10-Q 1 l87889ae10-q.txt BELDEN & BLAKE CORPORATION 10-Q 1 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 period ended March 31, 2001 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: 0-20100 BELDEN & BLAKE CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-1686642 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5200 Stoneham Road North Canton, Ohio 44720 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (330) 499-1660 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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. [X] Yes [ ] No As of April 30, 2001, Belden & Blake Corporation had outstanding 10,314,580 shares of common stock, without par value, which is its only class of stock. 2 BELDEN & BLAKE CORPORATION INDEX
---------------------------------------------------------------------------------------------------------------- Page ---- PART I Financial Information: Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 .......................................................... 1 Consolidated Statements of Operations for the three months ended March 31, 2001 and 2000 ....................................... 2 Consolidated Statements of Shareholders' Equity (Deficit) for the three months ended March 31, 2001 and the years ended December 31, 2000 and 1999 ................................................. 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and 2000 ....................................... 4 Notes to Consolidated Financial Statements .................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ 7 PART II Other Information Item 6. Exhibits and Reports on Form 8-K .............................................. 12
3 BELDEN & BLAKE CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2001 2000 ============= ============== (UNAUDITED) ASSETS ------ CURRENT ASSETS Cash and cash equivalents $ 2,127 $ 1,798 Accounts receivable, net 17,609 22,620 Inventories 2,184 2,222 Deferred income taxes 2,452 1,475 Other current assets 1,677 1,448 Fair market value of derivatives 924 -- -------------- -------------- TOTAL CURRENT ASSETS 26,973 29,563 PROPERTY AND EQUIPMENT, AT COST Oil and gas properties (successful efforts method) 423,687 413,824 Gas gathering systems 13,462 13,445 Land, buildings, machinery and equipment 22,963 23,469 -------------- -------------- 460,112 450,738 Less accumulated depreciation, depletion and amortization 213,487 208,435 -------------- -------------- PROPERTY AND EQUIPMENT, NET 246,625 242,303 FAIR MARKET VALUE OF DERIVATIVES 962 -- OTHER ASSETS 12,459 13,251 -------------- -------------- $ 287,019 $ 285,117 ============== ============== LIABILITIES AND SHAREHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES Accounts payable $ 6,099 $ 5,926 Accrued expenses 26,102 19,316 Current portion of long-term liabilities 111 141 Fair market value of derivatives 4,547 -- -------------- -------------- TOTAL CURRENT LIABILITIES 36,859 25,383 LONG-TERM LIABILITIES Bank and other long-term debt 50,174 61,535 Senior subordinated notes 225,000 225,000 Other 302 323 -------------- -------------- 275,476 286,858 FAIR MARKET VALUE OF DERIVATIVES 34 -- DEFERRED INCOME TAXES 22,361 21,189 SHAREHOLDERS' DEFICIT Common stock without par value; $.10 stated value per share; authorized 58,000,000 shares; issued 10,366,122 and 10,357,255 shares (which includes 57,252 and 53,972 treasury shares, respectively) 1,031 1,030 Paid in capital 108,179 107,921 Deficit (155,202) (157,264) Accumulated other comprehensive loss (1,719) -- -------------- -------------- TOTAL SHAREHOLDERS' DEFICIT (47,711) (48,313) -------------- -------------- $ 287,019 $ 285,117 ============== ==============
See accompanying notes. 1 4 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2001 2000 ---------------- ---------------- REVENUES Oil and gas sales $ 25,779 $ 19,812 Gas gathering, marketing, and oilfield service 8,875 8,426 Other 487 833 ---------------- ---------------- 35,141 29,071 EXPENSES Production expense 5,458 5,430 Production taxes 688 762 Gas gathering, marketing, and oilfield service 8,388 7,111 Exploration expense 1,426 937 General and administrative expense 1,124 932 Franchise, property and other taxes 105 165 Depreciation, depletion and amortization 6,070 8,986 Other nonrecurring expense 1,446 24 ---------------- ---------------- 24,705 24,347 ---------------- ---------------- OPERATING INCOME 10,436 4,724 OTHER (INCOME) EXPENSE (Gain) on sale of subsidiary and other income -- (14,426) Interest expense 7,202 8,286 ---------------- ---------------- INCOME BEFORE INCOME TAXES 3,234 10,864 Provision for income taxes 1,172 3,120 ---------------- ---------------- NET INCOME $ 2,062 $ 7,744 ================ ================
See accompanying notes. 2 5
BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) ACCUMULATED OTHER COMMON COMMON PAID IN COMPREHENSIVE TOTAL SHARES STOCK CAPITAL DEFICIT LOSS DEFICIT ========== ========== =========== =========== ================= =========== JANUARY 1, 1999 10,111 $1,011 $107,897 $(141,922) $ -- $(33,014) Net loss (18,303) (18,303) Stock options exercised 31 3 3 Stock-based compensation 118 12 (288) (276) ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 10,260 1,026 107,609 (160,225) -- (51,590) Net income 2,961 2,961 Stock options exercised 97 10 (9) 1 Stock-based compensation 336 336 Treasury stock (54) (6) (15) (21) ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 2000 10,303 1,030 107,921 (157,264) -- (48,313) Comprehensive income: Net income 2,062 2,062 Other comprehensive loss, net of tax Cumulative effect of accounting change (6,691) (6,691) Change in derivative fair value 3,172 3,172 Reclassification adjustments - contract settlements 1,800 1,800 ------------- Total comprehensive income 343 ------------- Stock options exercised 9 1 (1) -- Stock-based compensation 271 271 Treasury stock (3) (12) (12) ----------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2001 (UNAUDITED) 10,309 $1,031 $108,179 $(155,202) $(1,719) $(47,711) =============================================================================================================================
See accompanying notes. 3 6 BELDEN & BLAKE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------------------- 2001 2000 ---------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,062 $ 7,744 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 6,070 8,986 Gain on sale of subsidiary -- (13,155) (Gain) loss on disposal of property and equipment (51) 42 Exploration expense 1,426 937 Deferred income taxes 1,172 3,030 Stock-based compensation 271 -- Change in operating assets and liabilities, net of effects of disposition of subsidiary: Accounts receivable and other operating assets 4,762 (1,439) Inventories 38 (25) Accounts payable and accrued expenses 6,959 2,978 ---------------- ------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 22,709 9,098 CASH FLOWS FROM INVESTING ACTIVITIES: Disposition of subsidiaries net of cash -- 69,031 Proceeds from property and equipment disposals 380 82 Exploration expense (1,426) (937) Additions to property and equipment (9,930) (3,484) Increase in other assets (1) (311) ---------------- ------------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (10,977) 64,381 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving line of credit 44,576 -- Repayment of long-term debt and other obligations (55,967) (71,583) Purchase of treasury stock (12) -- ---------------- ------------------ NET CASH USED IN FINANCING ACTIVITIES (11,403) (71,583) ---------------- ------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 329 1,896 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,798 4,536 ---------------- ------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,127 $ 6,432 ================ ================== CASH PAID DURING THE PERIOD FOR: Interest $ 1,754 $ 3,542 NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisition of assets in exchange for long-term obligations $ -- $ 239
See accompanying notes. 4 7 BELDEN & BLAKE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2001 -------------------------------------------------------------------------------- (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Belden & Blake Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 2000. Certain reclassifications have been made to conform to the current presentation. (2) OTHER NONRECURRING EXPENSE Effective April 1, 2001, certain senior management members of the Company verbally accepted early retirements. These retirements will result in a cash charge of approximately $760,000 and an additional non-cash charge of $179,000 related to the acceleration of certain stock options. The Company recorded a total nonrecurring charge of $1.4 million in the first quarter of 2001 related to these retirement agreements and other severance charges incurred which included a non-cash charge of approximately $265,000 due to the acceleration of certain related stock options. (3) DERIVATIVES AND HEDGING As of January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. As a result of the adoption of SFAS 133, the Company recognizes all derivative financial instruments as either assets or liabilities at fair value. Derivative instruments that are not hedges must be adjusted to fair value through net income (loss). Under the provisions of SFAS 133, changes in the fair value of derivative instruments that are fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through net income (loss). Changes in the fair value of derivative instruments that are cash flow hedges are recognized in other comprehensive income (loss) until such time as the hedged items are recognized in net income (loss). The hedging relationship between the hedging instruments and hedged item must be highly effective in achieving the offset of changes in fair values or cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. The Company measures effectiveness on a monthly basis. Ineffective portions of a derivative instrument's change in fair value are immediately recognized in net income (loss). If there is a discontinuance of a cash flow hedge because it is probable that the original forecasted transaction will not occur, deferred gains or losses are recognized in earnings immediately. From time to time the Company may enter into a combination of futures contracts, commodity derivatives and fixed-price physical contracts to manage its exposure to natural gas price volatility. The Company employs a policy of hedging gas production sold under New York Mercantile Exchange ("NYMEX") based contracts by selling NYMEX based commodity derivative contracts which are placed with major financial institutions that the Company believes are minimal credit risks. The contracts may 5 8 take the form of futures contracts, swaps or options. All of the Company's futures contracts in place are designated as cash flow hedges. Adoption of SFAS No. 133 resulted in recording a $10.5 million ($6.7 million net of tax) decline in fair value to accumulated other comprehensive loss, consisting of $9.2 million to current fair market value of derivative liabilities and $1.3 million to current fair market value of derivative assets. The fair market value of derivatives assets and liabilities represent the difference between hedged prices and market prices on hedged volumes of natural gas as of March 31, 2001. During the first quarter of 2001, losses on contract settlements of $2.8 million ($1.8 million after tax) were reclassified from accumulated other comprehensive loss to earnings and the unrecognized net loss associated with the change in fair market value of open hedges decreased by $5.0 million ($3.2 million after tax). At March 31, 2001, the estimated net losses in accumulated other comprehensive loss that are expected to be reclassified into earnings within the next 12 months are approximately $3.6 million. The Company has partially hedged its exposure to the variability in future cash flows through December 2002. (4) INDUSTRY SEGMENT FINANCIAL INFORMATION The Company operates in one reportable segment, as an independent energy company engaged in producing oil and natural gas, exploring for and developing oil and gas reserves, acquiring and enhancing the economic performance of producing oil and gas properties, and gathering natural gas for delivery to intrastate and interstate gas transmission pipelines. The Company's operations are conducted entirely in the United States. (5) SUBSEQUENT EVENT The Company was notified by the Internal Revenue Service in April 2001 that it has completed the examination for the tax years 1994 through 1997. While the Company has not completed its analysis, it expects to record a favorable adjustment in the second quarter related to the conclusion of the examination. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On March 17, 2000, the Company sold the stock of Peake Energy, Inc. ("Peake"), a wholly owned subsidiary, to an independent oil and gas company, with an effective date of January 1, 2000. The sale included substantially all of the Company's oil and gas properties in West Virginia and Kentucky. The sale resulted in net proceeds of approximately $69 million. The Company recorded a $13.2 million gain on the sale in the first quarter of 2000. The following table presents certain information with respect to the oil and gas operations of the Company. The last column in the table excludes Peake:
EXCLUDING PEAKE -------------------------- THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, ------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ------------ PRODUCTION Gas (Mmcf) 4,483 5,877 4,483 4,723 Oil (Mbbls) 156 163 156 147 Total production (Mmcfe) 5,416 6,858 5,416 5,606 AVERAGE PRICE Gas (per Mcf) $ 4.85 $ 2.65 $ 4.85 $ 2.64 Oil (per Bbl) 25.85 25.98 25.85 26.10 Mcfe 4.76 2.89 4.76 2.91 AVERAGE COSTS (PER MCFE) Production expense 1.01 0.79 1.01 0.84 Production taxes 0.13 0.11 0.13 0.08 Depletion 0.76 0.96 0.76 1.02 GROSS MARGIN (PER MCFE) 3.62 1.99 3.62 1.99 MMCF - MILLION CUBIC FEET MBBLS - THOUSAND BARRELS MMCFE - MILLION CUBIC FEET OF NATURAL GAS EQUIVALENT MCF - THOUSAND CUBIC FEET BBL - BARREL MCFE - THOUSAND CUBIC FEET OF NATURAL GAS EQUIVALENT
RESULTS OF OPERATIONS Operating income increased $5.7 million from $4.7 million in the first quarter of 2000 to $10.4 million in the first quarter of 2001. This increase was the result of a $5.2 million increase in operating margins and a $2.9 million decrease in depreciation, depletion and amortization expense offset by a $1.4 million increase in nonrecurring expense, a $489,000 increase in exploration expense, a $346,000 decrease in other income and a $192,000 increase in general and administrative expense. The decrease in other income was primarily due to a reduction in income from the monetization of nonconventional fuel source tax credits as a result of the Peake sale. The $5.2 million increase in operating margins was primarily due to a $6.0 million increase in the operating margin from oil and gas sales due to a $2.20 per Mcf increase in the average price paid for the Company's natural gas partially offset by a decrease in oil and gas volumes sold as a result of the sale of Peake and the natural production decline of the wells. The operating margin from oil and gas sales on a per unit basis increased 82% from $1.99 per Mcfe in the first quarter of 2000 to $3.62 per Mcfe in the first quarter of 2001. The increase in the operating margin from oil and gas sales was offset by an $828,000 decrease in the operating margin from gas gathering, marketing and oilfield service due to the 7 10 sale of Peake, bad debt expense associated with a bankruptcy and lower gas gathering and marketing margins. Net income decreased $5.6 million from $7.7 million in the first quarter of 2000 to $2.1 million in the first quarter of 2001. This decrease was the result of the $13.2 million gain on the sale of Peake in March 2000 and a $1.3 million gain on terminated interest rate swaps in March 2000 offset by the changes in operating income discussed above, a decrease in the provision for income tax of $1.9 million and a $1.1 million decrease in interest expense. The decrease in the provision for income taxes was primarily due to the decrease in income before income taxes partially offset by a lower effective state tax rate in 2000 due to the sale of Peake. A deferred tax benefit of $817,000 was recorded in the first quarter of 2000 which reduced the effective rate in 2000 from 36.2% to 28.7%. Earnings before interest; income taxes; depreciation, depletion and amortization; exploration expense; and other nonrecurring items ("EBITDAX") increased $4.7 million (32%) from $14.7 million in the first quarter of 2000 to $19.4 million in the first quarter of 2001 primarily due to the increased operating margins in the first quarter of 2001. Total revenues increased $6.1 million (21%) in the first quarter of 2001 compared to the first quarter of 2000 primarily due to an increase in the average price paid for the Company's natural gas partially offset by decreases in the volume of oil and natural gas sold. Oil volumes decreased 7,000 Bbls (5%) from 163,000 Bbls in the first quarter of 2000 to 156,000 Bbls in the first quarter of 2001 resulting in a decrease in oil sales of approximately $200,000. Gas volumes decreased 1.4 Bcf (billion cubic feet) (24%) from 5.9 Bcf in the first quarter of 2000 to 4.5 Bcf in the first quarter of 2001 resulting in a decrease in gas sales of approximately $3.7 million. These volume decreases were due to the sale of Peake in the first quarter of 2000 and the natural production decline of the wells partially offset by production from wells drilled in 2000. The average price paid for the Company's oil decreased $.13 per Bbl from $25.98 per Bbl in the first quarter of 2000 to $25.85 per Bbl in the first quarter of 2001 which decreased oil sales by approximately $20,000. The average price paid for the Company's natural gas increased $2.20 per Mcf from $2.65 per Mcf in the first quarter of 2000 to $4.85 per Mcf in the first quarter of 2001 which increased gas sales by approximately $9.9 million. As a result of the Company's hedging activities gas sales for the first quarter of 2001 were reduced by $2.8 million or $.63 per Mcf, compared to $155,000 or $.03 per Mcf, for the first quarter of 2000. At March 31, 2001, the Company had approximately 6 Bcf of expected remaining 2001 natural gas production and approximately 9 Bcf of expected 2002 natural gas production hedged or committed to be sold under fixed price contracts at estimated average wellhead prices of $4.13 and $4.76 per Mcf, respectively. Production expense increased $28,000 to $5.5 million in the first quarter of 2001. The average production cost increased from $.79 per Mcfe in the first quarter of 2000 to $1.01 per Mcfe in the first quarter of 2001. The per unit increase was primarily due to the sale of Peake, increased compensation related expenses, additional costs incurred in the first quarter of 2001 to minimize production declines in order to take advantage of higher gas prices and general cost increases due to current market conditions. Production taxes decreased $74,000 (10%) from $762,000 in the first quarter of 2000 to $688,000 in the first quarter of 2001. This decrease was due to the sale of Peake partially offset by higher production taxes due to higher natural gas prices in 2001. Exploration expense increased by $489,000 (52%) from $937,000 in the first quarter of 2000 to $1.4 million in the first quarter of 2001 primarily due to increases in leasing activity and geophysical 8 11 expenses associated with the Company's planned drilling activity in 2001. The Company currently expects to spend $29.2 million to drill 205 gross (175.6 net) wells in 2001. General and administrative expense increased $192,000 (21%) from $932,000 in the first quarter of 2000 to $1.1 million in the first quarter of 2001 primarily due to increases in employment and compensation related expenses. Depreciation, depletion and amortization decreased by $2.9 million (32%) from $9.0 million in the first quarter of 2000 to $6.1 million in the first quarter of 2001. Depletion expense decreased approximately $2.5 million (38%) from $6.6 million in the first quarter of 2000 to $4.1 million in the first quarter of 2001. Depletion per Mcfe decreased from $.96 per Mcfe in the first quarter of 2000 to $.76 per Mcfe in the first quarter of 2001. These decreases were primarily the result of decreased production volumes and a lower amortization rate per Mcfe due to higher reserves resulting from higher oil and gas prices. The Company recorded a nonrecurring charge of $1.4 million in the first quarter of 2001 related to the early retirement of certain senior management members of the Company and other severance charges incurred which included a non-cash charge of approximately $265,000 due to the acceleration of certain related stock options. The Company expects to reduce its forecasted future general and administrative expenses by over $500,000 annually beginning in the second quarter of 2001 as a result of the retirements. Gain on sale of subsidiary and other income in the first quarter of 2000 was the result of the $13.2 million gain on the sale of Peake and the $1.3 million gain on terminated interest rate swaps. Interest expense decreased $1.1 million from $8.3 million in the first quarter of 2000 to $7.2 million in the first quarter of 2001 due to a decrease in average outstanding borrowings partially offset by higher blended interest rates. The Company's interest expense was reduced by $29,000 in the first quarter of 2000 due to interest rate swaps. There were no interest rate swaps open in the first quarter of 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity and capital resources are closely related to and dependent on the current prices paid for its oil and natural gas. The Company's current ratio at March 31, 2001 was .73 to 1. During the first three months of 2001, working capital decreased $14.1 million from working capital of $4.2 million to a deficit of $9.9 million at March 31, 2001. The decrease was primarily due to an increase in accrued expenses of $6.8 million and the recording of the fair market value of derivatives per SFAS 133 in the first quarter of 2001 which decreased working capital by $3.6 million. The increase in accrued expense was primarily due to an increase in accrued interest expense of $5.4 million and an increase in accrued drilling costs of $2.0 million. The Company's operating activities provided cash flows of $22.7 million during the first three months of 2001. The Company has a $100 million revolving credit facility ("the Revolver") which matures in August 2002. The Revolver bears interest at the prime rate plus two percentage points, payable monthly. At March 31, 2001, the interest rate was 10.0%. On April 19, 2001, the interest rate dropped to 9.5%. Up to $20 million in letters of credit may be issued pursuant to the conditions of the Revolver. At March 31, 2001, the 9 12 Company had $8.75 million of outstanding letters of credit. At March 31, 2001, the outstanding balance under the credit agreement was $50 million with $41 million of borrowing capacity available for general corporate purposes. The Revolver is secured by security interests and mortgages against substantially all of the Company's assets and is subject to periodic borrowing base determinations. The borrowing base is the lesser of $100 million or the sum of (i) 65% of the value of the Company's proved developed producing reserves subject to a mortgage; (ii) 45% of the value of the Company's proved developed non-producing reserves subject to a mortgage; and (iii) 40% of the value of the Company's proved undeveloped reserves subject to a mortgage. The price forecast used for calculation of the future net income from proved reserves is the three-year NYMEX strip for oil and natural gas as of the date of the reserve report. Prices beyond three years are held constant. Prices are adjusted for basis differential, fixed price contracts and financial hedges in place. The present value (using a 10% discount rate) of the Company's future net income at March 31, 2001, under this formula was approximately $268 million for all proved reserves of the Company and $210 million for properties secured by a mortgage. The Revolver is subject to certain financial covenants. These include a senior debt interest coverage ratio ranging from 5.0 to 1 at March 31, 2001, to 3.2 to 1 at June 30, 2002; and a senior debt leverage ratio ranging from 2.3 to 1 at March 31, 2001 to 3.2 to 1 at June 30, 2002. EBITDA, as defined in the Revolver, and consolidated interest expense on senior debt in these ratios are calculated quarterly based on the financial results of the trailing four quarters. In addition, the Company is required to maintain a current ratio (including available borrowing capacity in current assets and excluding current debt and accrued interest from current liabilities) of at least 1.0 to 1 and maintain liquidity of at least $5 million (cash and cash equivalents including available borrowing capacity). As of March 31, 2001, the Company's current ratio including the above adjustments was 2.29 to 1. The Company has satisfied all financial covenants as of March 31, 2001. From time to time the Company may enter into interest rate swaps to hedge the interest rate exposure associated with the credit facility, whereby a portion of the Company's floating rate exposure is exchanged for a fixed interest rate. At March 31, 2000, the Company had swap arrangements, which expired in October 2000, covering $40 million of debt. The Company had no interest rate swaps at March 31, 2001. The Company currently expects to spend approximately $39 million during 2001 on its drilling activities and other capital expenditures. The Company intends to finance its planned capital expenditures through its available cash flow, available revolving credit line and the sale of non strategic assets. At March 31, 2001, the Company had approximately $41 million available under its existing revolving credit line. The level of the Company's future cash flow will depend on a number of factors including the demand for and price levels of oil and gas, the scope and success of its drilling activities and its ability to acquire additional producing properties. To manage its exposure to natural gas price volatility, the Company may partially hedge its physical gas sales prices by selling futures contracts on the NYMEX or by selling NYMEX based commodity derivative contracts which are placed with major financial institutions that the Company believes are minimal credit risks. The contracts may take the form of futures contracts, swaps or options. The Company had pretax losses on its hedging activities of $2.8 million and $155,000 in the first quarters of 2001 and 2000, respectively. At March 31, 2001, the Company had open futures contracts covering 9.7 Tbtu (trillion British thermal units) of 2001 and 2002 natural gas production at a weighted average NYMEX price of $4.63 per Mmbtu (million British thermal units) which represented a net unrealized loss of $1.5 million. 10 13 The Company's financial results and cash flows can be significantly impacted as commodity prices fluctuate widely in response to changing market conditions. Accordingly, the Company may modify its fixed price contract and financial hedging positions by entering into new transactions or terminating existing contracts. The following table reflects the natural gas volumes and the weighted average prices under financial hedges and fixed price contracts (including settled hedges) at May 4, 2001:
FINANCIAL HEDGES FIXED PRICE CONTRACTS ----------------------------------------- --------------------------- NYMEX ESTIMATED ESTIMATED PRICE WELLHEAD WELLHEAD PER PRICE ESTIMATED PRICE QUARTER ENDING BBTU MMBTU PER MCF MMCF PER MCF ------------------------- ----------- ------------ ----------- ------------ ------------ June 30, 2001 1,450 $ 4.52 $ 4.67 1,496 $ 3.87 September 30, 2001 1,950 4.50 4.65 1,185 3.80 December 31, 2001 2,400 4.77 4.99 754 4.28 ------------ ------------- ------------ ------------- ------------ 5,800 $ 4.62 $ 4.79 3,435 $ 3.93 ============ ============= ============ ============= ============ March 31, 2002 2,550 $ 4.95 $ 5.20 760 $ 4.54 June 30, 2002 2,550 4.61 4.76 643 4.29 September 30, 2002 2,550 4.61 4.76 632 4.28 December 31, 2002 2,550 4.63 4.84 575 4.44 ------------ ------------- ------------ ------------- ------------ 10,200 $ 4.70 $ 4.89 2,610 $ 4.40 ============ ============= ============ ============= ============ BBTU - BILLION BRITISH THERMAL UNITS
The quarter ending June 30, 2001 in the above table does not include an unrealized loss of $1.2 million associated with terminated financial swaps on 750 Bbtu of natural gas. FORWARD-LOOKING INFORMATION The forward-looking statements regarding future operating and financial performance contained in this report involve risks and uncertainties that include, but are not limited to, the Company's availability of capital, production and costs of operation, the market demand for, and prices of, oil and natural gas, results of the Company's future drilling, the uncertainties of reserve estimates, environmental risks, availability of financing and other factors detailed in the Company's filings with the Securities and Exchange Commission. Actual results may differ materially from forward-looking statements made in this report. 11 14 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K On February 15, 2001, the Company filed a Current Report on Form 8-K dated February 13, 2001 relating to Regulation FD disclosures. On March 13, 2001, the Company filed a Current Report on Form 8-K dated March 4, 2001 relating to executive changes. 12 15 SIGNATURES -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELDEN & BLAKE CORPORATION Date: MAY 8, 2001 By: /s/ John L. Schwager ---------------------- -------------------------------- John L. Schwager, Director, President and Chief Executive Officer Date: MAY 8, 2001 By /s/ Robert W. Peshek ---------------------- -------------------------------- Robert W. Peshek, Vice President and Chief Financial Officer 13