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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NUMBER 333-12707
MARINER ENERGY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0460233
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2101 CITYWEST BLVD., SUITE 1900
HOUSTON, TEXAS 77042-3020
(Address of principal executive offices including Zip Code)
(713) 954-5500
(Registrant's telephone number)
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 requirement for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Note: The Company is not subject to the filing requirements of the Securities
Exchange Act of 1934. This quarterly report is filed pursuant to contractual
obligations imposed on the Company by an Indenture, dated as of August 1,
1996, under which the Company is the issuer of certain debt.
As of May 10, 2003, there were 1,380 shares of the registrant's common
stock outstanding.
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MARINER ENERGY, INC.
FORM 10-Q
MARCH 31, 2003
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Balance Sheets at March 31, 2003 and December 31, 2002......................................................1
Statements of Operations for the three-months ended March 31, 2003 and 2002 ............................... 2
Statements of Cash Flows for the three-months ended March 31, 2003 and 2002 ............................... 3
Notes to Financial Statements ............................................................................. 5
Independent Accountants' Report........................................................................... 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................ 30
Item 4. Controls and Procedures................................................................................... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................... 30
Item 2. Changes in Securities and Use of Proceeds................................................................. 30
Item 3. Defaults Upon Senior Securities........................................................................... 30
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 30
Item 5. Other Information ...................................................................................... 30
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 31
SIGNATURE ......................................................................................................... 34
Exhibit 99.1....................................................................................................... 35
Exhibit 99.2....................................................................................................... 36
PART I, ITEM 1.
MARINER ENERGY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
-------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 23,644 $ 18,344
Restricted cash.......................................... 121,070 15,195
Receivables.............................................. 44,888 29,673
Prepaid expenses and other............................... 6,502 6,757
------------ ------------
Total current assets............................... 196,104 69,969
------------ ------------
PROPERTY AND EQUIPMENT:
Oil and gas properties, at full cost:
Proved............................................. 529,813 620,949
Unproved, not subject to amortization.............. 53,366 44,630
------------ ------------
Total......................................... 583,179 665,579
Other property and equipment....................... 5,603 5,601
Accumulated depreciation, depletion and amortization..... (398,577) (383,601)
------------ ------------
Total property and equipment, net.................. 190,205 287,579
------------ ------------
OTHER ASSETS, NET OF AMORTIZATION.............................
2,482 2,636
TOTAL ASSETS.................................................. $ 388,791 $ 360,184
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 58,715 $ 38,438
Accrued liabilities...................................... 26,478 36,313
Accrued interest......................................... 1,750 4,375
Other current Liabilities 4,705
------------ ------------
Total current liabilities.......................... 91,648 79,126
------------ ------------
OTHER LIABILITIES.............................................
10,726 11,141
LONG-TERM DEBT:
Senior Subordinated Notes................................ 99,833 99,821
STOCKHOLDER'S EQUITY:
Common stock, $1 par value; 2,000 and 1,000
shares authorized, 1,380 issued and outstanding,
at December 31 2002 and December 31, 2001.............. 1 1
Additional paid-in-capital............................... 227,318 227,318
Accumulated other comprehensive income(loss)............. (21,571) (14,177)
Accumulated deficit...................................... (19,164) (43,046)
------------ ------------
Total stockholder's equity......................... 186,584 170,096
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$ 388,791 $ 360,184
============ ============
The accompanying notes are an integral part of these financial statements.
1
MARINER ENERGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
THREE-MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002
---------- ----------
REVENUES:
Oil sales $ 7,083 $ 10,810
Gas sales 38,128 17,093
---------- ----------
Total revenues 45,211 27,903
---------- ----------
COSTS AND EXPENSES:
Lease operating expenses 6,656 3,937
Transportation 1,518 1,874
General and administrative expenses 2,116 1,938
Depreciation, depletion and amortization 11,591 14,100
Unrealized loss on derivative instruments -- 1,252
---------- ----------
Total costs and expenses 21,881 23,101
---------- ----------
OPERATING INCOME 23,330 4,802
INTEREST:
Income 80 45
Expense (2,516) (2,991)
---------- ----------
INCOME BEFORE TAXES, AND CUMULATIVE EFFECT OF A 20,894 1,856
CHANGE IN ACCOUNTING
PROVISION FOR INCOME TAXES -- --
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING 2,988 --
---------- ----------
NET INCOME $ 23,882 $ 1,856
========== ==========
The accompanying notes are an integral part of these financial statements.
2
MARINER ENERGY, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
THREE-MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
------------ --------------
OPERATING ACTIVITIES:
Net Income $ 23,882 $ 1,856
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation, depletion and amortization 11,545 14,048
Unrealized loss and other non-cash derivative instrument
adjustments (7,394) (5,338)
Cumulative effect of a change in accounting principal (2,988) --
Changes in operating assets and liabilities:
Restricted Cash 7,190
Receivables (15,215) 4,283
Other current assets 255 3,246
Other assets 154 500
Accounts payable and accrued liabilities 6,848 (22,410)
------------ --------------
Net cash provided by (used in) operating activities 24,277 (3,815)
------------ --------------
INVESTING ACTIVITIES:
Additions to oil and gas properties (27,535) (33,439)
Proceeds from property conveyances 121,625 --
Proceeds from property conveyances held in escrow (113,065) --
Additions to other property and equipment (2) (71)
------------ --------------
Net cash used in investing activities (18,977) (33,510)
------------ --------------
FINANCING ACTIVITIES:
Borrowings (repayment) of proceeds from revolving credit facility -- 25,500
------------ --------------
Net cash provided by (used in) financing activities -- 25,500
------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,300 (11,825)
CASH AND CASH EQUIV. AT BEGINNING OF PERIOD 18,344 11,838
------------ --------------
CASH AND CASH EQUIV. AT END OF PERIOD $23,644 $ 13
============ ==============
The accompanying notes are an integral part of these financial statements.
3
MARINER ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements of Mariner Energy, Inc. (the
"Company" or "Mariner") included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). Accordingly, they reflect all adjustments (consisting only of normal,
recurring accruals) which are, in the opinion of management, necessary for a
fair presentation of the financial results for the interim periods. Certain
information and notes normally included in condensed financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. These condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
2002. The results of operations and cash flows for the three months ended March
31, 2003 are not necessarily indicative of the results for the full year.
2. OIL AND GAS PROPERTIES
Under the full cost method of accounting for oil and gas properties,
the net carrying value of proved oil and gas properties is limited to an
estimate of the future net revenues, plus the lower of cost or estimated fair
value of unproved properties discounted at 10%, from proved oil and gas reserves
based on period-end prices and costs.
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting
for Asset Retirement Obligations," addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 was adopted on January 1, 2003.
SFAS No. 143 requires that the fair value of a liability for an asset's
retirement obligation be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing 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, a gain or loss is recognized.
The adoption of SFAS 143 resulted in a January 1, 2003
cumulative effect adjustment to record (i) an $11.3 million increase in the
carrying values of proved properties, and (ii) a $4.5 million increase in
current abandonment liabilities. The net impact of these items was to record a
gain of $3.0 million as a cumulative effect adjustment of a change in accounting
principle in our statements of operations upon adoption on January 1, 2003. The
amount of amortization charged to depreciation, depletion and amortization
expense in the quarter ended March 31, 2003 was approximately $411,000. In
connection with the recording of the initial adjustment for the impact of
implementing FAS 143, we revised our calculations from those disclosed in our
2002 Form 10-K. The revised computation increased our initial adjustment to the
carrying values of proved properties by $9.2 million, increased our current
abandonment liability by $2.9 million and decreased our gain as a cumulative
effect by $6.5 million.
The following rollforward is provided as a reconciliation of the
beginning and ending aggregate carrying amounts of the asset retirement
obligation.
4
(in millions)
Abandonment Liability as of January 1, 2003 $ 15.7
Liabilities incurred .0
Claims settled (.7)
Accretion Expense .4
=======
Abandonment Liability as of March 31, 2003 $ 15.4
On March 19, 2003, with bids totaling $3.9 million net to us, we were
the apparent high bidder solely or with industry partners, on 11 out of 11
blocks on which we and our partners submitted bids in the Central Gulf of Mexico
Oil and Gas Lease Sale 185 held on that date. Each of the blocks is in water
depths ranging from approximately 20 feet to 1,500 feet. Mariner has a 100%
working interest in five of the blocks and a 50% working interest in six blocks.
In January 2003 we made a deepwater Gulf of Mexico Discovery at
"Harrier", East Breaks 759, and a shelf Gulf of Mexico discovery at Vermillion
144. Harrier was drilled in 4,100 feet of water to a total measured depth of
9,510 feet and encountered 315 net feet of gas pay. Mariner had a 25% working
interest in Harrier. Vermilion 144 was drilled in 87 feet of water to a total
measured depth of 16,522 feet and encountered 90 net feet of pay. Mariner is
operator of Vermillion 144 with a 42% working interest and first production is
expected in June 2003.
In March 2003, we sold our remaining 25% working interest in our Falcon
and Harrier discoveries and surrounding blocks, located in East Breaks area in
the western Gulf of Mexico, for $121.6 million, subject to closing adjustments.
We retained a 4 1/4 percent overriding royalty interest on seven non-producing
blocks. As of March 31, 2003 the net proceeds of $113.1 million were held in
escrow pending the receipt of a No Objection Letter to be obtained from Enron's
unsecured creditors committee. The terms and approval to the sale had been
previously agreed by all parties and the No Objection Letter being received on
April 1, 2003 thereby releasing the proceeds from escrow. The proceeds from the
sale are expected to be used for debt reduction, capital expenditures, and other
corporate purposes. At the time of the sale the Falcon and Harrier projects had
approximately 46 Bcfe assigned as proved oil and gas reserves to our interest.
3. RELATED PARTY TRANSACTIONS
5
ENRON BANKRUPTCY - Commencing on December 2, 2001, Enron Corp.
("Enron") and certain of its affiliates, including Enron North America Corp.
("ENA"), filed voluntary petitions for bankruptcy protection. We have been
informed that of our various direct or indirect owners, only Enron and ENA are
debtors in the bankruptcy. We do not know at this time if any other owners will
seek bankruptcy protection or what effect, if any, this may have on the
ownership of Mariner Energy LLC which owns 100% of Mariner Holdings, Inc. (our
direct parent) or on Joint Energy Development Investments Limited Partnership
("JEDI"), which owns approximately 96% of the issued and outstanding equity of
Mariner Energy LLC. Enron is the parent of ENA, and an affiliate of ENA is the
general partner of JEDI. JEDI is 100% owned by Enron and affiliates of ENA.
Accordingly, Enron may be deemed to control JEDI, Mariner Energy LLC, Mariner
Holdings and us. Additionally, five of the Company's directors are
representatives of Enron or affiliates of Enron. Three of the five Enron
representative directors are no longer employed by Enron or its affiliates
however remain on Mariner's Board. Because of these various potentially
conflicting interests, ENA, the Company, JEDI and the minority shareholders of
Mariner Energy LLC have entered into an agreement that is intended to make clear
that Enron and its affiliates have no duty to make business opportunities
available to the Company.
Mariner Energy LLC's only asset is 100% of the common stock of Mariner
Holdings, Inc., our direct parent. The only asset of Mariner Holdings is 100% of
the common shares of Mariner.
Management cannot predict with certainty what impact Enron's bankruptcy
may have on us. However, we do not believe that our assets and liabilities will
become part of the Enron estate in bankruptcy. Although JEDI owns 96% of Mariner
Energy LLC's common shares, we, as a separate corporation own or lease the
assets used in its business and our management, separate from Enron, is
responsible for our day-to-day operations. Contractual provisions restrict Enron
access to our assets. We maintain our own accounting system as well as separate
debt ratings. We maintain our own separate and complete cash management system
and finance our operations separately from Enron, on both a short-term and
long-term basis. We file a consolidated tax return with Mariner Energy LLC.
Notwithstanding the above, we may have potential exposure to certain
liabilities and asset impairments as a result of Enron's bankruptcy. Portions of
the following Enron-related disclosures are based on discussions with Enron's
legal advisors and management, including members of our Board of Directors.
Although our management has implemented with Enron's legal advisor and
management a systematic method of identifying Enron matters which may have a
material impact on us, management cannot provide any assurance as the
completeness or accuracy of the information provided by or on behalf of Enron.
ORGANIZATION AND OWNERSHIP OF THE COMPANY - Through March 31, 1996,
Hardy Oil & Gas USA Inc. (the "Predecessor Company") was a wholly-owned
subsidiary of Hardy Holdings Inc., which is a wholly-owned subsidiary of Hardy
Oil & Gas Plc ("Hardy Plc"), a company incorporated in the United Kingdom.
Pursuant to a stock purchase agreement dated April 1, 1996, JEDI and ENA,
together with members of management of the Predecessor Company, formed Mariner
Holdings, Inc. ("Mariner Holdings"). Mariner Holdings then purchased from Hardy
Holdings Inc. all of the issued and outstanding stock of the Predecessor Company
for a purchase price of approximately $185.5 million (the "Acquisition"). After
the Acquisition, the name of the Predecessor Company was changed to Mariner
Energy, Inc. In October 1998, JEDI and other shareholders exchanged all of their
common shares of Mariner Holdings, the Company's direct parent, for an
equivalent ownership percentage in common shares of Mariner Energy LLC. Mariner
Energy LLC owns 100% of Mariner Holdings.
6
Subsequent to the Acquisition, Mariner Energy LLC, Mariner
Holdings and Mariner have each entered into various financing and operating
transactions with affiliates. In addition, the Company may have from time to
time engaged in various commercial transactions and have various commercial
relationships with Enron and certain affiliates of Enron, such as holding and
exploring, exploiting and developing joint working interests in particular
prospects and properties and entering into other oil and gas related or
financial transactions. Certain of the Company's third-party debt instruments
and arrangements restrict the Company's ability to engage in transactions with
its affiliates, but those restrictions are subject to significant exceptions.
The Company believes that its current agreements with Enron and its affiliates
are, and anticipates that any future agreements with Enron and its affiliates
will be, on terms no less favorable to the Company than would be obtained in an
agreement with a third party. Below is a summary of key transactions between the
Company and affiliate entities.
MARINER ENERGY LLC
ENA Affiliate Term Loan - In March 2000, Mariner Energy LLC established
an unsecured term loan with ENA to repay amounts outstanding under various
affiliate credit facilities at Mariner Energy LLC and Mariner and to provide
additional working capital. The additional working capital of $55 million was
contributed to Mariner in 2000. The loan bears interest at 15%, which interest
accrues and is added to the loan principal. Repayment of the balance of loan
principal and accrued interest, which was approximately $172.6 million as of
March 31, 2003, is due March 20, 2004. In conjunction with the loan agreement,
two five-year warrants were issued to ENA providing the right to purchase up to
900,000 of common shares of Mariner Energy LLC for $0.01 per share.
Covenants in Mariner's Senior Subordinated Notes restrict the funds of
Mariner that can be distributed to Mariner Energy LLC. Accordingly, Mariner
Energy LLC is restricted in its ability to repay the unsecured Term Loan or to
distribute earnings to its shareholders. In the event Mariner Energy LLC is
unable to restructure or extend the maturity of its obligations prior to March
2004 it would either default under the Term Loan or be forced to sell its
interest in Mariner or cause Mariner to sell a substantial portion of its assets
to repay any outstanding Senior Subordinated Notes so that it could distribute
any remaining cash proceeds to Mariner Energy LLC to be used to repay the Term
Loan.
We have been informed by Enron's legal advisors and management that the
Term Loan and warrants were transferred from ENA to an ENA affiliate, which
affiliate is part of a finance structure formed by ENA. Because debt obligations
of the finance structure are in default and ENA therefore does not have complete
control over decisions made by the ENA affiliate, it may be difficult for
Mariner Energy LLC to obtain any consents, waivers or amendments needed from the
ENA affiliate in connection with the Term Loan or the warrants.
MARINER HOLDINGS, INC.
1998 Equity Investment - In June 1998, Mariner Holdings issued
additional equity to its existing shareholders, including JEDI, for
approximately $14.58 per share, for a net investment of $28.8 million, all of
which was contributed to Mariner. Mariner Holdings paid approximately $1.2
million as a structuring fee, on a pro rata basis, to existing shareholders
participating in this transaction. Approximately $1 million of this fee was paid
to ECT Securities Limited Partnership.
7
MARINER ENERGY, INC.
Oil and Gas Production Sales to ENA or Affiliates - During the three
years ending December 31, 2002, 2001 and 2000, sales of oil and gas production
to ENA or affiliates were $56.4million, $50.2 million and $73.4 million,
respectively. These sales were generally made on 1 to 3 month contracts. At the
time ENA filed its petition for bankruptcy protection, the Company immediately
ceased selling its physical production to ENA, however, we continued to sell our
production to Bridgeline in which ENA owned a minority interest. All amounts
sold to this entity have been collected. As of March 31, 2003, we had an
outstanding receivable for $3 million from ENA. This amount was not paid as
scheduled and is still outstanding. Mariner has submitted a proof of claim to
the bankruptcy court for amounts owed to it by ENA. The Company has estimated
100% of this balance is uncollectible and has recorded a full allowance and
related expense.
Management Activities - We engage in price risk management activities
from time to time. These activities are intended to manage our exposure to
fluctuations in commodity prices for natural gas and crude oil. We primarily
utilize price swaps and costless collars as a means to manage such risk.
Historically, all of our hedging contracts were with ENA. As a result of ENA's
bankruptcy, the contracts are currently in default. The November 2001 through
April 30, 2002 settlements for oil and gas have not been collected. In addition,
on May 14, 2002, we elected under our Master Service Agreement with ENA to
terminate all open contracts. The effect of this termination is to fix the
nominal value on all remaining contracts on May 14, 2002. Subsequent to this
termination, the value of all oil and natural gas unpaid hedge contracts was
$7.7 million. We have estimated 100% of this balance is uncollectible and have
recorded a full allowance. We have submitted a proof of claims to the bankruptcy
court for amounts owed under this agreement. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138, we
have de-designated our contracts effective December 2, 2001 and are recognizing
all market value changes subsequent to such de-designation in our earnings. The
value recorded up to the time of de-designation and included in Accumulated
Other Comprehensive Income ("AOCI"), will reverse out of AOCI and into earnings
as the original corresponding production, as hedged by the contracts, is
produced. As of March 31, 2003, $2.1 million remained in AOCI to be reversed out
to earnings.
The following table sets forth the results of hedging transactions
during the periods indicated that were made with ENA (all amounts shown are
non-cash items):
THREE MONTH ENDING MARCH 31,
--------------------------------
2003 2002
-------------- --------------
900 4,415
Natural gas quantity hedged (Mmbtu)..........................
Increase (decrease) in natural gas sales (thousands)......... $488 $(10,630)
Crude oil quantity hedged (MBbls)............................ -- --
Increase (decrease) in crude oil sales (thousands)........... -- --
8
Supplemental Affiliate Data - provided below is a supplemental balance sheet and
income statement for affiliate entities:
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
AMOUNTS AMOUNTS
BALANCE SHEET DATA (IN MILLIONS) (IN MILLIONS)
------------------
TOTAL TOTAL
------------------------------------------------------
RELATED PARTY RECEIVABLE: $ -- $ --
Derivative Asset
Settled Hedge Receivable -- --
Oil and Gas Receivable 0.7 0.7 8.2 8.2
ACCRUED LIABILITIES:
Transportation Contract -- -- 0.9 --
Service Agreement 0.6 0.6 0.6 1.5
STOCKHOLDER'S EQUITY:
Common Stock .001 -- .001 --
Additional Paid in Capital 227.3 227.3
Accumulated other Comprehensive Income $ 2.1 29.4 $ 2.3 $229.6
THREE MONTHS ENDED
MARCH 31,
------------------------------------------------------
INCOME STATEMENT DATA
2003 2002
------------------------------------------------------
Oil and Gas Sales $ 6.0 $ --
General and Administrative Expenses -- 0.1
Transportation Expenses 0.5 2.0
As a result of the Enron and ENA bankruptcies, among other
implications, we may not be able to obtain credit from banks or trade vendors or
enter into hedging arrangements on acceptable terms. To date, our operations
have not been materially affected by the bankruptcies; however, our ability to
enter into certain transactions including purchase or sale arrangements and to
conduct significant capital programs may be affected in the future. Oil and gas
sales and the related accounts receivable for the three month period ending
March 31, 2003 relate to sales made to a minority owned affiliate of Enron.
9
CONTROLLED GROUP LIABILITY
On November 12, 2002, Enron's legal advisors and management informed
us that we may be an Enron Corp. Controlled Group Member as defined under the
Employee Retirement Income Security Act of 1974 ("ERISA") due to Enron's
indirect ownership interest in Mariner Energy LLC. Enron management has not made
a final determination if we are in fact a Controlled Group Member. Because of
numerous ownership issues within the Enron Group, we are unable to make our own
determination as to whether we agree or disagree that we are a Controlled Group
Member. In the event we are a Controlled Group Member, we may have potential
liability for certain employee benefit plan obligations of Enron discussed
below.
Pension Plans - Applicable federal law authorizes the Pension Benefit
Guaranty Corporation ("PBGC") to institute proceedings in federal district court
for the termination of a pension plan if it determines the plan has failed to
comply with minimum funding standards, the plan is or will be unable to pay
benefits when due, or the failure to terminate the plan may reasonably be
expected to unreasonably increase the possible long-run loss to the PBGC.
Federal law also authorizes the sponsor of a pension plan to terminate the plan
at a time when the plan is underfunded, subject to PBGC or court approval.
Based on discussions with Enron management, it is our management's
understanding that, as of December 31, 2002 the assets of Enron's pension plan
(the "Enron Plan") were less than the present value of all accrued benefits by
approximately $52 million on a SFAS No. 87 basis and approximately $182 million
on a plan termination basis. Further, Enron's management has informed Mariner
management that the PBGC has filed claims in the Enron bankruptcy cases. The
claims are duplicative in nature, representing unliquidated claims for PBGC
insurance premiums (the "Premium Claims") and unliquidated claims for due but
unpaid minimum funding contributions (the "Contribution Claims") under the
Internal Revenue Code of 1986, as amended (the "Tax Code") 29 U.S.C.ss.ss.
412(a) and 1082 and claims for unfunded benefit liabilities (the "UBL" Claims").
Enron and the relevant sponsors of the defined benefit plans are current on
their PBGC premiums and their contributions to the pension plans. Therefore,
Enron has valued the Premium Claims and the Contribution Claims at $0. The total
amount of the UBL Claims is $305.5 million (including $271 million for the Enron
Plan). In addition Enron Management has informed Mariner Management that the
PBGC has informally alleged in pleadings filed with the bankruptcy court that
the UBL Claim related to the Enron Plan could increase by as much as 100%. PBGC
has provided no support (statutory or otherwise) for this assertion and Enron
Management disputes the validity of any such claim. Because the Enron Plan is
under funded and Enron is in bankruptcy, in certain circumstances the Enron Plan
may be terminated and taken control of by the PBGC upon approval of a Federal
District Court.
10
Mariner's employees have not been participants in the Enron Plan.
However, upon termination of a pension plan, all of the members of the
controlled group of the plan sponsor become jointly and severally liable for the
plan are under funding. The PBGC can demand payment from one or more of the
members of the controlled group. If payment is not made, a lien in favor of the
PBGC automatically arises against all of the assets of that member of the
Controlled Group. The amount of the lien is equal to the lesser of the
underfunding or 30% of the aggregate net worth of all of the controlled group
members. In addition, if the sponsor of a pension plan does not timely satisfy
its minimum funding obligation to the pension plan, once the aggregate missed
amounts exceed $1 million, a lien in favor of the plan in the amount of the
missed funding automatically arises against the assets of every member of the
controlled group. In either case, the PBGC may file to perfect the lien and
attempt to enforce it against the assets of members of the Enron Controlled
Group. Enron has informed Mariner that Enron's management believes that the lien
would be subordinate to prior perfected liens on the assets of the member of the
controlled group. Based on discussions with Enron's management, Mariner's
management understands that Enron has made all required contributions to date
through April 15, 2003. Enron's management has advised Mariner that it intends
to make its next contribution due on July 15, 2003.
Management cannot predict the outcome of the above matters or estimate
any potential loss. In addition, if the PBGC did look solely to Mariner to pay
any amount with respect to the Enron Plan, Mariner would exercise all legal
rights available to it to defend against such a demand and to recover any
contributions from the other solvent members of the Controlled Group. Mariner
has established no reserves for any amounts related to this issue.
Mariner has also been informed by Enron management that Enron has
contacted the PBGC as well as Unsecured Creditors Committee regarding their
intention to terminate the Enron Plan, subject to approval by such parties, the
bankruptcy court and authorization to fully fund the Enron Plan in accordance
with its terms. If approved Enron would fully fund the Enron Plan in accordance
with its terms, and the plan could be terminated without any liability to
Mariner. Enron has also stated that it believes it has the necessary funds to
consummate such a termination. In addition, to the extent that entities in the
Controlled Group are sold prior to termination of the Plan, proceeds of the sale
of such entities may be available to satisfy this liability. Enron management
has also informed Mariner that the proceeds from such sale of Enron Control
Group entities would exceed any plan obligations.
Retiree Health Benefits - Under COBRA, if certain retirees of Enron
lose coverage under Enron's group health plan due to Enron's bankruptcy
proceedings, they would be entitled to elect continuation of their health
coverage in a group plan maintained by Enron or a member of its Controlled
Group. Mariner's employees have not participated in this plan. Mariner
management understands, based on discussions with Enron management, that Enron
had provided a plan for retiree health insurance and that the actuarial
liability for such coverage was approximately $112 million as of December 31,
2002. Management further understands that to meet its obligation, Enron, at
December 31, 2002, had set aside approximately $31 million of assets in a VEBA
trust, which may be protected under ERISA from Enron's creditors, leaving an
unfunded liability of approximately $86 million.
In the event that Enron terminates its retiree group health plan, the
retirees must be provided the opportunity to purchase continuing coverage from
Enron's group health plan, if any, or the most appropriate existing group health
plan of another member of the Enron Controlled Group. Retirees electing to
purchase COBRA coverage would be provided the same coverage that is provided to
similarly situated retirees under the appropriate existing plan. Retirees
electing to purchase COBRA coverage would be required to pay for the coverage,
up to an amount not to exceed 102% of the cost of coverage for similarly
situated beneficiaries. Retirees are not required to purchase coverage under
COBRA. Retirees may, instead, shop for coverage from third party sources and
determine which is the least expensive coverage.
11
Management cannot predict the outcome of the above matter or estimate
any potential loss. However, management believes that in the event Enron
terminates coverage, any liability to Mariner associated with the number of
retirees that choose to remain under Enron's retiree health plan will not be
material. Mariner has established no reserves related to this issue.
SALE OF ENRON INTEREST IN MARINER
On May 3, 2002, Enron presented to its Unsecured Creditors' Committee a
proposal under which certain of Enron's core energy assets, including JEDI's
ownership of Mariner Energy LLC, would be separated from Enron's bankruptcy
estate and operated prospectively as a new integrated power and pipeline
company.
On August 27, 2002, Enron announced that it had commenced a formal
sales process for its interests in certain major assets, including JEDI's
ownership of Mariner Energy LLC. In its announcement, Enron indicated that it
was extending invitations to visit electronic data rooms containing information
on 12 of its most valuable businesses, including Mariner, to a broad universe of
potential bidders with whom Enron had executed confidentiality agreements.
Enron has announced its intent to move forward with the sale of
four companies, however, it continues to evaluate its alternatives with regard
to Mariner. Management is unable to give assurances that the Company will be or
not be sold in the near future and there can be no assurance as to whether
JEDI's ownership of Mariner Energy LLC will be sold in the future.
3. LIQUIDITY
As of March 31, 2003, we had working capital of approximately $104.5
million, of which $121.1 million is restricted, compared to a working capital
deficit of $9.2 million at December 31, 2002. On April 1, 2003, $113.1 million
of the restricted cash was released from its restricted status. The improvement
in the working capital was primarily a result of the sale of the Company's
remaining working interest in its Falcon and Harrier Projects for approximately
$121.6 prior to adjustment and $113.1 post adjustments. We expect our 2003
capital expenditures, excluding capitalized indirect costs and proceeds from
property conveyances to be approximately $103.0 million, which would exceed cash
flow from operations. However, we believe that cash on hand together with
expected cash flow from operations will permit us to fund our remaining planned
activities in 2003. There can be no assurance that our access to capital will be
sufficient to meet our needs for capital. Accordingly, we may be required to
reduce our planned capital expenditures and forego planned exploratory drilling.
12
The Company's Revolving Credit Facility matured in October 2002. We
have begun discussions with other third party banks to provide a new revolving
credit facility. There is no assurance that a new credit facility will be
obtained. In addition, our parent, Mariner Energy LLC, is currently obligated
under an unsecured term loan with an ENA affiliate. Mariner Energy LLC
negotiated an extension of the ENA Affiliate Term Loan to March 20, 2004. In the
event Mariner Energy LLC is unable to refinance or restructure its obligations
prior to March 2004, Mariner Energy LLC would either default or be forced to
sell its interest in the Company, or cause the Company to sell a substantial
portion of its assets to repay its outstanding Senior Subordinated Notes so that
it could distribute cash to Mariner Energy LLC to be used to repay the term
loan. In the event of either a merger or consolidation of Mariner Energy LLC or
the Company resulting in a change of control or a sale of all or substantially
all of the Company's assets, holders of the Senior Subordinated Notes would have
the right to require the Company to repurchase the Senior Subordinated Notes
held by them at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest. Any such transaction would also
trigger a mandatory prepayment of all amounts outstanding under the ENA
Affiliate Term Loan. The Company's ability to pay dividends and make other
distributions of cash to Mariner Energy LLC are generally restricted under the
indenture governing the Senior Subordinated Notes. As a result, following any
change of control transaction or sale of all or substantially all of its assets,
the Company would most likely be required to repurchase any Senior Subordinated
Notes tendered to it under the indenture and redeem the balance of the Senior
Subordinated Notes outstanding as permitted under the indenture before it could
distribute cash to Mariner Energy LLC to repay the ENA Affiliate Term Loan.
4. CURRENT HEDGING ACTIVITY
In June 2002 the Company commenced price risk activities with a third
party. These activities are intended to manage the Company's exposure to
fluctuations in commodity prices for natural gas and crude. As of March 31, 2003
the Company had the following fixed price swaps outstanding.
TIME PERIOD NOTIONAL FIXED MARCH 31, 2003
----------- QUANTITIES PRICE FAIR VALUE
(millions)
CRUDE OIL (MBBL)
April 1, 2003 - December 31, 2003
Fixed Price Swap Purchase 413 $23.69 $ (2.0)
April 1, 2003 - December 31, 2003
Fixed Price Swap Purchase 138 $24.51 (0.5)
NATURAL GAS (MMBTU)
April 1, 2003 - December 31, 2003
Fixed Price Swap Purchase 5,500 $3.55 (8.7)
Fixed Price Swap Purchase 5,500 $3.61 (8.4)
-
Fixed Price Swap Purchase (8,560) $5.32 (4.1)
------
$(23.7)
======
13
The following table sets forth the results of hedging transactions
during the periods indicated that were made with non-Enron related parties.
MARCH 31,
2003 2002
----------- ----------
NATURAL GAS 1,240 --
Quantity hedged (Mmbtu)
Increase (Decrease) in Natural Gas Sales (in thousands) $(6,989) --
CRUDE OIL
Quantity hedged (MBbls) 180 --
Increase (Decrease) in Crude Oil Sales (in thousands) $(1,550) --
As a result of these swaps and other hedging transactions the Company
will have approximately 22% of the remainder of 2003 production. Mark to market
value changes approximately $2.3 million for every 10% overall change in
commodity prices.
The Company has reviewed the financial strength of its counterparty to
these hedge transactions and believes credit risk to be minimal. As of March 31,
2003 the Company had on deposit, classified as restricted cash, $8.0 million
with the third party for collateral.
5. COMMITMENTS AND CONTINGENCIES
MMS APPEAL - Mariner operates numerous properties in the Gulf of
Mexico. Three of such properties were leased from the Mineral Management Service
subject to the 1996 Royalty Relief Act. This Act relieved the obligation to pay
royalties on certain predetermined leases until a designated volume is produced.
These three leases contained language that limited royalty relief if commodity
prices exceeded predetermined levels. Beginning in January 2000 commodity prices
exceeded the predetermined levels. Management believes the MMS did not have the
authority to set pricing limits and the Company filed an administrative appeal
with the MMS and has withheld royalties regarding this matter. The Company has
recorded a liability for 100% of the exposure on this matter which on March 31,
2003 was $7.4 million.
LITIGATION - The Company, in the ordinary course of business, is a
claimant and/or a defendant in various legal proceedings, including proceedings
as to which the Company has insurance coverage. The Company does not consider
its exposure in these proceedings, individually and in the aggregate, to be
material.
14
6. OTHER COMPREHENSIVE INCOME
Other Comprehensive Income includes net income and certain items
recorded directly to Stockholder's Equity and classified as Other Comprehensive
Income. The following table illustrates the calculation of Other Comprehensive
Income:
THREE-MONTHS ENDED
MARCH 31, 2003
(IN THOUSANDS)
----------------------------------------------
COMPREHENSIVE ACCUMULATED OTHER
COMPREHENSIVE
INCOME INCOME
-------------------- --------------------
Accumulated other comprehensive income - January 1, 2003........................ (14,177)
Net income...................................................................... $23,882 --
Other comprehensive loss
Reclassification adjustment for price risk management settled contracts.... 8,051
Change in fair value of non-ENA outstanding hedge positions................ (15,445)
--------------------
Other comprehensive income...................................................... (7,394) (7,394)
--------------------
Comprehensive income............................................................ $16,488
==================== --------------------
Other comprehensive income...................................................... $(21,571)
====================
There were no items in Other Comprehensive Income other than the
Company's hedging activity.
7. NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which addresses the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002.
The Company has adopted the disclosure requirements of FIN 45 (see Note
2 "Related-Party Transactions) and will apply the recognition and measurement
provisions for all material guarantees entered into or modified in periods
beginning January 1, 2003. The impact of FIN 45 on the Company's future
Financial Statements will depend upon whether the company enters into or
modifies any material guarantee arrangements.
15
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholder
Mariner Energy, Inc.
Houston, Texas
We have reviewed the accompanying condensed balance sheet of Mariner Energy,
Inc. as of March 31, 2003 and the related condensed statements of operations and
cash flow for the three-month periods end March 31, 2003 and 2002. These
condensed financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists primarily of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United Sates of America, the balance sheet as of December 31,
2002, and the related statements of operations, stockholder's equity, and cash
flows for the year ended December 31, 2001 (not presented herein), and in our
report dated April 14, 2003, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 2002 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
As described in Note 3 and 5, the Company has various related-party transactions
and certain control relationships with Enron Corp. The Company may have
potential exposure to certain liabilities and asset impairments as a result of
the Enron Corp. bankruptcy.
As discussed in Note 2 to the financial statements, effective January 1, 2003,
the Company changed its method of accounting for asset retirement obligations
upon adoption of Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations."
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
May 14, 2003
16
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following review of operations for the three-month period ended
March 31, 2003 should be read in conjunction with the condensed financial
statements of the Company and Notes thereto included elsewhere in this Form 10-Q
and with the Financial Statements, Notes, and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002, filed
with the Securities and Exchange Commission on April 16, 2003.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in
this quarterly report on Form 10-Q, including, without limitation, statements
contained in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations, and industry conditions, are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct, and actual results could differ materially from the
Company's expectations. Factors that could influence these results include, but
are not limited to, Enron-related matters, oil and gas price volatility, results
of future drilling, availability of drilling rigs, future production and costs,
capital resources, liquidity and other factors described in the Company's annual
report on Form 10-K for the year ended December 31, 2002, filed with the
Securities and Exchange Commission on April 16, 2003.
In addition to other factors and matters discussed elsewhere in this report,
some important factors that could cause actual results or outcomes for the
Company to differ materially from those disclosed in the forward looking
statements include matters related to Enron and certain of its subsidiaries'
filings to initiate bankruptcy proceedings under Chapter 11 of the Federal
Bankruptcy Code (Mariner is not included in the filing) and events related to
Enron's bankruptcy proceedings.
17
RESULTS OF OPERATIONS
The following table sets forth certain information regarding results of
operations for the periods shown:
THREE-MONTHS ENDED MARCH 31,
---------------------------
2003 2002
---------- -----------
TOTAL REVENUE, $MM $ 45.2 $ 27.9
NET INCOME, $MM $ 23.9 $ 1.9
PRODUCTION:
Oil and condensate (Mbbls) 282 531
Natural gas (Mmcf) 6,708 4,635
Natural gas equivalents (Mmcfe) 8,396 7,821
AVERAGE REALIZED SALES PRICES:
Oil and condensate ($/Bbl) $ 25.17 $ 20.35
Natural gas ($/Mcf) 5.68 3.68
Natural gas equivalents ($/Mcfe) 5.38 3.56
CASH MARGIN(1) PER MCFE:
Revenue (pre-hedge) $ 6.33 $ 2.72
Hedging impact (0.95) 0.84
Lease operating expenses (0.79) (0.50)
Transportation (0.18) (0.24)
Gross G&A costs (0.46) (0.48)
--------- ---------
Cash margin $ 3.95 $ 2.34
========= =========
CAPITAL EXPENDITURES, $MM:
Exploration:
Leasehold and G&G costs $ 1.5 $ 6.8
Drilling 9.0 1.5
Development & other 15.0 23.4
Capitalized G&A and interest costs 2.0 1.8
Total Capital 27.5 33.5
--------- ---------
Less property conveyances (121.6) --
--------- ---------
TOTAL NET CAPITAL $(94.1) $ 33.5
========= =========
(1) - Cash margin measures the net cash generated by a company's operations
during a given period, without regard to the period such cash is
physically received or spent by the company.
18
RESULTS OF OPERATIONS FOR THE FIRST QUARTER OF 2003
NET PRODUCTION was 8.4 billion cubic feet of natural gas equivalent
(Bcfe) as compared to 7.8 Bcfe in the same period of 2002. The increase of
production was due to a full quarter of production on our King Kong and Yosemite
projects located in Garden Banks 472 and 516, respectively.
HEDGING ACTIVITIES for the first quarter of 2003 decreased our average
realized natural gas sales price $.97 per Mcf and revenues by $6.5 million and
realized oil prices by $5.50 per Bbl and revenues by $1.6 million during the
first quarter of 2003. Hedging activities for the first quarter 2002 increased
our average realized natural gas and crude oil prices by $1.20 per Mcf and
resulting in reductions in revenue of $6.6 million.
OIL AND GAS REVENUES increased to $45.2 million for the first quarter
of 2003 from $27.9 million for the first quarter of 2002 due to the decrease in
production mentioned above and an increase in realized prices to $5.38 per Mcfe
for the first quarter from $3.56 per Mcfe in the same period of 2002.
LEASE OPERATING EXPENSES increased to $6.7 million for the first
quarter of 2003 from $3.9 million for the first quarter of 2002 due to the
addition of two wells mentioned above.
TRANSPORTATION EXPENSES decreased to $1.5 million for the first quarter
of 2003 from $1.9 million for the same period of 2002. This decrease was
primarily attributable to the reduced production from our Black Widow and Pluto
Projects.
DEPRECIATION, DEPLETION, AND AMORTIZATION EXPENSE (DD&A) decreased to
$11.6 million for the first quarter of 2002 from $14.1 million for the first
quarter of 2002 as a result of the sale of our Falcon Project offset by an
increase in equivalent volumes produced in the unit-of-production DD&A rate to
$1.38 per Mcfe from $1.81 per Mcfe.
GENERAL AND ADMINISTRATIVE EXPENSES, which are net of overhead
reimbursements received from other working interest owners increased $2.1
million for the first quarter of 2003 from $1.9 for the same period of 2002 due
to lower recovery from other working interest owners.
NET INTEREST EXPENSE for the first quarter of 2003 decreased to $2.5
million from $2.9 million in the first quarter of 2002 due to a reduction in
borrowings under our Revolving Credit Facility.
NET INCOME increased to $23.9 million for the first quarter of 2003
from $1.9 million for the comparable period last year, as a result of the
aforementioned factors.
LIQUIDITY, CAPITAL EXPENDITURES AND CAPITAL RESOURCES
As of March 31, 2003, we had working capital of approximately $104.5
million, of which $121.1 million is restricted, compared to a working capital
deficit of $9.2 million at December 31, 2002. On April 1, 2003, $113.1 million
of the restricted cash was released from its restricted status. The improvement
in the working capital was primarily a result of the sale of the Company's
remaining working interest in its Falcon and Harrier Projects for approximately
$121.6 prior to adjustment and $113.1 post adjustments. We expect our 2003
capital expenditures, excluding capitalized indirect costs and proceeds from
property conveyances to be approximately $103.0 million, which would exceed cash
flow from operations. However, we believe that cash on hand together with
expected cash flow from operations will permit us to fund our remaining planned
activities in 2003. There can be no assurance that our access to capital will be
sufficient to meet our needs for capital. Accordingly, we may be required to
reduce our planned capital expenditures and forego planned exploratory drilling.
19
The Company's Revolving Credit Facility matured in October 2002. We
have begun discussions with other third party banks to provide a new revolving
credit facility. There is no assurance that a new credit facility will be
obtained. In addition, our parent, Mariner Energy LLC, is currently obligated
under an unsecured term loan with an ENA affiliate. Mariner Energy LLC
negotiated an extension of the ENA Affiliate Term Loan to March 20, 2004. In the
event Mariner Energy LLC is unable to refinance or restructure its obligations
prior to March 2004, Mariner Energy LLC would either default or be forced to
sell its interest in the Company, or cause the Company to sell a substantial
portion of its assets to repay its outstanding Senior Subordinated Notes so that
it could distribute cash to Mariner Energy LLC to be used to repay the term
loan. In the event of either a merger or consolidation of Mariner Energy LLC or
the Company resulting in a change of control or a sale of all or substantially
all of the Company's assets, holders of the Senior Subordinated Notes would have
the right to require the Company to repurchase the Senior Subordinated Notes
held by them at a purchase price in cash equal to 101% of the principal amount
thereof plus accrued and unpaid interest. Any such transaction would also
trigger a mandatory prepayment of all amounts outstanding under the ENA
Affiliate Term Loan. The Company's ability to pay dividends and make other
distributions of cash to Mariner Energy LLC are generally restricted under the
indenture governing the Senior Subordinated Notes. As a result, following any
change of control transaction or sale of all or substantially all of its assets,
the Company would most likely be required to repurchase any Senior Subordinated
Notes tendered to it under the indenture and redeem the balance of the Senior
Subordinated Notes outstanding as permitted under the indenture before it could
distribute cash to Mariner Energy LLC to repay the ENA Affiliate Term Loan.
Net cash inflow from operating activities was $23.3 million in the
first quarter of 2003, a increase of $27.1 million from the same period of 2002.
A period to period increase of approximately $24.7 million in operating cash
flow before changes in operating assets and liabilities was due primarily to
higher production and higher commodity prices. An increase of $5.4 million in
net cash used by changes in working capital was caused by reductions in joint
interest receivables and the timing of payments made on accounts payable.
Net cash outflows from investing activities in the first three months
of 2003 decreased to $19.0 million from a cash outflow of $33.5 million for the
same period in 2002 due primarily to proceeds from property conveyances of
$121.6 million offset by $113.1 million held in escrow in the first quarter of
2003.
Cash flow in financing activities was $0 for the first three months of
2003 compared to cash inflow of $25.5 million for the same period in 2002.
Capital expenditures excluding proceeds from property conveyance for
the first three months of 2003 were $28.4 million including $2.0 million of
capitalized general, administrative and interest costs. Net capital expenditures
included $10.5 million for exploration activities and $17.9 million for
development and other activities.
During the remainder of 2003, we expect to conduct drilling operations
on eight to twelve exploratory wells, making additions to our seismic and
leasehold positions. The development budget includes funds for completing the
Roaring Fork project as well as funds for the Swordfish Project due to commence
production in 2004.
Long-term debt outstanding as of March 31, 2003 was approximately $99.8
million for our senior subordinated notes.
We believe there will be adequate cash flow in order for us to fund our
remaining planned activities in 2003. Our capital resources still may not be
sufficient to meet our anticipated future requirements for working capital,
capital expenditures and scheduled payments of principal and interest on our
indebtedness. There can be no assurance that anticipated growth will be
realized, that our business will generate sufficient cash flow from operations
or that future borrowings or equity
20
capital will be available in an amount sufficient to enable us to service our
indebtedness or make necessary capital expenditures. In addition, depending on
the levels of our cash flow and capital expenditures (the latter of which are,
to a large extent, discretionary), we may need to refinance a portion of the
principal amount of our senior subordinated debt at or prior to maturity.
However, there can be no assurance that we would be able to obtain financing on
acceptable terms to complete a refinancing.
RELATED PARTY TRANSACTIONS
ENRON BANKRUPTCY - Commencing on December 2, 2001, Enron Corp.
("Enron") and certain of its affiliates, including Enron North America Corp.
("ENA"), filed voluntary petitions for bankruptcy protection. We have been
informed that of our various direct or indirect owners, only Enron and ENA are
debtors in the bankruptcy. We do not know at this time if any other owners will
seek bankruptcy protection or what effect, if any, this may have on the
ownership of Mariner Energy LLC which owns 100% of Mariner Holdings, Inc. (our
direct parent) or on Joint Energy Development Investments Limited Partnership
("JEDI"), which owns approximately 96% of the issued and outstanding equity of
Mariner Energy LLC. Enron is the parent of ENA, and an affiliate of ENA is the
general partner of JEDI. JEDI is 100% owned by Enron and affiliates of ENA.
Accordingly, Enron may be deemed to control JEDI, Mariner Energy LLC, Mariner
Holdings and us. Additionally, five of the Company's directors are
representatives of Enron or affiliates of Enron. Three of the five Enron
representative directors are no longer employed by Enron or its affiliates
however remain on Mariner's Board. Because of these various potentially
conflicting interests, ENA, the Company, JEDI and the minority shareholders of
Mariner Energy LLC have entered into an agreement that is intended to make clear
that Enron and its affiliates have no duty to make business opportunities
available to the Company.
Mariner Energy LLC's only asset is 100% of the common stock of Mariner
Holdings, Inc., our direct parent. The only asset of Mariner Holdings is 100% of
the common shares of Mariner.
Management cannot predict with certainty what impact Enron's bankruptcy
may have on us. However, we do not believe that our assets and liabilities will
become part of the Enron estate in bankruptcy. Although JEDI owns 96% of Mariner
Energy LLC's common shares, we, as a separate corporation own or lease the
assets used in its business and our management, separate from Enron, is
responsible for our day-to-day operations. Contractual provisions restrict Enron
access to our assets. We maintain our own accounting system as well as separate
debt ratings. We maintain our own separate and complete cash management system
and finance our operations separately from Enron, on both a short-term and
long-term basis. We file a consolidated tax return with Mariner Energy LLC.
Notwithstanding the above, we may have potential exposure to certain
liabilities and asset impairments as a result of Enron's bankruptcy. Portions of
the following Enron-related disclosures are based on discussions with Enron's
legal advisors and management, including members of our Board of Directors.
Although our management has implemented with Enron's legal advisor and
management a systematic method of identifying Enron matters which may have a
material impact on us, management cannot provide any assurance as the
completeness or accuracy of the information provided by or on behalf of Enron.
21
ORGANIZATION AND OWNERSHIP OF THE COMPANY - Through March 31, 1996,
Hardy Oil & Gas USA Inc. (the "Predecessor Company") was a wholly-owned
subsidiary of Hardy Holdings Inc., which is a wholly-owned subsidiary of Hardy
Oil & Gas Plc ("Hardy Plc"), a company incorporated in the United Kingdom.
Pursuant to a stock purchase agreement dated April 1, 1996, JEDI and ENA,
together with members of management of the Predecessor Company, formed Mariner
Holdings, Inc. ("Mariner Holdings"). Mariner Holdings then purchased from Hardy
Holdings Inc. all of the issued and outstanding stock of the Predecessor Company
for a purchase price of approximately $185.5 million (the "Acquisition"). After
the Acquisition, the name of the Predecessor Company was changed to Mariner
Energy, Inc. In October 1998, JEDI and other shareholders exchanged all of their
common shares of Mariner Holdings, the Company's direct parent, for an
equivalent ownership percentage in common shares of Mariner Energy LLC. Mariner
Energy LLC owns 100% of Mariner Holdings.
22
Subsequent to the Acquisition, Mariner Energy LLC, Mariner
Holdings and Mariner have each entered into various financing and operating
transactions with affiliates. In addition, the Company may have from time to
time engaged in various commercial transactions and have various commercial
relationships with Enron and certain affiliates of Enron, such as holding and
exploring, exploiting and developing joint working interests in particular
prospects and properties and entering into other oil and gas related or
financial transactions. Certain of the Company's third-party debt instruments
and arrangements restrict the Company's ability to engage in transactions with
its affiliates, but those restrictions are subject to significant exceptions.
The Company believes that its current agreements with Enron and its affiliates
are, and anticipates that any future agreements with Enron and its affiliates
will be, on terms no less favorable to the Company than would be obtained in an
agreement with a third party. Below is a summary of key transactions between the
Company and affiliate entities.
MARINER ENERGY LLC
ENA Affiliate Term Loan - In March 2000, Mariner Energy LLC established
an unsecured term loan with ENA to repay amounts outstanding under various
affiliate credit facilities at Mariner Energy LLC and Mariner and to provide
additional working capital. The additional working capital of $55 million was
contributed to Mariner in 2000. The loan bears interest at 15%, which interest
accrues and is added to the loan principal. Repayment of the balance of loan
principal and accrued interest, which was approximately $172.6 million as of
March 31, 2003, is due March 20, 2004. In conjunction with the loan agreement,
two five-year warrants were issued to ENA providing the right to purchase up to
900,000 of common shares of Mariner Energy LLC for $0.01 per share.
Covenants in Mariner's Senior Subordinated Notes restrict the funds of
Mariner that can be distributed to Mariner Energy LLC. Accordingly, Mariner
Energy LLC is restricted in its ability to repay the unsecured Term Loan or to
distribute earnings to its shareholders. In the event Mariner Energy LLC is
unable to restructure or extend the maturity of its obligations prior to March
2004 it would either default under the Term Loan or be forced to sell its
interest in Mariner or cause Mariner to sell a substantial portion of its assets
to repay any outstanding Senior Subordinated Notes so that it could distribute
any remaining cash proceeds to Mariner Energy LLC to be used to repay the Term
Loan.
We have been informed by Enron's legal advisors and management that the
Term Loan and warrants were transferred from ENA to an ENA affiliate, which
affiliate is part of a finance structure formed by ENA. Because debt obligations
of the finance structure are in default and ENA therefore does not have complete
control over decisions made by the ENA affiliate, it may be difficult for
Mariner Energy LLC to obtain any consents, waivers or amendments needed from the
ENA affiliate in connection with the Term Loan or the warrants.
MARINER HOLDINGS, INC.
1998 Equity Investment - In June 1998, Mariner Holdings issued
additional equity to its existing shareholders, including JEDI, for
approximately $14.58 per share, for a net investment of $28.8 million, all of
which was contributed to Mariner. Mariner Holdings paid approximately $1.2
million as a structuring fee, on a pro rata basis, to existing shareholders
participating in this transaction. Approximately $1 million of this fee was paid
to ECT Securities Limited Partnership.
23
MARINER ENERGY, INC.
Oil and Gas Production Sales to ENA or Affiliates - During the three
years ending December 31, 2002, 2001 and 2000, sales of oil and gas production
to ENA or affiliates were $56.4million, $50.2 million and $73.4 million,
respectively. These sales were generally made on 1 to 3 month contracts. At the
time ENA filed its petition for bankruptcy protection, the Company immediately
ceased selling its physical production to ENA, however, we continued to sell our
production to Bridgeline in which ENA owned a minority interest. All amounts
sold to this entity have been collected. As of March 31, 2003, we had an
outstanding receivable for $3 million from ENA. This amount was not paid as
scheduled and is still outstanding. Mariner has submitted a proof of claim to
the bankruptcy court for amounts owed to it by ENA. The Company has estimated
100% of this balance is uncollectible and has recorded a full allowance and
related expense.
Management Activities - We engage in price risk management activities
from time to time. These activities are intended to manage our exposure to
fluctuations in commodity prices for natural gas and crude oil. We primarily
utilize price swaps and costless collars as a means to manage such risk.
Historically, all of our hedging contracts were with ENA. As a result of ENA's
bankruptcy, the contracts are currently in default. The November 2001 through
April 30, 2002 settlements for oil and gas have not been collected. In addition,
on May 14, 2002, we elected under our Master Service Agreement with ENA to
terminate all open contracts. The effect of this termination is to fix the
nominal value on all remaining contracts on May 14, 2002. Subsequent to this
termination, the value of all oil and natural gas unpaid hedge contracts was
$7.7 million. We have estimated 100% of this balance is uncollectible and have
recorded a full allowance. We have submitted a proof of claims to the bankruptcy
court for amounts owed under this agreement. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and No. 138, we
have de-designated our contracts effective December 2, 2001 and are recognizing
all market value changes subsequent to such de-designation in our earnings. The
value recorded up to the time of de-designation and included in Accumulated
Other Comprehensive Income ("AOCI"), will reverse out of AOCI and into earnings
as the original corresponding production, as hedged by the contracts, is
produced. As of March 31, 2003, $2.1 million remained in AOCI to be reversed out
to earnings.
The following table sets forth the results of hedging transactions
during the periods indicated that were made with ENA (all amounts shown are
non-cash items):
THREE MONTH ENDING MARCH 31,
---------------------------------------------
2003 2002
--------------- ---------------
900 4,415
Natural gas quantity hedged (Mmbtu)..........................
Increase (decrease) in natural gas sales (thousands)......... $ 488 $ (10,630)
Crude oil quantity hedged (MBbls)............................ -- --
Increase (decrease) in crude oil sales (thousands)........... -- --
24
Supplemental Affiliate Data - provided below is a supplemental balance sheet and
income statement for affiliate entities:
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
AMOUNTS AMOUNTS
BALANCE SHEET DATA (IN MILLIONS) (IN MILLIONS)
------------------
TOTAL TOTAL
----------------- ---------------- ----------------- ----------------
RELATED PARTY RECEIVABLE: $ -- $ --
Derivative Asset
Settled Hedge Receivable -- --
Oil and Gas Receivable 0.7 0.7 8.2 8.2
ACCRUED LIABILITIES:
Transportation Contract -- -- 0.9 --
Service Agreement 0.6 0.6 0.6 1.5
STOCKHOLDER'S EQUITY:
Common Stock .001 -- .001 --
Additional Paid in Capital 227.3 227.3
Accumulated other Comprehensive Income $ 2.1 229.4 $ 2.3 $229.6
THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------- -------
INCOME STATEMENT DATA
Oil and Gas Sales $ 6.0 $ --
General and Administrative Expenses -- 0.1
Transportation Expenses 0.5 2.0
As a result of the Enron and ENA bankruptcies, among other
implications, we may not be able to obtain credit from banks or trade vendors or
enter into hedging arrangements on acceptable terms. To date, our operations
have not been materially affected by the bankruptcies; however, our ability to
enter into certain transactions including purchase or sale arrangements and to
conduct significant capital programs may be affected in the future. Oil and gas
sales and the related accounts receivable for the three month period ending
March 31, 2003 relate to sales made to a minority owned affiliate of Enron.
25
CONTROLLED GROUP LIABILITY
On November 12, 2002, Enron's legal advisors and management informed
us that we may be an Enron Corp. Controlled Group Member as defined under the
Employee Retirement Income Security Act of 1974 ("ERISA") due to Enron's
indirect ownership interest in Mariner Energy LLC. Enron management has not made
a final determination if we are in fact a Controlled Group Member. Because of
numerous ownership issues within the Enron Group, we are unable to make our own
determination as to whether we agree or disagree that we are a Controlled Group
Member. In the event we are a Controlled Group Member, we may have potential
liability for certain employee benefit plan obligations of Enron discussed
below.
Pension Plans - Applicable federal law authorizes the Pension Benefit
Guaranty Corporation ("PBGC") to institute proceedings in federal district court
for the termination of a pension plan if it determines the plan has failed to
comply with minimum funding standards, the plan is or will be unable to pay
benefits when due, or the failure to terminate the plan may reasonably be
expected to unreasonably increase the possible long-run loss to the PBGC.
Federal law also authorizes the sponsor of a pension plan to terminate the plan
at a time when the plan is underfunded, subject to PBGC or court approval.
Based on discussions with Enron management, it is our management's
understanding that, as of December 31, 2002 the assets of Enron's pension plan
(the "Enron Plan") were less than the present value of all accrued benefits by
approximately $52 million on a SFAS No. 87 basis and approximately $182 million
on a plan termination basis. Further, Enron's management has informed Mariner
management that the PBGC has filed claims in the Enron bankruptcy cases. The
claims are duplicative in nature, representing unliquidated claims for PBGC
insurance premiums (the "Premium Claims") and unliquidated claims for due but
unpaid minimum funding contributions (the "Contribution Claims") under the
Internal Revenue Code of 1986, as amended (the "Tax Code") 29 U.S.C.ss.ss.
412(a) and 1082 and claims for unfunded benefit liabilities (the "UBL" Claims").
Enron and the relevant sponsors of the defined benefit plans are current on
their PBGC premiums and their contributions to the pension plans. Therefore,
Enron has valued the Premium Claims and the Contribution Claims at $0. The total
amount of the UBL Claims is $305.5 million (including $271 million for the Enron
Plan). In addition Enron Management has informed Mariner Management that the
PBGC has informally alleged in pleadings filed with the bankruptcy court that
the UBL Claim related to the Enron Plan could increase by as much as 100%. PBGC
has provided no support (statutory or otherwise) for this assertion and Enron
Management disputes the validity of any such claim. Because the Enron Plan is
under funded and Enron is in bankruptcy, in certain circumstances the Enron Plan
may be terminated and taken control of by the PBGC upon approval of a Federal
District Court.
Mariner's employees have not been participants in the Enron Plan.
However, upon termination of a pension plan, all of the members of the
controlled group of the plan sponsor become jointly and severally liable for the
plan are under funding. The PBGC can demand payment from one or more of the
members of the controlled group. If payment is not made, a lien in favor of the
PBGC automatically arises against all of the assets of that member of the
Controlled Group. The amount of the lien is equal to the lesser of the
underfunding or 30% of the aggregate net worth of all of the controlled group
members. In addition, if the sponsor of a pension plan does not timely satisfy
its minimum funding obligation to the pension plan, once the aggregate missed
amounts exceed $1 million, a lien in favor of the plan in the amount of the
missed funding automatically arises against the assets of every member of the
controlled group. In either case, the PBGC may file to perfect the lien and
attempt to enforce it against the assets of members of the Enron Controlled
Group. Enron has informed Mariner that Enron's management believes that the lien
would be subordinate to prior perfected liens on the assets of the member of the
controlled group. Based on discussions with Enron's management, Mariner's
management understands that Enron has made all required contributions to date
through April 15, 2003. Enron's management has advised Mariner that it intends
to make its next contribution due on July 15, 2003.
26
Management cannot predict the outcome of the above matters or estimate
any potential loss. In addition, if the PBGC did look solely to Mariner to pay
any amount with respect to the Enron Plan, Mariner would exercise all legal
rights available to it to defend against such a demand and to recover any
contributions from the other solvent members of the Controlled Group. Mariner
has established no reserves for any amounts related to this issue.
Mariner has also been informed by Enron management that Enron has
contacted the PBGC as well as Unsecured Creditors Committee regarding their
intention to terminate the Enron Plan, subject to approval by such parties, the
bankruptcy court and authorization to fully fund the Enron Plan in accordance
with its terms. If approved Enron would fully fund the Enron Plan in accordance
with its terms, and the plan could be terminated without any liability to
Mariner. Enron has also stated that it believes it has the necessary funds to
consummate such a termination. In addition, to the extent that entities in the
Controlled Group are sold prior to termination of the Plan, proceeds of the sale
of such entities may be available to satisfy this liability. Enron management
has also informed Mariner that the proceeds from such sale of Enron Control
Group entities would exceed any plan obligations.
Retiree Health Benefits - Under COBRA, if certain retirees of Enron
lose coverage under Enron's group health plan due to Enron's bankruptcy
proceedings, they would be entitled to elect continuation of their health
coverage in a group plan maintained by Enron or a member of its Controlled
Group. Mariner's employees have not participated in this plan. Mariner
management understands, based on discussions with Enron management, that Enron
had provided a plan for retiree health insurance and that the actuarial
liability for such coverage was approximately $112 million as of December 31,
2002. Management further understands that to meet its obligation, Enron, at
December 31, 2002, had set aside approximately $31 million of assets in a VEBA
trust, which may be protected under ERISA from Enron's creditors, leaving an
unfunded liability of approximately $86 million.
In the event that Enron terminates its retiree group health plan, the
retirees must be provided the opportunity to purchase continuing coverage from
Enron's group health plan, if any, or the most appropriate existing group health
plan of another member of the Enron Controlled Group. Retirees electing to
purchase COBRA coverage would be provided the same coverage that is provided to
similarly situated retirees under the appropriate existing plan. Retirees
electing to purchase COBRA coverage would be required to pay for the coverage,
up to an amount not to exceed 102% of the cost of coverage for similarly
situated beneficiaries. Retirees are not required to purchase coverage under
COBRA. Retirees may, instead, shop for coverage from third party sources and
determine which is the least expensive coverage.
Management cannot predict the outcome of the above matter or estimate
any potential loss. However, management believes that in the event Enron
terminates coverage, any liability to Mariner associated with the number of
retirees that choose to remain under Enron's retiree health plan will not be
material. Mariner has established no reserves related to this issue.
SALE OF ENRON INTEREST IN MARINER
On May 3, 2002, Enron presented to its Unsecured Creditors' Committee a
proposal under which certain of Enron's core energy assets, including JEDI's
ownership of Mariner Energy LLC, would be separated from Enron's bankruptcy
estate and operated prospectively as a new integrated power and pipeline
company.
On August 27, 2002, Enron announced that it had commenced a formal
sales process for its interests in certain major assets, including JEDI's
ownership of Mariner Energy LLC. In its announcement, Enron indicated that it
was extending invitations to visit electronic data rooms containing information
on 12 of its most valuable businesses, including Mariner, to a broad universe of
potential bidders with whom Enron had executed confidentiality agreements.
27
Enron has announced its intent to move forward with the sale of
four companies, however, it continues to evaluate its alternatives with regard
to Mariner. Management is unable to give assurances that the Company will be or
not be sold in the near future and there can be no assurance as to whether
JEDI's ownership of Mariner Energy LLC will be sold in the future.
28
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Part I, Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
PART 1, ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Vice President of Finance & Administration have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this quarterly report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to the
Company required to be included in the Company's reports filed or submitted
under the Exchange Act. Although the Company's Chief Executive Officer and Vice
President - Finance & Administration have concluded that the disclosure controls
and procedures are effective, disclosures relating to Enron and the effects of
its bankruptcy on Mariner were provided by Enron's management and its legal
advisors. The Chief Executive Officer and Vice President - Finance &
Administration rely on the information they provide for disclosure purposes.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith.
99.1 Certificate of Chairman of Board and Chief Executive Officer
99.2 Certificate of Vice President of Finance and Administration
(b) The Company filed no Current Reports on Form 8-K during the quarter
ended March 31, 2003.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARINER ENERGY, INC.
Date: May 15, 2003 /s/ Michael A. Wichterich
---------------------------------------
Michael A. Wichterich
Vice President of Finance & Administration
(Principal Financial Officer and Officer
Duly Authorized to Sign on Behalf of the
Registrant)
31
CERTIFICATION OF
CHAIRMAN OF THE BOARD / CEO
I, Scott D. Josey, certify that:
1. I have reviewed this quarterly report on Form10-Q of Mariner Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Scott D. Josey
-----------------------------------
Scott D. Josey
Chairman of the Board / CEO
32
CERTIFICATION OF
VICE PRESIDENT - FINANCE & ADMINISTRATION
I, Michael A. Wichterich, certify that:
1. I have reviewed this quarterly report on Form10-Q of Mariner Energy, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Michael A. Wichterich
-------------------------------------------
Michael A. Wichterich
Vice President - Finance & Administration
33
INDEX TO EXHIBIT
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
99.1 Certificate of Chairman of Board and Chief Executive Officer
99.2 Certificate of Vice President of Finance and Administration