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, 2003
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 900, 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 / /
Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes / x / No / /
Number of shares of Common Stock outstanding as of
October 30, 2003................................................ 118,027,311
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Definitions of Oil and Gas Terms and Conventions Used Herein............ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002........................................... 4
Consolidated Statements of Operations for the three and
nine months ended September 30, 2003 and 2002............... 5
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 2003........................ 6
Consolidated Statements of Cash Flows for the three and
nine months ended September 30, 2003 and 2002............... 7
Consolidated Statements of Comprehensive Income (Loss)
for the three and nine months ended September 30,
2003 and 2002............................................... 8
Notes to Consolidated Financial Statements.................... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 36
Item 4. Controls and Procedures....................................... 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 39
Item 6. Exhibits and Reports on Form 8-K.............................. 39
Signatures.................................................... 40
Exhibit Index................................................. 41
2
Definitions of Oil and Gas Terms and Conventions Used Herein
Within this Report, the following oil and gas terms and conventions have
specific meanings: "Bbl" means a standard barrel containing 42 United States
gallons; "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; "LIBOR" means
London Interbank Offered Rate, which is a market rate of interest; "MMBtu" means
one million Btus; "MBbl" means one thousand Bbls; "MBOE" means one thousand BOE;
"Mcf" means one thousand cubic feet and is a measure of natural 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 espect 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,
2003 2002
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 12,651 $ 8,490
Accounts receivable:
Trade, net of reserves for doubtful accounts of $4,641
and $4,744 as of September 30, 2003 and December 31,
2002, respectively........................................... 97,388 97,774
Due from affiliates............................................ 239 448
Inventories....................................................... 19,054 10,648
Prepaid expenses.................................................. 13,889 5,485
Deferred income taxes............................................. 39,500 13,900
Other current assets:
Derivatives.................................................... 1,856 2,508
Other, net of reserves for doubtful accounts of $4,207
and $3,351 as of September 30, 2003 and December 31,
2002, respectively........................................... 11,161 7,840
---------- ----------
Total current assets......................................... 195,738 147,093
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts
method of accounting:
Proved properties.............................................. 4,767,281 4,252,897
Unproved properties............................................ 182,429 219,073
Accumulated depletion, depreciation and amortization.............. (1,555,709) (1,303,541)
---------- ----------
3,394,001 3,168,429
---------- ----------
Noncurrent deferred income taxes.................................... 188,712 76,840
Other property and equipment, net................................... 25,733 22,784
Other assets:
Derivatives....................................................... 349 643
Other, net of reserves for doubtful accounts of $371 and $1,227
as of September 30, 2003 and December 31, 2002, respectively... 37,077 39,327
---------- ----------
$ 3,841,610 $ 3,455,116
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade.......................................................... $ 135,411 $ 117,582
Due to affiliates.............................................. 6,263 7,192
Interest payable.................................................. 38,039 37,458
Income taxes payable.............................................. 3,916 -
Other current liabilities:
Derivatives.................................................... 109,200 83,638
Other.......................................................... 30,002 28,722
---------- ----------
Total current liabilities.................................... 322,831 274,592
---------- ----------
Long-term debt...................................................... 1,621,364 1,668,536
Noncurrent derivatives.............................................. 44,999 42,490
Noncurrent deferred income taxes.................................... 12,713 8,760
Other noncurrent liabilities........................................ 123,798 85,841
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
119,672,784 and 119,592,344 shares issued as of
September 30, 2003 and December 31, 2002, respectively......... 1,197 1,196
Additional paid-in capital........................................ 2,726,969 2,714,567
Treasury stock, at cost; 1,674,819 and 2,339,806 shares as of
September 30, 2003 and December 31, 2002, respectively......... (23,857) (32,219)
Deferred compensation............................................. (11,477) (14,292)
Accumulated deficit............................................... (945,222) (1,298,440)
Accumulated other comprehensive income (loss):
Net deferred hedge gains (losses), net of tax.................. (55,043) 9,555
Cumulative translation adjustment.............................. 23,338 (5,470)
---------- ----------
Total stockholders' equity................................... 1,715,905 1,374,897
Commitments and contingencies.......................................
---------- ----------
$ 3,841,610 $ 3,455,116
========== ==========
The financial information included as of September 30, 2003 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,
--------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- -----------
Revenues and other income:
Oil and gas...................................... $ 332,515 $ 168,317 $ 953,625 $ 506,286
Interest and other............................... 348 7,083 4,321 9,089
Gain on disposition of assets, net............... 46 3,353 1,576 4,374
-------- -------- -------- ---------
332,909 178,753 959,522 519,749
-------- -------- -------- ---------
Costs and expenses:
Oil and gas production........................... 71,806 49,970 205,387 150,705
Depletion, depreciation and amortization......... 103,534 54,748 274,142 156,081
Exploration and abandonments..................... 24,516 18,324 107,430 57,304
General and administrative....................... 15,207 12,466 44,332 35,142
Accretion of discount on asset retirement
obligations.................................... 1,327 - 3,656 -
Interest......................................... 23,212 20,347 69,526 71,405
Other............................................ 1,389 21,599 12,205 37,603
-------- -------- -------- ---------
240,991 177,454 716,678 508,240
-------- -------- -------- ---------
Income before income taxes and cumulative effect
of change in accounting principle................ 91,918 1,299 242,844 11,509
Income tax benefit (provision)..................... 99,895 (2,189) 94,961 (3,216)
-------- -------- -------- ---------
Income (loss) before cumulative effect of change
in accounting principle.......................... 191,813 (890) 337,805 8,293
Cumulative effect of change in accounting
principle, net of tax............................ - - 15,413 -
-------- -------- -------- ---------
Net income (loss).................................. $ 191,813 $ (890) $ 353,218 $ 8,293
======== ======== ======== ==========
Net income (loss) per share:
Basic:
Income (loss) before cumulative effect of
change in accounting principle.............. $ 1.64 $ (.01) $ 2.89 $ .07
Cumulative effect of change in accounting
principle, net of tax....................... - - .13 -
-------- -------- -------- ---------
Net income (loss)........................... $ 1.64 $ (.01) $ 3.02 $ .07
======== ======== ======== ==========
Diluted:
Income (loss) before cumulative effect of
change in accounting principle.............. $ 1.62 $ (.01) $ 2.86 $ .07
Cumulative effect of change in accounting
principle, net of tax....................... - - .13 -
-------- -------- -------- ---------
Net income (loss)........................... $ 1.62 $ (.01) $ 2.99 $ .07
======== ======== ======== ==========
Weighted average shares outstanding:
Basic......................................... 117,216 116,193 116,990 111,227
======== ======== ======== =========
Diluted....................................... 118,457 116,193 118,283 112,889
======== ======== ======== =========
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)
---------------------
Net
Deferred
Hedge
Common Gains
Stock Additional (Losses), Cumulative Total
Shares Common Paid-in Treasury Deferred Accumulated Net Translation Stockholders'
Outstanding Stock Capital Stock Compensation Deficit of Tax Adjustment Equity
----------- ------ ---------- -------- ------------ ----------- --------- ----------- ------------
Balance as of January 1,
2003................... 117,253 $1,196 $2,714,567 $(32,219) $(14,292) $(1,298,440) $ 9,555 $ (5,470) $1,374,897
Stock options exercised
and employee stock
purchased.............. 797 1 1,630 10,711 - - - - 12,342
Purchase of treasury
stock.................. (100) - - (2,349) - - - - (2,349)
Deferred income tax
valuation reserve
adjustment related to
stock-based
compensation........... - - 9,266 - - - - - 9,266
Deferred compensation:
Compensation deferred.. 48 - 1,242 - (1,242) - - - -
Deferred compensation
included in net
income................ - - 264 - 4,057 - - - 4,321
Net income.............. - - - - - 353,218 - - 353,218
Other comprehensive
income (loss):
Net deferred hedge
gains (losses),
net of tax:
Net deferred hedge
losses............. - - - - - - (188,758) - (188,758)
Deferred income tax
valuation reserve
adjustment related
to hedging......... - - - - - - 23,288 - 23,288
Net hedge losses
included in
net income......... - - - - - - 100,872 - 100,872
Translation
adjustment........... - - - - - - - 28,808 28,808
------- ----- --------- ------- ------- ---------- -------- ------- ---------
Balance as of
September 30, 2003..... 117,998 $1,197 $2,726,969 $(23,857) $(11,477) $ (945,222) $ (55,043) $ 23,338 $1,715,905
======= ===== ========= ======= ======= ========== ======== ======= =========
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,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................... $ 191,813 $ (890) $ 353,218 $ 8,293
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depletion, depreciation and amortization..... 103,534 54,748 274,142 156,081
Exploration expenses, including dry holes.... 15,677 12,589 83,204 43,437
Deferred income taxes........................ (103,691) 1,512 (103,938) 1,617
Gain on disposition of assets, net........... (46) (3,353) (1,576) (4,374)
Accretion of discount on asset retirement
obligations................................ 1,327 - 3,656 -
Interest related amortization................ (4,781) (19) (13,960) (1,660)
Commodity hedge related amortization......... (18,132) 6,184 (54,119) 20,307
Cumulative effect of change in accounting
principle, net of tax...................... - - (15,413) -
Other noncash items.......................... 1,598 16,093 8,580 28,337
Changes in operating assets and liabilities:
Accounts receivable, net..................... 17,932 6,153 3,287 (4,715)
Inventories.................................. (4,678) 69 (8,895) 4,052
Prepaid expenses............................. 1,102 951 (8,404) 1,011
Other current assets, net.................... (2,712) (1,802) (3,276) (1,939)
Accounts payable............................. 23,281 (3,907) 28,951 (18,056)
Interest payable............................. 850 (384) 581 183
Income taxes payable......................... 1,740 - 3,916 -
Other current liabilities.................... (2,349) (290) (3,278) (4,320)
-------- -------- -------- --------
Net cash provided by operating activities.. 222,465 87,654 546,676 228,254
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............. 9,294 59,895 35,006 118,831
Additions to oil and gas properties............. (134,889) (226,440) (521,985) (489,733)
Other property additions, net................... (1,814) (2,675) (8,170) (8,535)
-------- -------- -------- --------
Net cash used in investing activities...... (127,409) (169,220) (495,149) (379,437)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................. 50,913 210,792 222,725 466,668
Principal payments on long-term debt............ (142,913) (56,257) (270,262) (442,583)
Common stock issuance proceeds, net of
issuance costs............................... - (4) - 236,000
Payment of other noncurrent liabilities......... (4,869) (67,142) (11,097) (103,704)
Exercise of stock options and employee
stock purchases.............................. 2,481 3,149 12,342 10,756
Purchase of treasury stock...................... - - (2,349) -
Deferred debt issuance costs.................... - (135) - (3,293)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities..................... (94,388) 90,403 (48,641) 163,844
-------- -------- -------- --------
Net increase in cash and cash equivalents......... 668 8,837 2,886 12,661
Effect of exchange rate changes on cash and
cash equivalents................................ (173) (63) 1,275 (1,493)
Cash and cash equivalents, beginning of period.... 12,156 16,728 8,490 14,334
-------- -------- -------- --------
Cash and cash equivalents, end of period.......... $ 12,651 $ 25,502 $ 12,651 $ 25,502
======== ======== ======== ========
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,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss)................................. $ 191,813 $ (890) $ 353,218 $ 8,293
-------- -------- -------- --------
Other comprehensive income (loss):
Net deferred hedge gains (losses), net of
tax:
Net deferred hedge gains (losses)............ 46,568 (24,269) (188,758) (113,360)
Deferred income tax valuation reserve
adjustment related to hedging............. 23,288 - 23,288 -
Net hedge (gains) losses included in net
income (loss).............................. 27,911 1,651 100,872 (34,147)
Translation adjustment.......................... (1,017) (6,915) 28,808 1,827
-------- -------- -------- --------
Other comprehensive income (loss).......... 96,750 (29,533) (35,790) (145,680)
-------- -------- -------- --------
Comprehensive income (loss)....................... $ 288,563 $ (30,423) $ 317,428 $(137,387)
======== ======== ======== ========
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, 2003
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company (the "Company" or "Pioneer") is a
Delaware corporation whose common stock is listed and traded on the New York
Stock Exchange. The Company is an oil and gas exploration and production company
with ownership interests in oil and gas properties located in the United States,
Argentina, Canada, Gabon, South Africa and Tunisia.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of September 30, 2003 and for the three
and nine month periods ended September 30, 2003 and 2002 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 have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the United States 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, 2002.
Adoption of SFAS 143. On January 1, 2003, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amended Statement of
Financial Accounting Standards No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies" ("SFAS 19") to require that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Under
the provisions of SFAS 143, asset retirement obligations are capitalized as part
of the carrying value of the long-lived asset. Under the provisions of SFAS 19,
asset retirement obligations were recognized using a cost-accumulation approach.
Prior to the adoption of SFAS 143, the Company recorded significant asset
retirement obligations through the unit-of-production method, except for asset
retirement obligations that were assumed in business combinations, which were
recorded at their estimated fair values on their dates of acquisition.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $13.8 million increase in the carrying values of
proved properties, (ii) a $26.3 million decrease in accumulated depreciation,
depletion and amortization of property, plant and equipment, (iii) a $1.0
million increase in current abandonment liabilities, (iv) a $22.4 million
increase in noncurrent abandonment liabilities and (v) a $1.3 million increase
in Argentine deferred income tax liabilities. The net impact of items (i)
through (v) was to record a gain of $15.4 million, net of tax, as a cumulative
effect adjustment of a change in accounting principle in the Company's
Consolidated Statements of Operations upon adoption on January 1, 2003. See
Notes C and F for additional information regarding the Company's income taxes
and asset retirement obligations.
The following pro forma data summarizes the Company's net income (loss)
and net income (loss) per share for the three and nine month periods ended
September 30, 2003 and 2002 as if the Company had adopted the provisions of SFAS
143 on January 1, 2002, including aggregate pro forma asset retirement
obligations on that date of $60.2 million:
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income (loss), as reported................. $ 191,813 $ (890) $ 353,218 $ 8,293
Pro forma adjustments to reflect retroactive
adoption of SFAS 143........................ - 1,270 (15,413) 2,594
-------- -------- -------- --------
Pro forma net income........................... $ 191,813 $ 380 $ 337,805 $ 10,887
======== ======== ======== ========
Net income (loss) per share:
Basic - as reported......................... $ 1.64 $ (.01) $ 3.02 $ .07
======== ======== ======== ========
Basic - pro forma........................... $ 1.64 $ - $ 2.89 $ .10
======== ======== ======== ========
Diluted - as reported....................... $ 1.62 $ (.01) $ 2.99 $ .07
======== ======== ======== ========
Diluted - pro forma......................... $ 1.62 $ - $ 2.86 $ .10
======== ======== ======== ========
Adoption of SFAS 145. On January 1, 2003, the Company a dopted the
provisions of 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 SFAS 145, gains or losses on the
early extinguishment of debt were 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, that gains or losses
from the early extinguishment of debt be classified, on both a prospective and
retrospective basis, as components of a company's income or loss from continuing
operations. The adoption of SFAS 145 did not affect the Company's financial
position or liquidity. Under the provisions of SFAS 145, gains or losses from
the early extinguishment of debt are recognized in the Company's Consolidated
Statements of Operations, except in the case of events or transactions of a
highly unusual and infrequent nature, as components of other income or other
expense and are included in the determination of income (loss) from continuing
operations. Accordingly, extraordinary losses from the early extinguishment of
debt of $2.8 million and $19.5 million recorded during the three month periods
ended June 30 and September 30, 2002, respectively, have been reclassified to
other expense.
Stock-based compensation. The Company accounts for stock-based
compensation granted under its long-term incentive plan using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Stock-based compensation expenses associated with option grants were not
recognized in the Company's net income (loss) for the three and nine month
periods ended September 30, 2003 and 2002, as all options granted had exercise
prices equal to the market value of the underlying common stock on the dates of
grant. Stock-based compensation expense associated with restricted stock awards
is deferred and amortized to earnings ratably over the vesting periods of the
awards. The following table illustrates the pro forma effect on net income
(loss) and net income (loss) per share as if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" to stock-based compensation
during the three and nine month periods ended September 30, 2003 and 2002:
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net income (loss), as reported................... $ 191,813 $ (890) $ 353,218 $ 8,293
Plus: Total stock-based employee compensation
expense included in net income (loss)
for all awards, net of tax (1)................. 1,022 483 2,744 517
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (1).......... (3,027) (3,462) (8,700) (8,819)
-------- -------- -------- --------
Pro forma net income (loss)...................... $ 189,808 $ (3,869) $ 347,262 $ (9)
======== ======== ======== ========
Net income (loss) per share:
Basic - as reported............................ $ 1.64 $ (.01) $ 3.02 $ .07
======== ======== ======== ========
Basic - pro forma.............................. $ 1.62 $ (.03) $ 2.97 $ -
======== ======== ======== ========
Diluted - as reported.......................... $ 1.62 $ (.01) $ 2.99 $ .07
======== ======== ======== ========
Diluted - pro forma............................ $ 1.60 $ (.03) $ 2.94 $ -
======== ======== ======== ========
- -----------
(1) Total stock-based employee compensation expense included in net income
(loss) is net of tax benefits of $587 thousand and $1.6 million during the
three and nine month periods ended September 30, 2003, respectively. Total
stock-based employee compensation expense determined under the fair value
based method for the three and nine month periods ended September 30, 2003
are net of $1.7 million and $5.0 million of tax benefits, respectively. No
tax benefits were recognized for the 2002 compensation expense. See Note C
for additional information regarding the Company's income taxes in the
United States.
NOTE C. Income Tax Assets
Since 1998, the Company has maintained a valuation allowance against a
portion of its deferred tax asset position in the United States. As of December
31, 2002, the Company's deferred tax valuation allowances totaled $247.0
million, comprised of $204.3 million of United States deferred tax valuation
allowances and $42.7 million of international deferred tax valuation allowances.
Statement of Financial Accounting Standards No. 109 requires that the Company
continually assess both positive and negative evidence to determine whether it
is more likely than not that the deferred tax assets can be realized prior to
their expiration. In the third quarter of 2003, the Company concluded that it is
now more likely than not that it will realize its gross deferred tax asset
position in the United States after giving consideration to the following
specific facts:
o Over the past several years, the Company has been steadily improving its
portfolio of assets, including significant proved reserve discoveries and
follow-up development projects that have recently started to produce.
Specifically, Pioneer completed development activities and began production
operations on its Canyon Express gas project in September 2002 and on its
Company-operated Falcon field gas project in March 2003. The production
performance to-date and the reservoir data that has been accumulated
through September 30, 2003 on these projects provide assurance that these
projects will recover the reserves as predicted.
o During the three months ended September 30, 2003, the Company announced
additional Falcon area discoveries in the Tomahawk and Raptor fields and
expects first production from these fields in the second half of 2004. The
Company also expects to complete its other significant United States Gulf
of Mexico development projects, Harrier and Devils Tower, in early and
mid-2004, respectively.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
o Commodity market supply and demand fundamentals have continued to stabilize
during the quarter as evidenced by quoted futures prices that suggest that
North American gas prices will remain relatively flat over the next five
years and that worldwide oil prices may decline modestly over that time
span compared to relatively high current levels for each commodity.
o The Company's future revenues are further protected against price declines
through its significant hedging program. The Company has hedged portions of
its oil price risk through 2005 and portions of its gas price risk through
2007. See Note E for information regarding the Company's hedge positions.
o The Company has generated record pretax income for the third quarter of
2003, significant net income for the nine months ended September 30, 2003
and net income in each of the years ended December 31, 2002, 2001 and 2000.
The Company has also generated significant taxable income for the third
consecutive quarter, including the deduction of 100 percent of its
intangible drilling costs for those periods. The Company believes that
these trends will continue for the foreseeable future.
o The Company performed various economic evaluations in the third quarter to
determine if the Company would be able to realize all of its deferred tax
assets, including its net operating loss carryforwards, prior to any
expiration. These evaluations were based on the Company's reserve
projections of existing producing properties and recent discoveries being
developed. These evaluations employed varying price assumptions, some of
which included a significant reduction in commodity prices, and factored in
limitations on the use of the Company's net operating loss carryforwards.
The evaluations did not include assumptions of increases in proved reserves
through future exploration or acquisitions. The evaluations indicated that
the deferred tax assets are realizable in the future.
Accordingly, during the third quarter of 2003, the Company reversed its
valuation allowance in the United States, resulting in the recognition of a
deferred tax benefit of $104.7 million ($.88 per diluted share). Further, the
reversal of the allowance increased stockholders' equity by $32.6 million as the
Company recognized the tax effects of previous stock option exercises and
deferred hedging gains and losses in other comprehensive income.
Pioneer will continue to monitor Company-specific, oil and gas industry
and worldwide economic factors and will reassess the likelihood that the
Company's net operating loss carryforwards and other deferred tax attributes
will be utilized prior to their expiration. There can be no assurances that
facts and circumstances will not materially change and require the Company to
reestablish a United States deferred tax asset valuation allowance in a future
period. As of September 30, 2003, the Company does not believe there is
sufficient positive evidence to reverse its valuation allowances related to
certain foreign tax jurisdictions. The Company's valuation allowances related to
foreign tax jurisdictions are $53.4 million as of September 30, 2003.
Income tax (provision) benefit attributable to income (loss) before
cumulative effect of change in accounting principle consists of the following
for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands)
Current:
U.S. state and local........... $ (201) $ (52) $ (839) $ (321)
Foreign........................ (3,595) (626) (8,138) (1,278)
-------- -------- -------- --------
(3,796) (678) (8,977) (1,599)
-------- -------- -------- --------
Deferred:
U.S. state and local........... 104,670 - 104,670 -
Foreign........................ (979) (1,511) (732) (1,617)
-------- -------- -------- --------
103,691 (1,511) 103,938 (1,617)
-------- -------- -------- --------
Total $ 99,895 $ (2,189) $ 94,961 $ (3,216)
======== ======== ======== ========
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE D. Asset Acquisition
On March 28, 2003, the Company purchased the remaining 25 percent working
interest that it did not already own in the Falcon field, the Harrier field and
surrounding satellite prospects in the deepwater Gulf of Mexico for $119.4
million, including $113.1 million of cash paid upon closing, $1.7 million of
asset retirement obligations assumed and $4.6 million of closing adjustments.
NOTE E. Derivative Financial Instruments
Fair value hedges. The Company monitors the debt capital markets and
interest rate trends to identify opportunities to enter into and terminate
interest rate swap contracts with the objective of minimizing costs of capital.
During August and February 2003, the Company entered into interest rate swap
contracts to hedge a portion of the fair value of its 9-5/8 percent senior
notes. Under the terms of the interest rate swap contracts entered into during
August 2003 (the "August Contracts"), the Company contracted to receive a fixed
annual rate of 9-5/8 percent on $300.0 million notional amount and agreed to pay
the counterparties a variable rate on the notional amount equal to the six-month
LIBOR, reset semi-annually, plus a weighted average margin ("LIBOR Margin") of
521.0 basis points. The terms of the interest rate swap contracts entered into
during February 2003 (the "February Contracts") differed from those of the
August Contracts only in notional amount and LIBOR Margin, which terms were
$250.0 million and 566.4 basis points, respectively. During September 2003, the
Company terminated the August Contracts for $10.1 million of cash proceeds. The
cash proceeds were comprised of $1.2 million of settlement gains attributable to
the period from August 2003 through the date of termination and $8.9 million
attributable to the fair value, on the date of termination, of the remaining
term of the August Contracts. During May 2003, the Company terminated the
February Contracts for $11.4 million of cash proceeds. The cash proceeds were
comprised of $2.0 million of settlement gains attributable to the period from
February 2003 through the date of termination and $9.4 million attributable to
the fair value, on the date of termination, of the remaining term of the
February Contracts. The $8.9 million and $9.4 million of proceeds attributable
to the fair value of the remaining term of the August Contracts and February
Contracts are included in "Proceeds from disposition of assets" in the
accompanying Consolidated Statements of Cash Flows during the periods that the
hedges were terminated.
As of September 30, 2003, the carrying value of the Company's long-term
debt in the accompanying Consolidated Balance Sheets included $34.7 million of
incremental carrying value attributable to unamortized net deferred hedge gains
realized from terminated fair value hedge interest rate swap contracts. The
amortization of net deferred hedge gains reduced the Company's reported interest
expense by $6.3 million and $2.3 million during the three month periods ended
September 30, 2003 and 2002, respectively, and by $18.1 million and $7.9 million
during the nine month periods ended September 30, 2003 and 2002, respectively.
The following table sets forth the scheduled amortization of net deferred
hedge gains and losses on terminated fair value hedges as of September 30, 2003
that will be recognized as increases, in the case of losses, or decreases, in
the case of gains, to the Company's future interest expense:
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----------
(in thousands)
2003 net hedge gain amortization....... $ 7,948 $ 7,948
2004 net hedge gain amortization....... $ 7,266 $ 6,074 $ 5,447 $ 4,512 23,299
2005 net hedge gain amortization....... $ 4,222 $ 2,773 $ 2,271 $ 1,533 10,799
Remaining net losses to be amortized
through 2010......................... (7,329)
------
$34,717
======
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The terms of the fair value hedges described above perfectly matched the
terms of the underlying senior notes. The Company did not exclude any component
of the derivatives' gains or losses from the measurement of hedge effectiveness.
Cash flow hedges. The Company utilizes commodity swap and collar
contracts to (i) reduce the effect of price volatility on the commodities the
Company produces and sells, (ii) support the Company's annual capital budgeting
and expenditure plans and (iii) reduce commodity price risk associated with
certain capital projects. The Company has also utilized interest rate swap
agreements to reduce the effect of interest rate volatility on the Company's
variable rate line of credit indebtedness and forward currency exchange
agreements to reduce the effect of U.S. dollar to Canadian dollar exchange rate
volatility.
Oil. 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 weighted average
NYMEX prices for those contracts as of September 30, 2003:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------- ------- ------- ------- -----------
Daily oil production:
2003 - Swap Contracts
Volume (Bbl)................ 14,000 14,000
Price per Bbl............... $ 24.35 $ 24.35
2004 - Swap Contracts
Volume (Bbl)................ 14,000 14,000 14,000 14,000 14,000
Price per Bbl............... $ 24.65 $ 24.65 $ 24.65 $ 24.65 $ 24.65
2005 - Swap Contracts
Volume (Bbl)................ 12,000 12,000 12,000 12,000 12,000
Price per Bbl............... $ 24.44 $ 24.44 $ 24.44 $ 24.44 $ 24.44
The Company reports average oil prices per Bbl including the effects of
oil quality adjustments and the net effect of 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 effect of settlements of oil
price hedges on oil revenue for the three and nine month periods ended September
30, 2003 and 2002:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
Average price reported per Bbl..................... $ 25.35 $ 21.77 $ 25.14 $ 22.86
Average price realized per Bbl..................... $ 28.27 $ 24.43 $ 28.84 $ 21.91
Addition (reduction) to oil revenue (in millions).. $ (9.1) $ (7.2) $ (32.9) $ 8.2
Natural gas liquids prices. During the three and nine month periods
ended September 30, 2003 and 2002, the Company did not enter into 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, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
prices, 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 prices for those contracts as of
September 30, 2003:
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- -----------
Daily gas production:
2003 - Swap Contracts
Volume (Mcf)................... 310,000 310,000
Index price per MMBtu.......... $ 4.39 $ 4.39
2004 - Swap Contracts
Volume (Mcf)................... 260,000 260,000 260,000 260,000 260,000
Index price per MMBtu.......... $ 4.05 $ 4.05 $ 4.05 $ 4.05 $ 4.05
2004 - Collar Contracts
Volume (Mcf)................... 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu.......... $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 $4.00-$6.60 $4.00-$6.60
2005 - Swap Contracts
Volume (Mcf)................... 60,000 60,000 60,000 60,000 60,000
Index price per MMBtu.......... $ 4.28 $ 4.28 $ 4.28 $ 4.28 $ 4.28
2006 - Swap Contracts
Volume (Mcf)................... 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu.......... $ 4.23 $ 4.23 $ 4.23 $ 4.23 $ 4.23
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
The Company reports average gas prices per Mcf including the effects of
Btu content, gas processing and shrinkage adjustments and the net effect of gas
hedges. The following table sets forth the Company's gas prices, both reported
and realized, and the net effect of settlements of gas price hedges on gas
revenue for the three and nine month periods ended September 30, 2003 and 2002:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
Average price reported per Mcf........... $ 3.64 $ 2.25 $ 3.91 $ 2.39
Average price realized per Mcf........... $ 3.96 $ 2.09 $ 4.35 $ 2.12
Addition (reduction) to gas revenue
(in millions)........................... $ (18.9) $ 5.8 $ (68.0) $ 26.3
Hedge ineffectiveness and excluded items. During the three month periods
ended September 30, 2003 and 2002, the Company recognized other expense of $.3
million and $1.4 million, respectively, related to the ineffective portions of
its cash flow hedging instruments. During the nine month periods ended September
30, 2003 and 2002, the Company recognized other expense of $2.6 million and $1.7
million, respectively, related to the ineffective portion of its cash flow
hedging instruments.
Accumulated other comprehensive income (loss) ("AOCI") - net deferred
hedge gains (losses), net of tax. As of September 30, 2003 and December 31,
2002, "AOCI - net deferred hedge gains (losses), net of tax" represented net
deferred losses of $55.0 million and net deferred gains of $9.6 million,
respectively. The "AOCI - net deferred hedge gains (losses), net of tax" balance
as of September 30, 2003 was comprised of $118.3 million of unrealized deferred
hedge losses on the effective portions of open commodity cash flow hedges, $40.0
million of net deferred gains on terminated cash flow hedges and $23.3 million
of associated net deferred tax benefits. The decrease in "AOCI - net deferred
hedge gains (losses), net of tax" during the nine months ended September 30,
2003 was primarily attributable to increases in future commodity prices relative
to the commodity prices stipulated in the hedge agreements, offset by the
reclassification of net deferred hedge losses to net income as derivatives
matured by their terms and the reversal of associated United States deferred tax
valuation allowances. The unrealized net deferred hedge losses associated with
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
open cash flow hedges remain subject to market price fluctuations until the
positions are either settled under the terms of the hedge agreements or
terminated prior to settlement. The net deferred gains on terminated cash flow
hedges are fixed.
During the twelve months ending September 30, 2004, the Company expects
to reclassify $75.1 million of net deferred losses associated with open cash
flow hedges, $27.8 million of net deferred gains on terminated cash flow hedges
and approximately $16.6 million of net deferred tax benefits from "AOCI - net
deferred hedge gains (losses), net of tax" to oil and gas revenue and income tax
(provision) benefit.
The following table sets forth the scheduled reclassifications of pretax
net deferred hedge gains and losses on terminated cash flow hedges as of
September 30, 2003 that will be recognized in the Company's future oil and gas
revenue:
First Second Third Fourth Yearly
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- ---------
(in thousands)
2003 net deferred hedge losses.... $(5,141) $(5,141)
2004 net deferred hedge gains..... $10,978 $10,932 $11,001 $10,954 43,865
2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249
------
$39,973
======
The net deferred commodity hedge gains and losses shown in the table above
include the following gains and losses for which cash settlements have been
deferred until the indicated future periods: (i) $22.8 million of net deferred
losses due during the fourth quarter of 2003, (ii) $1.2 million of net deferred
losses due during 2004 and (iii) $209 thousand of net deferred gains to be
received during 2005.
NOTE F. Asset Retirement Obligations
As referred to in Note B, the Company adopted the provisions of SFAS 143
on January 1, 2003. The Company's asset retirement obligations primarily relate
to the future plugging and abandonment of proved properties and related
facilities. The Company has no assets that are legally restricted for purposes
of settling asset retirement obligations. The following table summarizes the
Company's asset retirement obligation transactions recorded in accordance with
the provisions of SFAS 143 during the three and nine month periods ended
September 30, 2003 and in accordance with the provisions of SFAS 19 during the
three and nine month periods ended September 30, 2002:
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Beginning asset retirement obligations..... $ 65,223 $ 37,294 $ 34,692 $ 39,461
Cumulative effect adjustment............... - - 23,393 -
Liabilities incurred during period......... 7,740 - 14,755 -
Liabilities settled during period.......... (907) (3,028) (4,283) (5,836)
Accretion expense.......................... 1,327 622 3,656 1,905
Currency translation....................... (36) 104 1,134 (538)
------- ------- ------- -------
Ending asset retirement obligations ....... $ 73,347 $ 34,992 $ 73,347 $ 34,992
======= ======= ======= =======
NOTE G. 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
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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 $33.8 million, plus prejudgment interest.
However, the Company believes it has valid defenses to the 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 the 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 Court were to render
an adverse judgement against the Company. Although the amount of any resulting
liability could have a material adverse effect on the Company's results of
operations for the quarterly reporting period in which such liability is
recorded, 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 annual 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, one of the
Company's predecessor entities 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 reasonable 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 limited 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.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
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 a 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,
2003, the Company has settled $21.7 million of the original claim amounts. As of
September 30, 2003 and December 31, 2002, the Company had on deposit $10.5
million and $10.6 million, respectively, including accrued interest, in an
escrow account and had corresponding obligations for the remaining claim
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 H. Income (Loss) Per Share Before Cumulative Effect of Change in
Accounting Principle
Basic income (loss) per share before cumulative effect of change in
accounting principle is computed by dividing income (loss) before cumulative
effect of change in accounting principle by the weighted average number of
common shares outstanding for the period. The computation of diluted income per
share before cumulative effect of change in accounting principle reflects the
potential dilution that could occur if securities or other contracts to issue
common stock that are dilutive to income before cumulative effect of change in
accounting principle were exercised or converted into common stock or resulted
in the issuance of common stock that would then share in the earnings of the
Company.
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, 2003 and 2002:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
(in thousands)
Weighted average common shares outstanding:
Basic ..................................... 117,216 116,193 116,990 111,227
Dilutive common stock options (a)........... 1,006 - 1,106 1,662
Restricted stock awards..................... 235 - 187 -
------- ------- ------- -------
Diluted..................................... 118,457 116,193 118,283 112,889
======= ======= ======= =======
- ---------
(a) Common stock options to purchase 1,179,766 shares and 1,868,588 shares of
common stock were outstanding but not included in the computations of
diluted income (loss) before cumulative effect of change in accounting
principle per share for the three month periods ended September 30, 2003
and 2002, respectively, and common stock options to purchase 1,308,582
shares and 2,024,455 shares of common stock were outstanding but not
included in the computations of diluted income before cumulative effect of
change in accounting principle per share for the nine month periods ended
September 30, 2003 and 2002, respectively, because the exercise prices of
the options were greater than the average market price of the common shares
and would have been anti-dilutive to the computations. In-the-money options
representing 1,932,385 weighted average equivalent shares of common stock
and 395 weighted average equivalent shares of unvested restricted stock
were not included in the computation of diluted net loss before cumulative
effect of change in accounting principle for the three month period ended
September 30, 2002, since they have a dilutive effect to that period's
loss.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE I. Geographic Operating Segment Information
The Company has operations in only one industry segment, that being the
oil and gas exploration and production industry; however, the Company is
organizationally structured along geographic operating segments, or regions. The
Company has reportable operations in the United States, Argentina and Canada.
The following tables provide the Company's interim geographic operating
segment data for the three and nine month periods ended September 30, 2003 and
2002. 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 month period ended September 30, 2003:
Revenues and other income:
Oil and gas............................ $285,623 $ 30,777 $ 15,592 $ 523 $ - $ 332,515
Interest and other..................... - - - - 348 348
Gain on disposition of assets, net..... (2) - - - 48 46
------- ------- ------- ------ ------- --------
285,621 30,777 15,592 523 396 332,909
------- ------- ------- ------ ------- --------
Costs and expenses:
Oil and gas production................. 61,456 6,616 3,689 45 - 71,806
Depletion, depreciation and
amortization......................... 80,160 13,651 7,156 161 2,406 103,534
Exploration and abandonments........... 17,275 1,275 1,789 4,177 - 24,516
General and administrative............. - - - - 15,207 15,207
Accretion of discount on asset
retirement obligations............... - - - - 1,327 1,327
Interest............................... - - - - 23,212 23,212
Other.................................. - - - - 1,389 1,389
------- ------- ------- ------ ------- --------
158,891 21,542 12,634 4,383 43,541 240,991
------- ------- ------- ------ ------- --------
Income (loss) before income taxes........ 126,730 9,235 2,958 (3,860) (43,145) 91,918
Income tax benefit (provision)........... (46,256) (3,232) (1,168) 1,351 149,200 99,895
------- ------- ------- ------ ------- --------
Net income (loss) ....................... $ 80,474 $ 6,003 $ 1,790 $(2,509) $106,055 $ 191,813
======= ======= ======= ====== ======= ========
Three month period ended September 30, 2002:
Revenues and other income:
Oil and gas............................ $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
------- ------- ------- ------ ------- --------
Costs and expenses:
Oil and gas production................. 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.................................. - - - - 21,599 21,599
------- ------- ------- ------ ------- --------
89,877 18,692 10,777 1,495 56,613 177,454
------- ------- ------- ------ ------- --------
Income (loss) before income taxes........ 50,365 457 1,236 (1,495) (49,264) 1,299
Income tax benefit (provision)........... (17,628) (160) (521) 523 15,597 (2,189)
------- ------- ------- ------ ------- --------
Net income (loss) ....................... $ 32,737 $ 297 $ 715 $ (972) $(33,667) $ (890)
======= ======= ======= ====== ======= =========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
United Other Headquarters Consolidated
States Argentina Canada Foreign and Other Total
--------- --------- -------- -------- ------------ ------------
(in thousands)
Nine month period ended September 30, 2003:
Revenues and other income:
Oil and gas............................ $ 819,758 $ 79,632 $ 53,712 $ 523 $ - $ 953,625
Interest and other..................... - - - - 4,321 4,321
Gain on disposition of assets, net..... 1,319 - 1 - 256 1,576
-------- ------- ------- ------- --------- --------
821,077 79,632 53,713 523 4,577 959,522
-------- ------- ------- ------- --------- --------
Costs and expenses:
Oil and gas production................. 177,377 18,204 9,761 45 - 205,387
Depletion, depreciation and
amortization......................... 211,457 33,970 21,458 161 7,096 274,142
Exploration and abandonments........... 57,665 10,847 14,949 23,969 - 107,430
General and administrative............. - - - - 44,332 44,332
Accretion of discount on asset
retirement obligations............... - - - - 3,656 3,656
Interest............................... - - - - 69,526 69,526
Other.................................. - - - - 12,205 12,205
-------- ------- ------- ------- --------- --------
446,499 63,021 46,168 24,175 136,815 716,678
-------- ------- ------- ------- --------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle ................. 374,578 16,611 7,545 (23,652) (132,238) 242,844
Income tax benefit (provision).......... (136,721) (5,814) (2,979) 8,278 232,197 94,961
-------- ------- ------- ------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle..... $ 237,857 $ 10,797 $ 4,566 $(15,374) $ 99,959 $ 337,805
======== ======= ======= ======= ======== ========
Nine month period ended September 30, 2002:
Revenues and other income:
Oil and gas........................... $ 411,139 $ 57,459 $ 37,688 $ - $ - $ 506,286
Interest and other.................... - - - - 9,089 9,089
Gain (loss) on disposition of
assets, net......................... 3,249 (3) 1,010 - 118 4,374
-------- ------- ------- ------- -------- --------
414,388 57,456 38,698 - 9,207 519,749
-------- ------- ------- ------- -------- --------
Costs and expenses:
Oil and gas production................ 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................................. - - - - 37,603 37,603
-------- ------- ------- ------- -------- --------
270,160 47,917 33,987 5,560 150,616 508,240
-------- ------- ------- ------- -------- --------
Income (loss) before income taxes...... 144,228 9,539 4,711 (5,560) (141,409) 11,509
Income tax benefit (provision)......... (50,480) (3,339) (1,986) 1,946 50,643 (3,216)
-------- ------- ------- ------- -------- --------
Net income (loss)...................... $ 93,748 $ 6,200 $ 2,725 $ (3,614) $ (90,766) $ 8,293
======== ======= ======= ======= ======== ========
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 the
long-term debt of the Company. In accordance with practices accepted by the SEC,
the Company has prepared Consolidating Condensed Financial Statements in order
to quantify the assets and results of operations 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.
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of September 30, 2003
(in thousands)
(Unaudited)
ASSETS
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents............. $ 2,182 $ 1,762 $ 8,707 $ - $ 12,651
Other current assets, net............. 1,706,269 (1,389,079) (134,103) - 183,087
--------- ---------- --------- ---------- ----------
Total current assets............. 1,708,451 (1,387,317) (125,396) - 195,738
--------- ---------- --------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties.................. - 3,340,061 1,427,220 - 4,767,281
Unproved properties................ - 25,844 156,585 - 182,429
Accumulated depletion, depreciation and
amortization........................ - (1,124,926) (430,783) - (1,555,709)
--------- ---------- --------- ---------- ----------
- 2,240,979 1,153,022 - 3,394,001
--------- ---------- --------- ---------- ----------
Noncurrent deferred income taxes........ 186,935 - 1,777 - 188,712
Other property and equipment, net....... - 21,607 4,126 - 25,733
Other assets, net....................... 14,094 16,863 6,469 - 37,426
Investment in subsidiaries.............. 1,511,495 158,123 - (1,669,618) -
--------- ---------- --------- ---------- ----------
$3,420,975 $ 1,050,255 $1,039,998 $(1,669,618) $ 3,841,610
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 32,593 $ 257,300 $ 32,938 $ - $ 322,831
Long-term debt.......................... 1,621,364 - - - 1,621,364
Noncurrent deferred income taxes........ - - 12,713 - 12,713
Other noncurrent liabilities............ - 194,712 (25,915) - 168,797
Stockholders' equity.................... 1,767,018 598,243 1,020,262 (1,669,618) 1,715,905
Commitments and contingencies...........
--------- ---------- --------- ---------- ----------
$3,420,975 $ 1,050,255 $1,039,998 $(1,669,618) $ 3,841,610
========= ========== ========= ========== ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2002
(in thousands)
ASSETS
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents............. $ 6 $ 1,783 $ 6,701 $ - $ 8,490
Other current assets, net............. 1,727,828 (1,480,657) (108,568) - 138,603
--------- ---------- --------- ---------- ----------
Total current assets............. 1,727,834 (1,478,874) (101,867) - 147,093
--------- ---------- --------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties.................. - 3,024,845 1,228,052 - 4,252,897
Unproved properties................ - 43,969 175,104 - 219,073
Accumulated depletion, depreciation and
amortization........................ - (947,091) (356,450) - (1,303,541)
--------- ---------- --------- ----------- ----------
- 2,121,723 1,046,706 - 3,168,429
--------- ---------- --------- ----------- ----------
Noncurrent deferred income taxes........ 75,311 - 1,529 - 76,840
Other property and equipment, net....... - 19,000 3,784 - 22,784
Other assets, net....................... 16,067 14,231 9,672 - 39,970
Investment in subsidiaries.............. 1,247,042 136,159 - (1,383,201) -
--------- ---------- --------- ---------- ----------
$3,066,254 $ 812,239 $ 959,824 $(1,383,201) $ 3,455,116
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities..................... $ 30,785 $ 216,065 $ 27,742 $ - $ 274,592
Long-term debt, net of current maturities 1,668,536 - - - 1,668,536
Noncurrent deferred income taxes........ - - 8,760 - 8,760
Other noncurrent liabilities............ - 147,970 (19,639) - 128,331
Stockholders' equity.................... 1,366,933 448,204 942,961 (1,383,201) 1,374,897
Commitments and contingencies...........
--------- ---------- --------- ---------- ----------
$3,066,254 $ 812,239 $ 959,824 $(1,383,201) $ 3,455,116
========= ========== ========= ========== ==========
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2003
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax Consolidated
Parent USA Subsidiaries Provision Eliminations Total
--------- ---------- ------------ ------------ ------------ ------------
Revenues and other income:
Oil and gas......................... $ - $ 753,928 $ 199,697 $ - $ - $ 953,625
Interest and other.................. - 1,796 2,525 - - 4,321
Gain on disposition of assets, net.. - 1,469 107 - - 1,576
-------- --------- -------- --------- -------- --------
- 757,193 202,329 - - 959,522
-------- --------- -------- --------- -------- --------
Costs and expenses:
Oil and gas production.............. - 162,911 42,476 - - 205,387
Depletion, depreciation and
amortization...................... - 208,144 65,998 - - 274,142
Exploration and abandonments........ - 59,123 48,307 - - 107,430
General and administrative.......... 998 34,828 8,506 - - 44,332
Accretion of discount on asset
retirement obligations............ - 2,824 832 - - 3,656
Interest............................ 17,690 50,803 1,033 - - 69,526
Equity (income) loss from
subsidiaries...................... (268,108) 26,166 - - 241,942 -
Other............................... 72 2,191 9,942 - - 12,205
-------- --------- -------- --------- -------- --------
(249,348) 546,990 177,094 - 241,942 716,678
-------- --------- -------- --------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting principle............... 249,348 210,203 25,235 - (241,942) 242,844
Income tax benefit (provision)....... - - (8,909) 103,870 - 94,961
-------- --------- -------- --------- -------- --------
Income before cumulative effect of
change in accounting principle..... 249,348 210,203 16,326 103,870 (241,942) 337,805
Cumulative effect of change in
accounting principle, net of tax... - 11,859 3,554 - - 15,413
-------- --------- -------- --------- -------- --------
Net income........................... 249,348 222,062 19,880 103,870 (241,942) 353,218
Other comprehensive income (loss):
Net deferred hedge gains (losses),
net of tax:
Net deferred hedge losses........ - (176,351) (12,407) - - (188,758)
Deferred income tax valuation
reserve adjustment related
to hedging.................... - - - 23,288 - 23,288
Net hedge losses included in net
income........................ - 93,114 7,758 - - 100,872
Translation adjustment............. - - 28,808 - - 28,808
-------- --------- -------- --------- -------- --------
Comprehensive income................. $ 249,348 $ 138,825 $ 44,039 $ 127,158 $(241,942) $ 317,428
======== ========= ======== ========= ======== ========
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
For the Nine Months Ended September 30, 2002
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax Consolidated
Parent USA Subsidiaries Provision Eliminations Total
--------- ---------- ------------ ------------ ------------ ------------
Revenues and other income:
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............................. (47,031) 56,430 28,204 - - 37,603
-------- --------- -------- --------- -------- --------
(8,293) 365,771 132,375 - 18,387 508,240
-------- --------- -------- --------- -------- --------
Income (loss) before income taxes 8,293 30,617 (9,014) - (18,387) 11,509
Income tax provision ............... - - (3,216) - - (3,216)
-------- --------- -------- --------- -------- --------
Net income (loss)................... 8,293 30,617 (12,230) - (18,387) 8,293
Other comprehensive income (loss):
Net deferred hedge gains (losses),
net of tax:
Net deferred hedge losses....... (4) (94,816) (18,540) - - (113,360)
Net hedge (gains) losses
included in net income
(loss)........................ 447 (29,023) (5,571) - - (34,147)
Translation adjustment............ - - 1,827 - - 1,827
-------- --------- -------- --------- -------- --------
Comprehensive income (loss)......... $ 8,736 $ (93,222) $ (34,514) $ - $ (18,387) $(137,387)
======== ========= ======== ========= ======== ========
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Total
--------- --------- ------------ ------------
Cash flows from operating activities:
Net cash provided by operating activities........ $ 21,453 $ 355,799 $ 169,424 $ 546,676
-------- -------- --------- ----------
Cash flows from investing activities:
Proceeds from disposition of assets.............. 18,267 16,124 615 35,006
Additions to oil and gas properties.............. - (351,174) (170,811) (521,985)
Other property (additions) dispositions, net..... - (10,948) 2,778 (8,170)
-------- -------- --------- ----------
Net cash provided by (used in) investing
activities.................................. 18,267 (345,998) (167,418) (495,149)
-------- -------- --------- ----------
Cash flows from financing activities:
Borrowings under long-term debt.................. 222,725 - - 222,725
Principal payments on long-term debt............. (270,262) - - (270,262)
Payment of other noncurrent liabilities.......... - (9,822) (1,275) (11,097)
Exercise of stock options and employee stock
purchases..................................... 12,342 - - 12,342
Purchase of treasury stock....................... (2,349) - - (2,349)
-------- -------- --------- ----------
Net cash used in financing activities......... (37,544) (9,822) (1,275) (48,641)
-------- -------- --------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... 2,176 (21) 731 2,886
Effect of exchange rate changes on cash and
cash equivalents............................... - - 1,275 1,275
Cash and cash equivalents, beginning of period.... 6 1,783 6,701 8,490
-------- -------- --------- ----------
Cash and cash equivalents, end of period.......... $ 2,182 $ 1,762 $ 8,707 $ 12,651
======== ======== ========= ==========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2002
(in thousands)
Non-
Pioneer Guarantor Consolidated