-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JLFXJ6+r+3Dgyv3HOZBSuNc3QQ4ZAgnSJOt1BUDHX+Wso5/NaMsKnXq11eG1PgGi uEZlvnNV8PgZkShG8dKQtQ== 0000950129-03-005615.txt : 20031113 0000950129-03-005615.hdr.sgml : 20031113 20031113123117 ACCESSION NUMBER: 0000950129-03-005615 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ULTRA PETROLEUM CORP CENTRAL INDEX KEY: 0001022646 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-29370 FILM NUMBER: 03996735 BUSINESS ADDRESS: STREET 1: 363 N SAM HOUSTON PARKWAY E STREET 2: SUITE 1200 CITY: HOUSTON STATE: TX ZIP: 77060 BUSINESS PHONE: 2818760120 MAIL ADDRESS: STREET 1: 363 N SAM HOUSTON PARKWAY 3 STREET 2: SUITE 1200 CITY: HOUSTON STATE: TX ZIP: 77060 10-Q 1 h10575e10vq.txt ULTRA PETROLEUM CORP.- SEPTEMBER 30, 2003 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ________________ Commission file number 0-29370 ULTRA PETROLEUM CORP. (Exact name of registrant as specified in its charter) Yukon Territory, Canada N/A (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 363 North Sam Houston Parkway, Suite 1200, Houston, Texas 77060 (Address of principal executive offices) (Zip code) (281) 876-0120 (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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YES [X] NO [ ] The number of common shares, without par value, of Ultra Petroleum Corp., outstanding as of November 4, 2003 was 74,371,668. PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (Expressed in U.S. Dollars) ULTRA PETROLEUM CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------- ------------ ------------ Revenues: Natural gas sales $ 27,711,651 $ 7,578,471 $ 72,835,464 $ 23,440,699 Oil sales 1,578,976 1,092,561 4,591,912 2,480,039 ------------ ------------- ------------ ------------ 29,290,627 8,671,032 77,427,376 25,920,738 Expenses: Production expenses and taxes 6,179,424 2,556,096 16,354,828 7,137,225 Depletion and depreciation 4,033,606 2,340,270 11,091,346 6,193,858 General and administrative 1,468,553 1,095,113 4,210,029 3,154,376 General and administrative - stock compensation - 415,000 1,018,220 1,211,165 ------------ ------------- ------------ ------------ 11,681,583 6,406,479 32,674,423 17,696,624 Operating income 17,609,044 2,264,553 44,752,953 8,224,114 Other income: Interest expense (747,125) (706,705) (2,151,559) (1,912,922) Interest income 6,668 5,221 26,431 17,555 ------------ ------------- ------------ ------------ (740,457) (701,484) (2,125,128) (1,895,367) Income for the period, before income tax provision 16,868,587 1,563,069 42,627,825 6,328,747 Income tax provision - deferred 6,540,600 601,783 16,458,292 2,349,157 Net income for the period 10,327,987 961,286 26,169,533 3,979,590 Retained earnings, beginning of period 26,657,423 5,752,660 10,815,877 2,734,356 ------------ ------------- ------------ ------------ Retained earnings, end of period $ 36,985,410 $ 6,713,946 $ 36,985,410 $ 6,713,946 ============ ============= ============ ============ Income per common share - basic $ 0.14 $ 0.01 $ 0.35 $ 0.05 ============ ============= ============ ============ Income per common share - fully diluted $ 0.13 $ 0.01 $ 0.33 $ 0.05 ============ ============= ============ ============ Weighted average common shares outstanding - basic 74,279,516 73,716,932 74,170,485 73,716,932 ============ ============= ============ ============ Weighted average common shares outstanding - fully diluted 78,537,895 77,561,888 78,335,831 77,536,290 ============ ============= ============ ============
2 ULTRA PETROLEUM CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Expressed in U.S. Dollars) Nine Months Ended September 30, --------------------------- 2003 2002 ------------ ------------ Cash provided by (used in): Operating activities: Net income for the period $ 26,169,533 $ 3,979,590 Add (deduct) Items not involving cash: Depletion and depreciation 11,091,346 6,193,858 Deferred income taxes 16,458,291 2,349,158 Stock compensation 1,018,220 1,211,165 Net changes in non-cash working capital: Restricted cash (1,044) (1,720) Accounts receivable (3,313,559) 922,893 Prepaid expenses and other current assets (3,373,345) (2,494,282) Accounts payable and accrued liabilities 3,341,399 (6,263,595) Other long-term obligations 970,569 3,294,599 ------------ ------------ 52,361,410 9,191,666 Investing activities: Oil and gas property expenditures (68,499,293) (39,870,660) Oil and gas property expenditures in accounts payable 24,288,871 - Purchase of capital assets (553,212) (640,439) ------------ ------------ (44,763,634) (40,511,099) Financing activities: Long-term debt (7,000,000) 31,000,000 Repurchased shares - (1,193,650) Proceeds from exercise of options 569,657 899,931 ------------ ------------ (6,430,343) 30,706,281 Increase in cash during the period 1,167,433 (613,152) Cash and cash equivalents, beginning of period 1,417,711 1,379,462 ------------ ------------ Cash and cash equivalents, end of period $ 2,585,144 $ 766,310 ============ ============
3 ULTRA PETROLEUM CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
(Expressed in U.S. Dollars) September 30, December 31, 2003 2002 ------------ ------------ Assets Current assets Cash and cash equivalents $ 2,585,144 $ 1,417,711 Restricted cash 210,350 209,306 Accounts receivable 14,712,042 11,398,483 Prepaid expenses and other current assets 3,847,624 474,279 ------------ ------------ 21,355,160 13,499,779 Oil and gas properties, using the full cost method of accounting 265,452,490 207,362,408 Capital assets 1,175,565 1,011,699 ------------ ------------ Total assets $287,983,215 $221,873,886 ============ ============ Liabilities and shareholders' equity Current liabilities Accounts payable and accrued liabilities $ 47,614,070 $ 17,914,860 Long-term debt 79,000,000 86,000,000 Deferred income taxes 25,443,181 10,033,174 Other long-term obligations 4,829,379 3,858,810 Shareholders' equity Share capital 96,979,356 95,098,690 Treasury stock (1,193,650) (1,193,650) Other comprehensive loss - fair value of derivative instruments (1,674,531) (653,875) Retained earnings 36,985,410 10,815,877 ------------ ------------ 131,096,585 104,067,042 Total liabilities and shareholders' equity $287,983,215 $221,873,886 ============ ============
4 ULTRA PETROLEUM CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts in this Quarterly Report on Form 10-Q are expressed in U.S. dollars unless otherwise noted) DESCRIPTION OF THE BUSINESS: Ultra Petroleum Corp. (the "Company") is an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil and gas properties. The Company was incorporated under the laws of British Columbia, Canada. On March 1, 2000, the Company was continued under the laws of the Yukon Territory, Canada. The Company's principal business activities are in the Green River Basin of Southwest Wyoming and Bohai Bay, China. 1. SIGNIFICANT ACCOUNTING POLICIES: The accompanying financial statements, other than the balance sheet data as of December 31, 2002, are unaudited and were prepared from the Company's records. Balance sheet data as of December 31, 2002 was derived from the Company's audited financial statements, but do not include all disclosures required by U.S. generally accepted accounting principles. The Company's management believes that these financial statements include all adjustments necessary for a fair presentation of the Company's financial position and results of operations. All adjustments are of a normal and recurring nature unless specifically noted. The Company prepared these statements on a basis consistent with the Company's annual audited statements and Regulation S-X. Regulation S-X allows the Company to omit some of the footnote and policy disclosures required by generally accepted accounting principles and normally included in annual reports on Form 10-K. You should read these interim financial statements together with the financial statements, summary of significant accounting policies and notes to the Company's most recent annual report on Form 10-K. (a) Basis of presentation and principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries UP Energy Corporation, Ultra Resources, Inc., and Sino-American Energy Corporation. The Company presents its financial statements in accordance with accounting principles generally accepted in the United States ("US GAAP"). All material inter-company transactions and balances have been eliminated upon consolidation. (b) Accounting principles: The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. (c) Cash and cash equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (d) Restricted cash: Restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is unknown or in dispute. Wyoming law requires that these funds be held in a federally insured bank in Wyoming. (e) Capital assets: Capital assets are recorded at cost and depreciated using the declining-balance method based on a seven-year useful life. (f) Oil and gas properties: The Company uses the full cost method of accounting for oil and gas operations whereby all costs associated with the exploration for and development of oil and gas reserves are capitalized to the Company's cost centers. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. The Company conducts operations in both the United States and China. Separate cost centers are maintained for each country in which the Company has operations. The capitalized costs, together with the costs of production equipment, are depleted using the units-of-production method based on the proven reserves as determined by independent petroleum engineers. Oil and gas reserves and production are converted into equivalent units based upon relative energy content. Costs of acquiring and evaluating unproved properties are initially excluded from the costs subject to depletion. These unproved properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to the costs subject to depletion. The total capitalized cost of oil and gas properties less accumulated depletion is limited to an amount equal to the estimated future net cash flows from proved reserves, discounted at 10%, using year-end prices, plus the cost (net of impairment) of unproved properties as adjusted for related tax effects (the "full cost ceiling test limitation"). Proceeds from the sale of oil and gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would significantly alter the rate of depletion. Substantially all of the Company's exploration, development and production activities are conducted jointly with others and, accordingly, these financial statements reflect only the Company's proportionate interest in such activities. 5 (g) Hedging transactions: The Company has entered into commodity price risk management transactions to manage its exposure to gas price volatility. These transactions are in the form of price swaps with a financial institution or other credit worthy counter parties. These transactions have been designated by the Company as cash flow hedges. As such, unrealized gains and losses related to the change in fair market value of the derivative contracts are recorded in other comprehensive income in the balance sheet. The Company also enters into forward sales of physical gas volumes to credit worthy purchasers which are not reflected on the balance sheet. (h) Income taxes: The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences. Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. (i) Earnings per share: Basic earnings per share is computed by dividing net earnings attributable to common stock by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of stock options. The Company uses the treasury stock method to determine the dilutive effect. The following table provides a reconciliation of the components of basic and diluted net income per common share:
Three Months Ended Nine Months Ended ---------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------ ------------ ------------ ----------- Net income $ 10,327,987 $ 961,286 $ 26,169,533 $ 3,979,590 ============ ============ ============ =========== Weighted average common shares outstanding during the period 74,279,516 73,716,932 74,170,485 73,716,932 Effect of dilutive instruments 4,258,379 3,844,956 4,165,346 3,819,358 ------------ ------------ ------------ ----------- Weighted average common shares outstanding during the period including the effects of dilutive instruments 78,537,895 77,561,888 78,335,831 77,536,290 ============ ============ ============ =========== Basic earnings per share $ 0.14 $ 0.01 $ 0.35 $ 0.05 ============ ============ ============ =========== Diluted earnings per share $ 0.13 $ 0.01 $ 0.33 $ 0.05 ============ ============ ============ ===========
(j) Use of estimates: Preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) Reclassifications: Certain amounts in the financial statements of the prior years have been reclassified to conform to the current year financial statement presentation. (l) Accounting for stock-based compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), defines a fair value method of accounting for employee stock options and similar equity instruments. SFAS No. 123 allows for the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), provided that pro forma results of operations are disclosed for those options granted. The Company accounts for stock options granted to employees and directors of the Company under the intrinsic value method. Had the Company reported compensation costs as determined by the fair value method of accounting for option grants to employees and directors, net income (loss) and net income (loss) per common share would approximate the following pro forma amounts: 6
Three Months Ended Nine Months Ended ---------------------------------- ----------------------------------- September 30, September 30, September 30, September 30, 2003 2002 2003 2002 ------------- ------------- -------------- ------------- Net income: As reported $ 10,327,987 $ 961,286 $ 26,169,533 $ 3,979,590 Pro forma $ 9,587,818 $ 414,999 $ 25,429,364 $ 3,433,303 Basic earnings per share: As reported $ 0.14 $ 0.01 $ 0.35 $ 0.05 Pro forma $ 0.13 $ 0.01 $ 0.34 $ 0.05 Diluted earnings per share: As reported $ 0.13 $ 0.01 $ 0.33 $ 0.05 Pro forma $ 0.12 $ 0.01 $ 0.32 $ 0.04
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options' vesting period. The weighted-average fair value of each option granted is estimated on the date of grant using the Black Scholes option pricing model with an assumed expected volatility of 25% at September 30, 2003. All options have expected lives of ten years. 2. OIL AND GAS PROPERTIES:
September 30, December 31, 2003 2002 ------------------------------------ Developed Properties: Acquisition, equipment, exploration, drilling and environmental costs $ 208,504,374 $ 150,986,843 Less accumulated depletion, depreciation and amortization (33,516,605) (22,816,605) ------------- ------------- 174,987,769 128,170,238 Unproven Properties: China 75,469,724 64,873,186 Acquisition and exploration costs 14,994,997 14,318,984 ------------- ------------- $ 265,452,490 $ 207,362,408 ============= =============
3. LONG-TERM DEBT:
September 30, December 31, 2003 2002 ------------------------------------ Bank indebtedness $ 79,000,000 $ 86,000,000 Short-term obligations to be refinanced - 3,858,810 ============= ============= $ 79,000,000 $ 89,858,810 ============= =============
The Company (through its subsidiary) participates in a long-term credit facility with a group of banks led by Bank One N.A. The agreement specifies a maximum loan amount of $250 million and an aggregate borrowing base of $155 million at May 14, 2003. At September 30, 2003, the Company had $79 million outstanding and $76 million unused and available on the credit facility. The credit facility matures on March 1, 2006. The note bears interest at either the bank's prime rate plus a margin of one-half of one percent (0.50%) to one and one-quarter percent (1.25%) based on the percentage of available credit drawn or at LIBOR plus a margin of one and one-half percent (1.5%) to two and one-quarter percent (2.25%) based on the percentage of available credit drawn. An average annual commitment fee of 0.375% is charged quarterly for any unused portion of the credit line. The borrowing base is subject to periodic (at least semi-annual) review and re-determination by the bank and may be decreased or increased depending on a number of factors including the Company's proved reserves and the bank's forecast of future oil and gas prices. If the borrowing base is reduced to an amount less than the balance outstanding, the Company has sixty days from date of notice to pay the difference. Additionally, the Company is subject to quarterly reviews of compliance with the covenants under the bank facility including minimum coverage ratios relating to interest, working capital and advances to Sino-American Energy Corporation. In the event of a default under the covenants, the Company may not be able to access funds otherwise available under the facility. As of September 30, 2003, the Company was in compliance with the covenants and required ratios of the bank facility. The Company has secured this debt by a majority of it's proved domestic oil and gas properties. 4. DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES: Currently under Canadian generally accepted accounting principles ("Canadian GAAP"), there is not a provision in place to expense stock-based compensation as with FASB Statement No. 123, "Accounting for Stock-Based Compensation"; however, there was an exposure draft issued in December 2002 that would essentially harmonize Canadian accounting standards to US GAAP. The proposed effective date for implementing the harmonization of accounting for Stock-Based Compensation and Other Stock-Based Payments, Section 3870, is January 1, 2004. Recorded in other comprehensive income in the Equity section of the Company's balance sheet is an offset to a liability that measures a future effect of the fixed price to index price swap agreements that the Company currently has in place. The Company has recorded this in compliance with FASB No. 133 which addresses accounting impacts of derivative instruments. Currently under Canadian GAAP the future 7 effects of derivative instruments are recorded through revenue in the period in which the production is sold. The total future value of the swap is not captured as an asset or liability, and the term Other Comprehensive Income, is not recognized in Canada. In 2002, the Canadian Accounting Standards Board issued a draft proposal to put in place Canadian standards for the treatment of derivative instruments which would be in harmony with U.S. standards on financial instruments. Canadian enterprises could then choose to apply accounting policies and practices that are in accordance with both U.S. and Canadian GAAP. 5. RECENT ACCOUNTING PRONOUNCEMENTS: In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company adopted SFAS No. 143 on January 1, 2003. Based on current estimates, the Company would record asset retirement obligations (using a 10% discount rate) and a cumulative effect of change in accounting principle, related to the depreciation and accretion expense that would have been recorded had the fair value of the asset retirement obligation, and corresponding increase in the carrying amount of the related long-lived asset, been determined in prior years. The Company has determined that the impact of adopting SFAS No. 143 is not material to its financial position or results of operations. The Company adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure", effective January 1, 2003. SFAS No. 148 amended FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FASB Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. The provision of SFAS No. 148 has no material impact on the Company, as it does not plan to adopt the fair-value method of accounting for stock options at the current time. For the period ended September 30, 2003, the pro-forma net income, had the Company adopted the provisions of SFAS No. 123, equals $9,587,818. ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2003 VS. QUARTER ENDED SEPTEMBER 30, 2002 OPERATING REVENUES Oil and gas revenues increased to $29,290,627 for the quarter ended September 30, 2003 from $8,671,032 for the same period in 2002. This increase was attributable to an increase in production and prices received for that production. During this quarter, the Company's gas production increased 67% to 6.6 Bcf, up from 4.0 Bcf, while condensate increased to 50 thousand barrels from 36 thousand barrels for the same period in 2002. During the quarter ended September 30, 2003 the average product prices for gas and condensate were $4.17 per Mcf and $31.37 per barrel, respectively, compared to $1.91 per Mcf and $30.21 per barrel for the same period in 2002. PRODUCTION EXPENSES AND TAXES During the quarter ended September 30, 2003 production expenses and taxes increased to $6,179,424 from $2,556,096 for the quarter ended September 30, 2002. Direct lease operating expenses increased to $872,364 for the quarter ended September 30, 2003 from $605,335 for the same period in 2002. On a per unit of production basis, these costs decreased to $.13 per Mcfe in September 2003, as compared to $.15 per Mcfe in September 2002. Production taxes for the third quarter 2003 were $3,407,541, compared to $744,429 in third quarter 2002 or $.49 per Mcfe in third quarter 2003, compared to $.18 per Mcfe in third quarter 2002. Production taxes are calculated based on a percentage of revenue from production, excluding the effects of hedging and imbalances, therefore higher realized prices and production contributed to the increase. Gathering fees for the quarter ended September 30, 2003 increased to $1,899,519 from $1,206,332 for the same period in 2002 based on higher production levels. On a per Mcfe basis the rate decreased to $.27 for the third quarter ended September 30, 2003 from $.29 for the same quarter in 2002. DEPLETION AND DEPRECIATION Depletion, depreciation and amortization expenses ("DD&A") were $4,033,606 during the quarter ended September 30, 2003 compared to $2,340,270 for the same period in 2002. On a per unit basis, DD&A increased to $.58 per Mcfe, from $.56 per Mcfe in 2002. This increase is primarily attributable to the timing differences in which costs for wells that were not classified as proved at year-end have been added to the cost pool while new reserves related to those wells have not been added to the reserve estimates used to calculate the units of production depletion rate. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $1,468,553 during the quarter ended September 30, 2003 from $1,095,113 for the same period in 2002. The increase was attributable to legal, professional and compensation expenses, including accrued incentive compensation, that coincide with the Company's increased activity in both Wyoming and China. INTEREST Interest expense for the period increased to $747,125 in third quarter 2003 from $706,705 in third quarter 2002. This increase in interest expense was attributable to the increase in borrowings under the senior credit facility, which are partially offset by lower overall interest rates. 8 INCOME TAXES The Company recorded deferred income tax expense of $6,540,600 for the quarter ended September 30, 2003, compared to $601,783 for the quarter ended September 30, 2002. Although the Company is not expected to pay material cash taxes in 2003, in accordance with FAS No. 109 and specifically, the guidance concerning intraperiod tax allocations, the Company is required to recognize tax expense evenly throughout the year at a statutory rate of 38.5%. NINE MONTHS ENDED SEPTEMBER 30, 2003 VS. NINE MONTHS ENDED SEPTEMBER 30, 2002 OPERATING REVENUES Oil and gas revenues increased to $77,427,376 for the nine months ended September 30, 2003 from $25,920,738 for the same period in 2002. This increase was attributable to an increase in both production and in prices received for that production. During the nine months ended September 30, 2003, the Company's production increased by 70% on an Mcf equivalent basis, to 18.3 Bcf of gas, and 148 thousand barrels of condensate, up from 10.7 Bcf of gas and 99 thousand barrels of condensate for the same nine months in 2002. During the nine months ended September 30, 2003 the average product prices for gas and condensate were $3.99 per Mcf and $31.04 per barrel, respectively, compared to $2.18 per Mcf and $24.93 per barrel for the same period in 2002. PRODUCTION EXPENSES AND TAXES During the nine months ended September 30, 2003 production expenses and taxes increased to $16,354,828 from $7,137,225 for the nine months ended September 30, 2002. Direct lease operating expenses increased to $2,484,784 for the nine months ended September 30, 2003 from $1,510,479 for the same period in 2002. On a per unit of production basis, these costs remained a constant $.13 per Mcfe in a nine-month to nine-month comparison. Production taxes for the nine months ended September 30, 2003 were $8,674,351, compared to $2,463,468 during the same period in 2002 or $.45 per Mcfe at September 2003, compared to $.22 per Mcfe at September 2002. Production taxes are calculated based on a percentage of revenue from production, excluding the effects of hedging and imbalances, therefore both increased production and realized prices contributed to the increase. Gathering fees for the nine months ended September 30, 2003 increased to $5,195,693 from $3,163,278 for the same period in 2002, the increase in gathering fees is primarily attributable to higher production volumes. DEPLETION AND DEPRECIATION Depletion, depreciation and amortization expenses (DD&A) increased to $11,091,346 during the nine months ended September 30, 2003 compared to $6,193,858 for the same period in 2002. On a per unit basis, DD&A increased to $.58 per Mcfe, from $.55 per Mcfe in 2002. This increase is primarily attributable to the timing differences in which costs for wells that were not classified as proved at year-end have been added to the cost pool while new reserves related to those wells have not been added to the reserve estimates used to calculate the units of production depletion rate. GENERAL AND ADMINISTRATIVE General and administrative expenses totaled $4,210,029 during the nine months ended September 30, 2003 as compared to $3,154,376 for the same period in 2002. The increase in general and administrative expenses was attributable to legal, professional and compensation expenses including accrued incentive compensation that coincide with the Company's increased activity in both Wyoming and China. INTEREST Interest expense for the period increased to $2,151,559 during the nine months ended September 30, 2003 compared to $1,912,922 for the same period in 2002. This increase in interest expense was attributable to the increase in borrowings under the senior credit facility. INCOME TAXES The Company recorded deferred income tax expense of $16,458,292 at an effective rate of 38.5% for the nine months ended September 30, 2003, compared to $2,349,157 at an effective rate of 37% for the nine months ended September 30, 2002. Although the Company is not expected to pay material cash taxes in 2003, in accordance with FASB No. 109 and specifically, the guidance concerning intraperiod tax allocations, the Company is required to recognize tax expense evenly throughout the year. In the prior year, income tax expense, as calculated at the statutory rate, was offset by recognition of deferred tax assets for which a valuation allowance had previously been provided. LIQUIDITY AND CAPITAL RESOURCES During the nine month period ended September 30, 2003, the Company relied on cash provided by operations along with borrowings under it's credit facility to finance its capital expenditures. The Company participated in the drilling of 51 wells in Wyoming and 10 wells in China, and continued to participate in the development process in the China blocks. For the nine-month period ended September 30, 2003 net capital expenditures were $69 million. At September 30, 2003, the Company reported a cash position of $2.6 million compared to $766 thousand at September 30, 2002. Working capital deficit at September 30, 2003 was $(26.3) million as compared to $(4.4) million at December 31, 2002. As of September 30, 2003, the Company had incurred bank indebtedness of $79.0 million and other long-term obligations of $4.8 million comprised of items payable in more than one year. The Company's positive cash provided by operating activities, along with the availability under the senior credit facility, are projected to be sufficient to fund the Company's budgeted capital expenditures for 2003, which are currently projected to be $130.0 million. Of the $130.0 million budget, the Company plans to spend approximately $110.0 million of its 2003 budget in Wyoming and approximately $20.0 million in China. Of the $110.0 million for Wyoming, the Company plans to drill or participate in an estimated 64-66 gross wells in 2003, of which 9 approximately 40% will be for exploration wells and the remaining will be for development wells. Of the $20.0 million budgeted for China, approximately 50% will be for exploratory/appraisal activity and the balance will be for development activity. The Company currently has no budget for acquisitions in 2003. As of May 14, 2003, the revolving senior credit facility provides for a $250.0 million revolving credit line with a current borrowing base of $155.0 million. The credit facility matures on March 1, 2006. The notes bear interest at either Bank One's prime rate plus a margin of one-half of one percent (0.50%) to one and one-quarter percent (1.25%) based on the percentage of available credit drawn or at LIBOR plus a margin of one and one-half percent (1.50%) to two and one-quarter percent (2.25%) based on the percentage of available credit drawn. An average annual commitment fee of 0.375% is charged quarterly for any unused portion of the credit line. The borrowing base is subject to periodic (at least semi-annual) review and re-determination by the banks and may be increased or decreased depending on a number of factors including the Company's proved reserves and the bank's forecast of future oil and gas prices. Additionally, the Company is subject to quarterly reviews of compliance with the covenants under the bank facility including minimum coverage ratios relating to interest, working capital and advances to Sino-American Energy. In the event of a default under the covenants, the Company may not be able to access funds otherwise available under the facility and may, in certain circumstances including reduction in borrowing base, be required to repay the credit facilities. The notes are collateralized by a majority of the Company's proved domestic oil and gas properties. At September 30, 2003, the Company had $79.0 million of outstanding borrowings under this credit facility, with a current average interest rate of approximately 3%. The Company was in compliance with all loan covenants at September 30, 2003. During the nine-months ended September 30, 2003, net cash provided by operating activities was $52.4 million as compared to $9.2 million for the nine-months ended September 30, 2002. The increase in cash provided by operating activities was attributable to the increase in earnings and an increase in items not involving cash. During the nine-months ended September 30, 2003, cash used in investing activities was $44.8 million as compared to $40.5 million for the nine-months ended September 30, 2002. The change is primarily attributable to increased activity for drilling and completion activity in Wyoming. During the nine-months ended September 30, 2003, cash provided by (used in) financing activities was $(6.4) million as compared to $30.7 million for the nine-months ended September 30, 2002. The change is primarily attributable to paying down debt under the senior credit facility. CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this document, including without limitation, statements in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated quantities and net present values of reserves, business strategy, plans and objectives of the Company's management for future operations, covenant compliance and those statements preceded by, followed by or that otherwise include the words "believe", "expects", "anticipates", "intends", "estimates", "projects", "target", "goal", "plans", "objective", "should", or similar expressions or variations on such expressions are forward-looking statements. The Company can give no assurances that the assumptions upon which such forward-looking statements are based will prove to be correct nor can the Company assure adequate funding will be available to execute the Company's planned future capital program. Other risks and uncertainties include, but are not limited to, fluctuations in the price the Company receives for oil and gas production, reductions in the quantity of oil and gas sold due to increased industry-wide demand and/or curtailments in production from specific properties due to mechanical, marketing or other problems, operating and capital expenditures that are either significantly higher or lower than anticipated because the actual cost of identified projects varied from original estimates and/or from the number of exploration and development opportunities being greater or fewer than currently anticipated and increased financing costs due to a significant increase in interest rates. See the Company's annual report on Form 10-K for the year ended December 31, 2002 for additional risks related to the Company's business. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major market risk exposure is in the pricing applicable to its gas and oil production. Realized pricing is primarily driven by the prevailing price for crude oil and spot prices applicable to the Company's U.S. natural gas production. Historically, prices received for gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations averaged $3.99 per Mcf during the nine months ended September 30, 2003. This average wellhead price includes the effects of hedging and gas balancing between working interest owners. The Company periodically enters into various hedging arrangements for its natural gas production. During the first nine months of 2003, the total impact of the Company's hedges was a reduction in gas revenues of $3,436,975. The Company does not currently hedge its oil production. In the first nine months of 2003, the Company participated in swaps covering 10,000 MMBtu or approximately 9 MMcf of gas per day for the period from April 1, 2003 to October 31, 2003 at a price of $3.75 per MMBtu or approximately $3.95 per Mcf (pricing referenced to Opal, Wyoming), plus an additional 5,000 MMBtu or approximately 4 MMcf of gas per day for the same period at a price of $4.25 per MMBtu or approximately $4.48 per Mcf (pricing referenced to Opal, Wyoming). During the third quarter of 2003, the Company entered into swaps covering 20,000 MMBtu, or approximately 18 MMcf of gas per day, for calendar year 2004 at a weighted average price of $4.088/MMBtu, or approximately $4.33 per Mcf. Additionally, the Company entered into forward fixed price physical sales covering approximately 30,000 MMBtu gross (24,000 MMBtu, or approximately 22.6 MMcf net) of gas per day for calendar year 2004 at a weighted average net price of $4.22 per MMBtu or $4.48 per Mcf. In aggregate these transactions have 10 hedged 16,060,000 MMBtu of net gas for calendar year 2004 at a weighted average price of $4.16 per MMBtu, or approximately $4.41 per Mcf. The tables below summarize the hedges in place at September 30, 2003:
Calendar Year - 2003 Type Period Daily Volume MMBTU Price / MMBtu at OPAL WY - --------------------------------------------------------------------------------------------- Fixed Price Sale Calendar 2003 5,000 $ 3.06 Swap Calendar 2003 5,000 $3.005 Swap Calendar 2003 5,000 $ 3.27 Swap April-Oct 2003 10,000 $ 3.75 Swap April-Oct 2003 5,000 $ 4.25
Calendar Year - 2004 Type Period Daily Volume MMBTU Price / MMBtu at OPAL WY - --------------------------------------------------------------------------------------------- Fixed Price Sale Calendar 2004 5,000 $ 4.27 Fixed Price Sale 1st-3rd Qtr 2004 10,000 $4.315 Fixed Price Sale 4th Qtr 2004 10,000 $4.285 Fixed Price Sale Calendar 2004 5,000 $ 4.02 Fixed Price Sale Calendar 2004 5,000 $ 4.29 Fixed Price Sale Calendar 2004 5,000 $ 4.15 Swap Calendar 2004 10,000 $ 4.08 Swap Calendar 2004 5,000 $ 4.17 Swap Calendar 2004 5,000 $ 4.02
These hedges represent approximately 45% of the Company's forecasted production for the period from April 1, 2003 to October 31, 2003, approximately 30% of the Company's forecasted production for calendar year 2003 and approximately 42% of forecasted production for calendar year 2004. ITEM 4 - CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. The Company's management, including the Company's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company's principal executive officer and principal financial officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q. (b) Changes in Internal Controls. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART 2 - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently involved in various routine disputes and allegations incidental to its business operations. While it is not possible to determine the ultimate disposition of these matters, the Company believes that the resolution of all such pending or threatened litigation is not likely to have a material adverse effect on the Company's financial position, or results of operations. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act (b) Reports on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ULTRA PETROLEUM CORP. Date November 12, 2003 By: /s/ MICHAEL D. WATFORD ----------------------------------- Name: Michael D. Watford Title: Chief Executive Officer By: /s/ F. FOX BENTON III ----------------------------------- Name: F. Fox Benton III Title: Chief Financial Officer 12 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act EX-31.1 3 h10575exv31w1.txt CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31.1 Certification of Chief Executive Officer I, Michael D. Watford, being the Chairman, Chief Executive Officer and President, certify that: (1) I have reviewed the quarterly report on Form 10-Q of Ultra Petroleum Corp., (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 By: /s/ MICHAEL D. WATFORD ----------------- ---------------------------------- Michael D. Watford Chairman, Chief Executive Officer and President EX-31.2 4 h10575exv31w2.txt CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT 31.2 Certification of Chief Financial Officer I, F. Fox Benton III, being the Chief Financial Officer, certify that: (1) I have reviewed the quarterly report on Form 10-Q of Ultra Petroleum Corp., (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; (3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; (4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the board of directors (or persons fulfilling the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 By: /s/ F. FOX BENTON III ----------------- ---------------------------- F. Fox Benton III Chief Financial Officer EX-32.1 5 h10575exv32w1.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ultra Petroleum Corp. (the "Company") on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael D. Watford, Chairman, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2003 By: ----------------- ------------------------------------ Michael D. Watford Chairman, Chief Executive Officer and President This certification is being furnished solely for purposes of compliance with 18 U.S.C. Section 1350 and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing. A signed original of this written statement required by Section 906 has been provided to Ultra Petroleum Corp. and will be retained by Ultra Petroleum Corp. and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 h10575exv32w2.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Ultra Petroleum Corp. (the "Company") on Form 10-Q for the period ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, F. Fox Benton III, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2003 By: ----------------- ---------------------------------- F. Fox Benton Chief Financial Officer This certification is being furnished solely for purposes of compliance with 18 U.S.C. Section 1350 and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. Registration Statements or other documents filed with the Securities and Exchange Commission shall not incorporate this exhibit by reference, except as otherwise expressly stated in such filing. A signed original of this written statement required by Section 906 has been provided to Ultra Petroleum Corp. and will be retained by Ultra Petroleum Corp. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----