an ineffective portion (changes in realized prices that do not match the changes in hedge price) which is recognized in earnings. Historically, the Companys hedging program was based on fixed price swaps. In the second quarter of 2003, the hedging program was modified to include collars which establish a minimum floor price and a predetermined ceiling price. Gains or losses on open contracts are recorded in other comprehensive income (loss) (OCI). The Company also enters into swap agreements to reduce the risk of changing interest rates. These agreements qualify as cash flow hedges whereby changes in the fair value of the swaps are reflected as an adjustment to OCI to the extent the swaps are effective and are recognized in income as an adjustment to interest expense in the period covered for the ineffective portion. In the past, certain of the interest rate swaps, because of the option feature, did not qualify as interest rate hedges which required the changes in fair value to be reported in interest expense.
Derivatives are recorded on the balance sheet as assets or liabilities at fair value. For derivatives qualifying as hedges, the effective portion of changes in fair value is recognized in stockholders equity as OCI and reclassified to earnings as such transactions are settled. Changes in the value of the ineffective portion of all open hedges are recognized in earnings as they occur. At March 31, 2004, the Company reflected an unrealized net pre-tax commodity hedging loss on its balance sheet of $96.3 million. This accounting can greatly increase the volatility of earnings and stockholders equity for companies that have hedging programs, such as the Companys hedging program. Earnings are affected by the ineffective portion of a hedge contract (changes in realized prices that do not match the changes in the hedge price). Ineffective gains or losses are recorded in other revenue while the hedge contract is open and may increase or reverse until settlement of the contract. Stockholders equity is affected by the increase or decrease in OCI. Typically, when oil and gas prices increase, OCI decreases. Of the $96.3 million unrealized pre-tax loss at March 31, 2004, $76.3 million of losses would be reclassified to earnings over the next twelve month period and $20.0 million in later periods, if prices remained constant. Actual amounts that will be reclassified will vary as a result of future changes in prices.
Other revenues in the Consolidated Statements of Operations reflected ineffective commodity hedging losses (changes in realized prices did not match the changes in the hedge price) of $1.6 million and gains of $804,000 for the three months ended March 31, 2004 and March 31, 2003, respectively. Interest expense includes ineffective interest hedging gains of $799,000 and losses of $71,000 for the three months ended March 31, 2004 and March 31, 2003, respectively. Unrealized hedging losses at March 31, 2004 are shown on the Companys Consolidated Balance Sheets as net unrealized hedging losses of $96.6 million (including $268,000 of losses on interest rate swaps) and OCI losses of $58.0 million (net of taxes) (see Note 7).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses, as well as disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Depletion of oil and gas properties is determined using estimates of proved oil and gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and gas properties are subject to numerous uncertainties including estimates of future recoverable reserves and commodity prices. Other estimates which may significantly impact the Companys financial statements involve IPF receivables, deferred tax valuation allowances, fair value of derivatives and asset retirement obligations.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (the Interpretation). The Interpretation will significantly change whether entities included in its scope are consolidated by their sponsors, transferors, or investors. The Interpretation introduces a new consolidation model the variable interest model which determines control (and consolidation) based on potential variability in gains and losses of the entity being evaluated for consolidation. These provisions apply immediately to variable interests in Variable Interest Entities (VIEs) created after January
9
15, 2003 and are effective in 2004 for VIEs in which the Company holds a variable interest that it acquired prior to February 1, 2003. The Interpretation had no effect on the Companys financial statements.
Pro Forma Stock-Based Compensation
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123). Accordingly, no
compensation cost has been recognized for the stock option plans because the
exercise prices of employee stock options equals the market prices of the
underlying stock on the date of grant. If compensation cost had been
determined based on the fair value at the grant date for awards in the three
months ended March 31, 2004 and 2003, consistent with the provisions of SFAS
123, the Companys net income and earnings per share would have been reduced to
the pro forma amounts indicated below (in thousands, except per share data):
Three Months Ended
March 31,
2004
2003
$
6,620
$
9,454
2,871
367
(4,113
)
(1,041
)
$
5,378
$
8,780
$
0.11
$
0.18
$
0.08
$
0.16
$
0.10
$
0.17
$
0.08
$
0.16
(3) ASSET RETIREMENT OBLIGATION
Beginning in 2003, Statement of Financial Accounting Standards No. 143 Asset Retirement Obligations (SFAS 143) requires the Company to recognize an estimated liability for the plugging and abandonment of its oil and gas wells and associated pipelines and equipment. Previously, the Company had recognized a plugging and abandonment obligation primarily for its offshore properties. This liability was shown netted against oil and gas properties on the balance sheet. Under SFAS 143, the Company now recognizes an asset retirement obligation in the period in which the liability is incurred, if a reasonable estimate of the obligation can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 requires the Company to consider estimated salvage value in the calculation of DD&A. Consistent with industry practice, historically the Company had assumed the cost of plugging and abandonment on its onshore properties would be offset by salvage value received. The adoption of SFAS 143 resulted in (i) an increase of total liabilities because retirement obligations are required to be recognized, (ii) an increase in the recognized cost of assets because the retirement costs are added to the carrying amount of the long-lived asset, and (iii) an increase in DD&A expense, because of the accretion of the retirement obligation and increased basis. The asset retirement obligations recorded by the Company relate to the plugging and abandonment of oil and gas wells.
The estimated liability is based on historical experience in plugging and abandoning wells, estimated remaining lives of those wells, estimates as to the cost to plug and abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using an assumed credit-adjusted risk-free interest rate of 9%. Revisions to the liability could occur due to changes in estimates of plugging and abandonment costs, changes in the risk-free interest rate or remaining lives of the wells, or if federal or state regulators enact new plugging and
10
abandonment requirements. At the time of abandonment, the Company will likely to recognize a gain or loss on abandonment based on actual costs incurred.
The adoption of SFAS 143 as of January 1, 2003 resulted in a cumulative effect gain of $4.5 million (net of income taxes of $2.4 million) or $0.08 per share which is included in income in the three months ended March 31, 2003. The adoption resulted in a January 1, 2003 cumulative effect adjustment to record (i) a $37.3 million increase in the carrying values of proved properties, (ii) a $21.0 million decrease in accumulated depletion, (iii) a $2.3 million increase in current plugging and abandonment liabilities, (iv) a $49.1 million increase in non-current plugging and abandonment liabilities, and (v) a $2.4 million decrease in deferred tax assets.
A reconciliation of the Companys liability for plugging and abandonment costs for the three months ended March 31, 2004 and 2003 is as follows (in thousands):
(4) ACQUISITIONS AND DISPOSITIONS
Acquisitions are accounted for as purchases, and accordingly, the results of operations are included in the Companys Statements of Operations from the respective date of acquisition. Purchase prices are assigned to acquired assets and assumed liabilities based on their estimated fair value at acquisition. The Company purchased various properties for $3.3 million and $6.0 million during the three months ended March 31, 2004 and 2003, respectively. The purchases include $1.8 million and $5.0 million for proved oil and gas reserves, respectively, with the remainder representing unproved acreage.
In December 2003, the Company purchased producing oil and gas properties covering 38,000 gross (32,000 net) acres of leases which are adjacent to the Companys Conger Field properties in West Texas. The purchase price was $88.0 million and the Company recorded $81.0 million to oil and gas properties, $4.6 million to transportation and field assets and facilities, $207,000 to inventory and $2.1 million additional asset retirement obligations. This acquisition was funded through the bank credit facility.
During the first quarter of 2004, the Company sold non-strategic properties for proceeds of $2.3 million. Proceeds from the disposal of miscellaneous properties depreciated on a group basis are credited to net book value with no immediate effect on income.
11
(5) SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended | ||||||||
March 31,
|
||||||||
2004
|
2003
|
|||||||
(in thousands) | ||||||||
Non-cash investing and financing activities:
|
||||||||
Common stock issued
|
||||||||
Under benefit plans
|
$ | 305 | $ | 1,274 | ||||
Exchanged for fixed income securities
|
| 760 | ||||||
Cash used in operating activities:
|
||||||||
Income taxes paid
|
$ | 150 | $ | | ||||
Interest paid
|
6,370 | 7,130 |
(6) INDEBTEDNESS
The Company had the following debt outstanding as of the dates shown below (in thousands) (interest rates at March 31, 2004, excluding the impact of interest rate swaps, are shown parenthetically):
March 31, | December 31, | |||||||
2004
|
2003
|
|||||||
Senior debt:
|
||||||||
Senior Credit Facility (2.8%)
|
$ | 171,100 | $ | 178,200 | ||||
Non-recourse debt:
|
||||||||
Great Lakes Credit Facility (2.9%)
|
67,500 | 70,000 | ||||||
Subordinated debt:
|
||||||||
6% Convertible Subordinated Debentures due 2007
|
11,649 | 11,649 | ||||||
7-3/8% Senior Subordinated Notes due 2013, net of discount
|
98,362 | 98,331 | ||||||
|
|
|
||||||
Total
|
$ | 348,611 | $ | 358,180 |
Interest paid in cash during the three months ended March 31, 2004 and 2003 totaled $6.4 million and $7.1 million, respectively. No interest expense was capitalized during the three months ended March 31, 2004 and 2003.
Senior Credit Facility
In 2002, the Company entered into an amended and restated $225.0 million revolving bank facility (the Senior Credit Facility) which is secured by substantially all of the assets of the Company (excluding the assets of Great Lakes). The Senior Credit Facility provides for a borrowing base subject to redeterminations semi-annually each April and October and pursuant to certain unscheduled redeterminations. At of March 31, 2004, the outstanding balance under the Senior Credit Facility was $171.1 million and there was $68.9 million of borrowing capacity available. Effective March 31, 2004, the borrowing base was increased from $225.0 million to $240.0 million and the commitment was increased from $225.0 million to $375.0 million. The loan matures on January 1, 2007. Borrowings under the Senior Credit Facility can either be base rate loans or LIBOR loans. On all base rate loans, the rate per annum is equal to the lesser of (i) the maximum rate (the weekly ceiling as defined in Section 303 of the Texas Finance Code or other applicable laws if greater) (the Maximum Rate) or, (ii) the sum of (A) the higher of (1) the prime rate for such date, or (2) the sum of the federal funds effective rate for such date plus one-half
12
of one percent (0.50%) per annum, plus a base rate margin of between 0.25% to 1.0% per annum depending on the total outstanding under the Senior Credit Facility relative to the borrowing base under the Senior Credit Facility. On all LIBOR loans, the Company pays a varying rate per annum equal to the lesser of (i) the Maximum Rate, or (ii) the sum of the quotient of (A) the LIBOR base rate, divided by (B) one minus the reserve requirement applicable to such interest period, plus a LIBOR margin of between 1.50% and 2.25% per annum depending on the total outstanding under the Senior Credit Facility relative to the borrowing base. The Company may elect, from time to time, to convert all or any part of its LIBOR loans to base rate loans or to convert all or any part of its base rate loans to LIBOR loans. The weighted average interest rate (including applicable margin) was 3.1% and 3.4% for the three months ended March 31, 2004 and 2003, respectively. A commitment fee is paid on the undrawn balance based on an annual rate of 0.375% to 0.50%. At March 31, 2004, the commitment fee was 0.375% and the interest rate margin was 1.75%. At April 30 2004, the interest rate (including applicable margin) was 3.3%.
Great Lakes Credit Facility
The Company consolidates its proportionate share of borrowings on the Great Lakes $275.0 million secured revolving bank facility (the Great Lakes Credit Facility). The Great Lakes Credit Facility is non-recourse to the Company and provides for a borrowing base subject to redeterminations semi-annually each April and October and pursuant to certain unscheduled redeterminations. As of March 31, 2004, the Companys portion of the outstanding balance owed under the Great Lakes Credit Facility was $67.5 million. The loan matures on January 1, 2007. Any advance under the commitment may be a base rate loan or a Eurodollar loan. On all base rate loans the Company pays a varying rate per annum equal to the lesser of (i) the maximum nonusurious rate of interest under applicable law, or (ii) the sum of the base rate plus a base rate margin of between 0.25% to 0.75% per annum depending on the amounts outstanding on the loan, plus all outstanding letters of credit, divided by the borrowing base under the Great Lakes Credit Facility. On all Eurodollar loans, the Company pays a varying rate per annum equal to the lesser of (i) the maximum nonusurious rate of interest under applicable law, or (ii) the Eurodollar rate plus a Eurodollar margin of between 1.5% to 2.0% per annum depending on the amounts outstanding on the loan, plus all outstanding letters of credit, divided by the borrowing base. Great Lakes may elect, from time to time, to convert all or any part of its Eurodollar loans to base rate loans or to convert all or any part of its base rate loans to Eurodollar loans. Cash distributions to members of the joint venture are limited by a covenant contained in the Great Lakes Credit Facility. A commitment fee is paid on the undrawn balance at an annual rate of 0.25% to 0.50%. At March 31, 2004, the commitment fee was 0.375% and the interest rate margin was 1.75%. The average interest rate on the Great Lakes Credit Facility, excluding hedges, was 2.9% and 3.5% for the three months ended March 31, 2004 and 2003, respectively. After hedging (see Note 7), the rate was 5.3% and 6.0% for the three months ended March 31, 2004 and 2003, respectively. At April 30, 2004, the interest rate was 2.9% excluding hedges and 5.3% after hedging.
8-3/4% Senior Subordinated Notes due 2007
In 1997, the Company sold $125 million of 8-3/4% Senior Subordinated Notes due 2007 (the 8-3/4% Notes). In August 2003, the Company redeemed the outstanding 8-3/4% Notes at 102.9% of principal amount, plus accrued interest. The aggregate redemption price, including the premium, was $70.8 million.
7-3/8% Senior Subordinated Notes due 2013
In July 2003, the Company issued $100.0 million of 7-3/8% Senior Subordinated Notes due 2013 (the 7-3/8% Notes). The Company pays interest on the 7-3/8% Notes semi-annually each January and July. The 7-3/8% Notes mature in July 2013 and are guaranteed by certain of the Companys subsidiaries (the Subsidiary Guarantors). The 7-3/8% Notes were issued at a discount which is amortized into interest expense over the life of the 7-3/8% Notes. The Company may redeem the 7-3/8% Notes, in whole or in part, at any time on or after July 15, 2008, at redemption prices from 103.7% of the principal amount as of July 15, 2008, and declining to 100.0% on July 15, 2011 and thereafter. Prior to July 15, 2006, the Company may redeem up to 35% of the original aggregate principal amount of the notes at a redemption price of 107.4% of the principal amount thereof plus accrued and unpaid interest, if any, with the proceeds of certain equity offerings. If the Company experiences a change of control, the Company may be required to repurchase all or a portion of the 7-3/8% Notes at 101% of the principal amount the plus accrued and unpaid interest. The 7-3/8% Notes and the guarantees by the Subsidiary Guarantors are general, unsecured obligations and are subordinated to the Companys and the Subsidiary Guarantors senior debt and
13
will be subordinated to future senior debt that the Company and the Subsidiary Guarantors are permitted to incur under the senior credit facilities and the indenture governing the 7-3/8% Notes.
6% Convertible Subordinated Debentures due 2007
In 1996, the Company issued $55.0 million of 6% Convertible Subordinated Debentures due 2007 (the 6% Debentures). Interest on the 6% Debentures is payable semi-annually each February and August. The 6% Debentures are convertible into shares of the Companys common stock at the option of the holder at any time prior to maturity, unless previously redeemed or repurchased, at a conversion price of $19.25 per share, subject to adjustment in certain events. The 6% Debentures mature in 2007 and are subject to redemption at the Companys option, in whole or in part, at redemption prices from 102.0% of the principal amount as of March 31, 2004, and declining to 101.0% in 2006. Upon a change of control, the Company is required to offer to repurchase each holders 6% Debenture at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. The 6% Debentures are unsecured general obligations and are subordinated to all of the Companys senior indebtedness. During the three month period ended March 31, 2003, $880,000 of the 6% Debentures was retired in exchange for 128,793 shares of the Companys common stock. The Company recorded a $465,000 conversion expense related to this exchange. On April 30, 2004, $11.6 million of the 6% Debentures was outstanding.
5-3/4%Trust Preferred Securities manditorily redeemable securities of subsidiary
In 1997, the Company issued $120.0 million of 5-3/4% Trust Convertible Preferred Securities (the Trust Preferred Securities). Each Trust Preferred Security was convertible at the holders option into shares of the Companys common stock, at a conversion price of $23.50 per share. Distributions on the Trust Preferred Securities were recorded as interest expense. In September 2003, the Company exchanged $10.2 million in cash and $50.0 million of a newly issued 5.9% cumulative convertible preferred stock (the Convertible Preferred) for $79.5 million of the Trust Preferred Securities. In December 2003, the remaining Trust Preferred Securities were redeemed for cash.
Debt Covenants
The debt agreements contain covenants relating to net worth, working capital, dividends and financial ratios. The Company was in compliance with all covenants at March 31, 2004. Under the Senior Credit Facility, common and preferred dividends are permitted, subject to the provisions of the restricted payment basket. The Senior Credit Facility provides for a restricted payment basket of $20.0 million plus 50% of net income (excluding Great Lakes) plus 66-2/3% of distributions, dividends or payments of debt from or proceeds from sales of equity interests of Great Lakes plus 66-2/3% of net cash proceeds from common stock issuances. In addition, there is a separate restricted basket that allows for the proceeds from the issuance of the 7-3/8% Notes to be used to repurchase junior securities. Approximately $39.5 million was available under the Senior Credit Facilitys restricted payment basket on March 31, 2004 and $5.5 million available under the separate restricted basket. The terms of the 7-3/8% Notes limit restricted payments (including dividends) to the greater of $20.0 million or a formula based on earnings since the issuance of the notes. The 7-3/8% Notes also include a separate restricted payments basket of $25.0 million to repurchase junior securities. At March 31, 2004, approximately $17.9 million was available under the 7-3/8% Notes restricted payments basket and $2.0 million under the separate basket.
(7) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Companys financial instruments include cash and equivalents, receivables, payables, debt and commodity and interest rate derivatives. The book value of cash and equivalents, receivables and payables is considered representative of fair value because of their short maturity. The book value of bank borrowings is believed to approximate fair value because of their floating rate structure.
14
The following table sets forth the book and estimated fair values of financial instruments as of March 31, 2004 and December 31, 2003 (in thousands):
(1) | Fair value based on quotes received from brokerage firms. Quotes as of March 31, 2004 were 103.5% for the 7-3/8% Notes and 100.1% for the 6% Debentures. |
A portion of future oil and gas sales is periodically hedged through the use of swap and collar contracts. Realized gains and losses on these instruments are reflected in the contract month being hedged as an adjustment to oil and gas revenue. At times, the Company seeks to manage interest rate risk through the use of swaps. Gains and losses on interest rate swaps are included as an adjustment to interest expense in the relevant periods.
At March 31, 2004, the Company had open hedging contracts covering 44.4 Bcf of gas at prices averaging $4.11 per Mmbtu, 1.1 million barrels of oil at prices averaging $25.65 per barrel and 0.6 million barrels of NGLs at prices averaging $20.84 per barrel. The Company also has collars covering 16.6 Bcf of gas at weighted averaged floor and cap prices of $4.25 to $6.47 per mcf and 1.6 million barrels of oil at weighted average floor and cap prices of $24.23 to $30.55 per barrel. The fair value, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract prices and a reference price generally New York Mercantile Exchange (NYMEX) on March 31, 2004, was a net unrealized pre-tax loss of $96.3 million. The contracts expire monthly through December 2006. Transaction gains and losses on settled contracts are determined monthly and are included as increases or decreases to oil and gas revenues in the period the hedged production is sold. Oil and gas revenues were decreased by $16.9 million and $25.9 million due to hedging in the three months ended March 31, 2004 and 2003, respectively. Other revenues in the Consolidated Statements of Operations were decreased for ineffective hedging losses of $1.6 million and gains of $804,000 in the three months ended March 31, 2004 and 2003, respectively.
15
The following schedule shows the effect of closed oil and gas hedges since January 1, 2003 (in thousands):
Through Great Lakes, the Company uses interest rate swap agreements to manage the interest rate risk under the Great Lakes Credit Facility. Under the interest swap agreements, the Company agrees to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and to receive in return, a specified variable rate of interest times the same notional principal amount. Changes in the fair value of interest rate swaps, which qualify for cash flow hedge accounting treatment, are reflected as adjustments to OCI to the extent the swaps are effective and are recognized as an adjustment to interest expense during the period in which the cash flows related to the interest payments are made. The ineffective portion of the changes in fair value of the interest rate swaps is recorded in interest expense in the period incurred. Interest expense was decreased by $799,000 and increased by $71,000 for ineffective hedging gains and losses in the three months ended March 31, 2004 and 2003, respectively. At March 31, 2004, Great Lakes had seven interest rate swap agreements totaling $110.0 million, of which 50% is consolidated by the Company. These swaps consist of two agreements totaling $45.0 million at 7.1% which expire in May 2004, two agreements totaling $20.0 million at rates of 2.3% which expire in December 2004, one agreement for $10.0 million at 1.4% which expires in June 2005 and two agreements totaling $35.0 million at 1.8% which expire in June 2006. The fair value of the swaps at March 31, 2004 was a net loss of $536,000, of which 50% is consolidated at the Company.
The combined fair value of net unrealized losses on oil and gas hedges and net losses on interest rate swaps totaled $96.6 million and appear as short-term and long-term unrealized derivative gains and losses on the balance sheet. Hedging activities are conducted with major financial and commodities trading institutions which management believes are acceptable credit risks. At times, such risks may be concentrated with certain counterparties. The creditworthiness of the counterparties is subject to periodic review.
The following table sets forth qualitative information of derivative
instruments at March 31, 2004 (in thousands):
As of March 31, 2004
Assets
(Liabilities)
$
$
(86,293
)
(a)
$
$
(10,038
)
(b)
$
44
$
(312
)
(c)
(a) | $55.7 million, $30.2 million and $391,000 is expected to be reclassified to income in 2004, 2005 and 2006, respectively, if prices remain constant. | |||
(b) | $4.7 million, $5.1 million and $247,000 is expected to be reclassified to income in 2004, 2005 and 2006, respectively, if prices remain constant. | |||
(c) | $312,000 is expected to be reclassified to income in 2004, if rates remain constant. |
16
(8) COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions and claims arising in the ordinary course of business which, in the opinion of management, are likely to be resolved without material adverse effect on the Companys financial position or results of operations.
(9) STOCKHOLDERS EQUITY
The Company has authorized capital stock of 110 million shares, including 100 million shares of common stock and 10 million shares of preferred stock. Stockholders equity was $267.5 million at March 31, 2004. In September 2003, the Company issued 1.0 million shares of Convertible Preferred, par value $1.00 and liquidation preference $50 per share. The Convertible Preferred is convertible into common stock at $8.50 per share. Each share is non-voting. Beginning on September 30, 2007, the Company may, at its sole election, redeem the Convertible Preferred for cash at 103% and declines to 100% on September 30, 2012. Beginning on September 30, 2005, the Company may, cause the Convertible Preferred to convert, in whole but not in part, into common stock if, at the time, the common stock has closed at $11.90 or higher for 20 of the previous consecutive 30 trading days. Accrued dividends are cumulative and are payable quarterly in arrears.
The following is a schedule of changes in the number of outstanding common shares from December 31, 2002 to March 31, 2004:
(10) STOCK OPTION AND PURCHASE PLANS
The Company has four stock option plans, of which two are active, and a stock purchase plan. Under these plans, incentive and non-qualified options and stock purchase rights are issued to directors, officers and employees pursuant to decisions of the Compensation Committee of the Board of Directors (the Board). Information with respect to the option plans is summarized below:
Inactive
|
Active
|
|||||||||||||||||||
Domain | 1989 | Directors | 1999 | |||||||||||||||||
Plan
|
Plan
|
Plan
|
Plan
|
Total
|
||||||||||||||||
Outstanding on December 31, 2003
|
72,664 | 235,174 | 204,000 | 3,319,297 | 3,831,135 | |||||||||||||||
Granted
|
| | | 1,275,500 | 1,275,500 | |||||||||||||||
Exercised
|
(72,664 | ) | (86,524 | ) | | (294,224 | ) | (453,412 | ) | |||||||||||
Expired
|
| | | (1,754 | ) | (1,754 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
|
(72,664 | ) | (86,524 | ) | | 979,522 | 820,334 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Outstanding on March 31, 2004
|
| 148,650 | 204,000 | 4,298,819 | 4,651,469 | |||||||||||||||
|
|
|
|
|
|
17
In 1999, shareholders approved a stock option plan (the 1999 Plan) providing for the issuance of options of 1.4 million common shares. Subsequently, shareholders voted to increase the number of options issuable to 8.75 million. All options issued under the 1999 Plan through May 2002 vest over 4 years and have a maximum term of 10 years, while options issued after May 2002 vest over a three year period and have a maximum term of five years. During the three months ended March 31, 2004, 1.3 million options were granted to eligible employees at exercise prices ranging from $10.48 to $11.10 a share. At March 31, 2004, 4.3 million options were outstanding at exercise prices ranging from $1.94 to $11.10 a share.
In 1994, shareholders approved the Outside Directors Stock Option Plan (the Directors Plan). In 2000, shareholders voted to increase the number of options issuable to 300,000, extended the term of the options to ten years and set the vesting period at 25% per year beginning a year after grant. In 2002, the term of the options was changed to five years with vesting immediately upon grant. Directors options are granted upon initial election as a director and annually upon a directors re-election at the annual meeting. At March 31, 2004, 204,000 options were outstanding under the Directors Plan at exercise prices ranging from $2.81 to $6.00 a share.
The Company maintains the 1989 Stock Option Plan (the 1989 Plan) which authorized the issuance of options on 3.0 million common shares. No options have been granted under the plan since 1999. Options issued under the 1989 Plan vested over a three year period and expire in ten years. At March 31, 2004, 148,650 options remained outstanding under the 1989 Plan at exercise prices ranging from $2.63 to $7.63 a share. The last of these options expire in 2009.
The Domain stock option plan was adopted when that company was acquired in 1998, with existing Domain options becoming exercisable into the Companys common stock. In January 2004, all outstanding options were exercised and the plan was terminated.
In total, approximately 4.7 million options were outstanding at March 31, 2004 at exercise prices of $1.94 to $11.10 a share as follows:
18
In 1997, shareholders approved a plan (the Stock Purchase Plan) authorizing the sale of 900,000 shares of common stock to officers, directors, employees and consultants. In 2001, shareholders voted to increase the number of shares authorized under the Stock Purchase Plan to 1.75 million. Under the Stock Purchase Plan, the right to purchase shares at prices ranging from 50% to 85% of market value may be granted. To date, all purchase rights have been granted at 75% of market. Due to the discount from market value, the Company recorded additional compensation expense of $26,000 in the three months ended March 31, 2003. Through March 31, 2004, 1,377,319 shares have been sold under the Stock Purchase Plan. At March 31, 2004, there were no rights outstanding to purchase shares.
During 2003, the Company issued 234,000 restricted shares of its common stock as a compensation to directors, officers and employees of the Company. The restricted share grants included 136,000 issued to directors and 98,000 to officers and employees with vesting over a three year period. The Company recorded compensation expense of $116,500 during the first three months ended March 31, 2004 related to these grants.
(11) DEFERRED COMPENSATION
In 1996, the Board of the Company adopted a deferred compensation plan (the Plan). The Plan allows certain senior employees and directors to defer all or a portion of their salaries and bonuses and invests such amounts in common stock of the Company or makes other investments at the employees discretion. The assets of the Plan are held in a rabbi trust (the Rabbi Trust) and, therefore, are available to satisfy the claims of the Companys creditors in the event of bankruptcy or insolvency of the Company. The Companys stock held in the Rabbi Trust is treated in a manner similar to treasury stock with an offsetting amount reflected as a deferred compensation liability of the Company. The carrying value of the deferred compensation liability is adjusted to fair value each reporting period by a charge or credit to general and administrative expense on the Companys Consolidated Statements of Operations. The assets of the Rabbi Trust, other than common stock of the Company, are invested in marketable securities and reported at market value in other assets on the Companys Consolidated Balance Sheets. The deferred compensation liability on the Companys balance sheet reflects the market value of the marketable securities and the Companys common stock held in the Rabbi Trust. The cost of common stock held in the Rabbi Trust is shown as a reduction to stockholders equity. Changes in the market value of the marketable securities are reflected in OCI, while changes in the market value of the common stock held in the Rabbi Trust is charged or credited to general and administrative expense each quarter. The Company recorded mark-to-market expense related to the Company stock held in the Rabbi Trust of $4.4 million and $386,000 in the three months ended March 31, 2004 and 2003, respectively.
(12) BENEFIT PLAN
The Company maintains a 401(k) Plan that permits employees to contribute a portion of their salary, subject to Internal Revenue limitations, on a pre-tax basis. Historically, the Company has made discretionary contributions of its common stock to the 401(k) Plan annually. All Company contributions become fully vested after the individual employee has three years of service with the Company. In 2003, 2002 and 2001, the Company contributed common stock valued at $610,000, $602,000 and $554,000 at then market values, respectively, to the 401(k) Plan. The Company does not require that employees hold the contributed stock in their account. Employees have a variety of investment options in the 401(k) Plan and may, at any time, diversify out of the Companys common stock based on their personal investment strategy.
19
(13) INCOME TAXES
The Company follows SFAS No. 109, Accounting for Income Taxes, pursuant to which the liability method is used. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and regulations that will be in effect when the differences are expected to reverse. The significant components of deferred tax liabilities and assets on March 31, 2004 and December 31, 2003 were as follows (in thousands):
March 31, | December 31, | |||||||
2004
|
2003
|
|||||||
Deferred tax assets/(liabilities)
|
||||||||
Net unrealized loss in OCI
|
$ | 34,263 | $ | 24,620 | ||||
Other
|
(19,478 | ) | (15,592 | ) | ||||
|
|
|
||||||
Net deferred tax asset
|
$ | 14,785 | $ | 9,028 | ||||
|
|
|
At December 31, 2003, deferred tax assets exceeded deferred tax liabilities by $9.0 million with $24.6 million of deferred tax assets related to deferred hedging losses included in OCI. Based on the Companys recent profitability and its current outlook, no valuation allowance was deemed necessary at December 31, 2003. At March 31, 2004, deferred tax assets exceeded deferred tax liabilities by $14.8 million with $34.3 million of deferred tax assets related to hedging losses in OCI.
At December 31, 2003, the Company had regular net operating loss (NOL) carryovers of $188.8 million and alternative minimum tax (AMT) NOL carryovers of $161.0 million that expire between 2012 and 2021. At December 31, 2003, the Company had an AMT credit carryover of $2.4 million which is not subject to limitation or expiration.
20
(14) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share amounts):
Three Months Ended, | ||||||||
March 31
|
||||||||
2004
|
2003
|
|||||||
Numerator:
|
||||||||
Income before cumulative effect of change in
accounting principle
|
$ | 6,620 | $ | 4,963 | ||||
Preferred dividends
|
(738 | ) | | |||||
|
|
|
||||||
Numerator for basic earnings per share before
cumulative effect of
change in accounting principle
|
5,882 | 4,963 | ||||||
Cumulative effect of accounting change
|
| 4,491 | ||||||
|
|
|
||||||
Numerator for basic earnings per share
|
$ | 5,882 | $ | 9,454 | ||||
|
|
|
||||||
Income before cumulative effect of change in
accounting principle
|
$ | 5,882 | $ | 4,963 | ||||
Effect of dilutive securities
|
| | ||||||
|
|
|
||||||
Numerator for diluted earnings per share before
cumulative effect
of change in accounting principle
|
5,882 | 4,963 | ||||||
Cumulative effect of accounting change
|
| 4,491 | ||||||
|
|
|
||||||
Numerator for diluted earnings per share after
assumed conversions
and cumulative effect of change in
accounting principle
|
$ | 5,882 | $ | 9,454 | ||||
|
|
|
||||||
Denominator:
|
||||||||
Weighted average shares outstanding
|
56,646 | 55,196 | ||||||
Stock held by employee benefit trust
|
(1,672 | ) | (1,327 | ) | ||||
|
|
|
||||||
Weighted average shares, basic
|
54,974 | 53,869 | ||||||
|
|
|
||||||
Effect of dilutive securities:
|
||||||||
Weighted average shares outstanding
|
56,646 | 55,196 | ||||||
Employee stock options
|
1,092 | 413 | ||||||
|
|
|
||||||
Dilutive potential common shares for diluted
earnings per share
|
57,738 | 55,609 | ||||||
|
|
|
||||||
Earnings per share basic and diluted:
|
||||||||
Before cumulative effect of accounting change
|
||||||||
Basic
|
$ | 0.11 | $ | 0.10 | ||||
Diluted
|
$ | 0.10 | $ | 0.09 | ||||
After cumulative effect of accounting change
|
||||||||
Basic
|
$ | 0.11 | $ | 0.18 | ||||
Diluted
|
$ | 0.10 | $ | 0.17 |
21
Options to purchase 19,500 shares and 2.6 million shares of common stock were outstanding but not included in the computations of diluted net income per share for the three months ended March 31, 2004 and 2003, respectively, because the exercise prices of the options were greater than the average market price of the common shares and would be anti-dilutive to the computations. The 6% Debentures and the 5.9% Preferred were also not included because their inclusion would have been anti-dilutive.
(15) MAJOR CUSTOMERS
The Company markets its production on a competitive basis. Gas is sold
under various types of arrangements ranging from short-term contracts that are
cancelable within 30 days or less to life of well contracts. The price for oil
is generally equal to a posted price set by major purchasers in the area. The
Company sells to oil purchasers on the basis of price and service and may be
changed on 30 days notice. For the three months ended March 31, 2004, three
customers, Duke Energy Field Services, Inc., ConocoPhillips Company and Louis
Dreyfus Natural Gas Corp., accounted for 16%, 13% and 13%, respectively, of oil
and gas revenues. Management believes that the loss of any one customer would
not have a material long-term adverse effect on the Company. The
creditworthiness of our customers is subject to periodic review.
(16) OIL AND GAS ACTIVITIES
The following summarizes selected information with respect to producing
activities. Exploration costs include capitalized as well as expensed outlays
(in thousands):
22
Three Months
Year Ended
Ended March 31,
December 31,
2004
2003
$
1,364,432
$
1,350,616
10,265
12,195
1,374,697
1,362,811
(651,403
)
(639,429
)
$
723,294
$
723,382
$
1,487
$
5,580
1,800
90,723
4,622
22,044
83,433
4,060
22,564
29,391
206,922
408
4,597
$
29,799
$
211,519
(a)
Includes $3,567 and $13,946 of exploration costs
expensed in the three months ended March 31, 2004 and the
twelve months ended December 31, 2003, respectively.
(17) INVESTMENT IN GREAT LAKES
The Company owns 50% of Great Lakes and consolidates its proportionate interest in the joint ventures assets, liabilities, revenues and expenses. The following table summarizes the 50% interest in Great Lakes financial statements as of or for the three months ended March 31, 2004 and 2003 (in thousands):
March 31, | March 31, | |||||||
2004
|
2003
|
|||||||
Balance Sheet
|
||||||||
Current assets
|
$ | 9,055 | $ | 11,827 | ||||
Oil and gas properties, net
|
218,945 | 206,098 | ||||||
Transportation and field assets, net
|
14,506 | 15,190 | ||||||
Unrealized derivative gain
|
23 | 435 | ||||||
Other assets
|
260 | 92 | ||||||
Current liabilities
|
26,762 | 20,106 | ||||||
Unrealized derivative loss
|
6,271 | 4,779 | ||||||
Asset retirement obligation
|
16,732 | 17,277 | ||||||
Long-term debt
|
67,500 | 78,500 | ||||||
Members equity
|
125,524 | 112,980 | ||||||
Statement of Operations
|
||||||||
Revenues
|
$ | 14,718 | $ | 14,453 | ||||
Direct operating expense
|
2,530 | 2,476 | ||||||
Production taxes
|
132 | 113 | ||||||
Exploration expense
|
484 | 294 | ||||||
G&A expense
|
554 | 466 | ||||||
Interest expense
|
464 | 1,264 | ||||||
DD&A
|
3,402 | 3,668 | ||||||
Pretax income
|
7,152 | 6,172 | ||||||
Cumulative effect of change in
accounting principle (before
income taxes)
|
| 1,601 | ||||||
Net income
|
7,152 | 7,773 |
(18) GAIN ON RETIREMENT OF SECURITIES
In the first quarter of the 2003, $400,000 of the Trust Preferred Securities were repurchased for cash and $880,000 of the 6% Debentures was exchanged for common stock. A gain of $150,000 was recorded on the cash transaction and a $465,000 conversion expense was recorded on the exchange transaction.
(19) SUBSEQUENT EVENT
On April 30, 2004, the Company announced the acquisition of a privately held company owning producing oil and gas properties in the Permian Basin for $22.5 million. The Company does not expect the acquisition to have a material impact on the Companys business or results of operations.
23
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting Financial Condition and Liquidity
Critical Accounting Policies
The Companys discussion and analysis of its financial condition and
results of operation are based upon unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect
what is reported in the financial statements and related footnote disclosures.
Application of certain of the Companys accounting policies, including those
related to oil and gas revenues, oil and gas properties, income taxes, and
litigation, bad debts, marketable securities, fair value of derivatives, asset
retirement obligations, the deferred compensation plan, contingencies and
litigation require significant estimates. The Company bases its estimates on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Property, Plant and Equipment
Proved reserves are defined by the SEC as those volumes of crude oil,
condensate, natural gas liquids and natural gas that geological and engineering
data demonstrate with reasonable certainty are recoverable from known
reservoirs under existing economic and operating conditions. Proved developed
reserves are volumes expected to be recovered through existing wells with
existing equipment and operating methods. Although the Companys engineers are
knowledgeable of and follow the guidelines for reserves as established by the
SEC, the estimation of reserves requires the engineers to make a significant
number of assumptions based on professional judgment. Reserve estimates are
updated at least annually and consider recent production levels and other
technical information about each well. Estimated reserves are often subject to
future revision, which could be substantial, based on the availability of
additional information, including: reservoir performance, new geological and
geophysical data, additional drilling, technological advancements, price
changes, and other economic factors. Changes in oil and gas prices can lead to
a decision to start-up or shut-in production, which can lead to revisions to
reserve quantities. Reserve revisions in turn cause adjustments in the
depletion rates utilized by the Company. The Company can not predict what
reserve revisions may be required in future periods.
Depletion rates are determined based on reserve quantity estimates and the
capitalized costs of producing properties. As the estimated reserves are
adjusted, the depletion expense for a property will change, assuming no change
in production volumes or the costs capitalized. Estimated reserves are used as
the basis for calculating the expected future cash flows from a property, which
are used to determine whether that property may be impaired. Reserves are also
used to estimate the supplemental disclosure of the standardized measure of
discounted future net cash flows relating to its oil and gas producing
activities and reserve quantities annual disclosure to the consolidated
financial statements. Changes in the estimated reserves are considered changes
in estimates for accounting purposes and are reflected on a prospective basis.
The Company utilizes the successful efforts method to account for
exploration and development expenditures. Unsuccessful exploration wells are
expensed and can have a significant effect on operating results. Successful
exploration drilling costs and all development costs are capitalized and
systematically charged to expense using the units of production method based on
proved developed oil and natural gas reserves as estimated by the Companys and
independent engineers. Proven leasehold costs are charged to expense using the
units of production method based on total proved reserves. Unproved properties
are assessed periodically and impairments to value are charged to expense.
The Company monitors its long-lived assets recorded in Property, plant and
equipment in the Consolidated Balance Sheet to insure that they are fairly
presented. The Company must evaluate its properties for potential impairment
when circumstances indicate that the carrying value of an asset could exceed
its fair value. A significant amount of judgment is involved in performing
these evaluations since the results are based on estimated future events. Such
events include a projection of future oil and gas sales prices, an estimate of
the ultimate amount of
24
recoverable oil and natural gas reserves that will be produced, the timing
of future production, future production costs, and future inflation. The need
to test a property for impairment can be based on several factors, including a
significant reduction in sales prices for oil and/or gas, unfavorable
adjustment to reserves, or other changes to contracts, environmental
regulations, or tax laws. All of these factors must be considered when testing
a propertys carrying value for impairment. The Company cannot predict whether
impairment charges may be recorded in the future.
Derivatives
The Company uses commodity derivative contracts to manage its exposure to
oil and gas price volatility. The Company accounts for its commodity
derivatives in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). Earnings are affected by the
ineffective portion of a hedge contract (changes in realized prices that do not
match the changes in the hedge price). Ineffective gains or losses are
recorded in other revenue while the hedge contract is open and may increase or
reverse until settlement of the contract. This may result in significant
volatility to current period income. For derivatives qualifying as hedges, the
effective portion of any changes in fair value is recognized in stockholders
equity as other comprehensive income (OCI) and then reclassified to earnings
when the transaction is consummated. This may result in significant volatility
in stockholders equity. The fair value of open hedging contracts is an
estimated amount that could be realized upon termination.
The commodity derivatives used by the Company include commodity swaps and
collars. While there is a risk that the financial benefit of rising prices may
not be captured, management believes the benefits of stable and predictable
cash flow are important. Among these benefits are: more efficient utilization
of existing personnel and planning for future staff additions, the flexibility
to enter into long term projects requiring substantial committed capital,
smoother and more efficient execution of the Companys ongoing drilling and
production enhancement programs, more consistent returns on invested capital,
and better access to bank and other credit markets. Through Great Lakes, the
Company also has interest rate swap agreements to protect against the
volatility of variable interest rates under its credit facility.
Asset Retirement Obligations
The Company has significant obligations to remove tangible equipment and
restore land or seabed at the end of oil and gas production operations. The
Companys removal and restoration obligations are primarily associated with
plugging and abandoning wells and removing and disposing of offshore oil and
gas platforms. Estimating the future asset removal costs is difficult and
requires management to make estimates and judgments because most of the removal
obligations are many years in the future and contracts and regulations often
have vague descriptions of what constitutes removal. Asset removal
technologies and costs are constantly changing, as well as regulatory,
political, environmental, safety and public relations considerations.
Asset retirement obligations are not unique to the Company or to the oil
and gas industry and in 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, (SFAS 143). The Company adopted this statement
effective January 1, 2003, as discussed in Note 4 to the Consolidated Financial
Statements. SFAS 143 significantly changed the method of accruing for costs an
entity is legally obligated to incur related to the retirement of fixed assets
(asset retirement obligations or ARO). Primarily, the new statement
requires the Company to record a separate liability for the discounted present
value of the Companys asset retirement obligations, with an offsetting
increase to the related oil and gas properties on the Companys Consolidated
Balance Sheet.
Inherent in the present value calculation are numerous assumptions and
judgments including the ultimate retirement costs, inflation factors, credit
adjusted discount rates, timing of retirement, and changes in the legal,
regulatory, environmental and political environments. To the extent future
revisions to these assumptions impact the present value of the existing ARO
liability, a corresponding adjustment is made to the oil and gas property
balance. In addition, increases in the discounted ARO liability resulting from
the passage of time will be reflected as accretion expense in the Consolidated
Statement of Operations.
SFAS 143 required a cumulative adjustment to reflect the impact of
implementing the statement had the rule been in effect since inception. The
Company, therefore, calculated the cumulative accretion expense on the ARO
25
liability and the cumulative depletion expense on the corresponding
property balance. The sum of this cumulative expense was compared to the
depletion expense originally recorded. Because the historically recorded
depletion expense was higher than the cumulative expense calculated under SFAS
143, the difference resulted in a $4.5 million gain, net of tax, which the
Company recorded as cumulative effect of change in accounting principle on
January 1, 2003.
Deferred Taxes
The Company is subject to income and other similar taxes in all areas in
which it operates. When recording income tax expense, certain estimates are
required because: (a) income tax returns are generally filed months after the
close of its calendar year; (b) tax returns are subject to audit by taxing
authorities and audits can often take years to complete and settle; and (c)
future events often impact the timing of when income tax expenses and benefits
are recognized by the Company. The Company has deferred tax assets relating to
tax operating loss carry forwards and other deductible differences. The
Company routinely evaluates its deferred tax assets to determine the likelihood
of their realization. A valuation allowance has not been recognized for
deferred tax assets due to managements belief that these assets are likely to
be realized. At year-end 2003, deferred tax assets exceeded deferred tax liabilities by
$9.0 million with $24.6 million of deferred tax assets related to deferred
hedging losses included in OCI. Based on the Companys projected
profitability, no valuation allowance was deemed necessary.
The Company occasionally is challenged by taxing authorities over the
amount and/or timing of recognition of revenues and deductions in its various
income tax returns. Although the Company believes that it has adequate
accruals for matters not resolved with various taxing authorities, gains or
losses could occur in future years from changes in estimates or resolution of
outstanding matters. Currently, none of the consolidated tax returns of the
Company are under audit or review by the IRS.
Contingent Liabilities
A provision for legal, environmental, and other contingent matters is
charged to expense when the loss is probable and the cost can be reasonably
estimated. Judgment is often required to determine when expenses should be
recorded for legal, environmental, and contingent matters. In addition, the
Company often must estimate the amount of such losses. In many cases,
managements judgment is based on interpretation of laws and regulations, which
can be interpreted differently by regulators and/or courts of law. Management
closely monitors known and potential legal, environmental, and other contingent
matters, and makes its best estimate of when the Company should record losses
for these based on available information.
Bad Debt Expense
The Company periodically assesses the recoverability of all material trade
and other receivables to determine their collectability. At IPF, receivables
are evaluated quarterly and provisions for uncollectible amounts are
established. Such provisions for uncollectible amounts are recorded when
management believes that a receivable is not recoverable based on current
estimates of expected discounted cash flows.
Revenues
The Company recognizes revenues from the sale of products and services in
the period delivered. Revenues are sensitive to changes in prices received for
our products. A substantial portion of production is sold at prevailing market
prices, which fluctuate in response to many factors that are outside of the
Companys control. Imbalances in the supply and demand for oil and natural gas
can have dramatic effects on prices. Political instability and availability of
alternative fuels could impact worldwide supply, while economic factors can
impact demand. At IPF, payments believed to relate to return are recognized as
income. Currently, all receipts are being recognized as a return of capital.
Other
The Company records a write down of marketable securities when the decline
in market value is considered to be other than temporary. Third party
reimbursements for administrative overhead costs incurred by the Company
26
in its role as operator of oil and gas properties are applied to reduce
general and administrative expense. Salaries and other employment costs of
those employees working on the Companys exploration efforts are expensed as
exploration expense. The Company does not capitalize general and
administrative expense or interest expense.
Liquidity and Capital Resources
During the three months ended March 31, 2004, the Company spent $29.8
million on development, exploration, and acquisitions. During the three month
period ending March 31, 2004, debt declined $9.6 million. At March 31, 2004,
the Company had $913,000 in cash, total assets of $842.3 million and, a debt to
capitalization ratio of 56.6%. Available borrowing capacity at March 31, 2004
was $68.9 million on the Senior Credit Facility and $90.0 million on the Great
Lakes Credit Facility. Long-term debt at March 31, 2004 totaled $348.6
million, including $171.1 million of Senior Credit Facility debt, $67.5 million
of Great Lakes Credit Facility debt, $98.4 million of 7-3/8% Notes and $11.6
million of 6% Debentures.
Cash is required to fund capital expenditures necessary to offset inherent
declines in production and proven reserves which is typical in the oil and gas
industry. Future success in growing reserves and production will be highly
dependent on capital resources available and the success of finding or
acquiring additional reserves. The Company believes that net cash generated
from operating activities and unused committed borrowing capacity under the
credit facilities combined with the oil and gas price hedges currently in place
will be adequate to satisfy near term financial obligations and liquidity
needs. However, long-term cash flows are subject to a number of variables
including the level of production and prices as well as various economic
conditions that have historically affected the oil and gas industry. A
material drop in oil and gas prices or a reduction in production and reserves
would reduce the Companys ability to fund capital expenditures, reduce debt,
meet financial obligations and remain profitable. The Company operates in an
environment with numerous financial and operating risks, including, but not
limited to, the inherent risks of the search for, development and production of
oil and gas, the ability to buy properties and sell production at prices which
provide an attractive return and the highly competitive nature of the industry.
The Companys ability to expand its reserve base is, in part, dependent on
obtaining sufficient capital through internal cash flow, borrowings or the
issuance of debt or equity securities. There can be no assurance that internal
cash flow and other capital sources will provide sufficient funds to maintain
capital expenditures.
The debt agreements contain covenants relating to net worth, working
capital, dividends, and financial ratios. The Company was in compliance with
all covenants at March 31, 2004. Under the Senior Credit Facility, common and
preferred dividends are permitted, subject to the terms of the restricted
payment basket. The Senior Credit Facility provides for a restricted payment
basket of $20.0 million plus 50% of net income (excluding Great Lakes) plus
66-2/3% of distributions, dividends or payments of debt from or proceeds from
sales of equity interests of Great Lakes plus 66-2/3% of net cash proceeds from
common stock issuances occurring since December 31, 2001. Approximately $39.5 million was available under the
Senior Credit Facilitys restricted payment basket on March 31, 2004. The
terms of the 7-3/8% Notes limit restricted payments (including dividends) to
the greater of $20.0 million or a formula based on 50% of net
income since October 1, 2003 and 100% of net cash proceeds from common stock
issuances. Approximately $17.9 million was available under the 7-3/8% Notes
restricted payment basket on March 31, 2004.
Cash Flow
The Companys principal sources of cash are operating cash flow, and bank
borrowings and at times, issuance of debt and equity securities. The Companys
cash flow is highly dependent on oil and gas prices. The Company has entered
into hedging swap agreements covering 44.4 Bcf of gas, 1.1 million barrels of
oil and 0.6 million barrels of NGLs for the remainder of 2004 through the end
of 2006. The Company also has collars covering 16.6 Bcf of gas and 1.6 million
barrels of oil. The $26.6 million of capital expenditures in the three months
ended March 31, 2004 was funded with internal cash flow. Net cash provided by
operations for the three months ended March 31, 2004 and 2003 was $32.2 million
and $16.1 million, respectively. Cash flow from operations was higher than the
prior year due to higher prices and volumes partially offset by higher
exploration and direct operating expenses. Net cash used in investing for the
three months ended March 31, 2004 and 2003 was $23.2 million and $24.0 million,
respectively. The 2004 period included $22.8 million of additions to oil and
gas properties offset by $2.3 million of proceeds. The 2003 period included
$20.2 million of additions to oil and gas properties. Net cash provided by
(used in) financing for the three months ended March 31, 2004 and 2003 was
($8.7 million) and $7.9 million, respectively. During the first three months
of 2004, total debt decreased $9.6 million. Senior Credit Facility
27
debt declined $7.1 million and the Great Lakes Credit Facility decreased $2.5
million. The net decrease in debt was the result of excess cash flows.
Dividends to Stockholders
On April 12, 2004, the Board of Directors declared a dividend of one cent
per share on the Companys common stock, payable on May 31, 2004 to
stockholders of record at the close of business on May 14, 2004. Also, in
January 2004, the Company paid common stock dividends of $565,000.
Capital Requirements
The 2004 capital budget is approximately $126.0 million (excluding
acquisitions) and based on current projections, the Company expects to fund its
capital budget with internal cash flow. During the three months ended March
31, 2004, $29.8 million of development, exploration and
acquisition spending was funded with internal cash
flow.
Banking
The Company maintains two separate revolving bank credit facilities: a
$375.0 million Senior Credit Facility and a $275.0 million Great Lakes Credit
Facility (of which 50% is consolidated at the Company). Each facility is
secured by substantially all the borrowers assets. The Great Lakes Credit
Facility is non-recourse to the Company. As Great Lakes is 50% owned, half of
its borrowings are consolidated in the Companys financial statements.
Availability under the facilities is subject to borrowing bases set by the
banks semi-annually and in certain other circumstances. Redeterminations,
other than increases, require the approval of 75% of the lenders while
increases require unanimous approval.
At April 30, 2004, the Senior Credit Facility had a $240.0 million
borrowing base of which $46.6 million was available. The Great Lakes Credit
Facility, half of which is consolidated at the Company, had a $225.0 million
borrowing base, of which $92.0 million was available.
Hedging Oil and Gas Prices
The Company enters into hedging agreements to reduce the impact of oil and
gas price volatility on its operations. At March 31, 2004, swaps were in place
covering 44.4 Bcf of gas at prices averaging $4.11 per Mmbtu, 1.1 million
barrels of oil at prices averaging $25.65 per barrel and 0.6 million barrels of
NGLs at prices averaging $20.84 per barrel. The Company also has collars
covering 16.6 Bcf of gas at weighted average floor and cap prices of $4.25 to
$6.47 per mcf and 1.6 million barrels of oil at prices of $24.23 to $30.55 per
barrel. Their fair value at March 31, 2004 (the estimated amount that would be
realized on termination based on contract price and a reference price,
generally NYMEX) was a net unrealized pre-tax loss of $96.3 million. Gains and
losses are determined monthly and are included as increases or decreases in oil
and gas revenues in the period the hedged production is sold. An ineffective
portion (changes in contract prices that do not match changes in the hedge
price) of open hedge contracts is recognized in earnings in other revenue as it
occurs. Net decreases to oil and gas revenues from hedging were $16.9 million
and $25.9 million for the three months ended March 31, 2004 and 2003,
respectively.
28
At March 31, 2004, the following commodity derivative contracts were
outstanding:
Interest Rates
At March 31, 2004, the Company had $348.6 million of debt outstanding. Of
this amount, $110.0 million bore interest at fixed rates averaging 7.2%.
Senior Credit Facility debt and Great Lakes Credit Facility debt totaling
$238.6 million bore interest at floating rates which averaged 2.9% at March 31,
2004. At times, the Company enters into interest rate swap agreements to limit
the impact of interest rate fluctuations on its floating rate debt. At March
31, 2004, Great Lakes had interest rate swap agreements totaling $110.0
million, 50% of which is consolidated at the Company. These swaps consist of
$45.0 million at 7.1% which expire in May 2004, $20.0 million at rates
averaging 2.3% which expire in December 2004, $10.0 million at 1.4% which
expires in June 2005 and $35.0 million at 1.8% which expire in June 2006. The
fair value of the swaps, based on then current quotes for equivalent agreements
at March 31, 2004 was a net loss of $536,000, of which 50% is consolidated at
the Company. The 30 day LIBOR rate on March 31, 2004 was 1.1%.
Inflation and Changes in Prices
The Companys revenues, the value of its assets, its ability to obtain
bank loans or additional capital on attractive terms have been and will
continue to be affected by changes in oil and gas prices. Oil and gas prices
are subject to significant fluctuations that are beyond the Companys ability
to control or predict. During the first three months of 2004, the Company
received an average of $32.15 per barrel of oil and $5.21 per mcf of gas before
hedging compared to $31.44 per barrel of oil and $6.08 per mcf of gas in the
same period of the prior year. Although certain of the Companys costs and
expenses are affected by general inflation, inflation does not normally have a
significant effect on the Company. During 2003, the Company experienced a
modest overall increase in drilling and operational costs when compared to the
prior year. Increases in commodity prices can cause inflationary pressures
specific to the industry to also increase certain costs. The Company expects
an increase in these costs in 2004.
29
Results of Operations
Volumes and sales data:
30
The following table identifies certain items included in the results of
operations and is presented to assist in comparing the first quarter 2004 to
the same period of the prior year. The table should be read in conjunction
with the following discussions of results of operations (in thousands):
Comparison of 2004 to 2003
Overview
The first quarter of 2004 resulted in a quarter of solid production growth
derived from our successful drilling program and a full quarter of production
from the December 2003 Conger Field acquisition. Production was 15% higher
than the first quarter of last year and 7.7% higher than the previous quarter.
Realized oil and gas prices were 3% higher in the first quarter of 2004 when
compared to the first quarter of 2003.
The
Company spent approximately $30 million during the first quarter of
2004 as part of our $126 million capital spending program (excluding
acquisitions). Drilling success was achieved in each of the Companys
divisions during the first quarter of 2004 and the quarter ended with fifteen
rigs running. Debt decreased $9.6 million during the first quarter of 2004
through the application of operating cash flow and proceeds of $2.3 million
from the sale of non-strategic producing properties. Cash operating expenses
decreased from the same quarter of the prior year, but prices of some oil field
goods and services, particularly tubular goods, have noticeably increased. The
Companys basic business strategy of pursuing consistent drill bit growth
supplemented by complementary acquisitions remains in place and is evident in
the first quarter of 2004 operating and financial performance
.
Quarters Ended March 31, 2004 and 2003
Net income in the first quarter of 2004 totaled $6.6 million, compared to
$9.5 million in the prior year period. The first quarter of 2003 includes a
favorable effect of $4.5 million on adoption of a new accounting principle.
Production increased to 177.4 Mmcfe per day, a 15% increase from the prior year
period. The production increase was due primarily to the December 2003 Conger
Field acquisition and the recent success of the Companys drilling program. Oil
and gas revenues also increased due to a 3% increase in average realized prices
to $4.05 per mcfe. The average prices realized for oil increased 3% to $24.38
per barrel, increased 5% for gas to $4.15 per mcf and decreased 6% for NGLs to
$18.99 per barrel. Production expenses increased 5% to $10.0 million as a
result of higher workover expenses and additional costs related to the Conger
Field properties acquired in December 2003. Production expenses (excluding
production taxes) per mcfe produced averaged $0.62 in 2004 versus $0.69 in
2003. Production taxes averaged $0.26 per mcfe in 2004 versus $0.25 per mcfe
in 2003. Production taxes are paid on market prices not on hedged prices.
31
Transportation
and gathering net revenues are reflected net of expenses. Total net
revenues declined 54% to $467,000 in 2004. The major components of the
decline include lower transportation and marketing revenues ($283,000), higher
marketing expenses ($64,000), additional gas transportation system employee
expense related to the Conger Field acquisition ($196,000) and higher gas
processing expenses ($59,000). Gain on retirement of securities in 2003
includes $150,000 gain on the sale of $400,000 of Trust Preferred Securities
offset by a $465,000 conversion expense related to an $880,000 exchange of 6%
Debentures.
Other income reflected a loss of $2.3 million in the first quarter of 2004
versus income of $849,000 in the first quarter of 2003. The 2004 period
includes $1.6 million of ineffective hedging losses and $192,000 loss on asset
retirement obligations. Other income for 2004 also includes IPF revenues of
$33,000 offset by $169,000 of administrative costs, $1,600 of interest and
$529,000 increase to the valuation account. Other income in the 2003 period
included $804,000 of ineffective hedging gains and $88,000 of gains on asset
sales. Other income for 2003 also included IPF revenues of $539,000 offset by
$258,000 of administrative costs, $101,000 of interest and a $259,000 increase
in the valuation allowance.
Exploration expense increased $1.1 million to $3.6 million in 2004 due to
higher dry hole costs ($829,000) and higher seismic costs ($126,000). General
and administrative expenses increased $4.0 million in the quarter with higher
non-cash mark-to-market expense relating to the deferred compensation plan.
The mark-to-market deferred compensation adjustment included in general and
administrative expense was $4.4 million in the three months ended March 31,
2004 versus $386,000 in the same period of the prior year. (See Note 11 to the
consolidated financial statements).
Interest expense decreased 25% to $4.1 million primarily due to lower debt
balances, interest rates and higher gains on ineffective interest hedging.
Total debt was $348.6 million and $374.8 million at March 31, 2004 and 2003,
respectively. The average interest rates, including fixed and variable rate
debt (excluding hedging), were 4.3% and 5.0% at March 31, 2004 and 2003,
respectively.
DD&A
increased 6% periods from the first quarter of 2003 due to higher production.
Accretion expense of $1.1 million is included in DD&A in each of the three
month periods ending March 31, 2004 and 2003. The DD&A rate per mcfe for the first
quarter of 2004 was $1.38, a $0.13 decrease from the rate for the first quarter
of 2003. The decrease is due to lower amortization of unproved property
($0.02), lower accretion expense ($0.01) and lower average depletion rates
($0.10). The DD&A rate is determined based on year-end reserves and the
associated net book value and, to a lesser extent, depreciation on other assets
owned.
Income taxes reflected an expense of $3.9 million in the first quarter of
2004 versus $4.1 million in the first quarter of 2003. The first quarter of
2003 included $917,000 deferred tax expense associated with prior periods
percentage depletion carryover.
32
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Volume
Average Hedge
Contract Type
Period
Hedged
Price
April-December 2004
89,745 MMBtu/day
$4.00
2005
50,695 MMBtu/day
$4.21
2006
3,288 MMBtu/day
$4.85
April-December 2004
7,131 MMBtu/day
$4.50-$6.07
2005
26,688 MMBtu/day
$4.28-$6.47
2006
13,288 MMBtu/day
$4.25-$6.29
April-December 2004
2,643 Bbl/day
$25.91
2005
940 Bbl/day
$25.11
April-December 2004
2,336 Bbl/day
$24.23-$28.39
2005
2,115 Bbl/day
$24.90-$30.47
2006
382 Bbl/day
$25.05-$30.55
April-December 2004
1,375 Bbl/day
$21.88
2005
658 Bbl/day
$19.20
Table of Contents
Three Months Ended
March 31,
2004
2003
546,786
489,067
231,075
94,073
11,476,455
10,358,359
16,143,618
13,857,196
6,009
5,434
2,539
1,045
126,115
115,093
177,402
153,969
$
32.15
$
31.44
$
21.29
$
20.17
$
5.21
$
6.08
$
5.10
$
5.79
$
24.38
$
23.64
$
18.99
$
20.17
$
4.15
$
3.95
$
4.05
$
3.92
Table of Contents
Table of Contents
Table of Contents
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of the following information is to provide
forward-looking quantitative and qualitative information about the Companys
potential exposure to market risks. The term market risk refers to the risk
of loss arising from adverse changes in oil and gas prices and interest rates.
The disclosures are not meant to be indicators of expected future losses, but
rather an indicator of reasonably possible losses. This forward-looking
information provides indicators of how the Company views and manages its
ongoing market-risk exposures. All of the Companys market-risk sensitive
instruments were entered into for purposes other than trading.
Commodity Price Risk.
The Companys major market risk exposure is to oil
and gas prices. Realized prices are primarily driven by worldwide prices for
oil and spot market prices for North American gas production. Oil and gas
prices have been volatile and unpredictable for many years.
The Company periodically enters into hedging arrangements with respect to
its oil and gas production. Pursuant to these swaps, the Company receives a
fixed price for its production and pays market prices to the counterparty.
Hedging is intended to reduce the impact of oil and gas price fluctuations. In
the second quarter of 2003, the hedging program was modified to include collars
which assume a minimum floor price and predetermined ceiling price. Realized
gains or losses are generally recognized in oil and gas revenues when the
associated production occurs. Starting in 2001, gains or losses on open
contracts are recorded either in current period income or OCI. The gains and
losses realized as a result of hedging are substantially offset in the cash
market when the commodity is delivered. Of the $96.3 million unrealized
pre-tax loss included in OCI at March 31, 2004, $76.3 million of losses would
be reclassified to earnings over the next twelve month period if prices
remained constant. The actual amounts that will be reclassified will vary as a
result of changes in prices. The Company does not hold or issue derivative
instruments for trading purposes.
As of March 31, 2004, the Company had oil and gas swap hedges in place
covering 44.4 Bcf of gas, 1.1 million barrels of oil and 0.6 million barrels of
NGLs at prices averaging $4.11 per Mmbtu, $25.65 per barrel and $20.84 per
barrel, respectively. The Company also has collars covering 16.6 Bcf of gas at
weighted average floor and cap prices of $4.25 and $6.47 per mcf and 1.6
million barrels of oil at weighted average floor and cap prices of $24.23 to
$30.55 per barrel. Their fair value, represented by the estimated amount that
would be realized on termination, based on contract versus NYMEX prices,
approximated a net unrealized pre-tax loss of $96.3 million at that date.
These contracts expire monthly through December 2006. Gains or losses on open
and closed hedging transactions are determined as the difference between the
contract price and the reference price, generally closing prices on the NYMEX.
Transaction gains and losses are determined monthly and are included as
increases or decreases to oil and gas revenues in the period the hedged
production is sold. Any ineffective portion of such hedges is recognized in
earnings as it occurs. Net realized losses relating to these derivatives for
the three months ended March 31, 2004 were $16.9 million and $25.9 million for
the three months ended March 31, 2003.
In the first three months of 2004, a 10% reduction in oil and gas prices,
excluding amounts fixed through hedging transactions, would have reduced
revenue by $8.2 million. If oil and gas future prices at March 31, 2004 had
declined 10%, the unrealized hedging loss at that date would have decreased
$37.8 million.
Interest rate risk
. At March 31, 2004, the Company had $348.6 million of
debt outstanding. Of this amount, $110.0 million bore interest at fixed rates
averaging 7.2%. Senior Credit Facility debt and the Great Lakes Credit
Facility debt totaling $238.6 million bore interest at floating rates averaging
2.9%. At March 31, 2004 Great Lakes had interest rate swap agreements totaling
$110.0 million (See Note 7), 50% of which is consolidated at the Company, which
had a fair value loss (the Companys share) of $268,000 at that date. A 1%
increase or decrease in short-term interest rates would cost or save the
Company approximately $1.8 million in annual interest expense.
33
Table of Contents
Item 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure controls and procedures (as defined in 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in this report. There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Companys last fiscal quarter that have materially affected or are reasonably likely to materially affect the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various legal actions and claims arising in the ordinary course of business. In the opinion of management, such litigation and claims are likely to be resolved without material adverse effect on its financial position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
None.
34
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(b) Reports on Form 8-K
35
Restated Certificate of Incorporation of Range Resources Corporation
Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2
to the Companys Form 10K (File No. 001-12209) as filed with the SEC on March 3, 2004)
Form of 6% Convertible Subordinated Debentures due 2007 (contained as an exhibit to
Exhibit 4.1.2 hereto)
Indenture dated December 20, 1996 by and between Lomak and Keycorp Shareholder
Services, Inc., as trustee (incorporated by reference to Exhibit 4.1(a) to Lomaks Form
S-3 (File No. 333-23955) as filed with the SEC on March 25, 1997)
Form of 7.375% Senior Subordinated Notes due 2013 (contained as an exhibit 4.1.4 hereto)
Indenture dated July 21, 2003 by and among the Company, as issuer, the Subsidiary
Guarantors (as defined herein), as guarantors, and Bank One, National Association, as
trustee (incorporated by reference to Exhibit 4.4.2 to the Company is Form 10-Q (File
No. 001-12209) as filed with the SEC on August 6, 2003)
Registration Rights Agreement dated July 21, 2003 by and between the Company and UBS
Securities LLC, Banc One Capital Markets, Inc., Credit Lyonnais Securities (USA), Inc.,
and McDonald Investments Inc., (incorporated by reference to Exhibit 4.4.3 to the
Companys Form 10-Q (File No. 001-12209) as filed with the SEC on August 6, 2003)
Certification of Designation of the 5.90% Cumulative Convertible Preferred Stock of the
Company (incorporated by reference to Exhibit 4.2 to the Companys Form 10-Q (File No.
001-12209) as filed with the SEC on November 5, 2003)
Eighth Amendment to the Amended and Restated Credit Agreement dated March 31, 2004 by
and among Range Resources Corporation, as Borrower, certain parties, as lenders, Bank
One as Administrative Agent, Fleet National Bank as Co-Documentation Agent, Fortis
Capital Corp., as Co-Documentation Agent, JPMorgan Chase Bank as Co-Syndication Agent,
Credit Lyonnais New York Branch as Co-Syndication Agent, Banc One Capital Markets, Inc.
as Joint Lead Arranger and Joint Bookrunner and JPMorgan Securties, Inc. as Joint Lead
Arranger and Joint Bookrunner
Certification by the President and Chief Executive Officer of the Company Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification by the Chief Financial Officer of the Company Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification by the President and Chief Executive Officer of the Company Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification by the Chief Financial Officer of the Company Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*
filed herewith
On January 12, 2004, the Company filed a Current Report on
Form 8-K, pursuant to Item 1, 2 of Form 8-K, announcing its
2004 capital budget.
On January 5, 2004, the Company filed a Current Report on
Form 8-K, pursuant to Item 2 of Form 8-K, announcing the
purchase of certain West Texas oil and gas properties.
On January 22, 2004, the Company filed a Current Report on
Form 8-K, pursuant to Item 5 of Form 8-K, announcing its 4th
Quarter of 2003 production volumes.
On January 27, 2004, the Company filed a Current Report on
Form 8-K, pursuant to Item 5 of Form 8-K, announcing December
2003 proved reserves.
On February 17, 2004, the Company filed a Current Report on
Form 8-K, pursuant to Item 5 of Form 8-K, announcing a gas
discovery and providing an update on operations.
On March 3, 2004, the Company filed a Current Report on Form
8-K, pursuant to Item 5 of Form 8-K, announcing its 2003
results.
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 4, 2004
36
RANGE RESOURCES CORPORATION
By:
/s/ ROGER S. MANNY
Roger S. Manny
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and duly authorized to sign this report
on behalf of the Registrant)
Table of Contents
EXHIBIT INDEX
Exhibit Number
Description of Exhibit
Restated Certificate of Incorporation of Range Resources Corporation
Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2
to the Companys Form 10K (File No. 001-12209) as filed with the SEC on March 3, 2004)
Form of 6% Convertible Subordinated Debentures due 2007 (contained as an exhibit to
Exhibit 4.1.2 hereto)
Indenture dated December 20, 1996 by and between Lomak and Keycorp Shareholder
Services, Inc., as trustee (incorporated by reference to Exhibit 4.1(a) to Lomaks Form
S-3 (File No. 333-23955) as filed with the SEC on March 25, 1997)
Form of 7.375% Senior Subordinated Notes due 2013 (contained as an exhibit 4.1.4 hereto)
Indenture dated July 21, 2003 by and among the Company, as issuer, the Subsidiary
Guarantors (as defined herein), as guarantors, and Bank One, National Association, as
trustee (incorporated by reference to Exhibit 4.4.2 to the Company is Form 10-Q (File
No. 001-12209) as filed with the SEC on August 6, 2003)
Registration Rights Agreement dated July 21, 2003 by and between the Company and UBS
Securities LLC, Banc One Capital Markets, Inc., Credit Lyonnais Securities (USA), Inc.,
and McDonald Investments Inc., (incorporated by reference to Exhibit 4.4.3 to the
Companys Form 10-Q (File No. 001-12209) as filed with the SEC on August 6, 2003)
Eighth Amendment to the Amended and Restated Credit Agreement dated March 31, 2004 by
and among Range Resources Corporation, as Borrower, certain parties, as lenders, Bank
One as Administrative Agent, Fleet National Bank as Co-Documentation Agent, Fortis
Capital Corp., as Co-Documentation Agent, JPMorgan Chase Bank as Co-Syndication Agent,
Credit Lyonnais New York Branch as Co-Syndication Agent, Banc One Capital Markets, Inc.
as Joint Lead Arranger and Joint Bookrunner and JPMorgan Securties, Inc. as Joint Lead
Arranger and Joint Bookrunner
Certification of Designation of the 5.90% Cumulative Convertible Preferred Stock of the
Company (incorporated by reference to Exhibit 4.2 to the Companys Form 10-Q (File No.
001-12209) as filed with the SEC on November 5, 2003)
Certification by the President and Chief Executive Officer of the Company Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Certification by the Chief Financial Officer of the Company Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Certification by the President and Chief Executive Officer of the Company Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification by the Chief Financial Officer of the Company Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* | filed herewith |
37
EXHIBIT 3.1.1
RESTATED CERTIFICATE OF INCORPORATION
OF RANGE RESOURCES CORPORATION
(a Delaware corporation)
Range Resources Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
FIRST: The name of the corporation is Range Resources Corporation, and the corporation was originally incorporated on March 26, 1980, under the name Lomak Petroleum, Inc., pursuant to the Delaware General Corporation Law (the "DGCL").
SECOND: This Restated Certificate of Incorporation (the "Restated Certificate") restates the provisions of the Certificate of Incorporation of the Corporation (as amended to date, the "Certificate of Incorporation"), filed with the Secretary of State of the State of Delaware on March 26, 1980, and integrates the provisions of the several Certificates of Amendment filed from time to time, and does not further amend the provisions of the Corporation's Certificate of Incorporation as theretofore amended or supplemented. There is no discrepancy between the provisions of the Certificate of Incorporation and the provisions of the Restated Certificate.
THIRD: In accordance with Section 245 of the DGCL, the board of directors of the Corporation duly adopted resolutions authorizing the restatement of the Certificate of Incorporation, declaring said restatement to be appropriate, advisable and in the best interests of the Corporation.
FOURTH: The Certificate of Incorporation of said Corporation shall be restated to read in full as follows:
FIRST: The name of the Corporation is Range Resources Corporation (hereinafter referred to as the "Corporation").
SECOND: Its principal and registered office in the State of Delaware is located at 1209 Orange Street, City of Wilmington, County of New Castle, Delaware, 19801. The name and address of its registered agent is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware, 19801.
THIRD: The nature of the business or purposes to be conducted or promoted are:
To explore, prospect, drill for, produce, market, sell, and deal in and with petroleum, oil, asphaltum, natural gas, gasoline, naphthene, hydrocarbons, oil shales, ores of every kind or the mineral or nonmineral, liquid, solid, or volatile substances and products, by-products, combinations, and derivatives thereof, and to buy, lease, hire, contract for, invest in, and otherwise acquire, and to own, hold, maintain, equip, operate, manage, mortgage, create and grant security interests in, deal in and with, and to sell, lease, exchange and otherwise dispose of oil, gas, mineral, and mining lands, wells, rights, royalties, overriding royalties,
oil
payments and other oil, gas and mineral interests, claims, locations, patents, concessions, easements, rights-of-way, franchises, real and personal property, and all interests therein, machinery for use on land, water, or air, for prospecting, exploring, and drilling for, producing, gathering, manufacturing, refining, purchasing, leasing, exchanging, trading for, or otherwise disposing of oil, gas and such mineral and nonmineral substances; and to do engineering and contracting and to design, construct, drill, bore, sink, develop, improve, extend, maintain, operate, and repair wells, mines, plants, works, machinery, appliances, rigging, casing, tools, storage, and transportation lines and systems for this Corporation and other persons, associations, or corporations.
To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware as now in effect or hereafter amended.
FOURTH: (1) The total number of shares of all classes of stock that the Corporation shall have authority to issue is 110 million shares, divided into classes as follows:
100 million Common shares having a par value of $.01 per share; and 10 million Preferred shares having a par value of $1.00 per share. |
(2) No holder of shares of the Corporation shall have any preemptive right to subscribe for or to purchase any shares of the Corporation of any class whether now or hereafter authorized.
The designations, voting powers, preferences and relative, participating, optional or other special rights, qualifications, limitations and restrictions of the above classes of stock shall be as follows:
DIVISION A
SERIAL PREFERRED SHARES
SECTION 1. The Serial Preferred shares may be issued from time to time in one or more series. All Serial Preferred Shares shall be of equal rank and shall be identical, except in respect of the matters that may be fixed by the Board of Directors as hereinafter provided, and each share of each series shall be identical with all other shares of such series, except as to the date from which dividends may be cumulative. Subject to the provisions of Sections 2 to 8, both inclusive, of this Division, which provisions shall apply to all Serial Preferred Shares, the Board of Directors hereby is authorized to cause such shares to be issued in one or more series and with respect to each such series by resolution or resolutions adopted prior to the issuance thereof to fix or determine:
(a) The designation of the series, which may be by distinguishing number, letter or title.
(b) The number of shares of the series, which number the Board of Directors may (except where otherwise provided in the creation of the series) increase or decrease (but not below the number of shares thereof then outstanding).
(c) The dividend rate or rates on the shares of the series, whether dividends shall be cumulative and, if so, the dates from which dividends shall be cumulative, and the dates at which dividends, if declared, shall be payable.
(d) The redemption rights and price or prices, if any, for shares of the series (which may vary at different redemption dates).
(e) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series.
(f) The liquidation price payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.
(g) Whether the shares of the series shall be convertible into Common Shares or other securities of the Corporation, and, if so, the conversion price or rate (which may vary depending on the time at which such conversion is made), any adjustments thereof, and all other terms and conditions upon which such conversion may be made.
(h) Restrictions on the issuance of shares of the same series or of any other class or series.
(i) The voting powers, if any, of such series.
SECTION 2. The holders of Serial Preferred Shares of each series, in preference to the holders of Common Shares and of any other class of shares ranking junior to the Serial Preferred Shares, shall be entitled to receive out of any funds legally available and when and as declared by the Board of Directors dividends in cash at the rate for such series fixed in accordance with the provisions of Section 1 of this Division and no more, payable quarterly on the dates fixed for such series. Such dividends may be cumulative, in the case of shares of any particular series, from and after the date or dates fixed with respect to such series. No dividends may be paid upon or declared or set apart for any of the Serial Preferred Shares for any dividend period unless at the same time a like proportionate dividend for the same dividend period, ratably in proportion to the respective annual dividend rates fixed therefor, shall be paid upon or declared or set apart for all Serial Preferred Shares of all series then issued and outstanding and entitled to receive such dividend.
SECTION 3. In no event so long as any Serial Preferred Shares shall be outstanding shall any dividends, except a dividend payable in Common Shares, or other
shares ranking junior to the Serial Preferred Shares, be paid or declared or any distribution be made on the Common Shares or any other shares ranking junior to the Serial Preferred Shares, nor shall any Common Shares or any other shares ranking junior to the Serial Preferred Shares be purchased, retired or otherwise acquired by the Corporation (except out of the proceeds of the sale of Common Shares or other shares ranking junior to the Serial Preferred Shares received by the Corporation subsequent to the date on which the Serial Preferred Shares are first issued);
(a) Unless all accrued and unpaid dividends on Serial Preferred Shares, including the full dividends for the current dividend period, shall have been declared and paid or a sum sufficient for payment thereof set apart; and
(b) Unless there shall be no arrearages with respect to the redemption of Serial Preferred Shares of any series from any sinking fund provided for shares of such series in accordance with the provisions of Section 1 of this Division.
SECTION 4. (a) Subject to the express terms of each series,
the Corporation may from time to time redeem all or any part of the
Serial Preferred Shares of any series at the time outstanding (i) at
the option of the Board of Directors at the applicable redemption price
for such series fixed in accordance with the provisions of Section 1 or
(ii) in fulfillment of the requirements of any sinking fund provided
for shares of such series at the applicable sinking redemption price,
fixed in accordance with the provisions of Section 1, together in each
case with accrued and unpaid dividends to the redemption date.
(b) Notice of every such redemption shall be mailed, postage
prepaid, to the holders of record of the Serial Preferred Shares to be
redeemed at their respective addresses then appearing on the books of
the Corporation, not less than thirty (30) days nor more than sixty
(60) days prior to the date fixed for such redemption. At any time
before or after notice has been given as above provided, the
Corporation may deposit the aggregate redemption price of the Serial
Preferred Shares to be redeemed with any bank or trust company named in
such notice, directed to be paid to the respective holders of the
Serial Preferred Shares so to be redeemed, in amounts equal to the
redemption price of all Serial Preferred Shares so to be redeemed, on
surrender of the stock certificate or certificates held by such
holders, and upon the making of such deposit such holders shall cease
to be shareholders with respect to such shares, and after such notice
shall have been given and such deposit shall have been made such
holders shall have no interest in or claim against the Corporation with
respect to such shares except only to receive such money from such bank
or trust company without interest or the right to exercise, before the
redemption date, any unexpired privileges of conversion. In case less
than all of the outstanding Serial Preferred Shares of any series are
to be redeemed, the Corporation shall select by lot the shares so to be
redeemed in such manner as shall be prescribed by its Board of
Directors.
(c) Any Serial Preferred Shares which are redeemed by the Corporation pursuant to the provisions of this Section 4 and any Serial Preferred Shares which are purchased and delivered in satisfaction of any sinking fund requirements provided for
shares of such series and any Serial Preferred Shares which are converted in accordance with the express terms thereof shall be cancelled and not reissued. Any Serial Preferred Shares otherwise acquired by the corporation shall resume the status of authorized and unissued Serial Preferred Shares without serial designation.
SECTION 5. (a) The holders of Serial Preferred Shares of any series shall, in case of voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, be entitled to receive in full out of the assets of the Corporation, including its capital, before any amount shall be paid or distributed among the holders of the Common Shares or any other shares ranking junior to the Serial Preferred Shares, the amounts fixed with respect to the shares of such series in accordance with Section 1 of this Division plus an amount equal to all dividends accrued and unpaid thereon to the date of payment of the amount due pursuant to such liquidation, dissolution or winding up of the affairs of the Corporation. In case the net assets of the Corporation legally available therefor are insufficient to permit the payment upon all outstanding Serial Preferred Shares of the full preferential amount to which they are respectively entitled, then such net assets shall be distributed ratably upon outstanding Serial Preferred Shares in proportion to the full preferential amount to which each such share is entitled.
After payment to holders of Serial Preferred Shares of the full preferential amounts as aforesaid, holders of Serial Preferred Shares as such shall have no right or claim to any of the remaining assets of the Corporation.
(b) The merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all the property or business of the Corporation, shall not be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.
SECTION 6. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Serial Preferred Shares pursuant to this Division A, the holders of Serial Preferred Shares shall have no voting power with respect to any matter whatsoever.
SECTION 7. The holders of Serial Preferred Shares shall have no preemptive right to purchase or have offered to them for purchase any shares or other securities of the Corporation, whether now or hereafter authorized.
SECTION 8. For the purpose of this Division A:
Whenever reference is made to shares "ranking junior to the Serial Preferred Shares," such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event or a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation are junior and subordinate to the rights of the holders of Serial Preferred Shares.
DIVISION B
COMMON SHARES
The Common Shares shall be subject to the express terms of the Serial Preferred Shares and any series thereof and to the express terms of the Preferred Stock. Each Common Share shall be equal to every other Common Share. The holders of Common Shares shall be entitled to one vote for each share upon all matters presented to the shareholders.
The holders of Common Shares shall have no preemptive right to purchase or have offered to them for purchase any shares or other securities of the Corporation, whether now or hereafter authorized.
(3) The voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of the Corporation's 5.90% Cumulative Convertible Preferred Stock are set forth in Appendix A hereto and are incorporated herein by reference.
FIFTH: [Intentionally omitted] SIXTH: [Intentionally omitted] SEVENTH: In furtherance and not in limitation of the powers |
granted them by statute, the Board of Directors is hereby authorized:
(1) To alter, make, amend or repeal the By-laws of the corporation.
(2) From time to time,
a) to issue, sell and dispose of shares of the authorized and previously unissued capital stock of the corporation and shares of its outstanding capital stock held in its treasury;
b) to issue, sell and dispose of the bonds, debentures, notes and other obligations or evidences of indebtedness of the corporation convertible into, or carrying rights to purchase, stock of the corporation of any class; and
c) to authorize and cause to be executed mortgages and liens upon the real and personal property of the corporation.
(3) To purchase any of the outstanding shares of the Corporation at such price and upon such terms as the Directors may determine.
(4) The corporation may in its By-laws confer powers upon its Board of Directors in addition to the foregoing, and in addition to the powers and authorities expressly conferred upon it by statute.
(5) Any former, present or future director, officer or employee of the company or the legal representative of any such director, officer, or employee shall be indemnified by the company
a) against reasonable costs, disbursements and counsel fees paid or incurred where such person has been successful on the merits or otherwise in any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding, or in defense of any claim, issue or matter therein, by reason of such person being or having been such director, officer or employee, and
b) with respect to any such action, suit, proceeding, inquiry or investigation for which indemnification is not made under (a) above, against reasonable costs, disbursements (which shall include amounts paid in satisfaction of settlements, judgments, fines and penalties, exclusive, however, of any amount paid or payable to the company) and counsel fees if such person also had no reasonable cause to believe the conduct was unlawful, with the determination as to whether the applicable standard of conduct was met to be made by a majority of the members of the Board of Directors (sitting as a committee of the Board) who were not parties to such inquiry, investigation, action, suit or proceeding or by any one or more disinterested counsel to whom the question may be referred to the Board of Directors; provided, however, in connection with any proceeding by or in the right of the company, no indemnification shall be provided as to any person adjudged by any court to be liable for negligence or misconduct except as and to the extent determined by such court.
The termination of any such inquiry, investigation, action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that such person did not meet the standards of conduct set forth in subsection (b) above.
Reasonable costs, disbursements and counsel fees incurred by such person in connection with any inquiry, investigation action, suit or proceeding may be paid by the company in advance of the final disposition of such matter if authorized by a majority of the Board of Directors (sitting as a committee of the Board) not parties to such matter upon receipt by the company of an undertaking by or on behalf of such person to repay such amount unless it is ultimately determined that such person is entitled to be indemnified as set forth herein.
The Board of Directors may, at any regular or special meeting of the Board, by resolution, accord similar indemnification (prospective or retroactive) to any director, trustee, officer or employee of any other company who is serving as such at the request of the company because of the company's interest in such other company and any officer, director or employee of any constituent corporation absorbed by the company in a consolidation or merger, or the legal representative of any such director, trustee, officer or employee.
The indemnification herein provided shall not exclude any other rights to which such person may be entitled as a matter of law or which may by lawfully granted.
EIGHTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. This paragraph shall not eliminate or limit the liability of a director for any act or omission occurring prior to the effective date of its adoption. If the General Corporation Law of the State of Delaware is hereafter amended to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director to the Corporation shall be limited or eliminated to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended from time to time. No repeal or modification of this Article VIII, directly or by adoption of an inconsistent provision of this Certificate of Incorporation, by the stockholders of the Corporation shall be effective with respect to any cause of action, suit, claim or other matter, but for this Article VIII, would accrue or arise prior to such repeal or modification.
* * *
IN WITNESS WHEREOF, said Range Resources Corporation has caused this Restated Certificate to be signed by John H. Pinkerton, President, as of the ____ day of ______________, 2004.
RANGE RESOURCES CORPORATION
APPENDIX A
Certificate of Designation of the 5.90% Cumulative Convertible Preferred Stock
EXHIBIT 10.1
EXECUTION VERSION
EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This EIGHTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (hereinafter referred to as the "Amendment") executed as of the 31st day of March, 2004, by and among RANGE RESOURCES CORPORATION, a Delaware corporation ("Borrower"), BANK ONE, NA, a national banking association ("Bank One"), each of the financial institutions which is a party hereto (as evidenced by the signature pages to this Amendment) or which may from time to time become a party to the Credit Agreement pursuant to the provisions of Section 29 thereof or any successor or permitted assignee thereof (hereinafter collectively referred to as "Lenders", and individually, "Lender"), Bank One, as Administrative Agent ("Agent"), Fleet National Bank, as Co-Documentation Agent, Fortis Capital Corp., as Co-Documentation Agent, JPMorgan Chase Bank, as Co-Syndication Agent, Credit Lyonnais New York Branch, as Co-Syndication Agent, Banc One Capital Markets, Inc., as Joint Lead Arranger and Joint Bookrunner and JPMorgan Securities, Inc., as Joint Lead Arranger and Joint Bookrunner. Capitalized terms used but not defined in this Amendment have the meanings assigned to such terms in that certain Amended and Restated Credit Agreement dated as of May 2, 2002, by and among Borrower, Agent and Lenders (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement").
WITNESSETH:
WHEREAS, the Borrower has requested that the Agent and the Lenders
amend the Credit Agreement to (i) increase the Commitment to $375,000,000 and
(ii) increase the Borrowing Base to $240,000,000; and Agent and the Lenders have
agreed to do so on the terms and conditions hereinafter set forth; and
WHEREAS, Harris Nesbitt Financing, Inc. desires to become a Lender; and Agent and the Borrower are each willing to consent to Harris Nesbitt Financing, Inc. becoming a Lender under the Credit Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, the Borrower, Agent and the Lenders, hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. Subject to the satisfaction or waiver in writing of each condition precedent set forth in Section 3 hereof, and in reliance on the representations, warranties, covenants and agreements contained in this Amendment, the Credit Agreement shall be amended in the manner provided in this Section 1.
1.1 TITLE PAGE. The title page of the Credit Agreement shall be and it hereby is amended by deleting "$225,000,000 REVOLVING CREDIT" and inserting "$375,000,000 REVOLVING CREDIT".
1.2 AMENDED DEFINITIONS. The definition of "Commitment" set forth in
Section 1 of the Credit Agreement shall be and it hereby is amended in its
entirety as follows:
Commitment means (A) for all Lenders, the lesser of (i) $375,000,000 or
(ii) the Borrowing Base, as reduced or increased from time to time pursuant to
Sections 2 and 7 hereof, and (B) as to any Lender, its obligation to make
Advances hereunder in amounts not exceeding, in the aggregate, an amount equal
to such Lender's Commitment Percentage times the total Commitment as of any
date. The Commitment of each Lender hereunder shall be adjusted from time to
time to reflect assignments made by such Lender pursuant to Section 29 hereof.
Each reduction in the Commitment shall result in a Pro Rata reduction in each
Lender's Commitment.
1.3 FORM OF NOTES. The first sentence of Section 3(a) of the Credit Agreement shall be and it hereby is amended in its entirety to read as follows:
The Loans shall be evidenced by a Note or Notes in the aggregate face amount of $375,000,000, and shall be in the form of Exhibit "B" hereto with appropriate insertions.
1.4 ISSUANCE OF ADDITIONAL NOTES. The first sentence of Section 3(b) of the Credit Agreement shall be and it hereby is amended in its entirety to read as follows:
As of March [ ], 2004, there shall be outstanding Notes in the aggregate face amount of $375,000,000 payable to the order of Lenders.
1.5 AMENDMENT TO BORROWING BASE. Section 7(a) of the Credit Agreement shall be and it hereby is amended in its entirety to read as follows:
(a) Borrowing Base. Subject to Section 7(b) hereof, as of March [ ], 2004, the Borrowing Base shall be $240,000,000.
1.6 BORROWING BASE DETERMINATIONS. The first sentence of Section 7(b) of the Credit Agreement shall be and it hereby is amended by deleting "April 1, 2004" and inserting "September 1, 2004" in replacement thereof. The second sentence of Section 7(b) of the Credit Agreement shall be and it hereby is amended by deleting "March 1, 2004" and inserting "March 1, 2005" in replacement thereof.
1.7 NOTE HOLDERS. The first sentence of Section 15(b) of the Credit Agreement shall be and it hereby is amended in its entirety to read as follows:
From time to time as other Lenders become a party to this Agreement, Agent shall obtain execution by Borrower of additional Notes in amounts representing the Commitments of each such new Lender, up to an aggregate face amount of all Notes not exceeding $375,000,000.
1.8 ASSIGNMENT AND ACCEPTANCE. The Lenders have agreed among themselves to reallocate their respective Commitments and to allow Harris Nesbitt Financing, Inc. to acquire an interest in the Commitments and the Loans. After such reallocation of the Commitments, on the
date hereof, the Lenders shall own the Commitment Percentages set forth on Schedule 1 attached hereto. With respect to such reallocation, Harris Nesbitt Financing, Inc. shall be deemed to have acquired the Commitments and Loans allocated to them from each of the Lenders pursuant to the terms of the Assignment and Acceptance Agreement attached as Exhibit E to the Credit Agreement as if Harris Nesbitt Financing, Inc. and the Lenders had executed an Assignment and Acceptance Agreement with respect to such allocation. Each Lender shall surrender its existing Note and be issued a new Note in a face amount equal to each Lender's Commitment Percentage times $375,000,000. Each said Note to be in the form of Exhibit "B" to the Credit Agreement with appropriate insertions. The funds delivered to Agent by Harris Nesbitt Financing, Inc. to acquire an interest in the Commitments and the Loans shall be allocated and paid to each of the existing Lenders such that after giving effect to such allocation and payment each of the Lender's Commitment shall be in the amounts set forth on Schedule 1 attached hereto. By their execution hereof, Agent and the Borrower each hereby consent to Harris Nesbitt Financing, Inc. becoming a Lender under the Credit Agreement.
SECTION 2. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Except to the extent its provisions are specifically amended, modified or superseded by this Amendment, the representations, warranties and affirmative and negative covenants of the Borrower contained in the Credit Agreement are incorporated herein by reference for all purposes as if copied herein in full. The Borrower hereby restates and reaffirms each and every term and provision of the Credit Agreement, as amended, including, without limitation, all representations, warranties and affirmative and negative covenants. Except to the extent its provisions are specifically amended, modified or superseded by this Amendment, the Credit Agreement, as amended, and all terms and provisions thereof shall remain in full force and effect, and the same in all respects are confirmed and approved by the Borrower and the Lenders.
SECTION 3. CONDITIONS. The amendments to the Credit Agreement contained in
Section 1 of this Amendment shall be effective upon the satisfaction of each of
the conditions set forth in this Section 3.
3.1 EXECUTION AND DELIVERY. The Borrower and each Guarantor shall have executed and delivered (i) this Amendment, (ii) Revolving Notes in the form attached to the Credit Agreement as Exhibit "B" in the amounts set forth on Schedule I attached hereto, (iii) a duly executed officer's certificate, together with copies of the Borrower's certificate of incorporation and bylaws and appropriate corporate resolutions of the Borrower, in each case, certified as true and correct by the Secretary of the Borrower, the names of the officers of the Borrower authorized to sign loan documents on behalf of the Borrower and the true signatures of each such officer, in each case certified as true and correct by the Secretary of the Borrower and evidence of the existence and good standing of the Borrower, and (iv) other required documents, all in form and substance satisfactory to the Agent.
3.2 POST-CLOSING COVENANT. On or before April 15, 2004, the Borrower and each Guarantor, where applicable, shall execute amendments to the mortgages securing the indebtedness, liabilities and obligations to the Lenders in form and substance acceptable to the Agent. Borrowers further agree that any failure on their part to comply with and perform this covenant shall constitute an Event of Default under the Credit Agreement.
3.3 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Borrower under this Amendment are true and correct in all material respects as of such date, as if then made (except to the extent that such representations and warranties related solely to an earlier date).
3.4 NO EVENT OF DEFAULT. No Event of Default shall have occurred and be continuing nor shall any event have occurred or failed to occur which, with the passage of time or service of notice, or both, would constitute an Event of Default.
3.5 OTHER DOCUMENTS. The Agent shall have received such other instruments and documents incidental and appropriate to the transaction provided for herein as the Agent or its counsel may reasonably request, and all such documents shall be in form and substance satisfactory to the Agent.
3.6 LEGAL MATTERS SATISFACTORY. All legal matters incident to the consummation of the transactions contemplated hereby shall be reasonably satisfactory to special counsel for the Agent retained at the expense of Borrower.
SECTION 4. MISCELLANEOUS.
4.1 ADDITIONAL REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants that all factual information, if any, heretofore and contemporaneously furnished by or on behalf of Borrower to Agent for purposes of or in connection with this Amendment does not contain any untrue statement of a material fact or omit to state any material fact necessary to keep the statements contained herein or therein from being misleading. Each of the foregoing representations and warranties shall constitute a representation and warranty of Borrower made under the Credit Agreement, and it shall be an Event of Default if any such representation and warranty shall prove to have been incorrect or false in any material respect at the time given. Each of the representations and warranties made under the Credit Agreement (including those made herein) shall survive and not be waived by the execution and delivery of this Amendment or any investigation by Lenders.
4.2 INDEMNIFICATION. The Borrower agrees to indemnify and hold harmless the Lenders and their respective officers, employees, agents, attorneys and representatives (singularly, an "Indemnified Party", and collectively, the "Indemnified Parties") from and against any loss, cost, liability, damage or expense (including the reasonable fees and out-of-pocket expenses of counsel to the Lender, including all local counsel hired by such counsel) ("Claim") incurred by the Lenders in investigating or preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law, federal or state environmental law, or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon any acts, practices or omissions or alleged acts, practices or omissions of the Borrower or its agents or arises in connection with the duties, obligations or performance of the Indemnified Parties in negotiating, preparing, executing, accepting, keeping, completing, countersigning, issuing,
selling, delivering, releasing, assigning, handling, certifying, processing or receiving or taking any other action with respect to the Loan Documents and all documents, items and materials contemplated thereby even if any of the foregoing arises out of an Indemnified Party's ordinary negligence. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower to the Lenders hereunder or at common law or otherwise, and shall survive any termination of this Amendment, the expiration of the Loan and the payment of all indebtedness of the Borrower to the Lenders hereunder and under the Notes, provided that the Borrower shall have no obligation under this section to the Lenders with respect to any of the foregoing arising out of the gross negligence or willful misconduct of the Lenders. If any Claim is asserted against any Indemnified Party, the Indemnified Party shall endeavor to notify the Borrower of such Claim (but failure to do so shall not affect the indemnification herein made except to the extent of the actual harm caused by such failure). The Indemnified Party shall have the right to employ, at the Borrower's expense, counsel of the Indemnified Parties' choosing and to control the defense of the Claim. The Borrower may at its own expense also participate in the defense of any Claim. Each Indemnified Party may employ separate counsel in connection with any Claim to the extent such Indemnified Party believes it reasonably prudent to protect such Indemnified Party. THE PARTIES INTEND FOR THE PROVISIONS OF THIS SECTION TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF STRICT LIABILITY IMPOSED OR THREATENED TO BE IMPOSED ON ANY INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING, OR CONCURRING CAUSE OF ANY CLAIM, BUT NOT FROM ANY PORTION OF SUCH CLAIM ARISING FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY INDEMNIFIED PARTY.
4.3 COUNTERPARTS. This Amendment may be executed in one or more counterparts and by different parties hereto in separate counterparts each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. However, this Amendment shall bind no party until Borrower, Agent and Lenders have executed a counterpart. Facsimiles shall be effective as originals.
4.4 WRITTEN CREDIT AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED, REPRESENTS THE FINAL AGREEMENT BETWEEN AND AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN AND AMONG THE PARTIES.
4.5 NO IMPAIRMENT. Borrower acknowledges and agrees that the renewal, extension and amendment of the Credit Agreement shall not be considered a novation of account or new contract but that all existing rights, titles, powers, and estates in favor of the Lenders constitute valid and existing obligations in favor of the Lenders. Borrower confirms and agree that (a) neither the execution of this Amendment nor any other Loan Document nor the consummation of the transactions described herein and therein shall in any way effect, impair or limit the covenants, liabilities, obligations and duties of the Borrower under the Loan Documents and (b) the obligations evidenced and secured by the Loan Documents continue in full force and effect.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the parties have caused this Eighth Amendment to Amended and Restated Credit Agreement to be duly executed as of the date first above written.
BORROWER:
RANGE RESOURCES CORPORATION
a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
LENDERS:
BANK ONE, NA, a national
banking association (Main Office Chicago)
as a Lender and Administrative Agent
By: _______________________________________
Name: Wm. Mark Cranmer
Title: Director, Capital Markets
BANK OF SCOTLAND
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
JPMORGAN CHASE BANK
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
COMPASS BANK
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
CREDIT LYONNAIS NEW YORK BRANCH
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
FLEET NATIONAL BANK
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
FORTIS CAPITAL CORP.
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
NATEXIS BANQUES POPULAIRES
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
COMERICA BANK
(successor by merger with
Comerica Bank-Texas)
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
HIBERNIA NATIONAL BANK
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
SOUTHWEST BANK OF TEXAS, N.A.
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
HARRIS NESBITT FINANCING, INC.
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
CONSENT AND REAFFIRMATION
The undersigned (each a "Guarantor") hereby (i) acknowledges receipt of a copy of the foregoing Eighth Amendment to Amended and Restated Credit Agreement (the "Eighth Amendment"); (ii) consents to Borrower's execution and delivery thereof; (iii) agrees to be bound thereby; (iv) affirms that nothing contained therein shall modify in any respect whatsoever its guaranty of the obligations of the Borrower to Lenders pursuant to the terms of its Guaranty in favor of Agent and the Lenders (the "Guaranty") and (v) reaffirms that the Guaranty is and shall continue to remain in full force and effect. Although Guarantor has been informed of the matters set forth herein and has acknowledged and agreed to same, Guarantor understands that the Lenders have no obligation to inform Guarantor of such matters in the future or to seek Guarantor's acknowledgment or agreement to future amendments or waivers, and nothing herein shall create such duty.
IN WITNESS WHEREOF, the undersigned has executed this Consent and Reaffirmation on and as of the date of the Eighth Amendment.
GUARANTORS:
RANGE ENERGY I, INC.
a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
RANGE HOLDCO, INC.
a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
RANGE PRODUCTION COMPANY
a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
RANGE ENERGY VENTURES
CORPORATION, a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
GULFSTAR ENERGY, INC.
a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
RANGE ENERGY FINANCE CORPORATION
a Delaware corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
RANGE PRODUCTION I, L.P.
a Texas limited partnership
By: RANGE PRODUCTION COMPANY
Its general partner
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
RANGE RESOURCES, L.L.C.
a Oklahoma limited liability company
By: RANGE PRODUCTION COMPANY
Its member
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
By: RANGE HOLDCO, INC.
Its member
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
SCHEDULE 1
LENDER COMMITMENT ------ ---------- BANK ONE, NA $40,625,000 BANK OF SCOTLAND $40,625,000 COMERICA BANK $28,125,000 COMPASS BANK $28,125,000 CREDIT LYONNAIS NEW YORK BRANCH $40,625,000 FLEET NATIONAL BANK $40,625,000 FORTIS CAPITAL CORP. $40,625,000 HARRIS NESBITT FINANCING, INC. $40,625,000 HIBERNIA NATIONAL BANK $15,625,000 JPMORGAN CHASE $15,625,000 NATEXIS BANQUES POPULAIRES $28,125,000 SOUTHWEST BANK OF TEXAS, N.A. $15,625,000 |
EXHIBIT 31.1
CERTIFICATION
I, John H. Pinkerton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Range Resources Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 4, 2004 /s/ JOHN H. PINKERTON -------------------------------------- John H. Pinkerton President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, Roger S. Manny, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Range Resources Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 4, 2004 /s/ ROGER S. MANNY ------------------------------------------------- Roger S. Manny Senior Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF
PRESIDENT AND CHIEF EXECUTIVE OFFICER
OF RANGE RESOURCES CORPORATION
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying report on Form 10-Q for the period ending March 31, 2004 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John H. Pinkerton, President and Chief Executive Officer of Range Resources Corporation (the "Company"), hereby certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ JOHN H. PINKERTON --------------------------- John H. Pinkerton May 4, 2004 |
EXHIBIT 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF RANGE RESOURCES CORPORATION
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying report on Form 10-Q for the period ending March 31, 2004 and filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger S. Manny, Chief Financial Officer of Range Resources Corporation (the "Company"), hereby certify that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ ROGER S. MANNY --------------------- Roger S. Manny May 4, 2004 |