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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________TO_____________
COMMISSION FILE NO. 001-11899
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THE HOUSTON EXPLORATION COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF 22-2674487
INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
1100 LOUISIANA STREET, SUITE 2000
HOUSTON, TEXAS 77002-5215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(713) 830-6800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 15, 2001, 30,047,341 shares of Common Stock, par value $.01
per share, were outstanding.
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THE HOUSTON EXPLORATION COMPANY
TABLE OF CONTENTS
Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS..........................................................................3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets -- March 31, 2001 and December 31, 2000..........................................4
Consolidated Statements of Operations -- Three Months Ended March 31, 2001 and 2000..........................5
Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2001 and 2000..........................6
Notes to the Consolidated Financial Statements...............................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities.................................................................19
Item 6. Exhibits and Reports on Form 8-K............................................................................19
SIGNATURES...........................................................................................................20
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "anticipate," "believe," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements. Without
limiting the foregoing, all statements under the caption "Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to the Company's anticipated capital expenditures, future cash flows
and borrowings, pursuit of potential future acquisition opportunities and
sources of funding for exploration and development are forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as the volatility of natural gas and oil prices, uncertainty of reserve
information and future net revenue estimates, reserve replacement risks,
drilling risks, operating risks of natural gas and oil operations, acquisition
risks, substantial capital requirements, government regulation, environmental
matters and competition. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, believed, estimated, expected or
projected. For additional discussion of such risks, uncertainties and
assumptions, see "Items 1 and 2. Business and Properties" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K filed under the
Securities Exchange Act of 1934, as amended.
Unless otherwise indicated, references to "Houston Exploration" or the
"Company" refer to The Houston Exploration Company and its subsidiaries on a
consolidated basis.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents ........................................................ $ 17,670 $ 9,675
Accounts receivable .............................................................. 74,235 100,966
Accounts receivable -- Affiliate ................................................. 929 13,635
Inventories ...................................................................... 2,247 1,923
Prepayments and other ............................................................ 2,775 1,913
----------- -----------
Total current assets .................................................... 97,856 128,112
Natural gas and oil properties, full cost method
Unevaluated properties ......................................................... 153,219 142,890
Properties subject to amortization ............................................. 1,214,658 1,162,000
Other property and equipment ..................................................... 9,892 9,852
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1,377,769 1,314,742
Less: Accumulated depreciation, depletion and amortization ....................... (639,574) (609,352)
----------- -----------
738,195 705,390
Other assets ..................................................................... 3,568 3,882
----------- -----------
TOTAL ASSETS ............................................................ $ 839,619 $ 837,384
=========== ===========
LIABILITIES:
Accounts payable and accrued expenses ............................................ $ 83,390 $ 108,366
----------- -----------
Total current liabilities ............................................... 83,390 108,366
Long-term debt and notes ......................................................... 200,000 245,000
Deferred federal income taxes .................................................... 114,559 87,040
Other deferred liabilities ....................................................... -- 236
----------- -----------
TOTAL LIABILITIES ....................................................... 397,949 440,642
COMMITMENTS AND CONTINGENCIES (SEE NOTE 3)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value, 50,000,000 shares authorized and 29,997,741 shares
issued and outstanding at March 31, 2001 and 29,829,050 shares issued
and outstanding at December 31, 2000, respectively ............................. 300 298
Additional paid-in capital ....................................................... 328,085 325,205
Retained earnings ................................................................ 118,583 71,239
Accumulated other comprehensive income ........................................... (5,298) --
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TOTAL STOCKHOLDERS' EQUITY ............................................. 441,670 396,742
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 839,619 $ 837,384
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The accompanying notes are an integral part of these
consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2001 2000
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(UNAUDITED)
REVENUES:
Natural gas and oil revenues ............................. $ 123,996 $ 48,918
Other .................................................... 346 430
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Total revenues ................................... 124,342 49,348
OPERATING EXPENSES:
Lease operating .......................................... 6,245 6,377
Severance tax ............................................ 4,714 1,606
Depreciation, depletion and amortization ................. 30,219 20,757
General and administrative, net .......................... 7,965 2,189
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Total operating expenses ......................... 49,143 30,929
Income from operations ..................................... 75,199 18,419
Other (income) and expense ................................. (1,381) 1,752
Interest expense, net ...................................... 1,927 4,021
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Income before income taxes ................................. 74,653 12,646
Provision for federal income taxes ......................... 27,309 4,197
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NET INCOME ................................................. $ 47,344 $ 8,449
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Net income per share ....................................... $ 1.58 $ 0.35
============ ============
Net income per share -- assuming dilution .................. $ 1.55 $ 0.35
============ ============
Weighted average shares outstanding ........................ 29,963 23,979
Weighted average shares outstanding -- assuming dilution ... 30,502 24,102
The accompanying notes are an integral part of these
consolidated financial statements
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THE HOUSTON EXPLORATION COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2001 2000
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(UNAUDITED)
OPERATING ACTIVITIES:
Net income ................................................. $ 47,344 $ 8,449
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization ................. 30,219 20,757
Deferred income tax expense .............................. 27,519 4,422
Changes in operating assets and liabilities:
Decrease(increase) in accounts receivable ............. 39,437 (5,911)
Increase in inventories ............................... (324) (108)
Increase in prepayments and other ..................... (862) (3,002)
Decrease(increase) in other assets and liabilities .... 78 (172)
Decrease in accounts payable and accrued expenses ..... (30,274) (2,621)
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Net cash provided by operating activities .................. 113,137 21,814
INVESTING ACTIVITIES:
Investment in property and equipment ....................... (63,024) (31,904)
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Net cash used in investing activities ...................... (63,024) (31,904)
FINANCING ACTIVITIES:
Proceeds from long term borrowings ......................... 57,000 2,000
Repayments of long term borrowings ......................... (102,000) (4,000)
Proceeds from issuance of common stock ..................... 2,882 --
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Net cash used in financing activities ...................... (42,118) (2,000)
Increase(decrease) in cash and cash equivalents ............ 7,995 (12,090)
Cash and cash equivalents, beginning of period ............. 9,675 15,502
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Cash and cash equivalents, end of period ................... $ 17,670 $ 3,412
============ ============
Cash paid for interest ..................................... $ 7,280 $ 10,092
============ ============
Cash paid for taxes ........................................ $ -- $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Houston Exploration is an independent natural gas and oil company
engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's operations are currently
focused offshore in the Gulf of Mexico and onshore in South Texas, South
Louisiana, the Arkoma Basin, East Texas and West Virginia. Houston Exploration's
strategy is to utilize its geological and geophysical expertise to grow its
reserve base through a combination of: (i) exploratory drilling in the Gulf of
Mexico; (ii) lower risk, high impact exploitation and development drilling
onshore; and (iii) selective opportunistic acquisitions both offshore and
onshore. At December 31, 2000, the Company had net proved reserves of 562 Bcfe,
94% of which were natural gas and 77% of which were classified as proved
developed.
Houston Exploration began exploring for natural gas and oil in December
1985 on behalf of The Brooklyn Union Gas Company ("Brooklyn Union") and in
September 1996 the Company completed an initial public offering of its common
stock. Brooklyn Union became an indirect wholly-owned subsidiary of KeySpan
Corporation ("KeySpan") in May 1998 through the combination of Brooklyn Union's
parent company KeySpan Energy Corporation and Long Island Lighting Company. As
of March 31, 2001, THEC Holdings Corp., an indirect wholly owned subsidiary of
KeySpan, owned approximately 68% of the outstanding shares of Houston
Exploration's common stock. KeySpan, a member of the Standard & Poor's 500
Index, is a diversified energy provider that (i) distributes natural gas to 2.4
million customers in the Brooklyn, Long Island, Queens and Staten Island areas
of New York and to customers in eastern and central Massachusetts and central
New Hampshire; (ii) generates and manages electricity transmission and
distribution through the ownership and operation of generating plants throughout
New York state and through its contract with the Long Island Power Authority to
manage electricity service to 1.1 million customers in the Long Island area; and
(iii) through its other subsidiaries, is involved in various energy services and
energy related investments including wholesale and retail gas and electric
marketing, appliance service and installation, large energy-system installation
and management, fiber optic telecommunications and energy-related internet
activities.
Principles of Consolidation
The consolidated financial statements include the accounts of The
Houston Exploration Company and its wholly owned subsidiary, Seneca Upshur
Petroleum Company (collectively the "Company"). All significant intercompany
balances and transactions have been eliminated.
Interim Financial Statements
The balance sheet of the Company at March 31, 2001 and the statements
of operations and cash flows for the periods indicated herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although the
Company believes that the disclosures contained herein are adequate to make the
information presented not misleading. The balance sheet at December 31, 2000 is
derived from the December 31, 2000 audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The Interim Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
Reclassifications and Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles 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. The Company's most significant financial estimates are based
on remaining proved natural gas and oil reserves. Because there are numerous
uncertainties inherent in the estimation process, actual results could differ
from the estimates. Certain reclassifications of prior year items have been made
to conform with current year presentation.
New Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement, as amended, requires
companies to report the fair market value of derivatives on the balance sheet
and record in income or in accumulated other comprehensive income, as
appropriate, any changes in the fair market value of the derivative. The Company
adopted SFAS No. 133 effective January 1, 2001 and the adoption of SFAS No. 133
has had no effect on net income. At March 31, 2001, the Company recorded a
liability of $5.3 million representing the fair market value of its hedge
position and because the Company's natural gas hedges qualify for hedge
accounting under SFAS No. 133, the Company recorded a corresponding debit to
accumulated other comprehensive income, a component of stockholders' equity.
Net Income Per Share
Basic earnings per share ("EPS") is calculated by dividing net income
by the weighted average number of shares of common stock outstanding during the
period. No dilution for any potentially dilutive securities is included. Diluted
EPS assumes the conversion of all potentially dilutive securities and is
calculated by dividing net income, as adjusted, by the weighted average number
of shares of common stock outstanding plus all potentially dilutive securities.
THREE MONTHS ENDED MARCH 31,
2001 2000
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income ....................................... $ 47,344 $ 8,449
============ ============
Weighted average shares outstanding .............. 29,963 23,979
Add: dilutive securities
Options .................................... 539 123
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Total weighted average shares outstanding and
dilutive securities ............................ 30,502 24,102
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Net income per share ............................. $ 1.58 $ 0.35
============ ============
Net income per share -- assuming dilution ........ $ 1.55 $ 0.35
============ ============
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 -- LONG-TERM DEBT AND NOTES
MARCH 31, 2001 DECEMBER 31, 2000
--------------- -----------------
(IN THOUSANDS)
SENIOR DEBT:
Bank revolving credit facility, due 2003 ..... $ 100,000 $ 145,000
SUBORDINATED DEBT:
8 5/8% Senior Subordinated Notes, due 2008 ... 100,000 100,000
---------------- ----------------
Total long-term debt and notes ........... $ 200,000 $ 245,000
================ ================
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 March 31, 2001, the quoted market value of the
Company's $100 million of 8 5/8% Senior Subordinated Notes was 98.5% of the
$100 million carrying value or $98.5 million.
Credit Facility
The Company entered into a revolving bank credit facility (the "Credit
Facility") with a syndicate of lenders led by The Chase Manhattan Bank, National
Association ("Chase"). The Credit Facility, as amended, provides a maximum
commitment of $250 million, subject to borrowing base limitations. Effective
April 11, 2001 the Company's borrowing base was increased from $210 million to
$250 million. Up to $2.0 million of the borrowing base is available for the
issuance of letters of credit to support performance guarantees. The Credit
Facility matures on March 1, 2003 and is unsecured. At March 31, 2001, $100
million was outstanding under the Credit Facility and $0.4 million was
outstanding in letter of credit obligations. Subsequent to March 31, 2001, the
Company paid down an additional $14 million on the Credit Facility bringing
outstanding borrowings and letters of credit under the facility to $86.4 million
as of May 15, 2001.
Interest is payable on borrowings under the Credit Facility, at the
Company's option, at (i) a fluctuating rate ("Base Rate") equal to the greater
of the Federal Funds rate plus 0.5% or Chase's prime rate, or (ii) a fixed rate
("Fixed Rate") equal to a quoted LIBOR rate plus a variable margin of 0.875% to
1.625%, depending on the amount outstanding under the Credit Facility. Interest
is payable at calendar quarters for Base Rate loans and at the earlier of
maturity or three months from the date of the loan for Fixed Rate loans. In
addition, the Credit Facility requires a commitment fee of: (i) between 0.25%
and 0.375% per annum on the unused portion of the Designated Borrowing Base, and
(ii) an unavailable commitment fee equal to 33% of the commitment fee in (i)
above on the difference between the lesser of the Facility Amount or the
Borrowing Base and the Designated Borrowing Base.
The Credit Facility contains covenants of the Company, including
certain restrictions on liens and financial covenants which require the Company
to, among other things, maintain (i) an interest coverage ratio of 2.5 to 1.0 of
earnings before interest, taxes and depreciation ("EBITDA") to cash interest;
(ii) a total debt to capitalization ratio of less than 60%, exclusive of
non-cash charges; and (iii) sets a maximum limit of 70% on the amount of natural
gas production the Company may hedge during any 12 month period. In addition to
maintenance of certain financial ratios, cash dividends and/or purchase or
redemption of the Company's stock is restricted as well as the encumbering of
the Company's gas and oil assets or the pledging of the assets as collateral. As
of March 31, 2001, the Company was in compliance with all such covenants.
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Senior Subordinated Notes
On March 2, 1998, the Company issued $100 million of 8 5/8% senior
subordinated notes (the "Notes") due January 1, 2008. The Notes bear interest at
a rate of 8 5/8% per annum with interest payable semi-annually on January 1 and
July 1. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after January 1, 2003 at a price equal to 100% of the
principal amount plus accrued and unpaid interest, if any, plus a specified
premium if the Notes are redeemed prior to January 1, 2006. Upon the occurrence
of a change of control (as defined), the Company will be required to offer to
purchase the Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any. The Notes are general
unsecured obligations of the Company and rank subordinate in right of payment to
all existing and future senior debt, including the Credit Facility, and will
rank senior or equal in right of payment to all existing and future subordinated
indebtedness.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various claims and
lawsuits incidental to its business. In the opinion of management, the ultimate
liability thereunder, if any, will not have a material adverse affect on the
financial position or results of operations of the Company.
NOTE 4 -- RELATED PARTY TRANSACTIONS
Restricted Stock Grant to New President and Chief Executive.
On April 4, 2001, the Company's Board of Directors appointed William G.
Hargett to serve as the Company's President and Chief Executive Officer and
Director. Effective April 4, 2001, the Company entered into an employment
agreement with Mr. Hargett, and pursuant to the employment agreement, Mr.
Hargett received a grant of 10,000 restricted shares of Houston Exploration
common stock with a fair market value of approximately $300,000. The stock is
restricted from transfer and subject to forfeiture in the event Mr. Hargett's
employment is terminated prior to the third anniversary of his employment
agreement and will otherwise vest, be nonforfeitable and freely transferable in
equal one-third increments on each anniversary of the effective date of his
employment agreement. The cost of the restricted stock will be recognized in
earnings as compensation expense over the stock's three year vesting period.
Termination of Employment Agreements for Retiring Executives.
Effective March 31, 2001, the Company's President and Chief Executive
Officer and Director, James G. Floyd, and the Senior Vice President -
Exploration and Production, Randall J. Fleming, retired from the Company. Each
had served in their respective positions since the Company's inception in 1986.
In connection with their retirement as executive officers of the Company, each
Messrs. Floyd and Fleming agreed to the termination of their respective
employment agreements. They received lump sum severance payments of $2.3 million
and $1.4 million, respectively.
KeySpan Joint Venture
Effective January 1, 1999, the Company entered into a joint exploration
agreement (the "KeySpan Joint Venture") with KeySpan Exploration & Production,
LLC, a subsidiary of KeySpan, to explore for natural gas and oil over an initial
two year term expiring December 31, 2000. Under the terms of the KeySpan Joint
Venture, the Company contributed all of its then undeveloped offshore acreage to
the joint venture and KeySpan received 45% of Houston Exploration's working
interest in all prospects drilled under the program. KeySpan paid 100% of actual
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THE HOUSTON EXPLORATION COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
intangible drilling costs for the joint venture up to a specified maximum and
all additional intangible drilling costs incurred were paid 51.75% by KeySpan
and 48.25% by Houston Exploration. Revenues are shared 55% Houston Exploration
and 45% KeySpan. In addition, the Company received reimbursements from KeySpan
for a portion of its general and administrative costs.
During the initial two-year term of the joint drilling program
beginning January 1, 1999 and ending December 31, 2000, the Company, together
with KeySpan, drilled a total of 21 wells: 17 exploratory and four development,
five of which were unsuccessful. KeySpan spent a total of $82.1 million on
exploration and development, $46.5 million in 2000 and $35.6 million in 1999.
Houston Exploration received a total of $7.3 million in general and
administrative cost reimbursements, $2.5 million in 2000 and $4.8 million in
1999.
Effective December 31, 2000, the Company and KeySpan agreed not to
renew the primary or exploratory term of the KeySpan Joint Venture. As a result,
KeySpan will not participate in the Company's future offshore exploration
prospects nor will the Company receive any reimbursement from KeySpan for future
general and administrative costs. However, pursuant to the terms of the joint
venture agreement, KeySpan will continue to maintain its working interest in all
wells drilled under the KeySpan Joint Venture. For the year 2001, KeySpan has
agreed to commit approximately $17 million for the development of prospects
successfully drilled during 1999 and 2000. During the first three months of
2001, KeySpan spent approximately $2.7 million in capital costs which compared
to $12.5 million spent during the first three months of 2000. During the first
three months of 2001, the Company received no reimbursements for general and
administrative expenses from KeySpan compared to $0.6 million received in the
first three months of 2000.
KeySpan Credit Facility and Conversion.
On November 30, 1998, the Company entered into a revolving credit
facility with KeySpan (the "KeySpan Facility"), which provided a maximum
commitment of $150 million. The Company borrowed $80 million under the KeySpan
Facility to finance a portion of the November 1998 acquisition of the Mustang
Island A-31 Field. On March 31, 2000, the outstanding borrowings of $80 million
were converted into 5,085,177 shares of the Company's common stock at a
conversion price of $15.732 per share. As a result of the conversion, KeySpan's
ownership interest in the Company increased from 64% to 68%. The conversion
price was determined based upon the average of the closing prices of the
Company's common stock, rounded to three decimal places, as reported under "NYSE
Composite Transaction Reports" in the Wall Street Journal during the 20
consecutive trading days ending three trading days prior to March 31, 2000. The
conversion of the KeySpan Facility was approved by the Company's stockholders at
the Company's annual meeting held April 27, 1999. Borrowings under the facility
bore interest at LIBOR plus 1.4% and the Company incurred a quarterly commitment
fee of 0.125% on the unused portion of the maximum commitment. Pursuant to the
conversion, the KeySpan Facility terminated on March 31, 2000. For the three
months ended March 31, 2000, the Company incurred $1.5 million in interest and
fees to KeySpan.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in an understanding of
the Company's historical financial position and results of operations for the
three months ended March 31, 2001 and 2000. The Company's consolidated financial
statements and notes thereto included elsewhere in this report contain detailed
information that should be referred to in conjunction with the following
discussion.
GENERAL
The Houston Exploration Company is an independent natural gas and oil
company engaged in the exploration, development, exploitation and acquisition of
domestic natural gas and oil properties. The Company's offshore properties are
located primarily in the shallow waters of the Gulf of Mexico, and its onshore
properties are located in South Texas, South Louisiana, the Arkoma Basin, East
Texas and the Appalachian Basin in West Virginia. The Company has utilized its
geological and geophysical expertise to grow its reserve base through a
combination of (i) high potential exploratory drilling in the Gulf of Mexico;
(ii) lower risk, high impact exploitation and development drilling onshore; and
(iii) selective opportunistic acquisitions both offshore and onshore.
At December 31, 2000, net proved reserves were 562 Bcfe with a
discounted present value of cash flows before income taxes ("PV-10%") of $2.8
billion. The Company's focus is natural gas and approximately 94% of its net
proved reserves at December 31, 2000 were natural gas and approximately 77% were
classified as proved developed. The Company operates approximately 85% of its
production.
As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for natural gas, oil and condensate, which are dependent upon
numerous factors beyond the Company's control, such as economic, political and
regulatory developments and competition from other sources of energy. The energy
markets have historically been very volatile, as evidenced by the recent
volatility of natural gas and oil prices, and there can be no assurance that
commodity prices will not be subject to wide fluctuations in the future. A
substantial or extended decline in natural gas and oil prices could have a
material adverse effect on the Company's financial position, results of
operations, cash flows, quantities of natural gas and oil reserves that may be
economically produced and access to capital.
The Company uses the full cost method of accounting for its investment
in natural gas and oil properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of natural gas and oil
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved natural gas and
oil reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the present
value (using a 10% discount rate) of estimated future net cash flows from proved
natural gas and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations. If a write down is
required, it would result in a charge to earnings but would not have an impact
on cash flows from operating activities. Once incurred, a write down of oil and
gas properties is not reversible at a later date even if oil and gas prices
increase.
New Accounting Pronouncements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement, as amended, requires
companies to report the fair market value of derivatives on the balance sheet
and record in income or in accumulated other comprehensive income, as
appropriate, any changes in the fair market value of the derivative. The Company
adopted SFAS No. 133 effective January 1, 2001 and the adoption of SFAS No. 133
has had no effect on net income. At March 31, 2001, the Company recorded a
liability of $5.3 million representing the fair market value of its hedge
position and because the Company's natural gas hedges qualify for hedge
accounting under SFAS No. 133, the Company recorded a corresponding debit to
accumulated other comprehensive income, a component of stockholders' equity.
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13
Recent Developments
Retirement of Executive Officers. Effective March 31, 2001, the
Company's President and Chief Executive Officer and Director, James G. Floyd,
and the Senior Vice President - Exploration and Production, Randall J. Fleming,
retired from the Company. Each had served in their respective positions since
the Company's inception in 1986. In conjunction with his retirement on March 31,
2001, Mr. Floyd resigned from the Company's Board of Directors. In connection
with their retirement as executive officers of the Company, each Messrs. Floyd
and Fleming agreed to the termination of their respective employment agreements
and each received lump sum severance payments of $2.3 million and $1.4 million,
respectively.
New President and Chief Executive Officer. Effective April 4, 2001, the
Company's Board of Directors appointed William G. Hargett to serve as the
Company's President and Chief Executive Officer and Director. The Company
entered into an employment agreement with Mr. Hargett and on the effective date
of the agreement, Mr. Hargett received a grant of 10,000 restricted shares of
Houston Exploration common stock with a fair market value of approximately
$300,000. The stock is restricted from transfer and subject to forfeiture in the
event Mr. Hargett's employment is terminated prior to the third anniversary of
his employment agreement and will otherwise vest, be nonforfeitable and freely
transferable in equal one-third increments on each anniversary of the effective
date of his employment agreement. The cost of the restricted stock will be
recognized in earnings as compensation expense over the stock's three year
vesting period.
Prior to his appointment as the Company's President and Chief Executive
Officer and Director, Mr. Hargett served as President - North America of Santa
Fe Snyder until May 2000. Prior to Snyder Oil Corporation's merger with Santa Fe
Resources, Inc. in May of 1999, he was President, Chief Operating Officer and a
director of Snyder Oil Corporation since April 1997. Prior to joining Snyder Oil
Corporation, Mr. Hargett served as President of Greenhill Petroleum Corporation,
the U.S. oil and gas subsidiary of Australian based Western Mining Corporation,
from 1994 to 1997, Amax Oil & Gas, Inc. from 1993 to 1994 and North Central Oil
Corporation from 1988 to 1993. Mr. Hargett was employed in various exploration
capacities by Tenneco Oil Corporation from 1974 to 1988 and Amoco Production
Company from 1973 to 1974. Mr. Hargett earned Bachelor of Science and Master of
Science degrees from the University of Alabama.
KeySpan Joint Venture. Effective December 31, 2000, the Company and
KeySpan agreed not to renew the primary or exploratory term of their joint
exploration agreement (the "KeySpan Joint Venture"), (see Note 4 -- Related
Party Transactions -- KeySpan Joint Venture). As a result of the expiration of
the primary term of the KeySpan Joint Venture, all undeveloped offshore acreage
contributed to the KeySpan Joint Venture by the Company reverted back to Houston
Exploration, at no cost, and KeySpan will no longer participate in exploration
prospects of the Company nor will the Company receive general and administrative
expense reimbursements from KeySpan. However, under the secondary term of the
KeySpan Joint Venture, KeySpan has agreed to continue to complete the
development of wells drilled under the terms of the KeySpan Joint Venture during
1999 and 2000 and has committed to a development budget of approximately $17
million for 2001.
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RESULTS OF OPERATIONS
The following table sets forth the Company's historical natural gas and
oil production data during the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
------------ ------------
PRODUCTION:
Natural gas (MMcf) ........................... 22,095 19,344
Oil (MBbls) .................................. 112 75
Total (MMcfe) ................................ 22,767 19,794
AVERAGE SALES PRICES:
Natural gas (per Mcf) realized(1) ............ $ 5.48 $ 2.43
Natural gas (per Mcf) unhedged ............... 6.86 2.41
Oil (per Bbl) ................................ 25.58 26.23
EXPENSES (PER Mcfe):
Lease operating .............................. $ 0.27 $ 0.32
Severance tax ................................ 0.21 0.08
Depreciation, depletion and amortization ..... 1.33 1.05
General and administrative, net(2) ........... 0.35 0.11
----------
(1) Reflects the effects of hedging.
(2) For the three months ended March 31, 2001, includes one-time payments
in connection with the termination of employment contracts for retiring
executives combined with an increase in incentive compensation
expenses.
RECENT FINANCIAL AND OPERATING RESULTS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000
Production. Houston Exploration's production increased 15% from 19,794
million cubic feet equivalent, or MMcfe, for the three months ended March 31,
2000 to 22,767 MMcfe for the three months ended March 31, 2001. The increase in
production was primarily attributable to newly developed offshore production
brought on-line since the end of the first quarter of 2000 at West Cameron 587,
Matagorda Island 704, Galveston Island 389 and 190, High Island 115/133 and
North Padre Island 883. Offshore production increased a total of 34% or 32
MMcfe/day from 94 MMcfe/day during the first quarter of 2000 to 126 MMcfe/day
during the first quarter of 2001. Onshore, production increased slightly by 3%,
from 124 MMcfe/day during the first quarter of 2000 to 127 MMcfe/day during the
first quarter of 2001.
Natural Gas and Oil Revenues. Natural gas and oil revenues increased
154% from $48.9 million for the three months ended March 31, 2000 to $124
million for the three months ended March 31, 2001 as a result of the 15%
increase in production combined with a 126% increase in average realized natural
gas prices, from $2.43 per Mcf for the three months ended March 31, 2000 to
$5.48 per Mcf for the three months ended March 31, 2001.
Natural Gas Prices. As a result of hedging activities, the Company
realized an average gas price of $5.48 per Mcf for the three months ended March
31, 2001, which was 80% of the average unhedged natural gas price of $6.86 that
otherwise would have been received, resulting in natural gas and oil revenues
for the three months ended March 31, 2001 that were $30.5 million lower than the
revenues the Company would have achieved if hedges had not been in place during
the period. For the corresponding period during 2000, the Company realized an
average gas price of $2.43 per Mcf, which was 101% of the average unhedged
natural gas price of $2.41 per Mcf that otherwise would have been received,
resulting in natural gas and oil revenues that were $0.3 million higher than the
revenues the Company would have achieved if hedges had not been in place during
the period.
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15
Lease Operating Expenses and Severance Tax. Lease operating expenses
decreased slightly by 2%, from $6.4 million for the three months ended March 31,
2000 to $6.3 million for the three months ended March 31, 2001. On an Mcfe
basis, lease operating expenses decreased 16% from $0.32 for the first three
months of 2000 to $0.27 for the first three months of 2001. The decrease in both
the lease operating expenses and lease operating expenses on a per unit basis is
a result of the 15% increase in production for the three months ended March 31,
2001 as compared to the three months ended March 31, 2000 combined with the
benefits realized from the Company's reorganization of its offshore operations
and engineering department during the second half of 2000. Severance tax, which
is a function of volume and revenues generated from onshore production,
increased 194% from $1.6 million for the three months ended March 31, 2000 to
$4.7 million for the three months ended March 31, 2001. On an Mcfe basis,
severance tax increased from $0.08 per Mcfe, for the first three months of 2000
to $0.21 per Mcfe, for the first three months of 2001. The increase in severance
tax expense and severance tax per Mcfe is due to higher natural gas prices
received during the first three months of 2001 as compared to prices received
during the first three months of 2000.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense increased 46% from $20.8 million for the three months ended
March 31, 2000 to $30.2 million for the three months ended March 31, 2001.
Depreciation, depletion and amortization expense per Mcfe increased by 27% from
$1.05 for the three months ended March 31, 2000 to $1.33 for the corresponding
three months in 2001. The increase in depreciation, depletion and amortization
expense reflects the 15% increase in production during the first quarter of 2001
as compared to the first quarter of 2000 combined with the increase in the
depletion rate. The higher rate is a result of a higher level of capital
spending during the first quarter of 2001 as compared to the first quarter of
2000 combined with the addition of fewer new reserves since the end of the first
quarter of 2000.
General and Administrative Expenses. General and administrative
expenses, net of overhead reimbursements received from other working interest
owners of $0.9 million and $0.3 million for the three months ended March 31,
2000 and 2001, respectively, increased 264% from $2.2 million for the three
months ended March 31, 2000 to $8.0 million for the three months ended March 31,
2001. Included in reimbursements received from working interest owners were
reimbursements totaling $0.6 million for the first three months of 2000 received
from KeySpan pursuant to the KeySpan Joint Venture (see Note 4 -- Related Party
Transactions). Effective December 31, 2000 and pursuant to the expiration of the
initial exploratory term of the KeySpan Joint Venture, the Company will no
longer receive reimbursement of general and administrative expenses from
KeySpan. The Company capitalized general and administrative expenses directly
related to oil and gas exploration and development activities of $2.2 million
and $4.9 million, respectively, for the three months ended March 31, 2000 and
2001. The increase in capitalized general and administrative expenses is a
result of higher aggregate general and administrative expenses during the first
three months of 2001 as compared to the corresponding period of 2000. Aggregate
general and administrative expenses were higher during the first three months of
2001 primarily as a result of: (i) one-time payments totaling $3.7 million in
connection with the retirement of executive officers and the termination of
their employment contracts; and (ii) an increase in incentive compensation and
benefit related expenses.
On an Mcfe basis, general and administrative expenses increased 218%
from $0.11 for the three months ended March 31, 2000 to $0.35 for the three
months ended March 31, 2001. Excluding the one-time payments for retiring
executives totaling $3.7 million, general and administrative expenses on a per
Mcfe basis would have increased 73% from $0.11 for the three months ended March
31, 2000 to $0.19 for the three months ended March 31, 2001. The higher rate per
Mcfe during the first three months of 2001 reflects the increase in aggregate
general and administrative expenses caused by the effect of the termination of
reimbursements received pursuant to the KeySpan Joint Venture which were $0.6
million per quarter during 2000 combined with higher incentive compensation and
benefit related expenses.
Other Income and Expense. For the first quarter of 2001, the Company
recognized other income of $1.4 million which relates to the reversal of a
portion of $1.8 million in certain reserves recorded during the first quarter of
2000 in connection with the review of strategic alternatives for the Company
which are no longer required. In September 1999, the Company and KeySpan, the
Company's majority stockholder, announced their intention to review strategic
alternatives for KeySpan's investment in Houston Exploration. KeySpan was
assessing the role of Houston Exploration within its future strategic plan, and
was considering a full range of strategic transactions including the possible
sale of all or a portion of Houston Exploration. On February 25, 2000, KeySpan
and the
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16
Company jointly announced that the review of strategic alternatives for Houston
Exploration was complete. KeySpan announced that it planned to retain its equity
position in Houston Exploration for the foreseeable future.
Interest Expense, Net. Interest expense, net of capitalized interest,
decreased 53% from $4.0 million for the three months ended March 31, 2000 to
$1.9 million for the three months ended March 31, 2001. Capitalized interest
decreased 6% from $3.3 million during the first three months of 2000 to $3.1
million during the corresponding three months of 2001. Aggregate interest
expense decreased 31% from $7.3 million for the first three months of 2000 to
$5.1 million for the first three months of 2001. While interest rates have
decreased from the first quarter of 2000, the decrease in interest expense is
due to: (i) the paydown of $79 million in borrowings under the revolving bank
credit facility since March 31, 2000 of which $45 million was paid in the first
quarter of 2001; and (ii) the March 31, 2000 conversion of $80 million in
outstanding borrowings under a revolving credit facility with KeySpan into
shares of common stock of the Company (see Note 4 -- Related Party Transactions
-- KeySpan Credit Facility and Conversion).
Income Tax Provision. The provision for income taxes increased from
$4.2 million for the first three months of 2000 to $27.3 million for the first
three months of 2001. The increase in income tax expense for the three months
ended March 31, 2001 as compared to the corresponding period of 2001 is
primarily due to the increase in pretax income for the three months ended March
31, 2001 as a result of higher natural gas prices, an increase in production and
a decrease in interest expense, offset in part by higher operating expenses.
Operating Income and Net Income. For the three months ended March 31,
2001, the 126% increase in natural gas price combined with the 15% increase in
production offset in part by a 59% increase in operating expense caused
operating income to increase 309% from $18.4 million during the first quarter of
2000 to $75.2 million during the first quarter of 2001. Correspondingly, net
income increased 460% from $8.4 million for the three months ended March 31,
2000 to $47.3 million for the three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations, acquisitions,
capital expenditures and working capital requirements from cash flows from
operations, equity capital from KeySpan as well as public sources, public debt
and bank borrowings. On March 31, 2000, the Company converted $80 million in
outstanding borrowings under a revolving credit facility established in November
1998 with KeySpan (the "KeySpan Facility") into 5,085,177 shares of common stock
of the Company at a conversion price of $15.732 per share. The KeySpan Facility
was terminated at conversion and as a result of the conversion, KeySpan's
ownership interest in the Company has increased from 64% at December 31, 1999 to
68% as of March 31, 2001.
Cash Flows From Operations. As of March 31, 2001, the Company had
working capital of $14.5 million and $109.6 million of borrowing capacity
available under its revolving bank credit facility. Net cash provided by
operating activities for the three months ended March 31, 2001 was $113.1
million compared to $21.8 million for the three months ended March 31, 2000. The
increase in net cash provided by operating activities is due to an increase in
net income caused by substantially higher natural gas prices and an increase in
production combined with an increase in working capital. The increase in working
capital during the first three months of 2001 is primarily related to the timing
of cash receipts and payments. Receivables are higher due to the increase in
natural gas revenues caused by an increase in both natural gas price and
production volume, and payables are higher due to an increase in drilling
activity combined with an increase in operating costs. The Company's cash
position decreased during the first three months of 2001 by a net paydown of
borrowings under its revolving bank credit facility of $45 million. Funds used
in investing activities consisted of $63 million for investments in property and
equipment. As a result of these activities, cash and cash equivalents increased
$8 million from $9.7 million at December 31, 2000 to $17.7 million at March 31,
2001.
Capital Expenditures. During the first quarter of 2001, the Company
invested a total of $63 million in natural gas and oil properties. This included
$14.5 million for exploration, $33.6 million for development drilling, workovers
and construction of platforms and pipelines and $14.9 million for leasehold and
leasehold acquisition costs. The Company's capital expenditure budget for 2001
has been set at $225 million. The Company does not include property acquisition
costs in its capital expenditure budget as the size and timing of capital
requirements for property acquisitions are inherently unpredictable. The capital
expenditure budget includes development costs
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17
associated with recent discoveries and amounts are contingent upon drilling
success. No significant abandonment or dismantlement costs are anticipated in
2001. The Company will continue to evaluate its capital spending plans
throughout the year. Actual levels of capital expenditures may vary
significantly due to a variety of factors, including drilling results, natural
gas prices, industry conditions and outlook and future acquisitions of
properties. The Company believes cash flows from operations and borrowings under
its revolving bank credit facility will be sufficient to fund these
expenditures. The Company intends to continue to selectively seek acquisition
opportunities for proved reserves with substantial exploration and development
potential both offshore and onshore, although there can be no assurance that the
Company will be able to identify and make acquisitions of proved reserves on
terms it considers favorable.
Shelf Offering. On May 20, 1999, the Company filed a "shelf"
registration with the Securities and Exchange Commission to offer and sell in
one or more offerings up to a total offering amount of $250 million in
securities which could include shares of the Company's common stock, shares of
preferred stock or unsecured debt securities or a combination thereof. Depending
on market conditions and the Company's capital needs, the Company may utilize
the shelf registration in order to raise capital. The Company would use the net
proceeds received from the sale of any securities for the repayment of debt
and/or to fund an acquisition. There can be no assurance that the Company will
be able to consummate such offering on acceptable terms.
Capital Structure
Credit Facility. The Company entered into a revolving bank credit
facility (the "Credit Facility") with a syndicate of lenders led by The Chase
Manhattan Bank, National Association. The Credit Facility, as amended, provides
a maximum commitment of $250 million, subject to borrowing base limitations.
Effective April 11, 2001 the borrowing base was increased to $250 million from
$210 million. Up to $2.0 million of the borrowing base is available for the
issuance of letters of credit to support performance guarantees. The Credit
Facility matures on March 1, 2003 and is unsecured. At March 31, 2001, $100
million was outstanding under the Credit Facility and $0.4 million was
outstanding in letter of credit obligations. Subsequent to March 31, 2001, the
Company paid down an additional $14 million under the Credit Facility, further
reducing outstanding borrowings and letters of credit under the facility to
$86.4 million as of May 15, 2001.
Senior Subordinated Notes. On March 2, 1998, the Company issued $100
million of 8 5/8% Senior Subordinated Notes (the "Notes") due January 1, 2008.
The Notes bear interest at a rate of 8 5/8% per annum with interest payable
semi-annually on January 1 and July 1. The Notes are redeemable at the option of
the Company, in whole or in part, at any time on or after January 1, 2003 at a
price equal to 100% of the principal amount plus accrued and unpaid interest, if
any, plus a specified premium if the Notes are redeemed prior to January 1,
2006. Upon the occurrence of a change of control (as defined in the indenture
governing the Notes), the Company will be required to offer to purchase the
Notes at a purchase price equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any. The Notes are general
unsecured obligations of the Company and rank subordinate in right of payment to
all existing and future senior debt, including the Credit Facility, and rank
senior or equal in right of payment to all existing and future subordinated
indebtedness.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Natural Gas Hedging. The Company utilizes derivative commodity
instruments to hedge future sales prices on a portion of its natural gas
production to achieve a more predictable cash flow, as well as to reduce its
exposure to adverse price fluctuations of natural gas. While the use of these
hedging arrangements limits the downside risk of adverse price movements, they
would limit future revenues from possible favorable price movements. The use of
hedging transactions also involves the risk that the counterparties will be
unable to meet the financial terms of such transactions. Hedging instruments
used are swaps, collars and options, and are generally placed with major
financial institutions that the Company believes are minimal credit risks. The
Company accounts for these transactions as hedging activities and, accordingly,
gains or losses are included in natural gas and oil revenues in the period the
hedged production occurs.
As of May 15, 2001, the Company had entered into commodity price
hedging contracts with respect to its natural gas production as listed below.
Natural gas production during the month of March 2001 was 7,799 MMcf (8,052
MMMbtu) or 252 MMcf/day (260 MMMBtu/day).
COLLARS
------------------------------------------------------------
NYMEX
VOLUME CONTRACT PRICE
PERIOD (MMMbtu) AVERAGE FLOOR AVERAGE CEILING
------ -------- ------------- ---------------
April 2001................................... 4,800 4.000 6.110
May 2001..................................... 4,960 4.000 6.110
June 2001.................................... 4,800 4.000 6.110
July 2001.................................... 4,960 4.000 6.110
August 2001.................................. 4,960 4.000 6.110
September 2001............................... 4,800 4.000 6.110
October 2001................................. 4,960 4.000 6.110
November 2001................................ 4,800 4.000 6.371
December 2001................................ 4,960 4.000 6.371
January 2002................................. 1,240 4.000 7.000
February 2002................................ 1,120 4.000 7.000
March 2002................................... 1,240 4.000 7.000
April 2002................................... 1,200 4.000 7.000
May 2002..................................... 1,240 4.000 7.000
June 2002.................................... 1,200 4.000 7.000
July 2002.................................... 1,240 4.000 7.000
August 2002.................................. 1,240 4.000 7.000
September 2002............................... 1,200 4.000 7.000
October 2002................................. 1,240 4.000 7.000
November 2002................................ 1,200 4.000 7.000
December 2002................................ 1,240 4.000 7.000
These hedging transactions are settled based upon the average of the
reported settlement prices on the New York Mercantile Exchange (the "NYMEX") for
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 the Company in the event that the settlement price
for any settlement period is less than the swap price for such transaction, and
the Company is 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 such transaction. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the settlement price for any
settlement period is below the floor price for such transaction, and the Company
is required to make payment to the counterparty if the settlement price for any
settlement period is above the ceiling price for such transaction. The Company
is 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. For
option contracts, the Company has the option, but not the obligation, to buy
contracts at the strike price up to the day before the last trading day for that
NYMEX contract.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On March 31, 2000, the Company issued 5,085,177 shares of its common
stock to THEC Holdings, Inc., an indirect wholly owned subsidiary of KeySpan
Corporation, the Company's majority stockholder, as a result of the conversion
of the $80 million principal amount outstanding on March 31, 2000 under the
revolving credit facility entered into by the Company and KeySpan on November
30, 1998 (the "KeySpan Facility"). The number of shares issued was based on a
conversion price of $15.732 per share, which was determined based upon the
average of the closing prices of the Company's common stock, rounded to three
decimal places, as reported under "NYSE Composite Transaction Reports" in the
Wall Street Journal during the 20 consecutive trading days ending three trading
days prior to March 31, 2000. The conversion of the KeySpan Facility was
approved by the Company's stockholders at the Company's annual meeting held
April 27, 1999. The 5,085,177 shares of the Company's common stock issued to
THEC Holdings, Inc. are exempt from registration pursuant to Section 3(a)(9) of
the Securities Act of 1933, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
EXHIBITS DESCRIPTION
* 10.1 -- First Amendment to Employment Agreement dated March 8, 2001
between The Houston Exploration Company and Thomas W.
Powers.
* 10.2 -- Employment Agreement dated April 4, 2001 between The Houston
Exploration Company and William G. Hargett.
* 10.3 -- First Amendment to Employment Agreement dated April 26, 2001
between The Houston Exploration Company and Charles W.
Adcock.
* 10.4 -- First Amendment to Employment Agreement dated April 26, 2001
between The Houston Exploration Company and Thomas W.
Schwartz.
* 10.5 -- First Amendment to Employment Agreement dated April 26, 2001
between The Houston Exploration Company and James F.
Westmoreland.
----------
*Filed herewith and management contract.
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
THE HOUSTON EXPLORATION COMPANY
By: /s/ William G. Hargett
-----------------------------------------
Date: May 15, 2001 William G. Hargett
President and Chief Executive Officer
By: /s/ James F. Westmoreland
-----------------------------------------
James F. Westmoreland
Date: May 15, 2001 Vice President, Chief Accounting Officer,
Comptroller and Secretary
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
* 10.1 -- First Amendment to Employment Agreement dated March 8, 2001
between The Houston Exploration Company and Thomas W.
Powers.
* 10.2 -- Employment Agreement dated April 4, 2001 between The Houston
Exploration Company and William G. Hargett.
* 10.3 -- First Amendment to Employment Agreement dated April 26, 2001
between The Houston Exploration Company and Charles W.
Adcock.
* 10.4 -- First Amendment to Employment Agreement dated April 26, 2001
between The Houston Exploration Company and Thomas W.
Schwartz.
* 10.5 -- First Amendment to Employment Agreement dated April 26, 2001
between The Houston Exploration Company and James F.
Westmoreland.
----------
*Filed herewith and management contract.