| UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission file number 333-12707 Mariner Energy, Inc. (Exact name of registrant as specified in its charter) Internal Revenue Service - Employer Identification No. 86-0460233 State of other jurisdiction of incorporation or organization - Delaware 580 WestLake Park Blvd., Suite 1300 Houston, Texas 77079 (Address of principal executive offices including Zip Code) (281) 584-5500 (Registrant's telephone number) 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 requirement for the past 90 days. Yes [X] No [ ] Note: The Company is not subject to the filing requirements of the Securities Exchange Act of 1934. This quarterly report is filed pursuant to contractual obligations imposed on the Company by an Indenture, dated as of August 1, 1996, under which the Company is the issuer of certain debt. As of August 2, 2002, there were 1,380 shares of the registrant's common stock outstanding. |
| MARINER ENERGY, INC. Form 10-Q June 30, 2002 TABLE OF CONTENTS | |
|---|---|
| PART I | FINANCIAL INFORMATION |
| Item 1. | Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001 |
| Statements of Operations for the three-months and six-months ended June 30, 2002 and 2001 (unaudited) | |
| Statements of Cash Flows for the six-months ended June 30, 2002 and 2001 (unaudited) | |
| Notes to Financial Statements (unaudited) | |
| Independent Accountants' Report | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
PART II | OTHER INFORMATION |
| Item 1. | Legal Proceedings |
| Item 2. | Changes in Securities and Use of Proceeds |
| Item 3. | Defaults Upon Senior Securities |
| Item 4. | Submission of Matters to a Vote of Security Holders |
| Item 5. | Other Information |
| Item 6. | Exhibits and Reports on Form 8-K |
SIGNATURE | |
Part I, Item 1.
| MARINER ENERGY, INC. BALANCE SHEETS (in thousands) | ||
|---|---|---|
| June 30, 2002 (Unaudited) | December 31, 2001 | |
| ASSETS | ||
| Current Assets: | ||
| Cash and cash equivalents | $29,320 | $ 11,838 |
| Receivables | 28,995 | 34,122 |
| Prepaid expenses and other | 6,220 | 10,006 |
| Total current assets | 64,535 | 55,966 |
| Property and Equipment: | ||
| Oil and gas properties, at full cost: | ||
| Proved | 568,181 | 583,207 |
| Unproved, not subject to amortization | 47,284 | 29,341 |
| Total | 615,465 | 612,548 |
| Other property and equipment | 6,067 | 5,750 |
| Accumulated depreciation, depletion and amortization | (346,697) | (316,567) |
| Total property and equipment, net | 274,835 | 301,731 |
| Other Assets, Net of Amortization | 2,828 | 2,980 |
| Long-Term Related Party Receivable | 1,070 | 3,223 |
| TOTAL ASSETS | $343,268 | $363,900 |
| LIABILITIES AND STOCKHOLDER'S EQUITY | ||
| Current Liabilities | ||
| Accounts payable | $25,377 | $43,579 |
| Accrued liabilities | 24,906 | 27,543 |
| Accrued interest | 4,466 | 4,469 |
| Total current liabilities | 54,749 | 75,591 |
| Other Liabilities | 9,792 | 8,454 |
| Long-Term Debt: | ||
| Senior Subordinated Notes, due 2006, 10.5% interest | 99,796 | 99,772 |
| Total long-term debt | 99,796 | 99,772 |
| Commitments and Contingencies - Notes 3, 5 and 6 | ||
| Stockholder's Equity: | ||
| Common stock, $1 par value; 2,000 shared authorized, 1,380 issued and outstanding | 1 | 1 |
| Additional paid-in-capital | 227,318 | 227,318 |
| Other comprehensive income | 12,707 | 25,803 |
| Accumulated deficit | (61,095) | (73,039) |
| Total stockholder's equity | 178,931 | 180,083 |
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $343,268 | $363,900 |
The accompanying notes are an integral part of these financial statements. | ||
| MARINER ENERGY, INC. STATEMENTS OF OPERATIONS (Unaudited, in thousands) | ||||
|---|---|---|---|---|
| THREE-MONTHS ENDED JUNE 30, | SIX-MONTHS ENDED JUNE 30, | |||
| 2002 | 2001 | 2002 | 2001 | |
| Revenues: | ||||
| Oil sales | $11,902 | $18,200 | $22,712 | $37,962 |
| Gas sales | 29,856 | 23,553 | 46,949 | 53,705 |
| Total revenues | 41,758 | 41,753 | 69,661 | 91,667 |
| Costs and Expenses: | ||||
| Lease operating expenses | 6,214 | 5,281 | 10,151 | 10,410 |
| Transportation | 2,560 | 3,916 | 4,434 | 7,386 |
| General and administrative expenses | 2,177 | 1,674 | 4,115 | 3,705 |
| Depreciation, depletion and amortization | 17,375 | 16,697 | 31,475 | 34,196 |
| Unrealized loss on derivative instruments | 182 | -- | 2,153 | -- |
| Total costs and expenses | 28,508 | 27,568 | 52,328 | 55,697 |
| Operating Income | 13,250 | 14,185 | 17,333 | 35,970 |
| Interest: | ||||
| Expense, net | (2,443) | (1,644) | (5,389) | (4,026) |
| Income Before Taxes | 10,807 | 12,541 | 11,944 | 31,944 |
| Provision for Income Taxes | -- | -- | -- | -- |
| NET INCOME | $10,807 | $12,541 | $11,944 | $31,944 |
The accompanying notes are an integral part of these financial statements. | ||||
| MARINER ENERGY, INC. STATEMENTS OF CASH FLOWS (unaudited, in thousands) | ||
|---|---|---|
| SIX-MONTHS ENDED JUNE 30, | ||
| 2002 | 2001 | |
| Operating Activities: | ||
| Net Income | $11,944 | $31,944 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Depreciation, depletion and amortization | 31,372 | 34,664 |
| Unrealized loss and other non-cash derivative instrument adjustments | (10,608) | |
| Changes in operating assets and liabilities: | ||
| Receivables | 5,127 | 1,182 |
| Other current assets | 3,786 | (5,543) |
| Other assets | 152 | 103 |
| Accounts payable and accrued liabilities | (21,057) | 59,230 |
| Net cash provided by operating activities | 20,716 | 121,580 |
| Investing Activities: | ||
| Additions to oil and gas properties | (56,517) | (82,721) |
| Proceeds from property conveyances | 53,600 | 39,500 |
| Additions to other property and equipment | (317) | (701) |
| Net cash used in investing activities | (3,234) | (43,922) |
| Financing Activities: | ||
| Repayment of proceeds from revolving credit facility | -- | (30,000) |
| Net cash provided by (used in) financing activities | -- | (30,000) |
| Increase in Cash and Cash Equivalents | 17,482 | 47,658 |
| Cash and Cash Equiv. at Beginning of Period | 11,838 | 2,389 |
| Cash and Cash Equiv. at End of Period | $29,320 | $50,047 |
SUPPLEMENTAL INFORMATION | ||
| Cash interest paid | $5,590 | $5,984 |
The accompanying notes are an integral part of these financial statements. | ||
The
condensed financial statements of Mariner Energy, Inc. (the “Company”
or “Mariner”) included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”). Accordingly, they reflect all adjustments (consisting only of
normal, recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the financial results for the interim periods.
Certain information and notes normally included in condensed financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company’s Form 10-K for the year ended
December 31, 2001. The results of operations and cash flows for the six-months
ended June 30, 2002 are not necessarily indicative of the results for the full
year.
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As discussed in Note 3, 5 and 6, the Company is
owned and controlled by an entity that is bankrupt which may impact our future operations.
Under
the full cost method of accounting for oil and gas properties, the net carrying
value of proved oil and gas properties is limited to an estimate of the future
net revenues, discounted at 10%, from proved oil and gas reserves based on
period-end prices and costs plus the lower of cost or estimated fair value of
unproved properties.
In
April 2002, we sold 50% of our working interest in our Falcon discovery and
surrounding blocks, located in East Breaks Block 579 in the western Gulf of
Mexico, for $48.8 million, plus reimbursement for capital spent between the
effective date and the date of closing of $4.8 million as determined under an
effective sales date of January 1, 2002. Subsequent to the sale we have a 25%
working interest in the discovery and surrounding blocks within the Area of Mutual Interest. The project is
currently expected to begin production in the second quarter of 2003. At
December 31, 2001, the Falcon project had 66.8 Bcfe assigned as proven oil and
gas reserves to our 50% interest.
Enron
Bankruptcy - On December 2, 2001, Enron Corp. (“Enron”)
and certain of its affiliates, including Enron North America Corp.
(“ENA”), filed voluntary petitions for bankruptcy protection. The
Company has been informed that of the various affiliates of both Enron and
Mariner, only Enron and ENA are included in the bankruptcy. We do not know at
this time if any other affiliates of Enron will seek bankruptcy protection or
what effect, if any, this may have on the ownership of Mariner Energy LLC which
owns 100% of Mariner Holdings, Inc. (our direct parent) or on Joint Energy
Development Investments Limited Partnership (“JEDI”), which owns
approximately 96% of Mariner Energy LLC. Enron is the parent of ENA, and an
affiliate of ENA is the general partner of JEDI. JEDI is 100% owned by several
different Enron and ENA affiliates. Accordingly, Enron may be deemed to control
JEDI, Mariner Energy LLC, Mariner Holdings and the Company. Additionally, seven
of the Company’s directors are officers of Enron or affiliates of Enron.
Because of these various potentially conflicting interests, ENA, the Company,
JEDI and the minority shareholders of Mariner Energy LLC have entered into an
agreement that is intended to make clear that Enron and its affiliates have no
duty to make business opportunities available to the Company.
Mariner
Energy LLC’s only asset is 100% of the common stock of Mariner Holdings,
Inc., our direct parent. The only asset of Mariner Holdings is 100% of the
common shares of Mariner. Covenants in Mariner’s Revolving Credit Facility
and Senior Subordinated Notes restrict the funds of Mariner that can be
distributed to Mariner Energy LLC to repay its term loan or distribute earnings
to an ENA affiliate – see below “ENA Affiliate Term Loan”.
Mariner Energy LLC is currently negotiating the terms of an extension of the ENA Affiliate Term Loan to March 20, 2004. Based on
discussions with representatives of the ENA affiliate, management expects to obtain the extension by August 30, 2002. In the event Mariner Energy LLC is unable to obtain an extension or
restructure its obligations, it would either default or be forced to sell its
interest in Mariner or cause Mariner to sell a substantial portion of its assets
to repay its Revolving Credit Facility, if any amounts are outstanding, and
outstanding Senior Subordinated Notes so that it could distribute any remaining
cash proceeds to Mariner Energy LLC to be used to repay the ENA Affiliate Term
Loan.
As
a result of the Enron and ENA bankruptcies, among other implications, we may not
be able to obtain credit from banks or trade vendors or enter into hedging
arrangements on acceptable terms. To date, our operations have not been
materially affected by the bankruptcies; however, our ability to enter into
certain transactions including purchase or sale arrangements and to conduct
significant capital programs may be affected in the future (see Note 5 regarding
possible actions by Enron or ENA).
Mariner Energy LLC
ENA
Affiliate Term Loan – In March 2000, Mariner Energy LLC established an
unsecured term loan with ENA to repay amounts outstanding under various
affiliate credit facilities at Mariner Energy LLC and Mariner Energy, Inc. and
to provide additional working capital. The additional working capital of $55
million was contributed to Mariner in 2000. The loan bears interest at 15%,
which interest accrues and is added to the loan principal. Repayment of the
balance of loan principal and accrued interest, which was approximately $151.3
million as of June 30, 2002, is due March 20, 2003.Mariner Energy LLC is currently negotiating the terms of an extension of the ENA Affiliate Term Loan to March 20, 2004. Based on
discussions with representatives of the ENA affiliate, management expects to obtain the extension by August 30, 2002. As part of the loan
agreement, two five-year warrants were issued to ENA providing the right to
purchase up to 900,000 of common shares of Mariner Energy LLC for $0.01 per
share.
We
have been informed that the Term Loan and warrants were transferred from ENA to
an ENA affiliate.
Mariner Energy, Inc.
Oil
and Gas Production Sales to ENA or Affiliates – During the three years
ending December 31, 2001, 2000 and 1999, sales of oil and gas production to ENA
or affiliates were $50.2 million, $73.4 million and $16.2 million, respectively.
These sales were generally made on 1 to 3 month contracts. At the time ENA filed
its petition for bankruptcy protection, the Company immediately ceased selling
its physical production to ENA. As of June 30, 2002, we had an outstanding
receivable for $3.0 million from ENA. This amount was not paid as scheduled and
is still outstanding. The Company has estimated 90% of this balance is
uncollectible and has recorded an allowance and related expense for $2.7
million.
Accounting
for Price Risk Management Activities – Mariner engages in price risk
management activities from time to time. These activities are intended to manage
Mariner’s exposure to fluctuations in commodity prices for natural gas and
crude oil. The Company primarily utilizes price swaps and costless collars as a
means to manage such risk. Historically, all of the Company’s hedging
contracts were with ENA. As a result of ENA’s bankruptcy, the contracts are
currently in default. The November 2001 through April 30, 2002 settlements for
oil and gas have not been collected. In addition, on May 14, 2002 the Company
elected under its Master Service Agreement with ENA to terminate all open
contracts. The effect of this termination is to fix the nominal value on all
remaining contracts on May 14, 2002. Subsequent to this termination, the value
of all oil and natural gas unpaid hedge contracts was $7.7 million. The Company
has estimated 90% of this balance is uncollectible and has recorded an allowance
and related expenses of $7.0 million. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative
Instruments and Hedging Activities,” as amended by SFAS No. 137 and No.
138, we have de-designated our contracts effective December 2, 2001 and are
recognizing all market value changes subsequent to such de-designation in
earnings of the Company. The value recorded up to the time of de-designation and
included in Accumulated Other Comprehensive Income (“AOCI”), will
reverse out of AOCI and into earnings as the original corresponding production,
as hedged by the contracts, is produced. For the six-months ending June 30, 2002
approximately $12.9 million has reversed out to earnings. As of June 30, 2002,
$12.9 million remained in AOCI to be reversed out during the contract periods
covering July 1, 2002 through December 31, 2003 (see Note 8).
The
following table sets forth the results of hedging transactions during the
periods indicated that were made with ENA:
| SIX-MONTHS ENDED JUNE 30, | ||
|---|---|---|
| 2002 | 2001 | |
| Natural gas quantity hedged (Mmbtu) | 8,557 | 8,775 |
| Increase (decrease) in natural gas sales (thousands) | $10,960 | $(14,162) |
| Crude oil quantity hedged (MBbls) | 362 | 102 |
| Increase (decrease) in crude oil sales (thousands) | $1,969 | $17 |
Supplemental Affiliate Data – provided below is a supplemental balance sheet and income statement for affiliate entities:
| JUNE 30, 2002 | DECEMBER 31, 2001 | |||
|---|---|---|---|---|
| BALANCE SHEET DATA | AMOUNTS (In Millions) | AMOUNTS (In Millions) | ||
| RELATED PARTY RECEIVABLE: | ||||
| Derivative Asset | $0.7 | 2.5 | ||
| Settled Hedge Receivable | 0.3 | 1.0 | 0.4 | -- |
| Oil and Gas Receivable | 0.3 | 3.2 | ||
| ACCRUED LIABILITIES: | ||||
| Transportation Contract | 0.7 | 0.9 | ||
| Service Agreement | 0.5 | 0.3 | 1.2 | |
| STOCKHOLDER'S EQUITY: | ||||
| Common Stock | $.001 | $.001 | ||
| Additional Paid in Capital | $227.3 | $227.3 | $227.3 | $227.3 |
SIX-MONTHS ENDED JUNE 30, | ||||
| INCOME STATEMENT DATA | ||||
| Oil and Gas Sales | 19.7 | 40.9 | ||
| General and Administrative Expenses | 0.1 | -- | ||
| Transportation Expenses | 1.2 | 2.6 | ||
| Unrealized loss and other non-cash derivative instrument adjustments | 0.2 | -- | ||
On June 28, 2002 the Company commenced price risk activities with a third party. These activities are intended to manage the company’s exposure to fluctuations in commodity prices for natural gas and crude. The Company on June 28, 2002 entered into the following fixed price swap.
| TIME PERIOD | NOTIONAL QUANTITIES | FIXED PRICE | JUNE 30, 2002 FAIR VALUE |
|---|---|---|---|
| (MILLIONS) | |||
| Crude Oil (MBbl) | |||
| July 1, 2002 - December 31, 2003 Fixed Price Swap | 823 | $24.64 | (0.2) |
Subsequent to June 30, 2002 the Company also entered into these additional fixed price swaps.
| TIME PERIOD | NOTIONAL QUANTITIES | FIXED PRICE | |
|---|---|---|---|
| Natural Gas (MMbtu) | |||
| January 1, 2003 - December 31, 2003 Fixed Price Swap | 7,300 | $3.54 | |
| Fixed Price Swap | 7,300 | $3.60 | |
| Crude Oil (MBbl) | |||
| August 1, 2002 - December 31, 2002 Fixed Price Swap | 259 | $25.39 |
Subsequent
to these swaps the Company will have approximately 8% of the remainder of 2002
production subject to hedges and 33% of 2003 production subject to hedges. Mark
to market value changes approximately $5.3 million for every 10% overall change
in commodity prices.
The
Company has reviewed the financial strength of its counterparts and believes
credit risk to be minimal. The Company as of June 30, 2002 posted a $5 million
letter of credit to the third party for collateral. Subsequent to June 30, 2002
the Company also deposited $4.0 million in a variable margin account with the
third party for additional collateral.
As
of June 30, 2002, we had a working capital of approximately $9.8 million,
compared to a working capital deficit of $19.6 million at December 31, 2001. The
improvement in the working capital was primarily a result of the sale of 50% of
the Company’s working interest in its Falcon Project for approximately
$53.6 million including reimbursements with a portion of the proceeds being used
to repay the Revolving Credit Facility. We expect our 2002 capital expenditures,
excluding capitalized general and administrative expenses, interest costs and
proceeds from property conveyances (see “Note 2. Oil & Gas
Properties”), to be approximately $101.9 million, which would exceed cash
flow from operations. However, we believe that increased commodity prices and
proceeds from property conveyances will result in sufficient cash flow to permit
us to fund our remaining planned activities in 2002. There can be no assurance
that our access to capital will be sufficient to meet our needs for capital.
Accordingly, we may be required to reduce our planned capital expenditures and
forego planned exploratory drilling.
The
Company’s Revolving Credit Facility matures in October 2002. We have begun
discussions with the existing banks that provide the facility to obtain an
extension. As of June 30, 2002 there were no amounts outstanding under the
Revolving Credit Facility. We plan to minimize the use of the facility until
such time as this agreement can be extended or replaced with a similar
agreement. There is no assurance that this agreement can be extended or
replaced. In addition our parent, Mariner Energy LLC, is currently obligated
under a three-year unsecured term loan with an ENA affiliate. Mariner Energy LLC is currently negotiating the terms of an extension of the ENA Affiliate Term Loan to March 20, 2004. Based on
discussions with representatives of the ENA affiliate, management expects to obtain the extension by August 30, 2002. In the event Mariner Energy LLC is unable to refinance or restructure its obligations, Mariner Energy LLC would either
default or be forced to sell its interest in the Company, or cause the Company
to sell a substantial portion of its assets to repay its Revolving Credit
Facility and outstanding Senior Subordinated Notes so that it could distribute
cash to Mariner Energy LLC to be used to repay the term loan. In the event of
either a change of control of the Company or a sale of a substantial portion of
the Company’s assets, both the balances outstanding under the Senior
Subordinated Notes and Revolving Credit Facility would have to be repaid prior
to payment of the term loan. There can be no assurance that an extension will be
obtained.
On May 3, 2002, Enron presented to its Creditors Committee a proposal under which certain of Enron’s core energy assets, including JEDI’s ownership of Mariner LLC, would be separated from Enron’s bankruptcy estate and operated as a new integrated power and pipeline company. Prior to any transfer of assets to such new company, Enron has indicated that it would conduct a Section 363 auction under the bankruptcy code in which third party bidders may offer to purchase such energy assets, including JEDI’s ownerhip of Mariner. There can be no assurance that Mariner would ultimately be included in a new company or separately sold to a bidder in a Section 363 auction or otherwise.
Litigation – The Company, in the ordinary course of business, is a claimant and/or a defendant in various legal proceedings, including proceedings as to which the Company has insurance coverage. The Company does not consider its exposure in these proceedings, individually or in the aggregate, to be material.
Other Comprehensive Income includes net income and certain items recorded directly to Stockholder’s Equity and classified as Other Comprehensive Income. The following table illustrates the calculation of Other Comprehensive Income:
| SIX-MONTHS ENDED JUNE 30, 2002 (In Thousands) | ||
|---|---|---|
| Comprehensive Income | Other Comprehensive Income | |
| Other comprehensive income - December 31, 2001 | ||
| Net income | $11,964 | $25,803 |
| Other comprehensive loss | ||
| Reclassification adjustment for price risk management settled contracts | (12,928) | |
| Change in fair value of non-ENA outstanding hedge positions | (168) | |
| Other comprehensive income | (13,096) | |
| Comprehensive income | $(1,132) | |
| Other comprehensive income | $12,707 | |
There were no items in Other Comprehensive Income other than the Company's hedging activity.
Statement of Financial
Accounting Standards (SFAS) NO. 143, “Accounting for Asset Retirement
Obligations,” addresses accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. SFAS No. 143 will be effective for us January 1, 2003 and
early adoption is encouraged. SFAS No. 143 requires that the fair value of a
liability for an asset’s retirement obligation be recorded in the period in
which it is incurred and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset. The liability is accreted to
its then present value each period, and the capitalized cost is depreciated over
the useful life of the related asset. If the liability is settled for an amount
other than the recorded amount, a gain or loss is recognized. Currently, we
include estimated future costs of abandonment and dismantlement in our full cost
amortization base and amortize these costs as a component of our depletion
expense. We are evaluating the impact the new standard will have on our
financial statements and at this time we cannot reasonably estimate the effect
of the adoption of this statement.
In April 2002 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, "Rescission of FASB Statements No. 4,
No. 44, and No. 64, Amendment to FASB Statement No. 13 and Technical Corrections." SFAS No. 145 streamlines the reporting of debt
extinguishments and requires that only gains and losses from extinguishments meeting the criteria in Accounting Policies Board
Opinion 30 would be classified as extraordinary. Thus, gains or losses arising from extinguishments that are part of a company's
recurring operations would not be reported as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. We do not expect the adoption of SFAS No. 145 to have a material impact on our financial
position, results of operations or cash flows.
SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” was
issued in June 2002 and addresses accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
(“EITF”) Issue No. 94-3, “Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
was recognized at the date of an entity’s commitment to an exit plan. Under
SFAS No. 146, fair value is the objective for initial measurement of the
liability. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We do not
expect the adoption of SFAS No. 146 to have a material impact on our financial
position, results of operations or cash flows.
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have reviewed the
accompanying balance sheet of Mariner Energy, Inc. as of June 30, 2002 and the
related statements of operations and for the three-months and six-months ended
June 30, 2002 and 2001 and statements of cash flows for the six-months ended
June 30, 2002 and 2001. These financial statements are the responsibility of the
Company’s management.
We conducted our review in
accordance with standards established by the American Institute of Certified
Public Accountants. A review of interim financial information consists primarily
of applying analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with auditing standards
generally accepted in the United States of America, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are
not aware of any material modifications that should be made to the accompanying
financial statements for them to be in conformity with accounting principles
generally accepted in the United States of America.
We have previously audited,
in accordance with auditing standards generally accepted in the United Sates of
America, the balance sheet as of December 31, 2001, and the related statements
of operations, stockholder’s equity, and cash flows for the year ended
December 31, 2001 (not presented herein), and in our report dated April 16,
2002, we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying balance sheet as of
December 31, 2001 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
As described in Note 3, 5 and
6, the Company has various related-party transactions and certain control
relationships with Enron Corp.
/s/ DELOITTE & TOUCHE LLP
DELOITTE &
TOUCHE LLP
Houston, Texas
August 19, 2002
The
following review of operations for the three-month and six-month periods ended
June 30, 2002 and 2001 should be read in conjunction with the financial
statements of the Company and Notes thereto included elsewhere in this Form 10-Q
and with the Financial Statements, Notes, and Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2001,
filed with the Securities and Exchange Commission on April 16, 2002.
Information
Regarding Forward Looking Statements
All
statements other than statements of historical fact included in this quarterly
report on Form 10-Q, including, without limitation, statements contained in this
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” regarding the Company’s financial position,
business strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct, and actual results could differ materially from the
Company’s expectations. Factors that could influence these results include,
but are not limited to, oil and gas price volatility, results of future
drilling, availability of drilling rigs, future production and costs, capital
resources, liquidity and other factors described in the Company’s annual
report on Form 10-K for the year ended December 31, 2001, filed with the
Securities and Exchange Commission on April 16, 2002.
The following table sets forth certain information regarding results of operations for the periods shown:
| THREE-MONTHS ENDED JUNE 30, | SIX-MONTHS ENDED JUNE 30, | |||
|---|---|---|---|---|
| 2002 | 2001 | 2002 | 2001 | |
| Total Revenue, $MM | $41.8 | $41.8 | $69.7 | $91.7 |
| EBITDA(1), $MM | 30.8 | 30.9 | 51.0 | 70.2 |
| Net Income, $MM | 10.8 | 12.5 | 11.9 | 31.9 |
Production: | ||||
| Oil and condensate (Mbbls) | 469 | 757 | 1,000 | 1,542 |
| Natural gas (Mmcf) | 7,171 | 5,499 | 11,806 | 10,924 |
| Natural gas equivalents (Mmcfe) | 9,982 | 10,041 | 17,806 | 20,174 |
Average Realized Sales Prices: | ||||
| Oil and condensate ($/Bbl) | $25.40 | $24.04 | $22.71 | $24.62 |
| Natural gas ($/Mcf) | 4.16 | 4.28 | 3.98 | 4.92 |
| Natural gas equivalents ($/Mcfe) | 4.18 | 4.16 | 3.91 | 4.54 |
Cash Margin(2) Per Mcfe: | ||||
| Revenue (pre-hedge) | $3.55 | $4.51 | $3.18 | $5.25 |
| Hedging impact | 0.63 | (0.35) | 0.73 | (0.71) |
| Lease operating expenses | (0.62) | (0.53) | (0.57) | (0.52) |
| Transportation | (0.25) | (0.39) | (0.25) | (0.37) |
| Gross G&A costs | (0.43) | (0.35) | (0.44) | (0.39) |
| Cash margin | $2.88 | $2.89 | $2.65 | $3.26 |
Capital Expenditures, $MM: | ||||
| Exploration: | ||||
| Leasehold and G&G costs | $11.1 | $12.6 | $18.0 | $8.5 |
| Drilling | 1.9 | 15.5 | 2.9 | 30.8 |
| Development & other | 7.9 | 18.5 | 31.8 | 38.3 |
| Capitalized G&A and interest costs | 2.4 | 2.7 | 4.1 | 5.8 |
| SUB-TOTAL | 23.3 | 49.3 | 56.8 | 83.4 |
| Less property conveyances | (53.6) | 0 | (53.6) | (39.5) |
| TOTAL | $30.3 | $49.3 | $3.2 | $43.9 |
| (1) | EBITDA equals earnings before interest, income taxes, depreciation, depletion, and amortization and unrealized losses on derivative instruments. EBITDA should be used as a supplement to, and not as a supplement for, net earnings and cash provided by operating activities (as disclosed in the financial statements) in analyzing the Company’s results of operations and liquidity. |
| (2) | Cash margin measures the net cash generated by a company’s operations during a given period, without regard to the period such cash is physically received or spent by the company. |
Results of Operations for the Second Quarter of 2002
Net
production was flat at 10.0 Bcfe for the second quarter of 2002 compared to
second quarter of 2001. We anticipate production for 2002 to be approximately 39
Bcfe with production from the King Kong / Yosemite project offsetting
anticipated production decline from other properties. First production from the
Falcon project is expected in the second quarter of 2003.
Hedging
activities for the three months ending June 30, 2002 increased average
realized natural gas and crude oil prices by $0.93 per Mcf and $2.02 per Bbl,
resulting in revenue of $5.4 million and $3.5 million, respectively. Hedging
activity for the three months ending June 30, 2001 decreased our average natural
gas price by $0.65 per Mcf and increased our average realized crude prices by
$0.07 per Bbl resulting in reduced revenue of $3.5 million and increased revenue
of $17,000, respectively.
Oil
and gas revenues remained flat at $41.8 million for the second quarter of
2002 compared to the second quarter of 2001. Realized prices including $0.63 for
the effects of uncollectible hedges increased slightly to $4.18 per Mcfe for the
second quarter from $4.16 per Mcfe in the same period of 2001, offset by a
slight decrease in production.
Lease
operating expenses increased 15% to $6.2 million for the second quarter of
2002, from $5.3 million for the second quarter of 2001, due to the commencement
of production on our King Kong / Yosemite project located in Green Canyon 472
and 516, respectively.
Transportation
expenses decreased 33% to $2.6 million for the second quarter of 2002, from
$3.9 million for the second quarter of 2001, due to the lower production from
our Black Widow and Pluto fields located in Ewing Bank 966 and Mississippi
Canyon 718, respectively.
Depreciation,
depletion, and amortization expense (DD&A) increased 4% to $17.4 million
for the second quarter of 2002 from $16.7 million for the second quarter of
2001, as a result of an increase in the unit-of-production depreciation,
depletion, and amortization rate to $1.74 per Mcfe from $1.66 per Mcfe.
General
and administrative expenses,which are net of overhead
reimbursements received by us from other working interest owners, increased 23%
to $2.2 million for the second quarter of 2002 from $1.7 million for the second
quarter of 2001, due primarily to termination expenses related to our reduction
in personnel.
Interest
expense, net for the second quarter of 2002 increased 33% to $2.4 million from
$1.6 million in the second quarter of 2001, due to less interest capitalized
related to our unevaluated properties.
Income
before income taxes was $10.8 million for the second quarter of 2002
compared to $12.5 million in the second quarter of 2001, as a result of the
increased expenses as discussed above.
Results of Operations for the First Six Months of 2002
Net
production was 17.8 Bcfe for the first six months of 2002 compared to 20.2
Bcfe for the same period of 2001. This decrease was a result in part of
anticipated production declines in our other producing fields prior to the
commencement of production from our King Kong / Yosemite and Crater Lake
projects. Total production for the full year of 2002 is expected to be
approximately 39 Bcfe. First production from the Falcon project is anticipated
in the second quarter of 2003.
Oil
and gas revenues decreased 24% to $69.7 million for the first six months of
2002 from $91.7 million for the comparable period of 2001, primarily due to a
14% decrease in realized prices including the effects of uncollectible hedges to
$3.91 per Mcfe in the first six months of 2002 from $4.54 per Mcfe in the same
period last year, and the production decrease discussed above.
Hedging
activities for the first six months of 2002 increased average realized
natural gas prices and crude prices by $1.97 per Mcf and $0.93 per Bbl,
resulting in revenue of $11.0 million and $2.0 million, respectively. Hedging
activities for the first six months of 2001 increased average realized natural
gas prices by $1.29 per Mcf and revenues by $14.2 million. There were no crude
oil hedges in the first six months of 2001.
Lease
operating expenses decreased 2% to $10.2 million for the first six months of
2002, from $10.4 million for the comparable period of 2001, primarily due to the
reduced offshore production discussed above.
Transportation
expenses decreased 40% to $4.4 million for the first six months of 2002,
from $7.4 million for the same period of 2001, primarily due to lower production
from our Black Widow and Pluto projects as well as a contract loss of $1.0
million recorded in 2001.
Depreciation,
depletion, and amortization expense (DD&A) decreased 8% to $31.5 million
for the first six months of 2002 from $34.2 million for the comparable period of
2001, as a result of the lower production mentioned above offset by an increase
in the unit-of-production depreciation, depletion, and amortization rate to
$1.77 per Mcfe from $1.70 per Mcfe.
General
and administrative expenses, which are net of overhead reimbursements
received by us from other working interest owners, increased 11% to $4.1 million
for the first six months of 2002 from $3.7 million for the comparable period of
2001, due primarily to the termination costs as a result of a reduction in
staffing levels.
Interest
expense, net for the first six months of 2002 increased 34% to $5.4 million from
$4.4 million for the comparable period of 2001, primarily due to less interest
capitalized for our unevaluated properties.
Income
(loss) before income taxes was $12.0 million income for the first six months
of 2002 compared to $31.9 million for the same period of 2001, the reduction
occurring primarily as a result of oil and gas revenue decreases and increased
expenses discussed above.
Liquidity, Capital Expenditures and Capital Resources
As
of June 30, 2002, we had a working capital of approximately $9.8 million,
compared to a working capital deficit of $19.6 million at December 31, 2001. The
improvement in the working capital was primarily a result of the sale of 50% of
the Company’s working interest in its Falcon Project for approximately
$53.6 million including reimbursements with a portion of the proceeds being used
to repay the Revolving Credit Facility. We expect our 2002 capital expenditures,
excluding capitalized general and administrative expenses, interest costs and
proceeds from property conveyances (see “Note 2. Oil & Gas
Properties”), to be approximately $101.9 million, which would exceed cash
flow from operations. However, we believe that increased commodity prices and
proceeds from property conveyances will result in sufficient cash flow to permit
us to fund our remaining planned activities in 2002. There can be no assurance
that our access to capital will be sufficient to meet our needs for capital.
Accordingly, we may be required to reduce our planned capital expenditures and
forego planned exploratory drilling.
The
Company’s Revolving Credit Facility matures in October 2002. We have begun
discussions with the existing banks that provide the facility to obtain an
extension. As of June 30, 2002 there were no amounts outstanding under the
Revolving Credit Facility. We plan to minimize the use of the facility until
such time as this agreement can be extended or replaced with a similar
agreement. There is no assurance that this agreement can be extended or
replaced. In addition our parent, Mariner Energy LLC, is currently obligated
under a three-year unsecured term loan with an ENA affiliate. Mariner Energy LLC is currently negotiating the terms of an extension of the ENA Affiliate Term Loan to March 20, 2004. Based on
discussions with representatives of the ENA affiliate, management expects to obtain the extension by August 30, 2002. In the event Mariner Energy LLC is unable to
refinance or restructure its obligations, Mariner Energy LLC would
either default or be forced to sell its interest in the Company, or cause the
Company to sell a substantial portion of its assets to repay its Revolving
Credit Facility and outstanding Senior Subordinated Notes so that it could
distribute cash to Mariner Energy LLC to be used to repay the term loan. In the
event of either a change of control of the Company or a sale of a substantial
portion of the Company’s assets, both the balances outstanding under the
Senior Subordinated Notes and Revolving Credit Facility would have to be repaid
prior to payment of the term loan. There can be no assurance that an extension
will be obtained.
Net
cash inflow from operating activities was $20.7 million in the second quarter of
2002, a decrease of $100.9 million from the same period of 2001. A period to
period decrease of approximately $34.1 million in operating cash flow before
changes in operating assets and liabilities was due primarily to lower
production and commodity prices. A decrease of $66.8 million in net cash
provided by changes in working capital was caused by reductions in accounts
payable with the proceeds received from the sale of 50% of our working interest
in our Falcon project.
Net
cash outflow from investing activities in the first six months of 2002 increased
to $3.2 million from a cash outflow of $43.9 million for the same period in 2001
due primarily to proceeds from property conveyances of $53.6 million including
reimbursements in the second quarter of 2002.
Cash
from in financing activities was $0 for the first six months of 2002 compared to
cash outflow of $30.0 million for the same period in 2001.
Capital
expenditures for the first six months of 2002 were $51.8 million including $4.2
million of capitalized general, administrative and interest costs. Capital
expenditures included $20.9 million for exploration activities and $31.8 million
for development and other activities.
During
the remainder of 2002, we expect to conduct drilling operations on four to seven
exploratory wells, making additions to our seismic and leasehold positions. The
development budget includes funds for completing the Falcon project.
Long-term
debt outstanding as of June 30, 2002 was approximately $99.8 million for our
senior subordinated notes.
There
can be no assurance that funds available to us under the Revolving Credit
Facility will be sufficient for us to fund our currently planned capital
expenditures. We may be required to reduce our planned capital expenditures and
forego planned exploratory drilling or to monetize portions of our proved
reserves or undeveloped inventory if additional capital resources are not
available to us on terms we consider reasonable.
We
believe there will be adequate cash flow in order for us to fund our remaining
planned activities in 2002. Our capital resources still may not be sufficient to
meet our anticipated future requirements for working capital, capital
expenditures and scheduled payments of principal and interest on our
indebtedness. There can be no assurance that anticipated growth will be
realized, that our business will generate sufficient cash flow from operations
or that future borrowings or equity capital will be available in an amount
sufficient to enable us to service our indebtedness or make necessary capital
expenditures. In addition, depending on the levels of our cash flow and capital
expenditures (the latter of which are, to a large extent, discretionary), we may
need to refinance a portion of the principal amount of our senior subordinated
debt at or prior to maturity. However, there can be no assurance that we would
be able to obtain financing on acceptable terms to complete a refinancing.
Enron
Bankruptcy - On December 2, 2001, Enron Corp. (“Enron”)
and certain of its affiliates, including Enron North America Corp.
(“ENA”), filed voluntary petitions for bankruptcy protection. The
Company has been informed that of the various affiliates of both Enron and
Mariner, only Enron and ENA are included in the bankruptcy. We do not know at
this time if any other affiliates of Enron will seek bankruptcy protection or
what effect, if any, this may have on the ownership of Mariner Energy LLC which
owns 100% of Mariner Holdings, Inc. (our direct parent) or on Joint Energy
Development Investments Limited Partnership (“JEDI”), which owns
approximately 96% of Mariner Energy LLC. Enron is the parent of ENA, and an
affiliate of ENA is the general partner of JEDI. JEDI is 100% owned by several
different Enron and ENA affiliates. Accordingly, Enron may be deemed to control
JEDI, Mariner Energy LLC, Mariner Holdings and the Company. Additionally, seven
of the Company’s directors are officers of Enron or affiliates of Enron.
Because of these various potentially conflicting interests, ENA, the Company,
JEDI and the minority shareholders of Mariner Energy LLC have entered into an
agreement that is intended to make clear that Enron and its affiliates have no
duty to make business opportunities available to the Company.
Mariner
Energy LLC’s only asset is 100% of the common stock of Mariner Holdings,
Inc., our direct parent. The only asset of Mariner Holdings is 100% of the
common shares of Mariner. Covenants in Mariner’s Revolving Credit Facility
and Senior Subordinated Notes restrict the funds of Mariner that can be
distributed to Mariner Energy LLC to repay its term loan or distribute earnings
to an ENA affiliate – see below “ENA Affiliate Term Loan”.
Mariner Energy LLC is currently negotiating the terms of an extension of the ENA Affiliate Term Loan to March 20, 2004. Based on
discussions with representatives of the ENA affiliate, management expects to obtain the extension by August 30, 2002. In the event Mariner Energy LLC is unable to obtain an extension or
restructure its obligations, it would either default or be forced to sell its
interest in Mariner or cause Mariner to sell a substantial portion of its assets
to repay its Revolving Credit Facility, if any amounts are outstanding, and
outstanding Senior Subordinated Notes so that it could distribute any remaining
cash proceeds to Mariner Energy LLC to be used to repay the ENA Affiliate Term
Loan.
As
a result of the Enron and ENA bankruptcies, among other implications, we may not
be able to obtain credit from banks or trade vendors or enter into hedging
arrangements on acceptable terms. To date, our operations have not been
materially affected by the bankruptcies; however, our ability to enter into
certain transactions including purchase or sale arrangements and to conduct
significant capital programs may be affected in the future (see Note 5 regarding
possible actions by Enron or ENA).
Mariner Energy LLC
ENA
Affiliate Term Loan – In March 2000, Mariner Energy LLC established an
unsecured term loan with ENA to repay amounts outstanding under various
affiliate credit facilities at Mariner Energy LLC and Mariner Energy, Inc. and
to provide additional working capital. The additional working capital of $55
million was contributed to Mariner in 2000. The loan bears interest at 15%,
which interest accrues and is added to the loan principal. Repayment of the
balance of loan principal and accrued interest, which was approximately $151.3
million as of June 30, 2002, is due March 20, 2003. Mariner Energy LLC is currently negotiating the terms of an extension of the ENA Affiliate Term Loan to March 20, 2004. Based on
discussions with representatives of the ENA affiliate, management expects to obtain the extension by August 30, 2002. As part of the loan
agreement, two five-year warrants were issued to ENA providing the right to
purchase up to 900,000 of common shares of Mariner Energy LLC for $0.01 per
share.
We
have been informed that the Term Loan and warrants were transferred from ENA to
an ENA affiliate.
Mariner Energy, Inc.
Oil
and Gas Production Sales to ENA or Affiliates – During the three years
ending December 31, 2001, 2000 and 1999, sales of oil and gas production to ENA
or affiliates were $50.2 million, $73.4 million and $16.2 million, respectively.
These sales were generally made on 1 to 3 month contracts. At the time ENA filed
its petition for bankruptcy protection, the Company immediately ceased selling
its physical production to ENA. As of June 30, 2002, we had an outstanding
receivable for $3.0 million from ENA. This amount was not paid as scheduled and
is still outstanding. The Company has estimated 90% of this balance is
uncollectible and has recorded an allowance and related expense for $2.7
million.
Accounting
for Price Risk Management Activities – Mariner engages in price risk
management activities from time to time. These activities are intended to manage
Mariner’s exposure to fluctuations in commodity prices for natural gas and
crude oil. The Company primarily utilizes price swaps and costless collars as a
means to manage such risk. Historically, all of the Company’s hedging
contracts were with ENA. As a result of ENA’s bankruptcy, the contracts are
currently in default. The November 2001 through April 30, 2002 settlements for
oil and gas have not been collected. In addition, on May 14, 2002 the Company
elected under its Master Service Agreement with ENA to terminate all open
contracts. The effect of this termination is to fix the nominal value on all
remaining contracts on May 14, 2002. Subsequent to this termination, the value
of all oil and natural gas unpaid hedge contracts was $7.7 million. The Company
has estimated 90% of this balance is uncollectible and has recorded an allowance
and related expenses of $7.0 million. In accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative
Instruments and Hedging Activities,” as amended by SFAS No. 137 and No.
138, we have de-designated our contracts effective December 2, 2001 and are
recognizing all market value changes subsequent to such de-designation in
earnings of the Company. The value recorded up to the time of de-designation and
included in Accumulated Other Comprehensive Income (“AOCI”), will
reverse out of AOCI and into earnings as the original corresponding production,
as hedged by the contracts, is produced. For the six-months ending June 30, 2002
approximately $12.9 million has reversed out to earnings. As of June 30, 2002,
$12.9 million remained in AOCI to be reversed out during the contract periods
covering July 1, 2002 through December 31, 2003 (see Note 8).
The
following table sets forth the results of hedging transactions during the
periods indicated that were made with ENA:
| SIX-MONTHS ENDED JUNE 30, | ||
|---|---|---|
| 2002 | 2001 | |
| Natural gas quantity hedged (Mmbtu) | 8,557 | 8,775 |
| Increase (decrease) in natural gas sales (thousands) | $10,960 | $(14,162) |
| Crude oil quantity hedged (MBbls) | 362 | 102 |
| Increase (decrease) in crude oil sales (thousands) | $1,969 | $17 |
Supplemental Affiliate Data – provided below is a supplemental balance sheet and income statement for affiliate entities:
| JUNE 30, 2002 | DECEMBER 31, 2001 | |||
|---|---|---|---|---|
| BALANCE SHEET DATA | AMOUNTS (In Millions) | AMOUNTS (In Millions) | ||
| RELATED PARTY RECEIVABLE: | ||||
| Derivative Asset | $0.7 | 2.5 | ||
| Settled Hedge Receivable | 0.3 | 1.0 | 0.4 | -- |
| Oil and Gas Receivable | 0.3 | 3.2 | ||
| ACCRUED LIABILITIES: | ||||
| Transportation Contract | 0.7 | 0.9 | ||
| Service Agreement | 0.5 | 0.3 | 1.2 | |
| STOCKHOLDER'S EQUITY: | ||||
| Common Stock | $.001 | $.001 | ||
| Additional Paid in Capital | $227.3 | $227.3 | $227.3 | $227.3 |
SIX-MONTHS ENDED JUNE 30, | ||||
| INCOME STATEMENT DATA | ||||
| Oil and Gas Sales | 19.7 | 40.9 | ||
| General and Administrative Expenses | 0.1 | -- | ||
| Transportation Expenses | 1.2 | 2.6 | ||
| Unrealized loss and other non-cash derivative instrument adjustments | 0.2 | -- | ||
Sale of Enron Interest in Mariner
On May 3, 2002, Enron presented to its Creditors Committee a proposal under which certain of Enron’s core energy assets,
including JEDI’s ownership of Mariner LLC, would be separated from Enron’s bankruptcy estate and operated as a new integrated power
and pipeline company. Prior to any transfer of assets to such new company, Enron has indicated that it would conduct a Section 363
auction under the bankruptcy code in which third party bidders may offer to purchase such energy assets, including JEDI’s ownerhip of
Mariner. There can be no assurance that Mariner would ultimately be included in a new company or separately sold to a bidder in a
Section 363 auction or otherwise.
Current
Hedging Activity
On
June 28, 2002 the Company commenced price risk activities with a third party.
These activities are intended to manage the company’s exposure to
fluctuations in commodity prices for natural gas and crude. The Company on June
28, 2002 entered into the following fixed price swap.
| TIME PERIOD | NOTIONAL QUANTITIES | FIXED PRICE | JUNE 30, 2002 FAIR VALUE |
|---|---|---|---|
| (MILLIONS) | |||
| Crude Oil (MBbl) | |||
| July 1, 2002 - December 31, 2003 Fixed Price Swap | 823 | $24.64 | (0.2) |
Subsequent to June 30, 2002 the Company also entered into these additional fixed price swaps.
| TIME PERIOD | NOTIONAL QUANTITIES | FIXED PRICE | |
|---|---|---|---|
| Natural Gas (MMbtu) | |||
| January 1, 2003 - December 31, 2003 Fixed Price Swap | 7,300 | $3.54 | |
| Fixed Price Swap | 7,300 | $3.60 | |
| Crude Oil (MBbl) | |||
| August 1, 2002 - December 31, 2002 Fixed Price Swap | 259 | $25.39 |
Subsequent
to these swaps the Company will have approximately 8% of the remainder of 2002
production subject to hedges and 33% of 2003 production subject to hedges. Mark
to market value changes approximately $5.3 million for every 10% overall change
in commodity prices.
The
Company has reviewed the financial strength of its counterparts and believes
credit risk to be minimal. The Company as of June 30, 2002 posted a $5 million
letter of credit to the third party for collateral. Subsequent to June 30, 2002
the Company also deposited $2.6 million in a variable margin account with the
third party for additional collateral.
New Accounting
Pronouncements
Statement
of Financial Accounting Standards (SFAS) NO. 143, “Accounting for Asset
Retirement Obligations,” addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 will be effective for us January 1, 2003
and early adoption is encouraged. SFAS No. 143 requires that the fair value of a
liability for an asset’s retirement obligation be recorded in the period in
which it is incurred and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset. The liability is accreted to
its then present value each period, and the capitalized cost is depreciated over
the useful life of the related asset. If the liability is settled for an amount
other than the recorded amount, a gain or loss is recognized. Currently, we
include estimated future costs of abandonment and dismantlement in our full cost
amortization base and amortize these costs as a component of our depletion
expense. We are evaluating the impact the new standard will have on our
financial statements and at this time we cannot reasonably estimate the effect
of the adoption of this statement.
In April 2002 the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4,
No. 44, and No. 64, Amendment to FASB Statement No. 13 and Technical Corrections." SFAS No. 145 streamlines the reporting of debt
extinguishments and requires that only gains and losses from extinguishments meeting the criteria in Accounting Policies Board
Opinion 30 would be classified as extraordinary. Thus, gains or losses arising from extinguishments that are part of a company's
recurring operations would not be reported as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. We do not expect the adoption of SFAS No. 145 to have a material impact on our financial
position, results of operations or cash flows.
SFAS
No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities” was issued in June 2002 and addresses accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).” SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost was recognized at the date of an entity’s
commitment to an exit plan. Under SFAS No. 146, fair value is the objective for
initial measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. We do not expect the adoption of SFAS No. 146 to have a
material impact on our financial position, results of operations or cash flows.
Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Part II. Other
Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith.
Exhibit 99.1 - Certifications Pursuant to 18 U.S.C Section 1350,
As Adopted to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The Company filed no Current Reports on Form 8-K during the quarter ended March 31, 2002.
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.
| MARINER ENERGY, INC. | |
|---|---|
| Date: August 19, 2002 | /s/ Michael A. Wichterich |
| Michael A. Wichterich Vice President of Finance and Administration (Principal Financial Officer and Officer Duly Authorized to Sign on Behalf of the Registrant) |