UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 1-13446
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Barrett Resources Corporation
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(Exact name of registrant as specified in its charter)
Delaware 84-0832476
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1515 Arapahoe Street, Tower 3, Suite 1000 Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
(303) 572-3900
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(Registrant's telephone number, including area code)
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 _____
There were 31,405,268 shares of the registrant's $.01 par value
common stock outstanding as of November 10, 1997.
BARRETT RESOURCES CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Condensed Balance
Sheets - September 30, 1997 and
December 31, 1996.............................. 3
Consolidated Condensed Statements of
Income - Three Months Ended
September 30, 1997 and 1996.................... 4
Consolidated Condensed Statements of
Income - Nine Months Ended
September 30, 1997 and 1996.................... 5
Consolidated Condensed Statements of
Cash Flows - Nine Months Ended
September 30, 1997 and 1996.................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations ................................. 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................. 16
Item 6. Exhibits and Reports on Form 8-K.............. 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
September 30, December 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 13,925 $ 14,539
Receivables, net 72,823 73,045
Inventory 3,765 947
Other current assets 964 1,156
-------- --------
Total current assets 91,477 89,687
Property and equipment, net 661,492 487,258
Debt issue costs, net of amortization 3,794 --
-------- --------
$756,763 $576,945
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,365 $ 41,617
Amounts payable to oil and gas property owners 15,625 18,496
Production taxes payable 20,451 13,830
Accrued and other liabilities 8,350 4,374
-------- --------
Total current liabilities 92,791 78,317
Long-term debt 201,066 70,000
Deferred income taxes 60,983 50,908
Stockholders' equity:
Preferred stock, $.001 par value: 1,000,000
shares authorized, none outstanding -- --
Common stock, $.01 par value: 35,000,000
shares authorized; 31,409,952 issued
(31,330,361 at December 31, 1996) 314 313
Additional paid-in capital 247,473 241,991
Retained earnings 154,344 135,416
Treasury stock, at cost (208) --
-------- --------
Total stockholders' equity 401,923 377,720
-------- --------
$756,763 $576,945
-------- --------
-------- --------
See accompanying notes.
3
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
Three Months Ended
----------------------------
September 30, September 30,
1997 1996
------------- -------------
Revenues:
Oil and gas production $46,342 $37,838
Trading revenues 42,019 7,678
Revenue from gas gathering 299 544
Interest income 175 177
Other income 332 104
------- -------
89,167 46,341
Operating expenses:
Lease operating expenses 12,817 12,430
Cost of trading 40,735 7,025
Depreciation, depletion and amortization 18,334 11,595
General and administrative 6,414 4,146
Interest expense 3,403 17
------- -------
81,703 35,213
------- -------
Income for the period before income taxes 7,464 11,128
Provision for income taxes 2,836 4,230
------- -------
Net income for the period $ 4,628 $ 6,898
------- -------
------- -------
Net income per common share and common
share equivalent $ .14 $ .22
------- -------
------- -------
Weighted average number of shares of common
stock and common stock equivalents 31,948 31,354
------- -------
------- -------
See accompanying notes.
4
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
Nine Months Ended
----------------------------
September 30, September 30,
1997 1996
------------- -------------
Revenues:
Oil and gas production $144,120 $102,412
Trading revenues 89,550 30,547
Revenue from gas gathering 1,254 1,996
Interest income 1,364 633
Other income 651 465
-------- --------
236,939 136,053
Operating expenses:
Lease operating expenses 42,220 34,027
Cost of trading 86,679 28,449
Depreciation, depletion and amortization 50,226 31,859
General and administrative 18,564 11,212
Interest expense 8,721 3,154
-------- --------
206,410 108,701
-------- --------
Income for the period before income taxes 30,529 27,352
Provision for income taxes 11,601 10,393
-------- --------
Net income for the period $ 18,928 $ 16,959
-------- --------
-------- --------
Net income per common share and common
share equivalent $ .59 $ .62
-------- --------
-------- --------
Weighted average number of shares of common
stock and common stock equivalents 31,928 27,554
-------- --------
-------- --------
See accompanying notes.
5
BARRETT RESOURCES CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Nine Months Ended
----------------------------
September 30, September 30,
1997 1996
------------ -------------
Cash flows from operations:
Net income $ 18,928 $ 16,959
Adjustments needed to reconcile to
net cash provided by operations:
Depreciation, depletion, and amortization 50,479 31,859
Amortization of unrealized hedging (losses) -- (1,138)
Deferred income taxes 10,075 9,778
--------- ---------
79,482 57,458
Change in current assets and liabilities:
Accounts receivable 222 (7,246)
Other current assets 192 (416)
Accounts payable 6,748 457
Amounts due oil and gas owners (2,871) 7,325
Production taxes payable 6,621 6,717
Accrued and other liabilities 3,198 (1,585)
--------- ---------
Net cash flow provided by operations 93,592 62,710
--------- ---------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 8,717 1,992
Acquisition of property and equipment (228,991) (124,054)
--------- ---------
Net cash flow used in investing activities (220,274) (122,062)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,057 138,269
Borrowings on line of credit 65,000 33,000
Net payments under line of credit (85,000) (110,000)
Proceeds from issuance of Senior Notes, net
of offering costs 145,953 --
Payments on other long-term debt (942) --
--------- ---------
Net cash flow provided by financing activities 126,068 61,269
--------- ---------
(Decrease)increase in cash and cash equivalents (614) 1,917
Cash and cash equivalents at beginning of period 14,539 7,529
--------- ---------
Cash and cash equivalents at end of period $ 13,925 $ 9,446
--------- ---------
--------- ---------
Non-cash investing and financing activities:
Issuance/commitment of common stock for
property acquisitions $ 4,219 $ 31,603
Common stock/treasury share options exercised $ 207 $ 527
Assumption of debt with property acquisitions $ 2,785 $ --
See accompanying notes.
6
BARRETT RESOURCES CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1997
1. UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments necessary to
present fairly the financial position of Barrett Resources Corporation
and its wholly owned subsidiaries, collectively referred to as the
"Company", as of September 30, 1997 and the results of operations and
cash flows for the periods presented. All such adjustments are of a
normal recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results for the full year.
The accounting policies followed by the Company are set forth in Note 1
to the Company's financial statements in Form 10-K for the year ended
December 31, 1996. These financial statements should be read in
conjunction with the financial statements and notes included in the Form
10-K. Certain reclassifications have been made to 1996 amounts to
conform to the 1997 presentation.
PROPERTY AND EQUIPMENT
Oil and gas property costs associated with unevaluated properties and major
development projects are excluded from capitalized costs being amortized.
As of September 30, 1997 and December 31, 1996, excluded costs were $124
million and $82 million, respectively.
INVENTORIES
Inventories, stated at lower of average costs or market, consist of well
equipment of $1.5 million and natural gas held in inventory of $2.2 million
as of September 30, 1997. An average-cost method is used to expense the
cost of natural gas sold from inventory.
2. INCOME TAXES
Provisions for income taxes were calculated in accordance with Statement
of Financial Accounting Standards No. 109 which provides that a deferred
tax liability or asset be determined based on the timing differences
between the basis used for financial versus tax reporting of assets and
liabilities as measured by the effective tax rates. For the nine month
period ended September 30, 1997, the Company used an estimated
effective tax rate of 38 percent and paid income taxes of $684,000.
The Company is vigorously contesting a "Notice of Deficiency" of $5.3
million together with penalties of $1.1 million, and an undetermined
amount of interest, issued by the Internal Revenue Service resulting
from an examination of federal tax returns of a subsidiary of the
Company for years 1991 through 1993. The deficiency resulted primarily
from the IRS's disallowance of certain net operating loss deductions
claimed during the periods under examination and may affect
approximately $30 million of related unused net operating loss
carryforwards. The Company believes
7
that the federal returns of the subsidiary properly reflect the federal
tax liability and that the existing net operating loss carryforwards are
appropriate as supported by relevant authority. It is anticipated that
the final determination of this matter will involve a lengthy process.
3. LONG-TERM DEBT
The Company's long-term debt consists of the following (in thousands):
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
7.55% Senior Notes $150,000 $ ---
Credit facility 50,000 70,000
Other 1,844 ---
-------- -------
201,844 70,000
Less current portion 778 ---
-------- -------
$201,066 $70,000
-------- -------
-------- -------
In February 1997, the Company issued $150 million principal amount of
7.55% Senior Notes due 2007 ("Notes"). A portion of the net proceeds
from the offering was used to repay in full the balance of the Company's
existing line of credit. Interest on the Notes is payable semi-annually
on February 1 and August 1 of each year, commencing August 1, 1997.
As of September 30, 1997, the Company's effective interest rate, on an
outstanding balance of $50 million on its credit facility, was 6.3125% per
annum.
Total interest paid for the nine month period ended September 30, 1997 was
$6.7 million.
4. RECENTLY ISSUED ACCOUNTING STANDARD
In February and June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" and SFAS No. 130 "Reporting Comprehensive Income",
respectively. The purpose of SFAS No. 128 is to simplify the
computation of earnings per share ("EPS") and to make the U.S. standard
for computing EPS more compatible with the EPS standards of other
countries and with that of the International Accounting Standards
Committee. SFAS No. 130 expands the reporting of income to include all
changes in an enterprise's equity during a reporting period resulting
from non-owner transactions including net income and other economic
events. The effective date for the application of SFAS No. 128 and SFAS
No. 130 is for fiscal years and interim periods beginning after December
15, 1997. Earlier application is not permitted. The Company does not
expect the application of SFAS No. 128 or SFAS No. 130 to have a
material impact on its EPS calculation or on its calculations of net
income, respectively.
8
5. KANSAS AD VALOREM TAX
The Natural Gas Policy of 1978 ("NGPA") permitted producers to receive from
the gas purchaser reimbursement of "severance, production or similar taxes"
on top of the regulated maximum lawful price ("MLP") permitted under the
NGPA. For a number of years the Federal Energy Regulatory Commission
("FERC") and its predecessor, the Federal Power Commission, had ruled that
the Kansas ad valorem tax was similar to a severance tax and, therefore was
properly payable under the NGPA to a producer. Following an adverse court
decision, FERC reversed its earlier ruling, finding that the Kansas ad
valorem tax was not similar to a severance tax and, therefore, a producer
could not receive Kansas ad valorem tax reimbursement as an add-on to the
MLP. However, FERC determined that its later ruling should only apply to
natural gas sold after June 1988. In August 1996, the United States
Court of Appeals for the District of Columbia Circuit upheld the FERC's
ruling that the Kansas ad valorem tax was not similar to a severance tax,
but the Court of Appeals reversed the FERC's decision as to the effective
date. Specifically, the Court of Appeals held that, beginning with October
4, 1983 natural gas production, a producer could not receive Kansas ad
valorem tax reimbursement as an add-on to the MLP and, therefore, must
refund the ad valorem taxes it so collected as an add-on to the MLP. On
May 12, 1997, the United States Supreme Court declined to review the Court
of Appeals decision. Various petitions for adjustments were filed with
FERC requesting, among other things, that FERC waive all interest which
otherwise might be due on the ad valorem taxes to be refunded. On
September 10, 1997, FERC issued an order denying the waiver of interest.
FERC's order also established certain refund procedures, including a
requirement that pipelines send producers a statement of refunds on November
10, 1997. Requests for rehearing, clarification and stay of the
September 10 order have been filed. By order issued November 10, 1997,
the FERC denied all requests for stay of the September 10 order, but stated
that it needed more time to consider the issues raised by Plains and PPOC
and other parties in their requests for rehearing of that order. There is no
deadline for a FERC ruling on the rehearing requests.
Effective October 1, 1984, K N Energy, Inc. ("K N") assigned producing gas
properties in Kansas to its then subsidiary, Plains Petroleum Company
("Plains"). Plains sold the gas produced from those properties to K N and
received the MLP plus reimbursement for Kansas ad valorem taxes. On
September 13, 1985, Plains was "spun-off" to K N's shareholders, but Plains
continued to sell its Kansas gas production to K N. Effective December 1,
1986, Plains assigned these properties to its subsidiary, Plains Petroleum
Operating Company ("PPOC"), and PPOC assumed the obligation to sell the
production to K N at the MLP plus reimbursement for ad valorem taxes.
Beginning January 1, 1987, PPOC's sales to K N were made pursuant to FERC
Order 451 and, therefore, PPOC's receipt of ad valorem tax reimbursement
did not cause it to receive payment in excess of the MLP. On July 18,
1995, Plains and PPOC became subsidiaries of the Company.
Plains and PPOC are participating in the FERC adjustment proceedings
seeking waiver of interest on the ad valorem tax refund. In addition,
Plains and PPOC have requested the FERC to rule that K N should be
responsible for all Kansas ad valorem tax reimbursement refunds
attributable to the period October 1, 1984 through September 13, 1985.
FERC has yet to rule on this matter definitively. Further, Plains and
PPOC will seek to recoup from royalty and overriding royalty owners and
9
parties to certain net profit agreements a portion of the amount to be
refunded. To the extent Plains and PPOC are unable to recover refund
amounts from royalty and overriding royalty interest owners, they may
seek pursuant to the FERC's September 10, 1997 order, individual relief
with respect to those unrecoverable amounts. In light of the unresolved
issues and the motions currently pending before FERC, the ultimate amount
Plains and PPOC will be required to refund cannot be presently
quantified, however this refund is presently not anticipated to have a
material adverse effect upon the Company.
10
BARRETT RESOURCES CORPORATION
For the Quarter and Nine Months Ended
September 30, 1997
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1997, total assets increased
$179.8 million, or 31 percent, to $756.7 million as compared with total
assets of $576.9 million at December 31, 1996. Cash and short term
investments decreased $.6 million to $13.9 million, working capital
decreased $12.7 million to a negative $1.3 million and net property and
equipment increased $174.2 million to $661.5 million. During the nine
month period, the Company invested in oil and gas properties in its
areas of activity, which increased both property and equipment and
long-term debt.
Operating cash flows before working capital adjustments totaled $79.5
million for the nine month period ended September 30, 1997 compared with
$57.5 million for the comparable period in 1996. After working capital
adjustments, cash flow provided by operations increased by $30.9 million
to $93.6 million as compared with the same nine month period in 1996.
Capital expenditures of $236.0 million, including non-cash transactions
involving issuance of common stock and assumption of debt, for the nine
month period increased $80.3 million over the same period in 1996.
These expenditures, funded by operating cash flows and borrowings,
consisted principally of drilling and development activities of oil and
gas properties. Of these capital expenditures, approximately 36 percent
was invested in the Rocky Mountain Region, 18 percent in the
Mid-Continent Region and 37 percent in the Gulf of Mexico Region.
The Company plans to continue actively acquiring, exploring and developing
oil and gas properties. The Company expects cash flow from its producing
properties and its borrowing capacity to be sufficient to fund its
anticipated capital and operating requirements, including any
contingencies.
The Company's operating results are directly affected by oil and gas
prices. Oil and gas prices also affect the reserve values used in
determining the "ceiling test" limitation for the Company's capitalized oil
and gas property costs accounted for under the full cost method. Should the
net capitalized costs of the Company's oil and gas properties exceed the
estimated present value of future net cash flows from proved oil and gas
reserves, such excess costs would be recognized as an impairment and
charged to current expense. Sales prices of the Company's oil and gas
production have declined since December 31, 1996. A further decline in oil
and gas sales prices could possibly result in the recognition of an
impairment expense in future periods.
11
EXPLORATION AND DEVELOPMENT ACTIVITIES
During the first nine months of 1997, the Company drilled and completed a
total of 82 wells of which 59 were gas wells, 10 were oil wells and 13 were
dry holes. The Company was drilling or waiting on completion on an
additional 54 wells at the end of September. Following is a description of
significant activities.
ROCKY MOUNTAIN REGION
In the Wind River Basin, following the August approval of its Environmental
Impact Statement, the Company has resumed its development drilling program
of various gas bearing horizons in the Cave Gulch area in Wyoming. An
exploratory deep test to the Madison formation is also underway. The
Company currently has four drilling rigs and three completion rigs
operating in the Cave Gulch area.
The Company is continuing to operate four drilling rigs in the Piceance
Basin area and plans to continue this level of activity through 1998. For
the first nine months, the Company has successfully drilled and completed
23 gas wells in this Basin. To facilitate increases in production from the
Piceance Basin area, the Grand Valley Gathering System is being expanded
and additional compression facilitates are being installed. The 1997
expansion is scheduled to commence operations in mid-November. Further
expansion is scheduled for late 1998 to accommodate additional production
resulting from the four rig drilling program.
In late October, the Company entered into a joint development agreement
with an industry partner for the development of coal bed methane reserves
in the Powder River Basin in northeast Wyoming. The Company has a 50
percent working interest in the project.
The Company has made a strategic decision to divest itself of its
properties and interests in the Uinta Basin, contingent on receiving an
acceptable price, so that the Company can focus on its core areas elsewhere
in the Rocky Mountains, the Mid-Continent and the Gulf of Mexico. During
the first nine months of 1997, the Company's activity in the Uinta Basin
has consisted of recompleting seven wells in the Brundage Canyon Field and
14 wells in the Altamont-Bluebell Field.
MID-CONTINENT REGION
For the nine month period in the Mid-Continent Region, the Company
participated in drilling 88 wells, of which 75 are producing and 13 were
unsuccessful.
The Company's exploration activity for the Anadarko Basin has been
concentrated in the Cement field, the Mountain View area, the Carnegie
area, the Mountain Front Granite Wash, and the Sayre and North Carter
areas. Earlier this year, the Company participated in the drilling of a
discovery well in a new field in the Mountain View area. Four offset
12
wells have been drilled to date resulting in three successful producing
wells and one dry hole.
GULF OF MEXICO
For the nine month period, the Company has participated in the drilling of
nine successful gas wells, three oil wells and five dry holes. Two wells
are currently drilling. The Company is currently producing 26.5 million
cubic feet of natural gas equivalent per day net to the Company and 16
wells are scheduled to be placed on production in late 1997 or early 1998.
The Company currently has working interests in 54 offshore blocks and,
pending Minerals Management Service approval of all of the Company's
apparent high bids on seven blocks in the West Gulf of Mexico sale held in
August 1997, the Company will have an interest in 61 offshore blocks.
INTERNATIONAL - PERU
The 1997 seismic program for Block 67 in the country of Peru was completed,
processed and interpreted in the third quarter. Four lead areas have been
identified as drillable prospects. The Company expects to commence
construction of its first test well location by mid-December, subject to
partner consent and final approval of its environmental impact and
management statement, which is scheduled for a public hearing in
mid-November and is anticipating drilling of this test well will begin in
the second quarter of 1998. The Company currently owns a 45 percent
interest in Block 67.
RESULTS OF OPERATIONS
For the third quarter ended September 30,1997 net income of $4.6 million
or $.14 per share was $2.3 million lower than net income of $6.9 million
or $.22 per share in the third quarter 1996. The decrease in net income
is attributable to increases in depreciation, depletion and amortization
expense, lower crude oil prices and higher interest costs. These
factors were partially offset by increased gas and oil production
revenues resulting from higher production volumes and increased gas
trading activities. Net income for the nine months ended September 30,
1997 was $18.9 million or $.59 per share, an increase of $1.9 million
over net income of $17.0 million or $.62 per share for the first nine
months of 1996.
Total revenues for the third quarter of 1997 were $89.2 million, up 92
percent compared to $46.3 million for the same period in 1996. For the
nine months ended September 30, 1997, total revenues were $236.9 million
as compared to $136.1 million for the comparable 1996 period. Higher
production and trading revenues were the primary factors contributing to
the third quarter and nine month total revenue increases.
Production revenues for the third quarter of 1997 increased 22 percent
from $37.8 million in 1996 to $46.3 million. For the nine months ended
September 30, 1997, production revenues were up 41 percent to $144.1
million compared with revenues of $102.4 million for the same period in
1996.
13
Production revenues and related volumes and average prices during the
periods presented were as follows:
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
------- ------- -------- -------
Gas Revenues (000's) $36,605 $27,793 $113,115 $76,415
Gas Production (Bcf) 19.8 15.5 55.8 44.1
Average Price per Mcf $ 1.84 $ 1.80 $ 2.03 $ 1.73
Oil Revenues (000's) $ 9,737 $10,045 $ 31,005 $25,997
Oil Production (Mbbls) 586 511 1,722 1,397
Average Price per Barrel $ 16.62 $ 19.66 $ 18.01 $ 18.61
(Note: Bcf = billion cubic feet; Mcf = thousand cubic feet; Mbbls =
thousand barrels)
With a 28 percent increase in production volumes and a two percent
increase in average gas prices, third quarter gas revenues increased 32
percent as compared with the same period in 1996. A 27 percent increase
in production volumes accompanied by a 17 percent increase in average
gas prices resulted in a 48 percent increase in gas revenues for the
nine month period ended September 30, 1997 over same period in 1996.
Third quarter 1997 oil revenues were three percent below the same period
in 1996. This decrease is directly attributed to a 15 percent decrease
in average oil prices offset, in part, by a similar increase in
production volumes. Oil revenues increased 19 percent for the first
nine months of 1997 as compared with 1996 due principally to a 23
percent increase in production volumes. Oil prices for the nine month
periods averaged three percent lower in 1997 than 1996.
To reduce its exposure to volatile oil and gas price fluctuations, the
Company enters into hedging arrangements, principally swaps and options,
for both trading and producing activities. Gains or losses on these
hedging arrangements are generally offset by opposite changes in the
realized price of natural gas and crude oil and are recognized in revenues
for the periods to which the hedge relates. As of September 30, 1997, the
Company held positions to hedge its gas production for the fourth quarter
of 1997 of 2.7 Bcf and for the years of 1998 of 17.1 Bcf, 1999 of 19.2 Bcf,
2000 of 20.8 Bcf, 2001 of 21.0 Bcf, 2002 of 22.5 Bcf and 2003 of 3.7 Bcf.
For the quarter ended September 30, 1997, revenues from trading
activities were $42.0 million on 25.8 Bcf of gas compared to $7.7
million on 5.8 Bcf of gas for the same period in 1996. The associated
costs of trading increased to $40.7 million from $7.0 million. The gross
margin from trading activities was $1.3 million and $0.7 million for the
respective quarters ended September 30, 1997 and 1996. The gross margin
from trading activities for the first nine months of 1997 was $2.9
million on 50.0 Bcf with revenues of $89.6 million compared to a gross
14
margin of $2.1 million on 23.5 Bcf with revenues of $30.1 million for
the first nine months of 1996.
Per unit production costs averaged $.55 and $.64 per Mcfe produced for
the third quarter and nine months ended September 30, 1997,
respectively, compared with $.67 and $.65 per Mcfe produced for
comparable periods in 1996, respectively.
Depreciation, depletion and amortization increased to $18.3 million from
$11.6 million for the quarter and to $50.2 million from $31.9 million
for the nine month period. These increases are attributed to a 26
percent increase in equivalent production and higher depletion rates.
For the nine month period ended September 30, 1997 and 1996, depletion
on oil and gas production was recorded at $.72 and $.58 per Mcfe,
respectively.
Interest expense increased from $17,000 to $3.4 million for the quarter
and from $3.2 million to $8.7 million for the nine month period.
Increases are directly attributed to higher debt levels.
The Company's largest source of operating income is from sales of its
gas and oil production. Therefore, the levels of the Company's revenues
and earnings are affected by prices at which natural gas and oil are
being sold. This is particularly true with respect to natural gas, which
accounted for approximately 78 percent of the Company's production
revenue for the first nine months of 1997. As a result, the Company's
operating results for any prior period are not necessarily indicative of
future operating results because of the fluctuations in gas and oil
prices and the lack of predictability of those fluctuations as well as
changes in production levels.
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This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act of 1934. Although the Company believes that the
expectations reflected in the forward-looking statements and the
assumptions upon which such forward-looking statements are based are
reasonable, it can give no assurance that such expectations and
assumptions will prove to have been correct. See the Company's Annual
Report on Form 10-K for additional statements concerning important
factors that could cause actual results to differ materially from the
Company's expectations. These factors include but are not limited to
fluctuations in gas and crude oil prices, the success rate of
exploration efforts, the timeliness of development activities, and
changes in the political and economic environment of Peru.
15
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
KANSAS AD VALOREM TAX
The Natural Gas Policy of 1978 ("NGPA") permitted producers to receive
from the gas purchaser reimbursement of "severance, production or
similar taxes" on top of the regulated maximum lawful price ("MLP")
permitted under the NGPA. For a number of years the Federal Energy
Regulatory Commission ("FERC") and its predecessor, the Federal Power
Commission, had ruled that the Kansas ad valorem tax was similar to a
severance tax and, therefore was properly payable under the NGPA to a
producer. Following an adverse court decision, FERC reversed its
earlier ruling, finding that the Kansas ad valorem tax was not similar
to a severance tax and, therefore, a producer could not receive Kansas
ad valorem tax reimbursement as an add-on to the MLP. However, FERC
determined that its later ruling should only apply to natural gas sold
after June 1988. In August 1996, the United States Court of Appeals
for the District of Columbia Circuit upheld the FERC's ruling that the
Kansas ad valorem tax was not similar to a severance tax, but the
Court of Appeals reversed the FERC's decision as to the effective
date. Specifically, the Court of Appeals held that, beginning with
October 4, 1983 natural gas production, a producer could not receive
Kansas ad valorem tax reimbursement as an add-on to the MLP and,
therefore, must refund the ad valorem taxes it so collected as an
add-on to the MLP. On May 12, 1997, the United States Supreme Court
declined to review the Court of Appeals decision. Various petitions
for adjustments were filed with FERC requesting, among other things,
that FERC waive all interest which otherwise might be due on the ad
valorem taxes to be refunded. On September 10, 1997, FERC issued an
order denying the waiver of interest. FERC's order also established
certain refund procedures, including a requirement that pipelines
send producers a statement of refunds on November 10, 1997.
Requests for rehearing, clarification and stay of the September 10
order have been filed. By order issued November 10, 1997, the FERC
denied all requests for stay of the September 10 order, but stated
that it needed more time to consider the issues raised by Plains and
PPOC and other parties in their requests for rehearing of that order.
There is no deadline for a FERC ruling on the rehearing requests.
Effective October 1, 1984, K N Energy, Inc. ("K N") assigned producing
gas properties in Kansas to its then subsidiary, Plains Petroleum
Company ("Plains"). Plains sold the gas produced from those
properties to K N and received the MLP plus reimbursement for Kansas
ad valorem taxes. On September 13, 1985, Plains was "spun-off" to K
N's shareholders, but Plains continued to sell its Kansas gas
production to K N. Effective December 1, 1986, Plains assigned these
properties to its subsidiary, Plains Petroleum Operating Company
("PPOC"), and PPOC assumed the obligation to sell the production to K
N at the MLP plus reimbursement for ad valorem taxes. Beginning
January 1, 1987, PPOC's sales to K N were made pursuant to FERC Order
451 and, therefore, PPOC's receipt of ad valorem tax reimbursement did
not cause it to receive payment in
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excess of the MLP. On July 18, 1995, Plains and PPOC became
subsidiaries of the Company.
Plains and PPOC are participating in the FERC adjustment proceedings
seeking waiver of interest on the ad valorem tax refund. In addition,
Plains and PPOC have requested the FERC to rule that K N should be
responsible for all Kansas ad valorem tax reimbursement refunds
attributable to the period October 1, 1984 through September 13, 1985.
FERC has yet to rule on this matter definitively. Further, Plains and
PPOC will seek to recoup from royalty and overriding royalty owners
and parties to certain net profit agreements a portion of the amount
to be refunded. To the extent Plains and PPOC are unable to recover
refund amounts from royalty and overriding royalty interest owners,
they may seek pursuant to the FERC's September 10, 1997 order,
individual relief with respect to those unrecoverable amounts. In
light of the unresolved issues and the motions currently pending
before FERC, the ultimate amount Plains and PPOC will be required to
refund cannot be presently quantified, however this refund is
presently not anticipated to have a material adverse effect upon the
Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibit is filed as part of this Quarterly
Report on form 10-Q:
27. Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BARRETT RESOURCES CORPORATION
November 12, 1997 By /s/ Paul M. Rady
-------------------------------
Paul M. Rady
CEO - President
November 12, 1997 By /s/ J. Frank Keller
-------------------------------
J. Frank Keller
Chief Financial Officer
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