UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/ x / Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to ________
Commission File No. 1-13245
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 75-2702753
---------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5205 N. O'Connor Blvd., Suite 1400, Irving, Texas 75039
- ------------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number, including area code : (972) 444-9001
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 / /
Number of shares of Common Stock outstanding as of
October 30, 2002................................................. 117,044,020
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001....................................... 4
Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and 2001-........... 5
Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 2002..................... 6
Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2002 and 2001............ 7
Consolidated Statements of Comprehensive Income (Loss)
for the three and nine months ended September 30,
2002 and 2001................................................ 8
Notes to Consolidated Financial Statements..................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 35
Item 4. Controls and Procedures........................................ 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 38
Item 6. Exhibits and Reports on Form 8-K............................... 38
Signatures..................................................... 39
Certifications................................................. 40
Exhibit Index.................................................. 42
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this quarterly report on Form 10-Q (the "Report"), the following
oil and gas terms and conventions have specific meanings: "Bbl" means a standard
barrel containing 42 United States gallons; "Bcf" means one billion cubic feet;
"Tcf" means one trillion cubic feet; "Bcfe" means a billion cubic feet
equivalent and is a standard convention used to express oil and gas volumes on a
comparable gas equivalent basis; "BOE" means a barrel of oil equivalent and is a
standard convention used to express oil and gas volumes on a comparable oil
equivalent basis; "Btu" means British thermal unit and is a measure of the
amount of energy required to raise the temperature of one pound of water one
degree Fahrenheit; "MMBtu" means one million Btu's; "MBbl" means one thousand
Bbls; "MBOE" means one thousand BOE; "MMBOE" means one million BOE; "Mcf" means
one thousand cubic feet and is a measure of gas volume; "MMcf" means one million
cubic feet; "NGL" means natural gas liquid; "NYMEX" means The New York
Mercantile Exchange; "proved reserves" mean the estimated quantities of crude
oil, natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions, i.e., prices
and costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any; and (B) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A) oil
that may become available from known reservoirs but is classified separately as
"indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Gas equivalents are determined under the relative energy content method
by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL.
With respect to information on the working interest in wells, drilling
locations and acreage, "net" wells, drilling locations and acres are determined
by multiplying "gross" wells, drilling locations and acres by Pioneer Natural
Resources Company's working interest in such wells, drilling locations or acres.
Unless otherwise specified, wells, drilling locations and acreage statistics
quoted herein represent gross wells, drilling locations or acres; and, all
currency amounts are expressed in U.S. dollars.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2002 2001
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 25,502 $ 14,334
Accounts receivable:
Trade, net...................................................... 76,960 81,616
Affiliates...................................................... 513 595
Inventories........................................................ 10,151 14,549
Deferred income taxes.............................................. 12,700 6,400
Other current assets:
Derivatives..................................................... 978 127,074
Other........................................................... 9,098 11,075
---------- ----------
Total current assets.......................................... 135,902 255,643
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties............................................... 4,151,830 3,691,783
Unproved properties............................................. 203,270 187,785
Accumulated depletion, depreciation and amortization............... (1,245,139) (1,095,310)
---------- ----------
3,109,961 2,784,258
---------- ----------
Deferred income taxes................................................ 78,033 84,319
Other property and equipment, net.................................... 21,118 21,560
Other assets, net:
Derivatives........................................................ 2,604 54,486
Other.............................................................. 41,860 70,787
---------- ----------
$ 3,389,478 $ 3,271,053
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade........................................................... $ 88,186 $ 92,760
Affiliates...................................................... 5,240 6,405
Interest payable................................................... 37,592 37,410
Other current liabilities:
Derivatives..................................................... 35,980 36,830
Other........................................................... 37,096 54,804
---------- ----------
Total current liabilities..................................... 204,094 228,209
---------- ----------
Long-term debt....................................................... 1,650,756 1,577,304
Noncurrent derivative obligations.................................... 42,174 32,438
Other noncurrent liabilities......................................... 90,960 133,945
Deferred income taxes................................................ 6,394 13,768
Stockholders' equity:
Preferred stock, $.01 par value; 100,000,000 shares authorized;
one share issued and outstanding................................ - -
Common stock, $.01 par value; 500,000,000 shares authorized;
119,558,094 and 107,422,467 shares issued as of September 30,
2002 and December 31, 2001, respectively........................ 1,196 1,074
Additional paid-in capital......................................... 2,713,980 2,462,272
Treasury stock, at cost; 2,581,874 and 3,486,073 shares as of
September 30, 2002 and December 31, 2001, respectively.......... (35,552) (48,002)
Deferred compensation.............................................. (15,439) -
Accumulated deficit................................................ (1,316,793) (1,323,343)
Accumulated other comprehensive income:
Deferred hedge gains, net....................................... 53,539 201,046
Cumulative translation adjustment............................... (5,831) (7,658)
---------- ----------
Total stockholders' equity.................................... 1,395,100 1,285,389
Commitments and contingencies........................................
---------- ----------
$ 3,389,478 $ 3,271,053
========== ==========
The financial information included as of September 30, 2002 has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
4
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues:
Oil and gas.................................. $ 168,317 $ 198,088 $ 506,286 $ 674,685
Interest and other........................... 7,083 6,471 9,089 22,593
Gain (loss) on disposition of assets, net.... 3,353 (88) 4,374 8,677
-------- -------- -------- --------
178,753 204,471 519,749 705,955
-------- -------- -------- --------
Costs and expenses:
Oil and gas production....................... 49,970 51,713 150,705 159,489
Depletion, depreciation and amortization..... 54,748 60,065 156,081 169,622
Exploration and abandonments................. 18,324 24,666 57,304 94,132
General and administrative................... 12,466 8,153 35,142 26,606
Interest..................................... 20,347 32,261 71,405 102,137
Other........................................ 2,098 2,006 15,259 29,097
-------- -------- -------- --------
157,953 178,864 485,896 581,083
-------- -------- -------- --------
Income before income taxes and extraordinary
items........................................ 20,800 25,607 33,853 124,872
Income tax provision........................... (2,189) (2,379) (3,216) (5,387)
-------- -------- -------- --------
Income before extraordinary items.............. 18,611 23,228 30,637 119,485
Extraordinary items - gain (loss) on early
extinguishment of debt, net of tax........... (19,501) 1,374 (22,344) 1,374
-------- -------- -------- --------
Net income (loss).............................. $ (890) $ 24,602 $ 8,293 $ 120,859
======== ======== ======== ========
Net income (loss) per share:
Basic:
Income before extraordinary items......... $ .16 $ .24 $ .27 $ 1.22
Extraordinary items....................... (.17) .01 (.20) .01
-------- -------- -------- --------
Net income (loss)....................... $ (.01) $ .25 $ .07 $ 1.23
======== ======== ======== ========
Diluted:
Income before extraordinary items......... $ .16 $ .24 $ .27 $ 1.20
Extraordinary items....................... (.17) .01 (.20) .01
-------- -------- -------- --------
Net income (loss)....................... $ (.01) $ .25 $ .07 $ 1.21
======== ======== ======== ========
Weighted average shares outstanding:
Basic..................................... 116,193 98,468 111,227 98,395
======== ======== ======== ========
Diluted................................... 118,021 99,523 112,889 99,646
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
5
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Accumulated
Other Comprehensive
Income (Loss)
----------------------
Common Deferred
Stock Additional Hedge Total
Shares Common Paid-in Treasury Deferred Accumulated Gains & Translation Stockholders'
Outstanding Stock Capital Stock Compensation Deficit Losses Adjustment Equity
----------- ------- ---------- -------- ------------ ------------ -------- ----------- ------------
Balance as of January
1, 2002................ 103,936 $1,074 $2,462,272 $(48,002) $ - $(1,323,343) $ 201,046 $ (7,658) $1,285,389
Issuance of common
stock................. 11,500 115 235,885 - - - - - 236,000
Adjustment to common
stock issued for
2001 partnership
acquisitions........ (10) - (175) - - - - - (175)
Stock options
exercised........... 904 - 49 12,450 - (1,743) - - 10,756
Deferred
compensation:
Compensation
deferred.......... 646 7 15,949 - (15,956) - - - -
Deferred
compensation
included in net
income............ - - - - 517 - - - 517
Net income........... - - - - - 8,293 - - 8,293
Other comprehensive
income (loss):
Deferred hedge
gains and losses,
net of tax:
Deferred hedge
losses.......... - - - - - - (113,360) - (113,360)
Net gains
included in
net income..... - - - - - - (34,147) - (34,147)
Translation
adjustment........ - - - - - - - 1,827 1,827
------- ----- --------- ------- -------- ---------- -------- ------- ---------
Balance as of September
30, 2002............... 116,976 $1,196 $2,713,980 $(35,552) $ (15,439) $(1,316,793) $ 53,539 $ (5,831) $1,395,100
======= ===== ========= ======= ======== ========== ======== ======= =========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
6
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................... $ (890) $ 24,602 $ 8,293 $ 120,859
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation and amortization..... 54,748 60,065 156,081 169,622
Exploration expenses, including dry holes.... 12,589 17,250 43,437 80,082
Deferred income taxes........................ 1,512 567 1,617 (4,095)
(Gain) loss on disposition of assets, net.... (3,353) 88 (4,374) (8,677)
Extraordinary items, net of tax.............. 19,501 (1,374) 22,344 (1,374)
Interest related amortization................ (19) 2,559 (1,660) 8,446
Commodity hedge related amortization......... 6,184 3,076 20,307 5,484
Other noncash items.......................... (3,408) (551) 5,993 268
Changes in operating assets and liabilities:
Accounts receivable.......................... 6,153 8,862 (4,715) 36,916
Inventories.................................. 69 (3,489) 4,052 (4,401)
Other current assets......................... (851) (763) (928) (5,795)
Accounts payable............................. (3,907) 11,431 (18,056) (7,426)
Interest payable............................. (384) (626) 183 288
Other current liabilities.................... (290) 1,203 (4,320) (233)
-------- -------- -------- --------
Net cash provided by operating activities.. 87,654 122,900 228,254 389,964
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............. 59,895 57,811 118,831 73,006
Additions to oil and gas properties............. (226,440) (125,704) (489,733) (364,428)
Other property additions, net................... (2,675) (6,529) (8,535) (10,490)
-------- -------- -------- --------
Net cash used in investing activities...... (169,220) (74,422) (379,437) (301,912)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................. 210,792 95,000 466,668 204,175
Principal payments on long-term debt............ (56,257) (125,055) (442,583) (249,230)
Common stock issuance proceeds, net of
issuance costs............................... (4) - 236,000 -
Payment of noncurrent liabilities............... (67,142) (10,971) (103,704) (41,710)
Exercise of long-term incentive plan stock
options...................................... 3,149 1,165 10,756 6,610
Purchase of treasury stock...................... - (5,962) - (13,032)
Deferred debt issuance costs.................... (135) - (3,293) -
-------- -------- -------- --------
Net cash provided by (used in)
financing activities..................... 90,403 (45,823) 163,844 (93,187)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 8,837 2,655 12,661 (5,135)
Effect of exchange rate changes on cash and
cash equivalents................................ (63) (145) (1,493) (287)
Cash and cash equivalents, beginning of period.... 16,728 18,227 14,334 26,159
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 25,502 $ 20,737 $ 25,502 $ 20,737
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
7
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss)................................. $ (890) $ 24,602 $ 8,293 $ 120,859
-------- -------- -------- --------
Other comprehensive income (loss):
Deferred hedge gains and losses, net of tax:
Transition adjustment........................ - - - (197,444)
Deferred hedge gains (losses)................ (24,269) 148,116 (113,360) 343,080
Net (gains) losses included in net
income (loss).............................. 1,651 (14,800) (34,147) 37,055
Gains and losses on available for sale
securities:
Unrealized holding losses.................... - - - (45)
Gains included in net income (loss).......... - - - (8,109)
Translation adjustment.......................... (6,915) (7,994) 1,827 (9,749)
-------- -------- -------- --------
Other comprehensive income (loss).......... (29,533) 125,322 (145,680) 164,788
-------- -------- -------- --------
Comprehensive income (loss)....................... $ (30,423) $ 149,924 $(137,387) $ 285,647
======== ======== ======== ========
The financial information included herein has been prepared by
management without audit by independent public accountants.
The accompanying notes are an integral part of these consolidated
financial statements.
8
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company") is a Delaware
corporation whose common stock is listed and traded on the New York Stock
Exchange and the Toronto Stock Exchange. The Company is an oil and gas
exploration and production company with ownership interests in oil and gas
properties located principally in the Mid- Continent, Southwestern and onshore
and offshore Gulf Coast regions of the United States and in Argentina, Canada,
Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation and Use of Estimates
Basis of presentation. In the opinion of management, the unaudited
consolidated financial statements of the Company as of September 30, 2002 and
for the three and nine month periods ended September 30, 2002 and 2001 include
all adjustments and accruals, consisting only of normal, recurring accrual
adjustments, which are necessary for a fair presentation of the results for the
interim periods. These interim results are not necessarily indicative of results
for a full year. Certain amounts in the prior period financial statements have
been reclassified to conform to the current period presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted in this Form 10-Q pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
These consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
Exchange rates. As of September 30, 2002, the Company used an exchange
rate of 3.74 pesos to $1 to remeasure the peso-denominated monetary assets and
liabilities of the Company's Argentine subsidiaries and exchange rates of 1.58
Canadian dollars to $1 and 1.57 Canadian dollars to $1 for the translations of
the Company's Canadian subsidiary's balance sheet and statement of operations,
respectively.
During the three and nine month periods ended September 30, 2002, the
remeasurement of the Company's Argentine peso-denominated monetary assets and
liabilities resulted in a $176 thousand decrease and a $7.7 million increase,
respectively, in other expense included in the accompanying Consolidated
Statements of Operations. Prior to December 2001, the value of the Argentine
peso was tied to, and was perfectly correlated with, the value of the U.S.
dollar.
New accounting pronouncement. During April 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections" ("SFAS 145"). Prior to the adoption of the
provisions of SFAS 145, gains or losses on the early extinguishment of debt are
required to be classified in a company's periodic consolidated statements of
operations as extraordinary gains or losses, net of associated income taxes,
after the determination of income or loss from continuing operations. SFAS 145
requires, except in the case of events or transactions of a highly unusual and
infrequent nature, gains or losses from the early extinguishment of debt to be
classified as components of a company's income or loss from continuing
operations. The Company will adopt the provisions of SFAS 145 on January 1,
2003. The adoption of the provisions of SFAS 145 is not expected to affect the
Company's future financial position or liquidity. When the Company adopts the
provisions of SFAS 145, gains or losses from the early extinguishment of debt
recognized in the Company's consolidated statements of operations for prior
years will be reclassified to other revenues or other expense and included in
the determination of the income (loss) from continuing operations of those
periods.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
NOTE C. Derivative Financial Instruments
Hedge Derivatives
Fair value hedges. During April 2002, the Company entered into interest
rate swap contracts to hedge the fair value of $150 million of its 8-7/8 percent
senior notes due in 2005. The terms of these swap contracts obligated the
Company to pay the counterparties a variable annual rate equal to the six-month
London Interbank Offered Rate plus 3.97 percent and obligated the counterparties
to pay the Company a fixed rate of 8-7/8 percent. The interest rate swap
contracts were to mature on April 15, 2005.
During the three and nine month periods ended September 30, 2002,
aggregate settlement gains associated with the Company's various interest rate
swaps that were designated as fair value hedges of the Company's fixed rate debt
reduced the Company's reported interest expense by $4.4 million and $11.2
million, respectively, as compared to aggregate settlement gains of $2.4 million
and $3.1 million during the same respective periods of 2001. During the nine
months ended September 30, 2002 and 2001, there were no ineffective changes in
the fair values of the Company's interest rate swaps.
During September 2002 and September 2001, the Company terminated all of
its interest rate swaps that were active at each respective date in order to
lock-in the existing hedge gains. Associated therewith, the carrying value of
the Company's long-term debt in the accompanying Consolidated Balance Sheets was
increased by the unamortized portion of the deferred hedge gains. As of
September 30, 2002, the unamortized portion of the deferred hedge gains was
$43.0 million, comprised of $32.0 million associated with interest rate swaps
terminated during September 2002 and $11.0 million of unamortized deferred gains
on interest rate swaps terminated during September 2001. Amortization of these
deferred hedge gains reduced the Company's reported interest expense by $2.3
million and $7.9 million during the three and nine month periods ended September
30, 2002, respectively, and by $194 thousand during the three and nine month
periods ended September 30, 2001.
The following table sets forth the scheduled amortization of deferred
hedge gains on terminated fair value hedges that will be recognized as
reductions in the Company's future interest expense:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
(in thousands)
2002 hedge gain amortization...... $ 6,275 $ 6,275
2003 hedge gain amortization...... $ 6,135 $ 5,727 $ 4,882 $ 4,280 21,024
2004 hedge gain amortization...... $ 3,629 $ 3,217 $ 2,544 $ 2,177 11,567
Net gains amortized, thereafter... 4,166
-------
$ 43,032
=======
Cash flow hedges. The Company, from time to time, uses derivative
instruments as cash flow hedges of its commodity price, interest rate and
currency exchange rate risks.
Oil price hedges. All material sales contracts governing the Company's oil
production have been tied directly or indirectly to NYMEX prices. The following
table sets forth the Company's outstanding oil hedge contracts and the
associated weighted average NYMEX prices for those contracts as of September 30,
2002:
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------- ------- ------- ------- -----------
Daily oil production:
2002 - Swap Contracts
Volume (Bbl).................. 22,000 22,000
Price per Bbl................. $ 23.91 $ 23.91
2003 - Swap Contracts
Volume (Bbl).................. 28,000 28,000 28,000 28,000 28,000
Price per Bbl................. $ 24.48 $ 24.45 $ 24.42 $ 24.42 $ 24.44
2004 - Swap Contracts
Volume (Bbl).................. 14,000 14,000 14,000 14,000 14,000
Price per Bbl................. $ 23.11 $ 23.11 $ 23.11 $ 23.11 $ 23.11
The Company reports average oil prices per Bbl including the effects of
oil quality, gathering and transportation costs and the net effect of the oil
hedges. The following table sets forth the Company's oil prices, both reported
(including hedge results) and realized (excluding hedge results), and the net
adjustment to revenue from oil price hedges:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2002 2001 2002 2001
------- ------- ------- -------
Average price reported per Bbl................. $ 21.77 $ 25.06 $ 22.86 $ 24.95
Average price realized per Bbl................. $ 24.43 $ 24.84 $ 21.91 $ 25.74
Addition (reduction) to revenue (in millions).. $ (7.2) $ .7 $ 8.2 $ (7.4)
Natural gas liquids prices. During the three and nine month periods ended
September 30, 2002 and 2001, the Company did not enter into, nor was it a party
to, any NGL hedge contracts.
Gas prices. The Company employs a policy of hedging a portion of its gas
production based on the index price upon which the gas is actually sold in order
to mitigate the basis risk between NYMEX prices and actual index prices. The
following table sets forth the Company's outstanding gas hedge contracts and the
weighted average index price for those contracts as of September 30, 2002:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
-------- -------- -------- ----------- -----------
Daily gas production:
2002 - Swap Contracts
Volume (Mcf).................. 140,000 140,000
Index price per MMBtu......... $ 3.98 $ 3.98
2002 - Collar Contracts
Volume (Mcf).................. 120,000 120,000
Index price per MMBtu......... $2.79-$3.64 $2.79-$3.64
2003 - Swap Contracts
Volume (Mcf).................. 230,000 230,000 230,000 230,000 230,000
Index price per MMBtu......... $ 3.83 $ 3.83 $ 3.83 $ 3.83 $ 3.83
2004 - Swap Contracts
Volume (Mcf).................. 210,000 210,000 210,000 210,000 210,000
Index price per MMBtu......... $ 3.84 $ 3.84 $ 3.84 $ 3.84 $ 3.84
2005 - Swap Contracts
Volume (Mcf).................. 90,000 90,000 90,000 90,000 90,000
Index price per MMBtu......... $ 3.74 $ 3.74 $ 3.74 $ 3.74 $ 3.74
2006 - Swap Contracts
Volume (Mcf).................. 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu......... $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 3.75
2007 - Swap Contracts
Volume (Mcf).................. 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu......... $ 3.75 $ 3.75 $ 3.75 $ 3.75 $ 3.75
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
The Company reports average gas prices per Mcf including the effects of
Btu content, gathering and transportation costs, gas processing and shrinkage
and the net effect of the gas hedges. The following table sets forth the
Company's gas prices, both reported (including hedge results) and realized
(excluding hedge results), and the net adjustment to revenue from gas price
hedges:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Average price reported per Mcf................. $ 2.25 $ 2.66 $ 2.39 $ 3.40
Average price realized per Mcf................. $ 2.09 $ 2.24 $ 2.12 $ 3.59
Addition (reduction) to revenue (in millions).. $ 5.8 $ 14.6 $ 26.3 $ (18.6)
Interest rate hedges. During the nine months ended September 30, 2002,
the Company recognized settlement losses of $447 thousand associated with
interest rate swap agreements that were designated as cash flow hedges. These
interest rate swaps matured during the three months ended June 30, 2002. The
2002 settlement losses increased the Company's reported interest expense. No
settlement gains or losses were recognized associated with interest rate swap
agreements during the three and nine month periods ended September 30, 2001. The
Company recognized no ineffectiveness associated with any of these interest rate
swaps during their terms.
Foreign currency rate hedges. During the fourth quarter of 2001, the
Company entered into forward agreements to exchange an aggregate $24.8 million
U.S. dollars during 2002 for Canadian dollars at a weighted average exchange
rate of .6266 U.S. dollars for 1.0 Canadian dollar. These agreements are
designated as hedges of the exchange rate risk associated with forecasted
Canadian sales of gas under U.S. dollar denominated sales agreements. The
Company recognized settlement gains of $50 thousand and $192 thousand associated
with these forward agreements during the three and nine month periods ended
September 30, 2002, which increased the Company's reported gas sales price. The
Company did not recognize any ineffectiveness associated with changes in the
fair values of these derivative instruments during the nine months ended
September 30, 2002.
Hedge ineffectiveness and excluded items. During the three and nine month
periods ended September 30, 2002, the Company recognized increases to other
expense of $1.4 million and $1.7 million, respectively, related to the
ineffective portions of its cash flow commodity price hedges. During the three
and nine month periods ended September 30, 2001, the ineffective portions of the
Company's cash flow commodity hedges decreased other expense by $.2 million and
increased other expense by $11.0 million, respectively.
Accumulated other comprehensive income - deferred hedge gains, net.
During the twelve month period ending September 30, 2003, the Company expects to
reclassify $26.4 million of net deferred losses associated with open cash flow
hedges and $45.9 million of net deferred gains on terminated cash flow hedges
from "Accumulated other comprehensive income - deferred hedge gains, net" to oil
and gas revenue.
The following table sets forth the scheduled reclassifications of net
deferred hedge gains and losses on terminated cash flow hedges that will be
recognized in the Company's future oil and gas revenues:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- -----------
(in thousands)
2002 deferred hedge losses........ $ (8,645) $ (8,645)
2003 deferred hedge gains......... $ 18,122 $ 18,167 $ 18,207 $ 18,050 72,546
2004 deferred hedge gains......... $ 11,291 $ 11,242 $ 11,311 $ 11,258 45,102
2005 deferred hedge gains......... $ 301 $ 305 $ 307 $ 307 1,220
-------
$110,223
=======
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Non-hedge Derivatives
Btu swap agreements. The Company is a party to Btu swap agreements that
mature at the end of 2004. The Btu swap agreements do not qualify for hedge
accounting treatment. During the second quarter of 2001, the Company entered
into offsetting Btu swap agreements that eliminated the market risk associated
with the agreements and fixed the Company's remaining obligations associated
with the Btu swap agreements. Mark-to-market adjustments of the carrying values
of the Btu swap agreements resulted in $7.3 million of other revenues during the
second quarter of 2001 and $6.6 million of other expense during the first
quarter of 2001.
NOTE D. Acquisitions
Falcon acquisitions. During 2002, the Company purchased, through two
transactions, an additional 30 percent working interest in the Falcon field
development and a 25 percent working interest in associated acreage in the
deepwater Gulf of Mexico for a combined purchase price of $61.1 million
including normal closing adjustments. As a result of these transactions, the
Company owns a 75 percent working interest and operates the Falcon field
development and related exploration blocks.
West Panhandle acquisitions. During July 2002, the Company completed the
purchase of the remaining 23 percent of the rights that the Company did not
already own in its core area West Panhandle gas field, 100 percent of the West
Panhandle reserves attributable to field fuel, 100 percent of the related West
Panhandle field gathering system and ten blocks surrounding the Company's
deepwater Gulf of Mexico Falcon discovery. In connection with these
transactions, the Company recorded a $100.4 million increase to proved oil and
gas properties, a $3.8 million increase to unproved oil and gas properties and
$1.9 million of assets held for resale; retired a capital cost obligation for
$60.8 million; retired a $20.9 million gas balancing receivable; assumed trade
and environmental obligations amounting to $5.8 million in the aggregate; and
paid $140.2 million of cash.
The assets held for resale represented proved oil and gas properties in
Oklahoma that were not strategic to the Company's focus of operations. The
Company divested the assets held for resale in August 2002 for $4.7 million of
net proceeds, realizing an associated gain of $2.8 million.
The capital cost obligation retired by the Company for $60.8 million
represented an obligation for West Panhandle gas field capital additions that
bore interest at an annual rate of 20 percent. The capital cost obligation had a
carrying value of $45.2 million, resulting in an extraordinary loss of $15.6
million from the early retirement of this obligation in July 2002.
NOTE E. Financing Activities
Common stock offering. In April 2002, the Company completed a public
offering of 11.5 million shares of its common stock at $21.50 per share.
Associated therewith, the Company received $236.0 million of net proceeds after
the payment of issuance costs. The Company used the net proceeds from the public
offering to fund the acquisition of Falcon assets and associated acreage in the
deepwater Gulf of Mexico and to reduce outstanding borrowings under its $575
million corporate credit facility pending the closing of the West Panhandle gas
field acquisitions in July 2002.
Senior notes offering. In April 2002, the Company sold $150 million of
7-1/2 percent senior notes that will mature on April 15, 2012. The 7-1/2 percent
senior notes were sold at a price equal to 100 percent of their principal amount
and resulted in net proceeds to the Company, after payment of issuance costs, of
$146.7 million. The net proceeds from this offering were used to reduce
outstanding borrowings under the Company's corporate credit facility. Interest
is payable to holders of the 7-1/2 percent senior notes on April 15 and October
15 of each year. The first interest payment was made on October 15, 2002 and
consisted of interest from the closing date of the offering through October 15,
2002.
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
Early extinguishment of debt and capital cost obligation. During the
three and nine month periods ended September 30, 2002, the Company repurchased
and retired $27.1 million and $47.1 million, respectively, of its outstanding
9-5/8 percent senior notes due 2010. Associated therewith, the Company
recognized extraordinary losses from the early extinguishment of debt of $3.9
million and $6.7 million, respectively. Additionally, as discussed in Note D,
the Company recorded a $15.6 million extraordinary loss associated with the
repayment of a $45.2 million capital cost obligation that was associated with
the West Panhandle assets acquired during July 2002.
In July 2001, the Company redeemed its outstanding 11-5/8 percent senior
subordinated discount notes due 2006 and 10-5/8 percent senior subordinated
notes due 2006 for $31.0 million. The aggregate carrying value of the 11- 5/8
percent senior subordinated discount notes due 2006 and the 10-5/8 percent
senior subordinated notes due 2006 was $32.4 million on the date of redemption.
Associated with this redemption, the Company recognized an extraordinary gain of
$1.4 million during the three and nine month periods ended September 30, 2001.
See Note B for a discussion of the classification of losses on the early
extinguishment of debt after the adoption of SFAS 145 on January 1, 2003.
NOTE F. Commitments and Contingencies
Legal actions. The Company is party to various legal actions incidental to
its business, including, but not limited to, the proceedings described below.
The majority of these lawsuits primarily involve claims for damages arising from
oil and gas leases and ownership interest disputes. The Company believes that
the ultimate disposition of these legal actions will not have a material adverse
effect on the Company's consolidated financial position, liquidity, capital
resources or future results of operations. The Company will continue to evaluate
its litigation matters on a quarter-by- quarter basis and will adjust its
litigation reserves as appropriate to reflect the then current status of
litigation.
Alford. The Company is party to a 1993 class action lawsuit filed in the
26th Judicial District Court of Stevens County, Kansas by two classes of royalty
owners, one for each of the Company's gathering systems connected to the
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings to add claims regarding
the field compression installed by the Company in the 1990's. The lawsuit now
has two material claims. First, the plaintiffs assert that the expenses related
to the field compression are a "cost of production" for which plaintiffs cannot
be charged their proportionate share under the applicable oil and gas leases.
Second, the plaintiffs claim they are entitled to 100 percent of the value of
the helium extracted at the Company's Satanta gas plant. If the plaintiffs were
to prevail on the above two claims in their entirety, it is possible that the
Company's liability could reach $25 million, plus prejudgment interest. However,
the Company believes it has valid defenses to plaintiffs' claims, has paid the
plaintiffs properly under their respective oil and gas leases, and intends to
vigorously defend itself.
The Company believes the cost of the field compression is not a "cost of
production", but is rather an expense of transporting the gas to the Company's
Satanta gas plant for processing, where valuable hydrocarbon liquids and helium
are extracted from the gas. The plaintiffs benefit from such extractions and the
Company believes that charging the plaintiffs with their proportionate share of
such transportation and processing expenses is consistent with Kansas law. The
Company has also vigorously defended against plaintiffs' claims to 100 percent
of the value of the helium extracted, and believes that in accordance with
applicable law, it has properly accounted to the plaintiffs for their fractional
royalty share of the helium under the specified royalty clauses of the
respective oil and gas leases.
The factual evidence in the case was presented to the 26th Judicial
District Court without a jury in December 2001. Oral arguments were heard by the
court in April 2002, and although the court has not yet entered a judgment or
findings, it could do so at any time. The Company strongly denies the existence
of any material underpayment to plaintiffs and believes it presented strong
evidence at trial to support its positions. The Company has not yet determined
the amount of damages, if any, that would be payable if the lawsuit was
determined adversely to the Company. However, the amount of any resulting
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
liability could have a material adverse effect on the Company's results of
operations for the period in which such liability is recorded, but the Company
does not expect that any such liability will have a material adverse effect on
its consolidated financial position as a whole or on its liquidity, capital
resources or future results of operations.
Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows
a "severance, production or similar" tax to be included as an add-on, over and
above the maximum lawful price for gas. Based on a Federal Energy Regulatory
Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, the
Company collected the Kansas ad valorem tax in addition to the otherwise maximum
lawful price. The FERC's ruling was appealed to the United States Court of
Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988
that the FERC failed to provide a reasoned basis for its findings and remanded
the case to the FERC for further consideration.
On December 1, 1993, the FERC issued an order reversing its prior ruling,
but limiting the effect of its decision to Kansas ad valorem taxes for sales
made on or after June 28, 1988. The FERC clarified the effective date of its
decision by an order dated May 18, 1994. The order clarified that the effective
date applies to tax bills rendered after June 28, 1988, not sales made on or
after that date. Numerous parties filed appeals on the FERC's action in the D.C.
Circuit. Various gas producers challenged the FERC's orders on two grounds: (1)
that the Kansas ad valorem tax, properly understood, does qualify for
reimbursement under the NGPA; and (2) the FERC's ruling should, in any event,
have been applied prospectively. Other parties challenged the FERC's orders on
the grounds that the FERC's ruling should have been applied retroactively to
December 1, 1978, the date of the enactment of the NGPA and producers should
have been required to pay refunds accordingly.
The D.C. Circuit issued its decision on August 2, 1996, which holds that
producers must make refunds of all Kansas ad valorem tax collected with respect
to production since October 4, 1983, as opposed to June 28, 1988. Petitions for
rehearing were denied on November 6, 1996. Various gas producers subsequently
filed a petition for writ of certiori with the United States Supreme Court
seeking to limit the scope of the potential refunds to tax bills rendered on or
after June 28, 1988 (the effective date originally selected by the FERC).
Williams Natural Gas Company filed a cross-petition for certiori seeking to
impose refund liability back to December 1, 1978. Both petitions were denied on
May 12, 1997.
The Company and other producers filed petitions for adjustment with the
FERC on June 24, 1997. The Company was seeking waiver or set-off from FERC with
respect to that portion of the refund associated with (i) non-recoupable
royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the
higher prices collected, and (iii) interest for all periods. On September 10,
1997, FERC denied this request, and on October 10, 1997, the Company and other
producers filed a request for rehearing. Pipelines were given until November 10,
1997 to file claims on refunds sought from producers and refund claims totaling
approximately $30.2 million were made against the Company. Through September 30,
2002, the Company has settled $9.8 million of the original claim amounts. In
early October 2002, the Company received final approval to settle an additional
$11.8 million of the original claim amounts. This approval resulted in the
Company reducing its contingent liability and recognizing other income of $3.5
million in September 2002. As of September 30, 2002 and December 31, 2001, the
Company had on deposit $21.3 million and $24.5 million, respectively, including
accrued interest, in an escrow account and had corresponding obligations for the
remaining claims recorded in other current liabilities in the accompanying
Consolidated Balance Sheets. The Company believes that the escrowed amounts,
plus accrued interest, will be sufficient to settle the remaining claims.
NOTE G. Income Per Share Before Extraordinary Items
Basic income per share before extraordinary items is computed by dividing
income before extraordinary items by the weighted average number of common
shares outstanding for the period. The computation of diluted income per share
before extraordinary items reflects the potential dilution that could occur if
securities or other contracts to issue common stock that are dilutive to income
before extraordinary items were exercised or converted into common stock or
resulted in the issuance of common stock.
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
The following table is a reconciliation of the basic and diluted weighted
average common shares outstanding during the three and nine month periods ended
September 30, 2002 and 2001:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 116,193 98,468 111,227 98,395
Dilutive common stock options (a)........... 1,826 1,055 1,662 1,251
Restricted stock awards (b)................. 2 - - -
------- ------- ------- -------
Diluted..................................... 118,021 99,523 112,889 99,646
======= ======= ======= =======
- -----------
(a) Common stock options to purchase 1,868,588 shares and 4,347,845 shares of
common stock were outstanding but not included in the computations of
diluted income per share for the three month periods ended September 30,
2002 and 2001, respectively, and common stock options to purchase 2,024,455
shares and 3,022,779 shares of common stock were outstanding but not
included in the computations of diluted income per share for the nine month
periods ended September 30, 2002 and 2001, respectively, because the
exercise prices of the options were greater than the average market price
of the common shares and would be anti-dilutive to the computations.
(b) During the nine months ended September 30, 2002, the Company issued fixed
awards for 645,545 restricted shares of the Company's common stock. The
fixed awards were issued as compensation to directors, officers and key
employees of the Company. The restricted share awards include 18,545 shares
that were granted to directors of the Company on May 13, 2002. Director
awards for 3,302 shares vest on a quarterly pro-rata basis during the year
ended May 13, 2003, and director awards for 15,243 shares vest on May 13,
2005. The remaining 627,000 restricted shares were awarded to officers and
key employees of the Company on August 12, 2002 and vest on August 12,
2005.
NOTE H. Capitalized Interest
Interest expense incurred by the Company is presented in the accompanying
Consolidated Statements of Operations net of capitalized interest. Capitalized
interest during the three and nine month periods ended September 30, 2002 and
2001 is presented in the following table:
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
------- ------- -------- -------
(in thousands)
Capitalized interest................... $ 5,294 $ 1,527 $ 10,252 $ 4,233
====== ====== ======= ======
NOTE I. Geographic Operating Segment Information
The Company has operations in only one industry segment, which is the oil
and gas exploration and production industry. The Company is organizationally
structured along geographic operating segments, or regions. The Company has
reportable operations in the United States, Argentina and Canada.
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
The following tables provide the Company's interim geographic operating
segment data. Geographic operating segment income tax benefits (provisions) have
been determined based on statutory rates existing in the various tax
jurisdictions where the Company has oil and gas producing activities. The
"Headquarters and Other" column includes revenues and expenses that are not
routinely included in the earnings measures internally reported to management on
a geographic operating segment basis.
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- --------- --------- ------------ ------------
(in thousands)
Three months ended September 30, 2002:
Oil and gas revenue................. $137,155 $ 19,149 $ 12,013 $ - $ - $ 168,317
Interest and other.................. - - - - 7,083 7,083
Gain on disposition of assets, net.. 3,087 - - - 266 3,353
------- ------- ------- ------ ------- --------
140,242 19,149 12,013 - 7,349 178,753
------- ------- ------- ------ ------- --------
Production costs.................... 43,713 3,622 2,635 - - 49,970
Depletion, depreciation and
amortization...................... 33,607 12,227 6,713 - 2,201 54,748
Exploration and abandonments........ 12,557 2,843 1,429 1,495 - 18,324
General and administrative.......... - - - - 12,466 12,466
Interest............................ - - - - 20,347 20,347
Other............................... - - - - 2,098 2,098
------- ------- ------- ------ ------- --------
89,877 18,692 10,777 1,495 37,112 157,953
------- ------- ------- ------ ------- --------
Income (loss) before income taxes
and extraordinary items........... 50,365 457 1,236 (1,495) (29,763) 20,800
Income tax benefit (provision)...... (17,628) (160) (521) 523 15,597 (2,189)
------- ------- ------- ------ ------- --------
Income (loss) before extraordinary
items............................. $ 32,737 $ 297 $ 715 $ (972) $(14,166) $ 18,611
======= ======= ======= ====== ======= ========
Three months ended September 30, 2001:
Oil and gas revenue................. $149,283 $ 36,919 $ 11,886 $ - $ - $ 198,088
Interest and other.................. - - - - 6,471 6,471
Gain (loss) on disposition of
assets, net....................... 8 - (7) - (89) (88)
------- ------- ------- ------ ------- --------
149,291 36,919 11,879 - 6,382 204,471
------- ------- ------- ------ ------- --------
Production costs.................... 41,516 7,059 3,138 - - 51,713
Depletion, depreciation and
amortization...................... 34,061 15,003 7,793 - 3,208 60,065
Exploration and abandonments........ 16,292 2,728 1,440 4,206 - 24,666
General and administrative.......... - - - - 8,153 8,153
Interest............................ - - - - 32,261 32,261
Other............................... - - - - 2,006 2,006
------- ------- ------- ------ ------- --------
91,869 24,790 12,371 4,206 45,628 178,864
------- ------- ------- ------ ------- --------
Income (loss) before income taxes
and extraordinary items........... 57,422 12,129 (492) (4,206) (39,246) 25,607
Income tax benefit (provision)...... (20,098) (4,245) 210 1,473 20,281 (2,379)
------- ------- ------- ------ ------- --------
Income (loss) before extraordinary
items............................. $ 37,324 $ 7,884 $ (282) $(2,733) $(18,965) $ 23,228
======= ======= ======= ======= ======= ========
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
-------- --------- --------- --------- ------------ ------------
(in thousands)
Nine months ended September 30, 2002:
Oil and gas revenue................. $411,139 $ 57,459 $ 37,688 $ - $ - $ 506,286
Interest and other.................. - - - - 9,089 9,089
Gain on disposition of assets, net.. 3,249 (3) 1,010 - 118 4,374
------- ------- ------- ------- -------- --------
414,388 57,456 38,698 - 9,207 519,749
------- ------- ------- ------- -------- --------
Production costs................... 132,725 10,023 7,957 - - 150,705
Depletion, depreciation and
amortization..................... 97,594 31,263 20,758 - 6,466 156,081
Exploration and abandonments....... 39,841 6,631 5,272 5,560 - 57,304
General and administrative......... - - - - 35,142 35,142
Interest........................... - - - - 71,405 71,405
Other.............................. - - - - 15,259 15,259
------- ------- ------- ------- -------- --------
270,160 47,917 33,987 5,560 128,272 485,896
------- ------- ------- ------- -------- --------
Income (loss) before income taxes
and extraordinary items.......... 144,228 9,539 4,711 (5,560) (119,065) 33,853
Income tax benefit (provision)..... (50,480) (3,339) (1,986) 1,946 50,643 (3,216)
------- ------- ------- ------- -------- --------
Income (loss) before extraordinary
items............................ $93,748 $ 6,200 $ 2,725 $ (3,614) $ (68,422) $ 30,637
======= ======= ======= ======= ======== ========
Nine months ended September 30, 2001:
Oil and gas revenue................ $512,483 $104,439 $ 57,763 $ - $ - $ 674,685
Interest and other................. - - - - 22,593 22,593
Gain on disposition of assets, net. 224 - 31 - 8,422 8,677
------- ------- ------- ------- ------- --------
512,707 104,439 57,794 - 31,015 705,955
------- ------- ------- ------- -------- --------
Production costs................... 130,196 19,676 9,617 - - 159,489
Depletion, depreciation and
amortization..................... 95,274 41,380 22,273 - 10,695 169,622
Exploration and abandonments....... 50,567 13,211 8,921 21,433 - 94,132
General and administrative......... - - - - 26,606 26,606
Interest........................... - - - - 102,137 102,137
Other.............................. - - - - 29,097 29,097
------- ------- ------- ------- -------- --------
276,037 74,267 40,811 21,433 168,535 581,083
------- ------- ------- ------- -------- --------
Income (loss) before income taxes
and extraordinary items.......... 236,670 30,172 16,983 (21,433) (137,520) 124,872
Income tax benefit (provision)..... (82,835) (10,560) (7,238) 7,502 87,744 (5,387)
------- ------- ------- ------- -------- --------
Income (loss) before extraordinary
items............................ $153,835 $ 19,612 $ 9,745 $(13,931) $ (49,776) $ 119,485
======= ======= ======= ======= ======== ========
NOTE J. Pioneer USA
Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned
subsidiary of the Company that has fully and unconditionally guaranteed certain
debt securities of the Company. In accordance with practices accepted by the
SEC, the Company has prepared Consolidating Financial Statements in order to
quantify the assets of Pioneer USA as a subsidiary guarantor. The following
Consolidating Condensed Balance Sheets, Consolidating Condensed Statements of
Operations and Comprehensive Income (Loss) and Consolidating Condensed
Statements of Cash Flows present financial information for Pioneer Natural
Resources Company as the Parent on a stand-alone basis (carrying any investments
in subsidiaries under the equity method), financial information for Pioneer USA
on a stand-alone basis (carrying any investment in non-guarantor subsidiaries
under the equity method), the non-guarantor subsidiaries of the Company on a
consolidated basis, the consolidation and elimination entries necessary to
arrive at the information for the Company on a consolidated basis, and the
financial information for the Company on a consolidated basis. Pioneer USA is
not restricted from making distributions to the Company.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2002
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 68 $ 20,365 $ 5,069 $ $ 25,502
Other current assets.................. 1,705,788 (1,468,803) (126,585) 110,400
--------- ---------- --------- ----------
Total current assets............. 1,705,856 (1,448,438) (121,516) 135,902
--------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,952,978 1,198,852 4,151,830
Unproved properties................ - 41,425 161,845 203,270
Accumulated depletion, depreciation
and amortization.................... - (907,584) (337,555) (1,245,139)
--------- ---------- --------- ----------
- 2,086,819 1,023,142 3,109,961
--------- ---------- --------- ----------
Deferred income taxes................... 76,511 - 1,522 78,033
Other property and equipment, net....... - 17,404 3,714 21,118
Other assets, net....................... 16,755 15,360 12,349 44,464
Investment in subsidiaries.............. 1,199,599 210,243 - (1,409,842) -
--------- ---------- --------- ----------
$2,998,721 $ 881,388 $ 919,211 $ 3,389,478
========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,355 $ 151,449 $ 22,290 $ $ 204,094
Long-term debt.......................... 1,650,756 - - 1,650,756
Other noncurrent liabilities............ - 153,488 (20,354) 133,134
Deferred income taxes................... - - 6,394 6,394
Stockholders' equity.................... 1,317,610 576,451 910,881 (1,409,842) 1,395,100
Commitments and contingencies...........
--------- ---------- --------- ----------
$2,998,721 $ 881,388 $ 919,211 $ 3,389,478
========= ========== ========= ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2001
(in thousands)
ASSETS
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Eliminations Company
---------- ----------- ------------ ------------ -----------
Current assets:
Cash and cash equivalents............. $ 79 $ 10,900 $ 3,355 $ $ 14,334
Other current assets.................. 1,540,985 (1,125,968) (173,708) 241,309
--------- ---------- --------- ----------
Total current assets............. 1,541,064 (1,115,068) (170,353) 255,643
--------- ---------- --------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of
accounting:
Proved properties.................. - 2,688,962 1,002,821 3,691,783
Unproved properties................ - 25,222 162,563 187,785
Accumulated depletion, depreciation
and amortization.................... - (815,323) (279,987) (1,095,310)
--------- ---------- --------- ----------
- 1,898,861 885,397 2,784,258
--------- ---------- --------- ----------
Deferred income taxes................... 82,811 - 1,508 84,319
Other property and equipment, net....... - 17,881 3,679 21,560
Other assets, net....................... 15,911 81,356 28,006 125,273
Investment in subsidiaries.............. 1,060,457 87,636 - (1,148,093) -
--------- ---------- --------- ----------
$2,700,243 $ 970,666 $ 748,237 $ 3,271,053
========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,745 $ 176,442 $ 21,022 $ $ 228,209
Long-term debt.......................... 1,577,304 - - 1,577,304
Other noncurrent liabilities............ 19,582 124,552 22,249 166,383
Deferred income taxes................... - - 13,768 13,768
Stockholders' equity.................... 1,072,612 669,672 691,198 (1,148,093) 1,285,389
Commitments and contingencies...........
---------- ---------- --------- ----------
$2,700,243 $ 970,666 $ 748,237 $ 3,271,053
========= ========== ========= ==========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
For the Nine Months Ended September 30, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- --------- ------------- ----------- ------------ ---------
Revenues:
Oil and gas...................... $ - $ 386,021 $ 120,265 $ - $ $ 506,286
Interest and other............... - 7,143 1,946 - 9,089
Gain on disposition of
assets, net.................... - 3,224 1,150 - 4,374
-------- -------- -------- ------ --------
- 396,388 123,361 - 519,749
-------- -------- -------- ------ --------
Costs and expenses:
Oil and gas production........... - 127,402 23,303 - 150,705
Depletion, depreciation and
amortization................... - 98,268 57,813 - 156,081
Exploration and abandonments..... - 41,131 16,173 - 57,304
General and administrative....... 945 27,518 6,679 - 35,142
Interest......................... 62,036 9,166 203 - 71,405
Equity (income) loss from
subsidiaries................... (24,243) 5,856 - - 18,387 -
Other............................ (53,717) 56,430 12,546 - 15,259
-------- -------- -------- ------ --------
(14,979) 365,771 116,717 - 485,896
-------- -------- -------- ------ --------
Income before income taxes and
extraordinary items.............. 14,979 30,617 6,644 - 33,853
Income tax provision .............. - - (3,216) (3,216)
-------- -------- -------- ------ --------
Income before extraordinary items.. 14,979 30,617 3,428 30,637
Extraordinary items - loss on
early extinguishment of debt,
net of tax....................... (6,686) - (15,658) - (22,344)
-------- -------- -------- ------ --------
Net income (loss).................. 8,293 30,617 (12,230) 8,293
Other comprehensive income (loss):
Deferred hedge gains and losses:
Deferred hedge losses.......... (4) (94,816) (18,540) - (113,360)
Net (gains) losses included
in net income (loss)......... 447 (29,023) (5,571) - (34,147)
Translation adjustment........... - - 1,827 - 1,827
-------- -------- -------- ------ --------
Comprehensive loss................. $ 8,736 $ (93,222) $ (34,514) $ - $(137,387)
======== ======== ======== ====== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2001
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income The
Parent USA Subsidiaries Tax Benefit Eliminations Company
--------- --------- ------------- ----------- ------------ ---------
Revenues:
Oil and gas...................... $ - $ 494,474 $ 180,211 $ - $ $ 674,685
Interest and other............... - 18,042 4,551 - 22,593
Gain on disposition of assets,
net............................ - 8,762 (85) - 8,677
-------- -------- -------- ------ --------
- 521,278 184,677 - 705,955
-------- -------- -------- ------ --------
Costs and expenses:
Oil and gas production........... - 128,922 30,567 - 159,489
Depletion, depreciation and
amortization................... - 101,062 68,560 - 169,622
Exploration and abandonments..... - 52,713 41,419 - 94,132
General and administrative....... 616 18,434 7,556 - 26,606
Interest......................... 3,823 85,328 12,986 - 102,137
Equity (income) loss from
subsidiaries................... (123,937) 7,030 - - 116,907 -
Other............................ - 7,374 21,723 - 29,097
-------- -------- -------- ------ --------
(119,498) 400,863 182,811 - 581,083
-------- -------- -------- ------ --------
Income (loss) before income taxes
and extraordinary items.......... 119,498 120,415 1,866 - 124,872
Income tax benefit (provision) .... - (783) (4,591) (13) (5,387)
-------- -------- -------- ------ --------
Income before extraordinary items.. 119,498 119,632 (2,725) (13) 119,485
Extraordinary items - gain on
early extinguishment of debt,
net of tax....................... 1,374 - - - 1,374
-------- -------- -------- ------ --------
Net income (loss).................. 120,872 119,632 (2,725) (13) 120,859
Other comprehensive income (loss):
Deferred hedge gains and losses:
Transition adjustment.......... - (172,007) (25,437) - (197,444)
Deferred hedge gains (losses).. (519) 317,510 26,089 - 343,080
Net losses included in net
income........................ - 19,726 17,329 - 37,055
Gains and losses on available
for sale securities:
Unrealized holding losses...... - (45) - - (45)
Gains included in net income... - (8,109) - - (8,109)
Translation adjustment........... - - (9,749) - (9,749)
-------- -------- -------- ------ --------
Comprehensive income............... $ 120,353 $ 276,707 $ 5,507 $ (13) $ 285,647
======== ======== ======== ====== ========
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2002
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ---------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities..................................... $(299,553) $ 259,502 $ 268,305 $ 228,254
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 31,994 85,682 1,155 118,831
Additions to oil and gas properties.............. - (284,367) (205,366) (489,733)
Other property additions, net.................... - (7,466) (1,069) (8,535)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities.................................. 31,994 (206,151) (205,280) (379,437)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt.................. 466,668 - - 466,668
Principal payments on long-term debt............. (442,583) - - (442,583)
Common stock issuance proceeds, net of
issuance costs................................. 236,000 - - 236,000
Payment of noncurrent liabilities................ - (43,886) (59,818) (103,704)
Exercise of stock options........................ 10,756 - - 10,756
Deferred debt issuance costs..................... (3,293) - - (3,293)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. 267,548 (43,886) (59,818) 163,844
-------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (11) 9,465 3,207 12,661
Effect of exchange rate changes on cash and
cash equivalents............................... - - (1,493) (1,493)
Cash and cash equivalents, beginning of period.... 79 10,900 3,355 14,334
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 68 $ 20,365 $ 5,069 $ 25,502
======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2001
(in thousands)
Non-
Pioneer Guarantor The
Parent USA Subsidiaries Company
--------- --------- ------------ ---------
Cash flows from operating activities:
Net cash provided by operating activities........ $ 30,343 $ 225,330 $ 134,291 $ 389,964
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 21,170 51,105 731 73,006
Additions to oil and gas properties.............. - (228,154) (136,274) (364,428)
Other property additions, net.................... - (6,809) (3,681) (10,490)
-------- -------- --------- --------
Net cash provided by (used in) investing
activities.................................. 21,170 (183,858) (139,224) (301,912)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt.................. 204,175 - - 204,175
Principal payments on long-term debt............. (249,230) - - (249,230)
Payment of noncurrent liabilities................ - (43,823) 2,113 (41,710)
Exercise of stock options........................ 6,610 - - 6,610
Purchase of treasury stock....................... (13,032) - - (13,032)
-------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................. (51,477) (43,823) 2,113 (93,187)
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 36 (2,351) (2,820) (5,135)
Effect of exchange rate changes on cash and
cash equivalents............................... - - (287) (287)
Cash and cash equivalents, beginning of period.... 15 18,387 7,757 26,159
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 51 $ 16,036 $ 4,650 $ 20,737
======== ======== ========= ========
21
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information included in Item 2 and Item 3 of this document includes
forward-looking statements that are made pursuant to the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, and the business prospects of Pioneer Natural Resources Company
("Pioneer" or the "Company"), are subject to a number of risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from the forward-looking statements. These risks and uncertainties
include, among other things, volatility of oil and gas prices, product supply
and demand, competition, government regulation or action, foreign currency
valuation changes, foreign government tax and regulation changes, foreign
operations and associated foreign political and economic instability,
litigation, the costs and results of drilling and operations, the Company's
ability to replace reserves, implement its business plans or complete its
development projects as scheduled, access to and cost of capital, uncertainties
about estimates of reserves, quality of technical data, environmental and
weather risks. These and other risks are described in the Company's 2001 Annual
Report on Form 10-K that is available from the United States Securities and
Exchange Commission ("SEC").
Financial and Operating Performance
During the three and nine month periods ended September 30, 2002, as
compared to the same respective periods in 2001, commodity price declines and a
weak Argentine peso negatively impacted the Company's financial and operating
results. Additionally, Pioneer repaid relatively high cost bonds and capital
obligations during the three and nine month periods ended September 30, 2002,
reducing the Company's ongoing cost of capital. Associated therewith, the
Company recorded extraordinary losses of $19.5 million ($.17 per share) and
$22.3 million ($.20 per share) during the three and nine month periods ended
September 30, 2002, respectively. Including the extraordinary losses, the
Company reported a net loss of $890 thousand ($.01 per share) and net income of
$8.3 million ($.07 per share) during the three and nine month periods ended
September 30, 2002, as compared to net income of $24.6 million ($.25 per share)
and $120.9 million ($1.21 per diluted share) for the same respective periods of
2001. During the three and nine month periods ended September 30, 2002, the
Company also recorded gains of $3.4 million and $4.4 million, respectively, from
asset divestitures and a noncash credit of $.2 million and a noncash charge of
$7.7 million, respectively, for the remeasurement of Argentine peso-denominated
net monetary assets. During the three months ended September 30, 2001, the
Company's earnings were positively impacted by a $1.4 million ($.01 per share)
extraordinary gain on the early extinguishment of debt. During the nine months
ended September 30, 2001, the Company's earnings were positively impacted by
favorable commodity prices, an $8.7 million gain on the disposition of assets
and the aforementioned extraordinary gain.
The Company's net cash provided by operating activities was $87.7 million
and $228.3 million during the three and nine month periods ended September 30,
2002, respectively, as compared to net cash provided by operating activities of
$122.9 million and $390.0 million during the three and nine month periods ended
September 30, 2001, respectively. The decrease in net cash provided by operating
activities was primarily due to declines in commodity prices and slightly lower
production volumes. During the three months ended September 30, 2002, the
Company used its net cash provided by operating activities, together with
proceeds from asset divestitures and net borrowings under its corporate credit
facility to fund additions to oil and gas properties. During the nine months
ended September 30, 2002, the Company used its net cash provided by operating
activities, together with proceeds from asset divestitures and a portion of the
proceeds from the April 2002 sale of 11.5 million new shares of the Company's
common stock (the "Stock Offering"), to fund additions to oil and gas
properties.
The Company strives to maintain its outstanding indebtedness at a
moderate level in order to provide sufficient financial flexibility to fund
future opportunities. The Company's total book capitalization at September 30,
2002 was $3.05 billion, consisting of total debt of $1.65 billion and
stockholders' equity of $1.4 billion. Debt as a percentage of total book
capitalization was 54 percent at September 30, 2002, as compared to 55 percent
at December 31, 2001. The slight improvement of the Company's ratio of debt to
total book capitalization during the nine months ended September 30, 2002 was
primarily due to $236.0 million of net proceeds from the Stock Offering,
partially offset by a $147.5 million reduction in the fair value of the
Company's cash flow hedge derivatives, which are recorded in the "Accumulated
other comprehensive income - deferred hedge gains, net" component of
stockholders' equity, and a $73.5 million increase in long-term debt.
22
PIONEER NATURAL RESOURCES COMPANY
2002 Activities
During 2002, the Company has announced or completed the following
activities:
o the purchase through two transactions of an additional 30 percent working
interest in the Falcon field development and a 25 percent working interest
in associated acreage in the deepwater Gulf of Mexico for a combined
purchase price of $61.1 million including normal closing adjustments. As a
result of these transactions, the Company owns a 75 percent working
interest in, and operates, the Falcon field development and related
exploration blocks. These acquisitions were completed in April 2002;
o the purchase of the remaining 23 percent of the rights that the Company did
not already own in its core area West Panhandle gas field, 100 percent of
the West Panhandle reserves attributable to field fuel, 100 percent of the
related West Panhandle field gathering system and ten blocks surrounding
the Falcon discovery. See Note D of Item 1. "Financial Statements" for
information regarding these acquisitions that were completed during July
2002;
o the completion of the Stock Offering during April 2002, which resulted in
net proceeds to the Company of $236.0 million;
o the completion during April 2002 of a public offering of $150 million of
7-1/2 percent senior notes that will mature on April 15, 2012 (the "Debt
Offering"). The Company realized net proceeds, after payment of issuance
costs, of $146.7 million from the Debt Offering;
o the successful drilling of three additional wells on its Olowi Block in
offshore Gabon. The four wells drilled to date have established the
presence of a continuous oil rim along the edge of a large geologic
structure;
o the leasing of 42 blocks offered in the Western Gulf of Mexico by the
Minerals Management Service. The Company leased 34 blocks on the Gulf of
Mexico shelf and eight deepwater blocks in the Gulf of Mexico covering
prospects and leads within subsea tie-back range of its Falcon field;
o a successful exploration well in the Borj El Khadra permit in the Ghadames
basin onshore southern Tunisia. A total of four intervals were tested in
the Adam 1 discovery well at a combined rate of 6,000 barrels of oil and
condensate per day and 16 MMcf of gas per day; and
o the signing of an agreement with Armstrong Resources LLC in October 2002 to
acquire a 70 percent working interest and operatorship in ten state leases
on Alaska's North Slope. The leases cover approximately 14,000 acres
between the Kuparuk River unit and Thetis Island. The agreement will be
effective November 1, 2002. The Company plans to drill up to three wells
during this winter drilling season, contingent upon the receipt of required
permits, to test an area that the Company believes is prospective for oil
in the same sands as the offsetting Kuparuk River unit eight to ten miles
to the southeast. The Kuparuk River unit was discovered in 1969 and is
estimated to hold 2.5 billion barrels of recoverable oil. No wells have
been drilled on the acreage covered by Pioneer's leases to date, but wells
drilled just outside the perimeter of the acreage have encountered the
primary target, the Kuparuk "C" sand, and were oil-bearing. The acreage is
offshore in approximately five to ten feet of water. Drilling plans call
for grounded sea ice pad locations that will be accessed via ice roads from
Oliktok Point dock. No tundra travel is planned. All sea ice operations are
expected to be completed by the end of March.
Through these transactions, the Company has increased its ownership in
and control over certain of its core assets, improved its financial flexibility
and ratio of debt to total book capitalization and added to the Company's
portfolio of exploration opportunities including a new potentially high-impact
project for 2003 exploration in Alaska.
23
PIONEER NATURAL RESOURCES COMPANY
Drilling Highlights
During the first nine months of 2002, the Company continued progress on
its development projects at Canyon Express, Falcon and Devils Tower in the
deepwater Gulf of Mexico and Sable in South Africa, increased its ownership in
its Falcon project and West Panhandle Field, successfully extended the oil
accumulation previously established by the Olowi Marin-1 discovery well in the
shallow water offshore Gabon and announced the successful exploration well in
the Borj El Khadra permit in the Ghadames basin onshore Southern Tunisia. In
total, the Company's costs incurred for the first nine months of 2002 totaled
$529.5 million and included $256.0 million for development activities, $95.5
million for exploration activities and $178.0 million for acquisitions. While a
significant amount of capital this year has been spent on acquisitions, the
majority of the Company's capital expenditures was incurred on drilling wells
and fabricating infrastructure for the Company's significant development
projects. The following tables summarize the Company's development drilling and
exploration and extension drilling activities for the nine months ended
September 30, 2002:
Development Drilling
----------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- --------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast...