Back to GetFilings.com

McMoRan Exploration Co.

Part I.  FINANCIAL INFORMATION

Item 1.

Financial Statements.

McMoRan EXPLORATION CO.

CONDENSED BALANCE SHEETS (Unaudited)

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

McMoRan EXPLORATION CO.

STATEMENTS OF OPERATIONS (Unaudited)

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

McMoRan EXPLORATION CO.

STATEMENTS OF CASH FLOWS (Unaudited)

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.  McMoRan consolidates its wholly owned McMoRan Oil & Gas LLC (MOXY) and Freeport-McMoRan Energy LLC (Freeport Energy) subsidiaries and reflects its investment in K-Mc Venture I LLC (K-Mc I) using the equity method.  As a result of McMoRan’s exit from the sulphur business, 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 were calculated by dividing the net loss applicable to continuing operations, net 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, the net loss applicable to continuing operations includes preferred stock dividends and related amortization of the issuance costs.  

McMoRan had a net loss from continuing operations in both the first quarter of 2004 and 2003.  Accordingly, the assumed exercise of stock options and stock warrants whose exercise prices are less than the average market price of McMoRan’s common stock during these periods, as well as the assumed conversion of McMoRan’s 5% convertible preferred stock and 6% convertible senior notes, were excluded from the diluted net income (loss) per share calculations.  These instruments were excluded because they are considered to be anti-dilutive, meaning their inclusion would have decreased the reported net loss per share from continuing operations for both periods presented. The excluded share amounts are summarized below (in thousands):

a.

Options with an exercise price less than the average market price for McMoRan’s common stock for the periods presented.

b.

Stock warrants were issued to K1 USA Energy Production Corporation in December 2002 (1.74 million shares) and September 2003 (0.76 million shares).  The warrants are exercisable for McMoRan common stock at any time over their five-year terms at an exercise price of $5.25 per share.  See Note 4 of McMoRan’s 2003 Annual Report on Form 10-K for additional information regarding the warrants.

c.

At the election of the holder, and before the shares mature on June 30, 2012, each outstanding share of 5% mandatorily redeemable convertible preferred stock is convertible into 5.1975 shares of McMoRan common stock.  For additional information regarding McMoRan’s convertible preferred stock see Note 6 of McMoRan’s 2003 Annual Report on Form 10-K.

d.

The notes, issued in July 2003, are convertible at the option of the holder at any time prior to their maturity on July 2, 2008 into shares of McMoRan common stock at a conversion price of $14.25 per share.  Additional information regarding McMoRan’s 6% convertible senior notes is disclosed in Note 5 of its 2003 Annual Report on Form 10-K.  Accrued interest on the convertible senior notes totaled $2.0 million during the first quarter of 2004.

Outstanding stock options excluded from the computation of diluted net income 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:

Stock-Based Compensation Plans.  As of March 31, 2004, McMoRan had five stock-based employee compensation plans and one stock-based director compensation plan, which are more fully described in Note 8 of McMoRan’s 2003 Annual Report on Form 10-K.  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 (loss) and earnings per share if McMoRan had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Com pensation,” which requires 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):

For the pro forma computations, the values of option grants were calculated on the date of the grants using the Black-Scholes option-pricing model.  The pro forma effects on net income (loss) are not representative of future years because of the potential changes in the factors used in calculating the Black-Scholes valuation and the number and timing of option grants. No other discounts or restrictions related to vesting or the likelihood of vesting of stock options were applied.  The table below summarizes the weighted average assumptions used to value the options under SFAS 123.

3. OTHER MATTERS

Multi-Year Exploration Venture

In January 2004, McMoRan announced the formation of a multi-year exploration venture with a private exploration and production company.  Under terms of the agreement, the private company has committed to fund a minimum of $200 million for its share of the venture’s exploration costs and will participate for a minimum of 40 percent of McMoRan’s interests in certain exploration prospects.  The venture plans to participate in the drilling of at least 10 wells over the next twelve months.  McMoRan and its partner are currently participating in the Dawson Deep prospect at Garden Banks 625, the Minuteman (previously referred as the Phoenix) prospect at Eugene Island Block 213, the Lombardi Deep prospect at Vermilion Block 208, and the Deep Tern Miocene prospect at Eugene Island Block 193, which is expected to commence drilling in May 2004.  McMoRan has agreed to propose and drill an initial test well at 11 prospects by Decem ber 31, 2005, or at the request of the private company, refund its investment in the Dawson Deep prospect.  As of March 31, 2004, the private company’s investment in the Dawson Deep prospect totaled $7.3 million. At March 31, 2004, McMoRan’s net investment in its in-progress prospects totaled $10.6 million, including $8.9 million for Dawson Deep, $1.2 million for Minuteman and $0.5 million for Lombardi Deep.

Railcar Transactions

On January 14, 2004, McMoRan entered into a definitive sales agreement for its remaining sulphur railcars for a total of $1.1 million.   McMoRan has received $0.7 million of the railcar sale proceeds as of March 31, 2004 and anticipates it will receive the remainder in the second quarter of 2004.  On January 15, 2004 in conjunction with this sales agreement, McMoRan terminated its existing lease agreement for the remaining sulphur railcars by paying $7.0 million to the lessor for the remaining commitments under the lease (of which $5.9 million was expensed in 2003).

Stock-Based Awards

On February 2, 2004, the Board of Directors of McMoRan approved grants of options to purchase a total of 886,000 shares of McMoRan common stock at an exercise price of $16.78 per share, including a total of 525,000 shares issued to its Co-Chairmen.  Options for 300,000 shares were granted to the Co-Chairmen in lieu of cash compensation during 2004 and are immediately exercisable. The remainder, including 225,000 shares granted to the Co-Chairmen, vest ratably over a four-year period. In addition, awards of 12,500 restricted stock units convertible into 12,500 shares of McMoRan common stock were also granted.  The grant date market value of these restricted stock units ($0.2 million) will be charged to earnings over their three-year vesting period.

Interest Cost

Interest expense excludes capitalized interest of $0.1 million in the first quarter of 2004.  McMoRan had no capitalized interest in the first quarter of 2003.

Conversion of 5% Mandatorily Redeemable Convertible Preferred Stock

In June 2002, McMoRan completed a $35 million public offering of 1.4 million shares of its 5% mandatorily redeemable convertible preferred stock.  As of December 31, 2003, 131,615 shares of McMoRan’s convertible preferred stock had been tendered and converted into approximately 0.7 million shares of McMoRan common stock, including 42,500 preferred shares converted into 221,000 shares of common stock during the first quarter of 2003.  During the first quarter of 2004, an additional 44,785 shares of McMoRan preferred stock were tendered and converted into approximately 233,000 shares of McMoRan common stock.  For more information regarding McMoRan’s convertible preferred stock see Note 6 of its 2003 Annual Report on Form 10-K.

Pension Plan   

During 2000, McMoRan elected to terminate its defined benefit plan.  The plan’s termination is still pending approval from the Internal Revenue Service and the Pension Benefit Guaranty Corporation.  See Note 8 of McMoRan’s Annual Report on Form 10-K for additional information regarding its defined benefit plan and its status and for information on McMoRan’s other postretirement benefit plans.  The components of net periodic pension benefit cost for the three months ended March 31, 2004 and 2003 for plans follow (in thousands):

4. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2003, McMoRan adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires recording the fair value of an asset retirement obligation associated with tangible long-lived assets in the period incurred.  Retirement obligations associated with long-lived assets included within the scope of SFAS No. 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract or by legal construction.

At January 1, 2003, McMoRan discounted its estimated asset retirement obligations to their estimated fair value by using McMoRan’s credit adjusted risk free interest rates in effect for the corresponding time periods over which these estimated costs would be incurred.  The net difference between McMoRan’s previously recorded reclamation obligations and the amounts recorded under SFAS No.143 resulted in a $22.2 million gain, which was recognized as a cumulative effect for a change in accounting principle. See Notes 1 and 11 of McMoRan’s 2003 Annual Report on Form 10-K for additional information regarding its adoption of SFAS 143.

5. RATIO OF EARNINGS TO FIXED CHARGES

McMoRan’s ratio of earnings to fixed charges calculation resulted in a shortfall of $12.0 million for the first quarter of 2004 and $2.7 million for the first quarter of 2003. For this calculation, earnings consist of income from continuing operations before income taxes and fixed charges. Fixed charges include interest and that portion of rent deemed representative of interest.

                                                                -----------------

Remarks

The information furnished herein should be read in conjunction with McMoRan’s financial statements contained in its 2003 Annual Report on Form 10-K.  The information furnished herein reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods.  All such adjustments are, in the opinion of management, of a normal recurring nature.

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors of McMoRan Exploration Co.:

We have reviewed the accompanying condensed consolidated balance sheet of McMoRan Exploration Co. (a Delaware Corporation) as of March 31, 2004, and the related consolidated statements of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. These financial statements are the responsibility of the Company’s management.  

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants.  A review of interim financial information consists principally 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, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.  

Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited in accordance with auditing standards generally accepted in the United States, the consolidated bal