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 September 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 September 30, 2003, there were issued and outstanding 16,717,266 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

Independent Accountants’ Review Report	11

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

Controls and Procedures	23

Part II. Other Information	24

Signature	25

Exhibit Index	E-1

McMoRan Exploration Co.

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

McMoRan EXPLORATION CO.

CONDENSED BALANCE SHEETS (Unaudited)

	September 30,			December 31,
	2003			2002
	(In Thousands)
ASSETS
Cash and cash equivalents, continuing operations	$	104,768		$	12,907
Cash and cash equivalents from discontinued sulphur operations, $1.0 million and $0.9 million restricted at September 30, 2003 and December 31, 2002, respectively		956			2,316
Restricted investments		7,800			-
Accounts receivable		4,862			13,645
Inventories		-			120
Prepaid expenses		269			791
Current assets from discontinued sulphur operations, excluding cash		419			449
Total current assets		119,074			30,228
Property, plant and equipment, net		33,184			37,895
Discontinued sulphur business assets, net		312			355
Restricted investments and cash		18,963			3,500
Other assets		6,645			470
Total assets	$	178,178		$	72,448

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable	$	4,156		$	5,246
Accrued liabilities		4,055			5,092
Accrued interest		1,950			-
Current portion of accrued oil and gas reclamation costs		264			878
Current portion of accrued sulphur reclamation costs		2,550			8,126
Current liabilities from discontinued sulphur operations		9,620			5,481
Other		-			328
Total current liabilities		22,595			25,151
6% Convertible Senior Notes		130,000			-
Accrued sulphur reclamation costs		11,541			30,421
Accrued oil and gas reclamation costs		7,463			7,116
Postretirement medical benefits obligation		22,011			21,564
Other long-term liabilities		18,876			18,854
Mandatorily redeemable convertible preferred stock		31,125			33,773
Stockholders' deficit		(65,433	)		(64,431	)
Total liabilities and stockholders' deficit	$	178,178		$	72,448

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

McMoRan EXPLORATION CO.

STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2003			2002			2003			2002
	(In Thousands, Except Per Share Amounts)
Revenues	$	3,850		$	9,785		$	11,317		$	34,771
Costs and expenses:
Production and delivery costs		1,165			7,437			4,912			20,127
Depreciation and amortization		2,914			6,207			6,298			16,804
Exploration expenses		917			7,090			8,593			11,643
General and administrative expenses		2,273			1,624			6,590			5,481
Start-up costs for Main Pass Energy Hub^TM		7,073			-			7,073			-
Gain on disposition of oil and gas properties		-			-			-			(30,084	)
Total costs and expenses		13,442			22,358			32,566			23,971
Operating income (loss)		(10,492	)		(12,573	)		(22,149	)		10,800
Interest expense		(2,295	)		(151	)		(2,297	)		(694	)
Other income, net		1,384			103			1,396			162
Provision for income taxes		-			-			(1	)		(7	)
Income (loss) from continuing operations		(11,403	)		(12,621	)		(23,051	)		10,261
Income (loss) from discontinued sulphur operations		(7,506	)		2,853			(9,957	)		1,537
Net income (loss) before cumulative effect of change in accounting principle		(18,909	)		(9,768	)		(33,008	)		11,798
Cumulative effect of change in accounting principle		-			-			22,162			-
Net income (loss)		(18,909	)		(9,768	)		(10,846	)		11,798
Preferred dividends and amortization of convertible preferred stock issuance costs		(430	)		(488	)		(1,313	)		(537	)
Net income (loss) applicable to common stock	$	(19,339	)	$	(10,256	)	$	(12,159	)	$	11,261

Net income (loss) per share of common stock:
Basic net income (loss) from continuing operations		$(0.71	)		$(0.82	)		$(1.48	)		$0.61
Basic net income (loss) from discontinued sulphur operations		(0.45	)		0.18			(0.60	)		0.10
Before cumulative effect of change in accounting principle		(1.16	)		(0.64	)		(2.08	)		0.71
Cumulative effect of change in accounting principle		-			-			1.34			-
Basic net income (loss) per share of common stock		$(1.16	)		$(0.64	)		$(0.74	)		$0.71

Diluted net income (loss) from continuing operations		$(0.71	)		$(0.82	)		$(1.48	)		$0.55
Diluted net income (loss) from discontinued sulphur operations		(0.45	)		0.18			(0.60	)		0.08
Before cumulative effect of change in accounting principle		(1.16	)		(0.64	)		(2.08	)		0.63
Cumulative effect of change in accounting principle		-			-			1.34			-
Diluted net income (loss) per share of common stock		$(1.16	)		$(0.64	)		$(0.74	)		$0.63

Average common shares outstanding:
Basic		16,716			16,041			16,535			15,978
Diluted		16,716			16,041			16,535			18,698

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

McMoRan EXPLORATION CO.

STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended
	September 30,
	2003			2002
	(In Thousands)
Cash flow from operating activities:
Net income (loss)	$	(10,846	)	$	11,798
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Income) loss from discontinued sulphur operations		9,957			(1,537)
Depreciation and amortization		6,298			16,804
Exploration drilling and related expenditures		4,924			8,487
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		2,009			-
Stock warrants granted to K1 USA Energy Production Corporation		6,220			-
Amortization of deferred financing costs		346			-
Change in assets and liabilities:
Oil & gas reclamation and mine shutdown expenditures		(342	)		(728	)
Other		270			27
(Increase) decrease in working capital:
Accounts receivable		8,687			3,403
Accounts payable and accrued liabilities		(3,335	)		(11,515	)
Inventories and prepaid expenses		642			231
(Increase) decrease in working capital		5,994			(7,881	)
Net cash provided by (used in) continuing operations		2,668			(3,114	)
Net cash used in discontinued sulphur operations		(6,849	)		(7,367	)
Net cash used in operating activities		(4,181	)		(10,481	)

Cash flow from investing activities:
Exploration, development and other capital expenditures		(4,494	)		(13,893	)
Purchase of restricted investments		(22,991	)		-
Proceeds from disposition of oil and gas properties		-			60,000
Net cash (used in) provided by continuing operations		(27,485	)		46,107
Net cash provided by discontinued sulphur operations		189			58,583
Net cash (used in) provided by investing activities		(27,296	)		104,690

Cash flow from financing activities:
Proceeds from 6% convertible senior notes		130,000			-
Net proceeds from mandatorily redeemable preferred stock offering		-			33,750
Repayment of borrowings on oil and gas credit facility		-			(49,657	)
Dividends paid on convertible preferred stock		(1,233	)		(486	)
Financing costs		(6,987	)		-
Exercise of stock options and other		199			205
Net cash provided by (used in) continuing operations		121,979			(16,188	)
Net cash used in discontinued sulphur operations		-			(55,000	)
Net cash provided by (used in) financing activities		121,979			(71,188	)
Net increase in cash and cash equivalents		90,502			23,021
Net increase in restricted cash of discontinued sulphur operations		(16	)		(2,266	)
Net increase in unrestricted cash and cash equivalents		90,486			20,755
Cash and cash equivalents at beginning of year		14,282			500
Cash and cash equivalents at end of period	$	104,768		$	21,255

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

McMoRan EXPLORATION CO.

NOTES TO FINANCIAL STATEMENTS

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. 6% CONVERTIBLE SENIOR NOTES

On July 3, 2003, McMoRan issued $130 million of 6% convertible senior notes due July 2, 2008. Net proceeds from the notes totaled approximately $123.0 million, of which $22.9 million was used to purchase U.S. government securities held in escrow to secure the notes and to be used to pay the first six semi-annual interest payments. The notes are otherwise unsecured. Interest payments are payable on January 2 and July 2 of each year, beginning on January 2, 2004. The notes are convertible at the option of the holder at any time prior to maturity into shares of McMoRan’s common stock at a conversion price of $14.25 per share, representing a 25 percent premium over the closing price for McMoRan’s common stock on June 26, 2003.

McMoRan intends to use the remaining net proceeds from this offering for exploratory drilling activities on its oil and gas properties; for possible opportunities to acquire interests in oil and gas properties or leases; for continuation of its efforts with respect to the potential Main Pass Energy Hub^TM project, including a liquefied natural gas (LNG) terminal and supporting facilities; and for working capital requirements and other corporate purposes.

3. TRANSACTIONS WITH K1 USA ENERGY CORPORATION (K1 USA)

In December 2002, McMoRan and K1 USA established a joint venture, K-Mc Venture I LLC (K-Mc I), which acquired McMoRan’s Main Pass oil production facilities. K-Mc I is owned 66.7 percent by K1 USA and 33.3 percent by McMoRan. In connection with that transaction, as modified in September 2003, K1 USA received the right to participate as a passive equity investor in 15 percent of Freeport Energy’s equity participation in the Main Pass Energy Hub^TM project. K1 USA can exercise that right prior to the closing of any project financing arrangements by agreeing to fund 15 percent of McMoRan’s future contributions in the project. K1 USA also received warrants to acquire a total of 2.5 million shares of McMoRan’s common stock at $5.25 per share, with warrants for approximately 1.74 million shares expiring in December 2007 and the warrants for the remaining shares expiring in September 2008. In connection w ith the warrants for approximately 760,000 shares issued to K1 USA in September 2003, McMoRan recorded a charge of $6.2 million, which represented the fair value of the warrants as determined using the Black-Scholes valuation method on the date of their issuance. This charge is reflected within the caption “Start-up costs for Main Pass Energy Hub^TM” in the accompanying statements of operations.

For additional information regarding our business arrangements with K1 USA and its affiliates, including the formation of K-Mc I, see Note 2 of McMoRan’s 2002 Form 10-K.

4. EARNINGS PER SHARE

Basic and diluted net income (loss) 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 (loss) 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, income (loss) applicable to continuing operations includes preferred stock dividends and related charges.

With respect to the 2003 periods the diluted net loss per share calculations exclude the assumed conversion of the remaining 1.3 million shares of McMoRan’s 5% mandatorily redeemable convertible preferred stock (Note 6) issued in June 2002 into 6.7 million shares of common stock, the 2.5 million of stock warrants issued to K1 USA into 2.5 million shares of common stock, and McMoRan’s $130 million of convertible senior notes (Note 2) into approximately 9.1 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 3 above and Note 2 of McMoRan’s 2002 Form 10-K.

McMoRan had dilutive stock options representing approximately 1.4 million shares of common stock in the third quarter of 2003, and 1.2 million shares of common stock for the nine months ended September 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 no dilutive stock options outstanding during the third quarter of 2002. McMoRan had dilutive stock options representing approximately 1,000 shares of common stock during the nine months ended September 30, 2002, which were included in its diluted net income per share calculation. McMoRan’s nine-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 t he period that the convertible preferred stock was outstanding (102 days), which equates to approximately 2.7 million 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:

	Third Quarter				Nine Months
	2003		2002		2003		2002
Outstanding options (in thousands)		2,699		3,379		2,839		3,379
Average exercise price	$	16.79	$	14.89	$	16.48	$	14.89

Stock-Based Compensation Plans. As of September 30, 2003, McMoRan had five stock-based employee compensation plans and one stock-based director compensation plan, as further described in Note 8 of McMoRan’s 2002 Form 10-K. On May 1, 2003, McMoRan’s shareholders approved the McMoRan 2003 Stock Incentive Plan, which authorizes the Board of