MCMORAN EXPLORATION CO /DE/ - 10-Q Quarterly Report

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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 Quarter Ended June 30, 2003



Commission File Number: 001–07791



McMoRan Exploration Co.



Incorporated in Delaware	72–1424200
	(IRS Employer Identification No.)


1615 Poydras Street, New Orleans, Louisiana 70112


Registrant's telephone number, including area code: (504) 582–4000


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 _

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes No X

On June 30, 2003, there were issued and outstanding 16,696,476 shares of the registrant's Common Stock, par value $0.01 per share.


McMoRan Exploration Co.
TABLE OF CONTENTS

	Page

Part I. Financial Information

Financial Statements:

Condensed Balance Sheets	3

Statements of Operations	4

Statements of Cash Flows	5

Notes to Financial Statements	6

Remarks	10

Report of Independent Public Accountants	11

Management's Discussion and Analysis of Financial Condition and Results of Operations	12

Controls and Procedures	2 2

Part II. Other Information	23

Signature	24

Exhibit Index	E-1

McMoRan Exploration Co.

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

McMoRan EXPLORATION CO.

CONDENSED BALANCE SHEETS (Unaudited)

	June 30,			December 31,
	2003			2002
	(In Thousands)
ASSETS
Cash and cash equivalents, continuing operations	$	4,205		$	12,907
Cash and cash equivalents from discontinued sulphur operations, $1.0 million and $0.9 million restricted at June 30, 2003 and December 31, 2002, respectively		1,121			2,316
Accounts receivable		4,618			13,645
Inventories		-			120
Prepaid expenses		369			791
Current assets from discontinued sulphur operations, excluding cash		411			449
Total current assets		10,724			30,228
Property, plant and equipment, net		35,599			37,895
Sulphur business assets, net		355			355
Other assets, including restricted cash of $3.5 million		3,840			3,970
Total assets	$	50,518		$	72,448

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	3,168		$	5,246
Accrued liabilities		3,182			5,092
Current portion of accrued oil and gas reclamation costs		641			878
Current portion of accrued sulphur reclamation costs		2,550			8,126
Current liabilities from discontinued sulphur operations		3,276			5,481
Other		-			328
Total current liabilities		12,817			25,151
Accrued sulphur reclamation costs		11,335			30,421
Accrued oil and gas reclamation costs		7,335			7,116
Postretirement medical benefits obligation		21,856			21,564
Other long-term liabilities		18,631			18,854
Mandatorily redeemable convertible preferred stock		31,199			33,773
Stockholders' deficit		(52,655	)		(64,431	)
Total liabilities and stockholders' deficit	$	50,518		$	72,448

The accompanying notes are an integral part of these financial statements.

McMoRan EXPLORATION CO.

STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2003			2002			2003			2002
	(In Thousands, Except Per Share Amounts)
Revenues	$	2,703		$	11,400		$	7,467		$	24,986
Costs and expenses:
Production and delivery costs		2,136			6,272			3,747			12,690
Depreciation and amortization		1,582			3,892			3,384			10,597
Exploration expenses		5,881			1,150			7,676			4,553
General and administrative expenses		2,486			2,135			4,317			3,857
Gain on disposition of oil and gas properties		-			(886	)		-			(30,084	)
Total costs and expenses		12,085			12,563			19,124			1,613
Operating income (loss)		(9,382	)		(1,163	)		(11,657	)		23,373
Interest expense		-			(22	)		(2	)		(543	)
Other income, net		(23	)		36			12			59
Provision for income taxes		-			-			(1	)		(7	)
Income (loss) from continuing operations		(9,405	)		(1,149	)		(11,648	)		22,882
Loss from discontinued sulphur operations		(1,417	)		(1,324	)		(2,451	)		(1,316	)
Net income (loss) before cumulative effect of change in accounting principle		(10,822	)		(2,473	)		(14,099	)		21,566
Cumulative effect of change in accounting principle		-			-			22,162			-
Net income (loss)		(10,822	)		(2,473	)		8,063			21,566
Preferred dividends and amortization of convertible preferred stock issuance costs		(430	)		(49	)		(883	)		(49	)
Net income (loss) applicable to common stock	$	(11,252	)	$	(2,522	)	$	7,180		$	21,517

Net income (loss) per share of common stock:
Basic net income (loss) from continuing operations		$(0.59	)		$(0.08	)		$(0.76	)		$1.43
Basic net loss from discontinued sulphur operations		(0.09	)		(0.08	)		(0.15	)		(0.08	)
Before cumulative effect of change in accounting principle		(0.68	)		(0.16	)		(0.91	)		1.35
Cumulative effect of change in accounting principle		-			-			1.35			-
Basic net income (loss) per share of common stock		$(0.68	)		$(0.16	)		$0.44			$1.35

Diluted net income (loss) from continuing operations		$(0.59	)		$(0.08	)		$(0.76	)		$1.40
Diluted net loss from discontinued sulphur operations		(0.09	)		(0.08	)		(0.15	)		(0.08	)
Before cumulative effect of change in accounting principle		(0.68	)		(0.16	)		(0.91	)		1.32
Cumulative effect of change in accounting principle		-			-			1.35			-
Diluted net income (loss) per share of common stock		$(0.68	)		$(0.16	)		$0.44			$1.32

Average common shares outstanding:
Basic		16,649			15,977			16,445			15,946
Diluted		16,649			15,977			16,445			16,349

The accompanying notes are an integral part of these financial statements.

McMoRan EXPLORATION CO.

STATEMENTS OF CASH FLOWS (Unaudited)

	Six Months Ended
	June 30,
	2003			2002
	(In Thousands)
Cash flow from operating activities:
Net income	$	8,063		$	21,517
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss from discontinued sulphur operations		2,451			1,316
Depreciation and amortization		3,384			10,597
Exploration drilling and related expenditures		4,935			2,568
Gain on disposition of oil and gas properties		-			(30,084	)
Cumulative effect of change in accounting principle		(22,162	)		-
Compensation expense associated with stock-based awards		1,820			-
Change in assets and liabilities:
Oil & gas reclamation and mine shutdown expenditures		(237	)		(174	)
Other		(47	)		(686	)
(Increase) decrease in working capital:
Accounts receivable		9,009			3,947
Accounts payable and accrued liabilities		(8,781	)		(8,661	)
Inventories and prepaid expenses		542			(686	)
Net cash used in continuing operations		(1,023	)		(346	)
Net cash provided by (used in) discontinued sulphur operations		(5,226	)		1,979
Net cash provided by (used in) operating activities		(6,249	)		1,633

Cash flow from investing activities:
Exploration, development and other capital expenditures		(3,096	)		(13,695	)
Proceeds from disposition of oil and gas properties		-			60,000
Net cash provided by (used in) continuing operations		(3,096	)		46,305
Net cash provided by discontinued sulphur operations		131			58,576
Net cash provided by (used in) investing activities		(2,965	)		104,881

Cash flow from financing activities:
Net proceeds from equity offering		-			33,777
Repayment of borrowings on oil and gas credit facility		-			(49,657	)
Dividends paid on convertible preferred stock		(830	)		-
Exercise of stock options and other		148			122
Net cash (used in) provided by continuing operations		(682	)		(15,758	)
Net cash (used in) provided by discontinued sulphur operations		-			(55,000	)
Net cash (used in) provided by financing activities		(682	)		(70,758	)
Net increase (decrease) in cash and cash equivalents		(9,896	)		35,756
Net increase in restricted cash of discontinued sulphur operations		(11	)		(9,055	)
Net increase (decrease) in unrestricted cash and cash equivalents		(9,907	)		26,701
Cash and cash equivalents at beginning of year		14,282			500
Cash and cash equivalents at end of period	$	4,375		$	27,201

The accompanying notes are an integral part of these financial statements.

McMoRan EXPLORATION CO.

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

McMoRan Exploration Co.’s (McMoRan) financial statements are prepared in accordance with accounting principles generally accepted in the United States. As a result of McMoRan’s exit from the sulphur business, as evidenced by the sale of substantially all of its sulphur assets, its sulphur results have been presented as discontinued operations and the major classes of assets and liabilities related to the sulphur business have been separately shown for all periods presented.

2. EARNINGS PER SHARE

Basic and diluted net income per share of common stock was calculated by dividing the income (loss) applicable to continuing operations, income (loss) from discontinued operations, cumulative effect of change in accounting principle and net income applicable to common stock by the weighted-average number of common shares outstanding during the periods presented. For purposes of the earnings per share computations, net income (loss) applicable to continuing operations includes preferred stock dividends and related charges.

With respect to the 2003 periods the diluted earnings per share calculation excludes the assumed conversion of the remaining 1.3 million shares of McMoRan’s 5% mandatorily redeemable convertible preferred stock (Note 5) issued in June 2002 into 6.7 million shares of common stock and of 1.74 million stock warrants, issued to K1 USA Energy Production Corporation (K1 USA) in December 2002, into 1.74 million shares of common stock. These items were excluded considering McMoRan’s net loss from continuing operations, which made the assumed conversion of these instruments anti-dilutive. For additional information regarding the stock warrants granted to K1 USA see Note 2 of McMoRan’s 2002 Form 10-K.

McMoRan had dilutive stock options representing approximately 1,000 shares of common stock during the second quarter of 2002, 570,000 shares of common stock in the second quarter of 2003 and 270,000 shares of common stock for the six months ended June 30, 2003 that otherwise would have been included in the diluted earnings per share calculation but were excluded because of the net loss from continuing operations. McMoRan had dilutive stock options representing approximately 1,000 shares of common stock during the six months ended June 30, 2002, which were included in its diluted net income per share calculation. McMoRan’s six-month 2002 diluted net income per share calculation also includes the assumed conversion of its then outstanding 1.4 million shares of 5% mandatorily redeemable convertible preferred stock into approximately 7.3 million shares of common stock for the period that the convertible preferred stock was outstanding (10 days), which equates to approximately 402,000 shares of common stock.

Outstanding stock options excluded from the computation of diluted net loss per share of common stock because their exercise prices were greater than the average market price of the common stock during the period are as follows:

	Second Quarter				Six Months
	2003		2002		2003		2002
Outstanding options (in thousands)		2,619		3,503		2,838		3,503
Average exercise price	$	16.94	$	14.84	$	16.48	$	14.84

Stock-Based Compensation Plans. As of June 30, 2003, McMoRan has five stock-based employee compensation plans and one stock-based director compensation plan, see Note 8 of McMoRan’s 2002 Annual Report on Form 10-K. On May 1, 2003, the shareholders of McMoRan approved the McMoRan 2003 Stock Incentive Plan, which authorized the Board of Directors to grant stock-based awards representing up to 2.0 million shares of McMoRan common stock. McMoRan accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, which require compensation cost for stock-based employee compensation plans to be recognized based on the difference on the date of grant, if any, between the quoted market price of the stock and the amount an employee must pay to acquire the stock. The following table illustrates the effect on net income and earning s per share if McMoRan had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” which require compensation cost for all stock-based employee compensation plans to be recognized based on the use of a fair value method (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net income (loss) applicable to common stock, as reported	$	(11,252	)	$	(2,522	)	$	7,180		$	21,517
Add: Stock-based employee compensation expense included in reported net income for restricted stock units and employee stock options		1,804			12			1,820			12
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards		(4,150	)		(1,751	)		(5,025	)		(3,316	)
Pro forma net income (loss) applicable to common stock	$	(13,598	)	$	(4,261	)	$	3,975		$	18,213

Earnings per share:
Basic – as reported	$	(0.68	)	$	(0.16	)	$	0.44		$	1.35
Basic – pro forma		(0.82	)		(0.27	)		0.24			1.14

Diluted – as reported	$	(0.68	)	$	(0.16	)	$	0.44		$	1.32
Diluted – pro forma		(0.82	)		(0.27	)		0.24			1.11

For the pro forma computations, the values of option grants were calculated on the dates of grant using the Black-Scholes option-pricing model. The weighted average fair value for stock option grants was $9.37 per option in the second quarter of 2003 and $8.14 per option for the six months ended June 30, 2003 compared to $2.71 per option for the second quarter of 2002 and $3.16 per option for the six months ended June 30, 2002. The weighted average assumptions used include a risk-free interest rate of 3.6 percent for both the second quarter and six-month 2003 periods compared to 5.5 percent in the second quarter of 2002 and 5.1 percent for the six-month 2002 period; expected volatility of 66 percent for grants made in the second quarter and six-month 2003 periods compared with 60 percent and 55 percent for grants made in comparable 2002 periods; no annual dividends; and expected lives of 7 years for all disclosed periods. The pr o forma effects on net income a