-----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, N+0NczIwptD5aUbma7AnN6i4h8SwN4K5mMJR76vE4Ov31BAnKzjKBA7+9wXvg40l cM4eIbWMJJHoRL7stkMCOg== 0000899243-99-001021.txt : 19990514 0000899243-99-001021.hdr.sgml : 19990514 ACCESSION NUMBER: 0000899243-99-001021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELLWETHER EXPLORATION CO CENTRAL INDEX KEY: 0000319459 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 760437769 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09498 FILM NUMBER: 99620293 BUSINESS ADDRESS: STREET 1: 1331 LAMAR STREET 2: SUITE 1455 CITY: HOUSTON STATE: TX ZIP: 77010 BUSINESS PHONE: 7136501025 MAIL ADDRESS: STREET 1: 1221 LAMAR STREET 2: STE 1600 CITY: HOUSTON STATE: TX ZIP: 77010-3039 10-Q 1 1ST QUARTER FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________ FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities ----- Exchange Act of 1934 For the quarter ended March 31, 1999 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 0-9498 BELLWETHER EXPLORATION COMPANY (Exact name of registrant as specified in its charter) Delaware 74-0437769 (State of incorporation) (IRS Employer Identification Number) 1331 Lamar, Suite 1455 Houston, Texas 77010-3039 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code: (713) 650-1025 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 --- --- As of May 3, 1999, 13,853,791 shares of common stock of Bellwether Exploration Company were outstanding. 1 BELLWETHER EXPLORATION COMPANY INDEX
PART I. FINANCIAL INFORMATION Page # ITEM 1. Financial Statements Condensed Consolidated Balance Sheets: March 31, 1999 (Unaudited) and December 31, 1998...................... 3 Condensed Consolidated Statements of Operations (Unaudited): Three months ended March 31, 1999 and March 31, 1998.................. 5 Condensed Consolidated Statements of Cash Flows (Unaudited): Three months ended March 31, 1999 and March 31, 1998.................. 6 Notes to Condensed Consolidated Financial Statements (Unaudited)........... 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............... 20 PART II. OTHER INFORMATION......................................................... 21
2 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) ASSETS
March 31, December 31, 1999 1998 ------------ ----------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents....................................... $ 752 $ 10 Accounts receivable and accrued revenues........................ 14,689 15,602 Due from related parties........................................ 1,701 853 Prepaid expenses and other...................................... 796 1,719 ----------- ---------- Total current assets......................................... 17,938 18,184 ----------- ---------- PROPERTY AND EQUIPMENT, at cost: Oil and gas properties (full cost method)....................... 297,017 289,231 Gas plant facilities............................................ 17,411 17,406 ----------- ---------- 314,428 306,637 Accumulated depreciation, depletion, amortization and impairments.................................................. (202,943) (198,421) ----------- ---------- 111,485 108,216 ----------- ---------- OTHER ASSETS.................................................... 4,562 4,796 ----------- ---------- $ 133,985 $ 131,196 =========== ==========
See accompanying notes to condensed consolidated financial statements 3 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share information) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, 1999 1998 ----------- ------------ (Unaudited) CURRENT LIABILITIES: Accounts payable and accrued liabilities....................... $ 11,681 $ 11,982 Due to related parties......................................... -- 125 ----------- --------- Total current liabilities..................................... 11,681 12,107 ----------- --------- LONG-TERM DEBT................................................. 108,900 104,400 OTHER LIABILITIES.............................................. 200 200 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued or outstanding at March 31, 1999 and December 31, 1998............................................. --- --- Common stock, $0.01 par value, 30,000,000 shares authorized, 13,853,791 and 13,853,991 shares issued at March 31, 1999 and December 31, 1998, respectively............ 142 142 Additional paid-in capital..................................... 80,442 80,442 Retained earnings.............................................. (65,475) (64,191) Treasury stock, at cost, 311,000 shares........................ (1,905) (1,904) ----------- --------- Total stockholders' equity................................... 13,204 14,489 ----------- --------- $ 133,985 $ 131,196 =========== =========
See accompanying notes to condensed consolidated financial statements 4 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except per share information) Three Months Ended March 31, ---------------------- 1999 1998 ------- ------- REVENUES: Oil and gas revenues.......................... $12,727 $19,424 Gas plant operations, net..................... 221 226 Interest and other income..................... 283 187 ------- ------- 13,231 19,837 ------- ------- COST AND EXPENSES: Production expenses........................... 5,612 6,133 Depreciation, depletion and amortization...... 4,680 8,738 General and administrative expenses........... 1,394 2,611 Interest expense.............................. 2,829 2,979 ------- ------- 14,515 20,461 ------- ------- Loss before income taxes....................... (1,284) (624) Benefit for income taxes....................... -- (232) ------- ------- NET LOSS....................................... $(1,284) $ (392) ======= ======= Net loss per share............................. $ (.09) $ (.03) ======= ======= Net loss per share-diluted..................... $ (.09) $ (.03) ======= ======= Weighted average common shares outstanding................................... 13,854 14,049 ======= ======= Weighted average common shares outstanding diluted....................................... 13,854 14,049 ======= ======= See accompanying notes to condensed consolidated financial statements 5 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Three Months Ended March 31, ----------------------------- 1999 1998 ----------- ---------- Cash flows from operating activities: Net loss............................................................. $ (1,284) $ (392) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization........................ 4,886 8,958 Deferred income taxes........................................... -- (563) ----------- ---------- 3,602 8,003 Change in assets and liabilities: Accounts receivable and accrued revenue............................. 913 3,911 Accounts payable and other liabilities.............................. (301) 5,503 Due from (to) related parties....................................... (973) 2,793 Other............................................................... 878 628 ----------- ---------- Net cash flows provided by operating activities..................... 4,119 20,838 ----------- ---------- Cash flows from investing activities: Additions to properties and facilities.............................. (7,796) (9,874) Proceeds from sales of properties................................... (80) 289 ----------- ---------- Net cash flows used in investing activities......................... (7,876) (9,585) ----------- ---------- Cash flows from financing activities: Proceeds from borrowings............................................ 4,500 -- Exercise of stock options........................................... -- 1,492 Purchase of treasury shares......................................... (1) -- ----------- ---------- Net cash flows provided by financing activities..................... 4,499 1,492 ----------- ---------- Net increase in cash and cash equivalents........................... 742 12,745 Cash and cash equivalents at beginning of period.................... 10 2,699 ----------- ---------- Cash and cash equivalents at end of period........................... $ 752 $ 15,444 =========== ==========
See accompanying notes to condensed consolidated financial statements 6 BELLWETHER EXPLORATION COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) (Amounts in thousands) Three Months Ended March 31, ------------------ 1999 1998 ------- ------ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest.............................................. $ 87 $ 58 Income taxes.......................................... $ -- $ 864 See accompanying notes to condensed consolidated financial statements 7 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Summary of Significant Accounting Policies The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all disclosures required by generally accepted accounting principles. However, in the opinion of management, these statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position at March 31, 1999 and December 31, 1998, and the results of operations and changes in cash flows for the periods ended March 31, 1999 and 1998. These financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements in the December 31, 1998 Form 10-K of Bellwether Exploration Company ("the Company") that was filed with the Securities and Exchange Commission on March 22, 1999. Certain reclassifications of prior period statements have been made to conform with current reporting practices. In order to prepare these financial statements in conformity with generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities, and reserve information. Actual results could differ from those estimates. 8 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 2. Stockholders' Equity SFAS No. 128 requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. For the three months ended March 31, 1999 and 1998, diluted earnings per common share are not calculated since the issuance or conversion of additional securities would have an antidilutive effect. SFAS No. 128 reconciliation (amounts in thousands except per share amounts):
For the Three Months Ended For the Three Months Ended March 31, 1999 March 31, 1998 ----------------------------------------- ------------------------------------- Loss Shares Per Share Loss Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------- ------------ ----------- ----------- ------------ ---------- Loss per Common Share: Loss available to common stockholders................... $ 1,284 13,854 $ .09 $ 392 14,049 $ .03 ========== ========= Effect of Dilutive Securities: Options and Warrants............ $ -- -- $ -- -- -------- ------- -------- --------- Loss per Common Share-Diluted: Loss available to common stockholders and assumed conversions.................... $ 1,284 13,854 $ .09 $ 392 14,049 $ .03 ======== ======= ========== ======== ========= =========
Securities that could potentially dilute basic earnings per share in the future, that were not included in the computation of diluted earnings per share because to do so would have been antidiluted are as follows: For the Periods Ended March 31, --------------------------------------- 1999 (shares) 1998 (shares) --------------------------------------- Options and Warrants 1,000 347,000 ===== ======= 9 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) In September 1998, the Company's Board of Directors authorized the repurchase of up to $5 million of the Company's common stock. As of March 31, 1999, 311,000 shares had been acquired at an aggregate price of $1,905,000. These treasury shares are reported at cost as a reduction to Stockholder's Equity. 3. Long Term Debt In April 1997, the Company entered into a senior unsecured revolving credit facility ("Senior Credit Facility") which currently has a borrowing base of $60.0 million and a maturity date of March 31, 2002. The Company may elect an interest rate based either on a margin plus LIBOR or the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate. For LIBOR borrowings, the interest rate will vary from LIBOR plus 0.875% to LIBOR plus 1.25% based upon the borrowing base usage. As of March 31, 1999 there were $8.9 million borrowings outstanding under the Senior Credit Facility. The Senior Credit Facility contains various covenants including certain required financial measurements for current ratio, consolidated tangible net worth and interest coverage ratio. In addition, the Senior Credit Facility includes certain limitations on restricted payments, dividends, incurrence of additional funded indebtedness and asset sales. In April 1997, the Company issued $100.0 million of 10-7/8% senior subordinated notes ("Notes") that mature April 1, 2007. Interest on the Notes is payable semi-annually on April 1 and October 1. The Notes contain certain covenants, including limitations on indebtedness, liens, dividends and other payment restrictions affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales and restrictions on mergers and consolidations or sales of assets. Effective September 22, 1998, the Company entered into an eight and a half year interest rate swap agreement with a notional value of $80 million. Under the agreement, the Company receives a fixed interest rate and pays a floating interest rate based on the simple average of three foreign LIBOR rates. Floating rates are redetermined for a six month period each April 1 and October 1. The floating rate for the period from April 1, 1999 to October 1, 1999 is 9.39%. Through April 1, 2002 the floating rate is capped at 10.875% and capped at 12.875% thereafter. 10 BELLWETHER EXPLORATION COMPANY Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 4. New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. The Company has not yet determined the impact of this statement on the Company's financial condition or results of operations. 5. Natural Gas and Crude Oil Hedging Oil and gas revenues decreased $13,000 in the three months ended March 31, 1999, and increased $525,000 in the three month period ended March 31, 1998, as a result of hedging activity. Since year end 1998, the Company has entered into current swap contracts to hedge a total of 2,295,000 MMBTU of gas during the months of May through June 1999 at a weighted average NYMEX quoted price of $2.04 per MMBTU and a collar contract to hedge 30,000 MMBTU per day for July 1, 1999 through October 31, 1999 which establishes a floor NYMEX quoted price of $2.20 per MMBTU and a ceiling NYMEX quoted price of $2.61 per MMBTU. In addition, the Company has current contracts to hedge a total of 640 MBBLS of oil during the months of April through September 1999 at a weighted average NYMEX quoted price of $15.30 per barrel. The fair value at March 31, 1999 of these swap agreements was a loss of $238,000. 11 BELLWETHER EXPLORATION COMPANY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources The Company strives to maximize long-term shareholder value through aggressive growth in reserves and cash flow using advanced technologies, implementation of a low cost structure and maintenance of a capital structure supportive of growth. The Company employs an integrated interdisciplinary team approach to a balanced program of strategic acquisitions of producing oil and gas properties and technology driven development and exploration activities. The funding of these activities has historically been provided by operating cash flows, bank financing, equity placements and sale of non-core assets. The Company invested $7.8 million in oil and gas properties for the three months ended March 31, 1999 versus $9.9 million for the same period in 1998. Cash flows from operations before changes in assets and liabilities were $3.6 million for the three months ended March 31, 1999 compared to $8.0 million provided by operating activities in the same period of 1998. At March 31, 1999, the Company had $51.1 million of available debt capacity under the Senior Credit Facility. 1999 Capital Expenditures During 1999, the Company anticipates investing approximately $27.5 million, primarily for development and exploratory drilling activities and leasehold and seismic acquisitions. The Company believes its cash flow provided by operating activities and borrowings under its credit facilities will be sufficient to meet these projected capital investments (See Note 3 of the Notes to Condensed Consolidated Financial Statements). The Company continues to review acquisition opportunities and the consummation of such a transaction will directly impact anticipated capital expenditures. Gas Balancing It is customary in the industry for working interest partners to sell more or less than their entitled share of natural gas. The settlement or disposition of existing gas balancing positions is not anticipated to materially impact the financial condition of the Company. 12 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Oil and Gas Property Accounting The Company utilizes the full cost method of accounting for its investment in oil and gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and gas reserves are capitalized as incurred. To the extent that capitalized costs of oil and gas properties, net of accumulated depreciation, depletion and amortization, exceed the discounted future net revenues of proved oil and gas reserves net of deferred taxes, such excess capitalized costs would be charged to operations. Due to declines in oil and gas prices at year end, and to a lesser extent, downward revisions in estimated proved reserves, the Company recorded a $73.9 million pretax impairment charge in the fiscal year ended December 31, 1998. No such charges to operations were required during the three month periods ending March 31, 1999 or 1998. Results of Operations The following table sets forth certain operating information for the Company for the periods presented: Three Months Ended March 31, -------------------- 1999 1998 ------- ------- Production: Oil and condensate (MBBLs)...................... 520 572 Natural gas (MMCF).............................. 4,785 5,731 Average sales price: (1) Oil and condensate (per BBL).................... $ 9.35 $ 12.62 Natural gas (per MCF).......................... $ 1.65 $ 2.04 Average costs: Production expenses (per MCFE).................. $ .71 $ .67 General and administrative expense (per MCFE)................................... $ .18 $ .28 Depreciation, depletion and amortization (per MCFE)(2)................................ $ .55 $ .90 (1) Average sales prices exclude the effect of hedges, which decreased revenues by $13,000 in the three month period in 1999, and increased revenues by $525,000 in the three month period in 1998. (2) Excludes depreciation, depletion and amortization on gas plants and other assets of $306,000 in the three month period in 1999, and of $466,000 in the three month period ended in 1998. 13 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Three Months Ended March 31, 1999 and 1998 Net loss for the quarters ended March 31, 1999 and 1998 was $1.3 million or $.09 per share, and $.4 million or $.03 per share, respectively. The increased loss is due to lower oil and gas prices in 1999 and lower oil and gas production as compared to the quarter ended March 31, 1998. Oil and gas revenues for the three months ended March 31, 1999 were $12.7 million, as compared to $19.4 million for the respective period in 1998. The 35% decrease in oil and gas revenues is partially due to the decline in oil and gas prices. Oil prices averaged $9.35 per barrel in the three month period ended March 31, 1999 as compared to $12.62 per barrel in the comparable period of 1998. This represents a 26% decline in oil prices and translates into a $1.7 million decrease in oil revenues. Gas prices averaged $1.65 per mcf in the three month period ended March 31, 1999 as compared to $2.04 per mcf in the comparable period of 1998. This represents a 19% decline in gas prices and translates into a $1.9 million decrease in oil revenues. Also, gas hedges in place in 1998 resulted in $525,000 of additional gas revenues in the period ended March 31, 1998 while a decrease in revenues of $13,000 was reflected in the same period of 1999. Production volumes reflect normal declines from primarily the offshore Gulf of Mexico properties. Oil production was down 9% compared to the same quarter of 1998 with 520,000 and 572,000 barrels for the three month periods ended March 31, 1999 and 1998, respectively. Gas production was down 17% compared to the same quarter of 1998 with 4,785 and 5,731 million cubic feet (MMcf) for the three month periods ended March 31, 1999 and 1998, respectively. Net gas plant operating profit was $221,000 in the three months ended March 31, 1999 and $226,000 in the same period of 1998. Interest and Other Income increased from $187,000 at March 31, 1998 to $283,000 at March 31, 1999 primarily as a result of of the reversal of fee income in 1998 erroneously received in prior periods. The major components of Interest and Other Income remained at consistent levels. Production expenses for the three months ended March 31, 1999 totaled $5.6 million, or 8% below the $6.1 million for the three months March 31, 1998. On an Mcf equivalency basis (Mcfe), production expenses for the quarter ended March 31, 1999 increased to $.71 per Mcfe as compared to $.67 per Mcfe in the period ended March 31, 1998. The decreased oil and gas volumes mentioned above resulted in the increased production costs on an equivalency basis. Depreciation, depletion and amortization was $4.7 million for the three months ended March 31, 1999 and $8.7 million for the three month period ended March 31, 1998. The decline resulted from the $73.9 million impairment charge made at December 31, 1998 as well as decreased production volumes. Depreciation, depletion and amortization per Mcfe has declined from $.90 per Mcfe in 1998 to $.55 per Mcfe in 1999. 14 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) General and administrative expenses totaled $1.4 million in the three months ended March 31, 1999 as compared to $2.6 million for the comparable period of fiscal 1998. A decrease in outsourcing costs from $1.3 million to $.4 million was the major contribution to the decline. The Company is charged a management fee under its current outsourcing contract which is based upon a specified percentage of the average book value of the Company's total assets, excluding cash, plus a percentage of operating cash flows. Due to the $73.9 million impairment charge described above, the Company's total assets and resulting percentage of such assets was reduced. Additionally, the 1998 period included costs related to the closing of the Company's Dallas exploration office in March 1998 and certain transition costs related to the change of the Company's 1997 fiscal year. On an Mcf equivalency basis, general and administrative expenses were $.18 per Mcfe in the period ended March 31, 1999 and $.28 per Mcfe in the period ended March 31, 1998. Interest expense remained relatively flat at $2.8 million for the three months ended March 31, 1999 and $3.0 million in the same period of 1998 even though the Company had higher average balances outstanding in 1999. Savings of $229,000 realized as an interest rate swap accounted for the decline. The provision for federal and state income taxes for the three months ended March 31, 1999 and 1998 are based upon a 0%, and 37% effective tax rate, respectively. No tax accrual has been made in 1999 because of an increase in the Company's tax valuation allowance for the benefit for the current period's net loss from operations. Year 2000 Issues The Year 2000 problem ("Y2k") refers to the inability of computer and other information technology systems to properly process date and time information. The problem was caused, in part, by the outdated programming practice of using two digits rather than four to represent the year in a date. The consequence of the Y2k problem is that information technology and embedded processing systems are at risk of malfunction, particularly during the transition between 1999 to 2000. The effects of the Y2k are exacerbated by the interdependence of computer and telecommunication systems throughout the world. This interdependence also exists among the Company and its vendors, customers and business partners, as well as with government agencies. The risks of Y2k fall into three general areas: 1) Corporate Systems, 2) Field Systems and 3) Third Party Exposure. The Company is addressing each of these areas through a readiness process that follows the steps below: a) Planning and Awareness b) Inventory and Assessment c) Identify Potential Problems and their Business Impact d) Identify/Approve Solutions 15 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) e) Test and Implement Solutions f) Contingency Planning The Company outsources a substantial portion of its information technology and field operations to Torch. The Company and Torch have jointly developed a plan to address the Company's Year 2000 issues. (As used in the remainder of this discussion, references to the Company include the Torch employees assisting the Company in its Year 2000 compliance program.) The Company has formed a Y2k Team comprised of representatives from senior management, exploration, exploitation, accounting, legal and internal audit. The continuing progress of this Y2k Team is reported regularly to the Company's Board of Directors. The estimated total costs for Y2k readiness has been nominal. It is anticipated that such costs for complete Y2k readiness will continue to be nominal as much of these costs are borne by Torch under the terms of the existing outsourcing agreement. In addition, there have been no material capital expenditures for Y2k and there is not anticipated to be material capital expenditures because most major critical field operations do not have date sensitive equipment. Remediation and testing is scheduled to be completed by June 30, 1999. Corporate Systems 1. Planning and Awareness. All employees have attended Y2k informational programs including a general discussion of what Y2k is and how it could affect the business. Employees of all levels of the organization have been asked to participate in the identification of potential Y2k risks. 2. Inventory and Assessment. The Company has completed an inventory of the traditional computing platforms including client/server systems, LAN systems and PC systems, as well as an inventory of all systems software and operating systems for each computing system. In addition, third party service interfaces, banking/treasury interfaces and telecommunications have been cataloged. Assessment of component compliance (compliant, not-compliant, expected date of compliance, etc.) has been completed and included research of product information on the Internet, contacting peer group companies and accessing information that peer group companies have already found. 3. Identification. The failure to identify and correct a material Y2k problem in the Corporate Systems could result in inaccurate or untimely financial information for management decision-making or financial reporting purposes. The severity of such problems may impact the duration during which quality information is available to management. At this time, management believes that any Y2k disruptions associated with its financial and administration systems will not have a material effect on the Company. 4. Identify/Approve Solutions. Based upon the assessments of components' compliance, solutions are determined. These solutions include: 1) fix or replace the non-compliant component, 2) buy patches or 16 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) replacement items, 3) develop workarounds, 4) identify alternate automated processes, 5) design manual procedures and 6) develop business continuity plans for specific items or systems. 5. Test and Implement Solutions. Since April 1998 Torch has been working on a upgrade to its accounting software and is expected to achieve full Y2k compliance in the first half of 1999. In addition, all network and desktop applications used by the Company have been inventoried and are generally Y2k compliant. The costs of all such risk assessments and remediation are borne by Torch under the terms of Bellwether's outsourcing agreements. 6. Contingency Planning. Notwithstanding the foregoing, should there be significant unanticipated disruptions in the Company's financial and administrative systems, a number of accounting processes that are currently automated will need to be performed manually. The Company is currently considering its options with respect to contingency arrangements for temporary staffing to accommodate such situations. Field Systems 1. Planning and Awareness. The Company's Y2k program has involved all levels of management of field and facility assets from production foremen and higher. Employees at all levels of the organization have been asked to participate in the identification of potential Y2k risk, which might otherwise go unnoticed by higher level employees and officers of Bellwether, and as a result, the Company believes that awareness of the issue is high. 2. Inventory and Assessment. This step entailed locating all embedded chip technology used in the field operations including safety systems, measurement devices, overflow valves, SCADA systems and other field processes that are date-or-time-sensitive. It is estimated that there are less than a hundred embedded components residing in the computer systems within Bellwether's operated oil and natural gas fields and processing plants. During the assessment stage a list of assets to be tested was assembled. Consideration was given to 1) issues of health and safety, 2) environmental concerns, 3) economic factors and 4) other business risks as appropriate. Vendors and manufacturers have been contacted as well as product research through the Internet and the use of peer group company shared information. To date, the majority of embedded components researched have been deemed either date- insensitive or Y2k compliant. However, the complexity of embedded systems is such that a small minority of non-compliant components, even a single non- compliant component, can corrupt an entire system. Now that the component level evaluation is substantially complete, a broader evaluation at the system level has commenced. Bellwether anticipates that the system level evaluation will be completed by the end of the second quarter 1999. 3. Identification. The failure to identify and correct a material Y2k problem could result in outcomes ranging from errors in data reporting to curtailments or shutdowns in production or discharges of materials onto the environment. The Company is actively engaged in a program to prioritize the 17 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) remediation of embedded components and systems which are either known to be Y2k non-compliant or which have higher risk of Y2k failures, and to further prioritize remediation targets by the anticipated financial impact of any such failures on the Company. To assist in this effort, Bellwether and Torch have retained consultants who are knowledgeable and experienced in the assessment of Y2k issues impacting field operations. Bellwether intends to give extremely high priority to the remediation of any situation that impacts employee health and safety or environmental security. The cost of the assessment is not expected to be material to Bellwether's financial results. Despite these efforts, it is possible that there will be production disruptions or other Y2k related problems associated with Y2k non-compliance. Depending on the magnitude of any such disruptions or other problems, and the time and cost required to correct them, such failures could materially and adversely impact the Company's results of operations, liquidity and financial condition. 4. Identify/Approve Solutions. Based upon the assessment of field systems, regarding compliance or non-compliance, solutions are determined. These potential solutions include 1) fix or replace non-compliant items, 2) buy patches or replacement items, 3) develop workarounds, 4) identify alternative automated processes, 5) design manual procedures and 6) develop business continuity plans for specific items or systems. 5. Test and Implement Solutions. Once identified, assessed and prioritized, Bellwether intends to test, upgrade and certify those embedded components and systems in field process control units deemed to pose the greatest risk of significant non-compliance. It is important to note that in some circumstances, the procedures used to test embedded components for Y2k compliance themselves pose a risk of damaging the component or corrupting the system. Accordingly, there may be situations in which a decision not to test may be deemed the most prudent. The Company does not expect the cost of testing and upgrading its embedded chips to be material due to the number of components and the low cost of such components. If this assumption is incorrect, the Company may incur material costs in connection with testing and remedying Year 2000 problems. In addition, if the Company is not successful and ultimately experiences Y2k related failures, the costs attributable to lost production, damages to facilities and environmental damages may be material. The effort to address the Y2k situation is dynamic and may likely not be fully completed by December 31, 1999. 6. Contingency Planning. Should material production disruptions occur as a result of Y2k failures in the field operations, Bellwether's operating cash flow will be impacted. This contingency is being factored into deliberations on capital budgeting, liquidity and capital adequacy. It is management's intention to maintain adequate financial flexibility to sustain the Company during any such period of cash flow disruption. 18 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Third Party Exposures - --------------------- 1. Planning and Awareness. The Company has been involved in informational programs with its employees and the employees of Torch who have significant interaction with outside vendors, customers and business partners of the Company. All levels of employees in the organization have been asked to participate in the identification of potential third party Y2k risk, which might otherwise go unnoticed by higher level employees and officers of Bellwether, and as a result, awareness of the issue is considered high. 2. Inventory and Assessment. Surveys of general Y2k readiness have been sent to all vendors, customers and business partners of the Company. An assessment is made regarding the priority of risk associated with each third party, and how the third party's level of compliance directly affects day-to-day business. The Company's most critical customers are outside operators of wells, gas plants, refineries, natural gas marketers and pipelines. 3. Identification. Refineries are extremely complex operations containing hundreds or thousands of computerized processes. The failure on the part of a Bellwether refinery customer to identify and correct a material Y2k problem could result in material disruptions in the sale of Bellwether's production to that refinery. In many cases, affected Bellwether production may not be easily shifted to other markets, and markets may have similar effects. Although the Company has made inquiries to key third parties on the subject of Y2k readiness and will continue to do so, it has no ability to require responses to such inquiries or to independently verify their accuracy. Accordingly, management is unable to express any view about whether there will be material production disruptions associated with third party Y2k non- compliance. Depending on the magnitude of any such disruptions and the time required to correct them, such failures could materially and adversely impact the Company's results of operations, liquidity and financial condition. Other significant concerns include the integrity of global telecommunication systems, the readiness of commercial banks to execute electronic fund transfers and of the ability of the financial community to maintain an orderly market in Bellwether's securities. 4. Identify/Approve Solutions. By prioritizing the various third party risks mentioned above, a list of most critical third party vendors, customers and business partners has been determined. By cross-referencing the results of the Y2k readiness survey with the Company's priority list of third parties, solutions can be determined. These may involve field and/or office visits and more detailed meetings to access the third party's Y2k compliance. 5. Test and Implement Solutions. Where the Company perceives significant risk of Y2k non-compliance that may have a material impact on the Company, and where the relationship between the Company and a vendor, customer or business partner permits, joint testing may be undertaken during 1999. Joint 19 BELLWETHER EXPLORATION COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) testing would occur following upgrades and other remediation to hardware, software and communications links, as applicable, with the intent of determining that the remediated system being tested will perform as expected after December 31, 1999. 6. Contingency Planning. Should material production disruptions occur as a result of Y2k failures of third parties, Bellwether's operating cash flow will be impacted. This contingency is being factored into deliberations on capital budgeting, liquidity and capital adequacy. It is management's intention to maintain adequate financial flexibility to sustain the Company during any such period of cash flow disruption. Forward Look Statements This Form 10-Q contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included herein, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the notes to the financial statements regarding the Company's financial position, capital budget, intent to acquire oil and gas properties, estimated quantities and net present values of reserves, business strategy, plans and objectives of management of the Company for future operations, and the effect of gas balancing and the Year 2000 problem, are forward-looking statements. There can be no assurances that such forward looking statements will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") include the volatility of oil and gas prices, operating hazards, government regulations, exploration risks and other factors described in the Company's Form 10-K filed with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified by the Cautionary Statements. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk, including adverse changes in commodity prices and interest rates. Since year end 1998, the Company has entered into current swap contracts to hedge a total of 2,295,000 MMBTU of gas during the months of May through June 1999 at a weighted average NYMEX quoted price of $2.04 per MMBTU and a collar contract to hedge 30,000 MMBTU per day for July 1, 1999 through October 31, 1999 which establishes a floor NYMEX quoted price of $2.20 per MMBTU and a ceiling NYMEX quoted price of $2.61 per MMBTU. In addition, the Company has current contracts to hedge a total of 640 MBBLS of oil during the months of April through September 1999 at a weighted average NYMEX quoted price of $15.30 per barrel. The fair value at March 31, 1999 of these swap agreements was a loss of $238,000. Since March 31, 1999 oil and gas prices, for the periods included under the swap contracts, have increased approximately $1.50 per barrel and $.30 per mcf, respectively, resulting in a significantly larger potential future loss on swap agreements. Accordingly, the deferred loss associated with the swap contracts is currently approximately $2 million. 20 BELLWETHER EXPLORATION COMPANY PART II. OTHER INFORMATION ITEM 1. Legal Proceedings None. ITEM 2. Changes in Securities 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. Exhibits The following exhibits are filed with this Form 10-Q and they are identified by the number indicated. 27 Financial Data Schedule b. Reports on Form 8-K. None. 21 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. BELLWETHER EXPLORATION COMPANY (Registrant) Date: May 13, 1999 By: /s/ J. Darby Sere' ---------------------- ----------------------------- J. Darby Sere' Chairman and Chief Executive Officer Date: May 13, 1999 By: /s/ William C. Rankin ---------------------- ----------------------------- William C. Rankin Senior Vice President and Chief Financial Officer 22 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 752 0 14,689 0 0 17,938 314,428 (202,943) 133,985 11,681 100,000 0 0 142 13,062 133,985 12,727 13,231 10,292 14,515 1,394 0 2,829 (1,284) 0 (1,284) 0 0 0 (1,284) (0.09) (0.09)
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