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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-Q**(Mark One)   þ **Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the quarterly period ended September 30, 2006****or**   o **Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934****For the transition period from                                         to                                         ****Commission File Number: 0-20100****BELDEN & BLAKE CORPORATION**(Exact name of registrant as specified in its charter)   Ohio 34-1686642 (State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)   First City Tower  1001 Fannin Street, Suite 800  Houston, Texas 77002 (Address of principal executive offices) (Zip Code)(713) 659-3500 (Registrant’s telephone number, including area code)     Indicate by check mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. þ Yes    o No     Indicate by check mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act. (Check one):Large Accelerated filer o      Accelerated Filer o      Non-accelerated Filer þ     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act). Yes o    No þ     As of October 31, 2006, Belden & Blake Corporation had outstanding 1,534 shares of commonstock, without par value, which is its only class of stock.  
 

 
BELDEN & BLAKE CORPORATIONINDEX       **Page**PART I Financial Information         Item 1. Financial Statements (unaudited)         Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005   1      Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005:    Successor Company for the three months ended September 30, 2006; for the SuccessorCompany 46 day period from August 16, 2005 to September 30, 2005; and the PredecessorCompany 46 day period from July 1, 2005 to August 15, 2005  2      Consolidated Statements of Operations for the nine months endedSeptember 30, 2006 and 2005:    Successor Company for the nine months ended September 30, 2006; for the SuccessorCompany 46 day period from August 16, 2005 to September 30, 2005; and the PredecessorCompany 227 day period from January 1, 2005 to August 15, 2005  3      Consolidated Statements of Cash Flows for the nine months endedSeptember 30, 2006 and 2005:    Successor Company for the nine months ended September 30, 2006; for the SuccessorCompany 46 day period from August 16, 2005 to September 30, 2005; and the PredecessorCompany 227 day period from January 1, 2005 to August 15, 2005  4      Notes to Consolidated Financial Statements   5      Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations   9      Item 3. Quantitative and Qualitative Disclosures About Market Risk   16      Item 4. Controls and Procedures   18      PART II Other Information         Item 1. Legal Proceedings   18      Item 1A. Risk Factors  18      Item 4. Submission of Matters to a Vote of Security Holders   18      Item 6. Exhibits   19  EX-31.1 EX-31.2 EX-32.1 EX-32.2
 

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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****BELDEN & BLAKE CORPORATION****CONSOLIDATED BALANCE SHEETS****(unaudited, in thousands, except share data)**           **September 30,**  **December 31,**   **2006**  **2005** **ASSETS**        **Current assets**        Cash and cash equivalents $5,094  $8,172 Accounts receivable, net  18,334   25,225 Inventories  769   1,085 Deferred income taxes  11,410   25,752 Other current assets  387   349 Fair value of derivatives  1,353   174        **Total current assets**  37,347   60,757          **Property and equipment, at cost**        Oil and gas properties (successful efforts method)  689,904   661,094 Gas gathering systems  1,293   1,593 Land, buildings, machinery and equipment  3,037   6,795           694,234   669,482 Less accumulated depreciation, depletion and amortization  43,157   14,456        **Property and equipment, net**  651,077   655,026 **Goodwill**  91,443   91,443 **Fair value of derivatives**  184   285 **Other assets**  2,348   2,607          **$****782,399**  **$****810,118**                 **LIABILITIES AND SHAREHOLDER’S EQUITY**        **Current liabilities**        Accounts payable $4,538  $5,314 Accrued expenses  17,961   28,496 Current portion of long-term liabilities  766   776 Fair value of derivatives  28,771   65,170        **Total current liabilities**  52,036   99,756          **Long-term liabilities**        Bank and other long-term debt  95,456   52,085 Senior secured notes  165,312   200,340 Subordinated promissory note — related party  25,000   25,000 Asset retirement obligations and other long-term liabilities  20,424   18,919 Fair value of derivatives  172,529   240,129 Deferred income taxes  111,702   84,490        **Total long-term liabilities**  590,423   620,963          **Shareholder’s equity**        Common stock: without par value; 3,000 shares authorized and 1,534 shares issued  —   — Paid in capital  125,000   125,000 Retained earnings  36,140   9,063 Accumulated other comprehensive loss  (21,200)  (44,664)       **Total shareholder’s equity**  139,940   89,399          **$****782,399**  **$****810,118**        See accompanying notes.
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**BELDEN & BLAKE CORPORATION****CONSOLIDATED STATEMENTS OF OPERATIONS****(unaudited, in thousands)**                    **Three Months Ended September 30, 2005**            **Predecessor**   **Successor Company**   **Company**       **For the 46 Day Period**   **For the 46 Day Period**   **Three Months Ended**  **From August 16, 2005 to**   **From July 1, 2005 to**   **September 30, 2006**  **September30, 2005**   **August 15, 2005** **Revenues**             Oil and gas sales $31,576  $20,956   $15,481 Gas gathering and marketing  2,474   1,625    1,419 Other  196   81    67               34,246   22,662    16,967               **Expenses**             Production expense  5,959   3,284    2,667 Production taxes  877   524    406 Gas gathering and marketing  1,946   1,441    1,209 Exploration expense  148   379    490 General and administrative expense  2,460   422    648 Depreciation, depletion and amortization  10,314   4,528    4,248 Accretion expense  314   149    163 Derivative fair value (gain) loss  (50,218)  7,982    4,981 Transaction expenses  —   —    7,535               (28,200)  18,709    22,347            **Operating income (loss)**  **62,446**   **3,953**    **(5,380****)**              **Other expense**             Interest expense  5,846   2,903    3,010            **Income(loss) before income taxes**  **56,600**   **1,050**    **(8,390****)**Provision (benefit) for income taxes  22,405   390    (2,732)           **Net income (loss)** **$****34,195**  **$****660**   **$****(5,658****)**           See accompanying notes.
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**BELDEN & BLAKE CORPORATION****CONSOLIDATED STATEMENTS OF OPERATIONS****(unaudited, in thousands)**                    **Nine Months Ended September 30, 2005**            **Predecessor**   **Successor Company**   **Company**       **For the 46 Day**   **For the 227 Day**       **Period From**   **Period From**   **Nine Months Ended**  **August 16, 2005 to**   **January 1, 2005 to**   **September 30, 2006**  **September 30, 2005**   **August 15, 2005** **Revenues**             Oil and gas sales $108,726  $20,956   $71,400 Gas gathering and marketing  8,478   1,625    6,439 Other  494   81    284               117,698   22,662    78,123               **Expenses**             Production expense  16,386   3,284    13,423 Production taxes  2,466   524    1,901 Gas gathering and marketing  6,892   1,441    5,629 Exploration expense  697   379    2,424 General and administrative expense  7,962   422    3,964 Depreciation, depletion and amortization  29,039   4,528    21,265 Accretion expense  910   149    745 Derivative fair value (gain) loss  (36,742)  7,982    8,258 Transaction expenses  —   —    7,535               27,610   18,709    65,144            **Operating income**  **90,088**   **3,953**    **12,979**               **Other expense**             (Gain) on early extinguishment of debt  (436)  —    — Interest expense  17,153   2,903    14,786            **Income (loss) before income taxes**  **73,371**   **1,050**    **(1,807****)**Provision (benefit) for income taxes  29,044   390    (1,487)           **Net income (loss)** **$****44,327**  **$****660**   **$****(320****)**           See accompanying notes.
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**BELDEN & BLAKE CORPORATION****CONSOLIDATED STATEMENTS OF CASH FLOWS****(unaudited, in thousands)**                    **Nine Months Ended September 30, 2005**            **Predecessor**   **Successor Company**   **Company**       **For the 46 Day**   **For the 227 Day**       **Period From**   **Period From**   **Nine Months Ended**  **August 16, 2005 to**   **January 1, 2005 to**   **September 30, 2006**  **September 30, 2005**   **August 15, 2005** **Cash flows from operating activities:**             Net income (loss) $44,327  $660   $(320)Adjustments to reconcile net income (loss)to net cash provided by operating activities:             Depreciation, depletion and amortization  29,039   4,528    21,265 Accretion of asset retirement obligation  910   149    745 (Gain) loss on debt extinguishment of debt and disposal of property and equipment  (472)  (21)   86 Amortization of derivatives and other noncash hedging activities  (46,144)  7,717    12,344 Exploration expense  697   379    2,424 Deferred income taxes  29,044   390    (1,487)Stock-based compensation  —   —    2,586 Change in operating assets and liabilities, net ofeffects of acquisition and disposition of businesses:             Accounts receivable and other operating assets  6,854   (1,459)   213 Inventories  238   (571)   (85)Accounts payable and accrued expenses  (12,792)  3,427    (8,845)           **Net cash provided by operating activities**  **51,701**   **15,199**    **28,926**               **Cash flows from investing activities:**             Proceeds from property and equipment disposals  6,891   21    5 Exploration expense  (697)  (379)   (2,424)Additions to property and equipment  (30,164)  (4,942)   (17,177)Increase in other assets  (18)  (11)   (34)           **Net cash used in investing activities**  **(23,988****)**  **(5,311****)**   **(19,630****)**              **Cash flows from financing activities:**             Proceeds from senior secured facility  —   —    57,000 Proceeds from revolving line of credit  55,376   —    — Repayment of revolving line of credit  (12,000)  —    — Proceeds from subordinated promissory note  —   —    25,000 Debt issue costs  —   —    (2,120)Settlement of derivative liabilities recorded in purchase accounting  (22,961)  (7,040)   (20,440)Repayment of senior secured facility — term loan  —   —    (89,500)Repayment of senior secured facility  —   (5,000)   — Repayment of senior secured notes  (33,933)  —    — Repayment of long-term debt and other obligations  (23)  (3)   (84)Dividends paid  (17,250)  —    — Equity contribution  —   —    9,000            **Net cash used in financing activities**  **(30,791****)**  **(12,043****)**   **(21,144****)**           **Net decrease in cash and cash equivalents**  **(3,078****)**  **(2,155****)**   **(11,848****)****Cash and cash equivalents at beginning of period**  **8,172**   **6,559**    **18,407**            **Cash and cash equivalents at end of period** **$****5,094**  **$****4,404**   **$****6,559**            See accompanying notes.
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**BELDEN & BLAKE CORPORATION****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(unaudited)****September 30, 2006****(1) Change in Control, Merger and Basis of Presentation**     Unless the context requires otherwise or unless otherwise noted, when we use the terms “Belden& Blake,” “we,” “us,” “our” or the “Company,” we are referring to Belden & Blake Corporation(“Successor Company”) and its predecessors. On August 16, 2005, the former partners of the directparent of Belden & Blake Corporation (“Company”), Capital C Energy Operations, L.P., a Delawarelimited partnership (“Capital C”), completed the sale of all of the partnership interests inCapital C to certain institutional funds managed by EnerVest Management Partners, Ltd.(“EnerVest”), a Houston-based privately held oil and gas operator and institutional funds manager(the “Transaction”). The Transaction resulted in a change in control of the Company.     On July 7, 2004, the Company, Capital C, and Capital C Ohio, Inc., an Ohio corporation and awholly owned subsidiary of Capital C (“Merger Sub”), completed a merger pursuant to which MergerSub was merged with and into the Company (the “Merger”), with the Company surviving the Merger as awholly owned subsidiary of Capital C. The Merger resulted in a change in control of the Company.The general partner of Capital C was controlled by Carlyle/Riverstone Global Energy and Power FundII, L.P until the Transaction on August 16, 2005.     The Transaction and Merger were each accounted for as a purchase effective August 16, 2005 andJuly 7, 2004, respectively. The Transaction and Merger resulted in a new basis of accountingreflecting estimated fair values for assets and liabilities at August 16, 2005 and July 7, 2004.Accordingly, the financial statements for the periods subsequent to August 15, 2005 are presentedon the Company’s new basis of accounting, while the results of operations for prior period reflectthe historical results of the predecessor company. The “Successor Company” refers to the periodfrom August 16, 2005 and forward. The “Predecessor Company” refers to the period from July 7, 2004through August 15, 2005.     The accompanying unaudited consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include allof the information and footnotes required by generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have been included. Operatingresults for the Successor Company for the period ended September 30, 2006 are not necessarilyindicative of the results that may be expected for the year ended December 31, 2006. For furtherinformation, refer to the consolidated financial statements and footnotes included in our AnnualReport on Form 10-K for the year ended December 31, 2005. Certain reclassifications have been madeto conform to the current presentation.**(2) Derivatives and Hedging**     As a result of the adoption of SFAS 133 in 2001, the Company recognizes all derivativefinancial instruments as either assets or liabilities at fair value. Derivative instruments thatare not cash flow hedges must be adjusted to fair value through net income (loss). Under theprovisions of SFAS 133, changes in the fair value of derivative instruments that are fair valuehedges are offset against changes in the fair value of the hedged assets, liabilities, or firmcommitments, through net income (loss). Changes in the fair value of derivative instruments thatare cash flow hedges are recognized in other comprehensive income (loss) until such time as thehedged items impact earnings. Ineffective portions of a derivative instrument’s change in fairvalue are immediately recognized in net income (loss). Deferred gains and losses on terminatedhedges will be recognized as increases or decreases to oil and gas revenues orinterest expense during the same periods in which the underlying forecasted transactionsimpact earnings.
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If there is a discontinuance of a cash flow hedge because it is probable that theoriginal forecasted transaction will not occur, deferred gains or losses are recognized in earningsimmediately.     The relationship between the hedging instruments and the hedged items must be highly effectivein achieving the offset of changes in fair values or cash flows attributable to the hedged risk,both at the inception of the contract and on an ongoing basis. The Company assesses effectivenessat least quarterly based on the relative changes in fair value between the derivative contract andthe hedged item over time. Hedge accounting is discontinued prospectively if the Company determinesthat a derivative is no longer highly effective as a hedge or if the Company decides to discontinuethe hedging relationship.     From time to time the Company may enter into a combination of futures contracts, commodityderivatives and fixed-price physical commodity contracts to manage its exposure to natural gasprice, crude oil price or interest rate volatility and support its capital expenditure plans. TheCompany’s derivative financial instruments take the form of swaps or collars. At September 30,2006, the Company’s derivative contracts were comprised of natural gas swaps, crude oil swaps andinterest rate swaps, which were placed with major financial institutions that the Company believesare a minimal credit risk. Qualifying derivative financial instruments are designated as cash flowhedges. Changes in fair value of the derivative instruments that are cash flow hedges arerecognized in other comprehensive income (loss) until such time the hedged items impact earnings.The changes in fair value of non-qualifying derivative contracts will be reported in expense in theconsolidated statements of operations as derivative fair value gain or loss.     The Company uses New York Mercantile Exchange (“NYMEX”) based commodity derivative contractsto hedge natural gas, because the Company’s natural gas production is sold pursuant to NYMEX-basedsales contracts. Beginning July 7, 2004, the Company has ineffectiveness on the natural gas swapsdue to purchase accounting, which created non-zero value derivatives at the time of the Merger. TheCompany had collar agreements that could not be redesignated as cash flow hedges because thesecollars were not effective due to unrealized losses at the date of the Merger. These collarsqualified and were designated as cash flow hedges from their inception through the period prior tothe Merger. Although these collars were not deemed to be effective hedges in accordance with theprovisions of SFAS 133, the Company retained these instruments as protection against changes incommodity prices and the Company continued to record the mark-to-market adjustments on thesenatural gas collars, through 2005, in the Company’s income statement. The Company’s NYMEX crude oilswaps were highly effective and were designated as cash flow hedges through August 16, 2005. TheCompany had ineffectiveness on the crude oil swaps because the oil is sold locally at a postedprice which is different from the NYMEX price. At August 16, 2005, the Company’s oil swaps nolonger qualified for cash flow hedge accounting because the assessment of effectiveness indicatedthat they may not be highly effective on an on-going basis. This occurred due to the application ofpurchase accounting to the derivatives, which created non-zero value derivatives at the time of theTransaction. The changes in the fair values of the natural gas collars since July 7, 2004, thechanges in fair value of the oil swaps subsequent to August 15, 2005, the ineffective portion ofthe crude oil swaps through August 15, 2005, the ineffective portion of the natural gas swapssince July 7, 2004 and the changes in the fair values of the natural gas swaps since July 1, 2006are recorded as derivative fair value gain or loss. As of July 1, 2006, we determined that our gasswaps were no longer highly effective and, therefore, could no longer be designated as cash flowhedges.     During the first nine months of 2006 and 2005, net losses of $5.8 million ($3.8 million aftertax) and $18.1 million ($12.4 million after tax), respectively, were reclassified from accumulatedother comprehensive income to earnings. At September 30, 2006, the estimated net loss inaccumulated other comprehensive income that is expected to be reclassified into earnings within thenext 12 months is approximately $915,000. At September 30, 2006, we have partially hedged ourexposure to the variability in future cash flows from oil and gas sales through December 2013.
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     The following table reflects the natural gas and crude oil volumes and the weighted averageprices under financial hedges (including settled hedges) at September 30, 2006:                   **Natural Gas Swaps** **Crude Oil Swaps**      **NYMEX**     **NYMEX**      **Price per**     **Price per****Quarter Ending** **Bbtu** **Mmbtu** **Mbbls** **Bbl**December 31, 2006  2,829  $5.39   62  $31.71                  **Year Ending**                December 31, 2007  10,745  $4.97   227  $30.91 December 31, 2008  10,126   4.64   208   29.96 December 31, 2009  9,529   4.43   191   29.34 December 31, 2010  8,938   4.28   175   28.86 December 31, 2011  8,231   4.19   157   28.77 December 31, 2012  7,005   4.09   138   28.70 December 31, 2013  6,528   4.04   127   28.70          **Bbl – Barrel** **Mmbtu – Million British thermal units**    **Mbbls – Thousand barrels** **Bbtu – Billion British thermal units**       At September 30, 2006, we had interest rate swaps in place on $80 million of ouroutstanding debt under our revolving credit facility through September 16, 2008. The swaps provide1-month LIBOR fixed rates at 4.285% on $40 million and 5.160% on $40 million plus the applicablemargin.**(3) Industry Segment Financial Information**     We operate in one reportable segment, as an independent energy company engaged in producingoil and natural gas; exploring for and developing oil and gas reserves; acquiring and enhancing theeconomic performance of producing oil and gas properties; and marketing and gathering natural gasfor delivery to intrastate and interstate gas transmission pipelines. Our operations are conductedentirely in the United States.**(4) Supplemental Disclosure of Cash Flow Information**                **Successor**     **Company**  **Predecessor Company**       **For The 46 Day** **For The 227 Day**  **Nine months**  **Period From** **Period From**  **ended**  **August 16, to** **January 1, to****(in thousands)** **September 30, 2006**  **September 30, 2005** **August 15, 2005****Cash paid during the period for:**             Interest $22,721   $1,367  $20,803 Income taxes  —    —   500 **Non-cash investing and financing activities:**             Non-cash additions to property and equipment  1,481    3,487   (682)**(5) Contingencies**     The Company is involved in several lawsuits arising in the ordinary course of business. TheCompany believes that the result of such proceedings, individually or in the aggregate, will nothave a material adverse effect on the Company’s financial position or the results of operations.**(6)** **Dispositions**     On March 31, 2006, we sold our interests in 13 Oriskany wells and the associated gas gatheringsystem for approximately $3.3 million, which approximated the net carrying value of such assets.
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     In August, 2006, we closed on the sale of our office building in North Canton, Ohio. Netproceeds from the sale were approximately $3.5 million, which was the carrying value of theproperty.**(7) Comprehensive Income**     Comprehensive income includes net income and certain items recorded directly to shareholder’sequity and classified as other comprehensive income. The table below summarizes comprehensiveincome and provides the components of the change in accumulated other comprehensive income for thenine month periods ended September 30, 2006 and 2005.                **Successor**       **Company**   **Predecessor Company**        **For the 46 Day**  **For the 227 Day**   **Nine months**   **Period From**  **Period From**   **ended**   **August 16, 2005 to**  **January 1, 2005**   **September 30, 2006**   **September 30, 2005**  **to August 15, 2005** Comprehensive income (loss):             Net income $44,327   $660  $(320)Other comprehensive income (loss), net of tax:             Unrealized gain (loss) in derivative fair value  19,690    (32,138)  (140,614)Reclassification adjustment for derivative lossreclassified into earnings  3,774    439   11,925            Change in accumulated other comprehensive income (loss)  23,464    (31,699)  (128,689)           Comprehensive income (loss) $67,791   $(31,039) $(129,009)           **(8) Related Party Transactions**     On March 15, 2006, the Company entered into a joint operating agreement with EnerVestOperating LLC (“EnerVest Operating”). The Company recorded expenses of approximately $4.0 millionfor overhead fees, $5.1 million for field labor, vehicles and district office expense, $617,000 fordrilling overhead fees and $904,000 for drilling labor costs in the first nine months of 2006related to this agreement. The Company also reimbursed EnerVest Operating for expenses of $332,000in the first nine months of 2006 related to the transition of accounting responsibilities from theCompany to EnerVest Operating’s Charleston, West Virginia office.     The Company paid approximately $211,000 to Opportune LLP in the first nine months of 2006 forconsulting services related to the Company’s amended filings and the 2005 Form 10-K. JohnVanderhider, brother of James Vanderhider, the Company’s President and Chief Financial Officer, isa partner with Opportune.     The Company paid approximately $196,000 to PetroAcct LP in the first nine months of 2006 forservices related to the transition of accounting and information system responsibilities from theCompany to EnerVest Operating. A subsidiary of EnerVest Management Partners, Ltd owns 50% ofPetroAcct.
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**Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.****Forward-Looking Information**     The information in this document includes forward-looking statements that are made pursuant tothe Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Statementspreceded by, followed by or that otherwise include the statements “should,” “believe,” “expect,”“anticipate,” “intend,” “will,” “continue,” “estimate,” “plan,” “outlook,” “may,” “future,”“projection,” “likely,” “possible,” “would,” “could” and variations of these statements and similarexpressions are forward-looking statements as are any other statements relating to developments,events, occurrences, results, efforts or impacts. These forward-looking statements are based oncurrent expectations and projections about future events. Forward-looking statements and thebusiness prospects of Belden & Blake are subject to a number of risks and uncertainties which maycause our actual results in future periods to differ materially from the forward-looking statementscontained herein. These risks and uncertainties include, but are not limited to, our access tocapital, the market demand for and prices of oil and natural gas, our oil and gas production andcosts of operation, results of our future drilling activities, the uncertainties of reserveestimates, general economic conditions, new legislation or regulatory changes, changes inaccounting principles, policies or guidelines and environmental risks. These and other risks aredescribed in our Annual Report on Form 10-K for the year ended December 31, 2005, under the Heading“Risk Factors” and in our other filings with the Securities and Exchange Commission (“SEC”). Weundertake no obligation to publicly update or revise any forward-looking statement, whether as aresult of new information, future events, changes in assumptions, or otherwise.**Results of Operations**     The Transaction and Merger were accounted for as purchases effective August 16, 2005 and July7, 2004, respectively. The Transaction and Merger resulted in a new basis of accounting reflectingestimated fair values for assets and liabilities at August 16, 2005 and July 7, 2004, respectively.Accordingly, the financial statements for the periods subsequent to July 7, 2004 and August 15,2005 are each presented on a new basis of accounting.     The allocation of the purchase price at fair value resulted in a significant increase in thebook value of our assets. The increase in the book value of assets resulted in materially highercharges for depreciation, depletion and amortization in the Successor Company and PredecessorCompany periods. These higher charges are expected to continue in subsequent accounting periods.
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The following table sets forth certain information regarding our net oil and natural gasproduction, revenues and expenses for the periods indicated. The average prices shown in the tableinclude the effects of our qualified effective hedging activities.                   **Three months ended September 30,** **Nine months ended September 30,**  **2006** **2005** **2006** **2005****Production**                Gas (Mmcf)  3,582   3,633   10,606   10,844 Oil (Mbbls)  96   87   285   264 Total production (Mmcfe)  4,157   4,155   12,317   12,430                  **Average price (1)**                Gas (per Mcf) $6.98  $8.74  $8.51  $7.48 Oil (per Bbl)  68.63   53.80   64.76   42.52 Mcfe  7.60   8.77   8.83   7.43 **Average costs (per Mcfe)**                Production expense $1.43  $1.43  $1.33  $1.34 Production taxes  0.21   0.22   0.20   0.20 Depletion  2.42   2.00   2.30   1.93 **Operating margin (per Mcfe)**  5.96   7.12   7.30   5.89  (1) The average prices presented above include non-cash amounts related to purchaseaccounting for the Merger and the Transaction. Excluding these non-cash amounts from oil and gassales revenues would result in the following average prices:                   **Three months ended September 30,** **Nine months ended September 30,**  **2006** **2005** **2006** **2005**Gas (per Mcf) $6.98  $7.31  $6.45  $6.25 Oil (per Bbl)  68.63   53.27   64.76   41.18 Mcfe  7.60   7.51   6.29   6.32      **Mmcf — Million cubic feet** **Mbbls — Thousand barrels** **Mmcfe — Million cubic feet of natural gas equivalent****Mcf — Thousand cubic feet** **Bbl — Barrel** **Mcfe — Thousand cubic feet of natural gas equivalent****Operating margin (per Mcfe) – average price less production expense and production taxes****Results of Operations — Third Quarters of 2006 and 2005 Compared**