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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-11899
THE HOUSTON EXPLORATION COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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22-2674487
(IRS Employer
Identification No.) |
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1100 Louisiana, Suite 2000 |
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Houston, Texas
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77002-5215 |
(Address of Principal Executive Offices)
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(Zip Code) |
(713) 830-6800
(Registrants Telephone Number, including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Name of Each |
Title of Each Class |
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Exchange on Which Registered |
Common Stock, $0.01 par value
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New York Stock Exchange |
Series A Junior Participating Preferred Stock, $0.01 par value
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of common stock held by non-affiliates of the registrant was
approximately $1.710 billion, based on the closing sales price of $61.19 per share of the
registrants common stock as reported by on the New York Stock Exchange as of June 30, 2006, the
last business day of the registrants most recently completed second fiscal quarter. As of
February 28, 2007 28,155,996 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement for the Annual Meeting of Stockholders to be held
May 22, 2007 are incorporated by reference into Part III of this Form 10-K. If such Proxy
Statement is not filed within 120 days after December 31, 2006, the Part III information will be
filed as part of an amendment to this Form 10-K not later than the end of such 120-day period,
pursuant to General Instruction G(3).
EXPLANATORY NOTE
The
Houston Exploration Company is filing this Amendment No. 1 on Form 10-K/A (the Amendment No. 1)
to correct the item set forth below in our Annual Report on
Form 10-K for the year ended December 31, 2006 filed with the
Securities and Exchange Commission on February 28, 2007 (the
Original Filing):
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To amend paragraph five of the Report of Independent Registered Public Accounting Firm to correctly
reflect the date of the opinion related to Houston Explorations maintaining, in all material respects,
effective internal control over financial reporting as December 31, 2006. |
This Amendment No. 1 includes the following: Part IV, Item 15. Exhibits, Financial Statements
Schedules, which includes the financial statements and the amended report of our Independent
Registered Public Accounting Firm, the signature pages, and the Index to Exhibits.
Except for the item discussed in this Explanatory Note, no other changes have been made to the
Original Filing. This Amendment No. 1 does not reflect events occurring after the Original Filing
or modify or update those disclosures affected by subsequent events.
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Part IV.
Item 15. Exhibits, Financial Statement Schedules
(a) Documents Filed as a Part of this Report
1. Financial Statements:
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PAGE |
Index to Financial Statements |
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F-1 |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
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F-39 |
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F-42 |
All other schedules are omitted because they are not applicable, not required, or because the
required information is included in the financial statements or related notes.
2. Exhibits:
INDEX TO EXHIBITS
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EXHIBITS |
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DESCRIPTION |
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2.1
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Agreement and Plan of Merger dated as of January 7, 2007 by and among the Company, Forest
Oil Corporation and MJCO Corporation (filed as exhibit 2.1 to our Current Report on Form
8-K dated January 7, 2007 (file No. 001-11899) and incorporated by reference herein). |
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3.1
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Restated Certificate of Incorporation, as amended, including the Certificate of Amendment
thereto dated April 26, 2005 (filed as exhibit 3.1 to our Quarterly Report on Form 10-Q
for the period ended March 31, 2005 (file No. 001-11899) and incorporated by reference
herein). |
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3.2
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Restated Bylaws of The Houston Exploration Company (filed as Exhibit 3.2 to our Annual
Report on Form 10-K for the year ended December 31, 2005 (File No.001-11899) and
incorporated by reference). |
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4.1
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Indenture, dated as of June 10, 2003, between The Houston Exploration Company and the
Bank of New York, as Trustee, with respect to the 7% Senior Subordinated Notes due 2013
(filed as Exhibit 4.2 to our Registration Statement on Form S-4 (Registration No.
333-106836) and incorporated by reference). |
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4.2
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Rights Agreement, dated as of August 12, 2004, between The Houston Exploration Company
and The Bank of New York, as Rights Agent (filed as Exhibit 4.1 to our Current Report on
Form 8-K dated August 13, 2004 (File No. 001-11899) and incorporated by reference). |
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4.3
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First Amendment dated as of May 2, 2005, to the Rights Agreement dated as of August 12,
2004 between The Houston Exploration Company and The Bank of New York, as Rights Agent
(filed as exhibit 4.1 to our Quarterly Report on Form 10-Q for the period ended March 31,
2005 (file No. 001-11899) and incorporated by reference herein). |
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4.4
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Second Amendment to Rights Agreement dated as of January 7, 2007 between The Houston
Exploration Company and The Bank of New York, as Rights Agent (filed as exhibit 4.1 to
our Current Report on Form 8-K dated January 7, 2007 (file No. 001-11899) and
incorporated by reference herein). |
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EXHIBITS |
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DESCRIPTION |
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4.5
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Form of Certificate of Designation of Series A Junior Participating Preferred Stock of
The Houston Exploration Company (filed as Exhibit 4.2 to our Current Report on Form 8-K
dated August 13, 2004 (File No. 001-11899) and incorporated by reference). |
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10.1
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Amended and Restated Credit Agreement dated November 30, 2005 among The Houston
Exploration Company and Wachovia Bank, National Association, as Issuing Bank and
Administrative Agent; The Bank of Nova Scotia and Bank of America as Co-Syndication
Agents; and BNP Paribas and Comerica Bank as Co-Documentation Agents (filed as exhibit
99.1 to our Current Report on Form 8-K dated November 30, 2005 (File No. 001-11899) and
incorporated by reference). |
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10.2
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First Amendment to Amended and Restated Credit Agreement effective May 31, 2006 among The
Houston Exploration Company and Wachovia Bank, National Association, as Issuing Bank and
Administrative Agent; The Bank of Nova Scotia and Bank of America as Co-Syndication
Agents; and BNP Paribas and Comerica Bank as Co-Documentation Agents (filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q for the period ended June 30, 2006 (File No.
001-11899) and incorporated by reference). |
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10.3
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Purchase and Sale Agreement, dated September 3, 2003, by and among Transworld Exploration
and Production, Inc., as Seller, and The Houston Exploration Company, as Buyer (filed as
Exhibit 2.1 to our Current Report on Form 8-K dated October 15, 2003 (file No. 001-11899)
and incorporated by reference). |
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10.4
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Asset Contribution Agreement dated June 2, 2004 between The Houston Exploration Company
and Seneca-Upshur Petroleum, Inc. (filed as Exhibit 99.3 to our Current Report on Form
8-K dated June 30, 2004 (File No. 001-11899) and incorporated by reference). |
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10.5
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Tax Matters Agreement dated as of June 2, 2004 by and among The Houston Exploration
Company, Seneca-Upshur Petroleum, Inc., THEC Holdings Corp., and KeySpan Corporation
(filed as Exhibit 99.4 to our Current Report on Form 8-K dated June 30, 2004 (File No.
001-11899) and incorporated by reference). |
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10.6
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Distribution Agreement dated as of June 2, 2004 by and among The Houston Exploration
Company, Seneca-Upshur Petroleum, Inc., THEC Holdings Corp. and KeySpan Corporation
(filed as Exhibit 99.2 to our Current Report on Form 8-K dated June 30, 2004 (File No.
001-11899) and incorporated by reference). |
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10.7
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Purchase and Sale Agreement, dated September 17, 2004, between The Houston Exploration
Company and Orca Energy, L.P. (filed as Exhibit 2.1 to our Current Report on Form 8-K
dated November 1, 2004 (File No. 001-11899) and incorporated by reference). |
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10.8
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Purchase and Sale Agreement dated October 21, 2005 by and between Kerr-McGee Oil & Gas
Onshore LP D/B/A KMOG Onshore LP and Westport Oil and Gas Company, L.P., as sellers, and
The Houston Exploration Company, as buyer, (filed as exhibit 99.2 to our Current Report
on Form 8-K dated November 30, 2005 (File No. 001-11899) and incorporated by reference). |
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10.9
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Purchase and Sale Agreement dated February 28, 2006 between The Houston Exploration
Company, as seller, and Merit Management Partners I, L.P., Merit Management Partners II,
L.P., Merit Management Partners III, L.P., Merit Energy Partners III, L.P., Merit Energy
Partners D-III, L.P., Merit Energy Partners E-III, L.P. and Merit Energy Partners F-III,
L.P., collectively, as buyer (filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q
for the period ended March 31, 2006 (File No. 001-11899) and incorporated by reference). |
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10.10
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Purchase and Sale Agreement dated April 7, 2006 between The Houston Exploration Company,
as seller, and Merit Management Partners I, L.P., Merit Management Partners II, L.P.,
Merit Management Partners III, L.P., Merit Energy Partners III, L.P., Merit Energy
Partners D-III, L.P., Merit Energy Partners E-III, L.P. and Merit Energy Partners F-III,
L.P., collectively, as buyer (filed as Exhibit 99.1 to our Current Report on Form 8-K
dated June 2, 2006 (File No. 001-11899) and incorporated by reference). |
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EXHIBITS |
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DESCRIPTION |
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10.11(2)
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Deferred Compensation Plan for Non-Employee Directors (filed as Exhibit 10.24 to our
Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-11899) and
incorporated by reference). |
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10.12(2)
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Amendment dated April 26, 2005, but effective as of December 31, 2004, to The Houston
Exploration Company Non-Employee Director Deferred Compensation Plan (filed as Exhibit
10.4 to our Current Report on Form 8-K dated July 31, 2006 (File No. 001-11899) and
incorporated by reference). |
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10.13(2)
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The Houston Exploration Company Post-2004, AJCA Compliant Deferred Compensation Plan for
Non-Employee Directors dated April 26, 2005, effective as of January 1, 2005 (filed as
Exhibit 10.5 to our Current Report on Form 8-K dated July 31, 2006 (File No. 001-11899)
and incorporated by reference). |
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10.14(2)
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Compensation Table for Non-Employee Directors, effective January 1, 2006 (filed as
exhibit 99.2 to our Current Report on Form 8-K dated January 6, 2006. |
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10.15(2)
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Amended and Restated 1996 Stock Option Plan (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 001-11899) and
incorporated by reference). |
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10.16(2)
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1999 Non-Qualified Stock Option Plan dated October 26, 1999 (filed as Exhibit 10.24 to
our Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11899)
and incorporated by reference). |
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10.17(2)
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Amended and Restated 2002 Long-Term Incentive Plan effective May 17, 2002, adopted
October 26, 2003 (filed as Exhibit 10.31 to our Annual Report on Form 10-K for the year
ended December 31, 2003 (file No. 001-11899) and incorporated by reference). |
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10.18(2)
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Amended and Restated 2004 Long Term Incentive Plan (filed as exhibit 99.1 to our Current
Report on Form 8-K dated January 31, 2006 (File No. 001-11899) and incorporated by
reference). |
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10.19(2)
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Supplemental Executive Pension Plan dated May 1, 1996 (filed as exhibit 10.23 to our
Registration Statement on Form S-1/A (Amendment No. 2) (Registration No. 333-4437) and
incorporated by reference). |
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10.20(2)
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The Houston Exploration Company Supplemental Executive Retirement Plan (Amended and
Restated on July 25, 2006) (filed as Exhibit 10.1 to our Current Report on Form 8-K dated
July 31, 2006 (File No. 001-11899) and incorporated by reference). |
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10.21(2)
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First Amendment to The Houston Exploration Company Supplemental Executive Retirement Plan
(filed as exhibit 10.3 to our Current Report on Form 8-K dated January 7, 2007 (file No.
001-11899) and incorporated by reference herein). |
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10.22(2)
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Executive Deferred Compensation Plan dated January 1, 2002 (filed as Exhibit 10.28 to our
Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-11899) and
incorporated by reference). |
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10.23(2)
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Amendment [No. 1] to The Houston Exploration Company Executive Deferred Compensation Plan
(filed as exhibit 99.2 to our Current Report on Form 8-K dated January 31, 2006 (File No.
001-11899) and incorporated by reference). |
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10.24(2)
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Amendment No. 2 dated July 25, 2006, but effective as of December 31, 2004, to The
Houston Exploration Company Executive Deferred Compensation Plan (filed as Exhibit 10.2
to our Current Report on Form 8-K dated July 31, 2006 (File No. 001-11899) and
incorporated by reference). |
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10.25(2)
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The Houston Exploration Company 2005 Executive Deferred Compensation Plan (filed as
Exhibit 10.3 to our Current Report on Form 8-K dated July 31, 2006 (File No. 001-11899)
and incorporated by reference). |
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10.26(2)
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Amended and Restated Employment Agreement dated February 8, 2005 between The Houston
Exploration Company and William G. Hargett (filed as Exhibit 10.1 to our Current Report
on Form 8-K dated February 8, 2005 (File No. 001-11899) and incorporated by reference). |
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EXHIBITS |
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DESCRIPTION |
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10.27(2)
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Amendment No. 1, dated October 24, 2006, to the Amended and Restated Employment Agreement
dated February 8, 2005 between The Houston Exploration Company and William G. Hargett
(filed as Exhibit 10.1 to our Current Report on Form 8-K dated October 27, 2006 (File No.
001-11899) and incorporated by reference). |
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10.38(2)
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Amended and Restated Employment Agreement between The Houston Exploration Company and
Steven L. Mueller dated February 8, 2005 (filed as Exhibit 10.19 to our Annual Report on
Form 10-K for the year ended December 31, 2004 (File No. 001-11899) and incorporated by
reference). |
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10.29(2)
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Amendment No. 1, dated October 24, 2006, to the Amended and Restated Employment Agreement
dated February 8, 2005 between The Houston Exploration Company and Steven L. Mueller
(filed as Exhibit 10.2 to our Current Report on Form 8-K dated October 27, 2006 (File No.
001-11899) and incorporated by reference). |
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10.30(2)
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Amended and Restated Employment Agreement between The Houston Exploration Company and
John H. Karnes dated February 8, 2005 (filed as Exhibit 10.20 to our Annual Report on
Form 10-K for the year ended December 31, 2004 (File No. 001-11899) and incorporated by
reference). |
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10.31(2)
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Separation Agreement and General Release dated December 8, 2005 between The Houston
Exploration Company and John H. Karnes (filed as exhibit 99.1 to our Current Report on
Form 8-K dated December 12, 2005 (File No. 001-11899) and incorporated by reference). |
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10.32(2)
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Amended and Restated Employment Agreement between The Houston Exploration Company and
James F. Westmoreland dated February 8, 2005 (filed as Exhibit 10.21 to our Annual Report
on Form 10-K for the year ended December 31, 2004 (File No. 001-11899) and incorporated
by reference). |
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10.33(2)
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Amendment No. 1, dated October 24, 2006, to the Amended and Restated Employment Agreement
dated February 8, 2005 between The Houston Exploration Company and James F. Westmoreland
(filed as Exhibit 10.7 to our Current Report on Form 8-K dated October 27, 2006 (File No.
001-11899) and incorporated by reference). |
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10.34(2)
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Amended and Restated Employment Agreement between The Houston Exploration Company and
Roger B. Rice dated February 8, 2005 (filed as Exhibit 10.22 to our Annual Report on Form
10-K for the year ended December 31, 2004 (File No. 001-11899) and incorporated by
reference). |
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10.35(2)
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Amendment No. 1, dated October 24, 2006, to the Amended and Restated Employment Agreement
dated February 8, 2005 between The Houston Exploration Company and Roger B. Rice (filed
as Exhibit 10.5 to our Current Report on Form 8-K dated October 27, 2006 (File No.
001-11899) and incorporated by reference). |
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10.36(2)
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Employment Agreement dated February 10, 2005 between The Houston Exploration Company and
Joanne C. Hresko (filed as Exhibit 10.3 to our Current Report on Form 8-K dated February
8, 2005 (File No. 001-11899) and incorporated by reference). |
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10.37(2)
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Amendment No. 1, dated October 24, 2006, to the Employment Agreement dated February 10,
2005, between The Houston Exploration Company and Joanne C. Hresko (filed as Exhibit 10.8
to our Current Report on Form 8-K dated October 27, 2006 (File No. 001-11899) and
incorporated by reference). |
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10.38(2)
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Employment Agreement effective March 10, 2005, between The Houston Exploration Company
and John E. Bergeron, Jr. (filed as exhibit 99.2 to our Current Report on Form 8-K dated
March 10, 2005 (File No. 001-11899) and incorporated by reference). |
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10.39(2)
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Amendment No. 1, dated October 24, 2006, to the Employment Agreement dated March 10,
2005, between The Houston Exploration Company and John E. Bergeron, Jr. (filed as Exhibit
10.9 to our Current Report on Form 8-K dated October 27, 2006 (File No. 001-11899) and
incorporated by reference). |
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EXHIBITS |
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DESCRIPTION |
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10.40(2)
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Employment Agreement effective April 13, 2005, between The Houston Exploration Company
and Jeffrey B. Sherrick (filed as exhibit 99.2 to our Current Report on Form 8-K dated
April 13, 2005 (File No. 001-11899) and incorporated by reference). |
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10.41(2)
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Amendment No. 1, dated October 24, 2006, to the Employment Agreement dated April 13,
2005, between The Houston Exploration Company and Jeffrey B. Sherrick (filed as Exhibit
10.6 to our Current Report on Form 8-K dated October 27, 2006 (File No. 001-11899) and
incorporated by reference). |
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10.42(2)
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Employment Agreement dated January 18, 2006 between The Houston Exploration Company and
Robert T. Ray (filed as exhibit 99.1 to our Current Report on Form 8-K dated January 18,
2006 (File No. 001-11899) and incorporated by reference). |
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10.43(2)
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Amendment No. 1, dated October 24, 2006, to the Employment Agreement dated January 18,
2006, between The Houston Exploration Company and Robert T. Ray (filed as Exhibit 10.3 to
our Current Report on Form 8-K dated October 27, 2006 (File No. 001-11899) and
incorporated by reference). |
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10.44(2)
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Employment Agreement dated March 27, 2006 between The Houston Exploration Company and
Carolyn M. Campbell (filed as Exhibit 99.1 to our Current Report on Form 8-K dated March
27, 2006 (File No. 001-11899) and incorporated by reference). |
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10.45(2)
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Amendment No. 1, dated October 24, 2006, to the Employment Agreement dated March 27,
2006, between The Houston Exploration Company and Carolyn M. Campbell (filed as Exhibit
10.4 to our Current Report on Form 8-K dated October 27, 2006 (File No. 001-11899) and
incorporated by reference). |
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10.46 |
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Form of Amendment No. 2 to [Amended and Restated] Employment Agreement entered into by
and between The Houston Exploration Company and each of William G. Hargett, Steven L.
Mueller, James F. Westmoreland, Roger B. Rice, Joanne C. Hresko, John E. Bergeron Jr.,
Jeffrey B. Sherrick, Robert T. Ray and Carolyn M. Campbell (filed as Exhibit 10.1 to our
Current Report on Form 8-K dated January 7, 2007 (file No. 001-11899) and incorporated by
reference herein). |
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10.47(2)
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Change of Control Plan dated October 26, 1999 (filed as Exhibit 10.25 to our Annual
Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11899) and
incorporated by reference). |
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10.48(2)
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First Amendment to The Houston Exploration Company Change of Control Plan dated May 17,
2002 (filed as Exhibit 10.48 to our Annual Report on Form 10-K for the year ended
December 31, 2006 (File No. 001-11899) and incorporated by reference). |
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10.49(2)
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Second Amendment to The Houston Exploration Company Change of Control Plan (filed as
exhibit 10.4 to our Current Report on Form 8-K dated January 7, 2007 (file No. 001-11899)
and incorporated by reference herein). |
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10.50(2)
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Form of Indemnification Agreement for Directors and Executive Officers (filed as Exhibit
10.8 to our Quarterly Report on Form 10-Q for the period ended June 30, 2006 (File No.
001-11899) and incorporated by reference). |
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10.51(2)
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Form of Non-Qualified Stock Option Agreement (filed as Exhibit 10.9 to our Quarterly
Report on Form 10-Q for the period ended June 30, 2006 (File No. 001-11899) and
incorporated by reference). |
|
|
|
|
|
10.52(2)
|
|
|
|
Form of Director Restricted Stock Award Agreement (filed as Exhibit 10.10 to our
Quarterly Report on Form 10-Q for the period ended June 30, 2006 (File No. 001-11899) and
incorporated by reference). |
|
|
|
|
|
10.53(2)
|
|
|
|
Form of Employee Restricted Stock Award Agreement (filed as Exhibit 10.11 to our
Quarterly Report on Form 10-Q for the period ended June 30, 2006 (File No. 001-11899) and
incorporated by reference). |
|
|
|
|
|
12.1
|
|
|
|
Computation of ratio of earnings to fixed charges (filed as Exhibit 10.48 to our Annual
Report on Form 10-K for the year ended December 31, 2006 (File No. 001-11899) and
incorporated by reference). |
|
|
|
|
|
21.1
|
|
|
|
Subsidiaries of The Houston Exploration Company (filed as Exhibit 10.48 to our Annual
Report on Form 10-K for the year ended December 31, 2006 (File No. 001-11899) and
incorporated by reference). |
-7-
|
|
|
|
|
EXHIBITS |
|
|
|
DESCRIPTION |
|
|
|
|
|
|
23.1
|
|
|
|
Consent of Deloitte & Touche LLP (filed as Exhibit 23.1 to our Annual Report on Form 10-K
for the year ended December 31, 2006 (File No. 001-11899)
and incorporated by reference). |
|
|
|
|
|
23.2
|
|
|
|
Consent of Netherland, Sewell & Associates (filed as Exhibit 23.2 to our Annual Report on
Form 10-K for the year ended December 31, 2006 (File No. 001-11899) and incorporated by
reference). |
|
|
|
|
|
23.3
|
|
|
|
Consent of Miller and Lents (filed as Exhibit 23.3 to our Annual Report on Form 10-K for
the year ended December 31, 2006 (File No. 001-11899) and
incorporated by reference). |
|
|
|
|
|
31.1(1)
|
|
|
|
Certification of William G. Hargett, Chief Executive Officer, as required pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2(1)
|
|
|
|
Certification of Robert T. Ray, Chief Financial Officer, as required pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1(1)
|
|
|
|
Certification of William G. Hargett, Chief Executive Officer, as required pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.2(1)
|
|
|
|
Certification of Robert T. Ray, Chief Financial Officer, as required pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
(1) |
|
Filed herewith. |
|
(2) |
|
Management contract or compensation plan. |
-8-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
THE HOUSTON EXPLORATION COMPANY
|
|
|
By: |
/s/ William G. Hargett
|
|
|
|
William G. Hargett |
|
Date: March 2, 2007 |
|
President and Chief Executive Officer |
|
-9-
Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment No. 1 has been
signed below by the following persons on behalf of the registrant in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ William G. Hargett
William G. Hargett
|
|
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
|
|
March 2, 2007 |
|
|
|
|
|
/s/ Robert T. Ray
Robert T. Ray
|
|
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
|
|
March 2, 2007 |
|
|
|
|
|
/s/ James F. Westmoreland
James F. Westmoreland
|
|
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
|
|
March 2, 2007 |
|
|
|
|
|
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
/s/ *
Harold R. Logan, Jr.
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
|
|
Director
|
|
March 2, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
*James F. Westmoreland
James F. Westmoreland
|
|
* Attorney-in-Fact
|
|
March 2, 2007 |
-10-
Index to Financial Statements
|
|
|
|
|
PAGE |
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
F-39 |
|
|
F-42 |
F-1
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of
The Houston Exploration Company
The Houston Exploration Companys management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of management, including Houston
Explorations principal executive officer and principal financial officer, Houston Exploration
conducted an evaluation of the effectiveness of internal control over financial reporting based on
the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on Houston Explorations evaluation under the framework in Internal Control Integrated
Framework, our principal executive officer and principal financial officer concluded that internal
control over financial reporting was effective as of December 31, 2006. The conclusion of our
principal executive officer and principal financial officer is based on the recognition that there
are inherent limitations in all systems of internal control. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with the polices or procedures may deteriorate. Managements assessment of the effectiveness of
internal control over financial reporting as of December 31, 2006 has been audited by Deloitte &
Touche LLP, an independent registered public accounting firm, as stated in their report which is
included herein.
The
Houston Exploration Company
Houston, Texas
February 28, 2007
|
|
|
/s/ William G. Hargett
|
|
/s/ Robert T. Ray |
|
|
|
William G. Hargett
|
|
Robert T. Ray |
Chairman, President and Chief Executive Officer
|
|
Senior Vice President and Chief Financial Officer |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Houston Exploration Company
Houston, Texas
We have audited the accompanying consolidated balance sheets of The Houston Exploration Company (a
Delaware corporation) and subsidiaries (the Company) as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders equity and comprehensive income
(loss), and cash flows for each of the three years in the period ended December 31, 2006. We also
have audited managements assessment, included in the accompanying Managements Report on Internal
Control Over Financial Reporting, that the Company maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on these financial statements, an opinion on managements assessment, and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Houston Exploration Company and subsidiaries as of
December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, managements assessment
that the Company maintained effective internal control over financial reporting as of December 31,
2006, is fairly stated, in all material respects, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on the criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment on January 1, 2006 and
SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans on
December 31, 2006.
DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2007
F-3
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
53,950 |
|
|
$ |
7,979 |
|
Accounts receivable |
|
|
86,416 |
|
|
|
146,020 |
|
Inventories |
|
|
2,900 |
|
|
|
2,726 |
|
Deferred tax asset |
|
|
10,244 |
|
|
|
145,922 |
|
Prepayments and other |
|
|
8,370 |
|
|
|
19,709 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
161,880 |
|
|
|
322,356 |
|
|
|
|
|
|
|
|
|
|
Natural gas and oil properties, full cost method |
|
|
|
|
|
|
|
|
Unevaluated properties |
|
|
28,317 |
|
|
|
107,146 |
|
Properties subject to amortization |
|
|
3,478,878 |
|
|
|
3,556,755 |
|
Other property and equipment |
|
|
15,101 |
|
|
|
12,971 |
|
|
|
|
|
|
|
|
|
|
|
3,522,296 |
|
|
|
3,676,872 |
|
Less: Accumulated depreciation, depletion and amortization |
|
|
1,930,964 |
|
|
|
1,658,532 |
|
|
|
|
|
|
|
|
|
|
|
1,591,332 |
|
|
|
2,018,340 |
|
|
|
|
|
|
|
|
|
|
Other non-current assets |
|
|
18,514 |
|
|
|
20,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,771,726 |
|
|
$ |
2,361,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
151,482 |
|
|
$ |
177,159 |
|
Derivative financial instruments |
|
|
10,151 |
|
|
|
352,457 |
|
Asset retirement obligation |
|
|
|
|
|
|
7,265 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
161,633 |
|
|
|
536,881 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and notes |
|
|
175,000 |
|
|
|
597,000 |
|
Derivative financial instruments |
|
|
17,247 |
|
|
|
65,201 |
|
Deferred federal income taxes |
|
|
363,322 |
|
|
|
341,302 |
|
Asset retirement obligation |
|
|
72,782 |
|
|
|
112,406 |
|
Other non-current liabilities |
|
|
17,138 |
|
|
|
15,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
807,122 |
|
|
|
1,668,486 |
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (see Note 9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value, 5,000,000 shares authorized and no shares issued |
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value, 100,000,000 shares authorized and 28,098,172 and
28,980,128 shares issued and outstanding at December 31, 2006 and 2005,
respectively |
|
|
281 |
|
|
|
289 |
|
Additional paid-in capital |
|
|
253,922 |
|
|
|
297,218 |
|
Retained earnings |
|
|
731,150 |
|
|
|
663,367 |
|
Accumulated other comprehensive (loss) |
|
|
(20,749 |
) |
|
|
(267,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
964,604 |
|
|
|
693,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
1,771,726 |
|
|
$ |
2,361,624 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas and oil revenues |
|
$ |
529,586 |
|
|
$ |
620,271 |
|
|
$ |
649,087 |
|
Other |
|
|
2,011 |
|
|
|
1,272 |
|
|
|
1,352 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
531,597 |
|
|
|
621,543 |
|
|
|
650,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating |
|
|
63,959 |
|
|
|
67,796 |
|
|
|
55,925 |
|
Severance tax |
|
|
18,102 |
|
|
|
18,121 |
|
|
|
11,933 |
|
Transportation expense |
|
|
10,636 |
|
|
|
11,883 |
|
|
|
11,819 |
|
Asset retirement accretion expense |
|
|
3,373 |
|
|
|
5,278 |
|
|
|
4,902 |
|
Depreciation, depletion and amortization |
|
|
253,666 |
|
|
|
295,351 |
|
|
|
265,148 |
|
Writedown in carrying value of natural gas and oil properties |
|
|
19,000 |
|
|
|
|
|
|
|
|
|
General and administrative, net of amounts capitalized |
|
|
36,013 |
|
|
|
38,378 |
|
|
|
32,899 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
404,749 |
|
|
|
436,807 |
|
|
|
382,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
126,848 |
|
|
|
184,736 |
|
|
|
267,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense |
|
|
(13,495 |
) |
|
|
142 |
|
|
|
(1,058 |
) |
Interest expense, net of amounts capitalized |
|
|
25,206 |
|
|
|
16,535 |
|
|
|
9,455 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
115,137 |
|
|
|
168,059 |
|
|
|
259,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
47,354 |
|
|
|
62,890 |
|
|
|
96,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
67,783 |
|
|
$ |
105,169 |
|
|
$ |
162,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
2.37 |
|
|
$ |
3.66 |
|
|
$ |
5.50 |
|
Net income per share diluted |
|
$ |
2.36 |
|
|
$ |
3.62 |
|
|
$ |
5.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
28,543 |
|
|
|
28,707 |
|
|
|
29,616 |
|
Weighted average shares outstanding diluted |
|
|
28,693 |
|
|
|
29,037 |
|
|
|
29,932 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Shares |
|
|
$ Value |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2004 |
|
|
31,437,581 |
|
|
$ |
315 |
|
|
$ |
365,973 |
|
|
$ |
395,374 |
|
|
$ |
(26,128 |
) |
|
$ |
735,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued stock options |
|
|
873,626 |
|
|
|
9 |
|
|
|
25,586 |
|
|
|
|
|
|
|
|
|
|
|
25,595 |
|
Common shares issued restricted stock |
|
|
49,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued public offering |
|
|
6,820,000 |
|
|
|
68 |
|
|
|
310,659 |
|
|
|
|
|
|
|
|
|
|
|
310,727 |
|
Common shares repurchased from KeySpan
and retired |
|
|
(10,800,000 |
) |
|
|
(108 |
) |
|
|
(441,471 |
) |
|
|
|
|
|
|
|
|
|
|
(441,579 |
) |
Amortization of restricted stock |
|
|
|
|
|
|
|
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
3,670 |
|
|
|
|
|
|
|
|
|
|
|
3,670 |
|
Tax benefit non-qualified stock options |
|
|
|
|
|
|
|
|
|
|
4,922 |
|
|
|
|
|
|
|
|
|
|
|
4,922 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,824 |
|
|
|
|
|
|
|
162,824 |
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative settlements
reclassified to income, net of tax
of $24,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,054 |
|
|
|
44,054 |
|
Unrealized loss change in fair
value of derivatives, net of tax of
$42,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,953 |
) |
|
|
(63,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004 |
|
|
28,380,207 |
|
|
$ |
284 |
|
|
$ |
270,465 |
|
|
$ |
558,198 |
|
|
$ |
(46,027 |
) |
|
$ |
782,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued stock options |
|
|
510,316 |
|
|
|
5 |
|
|
|
16,285 |
|
|
|
|
|
|
|
|
|
|
|
16,290 |
|
Common shares issued restricted stock |
|
|
89,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock |
|
|
|
|
|
|
|
|
|
|
2,882 |
|
|
|
|
|
|
|
|
|
|
|
2,882 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
4,229 |
|
|
|
|
|
|
|
|
|
|
|
4,229 |
|
Tax adjustment to 2004 benefit from
non-qualified stock options |
|
|
|
|
|
|
|
|
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
(180 |
) |
Tax benefit non-qualified stock options |
|
|
|
|
|
|
|
|
|
|
3,537 |
|
|
|
|
|
|
|
|
|
|
|
3,537 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,169 |
|
|
|
|
|
|
|
105,169 |
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative settlements
reclassified to income, net of tax
of $93,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,342 |
|
|
|
171,342 |
|
Unrealized loss change in fair
value of derivatives, net of tax
of $214,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(393,051 |
) |
|
|
(393,051 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
28,980,128 |
|
|
$ |
289 |
|
|
$ |
297,218 |
|
|
$ |
663,367 |
|
|
$ |
(267,736 |
) |
|
$ |
693,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued stock options |
|
|
214,868 |
|
|
|
3 |
|
|
|
7,497 |
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
Common shares issued restricted
stock and units |
|
|
79,676 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares repurchased and retired |
|
|
(1,176,500 |
) |
|
|
(12 |
) |
|
|
(61,626 |
) |
|
|
|
|
|
|
|
|
|
|
(61,638 |
) |
Amortization of restricted stock |
|
|
|
|
|
|
|
|
|
|
3,939 |
|
|
|
|
|
|
|
|
|
|
|
3,939 |
|
Stock compensation expense |
|
|
|
|
|
|
|
|
|
|
5,783 |
|
|
|
|
|
|
|
|
|
|
|
5,783 |
|
Tax benefit non-qualified stock options |
|
|
|
|
|
|
|
|
|
|
1,112 |
|
|
|
|
|
|
|
|
|
|
|
1,112 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,783 |
|
|
|
|
|
|
|
67,783 |
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative settlements
reclassified to income, net of tax
of $24,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,708 |
|
|
|
44,708 |
|
Unrealized gain change in fair
value of derivatives, net of tax
of $116,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,528 |
|
|
|
204,528 |
|
Unfunded future post retirement
benefit obligation, net of tax of
$1,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,249 |
) |
|
|
(2,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006 |
|
|
28,098,172 |
|
|
$ |
281 |
|
|
$ |
253,922 |
|
|
$ |
731,150 |
|
|
$ |
(20,749 |
) |
|
$ |
964,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
67,783 |
|
|
$ |
105,169 |
|
|
$ |
162,824 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
|
|
22,702 |
|
|
|
57,555 |
|
|
|
50,500 |
|
Depreciation, depletion and amortization |
|
|
253,666 |
|
|
|
295,351 |
|
|
|
265,148 |
|
Writedown in carrying value of natural gas and oil properties |
|
|
19,000 |
|
|
|
|
|
|
|
|
|
Asset retirement accretion expense |
|
|
3,373 |
|
|
|
5,278 |
|
|
|
4,902 |
|
Stock compensation expense |
|
|
9,722 |
|
|
|
7,111 |
|
|
|
4,796 |
|
Tax benefit (loss) non-qualified stock options |
|
|
|
|
|
|
(180 |
) |
|
|
4,922 |
|
Unrealized (gain) loss on derivative instruments |
|
|
(4,757 |
) |
|
|
(694 |
) |
|
|
1,950 |
|
Amortization of premiums paid on derivative contracts |
|
|
|
|
|
|
|
|
|
|
5,287 |
|
Debt extinguishment expense |
|
|
572 |
|
|
|
|
|
|
|
211 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
59,604 |
|
|
|
(42,951 |
) |
|
|
(8,387 |
) |
Inventories |
|
|
(174 |
) |
|
|
(1,750 |
) |
|
|
95 |
|
Prepayments and other |
|
|
11,339 |
|
|
|
(11,714 |
) |
|
|
(3,289 |
) |
Other assets |
|
|
2,041 |
|
|
|
(43 |
) |
|
|
(6,218 |
) |
Accounts payable and accrued expenses |
|
|
(25,108 |
) |
|
|
42,403 |
|
|
|
39,693 |
|
Other non-current liabilities |
|
|
(3,574 |
) |
|
|
4,974 |
|
|
|
7,276 |
|
ARO liability for assets abandoned |
|
|
|
|
|
|
|
|
|
|
(2,569 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
416,189 |
|
|
|
460,509 |
|
|
|
527,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in property and equipment |
|
|
(614,228 |
) |
|
|
(728,882 |
) |
|
|
(523,205 |
) |
Cash designated for investment |
|
|
(323,675 |
) |
|
|
|
|
|
|
|
|
Withdrawal of cash designated for investment |
|
|
323,675 |
|
|
|
|
|
|
|
|
|
Dispositions and other |
|
|
719,235 |
|
|
|
1,879 |
|
|
|
13,283 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
105,007 |
|
|
|
(727,003 |
) |
|
|
(509,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings |
|
|
525,000 |
|
|
|
831,000 |
|
|
|
420,000 |
|
Repayments of long-term borrowings |
|
|
(947,000 |
) |
|
|
(589,000 |
) |
|
|
(367,000 |
) |
Debt issuance costs |
|
|
(199 |
) |
|
|
(2,394 |
) |
|
|
(1,555 |
) |
Proceeds from issuance of common stock from exercise of stock options |
|
|
7,500 |
|
|
|
16,290 |
|
|
|
25,596 |
|
Tax benefit non-qualified stock options |
|
|
1,112 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
|
310,727 |
|
Repurchase of common stock |
|
|
(61,638 |
) |
|
|
|
|
|
|
(388,979 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(475,225 |
) |
|
|
255,896 |
|
|
|
(1,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
45,971 |
|
|
|
(10,598 |
) |
|
|
16,008 |
|
Cash and cash equivalents, beginning of year |
|
|
7,979 |
|
|
|
18,577 |
|
|
|
2,569 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
53,950 |
|
|
$ |
7,979 |
|
|
$ |
18,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in investments in property and equipment accrued, not paid |
|
$ |
(927 |
) |
|
$ |
(15,785 |
) |
|
$ |
4,705 |
|
Divesture and exchange of Appalachian Basin assets |
|
|
|
|
|
|
|
|
|
|
60,000 |
|
Deferred tax benefit exchange of Appalachian Basin assets |
|
|
|
|
|
|
|
|
|
|
7,400 |
|
Cash paid during period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
28,015 |
|
|
$ |
23,858 |
|
|
$ |
16,385 |
|
Federal and state income taxes, net payments and refunds |
|
|
16,635 |
|
|
|
19,297 |
|
|
|
41,854 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Summary of Organization and Significant Accounting Policies (Reserve quantities, wells,
acreage and working interests included below are unaudited.)
Our Business
We are an independent natural gas and oil producer engaged in the exploration, development,
exploitation and acquisition of natural gas and oil reserves in North America. We were founded in
December 1985 as a Delaware corporation and completed our initial public offering in September
1996. As of December 31, 2006, our operations were concentrated in four producing regions within
the United States: South Texas; the Arkoma Basin of Arkansas and Oklahoma; East Texas; and the
Uinta and DJ Basins of the Rocky Mountains.
Our total net proved reserves as of December 31, 2006 were 699 billion cubic feet equivalent, or
Bcfe. All of our reserves are estimated on an annual basis by independent petroleum engineers.
Approximately 67% of our proved reserves at December 31, 2006, were classified as proved developed.
During 2006, we produced 88.2 Bcfe. Production volumes during 2006 were significantly impacted by
the sale of substantially all of our Gulf of Mexico assets during the first and second quarters of
2006 and continued curtailments of certain of these offshore fields prior to their sale primarily
as a result of infrastructure damage to third party pipelines and processing facilities caused by
Hurricanes Katrina and Rita that hit the Louisiana and Texas coasts in August and September 2005.
Recent Events
In November 2005, we announced a strategic plan to restructure the company by pursuing the sale of
our Gulf of Mexico assets, shifting our operating focus primarily onshore and repurchasing up to
$200 million of our outstanding common stock. On March 31, 2006, we completed the sale of the
Texas portion of our Gulf of Mexico assets and on June 1, 2006, we completed the sale of
substantially all of our Louisiana Gulf of Mexico assets. The divestiture of these assets had a
significant impact on our operating results for the year ended December 31, 2006 and on the
comparability of those results to prior years.
On June 12, 2006, we received an unsolicited proposal from JANA Partners LLC, a hedge fund, to
acquire our company for $62 per share, subject to due diligence and negotiation of required
documentation. According to its public filings, JANA Partners beneficially owned approximately
12.3% of our outstanding common stock as of the date of the proposal. On June 26, 2006, we
announced our Board of Directors determination that the unsolicited proposal made by JANA Partners
was not in the best interest of our shareholders and that Lehman Brothers Inc. had been engaged to
assist us in exploring a broad range of strategic alternatives to further enhance shareholder
value. In connection with our review of strategic alternatives, Lehman assisted our Board in
soliciting third party indications of interest for proposed business combination transactions with
Houston Exploration. During the solicitation and review period, forward natural gas prices
declined significantly.
On January 7, 2007, we announced the conclusion to the strategic alternatives review process with
our entry into an agreement and plan of merger with Forest Oil Corporation. Under the merger
agreement, Forest will acquire all of the outstanding shares of Houston Exploration for a
combination of cash and Forest common stock.
Under the terms of the merger agreement, our shareholders will receive total consideration equal to
0.84 shares of Forest common stock and $26.25 in cash for each outstanding share of Houston
Exploration common stock, or an aggregate of an estimated 23.6 million shares of Forest common
stock and cash of $740 million. Based on the closing price of Forest common stock on January 5,
2007, the last trading day prior to announcement of the transaction, this represents $52.47 per
share of merger consideration to be received by Houston Exploration shareholders. The actual value
of the merger consideration to be received by our shareholders will depend on the average closing
price of Forest common stock for the ten trading days ending three calendar days prior to the
effective date of the merger, and the amount of cash and stock consideration will be determined by
shareholder elections, subject to proration and an equalization formula. It is anticipated that the
stock portion of the consideration will be tax free to Houston Exploration shareholders.
The Boards of Directors of Houston Exploration and Forest each unanimously approved the proposed
merger. The merger is subject customary terms and conditions, including the approval of both
Houston Exploration and Forest shareholders, and is expected to be completed in the second quarter
of 2007. Upon completion of the transaction, it is anticipated that Forest shareholders would own
approximately 73% of the combined company, and Houston Exploration shareholders would own
approximately 27%.
Concurrently with the execution of the merger agreement, funds affiliated with JANA Partners
entered into a voting agreement with Forest pursuant to which the JANA funds agreed, during the
term of the voting agreement, to vote their shares of our common stock in favor of the merger with
Forest and the adoption of the merger agreement and against any transaction that would impede or
delay the merger with Forest, and granted to Forest a proxy to vote their shares at any
F-8
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stockholder meeting convened to consider such matters. As of January 7, 2007, the JANA funds
beneficially owned approximately 14.7% of our total issued and outstanding shares of our common
stock. The voting agreement will terminate in certain instances, including an adverse
recommendation change (as defined in the merger agreement) by our Board of Directors or any
material amendment to the merger agreement that is adverse to us or our stockholders.
On February 8, 2007, Forest filed a registration statement on Form S-4 with the SEC, including a
preliminary joint proxy statement / prospectus with respect to the merger. Also on February 8,
2007, the companies received notice of early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvement Act with respect to the proposed transaction.
Principles of Consolidation
Our consolidated financial statements for the periods ended December 31, 2006, 2005 and 2004
include the accounts of Houston Exploration and the accounts of our wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated.
Our consolidated financial statements for the period ended December 31, 2004 include our accounts
and the accounts of our 100% owned subsidiary, Seneca-Upshur Petroleum, Inc., until June 2, 2004,
when we conveyed all of the shares of Seneca-Upshur to KeySpan in connection with an asset exchange
transaction. At that time, Seneca-Upshur was our only subsidiary. Seneca-Upshur is a natural gas
exploration and production company located in West Virginia.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principals
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Our most significant financial estimates are
based on remaining proved natural gas and oil reserves. Estimates of proved reserves are key
components of our depletion rate for natural gas and oil properties and our full cost ceiling test
limitation. In addition, estimates are used in computing taxes, preparing accruals of operating
costs and production revenues, asset retirement obligations, fair value and effectiveness of
derivative instruments and fair value of stock options and the related compensation expense. See
Note 12 Supplemental Information on Natural Gas and Oil Exploration, Development and Production
Activities (Unaudited) for more information relating to estimates of proved reserves. Because there
are numerous uncertainties inherent in the estimation process, actual results could differ
materially from these estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year
presentation.
Business Segment Information
The Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) 131, Disclosures about Segments of an Enterprise and Related Information establishes
standards for reporting information about operating segments. Operating segments are defined as
components of an enterprise that engage in activities from which it may earn revenues and incur
expenses. Separate financial information is available and this information is regularly evaluated
by the chief decision maker for the purpose of allocating resources and assessing performance.
Segment reporting is not applicable for us as each of our operating areas has similar economic
characteristics and each meets the criteria for aggregation as defined in SFAS 131. All of our
operations involve the exploration, development and production of natural gas and oil, and all of
our operations are located in the United States. We have a single, company-wide management team
that administers all properties as a whole rather than as discrete operating segments. We track
only
basic operational data by area, and do not maintain comprehensive financial statement information
by area. We measure financial performance as a single enterprise and not on an area-by-area basis.
Throughout the year, we freely allocate capital resources on a project-by-project basis across our
entire asset base to maximize profitability without regard to individual areas or segments.
F-9
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition and Gas Imbalances
We use the entitlements method of accounting for the recognition of natural gas and oil revenues.
Under this method of accounting, income is recorded based on our net revenue interest in production
or nominated deliveries. We recognize and record sales when production is delivered to a specified
pipeline point, at which time title and risk of loss are transferred to the purchaser. Our
arrangements for the sale of natural gas and oil are evidenced by written contracts with
determinable market prices based on published indices. We continually review the creditworthiness
of our purchasers in order to reasonably assure the timely collection of our receivables.
Historically, we have experienced no material losses on receivables.
We incur production gas volume imbalances in the ordinary course of business. Net deliveries in
excess of entitled amounts are recorded as liabilities, and net under-deliveries are reflected as
assets. Imbalances are reduced either by subsequent recoupment of over- and under-deliveries or by
cash settlement, as required by applicable contracts. Production imbalances are marked-to-market at
the end of each month at the lowest of (i) the price in effect at the time of production; (ii) the
current market price; or (iii) the contract price, if a contract exists.
At December 31, 2006, we had production imbalances representing assets of $2.8 million and
liabilities of $2.4 million. At December 31, 2005, we had production imbalances representing
assets of $4.9 million and liabilities of $7.2 million, which included imbalances related to our
offshore properties that were sold during the first six months of 2006. Our production imbalances
receivable at December 31, 2006 relate primarily to certain South Texas and Arkoma Basin properties
and our payables relate primarily to certain Arkoma Basin properties. A significant portion of the
Arkoma Basin imbalances were assumed in connection with our initial acquisition of these
properties, and due to the inherent long life and comparatively low production rate of the wells,
the imbalances will likely require a long period of time to resolve. Production imbalances are
included in the line items other non-current assets and other non-current liabilities on our
balance sheet.
Cash and Cash Equivalents
We consider all highly liquid, short-term investments with original maturities of three months or
less to be cash and cash equivalents.
Cash Designated for Investment
In connection with the sale of our Gulf of Mexico assets (see Note 10 Acquisitions and
Dispositions), we initially deposited in escrow $323.7 million of the $721.6 million in total net
cash proceeds received from the sale of these assets with qualified intermediaries for potential
reinvestment in like-kind exchange transactions under Section 1031 of the Internal Revenue Code.
This cash was designated for the potential future acquisition of natural gas and oil assets and was
invested in interest-bearing accounts with creditworthy financial institutions. During the third
quarter of 2006, designated cash of $2.0 million was used to fund qualified investments in natural
gas and oil assets, and $7.6 million, representing the remaining proceeds from the sale of the
Texas offshore assets, was released from escrow, as the 180-day time period for reinvestment under
Section 1031 had expired. In November 2006, the remaining designated cash balance of $314.1
million relating to the sale of the Louisiana offshore assets was released from escrow, as the
180-day time period for reinvestment under Section 1031 had expired. Upon release of cash from
escrow, we used $190 million to repay all outstanding borrowings under our bank credit facility and
used the balance, or $124 million, for working capital purposes, which included an estimated
payment for federal income taxes for the fourth quarter of 2006 of $34 million.
Interest income earned during 2006 on the amounts deposited with qualified intermediaries was
approximately $8.7 million. Interest income earned was not designated for potential reinvestment
in replacement properties and is included in the line item other (income) expense on our
statement of operations for the year ended December 31, 2006.
Financial Instruments
The estimated fair value of financial instruments is the amount at which the instrument could be
exchanged currently between willing parties. On the balance sheet, we report cash and cash
equivalents, accounts receivable and accounts payable at cost or carrying value, which approximates
fair value due to the short maturity of these instruments. See Note 2 Long-term Debt and Notes
for fair value of our debt. Our derivative financial instruments are reported on the balance sheet
at fair market value. See Note 7 Derivative Instruments.
F-10
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted net income per share assumes the
conversion of all potentially dilutive securities and is calculated by dividing net income by the
sum of the weighted average number of shares of common stock outstanding plus all potentially
dilutive securities. Diluted net loss per share is computed using the weighted average number of
common shares and excludes potentially dilutive common shares outstanding, as their effect is
antidilutive. For us, potentially dilutive common shares consist of employee stock options,
restricted stock and restricted units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands, except per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
67,783 |
|
|
$ |
105,169 |
|
|
$ |
162,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
28,543 |
|
|
|
28,707 |
|
|
|
29,616 |
|
Add potentially dilutive securities: restricted stock/units and options |
|
|
150 |
|
|
|
330 |
|
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding and dilutive securities |
|
|
28,693 |
|
|
|
29,037 |
|
|
|
29,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
2.37 |
|
|
$ |
3.66 |
|
|
$ |
5.50 |
|
Net income per share diluted |
|
$ |
2.36 |
|
|
$ |
3.62 |
|
|
$ |
5.44 |
|
For the years ended December 31, 2006, 2005 and 2004, the calculation of shares outstanding for
diluted net income per share does not include the effect of outstanding stock options to purchase
665,720, 459,215 and 755,922 shares, respectively, because the exercise price of these shares was
greater than the average market price for the year, which would have an antidulitive effect on net
income per share.
Comprehensive Income
Comprehensive income (loss) includes net income and certain items recorded directly to
stockholders equity and classified as other comprehensive income (loss). The table below
summarizes comprehensive income and provides the components of the change in accumulated other
comprehensive income for the twelve-month periods ended December 31, 2006, 2005 and 2004,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Net income |
|
$ |
67,783 |
|
|
$ |
105,169 |
|
|
$ |
162,824 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments settled and reclassified, net of tax |
|
|
44,708 |
|
|
|
171,342 |
|
|
|
44,054 |
|
Unrealized change in fair value of open derivative
contracts, net of tax |
|
|
204,528 |
|
|
|
(393,051 |
) |
|
|
(63,953 |
) |
Future post retirement benefit obligation, net of tax |
|
|
(2,249 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
246,987 |
|
|
|
(221,709 |
) |
|
|
(19,899 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
314,770 |
|
|
$ |
(116,540 |
) |
|
$ |
142,925 |
|
|
|
|
|
|
|
|
|
|
|
Natural Gas and Oil Properties
Full Cost Accounting. We use the full cost method to account for our natural gas and oil
properties. Under full cost accounting, all costs directly associated with the acquisition,
exploration and development of natural gas and oil reserves are capitalized into a full cost
pool. These capitalized costs include costs of all unevaluated properties, internal general and
administrative costs directly related to our acquisition, exploration and development activities
and capitalized interest. We amortize these costs using a unit-of-production method. Under this
method, we compute the provision for depreciation, depletion and amortization at the end of each
quarter by multiplying our total production for such quarter by a depletion
rate. The depletion rate is determined by dividing our total unamortized cost base by our net
equivalent proved reserves at the beginning of the quarter. Our total unamortized cost base
consists of the following:
F-11
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
our full cost pool (including assets associated with retirement obligations); plus |
|
|
|
|
estimates for future development costs (excluding liabilities associated with retirement obligations); less |
|
|
|
|
unevaluated properties and their related costs; less |
|
|
|
|
estimates for salvage. |
Costs associated with unevaluated properties are excluded from our total unamortized cost base
until we have made a determination as to the existence of proved reserves. We review our
unevaluated properties at the end of each quarter to determine whether the costs incurred should be
reclassified to the full cost pool and, thereby, subject to amortization. Sales and abandonment of
natural gas and oil properties being amortized currently are accounted for as adjustments to the
full cost pool, with no gain or loss recognized, unless the adjustments would significantly alter
the relationship between capitalized costs and proved natural gas and oil reserves. A significant
alteration would not ordinarily be expected to occur upon the sale of reserves involving less than
25% of the reserve quantities of a cost center. However, we evaluate each asset sale using both
qualitative indicators and quantitative measures to determine whether gain or loss recognition is
appropriate.
Under full cost accounting, total capitalized costs (net of accumulated depreciation, depletion and
amortization) less related deferred taxes may not exceed an amount equal to the present value of
future net revenues from proved reserves, discounted at 10% per annum, plus the lower of cost or
fair value of unevaluated properties, plus estimated salvage value, less income tax effects (the
ceiling limitation). We perform a test of this ceiling limitation at the end of each quarter. If
our total capitalized costs (net of accumulated depreciation, depletion and amortization) less
related deferred taxes are greater than the ceiling limitation, a writedown or impairment of the
full cost pool is required. A writedown of the carrying value of the full cost pool is a non-cash
charge that reduces earnings and impacts stockholders equity in the period of occurrence and
typically results in lower depreciation, depletion and amortization expense in future periods.
Once incurred, a writedown is not reversible at a later date.
The ceiling test is calculated using natural gas and oil prices in effect as of the balance sheet
date, as adjusted for basis or location differentials as of the balance sheet date and held
constant over the life of the reserves (net wellhead prices). If applicable, these net wellhead
prices would be further adjusted to include the effects of any fixed price arrangements for the
sale of natural gas and oil. Historically, we have used derivative financial instruments to hedge
against the volatility of natural gas prices. If our derivative contracts qualify and if they are
designated as cash flow hedges under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, then in accordance with SEC guidelines, we include estimated future cash flows from
our hedging program in our ceiling test calculation. Because our derivative contracts ceased to
qualify as cash flow hedges during the first quarter of 2006, our ceiling test calculation at
December 31, 2006 did not include the future cash flows from our hedging program. In addition,
subsequent to the adoption of SFAS 143, Accounting for Asset Retirement Obligations, the future
cash outflows associated with settling asset retirement obligations are excluded from the
computation of the discounted present value of future net revenues for the purposes of the ceiling
test calculation.
In calculating our ceiling test at December 31, 2006, we estimated that, using an average net
wellhead price of $4.94 per Mcf, the carrying value of our full cost pool exceeded the ceiling
limitation by approximately $582.8 million ($376.5 million net of tax). However, since December
31, 2006 and prior to filing this Annual Report, the market price for natural gas increased such
that, using an average net wellhead price of $6.63 per Mcf on February 20, 2007, the carrying value
of our full cost pool exceed the ceiling limitation by approximately $19.0 million ($12.3 million
net of tax). Accordingly, we recorded a writedown to our natural gas and oil properties and a
non-cash charge and reduction to earnings in the fourth quarter of 2006 of $12.3 million, net of
tax. In calculating our ceiling test at December 31, 2005 and 2004, we estimated, using wellhead
prices of $8.21 per Mcfe and $5.75 per Mcfe, respectively, that we had a full cost ceiling
cushion at each of the respective balance sheet dates, whereby the carrying value of our full
cost pool was less than the ceiling limitation by $329.9 million (net of tax) for 2005 and $399.3
million (net of tax) for 2004. No writedown was required.
Unevaluated Properties. The costs associated with unevaluated properties are not initially
included in the amortization base and relate to unproved leasehold acreage, wells and production
facilities in progress and wells pending determination, together with capitalized interest costs
for these projects. Unevaluated leasehold costs are transferred to the amortization
base with the costs of drilling the related well once a determination has been made or upon
expiration of a lease. Costs of seismic data are allocated to various unproved leaseholds and
transferred to the amortization base with the associated leasehold costs on a specific project
basis. Costs associated with wells in progress and completed wells that have yet to be evaluated
are transferred to the amortization base once a determination is made whether or not proved
reserves can be
F-12
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assigned to the property. Costs of dry holes are transferred to the amortization base immediately
upon determination that the well is unsuccessful.
We assess all items classified as unevaluated property on a quarterly basis for possible impairment
or reduction in value. We assess our properties on an individual basis or as a group if properties
are individually insignificant. Our assessment includes consideration of the following factors,
among others: intent to drill; remaining lease term; geological and geophysical evaluations;
drilling results and activity; the assignment of proved reserves; and the economic viability of
development if proved reserves are assigned. During any period in which these factors indicate an
impairment, the cumulative drilling costs incurred to date for such property and all or a portion
of the associated leasehold costs are transferred to the full cost pool and are then subject to
amortization.
Of the $28.3 million of unevaluated property costs at December 31, 2006 that have been excluded
from the amortization base, $11.1 million were incurred during 2006, $12.0 million were incurred in
2005, $4.7 million were incurred in 2004 and $0.5 million were incurred in years prior to 2004. Of
the $107.1 million of unevaluated property costs at December 31, 2005 that have been excluded from
the amortization base, $37.9 million were incurred during 2005, $18.3 million were incurred in
2004, $30.5 million were incurred in 2003 and $20.4 million were incurred prior to 2003. We
estimate that substantially all of our costs classified as unproved as of the balance sheet date
will be evaluated and transferred within a four-year period.
Asset Retirement Obligations
For us, asset retirement obligations (ARO) represent the future abandonment costs of tangible
assets such as platforms, wells, service assets, pipelines, and other facilities. SFAS 143,
Accounting for Asset Retirement Obligations, requires that the fair value of a liability for an
assets retirement obligation be recorded in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the corresponding cost be capitalized as part of the
carrying amount of the related long-lived asset. The liability is accreted to its then present
value each period, and the capitalized cost is depreciated over the useful life of the related
asset. If the liability is settled for an amount other than the recorded amount, an adjustment is
made to the full cost pool, with no gain or loss recognized, unless the adjustment would
significantly alter the relationship between capitalized costs and proved reserves. We carry ARO
assets on the balance sheet as part of our full cost pool, and include these ARO assets in our
amortization base for purposes of calculating depreciation, depletion and amortization expense.
For purposes of calculating the ceiling test, the future cash outflows associated with settling the
ARO liability are excluded from the computation of the discounted present value of estimated future
net revenues.
The following table describes changes in our asset retirement liability during each of the years
ended December 31, 2006 and 2005. The ARO liability in the table below includes amounts classified
as both current and long-term at December 31st.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
ARO liability at January 1, |
|
$ |
119,671 |
|
|
$ |
91,746 |
|
Accretion expense |
|
|
3,373 |
|
|
|
5,278 |
|
Liabilities incurred from drilling |
|
|
7,656 |
|
|
|
7,520 |
|
Liabilities incurred assets acquired |
|
|
1,312 |
|
|
|
5,783 |
|
Liabilities settled assets sold |
|
|
(88,375 |
) |
|
|
(32 |
) |
Liabilities settled assets abandoned |
|
|
|
|
|
|
(971 |
) |
Changes in estimates |
|
|
29,145 |
|
|
|
10,347 |
|
|
|
|
|
|
|
|
ARO liability at December 31, |
|
$ |
72,782 |
|
|
$ |
119,671 |
|
|
|
|
|
|
|
|
Other Property and Equipment
Other property and equipment includes the costs of various gathering facilities that are
depreciated using the unit-of-production basis utilizing estimated proved reserves attributable to
the facilities. Also included in other property and equipment are costs of office furniture,
fixtures and computer equipment and other office equipment which are recorded at cost and
depreciated using the straight-line method over estimated useful lives ranging from two to five
years.
F-13
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist primarily of tubular goods used in our operations and are stated at the lower
of the specific cost of each inventory item or market value.
Income Taxes
We determine deferred taxes based on the estimated future tax effect of differences between the
financial statement and tax basis of assets and liabilities given the provisions of enacted tax
laws as of the balance sheet dates. These differences relate primarily to
|
|
|
intangible drilling and development costs associated with natural gas and oil
properties, which are capitalized and amortized for financial reporting purposes and
expensed as incurred for tax reporting purposes; and |
|
|
|
|
provisions for depreciation and amortization for financial reporting purposes
that differ from those used for income tax reporting purposes. |
General and Administrative Costs and Expenses
Under the full cost method of accounting, we capitalize only those internal general and
administrative costs that are directly associated with our acquisition, exploration and development
activities, such as salaries, benefits and incentive compensation for geological and geophysical
employees and other specifically identifiable non-payroll costs. These capitalized general and
administrative costs do not include costs related to production operations, general corporate
overhead or other activities not directly attributable to our acquisition, exploration and
development efforts. We capitalized general and administrative costs directly related to our
acquisition, exploration and development activities, during 2006, 2005 and 2004 of $20.2 million,
$16.9 million and $14.8 million, respectively.
We receive reimbursement for administrative and overhead expenses incurred on behalf of other
working interest owners on properties we operate. These reimbursements totaling $2.2 million, $2.1
million and $2.2 million for the years ended December 31, 2006, 2005 and 2004, respectively, were
allocated as reductions to general and administrative expenses incurred. Generally, we do not
receive any excess of reimbursements or fees over the costs incurred; however, if we did, we would
credit the excess to the full cost pool to be recognized through lower cost amortization as
production occurs.
Capitalization of Interest
We capitalize interest only on investments in unevaluated properties and projects for which
exploration or development activity is in progress. Interest is capitalized during the period of
time that these properties and projects are classified as unevaluated properties and not subject to
depreciation, depletion and amortization. See Note 1 Summary of Organization and Significant
Accounting Policies Natural Gas and Oil Properties Unevaluated Properties for a discussion of
unevaluated properties and our assessment process. For the years ended December 31, 2006, 2005 and
2004, we capitalized interest costs of $4.4 million, $8.8 million and $8.4 million, respectively.
Concentration of Credit Risk
Substantially all of our accounts receivable result from natural gas and oil sales or joint
interest billings to third parties in the oil and gas industry. This concentration of customers and
joint interest owners may impact our overall credit risk in that these entities may be similarly
affected by changes in economic and other conditions. Historically, we have not experienced credit
losses on these receivables. Based on the current demand for natural gas and oil, we do not expect
that termination of sales to any of our current purchasers would have a material adverse effect on
our ability to find replacement purchasers and to sell our production at favorable market prices.
Further, our derivative instruments also expose us to credit risk in the event of nonperformance by
counterparties. Generally, these contracts are with major investment grade financial institutions
and other substantive counterparties. We believe that our credit risk related to the natural gas
derivative contracts is no greater than the risk associated with the primary contracts and that the
elimination of price risk through our hedging activities reduces volatility in our reported results
of operations, financial position and cash flows from period to period and lowers our overall
business risk; however, as a result of these same hedging activities, we may be exposed to greater
credit risk in the future.
F-14
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments and Hedging Activities
We account for derivative instruments utilizing SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. To achieve more predictable cash flows and to reduce our
exposure to downward price fluctuations, we have historically utilized derivative instruments to
hedge future sales prices on a significant portion of our natural gas production. Our derivative
instruments are not held for trading purposes. Our hedging policy allows us to implement a wide
variety of hedging strategies, including swaps, collars and options. We generally execute
derivative contracts with significant, creditworthy financial institutions. Although our hedging
program is intended to protect a portion of our cash flows from downward price movements, certain
hedging strategies, specifically the use of swaps and collars, may also limit our ability to
realize the full benefit of future price increases, as in recent years. In addition, because our
derivative instruments are typically indexed to the New York Mercantile Exchange (NYMEX) price,
as opposed to the index price where the gas is actually sold, our hedging strategy may not fully
protect our cash flows when there are significant price differentials between the NYMEX price and
index price at the point of sale.
Historically, all of our derivative contracts qualified for hedge accounting at inception of the
contract and were designated as cash flow hedges. Under hedge accounting, derivative contracts
designated as cash flow hedges are recorded on the balance sheet as either an asset or liability at
fair market value, and changes in fair market value (representing unrealized gains or losses) are
deferred in accumulated other comprehensive income. Gains and losses are reclassified from
accumulated other comprehensive income to the income statement as a component of natural gas and
oil revenues in the period when sale of the related production occurs. The portion of the
derivative instrument that is ineffective as a hedge, if any, is recorded directly to the income
statement and is included as a component of natural gas and oil revenues. For us, ineffectiveness
typically results from changes at the end of the current period in the price differentials between
the index price of the derivative contract, which typically is a NYMEX price, and the index price
for the point of sale for the cash flow that is being hedged.
Under SFAS 133, we are required to assess the effectiveness of all our derivative contracts at
inception and at least every three months. If our derivative contracts cease to be effective as
cash flow hedges, they would no longer qualify for hedge accounting and mark-to-market accounting
would then be utilized. Gains or losses deferred in accumulated other comprehensive income are
fixed at the time they cease to qualify for hedge accounting and remain deferred in accumulated
other comprehensive income until the related production occurs, at which time these gains or losses
are reclassified to income. Subsequent changes in the fair market value of the derivative
contracts (representing unrealized gains or losses) are recognized in income as a component of
natural gas and oil revenues.
During the fourth quarter of 2005, the portion of our hedged production allocated to the Houston
Ship Channel index failed to qualify for hedge accounting due to a loss of correlation with the
NYMEX price caused primarily by the impact of Hurricanes Katrina and Rita. During the first
quarter of 2006, the portion of our hedged production allocated to the Arkoma index failed to
qualify for hedge accounting due to a loss of correlation with the NYMEX price caused in part by
the residual effects of the hurricanes, as well as an increase in the natural gas supply in the
mid-continent region primarily associated with mild winter and pipeline expansions in the region.
Finally, in February 2006 in connection with our entry into a definitive purchase and sale
agreement to sell the Texas portion of our Gulf of Mexico assets (see Note 10 Acquisitions and
Dispositions Sale of Texas Gulf of Mexico Assets), the remaining portion of our open derivative
contracts ceased to qualify for hedge accounting. As a result, subsequent to February 2006,
mark-to-market accounting applies to all of our open derivative contracts, and changes in the fair
market value of these open contracts are recognized in income as either a gain or loss and included
as a component of natural gas and oil revenues.
At December 31, 2006, an unrealized loss of $18.5 million, net of tax, remains deferred in
accumulated other comprehensive income. This loss represents the fixed value of our remaining open
derivative contracts deferred in accumulated other comprehensive income at the time they ceased to
qualify for hedge accounting. All of these deferred losses will be reclassified and recognized in
future earnings at the time when sale of the related natural gas production
occurs. Over the next 12-month period, we expect to reclassify from accumulated other
comprehensive income to earnings a net loss of $11.1 million, net of tax, leaving $7.4 million to
be recognized thereafter. At December 31, 2006, our open derivative contracts extended through each
of the twelve months of 2007 and 2008. See Note 7 Derivatives Instruments for additional
disclosures.
We enter into a substantial portion of our derivative contracts with counterparties who are
participant banks in our bank credit facility. Under our arrangements with these banks, we
generally have no margin obligation so long as the counterparty remains in our bank group or is
otherwise secured at an equal rate with our bank group. As to other counterparties, with one
exception, we have no margin obligation so long as we satisfy certain credit rating thresholds with
F-15
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prescribed rating agencies. In one instance we have a margin exposure threshold, above which we
must provide the counterparty margin to secure our hedge obligations. At December 31, 2006 and
2005, we did not have any letters of credit issued to secure performance for our open derivative
contracts.
Accounting for Stock Options
On January 1, 2003, we adopted the fair value expense recognition provisions of SFAS 123,
Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for StockBased
Compensation Transition and Disclosure using the prospective method as defined by SFAS 148.
Accordingly, we recognized compensation expense for all stock options granted subsequent to January
1, 2003. On January 1, 2006, we adopted SFAS 123(R), Share-Based Payment using the modified
prospective method as defined by SFAS 123 (R). Accordingly, we now recognize compensation expense
for all stock options, including the unvested portion of all grants made prior to our initial
adoption of SFAS 123 on January 1, 2003. Prior period amounts have not been restated. During
2006, we recognized additional stock compensation expense for grants made prior to our initial
adoption of SFAS 123, not vested as of January 1, 2006, of $1.4 million ($0.9 million net of tax).
Based on current estimates, we expect to recognize additional expense of $0.7 million ($0.4 million
net of tax) related to these option grants during 2007. See Note 4 Employee Benefit and Stock
Compensation Plans Stock Compensation Expense for additional disclosure relating to our stock
plans and related stock compensation expense.
Accounting for Postretirement Benefits
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans. SFAS 158 amends SFAS 87, Employers Accounting for Pensions,
SFAS 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, SFAS 106, Employers Accounting for Postretirement Benefits Other
Than Pensions, and SFAS 132 (revised 2003), Employers Disclosures about Pensions and Other
Postretirement Benefits. On December 31, 2006, we adopted the recognition and disclosure
provisions of SFAS 158. SFAS No. 158 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or liability on its balance
sheet and to recognize changes in the funded status in the year in which the changes occur through
comprehensive income. In addition, SFAS 158 requires employers to measure the funded status of a
plan as of the date of its year-end balance sheet, which for us is December 31st and to
provide additional disclosures. The effect of adopting SFAS 158 has been included in our
accompanying consolidated financial statements.
The table below summarizes the effect of adopting SFAS 158 on our consolidated balance sheet as of
December 31, 2006 and the recognition of (i) our total unfunded benefit obligation of $5.1 million
at December 31, 2006 as a liability; and (ii) prior service costs and net actuarial losses of $3.5
million ($2.2 million net of tax) as a component of accumulated other comprehensive income. See
Note 4 Employee Benefit and Stock Compensation Plans Supplemental Executive Retirement Plan
for additional disclosures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before |
|
|
Adjustment |
|
|
After |
|
|
|
Adopting |
|
|
to adopt |
|
|
Adopting |
|
|
|
SFAS 158 |
|
|
SFAS 158 |
|
|
SFAS 158 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets current tax benefit |
|
$ |
|
|
|
$ |
36 |
|
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
1,596 |
|
|
|
(1,496 |
) |
|
|
100 |
|
Other non-current liabilities |
|
|
|
|
|
|
5,016 |
|
|
|
5,016 |
|
Deferred tax liability (benefit) |
|
|
|
|
|
|
(1,235 |
) |
|
|
(1,235 |
) |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,596 |
|
|
|
2,285 |
|
|
|
3,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
(2,249 |
) |
|
|
(2,249 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
|
|
|
$ |
(2,249 |
) |
|
$ |
(2,249 |
) |
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value and requires enhanced disclosures regarding
fair value measurements. SFAS 157 does not add any new fair value measurements, but it does change
current practice and is intended to increase consistency
F-16
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and comparability in such measurement. The provisions of SFAS 157 are effective for financial
statements issued for fiscal years beginning after November 15, 2007. Any amounts recognized upon
adoption as a cumulative effect adjustment will be recorded to the opening balance of retained
earnings in the year of adoption. We are currently evaluating the impact of adopting SFAS 157 on
our financial statements and assessing early adoption which is permitted and would occur as of the
first quarter of fiscal 2007, or in our case, January 1, 2007.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement 109 (FIN 48), which clarifies the accounting for
uncertainty in tax positions taken or expected to be taken in a tax return, including issues
relating to financial statement recognition and measurement. FIN 48 provides that the tax effects
from an uncertain tax position can be recognized in the financial statements only if the position
is more-likely-than-not to be sustained if the position were to be challenged by a taxing
authority. The assessment of the tax position is based solely on the technical merits of the
position, without regard to the likelihood that the tax position may be challenged. If an uncertain
tax position meets the more-likely-than-not threshold, the largest amount of tax benefit that is
more than 50 percent likely to be recognized upon ultimate settlement with the taxing authority, is
recorded. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded as an adjustment to opening
retained earnings. Consistent with the requirements of FIN 48, we adopted FIN 48 on January 1,
2007. We are currently evaluating the impact of adopting FIN 48 and do not expect the
interpretation will have a material impact on our results of operations or financial position.
NOTE 2 Long-Term Debt and Notes
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior Debt: |
|
|
|
|
|
|
|
|
Revolving bank credit facility, due November 30, 2010 |
|
$ |
|
|
|
$ |
422,000 |
|
Subordinated Debt: |
|
|
|
|
|
|
|
|
7% senior subordinated notes, due June 15, 2013 |
|
|
175,000 |
|
|
|
175,000 |
|
|
|
|
|
|
|
|
Total long-term debt and notes |
|
$ |
175,000 |
|
|
$ |
597,000 |
|
|
|
|
|
|
|
|
The carrying amount of borrowings outstanding under the revolving bank credit facility approximates
fair value as the interest rates are tied to current market rates. At December 31, 2006, the
quoted market value of our $175 million of 7% senior subordinated notes was 98.5% of the $175
million carrying value or $172.4 million. At December 31, 2005, the quoted market value of our
$175 million of 7% senior subordinated notes was 95.4% of the $175 million carrying value or $167
million. At December 31, 2006, principal payments due over the next five-year period and
thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
|
(in thousands) |
|
Revolving bank credit facility |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
7% senior Subordinated Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total maturities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
We maintain a revolving credit facility with a syndicate of lenders led by Wachovia Bank, National
Association, as issuing bank and administrative agent, The Bank of Nova Scotia and Bank of America
as co-syndication agents and BNP Paribas and Comerica Bank as co-documentation agents. The
facility provides us with a commitment of $750 million, which may be increased at our request and
with prior approval from the required lenders to a maximum of $850 million. Amounts available for
borrowing under the credit facility are limited to a borrowing base that is redetermined
semi-annually on April 1st and October 1st. Up to $60 million of our
borrowing base is available for the issuance of letters of credit. As of December 31, 2006, our
borrowing base was $500 million. We expect our current $500 million borrowing base to remain in
effect until the next scheduled semi-annual redetermination on April 1, 2007. Outstanding
borrowings under the revolving credit facility are secured by substantially all of our natural gas
and oil assets as well as certain other assets and rank senior in right of payment to our $175
million of 7% senior subordinated notes. The facility matures on November 30, 2010. At December
31, 2006, we had no outstanding borrowings under the credit facility and $0.3 million in
outstanding letter of credit obligations. Although we had no outstanding indebtedness under our
bank credit facility as of December 31,
F-17
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2006 or as of the date of this Annual Report, consummation of the pending merger will require the
refinancing or repayment of any outstanding indebtedness thereunder.
Interest is payable on borrowings under our revolving credit facility as follows:
|
|
|
on base rate loans, at a fluctuating rate, or base rate, equal to the sum of (a)
the greater of the Federal funds rate plus 0.5% or Wachovias prime rate plus (b) a variable
margin between 0.00% and 0.50%, depending on the amount of borrowings outstanding under the
credit facility, or |
|
|
|
|
on fixed rate loans, a fixed rate equal to the sum of (a) a quoted LIBOR rate
divided by one minus the average maximum rate during the interest period set for certain
reserves of member banks of the Federal Reserve System in
Dallas, Texas, plus (b) a variable margin between 1.00% and 1.75%, depending on the amount of
borrowings outstanding under the credit facility. |
Interest is payable on base-rate loans on the last day of each calendar quarter. Interest on
fixed-rate loans is generally payable at maturity or at least every 90 days if the term of the loan
exceeds three months. In addition to interest, we must pay a quarterly commitment fee of between
0.30% and 0.50% per annum on the unused portion of the borrowing base.
Our revolving credit facility contains customary financial and other covenants that place
restrictions and limits on, among other things, the incurrence of debt, guarantees, liens, leases
and certain investments. The credit facility also restricts and limits our ability to pay cash
dividends, purchase or redeem our stock, and sell or encumber our assets. Financial covenants
require us to, among other things:
|
|
|
maintain a ratio of earnings before interest, taxes, depreciation, depletion and
amortization (EBITDA) to cash interest payments of at least 3.00 to 1.00; |
|
|
|
|
maintain a ratio of total debt to EBITDA of not more than 3.50 to 1.00; and |
|
|
|
|
hedge no more than 85% of our projected production during any calendar year. |
At December 31, 2006 and 2005, we were in compliance with all covenants.
Senior Subordinated Notes
On June 10, 2003, we issued $175 million of 7% senior subordinated notes due June 15, 2013. The
notes bear interest at a rate of 7% per annum with interest payable semi-annually on June 15 and
December 15. We may redeem the notes at our option, in whole or in part, at any time on or after
June 15, 2008, at a price equal to 100% of the principal amount plus accrued and unpaid interest,
if any, plus a specified premium that decreases yearly from 3.5% in 2008 to 0% in 2011 and
thereafter. The notes are general unsecured obligations and rank subordinate in right of payment
to all of our existing and future senior debt, including the revolving bank credit facility, and
will rank senior or equal in right of payment to all of our existing and future subordinated
indebtedness.
The indenture governing the notes contains covenants that, among other things, restrict or limit:
|
|
|
incurrence of additional indebtedness and issuance of preferred stock; |
|
|
|
|
repayment of certain other indebtedness; |
|
|
|
|
payment of dividends or certain other distributions; |
|
|
|
|
investments and repurchases of equity; |
|
|
|
|
use of the proceeds of assets sales; |
|
|
|
|
transactions with affiliates; |
|
|
|
|
creation, incurrence or assumption of liens; |
|
|
|
|
merger or consolidation and sales or other dispositions of all or substantially all of our assets; |
|
|
|
|
entering into agreements that restrict the ability of our subsidiary to make certain distributions or payments; or |
|
|
|
|
guarantees by our subsidiary of certain indebtedness.
|
F-18
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, upon the occurrence of a change of control (as defined in the indenture and including
the pending merger with Forest), the obligor or successor obligor on the notes will be required to
offer to purchase the notes at a purchase price equal to 101% of the aggregate principal amount,
plus accrued and unpaid interest and liquidated damages, if any.
NOTE 3 Stockholders Equity
Stock Repurchase Program
On November 4, 2005, and in conjunction with the divestiture of all of our Gulf of Mexico assets,
our Board of Directors approved discretionary repurchases from time to time over twelve months of
up to $200 million in company stock. In May 2006, we initiated our share repurchases, and during
May and June 2006, we repurchased a total of 1,176,500 shares, or approximately 4% of our
outstanding common stock, in the open market at a weighted average price of $52.39 per share for a
total cost of approximately $61.6 million. All repurchases were paid for in cash and funded with
cash on hand or borrowings under our revolving credit facility. All repurchased shares were
retired.
Stockholder Rights Plan
In August 2004, we adopted a stockholder rights plan designed to assure that our stockholders
receive fair and equal treatment in the event of an unsolicited attempt to takeover our company and
to protect against abusive or coercive takeover tactics that are not in the best interest of our
company or its stockholders. On May 2, 2005, the Board of Directors approved an amendment to the
rights agreement to increase the acquisition threshold of an acquiring party from 10% to 15%. The
rights under the plan expire on August 12, 2014, unless redeemed earlier by our Board of Directors.
The Board of Directors can redeem the rights at a price of $.01 per right at any time before the
rights become exercisable, and thereafter only in limited circumstances. On January 7, 2007, in
connection with the merger agreement with Forest, we amended the rights agreement to render the
rights agreement inapplicable to (i) the approval, execution, delivery, adoption and performance of
the merger agreement with Forest and the voting agreement among Forest and certain affiliates of
JANA Partners LLC, (ii) the consummation of the pending merger or the other transactions
contemplated by the merger agreement and (iii) the announcement of the merger, the merger agreement
and the voting agreement. See Note 11 Subsequent Events Pending Merger with Forest Oil
Corporation.
Increase in Number of Shares Outstanding
In April 2005, our Board of Directors received shareholder approval to increase the number of
shares we are authorized to issue to up to 105,000,000 shares of stock, including up to 100,000,000
shares of common stock and up to 5,000,000 shares of preferred stock.
KeySpans Divesture of Our Common Stock
Through a series of three separate transactions, the first in February 2003 and the last in
November 2004, KeySpan completely divested of its investment in the common stock of our company.
The three transactions are as follows:
Issuance of 3,000,000 Shares to the Public and Concurrent Repurchase of 3,000,000 Shares from
KeySpan. In connection with our initial public offering in September 1996, we entered into a
registration rights agreement with KeySpan pursuant to which we were obligated, at KeySpans
election, to facilitate KeySpans sale of its shares of our stock by registering the shares under
the Securities Act of 1933 and assisting in KeySpans selling efforts. During February of 2003,
KeySpan notified us of its desire to sell 3,000,000 shares of their Houston Exploration stock. To
accomplish the transaction, we sold 3,000,000 newly issued shares of our stock in a public offering
under our shelf registration statement for net proceeds of $26.40 per share, or an aggregate $79.2
million, and simultaneously bought a like number of KeySpans shares of our stock for the same
price per share. We cancelled the 3,000,000 shares acquired from KeySpan immediately following the
repurchase. KeySpan reimbursed us for all costs and expenses, and the transaction had no impact on
our capitalization. The transaction was evidenced in a stock purchase agreement, dated February
26, 2003. As a result of the transactions, KeySpans interest in our outstanding shares decreased
from 66% to 55%.
KeySpan Exchange and Offering. On June 2, 2004, we completed an asset exchange transaction with
KeySpan pursuant to which we redeemed and cancelled 10,800,000 shares of our common stock owned by
KeySpan in exchange for all the stock of Seneca-Upshur Petroleum, Inc., our wholly-owned
subsidiary, to which we contributed all of our Appalachian Basin assets, valued at $60 million, and
$389 million in cash, for a total exchange value of $449 million. This transaction is referred to
as the KeySpan Exchange. The KeySpan Exchange was intended to qualify as a tax-free exchange
under Section 355(a) of the Internal Revenue Code.
F-19
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To fund the cash portion of the exchange, on June 2, 2004, we sold 6,200,000 shares of our common
stock in a registered public offering at $48.00 per share, (the Offering), and contributed to
Seneca-Upshur substantially all of the net proceeds from the Offering (approximately $282 million),
together with an additional $107 million of proceeds from bank borrowings. We then conveyed to
KeySpan all of the shares of Seneca-Upshur in exchange for 10,800,000 shares of our common stock
owned by KeySpan.
On June 23, 2004, the underwriters of our Offering exercised a portion of their over-allotment
option and we sold an additional 620,000 shares of common stock at $48.00 per share for net
proceeds of $28.6 million. The proceeds from the over-allotment were used to reduce bank
borrowings.
Our redemption and cancellation of the 10,800,000 shares received from KeySpan and our issuance of
6,820,000 new shares resulted in a net 3,980,000 decrease in the outstanding shares of our common
stock, and thereby reduced KeySpans ownership from approximately 54% to 24%. As a result of the
KeySpan Exchange and Offering, our bank borrowings increased by a net $79 million and we incurred
approximately $5.1 million in compensation and other expenses related to special bonuses awarded to
executives and key employees who assisted in structuring and consummating the transactions. As a
result of the reduction in ownership, KeySpan agreed to reduce its representation on our Board of
Directors from five to two directors. Our Chief Executive Officer, William G. Hargett, was elected
Chairman of the Board, replacing Robert B. Catell, Chairman and Chief Executive Officer of KeySpan,
who remains on the Board.
KeySpan Secondary Offering. On November 24, 2004, KeySpan completed a secondary public offering of
its remaining 6,580,392 shares of our common stock at $56.25 per share. All shares were offered by
KeySpan under our shelf registration statement filed with the Securities and Exchange Commission on
March 16, 2004. We did not receive any proceeds from the sale of these shares in the offering.
Subsequent to the offering, KeySpan no longer held any common stock of our company.
NOTE 4 Employee Benefit and Stock Compensation Plans
401(k) Plan
We maintain a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue
Code for our employees. All employees are eligible to participate in the plan upon reaching 21
years of age and completing one month of service. Participants may elect to have us contribute on
their behalf up to 12.5% of their total compensation (subject to limitations imposed under the
Internal Revenue Code) on a before tax basis. We make a matching contribution of $1.00 for each
$1.00 of employee deferral, subject to limitations imposed by the 401(k) plan and the Internal
Revenue Code. The amounts contributed under the 401(k) plan are held in a trust and invested at
the direction of each participant among various investment funds. An employees salary deferral
contributions to the 401(k) plan are 100% vested. Our matching contributions vest at the rate of
20% per year of service. Participants are entitled to distribution of their vested account balances
upon termination of employment. We made contributions to the 401(k) plan of $1.6 million, $1.4
million and $1.2 million, respectively, for the years ended December 31, 2006, 2005 and 2004. On
January 7, 2007 and in connection with our entry into the merger agreement with Forest (see Note
11 Subsequent Events Pending Merger with Forest Oil Corporation), the 401(k) plan was amended
to provide for the full vesting of all plan account balances at the effective time of the pending
merger with respect to plan participants who are employed by Houston Exploration immediately prior
to the effective time of the merger.
Deferred Compensation Plan
We maintain a deferred compensation plan for the benefit of our employees. We have two such plans
which are substantially identical, except for differences attributable to the American Jobs
Creation Act of 2004, covering two separate time periods. On July 25, 2006, we amended the 2002
deferred compensation plan to prohibit deferrals or contributions to the plan after December 31,
2004 and to transfer to the 2005 deferred compensation plan all amounts not vested as of December
31, 2004, effectively grandfathering within the 2002 plan all participant deferrals and company
matching contributions that were vested as of December 31, 2004, as well as the earnings and losses
on those amounts. On July 25, 2006, we also adopted the 2005 deferred compensation plan, which
covers all participant deferrals and Company matching contributions from and after January 1, 2005,
as well as any contributions made prior to such date that were not vested as of December 31, 2004,
and the earnings or losses on such amounts.
Each deferred compensation plan is a non-qualified plan and is intended to supplement our 401(k)
plan by allowing highly compensated employees to save on a tax deferred basis a portion of their
eligible compensation subject to limitations imposed by the plan. Under the terms of the plan,
employees who have made the maximum allowable contribution to their
F-20
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) accounts for any year may elect to defer an additional portion of their compensation into
the deferred compensation plan. We match 100% of each employees deferral up to an aggregate
contribution of 12.5% under both the 401(k) plan and the deferred compensation plan. During 2006,
2005 and 2004, we made matching contributions totaling $1.5 million, $1.2 million and $0.7 million,
respectively, to the deferred compensation plan. Employer contributions vest 20% per year and
become fully vested after a five-year period. We make contributions to a grantor trust to fund
plan benefits, but the assets of the trust are subject to the claims of our general creditors.
Assets of the grantor trust are invested, at the direction of the employee, in various investment
funds. Income on trust assets is treated as our income. Participants are entitled to a benefit
attributable to their deferrals and the vested portion of our matching contributions at
predetermined future dates or upon termination of their employment.
At December 31, 2006 and 2005, the fair market value of the assets held in the trust was $9.7
million and $8.5 million, respectively. These balances are carried on our balance sheet as a
non-current asset together with a corresponding non-current liability for the same amount and are
located in the line items Other Non-Current Assets and Other Non-Current Liabilities. Vesting
under the deferred compensation plan follows vesting under our 401(k) plan; therefore, all plan
account balances will become fully vested at the effective time of the merger with Forest (see Note
11 Subsequent Events Pending Merger with Forest Oil Corporation) with respect to plan
participants who are employed by Houston Exploration immediately prior to the effective time of the
merger.
Deferred Compensation Plan for Non-Employee Directors
We maintain a deferred compensation plan for non-employee, non-affiliated directors. We have two
such plans which are substantially identical, except for differences attributable to the American
Jobs Creation Act of 2004, covering two separate time periods. On April 26, 2005, we amended the
1997 director deferred compensation plan to prohibit deferrals under the plan after December 31,
2004, effectively grandfathering within the 1997 director plan all participant deferrals and
company matching contributions that were vested as of December 31, 2004, as well as the earnings
and losses on those amounts. On April 26, 2005, we also adopted the post-2004 director deferred
compensation plan, which covers all participant deferrals from and after January 1, 2005 and the
earnings or losses on such amounts.
Each director deferred compensation plan is a non-tax qualified plan designed to allow members of
our Board of Directors who are not employees to defer retainer and/or meetings fees on a pre-tax
basis, to be credited with interest or deemed invested in phantom stock rights that are tied to the
market price of our common stock on the date services are performed. The term phantom stock
rights refers to units of value that track the performance of our companys common stock. These
units are not convertible to stock and do not possess any voting rights. Phantom stock rights are
exchanged for a cash distribution upon retirement from our Board of Directors. Deferred fees under
the plans totaled $0.9 million at December 31, 2006 and 2005.
Employee Annual Incentive Compensation Plan
We maintain an annual incentive compensation plan that provides an annual incentive bonus to all
full-time employees if certain performance goals are met during the year. The plan is administered
by our Chief Executive Officer on behalf of our Board of Directors and the Compensation Committee.
Annual objectives and incentive opportunity levels are established and approved by the Compensation
Committee. Incentive awards are earned based on our actual performance in relation to
pre-established objectives and on an assessment of individual contribution during the year. We
incurred incentive compensation costs under this plan of approximately $4.6 million, $5.0 million
and $6.2 million in 2006, 2005 and 2004.
Retention Bonus Plan
In July 2005, we adopted a retention bonus plan designed to retain key non-executive employees,
primarily involved in the operations of our business. Under the terms of the plan, participants
were awarded a bonus equal to one years base salary, with 50% payable in cash and 50% payable in
restricted stock of the company. Participants earn their bonus over a 36 month period, with the
first installment of cash and stock delivered January 26, 2007, or 18 months after implementing the
plan, and the final installment is due to participants employed with us on July 26, 2008. The
number of shares of restricted stock to be issued was determined by dividing 50% of the employees
base salary by the closing price of our shares on July 26, 2005 which was equal to $58.88. At
December 31, 2006 and 2005, an aggregate of 41,882 and 52,501 restricted units, respectively, were
outstanding under the plan. For the years ended December 31, 2006 and 2005, we incurred total
costs of approximately $2,8 million and $1.3 million, respectively in compensation expense under
the plan. Benefits under the plan
are forfeited if a participants employment with our company is terminated before the payment date.
On January 26, 2007,
F-21
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the first payment under this plan was made. We issued 12,295 shares of common stock at $52.35 per
share, or $0.6 million, in exchange for the vested restricted stock units under this plan and made
cash payments totaling $1.2 million.
Immediately prior to the effective time of the merger with Forest, each restricted stock unit
outstanding under the retention bonus plan will be fully vested. Shares of our common stock will
be issued in exchange for the restricted stock unit, and these shares will be treated at the
effective time of the merger the same as, and will have the same rights and be subject to the same
conditions as, other shares of our common stock. Participants in this plan that continue to remain
employed with Forest after completion of the merger will receive the second portion of their cash
payment on July 26, 2008.
Supplemental Executive Retirement Plans
Effective January 1, 2006, we adopted a new Supplemental Executive Retirement Plan (SERP) to
provide retirement benefits to certain management level or other highly compensated employees. The
SERP is an unfunded, non-tax qualified defined benefit pension plan. Initial participation in the
SERP is currently limited to all our executive officers. Participants in the SERP will be entitled
to a monthly retirement benefit payable for life. The annual amount of this retirement benefit is
equal to 2.5% times final average compensation times years of service with the company (not to
exceed 20 years), reduced by an annuity (offset) based on a hypothetical account that is credited
with 6% of the participants annual base salary and bonus paid each year and investment returns as
defined in the Plan. Participants are fully vested in their benefits after five years of plan
participation or age 65, whichever is earlier. If a vested participant retires prior to age 65,
then the monthly retirement benefit as described above (before reduction for the offset) will be
reduced by 5% for each year that retirement precedes age 65. In the event a participant is
terminated for cause before becoming vested in his or her benefits, all benefits under the SERP
will be forfeited. In general, benefits will be paid when the participant retires from the company
or beginning at age 65. However, in the event of a change of control (as defined in the plan and
including the pending merger with Forest), the benefit will be paid as a lump-sum if a
participants employment is terminated by us without cause or the participant resigns for good
reason within two years following a change of control. All benefits become fully vested upon a
change of control whether or not a participants employment is terminated.
On January 7, 2007 and in connection with our entry into the merger agreement with Forest, the SERP
was amended to eliminate provisions relating to the appointment of an independent plan
administrator. Assuming the termination of employment of each of our executive officers as of June
30, 2007 following the merger with Forest, the total lump sum that would be payable under the SERP
is estimated at approximately $3.2 million. Pursuant to the terms of the merger agreement, Forest
will assume this payment obligation under our SERP as of the effective time of the merger.
The assumptions and disclosures included herewith relating to our postretirement benefit plan do
not include the effect of the pending merger with Forest, as the merger agreement was entered into
subsequent to December 31, 2006. We use a December 31st measurement date for our
benefit obligations. The weighted average assumptions used to determine our benefit obligations at
December 31, 2006 were (i) a discount rate of 5.75%, and (ii) a rate of 5.00% for increases in
compensation. Our SERP was adopted effective January 1, 2006, and activity during 2006 was as
follows:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Change in Benefit Obligation: |
|
|
|
|
Benefit obligation at January 1, 2006 |
|
$ |
4,013 |
|
Service cost |
|
|
572 |
|
Interest cost |
|
|
249 |
|
Actuarial (gain) loss |
|
|
382 |
|
Benefits paid |
|
|
(100 |
) |
|
|
|
|
Benefit obligation at December 31, 2006 |
|
$ |
5,116 |
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
Fair value of plan assets at January 1, 2006 |
|
$ |
|
|
Actual return on plan assets |
|
|
|
|
Employer contributions |
|
|
100 |
|
Benefits paid |
|
|
(100 |
) |
|
|
|
|
Fair value of plan assets at December 31, 2006 |
|
$ |
|
|
|
|
|
|
F-22
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Reconciliation of Funded Status: |
|
|
|
|
|
|
|
|
|
Funded (unfunded) status of plan at December 31, 2006 |
|
$ |
(5,116 |
) |
Unrecognized actuarial (gain) loss |
|
|
|
|
Unrecognized prior service cost |
|
|
|
|
Unrecognized transition cost |
|
|
|
|
|
|
|
|
Accrued asset (liability) recognized at December 31, 2006 |
|
$ |
(5,116 |
) |
|
|
|
|
|
Accumulated Benefit Obligation at December 31, 2006: |
|
$ |
3,709 |
|
|
|
|
|
The following table provides certain information related to our unfunded SERP which has an
accumulated benefit obligation in excess of plan assets at December 31, 2006:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
5,116 |
|
Accumulated benefit obligation |
|
|
3,709 |
|
Fair value of plan assets |
|
|
|
|
The weighted average assumptions used to determine our net periodic benefit cost for the year ended
December 31, 2006 were (i) a discount rate of 5.50%; and (ii) a rate of 4.00% for increases in
compensation. The components of net periodic benefit cost at December 31, 2006 were as follows:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Net Periodic Benefit Cost: |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
572 |
|
Interest cost |
|
|
250 |
|
Amortization of prior service cost |
|
|
316 |
|
Recognized net actuarial (gain) loss |
|
|
8 |
|
|
|
|
|
Net periodic benefit cost |
|
|
1,146 |
|
Curtailment and settlement expense |
|
|
|
|
Special termination benefit expense |
|
|
|
|
|
|
|
|
Total expense |
|
$ |
1,146 |
|
|
|
|
|
In connection with our adoption of SFAS 158, the following table summarizes amounts recognized as a
component of accumulated other comprehensive income during 2006. These amounts were not previously
recognized as a component of our net periodic benefit cost and will be amortized to expense during
future periods. During 2007, we estimate that $0.3 million ($0.2 million net of tax) will be
amortized from accumulated other comprehensive income into net periodic benefit cost.
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Net actuarial losses |
|
$ |
599 |
|
Prior service costs |
|
|
2,920 |
|
|
|
|
|
|
|
|
3,520 |
|
Tax expense (benefit) |
|
|
(1,271 |
) |
|
|
|
|
Benefit obligation, net of tax |
|
$ |
2,249 |
|
|
|
|
|
As of December 31, 2006, expected contributions during 2007 are estimated at $0.1 million.
Estimated future benefit payments over the next 10 years are as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
100 |
|
2008 |
|
|
98 |
|
2009 |
|
|
142 |
|
2010 |
|
|
162 |
|
2011 |
|
|
159 |
|
2012 through 2016 |
|
$ |
2,455 |
|
F-23
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Compensation Plans
Stock Plans. We have four stock incentive plans (together, our Stock Plans): (i) the 1996 Stock
Option Plan, which was adopted at the completion of our initial public offering in September 1996,
and amended and approved by our stockholders in 1997; (ii) the 1999 Non-Qualified Stock Option Plan
adopted by our Board of Directors in October 1999; (iii) the 2002 Long-Term Incentive Plan adopted
in January 2002, approved by our stockholders in May 2002 and amended by our Board in October 2003;
and (iv) the 2004 Long-Term Incentive Plan, approved by our stockholders in June 2004 and amended
and restated by our Board in January 2006. All our employees, directors, consultants and advisors
are eligible to participate in our Stock Plans, except that executive officers are not eligible to
participate in the 1999 plan. The 1996, 2002 and 2004 plans allow for the granting of both
incentive stock options and non-qualified stock options, and the 2002 and 2004 plans allow for the
granting of restricted stock. Upon shareholder approval of the 2004 plan, all remaining options
available for grant under the 2002, 1999 and 1996 plans were cancelled, and 1,500,000 shares were
authorized for awards under the 2004 plan. At December 31, 2006, we had 362,877 shares authorized
and available for award under the 2004 plan.
The following table summarizes all of our Stock Plans as of December 31, 2006. Pursuant to
shareholder approval of the 2004 Plan, all remaining options available for grant under the 2002,
1999 and 1996 Plans were cancelled and 1,500,000 shares were made available for grant under the
2004 Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 Plan |
|
2002 Plan |
|
1999 Plan |
|
1996 Plan |
|
Total Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and restricted stock authorized |
|
|
1,500,000 |
|
|
|
1,500,000 |
|
|
|
800,000 |
|
|
|
3,033,912 |
|
|
|
6,833,912 |
|
Options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive stock grants |
|
|
|
|
|
|
47,675 |
|
|
|
|
|
|
|
909,454 |
|
|
|
957,129 |
|
Non-qualified stock grants |
|
|
943,050 |
|
|
|
1,194,000 |
|
|
|
806,606 |
|
|
|
2,132,758 |
|
|
|
5,076,414 |
|
Forfeitures |
|
|
(66,090 |
) |
|
|
(115,440 |
) |
|
|
(47,905 |
) |
|
|
(40,000 |
) |
|
|
(269,435 |
) |
Cancellations |
|
|
|
|
|
|
351,765 |
|
|
|
41,299 |
|
|
|
31,700 |
|
|
|
424,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options |
|
|
876,960 |
|
|
|
1,478,000 |
|
|
|
800,000 |
|
|
|
3,033,912 |
|
|
|
6,188,872 |
|
Restricted stock and units: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants |
|
|
274,039 |
|
|
|
22,000 |
|
|
|
|
|
|
|
|
|
|
|
296,039 |
|
Forfeitures |
|
|
(13,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,496 |
) |
Cancellations |
|
|
(380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted stock and units |
|
|
260,163 |
|
|
|
22,000 |
|
|
|
|
|
|
|
|
|
|
|
282,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and restricted stock available for grant |
|
|
362,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total exercised and issued |
|
|
84,666 |
|
|
|
607,105 |
|
|
|
597,143 |
|
|
|
2,820,092 |
|
|
|
4,109,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Immediately prior to the effective time of the pending merger with Forest (see Note 11 Subsequent
Events Pending Merger with Forest Oil Corporation), all outstanding stock options will vest and
become fully exercisable, the restrictions on all outstanding shares of restricted stock will
lapse, at which time these shares will become freely transferable, and all restricted units will
become fully vested and the underlying shares of our common stock will be issued to the holder.
Options not exercised prior to the effective time of the merger will be cancelled (with payment for
all in-the-money options). All of our stock plans will terminate as of the effective time of the
merger.
Stock Options. Options granted under our Stock Plans expire 10 years from the grant date and vest
in equal annual increments over either a five-year or three-year vesting period, except that
options granted to directors vest immediately upon grant. In general, stock options become fully
vested upon the occurrence of a change of control (including the pending merger with Forest),
unless an award agreement provides otherwise. All stock options have an exercise price equal to
the closing price of our common stock as reported on the NYSE on the date of grant. After the
amendment and restatement of the 2004 plan in January 2006, non-employee directors are no longer
eligible to receive stock options and instead receive an annual grant of restricted stock, the
number of shares of which is determined by dividing $100,000 by the closing price of our common
stock on the date of our Annual Meeting of Stockholders.
Common stock issued through the exercise of non-qualified stock options results in a tax deduction
for us equal to the taxable gain recognized by the optionee. Generally, we do not receive an
income tax deduction for incentive stock options. For financial reporting purposes, the tax effect
of this deduction is accounted for as a credit to additional paid-in-capital rather than as a
reduction of income tax expense. Prior to the adoption of SFAS 123(R) on January 1, 2006, we
presented tax benefits resulting from stock-based compensation as a cash flow from operating
activities within our consolidated
statements of cash flows. SFAS 123(R) requires excess tax benefits to be presented as a cash flow
from financing
F-24
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
activities. For years ended December 31, 2006, 2005 and 2004, the exercise of
non-qualified stock options resulted in a tax benefit of $1.1 million, $3.5 million and $4.9
million, respectively. For 2005, the tax benefit of $3.5 million was not able to be utilized due
to a tax net operating loss during 2005.
The table below sets forth a summary of options granted and outstanding, their remaining
contractual lives, a weighted average exercise price and the number vested and exercisable as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
Unvested |
|
|
|
Shares |
|
|
|
|
|
|
Remaining |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
|
Shares |
|
Range of |
|
Underlying |
|
|
Year |
|
|
Contractual |
|
|
Average |
|
|
Underlying |
|
|
Average |
|
|
Underlying |
|
Exercise Prices |
|
Options |
|
|
Granted |
|
|
Life |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.13 - $25.00 |
|
|
15,500 |
|
|
|
1997 |
|
|
1 years |
|
|
20.72 |
|
|
|
15,500 |
|
|
|
20.72 |
|
|
|
|
|
$15.75 - $23.38 |
|
|
4,980 |
|
|
|
1998 |
|
|
2 years |
|
|
18.97 |
|
|
|
4,980 |
|
|
|
18.97 |
|
|
|
|
|
$16.94 - $21.00 |
|
|
24,230 |
|
|
|
1999 |
|
|
3 years |
|
|
19.53 |
|
|
|
24,230 |
|
|
|
19.53 |
|
|
|
|
|
$18.00 - $26.19 |
|
|
26,500 |
|
|
|
2000 |
|
|
4 years |
|
|
23.69 |
|
|
|
26,500 |
|
|
|
23.69 |
|
|
|
|
|
$22.50 - $37.38 |
|
|
219,369 |
|
|
|
2001 |
|
|
5 years |
|
|
29.13 |
|
|
|
219,368 |
|
|
|
29.13 |
|
|
|
|
|
$27.49 - $33.75 |
|
|
273,970 |
|
|
|
2002 |
|
|
6 years |
|
|
30.13 |
|
|
|
183,670 |
|
|
|
30.12 |
|
|
|
90,300 |
|
$26.18 - $37.42 |
|
|
287,540 |
|
|
|
2003 |
|
|
7 years |
|
|
34.76 |
|
|
|
146,070 |
|
|
|
35.07 |
|
|
|
141,470 |
|
$36.56 - $60.45 |
|
|
247,195 |
|
|
|
2004 |
|
|
8 years |
|
|
56.63 |
|
|
|
106,924 |
|
|
|
57.82 |
|
|
|
140,271 |
|
$46.25 - $66.86 |
|
|
305,206 |
|
|
|
2005 |
|
|
9 years |
|
|
55.49 |
|
|
|
98,127 |
|
|
|
54.17 |
|
|
|
207,079 |
|
$50.41 - $64.61 |
|
|
293,945 |
|
|
|
2006 |
|
|
10 years |
|
|
55.15 |
|
|
|
|
|
|
|
|
|
|
|
293,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,698,434 |
|
|
|
|
|
|
|
|
|
|
$ |
43.16 |
|
|
|
825,369 |
|
|
$ |
36.42 |
|
|
|
873,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity for stock options during the respective years for
all of our stock plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
Weighted Average |
|
Remaining |
|
Aggregate Intrinsic |
|
|
Options |
|
Exercise Price |
|
Contractual Term |
|
Value (1) |
|
|
(Shares) |
|
($/Share) |
|
(Years) |
|
($ in thousands) |
Options outstanding January 1, 2004 |
|
|
2,535,159 |
|
|
$ |
30.23 |
|
|
|
|
|
|
$ |
15,946 |
|
Granted |
|
|
342,950 |
|
|
|
55.98 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(873,626 |
) |
|
|
29.30 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(46,885 |
) |
|
|
34.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2004 |
|
|
1,957,598 |
|
|
|
35.05 |
|
|
|
|
|
|
|
41,619 |
|
Granted |
|
|
345,230 |
|
|
|
55.37 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(510,316 |
) |
|
|
31.92 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(95,902 |
) |
|
|
40.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2005 |
|
|
1,696,610 |
|
|
$ |
39.85 |
|
|
|
|
|
|
|
21,971 |
|
Granted |
|
|
296,370 |
|
|
|
55.37 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(214,868 |
) |
|
|
31.92 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(79,678 |
) |
|
|
40.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding December 31, 2006 |
|
|
1,698,434 |
|
|
$ |
39.85 |
|
|
|
4.1 |
|
|
$ |
14,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable December 31, 2006 |
|
|
825,369 |
|
|
$ |
36.42 |
|
|
|
2.7 |
|
|
$ |
12,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for grant December 31, 2006 |
|
|
362,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The intrinsic value of an option is the amount by which the current market value of
the underlying stock exceeds the exercise price of the option, or the market price at the end
of the period less the exercise price. At December 31, 2006, 2005, 2004 and 2003, the closing
price per share of our common stock on the NYSE was $51.78, $52.80 and $56.31 and $36.52,
respectively. |
For all option grants, the grant or exercise price is equal to the closing market price on the NYSE
on the date of grant. The total intrinsic value of options exercised during 2006, 2005 and 2004
was $5.5 million, $13.5 million and $15.4 million, respectively.
F-25
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock. Restricted stock may be granted and issued to executive officers, employees and
non-employee directors as a component of each recipients annual compensation, and vesting is
generally dependent upon continued service to our company. Restricted stock carries voting and
dividend rights; however, the sale or transfer of the shares is restricted. Generally, restricted
shares vest and become freely transferable at the end of the vesting period, which is either five
years or three years from the date of grant. In general, accelerated vesting will occur upon the
occurrence of certain events, including a change of control (as defined by the plan, and which
would include our proposed merger with Forest), unless an award agreement provides otherwise, and
in the case of non-employee directors, termination as a director by reason of death, disability or
retirement. Restricted stock awards are valued at the closing price of our common stock on the
date of grant.
The table below summarizes the activity for restricted stock and units during the respective years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted Average |
|
|
|
|
Stock and Units |
|
Grant Date Fair |
|
Aggregate Intrinsic |
|
|
(1) |
|
Value |
|
Value (2) |
|
|
(Shares) |
|
($/Share) |
|
($ in thousands) |
Unvested restricted stock January 1, 2004 |
|
|
25,333 |
|
|
$ |
35.44 |
|
|
$ |
925 |
|
Granted |
|
|
49,000 |
|
|
|
58.28 |
|
|
|
|
|
Vested |
|
|
(22,333 |
) |
|
|
44.29 |
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock December 31, 2004 |
|
|
52,000 |
|
|
|
53.16 |
|
|
|
2,928 |
|
Granted |
|
|
146,423 |
|
|
|
57.47 |
|
|
|
|
|
Vested |
|
|
(22,892 |
) |
|
|
56.64 |
|
|
|
|
|
Forfeited |
|
|
(4,317 |
) |
|
|
59.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock December 31, 2005 |
|
|
171,214 |
|
|
$ |
56.23 |
|
|
|
9,040 |
|
Granted |
|
|
78,616 |
|
|
|
55.07 |
|
|
|
|
|
Vested |
|
|
(1,440 |
) |
|
|
58.88 |
|
|
|
|
|
Forfeited |
|
|
(9,179 |
) |
|
|
58.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock December 31,2006 |
|
|
239,211 |
|
|
$ |
55.73 |
|
|
$ |
12,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2006 and 2005, includes 41,882 and 52,501 restricted units unvested
and outstanding, respectively, granted in July 2005 pursuant to a retention bonus plan for
certain employees at an average price of $58.76 per unit. See above discussion of the terms
of our retention bonus plan. |
|
(2) |
|
For unvested shares of restricted stock, the intrinsic value is calculated using the
closing price of our common stock at the end of the period. At December 31, 2006, 2005, 2004
and 2003, the closing price per share of our common stock on the NYSE was $51.78, $52.80 and
$56.31 and $36.52, respectively. |
Stock Compensation Expense
On January 1, 2003, we adopted the fair value expense recognition provisions of SFAS 123,
Accounting for Stock-Based Compensation, as amended, using the prospective method as defined.
Accordingly, we recognized compensation expense for all stock options granted subsequent to January
1, 2003. On January 1, 2006, we adopted SFAS 123(R), Share-Based Payment. Accordingly, we now
recognize compensation expense for all stock options, including the unvested portion of all grants
made prior to our initial adoption of SFAS 123 on January 1, 2003. Prior period amounts have not
been restated.
F-26
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to adopting SFAS 123 in January 2003 and SFAS 123(R) in January 2006, we accounted for
stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board
(APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. If we
had accounted for all stock options using the fair value method as recommended in SFAS 123 and
123(R), compensation expense would have had the following pro forma effect on our net income and
earnings per share for the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands, except per share data) |
|
|
|
|
Net income as reported |
|
$ |
105,169 |
|
|
$ |
162,824 |
|
Add: Stock-based compensation expense included in
net income, net of tax |
|
|
3,292 |
|
|
|
2,581 |
|
Less: Stock-based compensation expense determined
using fair value method, net of tax |
|
|
4,679 |
|
|
|
4,694 |
|
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
103,782 |
|
|
$ |
160,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic as reported |
|
$ |
3.66 |
|
|
$ |
5.50 |
|
Net income per share diluted as reported |
|
|
3.62 |
|
|
|
5.44 |
|
|
|
|
|
|
|
|
|
|
Net income per share basic pro forma |
|
$ |
3.62 |
|
|
$ |
5.43 |
|
Net income per share diluted pro forma |
|
|
3.57 |
|
|
|
5.37 |
|
The effects of applying SFAS 123 and the calculation of stock compensation expense in this pro
forma disclosure may not be representative of future amounts.
The weighted average fair value of options granted and valuation assumptions used in the
Black-Scholes option-pricing model during 2006, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
|
|
|
Weighted average fair value of options granted |
|
$ |
15.02 |
|
|
$ |
16.62 |
|
|
$ |
21.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
4.8 |
% |
|
|
4.1 |
% |
|
|
3.7 |
% |
Expected life or years until exercise |
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
Expected stock volatility |
|
|
23.6 |
% |
|
|
42.7 |
% |
|
|
37.2 |
% |
Expected dividends |
|
|
|
|
|
|
|
|
|
|
|
|
The Black-Scholes option pricing model requires the input of certain subjective assumptions,
including the expected stock price volatility and expected life of the option. For the risk-free
interest rate, we utilize United States treasury bills with constant maturities that correspond to
the options expected life. The expected life is based on historical exercise activity over the
previous ten-year period. The expected volatility is based on historical volatility and measured
using the average closing price of our stock over a 48-month period. We believe historical
volatility is the most accurate measure of future volatility of our common stock. Our expected
rate of forfeitures is estimated at 5% and is based on historical forfeiture rates over the
previous ten-year period.
The following table provides a detail of stock compensation expenses incurred during the years
ended December 31, 2006, 2005 and 2004. For 2005 and 2004, we incurred additional expense of $0.6
million and $1.6 million, respectively related to the accelerated vesting of stock options and $1.0
million and $0.8 million, respectively for the accelerated vesting of restricted stock for
executive officers and members of our Board of Directors that either retired or resigned.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Options |
|
$ |
6,287 |
|
|
$ |
4,229 |
|
|
$ |
3,670 |
|
Restricted stock/units |
|
|
3,435 |
|
|
|
2,882 |
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense, gross |
|
|
9,722 |
|
|
|
7,111 |
|
|
|
4,796 |
|
Amounts capitalized |
|
|
(3,265 |
) |
|
|
(2,015 |
) |
|
|
(800 |
) |
|
|
|
|
|
|
|
|
|
|
Stock compensation expense, net of amounts capitalized |
|
$ |
6,457 |
|
|
$ |
5,096 |
|
|
$ |
3,996 |
|
|
|
|
|
|
|
|
|
|
|
F-27
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts capitalized are categorized as leasehold costs and included as a component
of our natural gas and oil property balance or full cost pool. Amounts expensed
are included as a component of general and administrative expense. At
December 31, 2006, our unrecognized stock compensation expense related to unvested stock options to
be recognized over a weighted average two-year period was approximately $7.7 million. At December
31, 2006, our unrecognized compensation expense related to restricted stock and units and expected
to be recognized over a weighted average two-year period totaled $8.6 million. Amounts relating to
restricted stock expense are classified as unearned compensation and included as a component of
additional paid-in capital.
NOTE 5 Income Taxes
The components of our state and federal income tax provision are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
$ |
(16 |
) |
|
$ |
(258 |
) |
|
$ |
3,411 |
|
Federal |
|
|
24,668 |
|
|
|
5,593 |
|
|
|
42,681 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
24,652 |
|
|
|
5,335 |
|
|
|
46,092 |
|
Deferred : |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
6,544 |
|
|
|
1,149 |
|
|
|
3,236 |
|
Federal |
|
|
16,158 |
|
|
|
56,406 |
|
|
|
47,264 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
22,702 |
|
|
|
57,555 |
|
|
|
50,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision |
|
$ |
47,354 |
|
|
$ |
62,890 |
|
|
$ |
96,592 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, we had estimated taxable income of $132.8 million, including
tax deductions of $3.1 million for certain non-qualified stock options. A major component of
taxable income for 2006 relates to the sale of substantially all of our Gulf of Mexico natural gas
and oil properties during the first and second quarters of 2006 (see Note 10 Acquisitions and
Dispositions Sale of Texas and Louisiana Gulf of Mexico Assets). Total taxable gains from the
sales of these assets are estimated at $264 million. In addition, during 2006, we utilized all of
our federal net operating loss carryforwards to partially offset taxable income in 2006, which
resulted in additional alternative minimum tax credits of $6.2 million and a federal income tax
receivable of $11.3 million, which was refunded in January 2007.
For the year ended December 31, 2005, we had an estimated net operating tax loss of $31.4 million,
including tax deductions of $10 million for certain non-qualified stock options. During 2006, we
were able to carry back this net operating loss to years 2004 and 2003 for tax refunds and
additional alternative minimum tax credits. In addition, for 2005, we generated alternative
minimum tax credits of $8.7 million. These tax credits can be carried forward indefinitely to
offset regular income tax. At December 31, 2004, we had no net operating loss carryforwards
remaining for federal income tax purposes. Net operating loss carryforwards may be used in future
years to offset taxable income.
The following is a reconciliation of statutory federal income tax expense to our income tax
provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands, except rates) |
|
Income before income taxes |
|
$ |
115,137 |
|
|
$ |
168,059 |
|
|
$ |
259,416 |
|
Statutory rate |
|
|
35 |
% |
|
|
35 |
% |
|
|
35 |
% |
Income tax expense computed at statutory rate |
|
|
40,298 |
|
|
|
58,821 |
|
|
|
90,796 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes and other, net of federal
tax benefit(1) |
|
|
7,033 |
|
|
|
672 |
|
|
|
4,358 |
|
Permanent differences |
|
|
23 |
|
|
|
40 |
|
|
|
45 |
|
Other adjustments(2) |
|
|
|
|
|
|
1,852 |
|
|
|
|
|
Non-deductible compensation expense |
|
|
|
|
|
|
1,505 |
|
|
|
1,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision |
|
$ |
47,354 |
|
|
$ |
62,890 |
|
|
$ |
96,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For 2006, includes approximately $5.4 million for Texas state margin tax
implemented during 2006. |
|
(2) |
|
For 2005, includes an adjustment relating to 2004 estimates for federal and
state taxes. |
F-28
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Income Taxes
Deferred income taxes primarily represent the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The components of our deferred taxes are detailed in the table below.
For 2006, the change in the balance of our net deferred tax liability was comprised primarily of
deferred tax expense of $22.7 million, and a net decrease of $135.0 million related to tax benefits
associated with the change in the fair value of open derivative contracts and post retirement
benefit obligations deferred in accumulated other comprehensive income.
For 2005, the change in the balance of our deferred tax liability was comprised of deferred tax
expense of $57.6 million, a tax benefit of $121.5 million due to the change in the fair value of
our open derivative contracts that have been deferred in accumulated other comprehensive income, an
increase in deferred tax assets for stock option deductions of $3.5 million and other adjustments
of $1.1 million.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
10,446 |
|
|
$ |
146,716 |
|
Future post retirement benefit obligation |
|
|
1,271 |
|
|
|
|
|
Ineffectiveness derivative instruments |
|
|
|
|
|
|
1,135 |
|
Net operating loss |
|
|
979 |
|
|
|
11,101 |
|
Alternative minimum tax credit carryforwards |
|
|
2,961 |
|
|
|
8,728 |
|
Deferred compensation |
|
|
9,192 |
|
|
|
5,728 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
24,849 |
|
|
|
173,408 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Oil and gas property and equipment |
|
|
377,367 |
|
|
|
368,788 |
|
Ineffectiveness of derivative instruments |
|
|
560 |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
377,927 |
|
|
|
368,788 |
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
353,078 |
|
|
$ |
195,380 |
|
|
|
|
|
|
|
|
Reflected in the accompanying Balance Sheet as: |
|
|
|
|
|
|
|
|
Current deferred income tax asset |
|
$ |
(10,244 |
) |
|
$ |
(145,922 |
) |
Non-current deferred income tax liability |
|
|
363,322 |
|
|
|
341,302 |
|
|
|
|
|
|
|
|
|
|
$ |
353,078 |
|
|
$ |
195,380 |
|
|
|
|
|
|
|
|
NOTE 6 Related Party Transactions
Transactions with our Executive Officers and Directors
Employment Agreements
We have entered into employment agreements with all of our executive officers. These agreements
have an initial term of three years, which is automatically extended each year for an additional
year on the anniversary effective date, unless either party gives notice to the contrary within 90
days prior to the anniversary of the effective date. Executive officers receive annual salary and
bonus payments pursuant to their employment agreements which are subject to review each year by our
Compensation Committee. Payment of the bonus is based on achievement of certain performance goals
established each year by our Compensation Committee. In addition, executive officers are eligible
to participate in our stock compensation, deferred compensation and supplemental executive pension
plans.
If we terminate the employment of an executive without cause (as defined in the agreement), or if
the executive terminates his employment with us for good reason (as defined in the agreement,
which includes the occurrence of certain events following a change in control, including the
pending merger with Forest (see Note 11 Subsequent Events Pending Merger With Forest Oil
Corporation)), we are obligated to pay the executive a lump-sum severance payment equal to 2.99
times his or her then current annual rate of total compensation, and to continue certain medical
and insurance benefits for a specified time period. Total compensation is defined to include
salary, targeted bonus and car allowance.
F-29
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreements further provide that if any payments made
to the executive, whether or not under the agreement, would result in an excise tax being imposed
on the executive under Section 4999 of the Internal Revenue Code on excess parachute payments, we
will make each of the executives whole on a net after-tax basis.
We may terminate an executives employment for cause without financial obligation (other than
payment of any accrued obligations). Each executive may terminate his or her employment at any
time for any reason. In the event the executives employment is terminated by us without cause or
upon death or disability, or if the executive terminates his employment with us for good reason,
any unvested shares of restricted stock, unvested options or similar deferred compensation
automatically will vest and any other conditions to such awards shall be deemed satisfied.
In October 2006, we amended the employments agreements with each of our executive officers to
comply with Section 409A of the Internal Revenue Code, and any regulations and/or guidance
promulgated thereunder (collectively, Section 409A). The purpose of the amendments generally was
to avoid the imposition of certain taxes and penalties under Section 409A relating to certain
non-qualified deferred compensation payments (within the meaning of Section 409A) payable upon an
executives separation from a company by imposing, where necessary, a six-month delay upon the
commencement of such payments following separation from service. In addition, the amendments
provided that interest will be payable by us in the event of a delay in payments necessitated by
Section 409A.
The merger agreement dated January 7, 2007 with Forest (see Note 11 Subsequent Events Pending
Merger With Forest Oil Corporation) permits us to amend each of the employment agreements with our
executive officers to provide for a transitional period of 60 days following the effective time of
the merger. Pursuant to such amendment, the executive would agree not to assert that he or she has
good reason to terminate employment and to remain employed for 60 days following the effective time
of the merger. In exchange, we would agree that (a) the executive will continue to be paid base
salary during such transitional period at the rate in effect immediately prior to the effective
time of the merger, (b) unless otherwise agreed in writing with the executive, the executives
employment will terminate on the last day of such 60-day transitional period and (c) such
termination (or any earlier termination by the employer without cause or due to the executives
death or disability) will be deemed to be a termination by the employer without cause for all
purposes under the employment agreement. As of the date of this Annual Report, all of our
executives have signed amendments to their employment agreements as described above.
Pursuant to the merger agreement with Forest and to the extent required in our employment
agreements, Forest has agreed to assume and perform each of the employment agreements as of the
effective time of the merger.
Employment Agreements with Robert T. Ray, Chief Financial Officer, and Carolyn M. Campbell, Senior
Vice President and General Counsel.
On January 18, 2006, we entered into an employment agreement with Robert T. Ray in connection with
Mr. Rays appointment as Senior Vice President and Chief Financial Officer of our company and, on
March 27, 2006, we entered into an employment agreement with Carolyn M. Campbell in connection with
Ms. Campbells appointment as Senior Vice President and General Counsel of our company. The terms
of Mr. Rays and Ms. Campbells employment agreements are consistent with the general terms
described above. Further, Mr. Rays agreement provided for an initial annual base salary of
$315,000 and an annual target incentive bonus equal to 55% of his base salary upon the achievement
of pre-established performance goals. Ms. Campbells agreement provided for an initial annual base
salary of $275,000 and an annual target incentive bonus equal to 55% of her salary upon the
achievement of pre-established performance goals. In addition, Mr. Ray received a signing bonus in
the amount of $85,000, together with 7,500 restricted shares of our common stock and options to
purchase 20,000 shares of our common stock at $53.72 per share. Ms. Campbell received 5,000
restricted shares of our common stock and options to purchase 15,000 shares of our common stock at
an exercise price of $50.41 per share. The agreements provide for an automobile allowance of $700
per month and reimbursement of certain business expenses and require us to provide certain
disability and life insurance. If Mr. Ray or Ms. Campbell is terminated without cause, or if
either terminates their employment with us for good reason, we are obligated to pay each a lump
sum severance payment as described above. Based on compensation levels at year-end 2006, Mr. Rays
lump sum payment would equal approximately $1.7 million and Ms. Campbells would equal
approximately $1.4 million.
Amendments to Employment Agreements 2005
In February 2005, we entered into amended and restated employment agreements with William G.
Hargett, our President and Chief Executive Officer, Steven L. Mueller, our Executive Vice President
and Chief Operating Officer, John H.
F-30
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Karnes, our then Senior Vice President and Chief Financial
Officer, James F. Westmoreland, our Vice President and Chief Accounting Officer, and Roger B. Rice,
our Senior Vice President-Administration.
By entering into the amended and restated employment agreements and terminating their prior
employment agreements with us, Messrs. Hargett, Mueller, Karnes, Westmoreland and Rice gave up
certain rights, including the right to receive severance for a termination of employment following a change of control of our company absent the
existence of good reason and the right to guaranteed annual stock option grants and incentive
compensation bonuses, which will now be subject to the discretion of our Compensation and
Management Development Committee. In addition to these rights, Mr. Hargett also gave up the right
to receive a transaction bonus upon the occurrence of certain corporate transactions involving our
company, and all of the executives are agreeing to somewhat broader non-competition provisions
under the amended and restated agreements. In consideration of their entering into the amended and
restated agreements and foregoing such rights, we paid to each of these executives cash and/or
restricted stock as follows: for Mr. Hargett, $4.2 million; for Mr. Mueller, $0.4 million in cash
and 6,553 shares of restricted stock; for Mr. Karnes, 12,892 shares of restricted stock; for Mr.
Westmoreland, $0.3 million in cash and 5,394 shares of restricted stock; and for Mr. Rice, $0.3
million in cash and 5,266 shares of restricted stock. The restricted stock vests over a period of
five years in accordance with the terms of our Amended and Restated 2004 Long-Term Incentive
Compensation Plan.
Lump-Sum Payments to Executives Under Employment Contracts 2005 and 2004
On December 8, 2005, we terminated our employment agreement with John H. Karnes, who resigned as
Senior Vice President and Chief Financial Officer, and entered into a separation agreement and
general release with Mr. Karnes. The separation agreement provided for full settlement of any
compensation and benefits to which Mr. Karnes would otherwise be entitled under his employment
agreement. Mr. Karnes received a cash lump-sum severance payment of $1.5 million and was entitled
to receive certain welfare benefits at our expense for a specified period following termination of
employment. In addition, we incurred $1.7 million in stock compensation expense pursuant to the
accelerated vesting of Mr. Karnes restricted stock and stock options.
Pursuant to a management organizational change made within our company in November 2004 that
changed the reporting responsibilities of three executive officers, Charles W. Adcock, Senior Vice
President and General Manager Offshore Division, resigned effective December 14, 2004, and
Timothy R. Lindsey, Senior Vice President of Exploration, and Tracy Price, Senior Vice President
Land, resigned effective March 1, 2005. Pursuant to their resignations and the termination of
their employment agreements with our company, during the fourth quarter of 2004, we incurred
approximately $5.1 million in general and administrative expense of which $1.3 million, $1.1
million and $1.0 million, respectively, related to lump-sum severance entitlements for Messrs.
Adcock, Lindsey and Price and, $1.7 million related to expense incurred as a result of the
accelerated vesting of all their outstanding stock options and restricted stock.
Transactions Involving Companies with Common Directors
John U. Clarke, a member of our Board of Directors and Chairman of the Audit Committee, serves as a
Chairman and Chief Executive Officer of NATCO Group, a publicly traded oil field services and
equipment company. During 2006, 2005 and 2004, we purchased services and supplies from NATCO of
approximately $1.0 million, $1.3 million and $0.9 million, respectively. Mr. Clarke meets all
requirements of the New York Stock Exchange to be considered an independent director of our
company.
Transactions with KeySpan
To facilitate the KeySpan Exchange (see Note 3 KeySpan Exchange and Offering), we entered into a
Distribution Agreement with KeySpan that defines each companys rights and obligations with respect
to the exchange transaction. The Distribution Agreement contains, among other provisions,
customary representations and warranties concerning our Appalachian Basin properties, including
title, regulatory compliance and environmental matters, along with limited indemnification
obligations. Pursuant to the Distribution Agreement, the two companies also entered into a Tax
Matters Agreement, which generally provides that each party would be responsible for its own tax
consequences if the KeySpan Exchange fails to qualify as a tax-free transaction. In addition, we
entered into a Transition Services Agreement pursuant to which we provided KeySpan with
transitional services with respect to the Appalachian Basin assets for a fee of $27,000 per month
until March 31, 2005.
F-31
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 Derivative Instruments
At of December 31, 2006, we had entered into commodity price derivative contracts with respect to
approximately 10% of our forecasted natural gas production for 2007 and less than 5% of our
forecasted natural gas production for 2008, as listed in the following table. The total estimated
fair value of our natural gas derivative instruments at December 31, 2006 was a liability of $27.4
million. During the first quarter of 2006, our open derivative contracts ceased to qualify for
hedge accounting due to the combination of factors, including the loss of correlation with the
NYMEX price for certain contracts caused in part by the residual effects of Hurricanes Katrina and
Rita during the first three months of 2006 and our entry into a definitive purchase and sale
agreement to sell the Texas portion of our Gulf of Mexico assets in February 2006. At December 31,
2006, an unrealized loss of $18.5 million, net of tax, remains deferred in accumulated other
comprehensive income. This loss represents the fixed value of our remaining open derivative
contracts deferred in accumulated other comprehensive income at the time they ceased to qualify for
hedge accounting. Over the next 12-month period and at the time when sale of the related natural
gas production occurs, we expect to reclassify from accumulated other comprehensive income to
earnings a net loss of $11.1 million, net of tax, leaving $7.4 million to be recognized during
2008.
During 2006, our total loss from hedging activities was $64.5 million, which included a realized
loss of $69.2 million on contracts settled during the period and a net unrealized gain of $4.7
million. The unrealized gain of $4.7 million was comprised of (i) a mark-to-market gain of $37.7
million for changes in the fair value of our open contracts subsequent our loss of hedge
accounting; (ii) a gain of $45.9 million on the recapture of prior ineffectiveness; (iii)
recognition of a loss of $20.6 million deferred in accumulated other comprehensive income at
December 31, 2005 as a result of offshore production curtailments during the fourth quarter of 2005
resulting from damage to Gulf of Mexico infrastructure after Hurricanes Katrina and Rita; and (iv)
a loss of $58.2 million representing amounts previously deferred in accumulated other comprehensive
income allocated to production from Gulf of Mexico assets that were sold during the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Derivatives at December 31, 2006 |
|
Fixed Price Swaps |
|
Collars |
|
December 31, 2006 |
|
|
|
Daily |
|
NYMEX |
|
Daily |
|
NYMEX |
|
|
|
|
Volume |
|
Contract |
|
Volume |
|
Contract Price |
|
Fair Value |
|
Period |
|
(MMBtu) |
|
Price |
|
(MMBtu) |
|
Floor |
|
Ceiling |
|
(thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January December 2007
|
|
|
|
|
|
|
30,000 |
|
|
$ |
5.000 |
|
|
$ |
6.597 |
|
|
$ |
(10,151 |
) |
January December 2008
|
|
|
|
|
|
|
20,000 |
|
|
|
5.000 |
|
|
|
5.720 |
|
|
|
(17,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(27,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the completion of the divestiture of our Gulf of Mexico assets on June 1, 2006,
we were required under our revolving credit facility to liquidate a portion of our 2006 hedge
position. In order to comply with this requirement, in June 2006, we liquidated and settled open
contracts covering 60,000 MMBtu per day of hedged production for each of the months July through
December 2006. The cost to liquidate and settle these contracts was approximately $14.3 million.
In addition, on August 4, 2006, we liquidated and settled open derivative contracts representing
20,000 MMBtu per day of hedged production for each of the months September and October 2006. The
cost to liquidate and settle these contracts was approximately $0.9 million.
At of December 31, 2005, we had entered into commodity price derivative contracts with respect to
approximately 75% of our forecasted natural gas production for 2006 and less than 10% of our
forecasted natural gas production for 2007 and 2008 as listed in the table below. The total
estimated fair value of our natural gas and oil derivative instruments at December 31, 2005 was a
liability of $417.7 million, of which we had deferred a net loss of $267.7 million in accumulated
other comprehensive income and recognized $46.0 million in earnings as a reduction to natural gas
and oil revenues as a result of the estimated ineffectiveness of our open contracts as of the end
of the period. In addition, during the fourth quarter of 2005, we recognized in income a gain of
$26.1 million for NYMEX based derivative contracts that hedged production allocated to the Houston
Ship Channel index due to loss of correlation between the NYMEX price and the Houston Ship Channel
index. Further, we deferred a loss in accumulated other comprehensive income of $20.6 million as a
result of a production shortfall during the fourth quarter of 2005 due to offshore production
curtailments caused by Hurricanes Katrina and Rita, which deferred loss was reclassified to
earnings during the first quarter of 2006, as we determined that due to continued delays in the
restoration of third party pipelines and processing facilities to pre-hurricane
capacity, production from certain of our offshore fields would not occur in accordance with our
internal forecasts. Finally, during 2005, we realized a loss of $265.2 million on contracts
settled during the period.
F-32
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Derivatives at December 31, 2005 |
|
Fixed Price Swaps |
|
Collars |
|
December 31, 2005 |
|
|
|
Daily |
|
NYMEX |
|
Daily |
|
NYMEX |
|
|
|
|
Volume |
|
Contract |
|
Volume |
|
Contract Price |
|
Fair Value |
|
Period |
|
(MMBtu) |
|
Price |
|
(MMBtu) |
|
Floor |
|
Ceiling |
|
(thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January December 2006
|
|
|
30,000 |
|
|
$ |
5.893 |
|
|
|
220,000 |
|
|
$ |
5.774 |
|
|
$ |
7.090 |
|
|
$ |
(352,456 |
) |
January December 2007
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
5.000 |
|
|
|
6.597 |
|
|
|
(40,255 |
) |
January December 2008
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
5.000 |
|
|
|
5.720 |
|
|
|
(24,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(417,658 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From time to time, if the fair value of an open contract or contracts exceeds our available credit
limit with a particular counterparty, we could be required to post a letter of credit to further
guarantee our performance. As of December 31, 2006 and 2005, we did not have any outstanding
letters of credit issued relating to derivative contracts.
Fair market value is calculated for the respective months using prices derived from NYMEX futures
contract prices existing at December 31st and from market quotes received from
counterparties.
For natural gas, transactions are settled based upon the NYMEX price on the final trading day of
the month (the settlement price). With respect to any particular swap transaction, the
counterparty is required to make a payment to us in the event that the settlement price for any
settlement period is less than the swap price for the transaction, and we are required to make
payment to the counterparty in the event that the settlement price for any settlement period is
greater than the swap price for the transaction. For any particular collar transaction, the
counterparty is required to make a payment to us if the settlement price for any settlement period
is below the floor price for the transaction, and we are required to make payment to the
counterparty if the settlement price for any settlement period is above the ceiling price for the
transaction. We are not required to make or receive any payment in connection with a collar
transaction if the settlement price is between the floor and the ceiling.
NOTE 8 Sales to Major Customers
We sold natural gas and oil production representing 10% or more of our natural gas and oil revenues
for the years ended December 31, 2006, 2005 and 2004 as listed below. In the exploration,
development and production business, production is normally sold to relatively few customers.
However, based on the current demand for natural gas and oil, we believe that the loss of any of
our major purchasers would not have a material adverse effect on our operations. Amounts presented
in the below table that are less than 10% have been included for information and comparison
purposed only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
Major Purchaser |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oneok |
|
|
11.9 |
% |
|
|
8.8 |
% |
|
|
8.0 |
% |
ConocoPhillips |
|
|
11.7 |
% |
|
|
11.9 |
% |
|
|
11.9 |
% |
Kinder Morgan |
|
|
11.3 |
% |
|
|
8.5 |
% |
|
|
10.1 |
% |
Anadarko Petroleum Corporation |
|
|
6.1 |
% |
|
|
10.1 |
% |
|
|
9.1 |
% |
NOTE 9 Commitments and Contingencies
Legal Proceedings
On June 22, 2006, the City of Monroe Employees Retirement System filed a purported class action
lawsuit in the District Court of Harris County, Texas, on behalf of itself and all of the companys
other public shareholders, against the company and its directors. The plaintiff alleges that the
defendants breached their fiduciary duties of loyalty and due care to the class in connection with
our response to an unsolicited proposal by JANA Partners LLC to purchase the company. The
plaintiff subsequently amended its petition as a derivative claim and requested that the court
order the defendants to comply with their fiduciary duties, respond in good faith to potential
offers, and establish a committee of independent directors to evaluate strategic alternatives and
take decisive steps to maximize shareholder value. The plaintiff also seeks to invalidate our
shareholder rights plan or require the defendants to rescind or redeem such plan. Finally, the
plaintiff seeks
compensatory and punitive damages, as well as attorneys and experts fees. In October 2006, the
judge denied the defendants motion to abate or special exceptions. Although this ruling allows
the plaintiffs claim to survive beyond the
F-33
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pleadings stage, it has no bearing on the merits of the case. In January 2007 and following our
entry into the merger agreement with Forest, the plaintiff further amended its petition, adding a
new class-action claim challenging the strategic alternatives review process conducted by us and
the adequacy of the merger consideration agreed upon in the merger agreement, and naming Forest as
a defendant. The plaintiff also seeks to enjoin the merger, asserting that our directors decision
to enter into the merger with Forest constitutes a breach of fiduciary duties. We believe this
lawsuit is without merit, and we intend to vigorously defend against it. Although it is too soon
to predict the outcome of this lawsuit or the time to resolution, we do not believe that it will
have a material adverse effect on our financial position, results of operations or cash flows.
In addition to the foregoing, we are involved from time to time in various other claims and legal
or governmental proceedings incidental to our business. In the opinion of management, the ultimate
liability, if any, associated with these matters is not expected to have a material adverse effect
on our financial position, results of operations or cash flows.
Severance Tax Refund
During July 2002, we applied for and received from the Railroad Commission of Texas a
high-cost/tight-gas formation designation for a portion of our South Texas production. For
qualifying wells, production is either exempt from tax or taxed at a reduced rate until certain
capital costs are recovered. For the years ended December 31, 2006, 2005 and 2004, we recognized
as other, non-operating income refunds of prior period severance tax payments of $7.7 million, $2.7
million and $1.2 million, respectively. At December 31, 2006 and 2005, our current receivables
include $2.0 million and $0.7 million, respectively, in gross refunds, of which we estimate
approximately 70%, or $1.4 million and $0.5 million, respectively, relate to our net revenue
interest. Beginning September 1, 2003, all refunds issued by the State of Texas are to be made in
the form of a reduction to or credit against our current severance tax liability rather than in the
form of a cash reimbursement.
Operating Leases
We have entered into non-cancelable operating lease agreements in the ordinary course of our
business activities. These leases include those for our office space at 1100 Louisiana in Houston,
Texas and at 700 17th Street in Denver, Colorado together with various types of office
equipment (primarily copiers and fax machines). The terms of these agreements have various
expiration dates from 2007 through 2010. Rental expense related to these leases was $2.3 million,
$1.9 million and $1.6 million, respectively, for the years ended December 31, 2006, 2005 and 2004.
At December 31, 2006, our total commitment under these non-cancelable operating leases was
approximately $5.0 million. Minimum rental commitments under the terms of our operating leases are
as follows:
|
|
|
|
|
|
|
Minimum |
|
Years Ended December 31, |
|
Payments |
|
|
|
(in thousands) |
|
|
|
|
|
|
2007 |
|
$ |
1,913 |
|
2008 |
|
|
1,924 |
|
2009 |
|
|
1,137 |
|
2010 |
|
|
23 |
|
Thereafter |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,997 |
|
|
|
|
|
Letters of Credit
We had $0.3 million in letters of credit outstanding at December 31, 2006 and at December 31, 2005.
North Dakota Lease Acquisition
On December 1, 2006, we entered into a purchase and sale agreement to acquire natural gas and oil
leases in the Williston Basin of North Dakota for $3.9 million. Upon entering the agreement, we
paid a performance deposit of approximately
$0.1 million. At December 31, 2006 and under the terms of the agreement, we are obligated for up
to an estimated $3.8 million for the remaining portion of the purchase price.
F-34
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Drilling Contracts
During 2006, we entered into three long-term contracts for the exclusive use of drilling rigs for
periods of greater than or equal to 12 months. These include a one-year contract for a drilling
rig in East Texas; a two-year contract for a rig in the Uinta Basin; and a one-year contract for a
rig in South Texas. At December 31, 2006 and under these contracts, we are obligated for up to an
estimated $8.7 million in fees for use of the rigs during the remaining terms of the contracts.
Seismic Contracts
In October 2006, we entered into an agreement to acquire seismic data covering various acreage
positions in Colorado. At December 31, 2006 and under the terms of the agreement, we are obligated
for up to an estimated $1.5 million in future fees.
NOTE 10 Acquisitions and Dispositions (Reserve quantities, wells, acreage and working interests
included below are unaudited.)
2006 Acquisitions and Dispositions
East Texas Acquisition. On April 25, 2006, we completed the acquisition of certain interests in
natural gas and oil producing properties and acreage in the Willow Springs Field of Gregg County,
located in East Texas, from Samson Lone Star Limited Partnership. The $22 million cash purchase
price was reduced by $0.7 million to $21.3 million for various customary closing items, including
an adjustment for operations related to the properties after the effective date of the transaction,
January 1, 2006. The properties cover approximately 4,237 gross (3,579 net) acres, are adjacent to
our existing operations in the Willow Springs Field and include interests in 28 producing wells
with an average working interest of 80%. Based on internal estimates, total proved reserves
associated with the interests acquired were 16.2 Bcfe as of January 1, 2006. The acquisition was
funded with cash on hand of $19.1 million and borrowings under our revolving credit facility of
$2.2 million.
South Texas Acquisition. On December 13, 2006, we acquired, a 100% working interest in 10
producing wells located in Webb County, Texas, from Legend Natural Gas II, LP. The $4.3 million
purchase price was paid with cash on hand. The acquired properties cover approximately 3,000 acres
and are located in close proximity to our producing assets in the South Laredo Field. Based on
internal estimates, total proved reserves associated with the interests acquired were approximately
1.8 Bcfe.
DJ Basin Acquisition. On December 14, 2006, we completed the acquisition of certain interests in
natural gas and oil producing properties together with developed and undeveloped acreage, located
along the Niobrara trend in the DJ Basin of Eastern Colorado and Western Nebraska, from Santos TOG
Corp. (formerly known as Tipperary Oil & Gas Corporation). The net purchase price of $21.4 million
was paid with cash on hand. The acquired properties and acreage cover approximately 145,000 net
acres and include interests in approximately 305 wells. The majority of the interests acquired
were incremental working interests of ranging between 20% and 25% in wells operated by us. Based
on internal estimates, total proved reserves associated with the interests acquired were
approximately 14.2 Bcfe at November 1, 2006, and daily production averaged 1 Mcfe per day, net to
the interests acquired.
Sale of Texas Gulf of Mexico Assets. On March 31, 2006, we completed the sale of the Texas portion
of our Gulf of Mexico assets. Pursuant to the purchase and sale agreement dated February 28, 2006
between us, as seller, and various partnerships affiliated with Merit Energy Company, as buyer, the
gross sale price was $220 million. The net cash proceeds received from the sale of these assets
totaled approximately $190.8 million after various customary closing items, including the
adjustment for operations related to the properties after January 1, 2006, the effective date of
the transactions. Of the total net proceeds, approximately $140.1 million was received for assets
acquired by various partnerships affiliated with Merit Energy Company. In addition, approximately
$43.1 million and $7.6 million were received from Hydro Gulf of Mexico, L.L.C. and Nippon Oil
Exploration U.S.A. Ltd., respectively, pursuant to the exercise of their preferential rights to
acquire certain working interests offered for sale. The Texas portion of our Gulf of Mexico assets
accounted for
approximately 18% of our 2005 production and represented an estimated 58.5 Bcfe, or 7% of our total
proved reserves at December 31, 2005. Of the $190.8 million in net cash proceeds received from the
sale of our Texas Gulf of Mexico assets, we used $158 million to repay and reduce outstanding
borrowings under our revolving credit facility, deposited $9.5 million with a qualified
intermediary for potential reinvestment in like-kind exchange transactions under Section 1031 of
the Internal Revenue Code, and used substantially all of the $23.3 million balance for working
capital purposes. In
F-35
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accordance with full cost accounting, no gain or loss was recognized on the sale. The net proceeds
of $190.8 million were recorded as a reduction to the full cost pool.
Sale of Louisiana Gulf of Mexico Assets. On June 1, 2006, we completed the sale of substantially
all of our Louisiana Gulf of Mexico assets for a gross sale price of $590 million. The sale of a
substantial majority of these assets to various partnerships affiliated with Merit Energy Company
was completed on May 31, 2006 pursuant to a purchase and sale agreement dated April 7, 2006, and
the sale of certain working interests to Nippon Oil Exploration U.S.A. Ltd. and Chevron USA Inc.
was completed on June 1, 2006 pursuant to the exercise of preferential purchase rights. The
aggregate net cash proceeds received from the sale of these assets totaled approximately $530.8
million after customary closing items, including the preliminary adjustment for operations related
to the properties after January 1, 2006, the effective date of the transactions. Of the total net
proceeds, approximately $510.2 million was received from various partnerships affiliated with Merit
Energy Company, and approximately $16.6 million and $4.0 million was received from Nippon Oil
Exploration U.S.A. Ltd. and Chevron USA Inc., respectively.
At December 31, 2005, proved reserves associated with these assets were estimated at 186.1 Bcfe,
and production associated with these assets accounted for approximately 22% of our 2005 production
and 27% of our production during the first six months of 2006. The sale transactions did not
include 18 Louisiana offshore blocks retained by us. Of these 18 blocks, four expired subsequent
to the sales transactions, two were drilled during 2006, resulting in two successful exploratory
wells, and 12 remain classified as undeveloped at the end of 2006.
Of the $530.8 million in net cash proceeds received from the sale of the Louisiana portion of our
Gulf of Mexico assets, $314.2 million was deposited directly with qualified intermediaries for
potential reinvestment in like-kind exchange transactions under Section 1031 of the Internal
Revenue Code, and substantially all of the $216.6 million balance, associated with properties sold
outside the like-kind exchange arrangement, was used to reduce outstanding borrowings under our
revolving credit facility. In accordance with full cost accounting, no gain or loss was recognized
on the sale. The net proceeds of $530.8 million were recorded as a reduction to the full cost
pool.
The sale of certain of our Gulf of Mexico properties accelerated the payment of a net profits
interest to the predecessor owner of properties acquired by us in October 2003, for which we paid
approximately $21.0 million during August 2006. The payment was accounted for as a purchase price
adjustment in connection with the original acquisition of the properties and recorded as an
addition to natural gas and oil properties.
2005 Acquisitions
Kerr-McGee South Texas Acquisition. On November 30, 2005, we completed the acquisition of certain
interests in natural gas and oil producing properties and undeveloped acreage in four fields
located in South Texas from Kerr-McGee Oil & Gas Onshore LP and Westport Oil and Gas Company, L.P.
The net purchase price of $159.0 million was paid in cash and financed by borrowings under our bank
credit facility. The $163.0 million purchase price was reduced by $4.0 million for various
customary closing items, including revenues received by and expenditures made by the seller related
to the properties acquired for the period between the effective date of the transaction, October 1,
2005, and the closing date, November 30, 2005.
The properties cover approximately 26,000 net acres, include approximately 300 wells and are
located in the Rincon Field in Starr County, the Tijerina-Canales-Blucher Field in Jim Wells and
Kleberg Counties, the Vaquillas Ranch Field in Webb County, and the San Carlos Field in Hidalgo
County. At December 31, 2005, proved reserves were approximately 62 Bcfe, of which approximately
75% were natural gas. Current production from the four fields is estimated at approximately 10
MMcfe/day, net to the interests acquired. We operate 100% percent of the proved reserves with an
average working interest of 60%.
Dale East Texas Acquisitions. On March 15, 2005, we completed the purchase of certain natural gas
and oil producing properties and associated gathering pipelines and equipment, together with
developed and undeveloped acreage, located in
Rusk County, Texas, from Dale Gas Partners L.P. The $22.0 million purchase price was paid in cash
and financed by borrowings under our bank credit facility. The properties purchased cover
approximately 5,776 gross acres located in South Oak Hill Field, which is in close proximity to our
existing operations in the Willow Springs Field, and represent interests in three producing wells
and one well in the completion stage. We operate all of the wells acquired, and our working
interest is 100%. Based on internal estimates, total proved reserves associated with the interests
acquired were 9.1 Bcfe as of March 15, 2005, the effective date of the transaction.
On April 5, 2005, we completed the acquisition of a 50% working interest in seven producing wells
together with undeveloped acreage located in the North Blocker Field located in Harrison County,
Texas from Dale Resources East Texas L.L.C. The $9.2 million purchase price was paid in cash and
financed by borrowings under our bank credit facility. The
F-36
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
properties purchased cover approximately 4,679 gross acres, and we operate all seven wells. Based
on internal estimates, total proved reserves associated with the interests acquired were estimated
at 7.7 Bcfe, as of April 1, 2005, the effective date of the transaction. On December 31, 2005, we
purchased the remaining working interests held by Dale in the seven wells and undeveloped acreage
acquired in April 2005 for $7.3 million.
2004 Acquisitions and Dispositions
Orca Acquisition. On October 29, 2004, we completed the acquisition of certain producing
properties from Orca Energy, L.P. The $113.6 purchase price was paid in cash and financed by
borrowings under our bank credit facility. The transaction was effective August 1, 2004. The Orca
properties consist of 10 offshore blocks and two onshore fields. The onshore fields are
non-operated and located in central Mississippi, the Wausau Field, located in Wayne County and the
Oakvale Dome Field, located in Jefferson Davis County. The 10 offshore blocks are a mix of state
and federal leases, located in less than 50 feet of water, and include seven blocks in federal
waters and three blocks in state waters. Total acreage acquired covers 23,777 gross (17,973 net)
acres. The properties include 15 platforms, five production caissons and 28 producing wells.
Based on internal estimates, total proved reserves acquired were approximately 60.7 Bcfe as of the
closing date, October 29, 2004, of which 81% were natural gas. Our average working interest in the
properties acquired is 68%, and we operate approximately 85% of the proved reserves acquired.
BP Acquisition. On September 30, 2004, we completed the purchase of two producing offshore fields
from BP Exploration & Production Inc. The net purchase price of $30.0 million was paid in cash and
financed by borrowings under our bank credit facility. The $31.5 million purchase price was
reduced by $1.5 million for various customary closing items, including revenues received by and
expenditures made by the seller related to the properties acquired for the period between the
effective date of the transaction, August 1, 2004, and the closing date, September 30, 2004. The
properties acquired are located at Eugene Island 240 and Main Pass 264 and each block has one
producing platform. Based on internal estimates, total proved reserves associated with the
interests acquired were approximately 16.2 Bcfe as of September 30, 2004, of which 85% were natural
gas. Our average working interest is 85%, and we operate both blocks.
Disposition and Exchange of Appalachian Basin Assets. In connection with the KeySpan Exchange on
June 2, 2004 (see Note 3 KeySpan Exchange and Offering), we divested all of our Appalachian
Basin assets with an agreed upon value of $60 million. Pursuant to an Asset Contribution
Agreement, we contributed to Seneca-Upshur all of the assets relating solely to our Appalachian
Basin assets that were not already owned by Seneca-Upshur, and Seneca-Upshur assumed all of the
liabilities relating to the Appalachian Basin assets for which it was not already liable. In the
KeySpan Exchange, all of the stock of Seneca-Upshur was then conveyed to KeySpan and effective June
1, 2004, Seneca-Upshur became an indirect wholly-owned subsidiary of KeySpan.
Our Appalachian property base was located primarily in central West Virginia and included the
Belington, Clarksburg and Seneca Upshur Fields located in Barbour, Randolph, Upshur and Mingo
Counties of West Virginia. Included in the assets exchanged were the assets acquired on December
31, 2003, from EnerVest East Limited Partnership located adjacent to our existing base in the
Crawford and Pennsboro Fields in Lewis, Harrison, Tyler and Ritchie Counties of West Virginia and
the Waynesburg and Yatesboro Fields in Greene and Armstrong Counties of southwestern Pennsylvania.
Based on internal estimates at June 1, 2004, our Appalachian Basin properties had 51.2 Bcfe of
estimated proved reserves, and our average daily production was approximately 8 MMcfe/day, which
represented approximately 3% of our total daily production. We had approximately 207,000 gross
(129,000 net) acres under lease and owned working interests in approximately 1,414 gross (1,035
net) wells, of which we operated approximately 92%. Our average working interest was 73%.
Sale of Onshore South Louisiana Properties. On February 4, 2004, we completed the sale of our
onshore South Louisiana producing properties. The sale was effective November 1, 2003, and the
properties represented 12.3 Bcfe proved reserves as of December 31, 2003, and included interests in
33 gross (9.5 net) producing wells and covered approximately 6,300 gross (2,300 net) acres. The
sale price of $15 million was reduced by $1.9 million for various customary closing items,
including revenues received by and expenditures made by us related to the properties sold for the
period between the effective date of the transaction and the closing date. The net proceeds of
$13.1 million from the sale were used to repay borrowings under our bank credit facility.
NOTE 11 Subsequent Events
Pending Merger Agreement with Forest Oil Corporation
On January 7, 2007, we announced the conclusion to the strategic alternatives review process with
our entry into an agreement and plan of merger with Forest Oil Corporation. Under the merger
agreement, Forest will acquire all of the outstanding shares of Houston Exploration for a
combination of cash and Forest common stock. Under the terms of the
F-37
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
merger agreement, our shareholders will receive total consideration equal to 0.84 shares of Forest
common stock and $26.25 in cash for each outstanding share of Houston Exploration common stock, or
an aggregate of an estimated 23.6 million shares of Forest common stock and cash of $740 million.
Based on the closing price of Forest common stock on January 5, 2007, the last trading day prior to
announcement of the transaction, this represents $52.47 per share of merger consideration to be
received by Houston Exploration shareholders. The actual value of the merger consideration to be
received by our shareholders will depend on the average closing price of Forest common stock for
the ten trading days ending three calendar days prior to the effective date of the merger, and the
amount of cash and stock consideration will be determined by shareholder elections, subject to
proration and an equalization formula. It is anticipated that the stock portion of the
consideration will be tax free to Houston Exploration shareholders.
The Boards of Directors of Houston Exploration and Forest each unanimously approved the proposed
merger. The merger is subject customary terms and conditions, including the approval of both
Houston Exploration and Forest shareholders, and is expected to be completed in the second quarter
of 2007. Upon completion of the transaction, it is anticipated that Forest shareholders would own
approximately 73% of the combined company, and Houston Exploration shareholders would own
approximately 27%.
Concurrently with the execution of the merger agreement, funds affiliated with JANA Partners
entered into a voting agreement with Forest pursuant to which the JANA funds agreed, during the
term of the voting agreement, to vote their shares of our common stock in favor of the merger with
Forest and the adoption of the merger agreement and against any transaction that would impede or
delay the merger with Forest, and granted to Forest a proxy to vote their shares at any stockholder
meeting convened to consider such matters. As of January 7, 2007, the JANA funds beneficially
owned approximately 14.7% of our total issued and outstanding shares of our common stock. The
voting agreement will terminate in certain instances, including an adverse recommendation change
(as defined in the merger agreement) by our Board of Directors or any material amendment to the
merger agreement that is adverse to us or our stockholders.
On February 8, 2007, Forest filed a registration statement on Form S-4 with the SEC, including a
preliminary joint proxy statement / prospectus with respect to the merger. Also on February 8,
2007, the companies received notice of early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvement Act with respect to the proposed transaction.
F-38
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 Supplemental Information on Natural Gas and Oil Exploration, Development and Production
Activities (Unaudited)
The following information concerning our natural gas and oil operations has been provided pursuant
to Statement of Financial Accounting Standards No. 69, Disclosures about Oil and Gas Producing
Activities. Our natural gas and oil producing activities are conducted onshore within the
continental United States and offshore in federal and state waters of the Gulf of Mexico.
Capitalized Costs of Natural Gas and Oil Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Unevaluated properties, not subject to amortization |
|
$ |
28,317 |
|
|
$ |
107,146 |
|
|
$ |
122,691 |
|
Properties subject to amortization (1) |
|
|
3,478,878 |
|
|
|
3,556,755 |
|
|
|
2,777,097 |
|
|
|
|
|
|
|
|
|
|
|
Capitalized costs |
|
|
3,507,195 |
|
|
|
3,663,901 |
|
|
|
2,899,788 |
|
Accumulated depreciation, depletion and amortization |
|
|
(1,920,494 |
) |
|
|
(1,649,674 |
) |
|
|
(1,355,857 |
) |
|
|
|
|
|
|
|
|
|
|
Net capitalized costs |
|
$ |
1,586,701 |
|
|
$ |
2,014,227 |
|
|
$ |
1,543,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes asset retirement obligations of $43.6 million, $93.8 million and
$71.2 million, respectively, for the years ended December 31, 2006, 2005 and 2004. |
Additions to Unevaluated Properties
The following table provides a summary of unevaluated costs not being amortized as of December 31,
2006, by the year in which the costs were incurred. There are no individually significant
properties or significant development projects included in our unevaluated property balance. We
estimate that costs will be evaluated and transferred within four years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs incurred by Year as of December 31, 2006 |
|
|
|
Total |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 and Prior |
|
|
|
(in thousands) |
|
Property acquisition costs |
|
$ |
17,393 |
|
|
$ |
1,008 |
|
|
$ |
11,426 |
|
|
$ |
4,495 |
|
|
$ |
464 |
|
Exploration and development |
|
|
10,924 |
|
|
|
10,078 |
|
|
|
603 |
|
|
|
224 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,317 |
|
|
$ |
11,086 |
|
|
$ |
12,029 |
|
|
$ |
4,719 |
|
|
$ |
483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Costs Incurred
Costs incurred for natural gas and oil exploration, development and acquisition are summarized
below. Costs incurred during the years ended December 31, 2006, 2005 and 2004 include interest
expense and general and administrative costs directly related to acquisition, exploration and
development of natural gas and oil properties of $24.8 million, $25.6 million and $23.2 million,
respectively. During the years ended December 2006, 2005 and 2004, we spent $160.4 million, $128.9
million and $56.7 million, respectively, to develop our proved undeveloped reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Property acquisition and leasehold costs |
|
|
|
|
|
|
|
|
|
|
|
|
Unevaluated |
|
$ |
2,334 |
|
|
$ |
31,009 |
|
|
$ |
28,059 |
|
Proved |
|
|
112,646 |
|
|
|
232,784 |
|
|
|
179,281 |
|
Exploration costs |
|
|
71,195 |
|
|
|
112,634 |
|
|
|
63,646 |
|
Development costs |
|
|
|
|
|
|
|
|
|
|
|
|
Development drilling |
|
|
426,615 |
|
|
|
366,902 |
|
|
|
245,971 |
|
Asset retirement obligations costs assumed (1) |
|
|
38,113 |
|
|
|
23,651 |
|
|
|
12,116 |
|
Asset retirement obligations costs properties sold (1) |
|
|
(88,375 |
) |
|
|
(32 |
) |
|
|
(12,714 |
) |
Asset retirement expenditures (1) |
|
|
|
|
|
|
(971 |
) |
|
|
(2,362 |
) |
|
|
|
|
|
|
|
|
|
|
Total development costs |
|
|
376,353 |
|
|
|
389,550 |
|
|
|
243,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs incurred |
|
$ |
562,528 |
|
|
$ |
765,977 |
|
|
$ |
513,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Asset retirement obligation costs reflect abandonment obligations assumed
during the year and revisions to prior estimates. As a result of the dispositions of
substantially all of our Gulf of Mexico assets during 2006 and our South Louisiana and |
F-39
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Appalachian Basin assets during 2004, asset retirement obligations were reduced by $88.7
million during 2006 and by $12.7 million in 2004. Actual retirement expenditures reflect
plugging and abandonment costs during the year.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Natural Gas and
Oil Reserves
The following summarizes the policies we used in the preparation of the accompanying natural gas
and oil reserve disclosures, standardized measures of discounted future net cash flows from proved
natural gas and oil reserves and the reconciliations of standardized measures from year to year.
The information disclosed, as prescribed by the Statement of Financial Accounting Standards No. 69,
is an attempt to present the information in a manner comparable with industry peers.
The information is based on estimates of proved reserves attributable to our interest in natural
gas and oil properties as of December 31 of the years presented. These estimates were prepared by
independent petroleum consultants. Proved reserves are estimated quantities of natural gas and
crude oil which geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and operating conditions.
The standardized measure of discounted future net cash flows from production of proved reserves was
developed as follows:
|
1. |
|
Estimates are made of quantities of proved reserves and future periods during which
they are expected to be produced based on year-end economic conditions. |
|
|
2. |
|
The estimated future cash flows are compiled by applying year-end prices of natural gas
and oil relating to our proved reserves to the year-end quantities of those reserves. |
|
|
3. |
|
The future cash flows are reduced by estimated production costs, costs to develop and
produce the proved reserves and abandonment costs, all based on year-end economic
conditions. |
|
|
4. |
|
Future income tax expenses are based on year-end statutory tax rates giving effect to
the remaining tax basis in the natural gas and oil properties, other deductions, credits
and allowances relating to our proved natural gas and oil reserves. |
|
|
5. |
|
Future net cash flows are discounted to present value by applying a discount rate of
10%. |
The standardized measure of discounted future net cash flows does not purport, nor should it be
interpreted, to present the fair value of our natural gas and oil reserves. An estimate of fair
value would also take into account, among other things, the recovery of reserves not presently
classified as proved, anticipated future changes in prices and costs, and a discount factor more
representative of the time value of money and the risks inherent in reserve estimates.
The standardized measure of discounted future net cash flows relating to proved natural gas and oil
reserves is as follows and does not include cash flows associated with hedges outstanding at each
of the respective reporting dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Future cash inflows |
|
$ |
3,547,732 |
|
|
$ |
7,065,492 |
|
|
$ |
4,558,560 |
|
Future production costs |
|
|
(957,940 |
) |
|
|
(1,403,934 |
) |
|
|
(812,800 |
) |
Future development costs |
|
|
(594,544 |
) |
|
|
(874,327 |
) |
|
|
(545,192 |
) |
Future income taxes |
|
|
(555,522 |
) |
|
|
(1,520,815 |
) |
|
|
(976,611 |
) |
|
|
|
|
|
|
|
|
|
|
Future net cash flows |
|
|
1,439,726 |
|
|
|
3,266,416 |
|
|
|
2,223,957 |
|
10% annual discount for estimated timing of cash flows |
|
|
(702,500 |
) |
|
|
(1,299,392 |
) |
|
|
(783,902 |
) |
|
|
|
|
|
|
|
|
|
|
Standardized measure of discounted future net cash flows |
|
$ |
737,226 |
|
|
$ |
1,967,024 |
|
|
$ |
1,440,055 |
|
|
|
|
|
|
|
|
|
|
|
Year-end prices per Mcf of natural gas used in making standardized measure determinations as of
December 31, 2006, 2005 and 2004 were $4.94, $8.15 and $5.68, respectively. Year-end prices per
Bbl of oil used in making these same calculations were $49.94, $53.27 and $41.67, respectively, for
2006, 2005 and 2004.
At December 31, 2006, our standardized measure of discounted future net cash flows includes
estimated future development costs for our proved undeveloped reserves for the next three years of
$135.1 million, $207.2 million and $104.3 million, respectively, for 2007, 2008 and 2009.
F-40
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes changes in the standardized measure of discounted future net cash
flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(in thousands) |
|
Beginning of the year |
|
$ |
1,967,024 |
|
|
$ |
1,440,055 |
|
|
$ |
1,504,406 |
|
Revisions in quantities |
|
|
(66,056 |
) |
|
|
(251,007 |
) |
|
|
(59,549 |
) |
Changes in prices |
|
|
(859,166 |
) |
|
|
943,487 |
|
|
|
(34,170 |
) |
Changes in future development costs |
|
|
(44,270 |
) |
|
|
(198,013 |
) |
|
|
(35,056 |
) |
Development costs incurred during the period |
|
|
195,723 |
|
|
|
209,322 |
|
|
|
85,439 |
|
Extensions and discoveries, net of related costs |
|
|
237,296 |
|
|
|
620,243 |
|
|
|
445,908 |
|
Sales of natural gas and oil, net of production costs |
|
|
(499,057 |
) |
|
|
(787,013 |
) |
|
|
(639,555 |
) |
Accretion of discount |
|
|
287,742 |
|
|
|
207,197 |
|
|
|
205,641 |
|
Net change in income taxes |
|
|
644,930 |
|
|
|
(278,475 |
) |
|
|
(79,913 |
) |
Purchase of reserves in place |
|
|
55,115 |
|
|
|
250,520 |
|
|
|
247,671 |
|
Sale of reserves in place |
|
|
(1,137,244 |
) |
|
|
(4,904 |
) |
|
|
(110,877 |
) |
Production timing and other |
|
|
(44,811 |
) |
|
|
(184,388 |
) |
|
|
(89,890 |
) |
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
737,226 |
|
|
$ |
1,967,024 |
|
|
$ |
1,440,055 |
|
|
|
|
|
|
|
|
|
|
|
Estimated Net Quantities of Natural Gas and Oil Reserves
The following table sets forth our proved reserves, including changes, and proved developed
reserves (all within the United States) at the end of each of the three years in the period ended
December 31, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas (MMcf) |
|
Crude Oil, Liquids and Condensate (MBbls) |
|
|
2006 |
|
2005 |
|
2004 |
|
2006 |
|
2005 |
|
2004 |
|
Beginning of the year reserves |
|
|
793,074 |
|
|
|
749,114 |
|
|
|
709,883 |
|
|
|
11,291 |
|
|
|
7,335 |
|
|
|
7,481 |
|
Revisions of previous estimates |
|
|
(33,797 |
) |
|
|
(66,205 |
) |
|
|
(13,232 |
) |
|
|
471 |
|
|
|
1,097 |
|
|
|
(1,110 |
) |
Extensions and discoveries |
|
|
153,020 |
|
|
|
135,336 |
|
|
|
162,719 |
|
|
|
1,140 |
|
|
|
1,395 |
|
|
|
255 |
|
Production |
|
|
(82,528 |
) |
|
|
(105,809 |
) |
|
|
(115,855 |
) |
|
|
(938 |
) |
|
|
(1,417 |
) |
|
|
(1,355 |
) |
Purchase of reserves in place |
|
|
30,779 |
|
|
|
81,704 |
|
|
|
67,806 |
|
|
|
237 |
|
|
|
3,000 |
|
|
|
2,245 |
|
Sales of reserves in place |
|
|
(188,912 |
) |
|
|
(1,066 |
) |
|
|
(62,207 |
) |
|
|
(7,586 |
) |
|
|
(119 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year reserves |
|
|
671,636 |
|
|
|
793,074 |
|
|
|
749,114 |
|
|
|
4,615 |
|
|
|
11,291 |
|
|
|
7,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
506,212 |
|
|
|
475,080 |
|
|
|
487,867 |
|
|
|
6,933 |
|
|
|
3,535 |
|
|
|
4,073 |
|
End of year |
|
|
446,109 |
|
|
|
506,212 |
|
|
|
475,080 |
|
|
|
3,589 |
|
|
|
6,933 |
|
|
|
3,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas Equivalents (MMcfe) |
|
|
2006 |
|
2005 |
|
2004 |
|
Beginning of year reserves |
|
|
860,820 |
|
|
|
793,124 |
|
|
|
754,769 |
|
Revisions of previous estimates |
|
|
(30,971 |
) |
|
|
(59,623 |
) |
|
|
(19,892 |
) |
Extensions and discoveries |
|
|
159,860 |
|
|
|
143,706 |
|
|
|
164,249 |
|
Production |
|
|
(88,156 |
) |
|
|
(114,311 |
) |
|
|
(123,985 |
) |
Purchase of reserves in place |
|
|
32,201 |
|
|
|
99,704 |
|
|
|
81,276 |
|
Sales of reserves in place |
|
|
(234,428 |
) |
|
|
(1,780 |
) |
|
|
(63,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year reserves |
|
|
699,328 |
|
|
|
860,820 |
|
|
|
793,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed reserves: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
547,810 |
|
|
|
496,290 |
|
|
|
512,305 |
|
End of year |
|
|
467,643 |
|
|
|
547,810 |
|
|
|
496,290 |
|
F-41
THE HOUSTON EXPLORATION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 Quarterly Financial Information (Unaudited)
The following represents our unaudited quarterly results for years ended December 31, 2006 and
2005. The quarterly results were prepared in accordance with GAAP and reflect all adjustments that
are, in the opinion of management, necessary for a fair statement of the results. These
adjustments are of a normal recurring nature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
|
|
|
2006 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(2) |
|
$ |
177,604 |
|
|
$ |
145,914 |
|
|
$ |
131,337 |
|
|
$ |
76,742 |
|
Total operating expenses(3) |
|
|
124,436 |
|
|
|
93,353 |
|
|
|
81,809 |
|
|
|
105,151 |
|
Income (loss) from operations |
|
|
53,168 |
|
|
|
52,561 |
|
|
|
49,528 |
|
|
|
(28,409 |
) |
Net income (loss)(4) |
|
|
29,772 |
|
|
|
23,371 |
|
|
|
34,003 |
|
|
|
(19,363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)per share basic(7) |
|
$ |
1.03 |
|
|
$ |
0.82 |
|
|
$ |
1.22 |
|
|
$ |
(0.69 |
) |
Net income (loss) per share diluted(7) |
|
$ |
1.02 |
|
|
$ |
0.81 |
|
|
$ |
1.22 |
|
|
$ |
(0.69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(5) |
|
$ |
165,720 |
|
|
$ |
175,817 |
|
|
$ |
125,413 |
|
|
$ |
154,593 |
|
Total operating expenses(6) |
|
|
104,119 |
|
|
|
106,117 |
|
|
|
109,180 |
|
|
|
117,391 |
|
Income from operations |
|
|
61,601 |
|
|
|
69,700 |
|
|
|
16,233 |
|
|
|
37,202 |
|
Net income |
|
|
33,438 |
|
|
|
43,830 |
|
|
|
8,081 |
|
|
|
19,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic(7) |
|
$ |
1.17 |
|
|
$ |
1.53 |
|
|
$ |
0.28 |
|
|
$ |
0.69 |
|
Net income per share diluted(7) |
|
$ |
1.16 |
|
|
$ |
1.51 |
|
|
$ |
0.28 |
|
|
$ |
0.69 |
|
|
|
|
(1) |
|
Operating results for 2006 reflect the sale of substantially all of our Gulf
of Mexico assets with completion of the sale of the Texas offshore assets on March 31, 2006
and the completion of the sale of the Louisiana offshore assets on June 1, 2006. In addition,
the fluctuations in total revenues each quarter reflect the loss of hedge accounting during
the first quarter of 2006 and the subsequent application of mark-to-market accounting for open
derivative contracts. The loss of hedge accounting was a result of market factors subsequent
to Hurricanes Katrina and Rita and the sale of the Gulf of Mexico assets. |
|
(2) |
|
For the fourth quarter of 2006, total revenues includes a net loss of $41.2 million
from hedging activities which includes the following items: (i) a $1.5 million loss realized
on contracts settled during the fourth quarter; (ii) an unrealized loss of $46.6 million for
the mark-to-market change in the fair value of open derivative contracts; and (iii) a $6.9
million unrealized gain for ineffective contracts. |
|
(3) |
|
For the fourth quarter of 2006, total operating expenses includes a writedown in the
carrying value of our natural gas and oil properties of $19.0 million ($12.3 million net of
tax) incurred due to the cumulative effect of higher finding and development costs during
recent years, combined with higher estimated future operating and development costs at
year-end 2006. |
|
(4) |
|
For the fourth quarter of 2006, the loss from operations and the net loss were
primarily due to realized natural gas prices that averaged $5.80 per Mcf; higher depreciation,
depletion and amortization expense caused by higher rates due to higher finding and
development costs and higher estimated future development costs; and a writedown in the
carrying value of our natural gas and oil properties of $19.0 million ($12.3 million net of
tax). |
|
(5) |
|
For the fourth quarter of 2005, total revenues includes a net loss of $116.5 million
from hedging activities which includes the following items: (i) a $164.5 million loss
realized on contracts settled during fourth quarter; (ii) a $20.6 million unrealized gain for
the deferral of losses on settled contracts that were deferred to accumulated other
comprehensive income due to an offshore production shortfall; and (iii) a $27.6 million
unrealized gain for ineffective contracts which includes $26.4 million due to loss of
correlation between the NYMEX price and the Houston Ship Channel index during the fourth
quarter of 2005. |
|
(6) |
|
For the fourth quarter of 2005, total operating expenses includes $4.0 million in
additional general and administrative expenses related to severance and other separation
related payments made to certain former employees, including our former Chief Financial
Officer. |
|
(7) |
|
Quarterly earnings per share is based on the weighted average number of shares
outstanding during the quarter. Because of changes in the number of shares outstanding during
the quarters due to the exercise of stock options and/or the issuance or repurchase of common
stock, the sum of quarterly earnings per share may not equal earnings per share for the year. |
F-42