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 March 31, 2004
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 Number: 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 No.)
5205 N. O'Connor Blvd., Suite 900, Irving, Texas 75039
- ------------------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
(972) 444-9001
----------------------------------------------------
(Registrant's telephone number, including area code)
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 check mark 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 May 6, 2004... 120,104,666
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Definitions of Oil and Gas Terms and Conversions Used Herein........ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 and
December 31, 2003 ..................................... 4
Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003................... 5
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 2004...................... 6
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003................... 7
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2004 and 2003............. 8
Notes to Consolidated Financial Statements................ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 36
Item 4. Controls and Procedures................................... 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 39
Item 6. Exhibits and Reports on Form 8-K.......................... 39
Signatures ......................................................... 41
Exhibit Index....................................................... 42
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;"MBbl" means one thousand Bbls; "MBOE" means one thousand BOEs; "Mcf"
means one thousand cubic feet and is a measure of natural gas volume; "MMBtu"
means one million Btus; "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 ("Pioneer" or the "Company") 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)
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 9,022 $ 19,299
Accounts receivable:
Trade, net of allowance for doubtful accounts of $2,466
and $4,727 as of March 31, 2004 and December 31, 2003,
respectively.................................................... 145,733 111,033
Due from affiliates............................................... 406 447
Inventories.......................................................... 17,210 17,509
Prepaid expenses..................................................... 10,166 11,083
Deferred income taxes................................................ 35,780 40,514
Other current assets:
Derivatives....................................................... 179 423
Other, net of allowance for doubtful accounts of $4,486 as of
March 31, 2004 and December 31, 2003............................ 4,217 4,807
---------- ----------
Total current assets............................................ 222,713 205,115
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method
of accounting:
Proved properties................................................. 5,069,733 4,983,558
Unproved properties............................................... 176,580 179,825
Accumulated depletion, depreciation and amortization................. (1,808,468) (1,676,136)
---------- ----------
Total property, plant and equipment............................. 3,437,845 3,487,247
---------- ----------
Deferred income taxes.................................................. 198,587 192,344
Other property and equipment, net...................................... 28,470 28,080
Other assets:
Derivatives.......................................................... 157 209
Other, net of allowance for doubtful accounts of $92 as of
March 31, 2004 and December 31, 2003.............................. 40,512 38,577
---------- ----------
$ 3,928,284 $ 3,951,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade............................................................. $ 173,378 $ 177,614
Due to affiliates................................................. 2,523 8,804
Interest payable..................................................... 37,728 37,034
Income taxes payable................................................. 8,986 5,928
Other current liabilities:
Derivatives....................................................... 195,295 161,574
Other............................................................. 45,668 38,798
---------- ----------
Total current liabilities....................................... 463,578 429,752
---------- ----------
Long-term debt......................................................... 1,456,695 1,555,461
Derivatives............................................................ 89,524 48,825
Deferred income taxes.................................................. 12,832 12,121
Other liabilities...................................................... 147,828 145,641
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
120,118,811 and 119,665,784 shares issued as of
March 31, 2004 and December 31, 2003, respectively................ 1,202 1,197
Additional paid-in capital........................................... 2,751,454 2,734,403
Treasury stock, at cost; 67,408 and 378,012 shares as of
March 31, 2004 and December 31, 2003, respectively................ (1,367) (5,385)
Deferred compensation................................................ (24,164) (9,933)
Accumulated deficit.................................................. (839,646) (887,848)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax............................. (158,879) (104,130)
Cumulative translation adjustment................................. 29,227 31,468
---------- ----------
Total stockholders' equity...................................... 1,757,827 1,759,772
Commitments and contingencies
---------- ----------
$ 3,928,284 $ 3,951,572
========== ==========
The financial information included as of March 31, 2004 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
March 31,
------------------------
2004 2003
---------- ----------
Revenues and other income:
Oil and gas............................................................ $ 446,526 $ 284,999
Interest and other..................................................... 1,735 2,713
Gain (loss) on disposition of assets, net.............................. (13) 1,426
--------- ---------
448,248 289,138
--------- ---------
Costs and expenses:
Oil and gas production................................................. 89,211 67,867
Depletion, depreciation and amortization............................... 136,499 70,049
Exploration and abandonments........................................... 80,506 35,867
General and administrative............................................. 18,329 15,481
Accretion of discount on asset retirement obligations.................. 1,966 1,094
Interest............................................................... 21,576 22,491
Other.................................................................. 196 5,178
--------- ---------
348,283 218,027
--------- ---------
Income before income taxes and cumulative effect of change in
accounting principle.................................................... 99,965 71,111
Income tax provision....................................................... (39,777) (2,304)
--------- ---------
Income before cumulative effect of change in accounting principle.......... 60,188 68,807
Cumulative effect of change in accounting principle, net of tax............ - 15,413
--------- ---------
Net income................................................................. $ 60,188 $ 84,220
========= =========
Net income per share:
Basic:
Income before cumulative effect of change in accounting principle.... $ .51 $ .59
Cumulative effect of change in accounting principle, net of tax...... - .13
--------- ---------
Net income........................................................ $ .51 $ .72
========= =========
Diluted:
Income before cumulative effect of change in accounting principle.... $ .50 $ .58
Cumulative effect of change in accounting principle, net of tax...... - .13
--------- ---------
Net income........................................................ $ .50 $ .71
========= =========
Weighted average shares outstanding:
Basic.................................................................. 118,719 116,743
========= =========
Diluted................................................................ 120,264 118,675
========= =========
Dividends declared per share............................................... $ .10 $ -
========= =========
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
Additional Hedge Cumulative Total
Common Paid-in Treasury Deferred Accumulated Losses, Translation Stockholders'
Stock Capital Stock Compensation Deficit Net of Tax Adjustment Equity
------ ---------- -------- ------------ ----------- ----------- ----------- ------------
Balance as of January 1, 2004...... $1,197 $2,734,403 $(5,385) $ (9,933) $(887,848) $(104,130) $ 31,468 $1,759,772
Dividends declared............... - - - - (11,986) - - (11,986)
Exercise of long-term
incentive plan stock options.... - (1,089) 9,584 - - - - 8,495
Purchase of treasury stock....... - - (5,566) - - - - (5,566)
Tax benefits related to
stock-based compensation........ - 1,935 - - - - - 1,935
Deferred compensation:
Compensation deferred.......... 5 16,205 - (16,210) - - - -
Deferred compensation
included in net income........ - - - 1,979 - - - 1,979
Net income....................... - - - - 60,188 - - 60,188
Other comprehensive income
(loss):
Net deferred hedge losses,
net of tax:
Net deferred hedge losses.... - - - - - (117,392) - (117,392)
Tax benefits related to net
deferred hedge losses..... - - - - - 31,871 - 31,871
Net hedge losses included
in net income............. - - - - - 30,772 - 30,772
Translation adjustment......... - - - - - - (2,241) (2,241)
----- --------- ------ ------- -------- -------- ------- ---------
Balance as of March 31, 2004....... $1,202 $2,751,454 $(1,367) $(24,164) $(839,646) $(158,879) $ 29,227 $1,757,827
===== ========= ====== ======= ======== ======== ======= =========
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
March 31,
---------------------
2004 2003
--------- ---------
Cash flows from operating activities:
Net income.......................................................... $ 60,188 $ 84,220
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization......................... 136,499 70,049
Exploration expenses, including dry holes........................ 78,820 30,263
Deferred income taxes............................................ 32,720 254
(Gain) loss on disposition of assets, net........................ 13 (1,426)
Accretion of discount on asset retirement obligations............ 1,966 1,094
Interest related amortization.................................... (6,370) (4,565)
Commodity hedge related amortization............................. (11,291) (17,782)
Cumulative effect of change in accounting principle, net of tax.. - (15,413)
Other noncash items.............................................. 1,220 4,733
Changes in operating assets and liabilities:
Accounts receivable, net......................................... (33,737) (25,967)
Inventories...................................................... (19) (360)
Prepaid expenses................................................. 917 (8,222)
Other current assets, net........................................ 757 398
Accounts payable................................................. (6,002) 8,381
Interest payable................................................. 693 522
Income taxes payable............................................. 3,058 1,452
Other current liabilities........................................ (5,802) 9,158
-------- --------
Net cash provided by operating activities...................... 253,630 136,789
-------- --------
Cash flows from investing activities:
Proceeds from disposition of assets................................. 285 15,553
Additions to oil and gas properties................................. (167,226) (252,753)
Other property additions, net....................................... (5,360) (2,281)
-------- --------
Net cash used in investing activities.......................... (172,301) (239,481)
-------- --------
Cash flows from financing activities:
Borrowings under long-term debt..................................... 56,083 116,628
Principal payments on long-term debt................................ (146,083) (15,000)
Payment of other liabilities........................................ (4,355) (6,380)
Purchase of treasury stock.......................................... (5,566) -
Exercise of long-term incentive plan stock options.................. 8,495 5,346
-------- --------
Net cash provided by (used in) financing activities............ (91,426) 100,594
-------- --------
Net decrease in cash and cash equivalents............................... (10,097) (2,098)
Effect of exchange rate changes on cash and cash equivalents............ (180) 466
Cash and cash equivalents, beginning of period.......................... 19,299 8,490
-------- --------
Cash and cash equivalents, end of period................................ $ 9,022 $ 6,858
======== ========
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
(in thousands)
(Unaudited)
Three months ended
March 31,
----------------------
2004 2003
--------- ---------
Net income................................................... $ 60,188 $ 84,220
-------- --------
Other comprehensive income (loss):
Net deferred hedge losses, net of tax:
Net deferred hedge losses.............................. (117,392) (116,164)
Tax benefits related to net deferred hedge losses...... 31,871 (268)
Net hedge losses included in net income................ 30,772 50,363
Translation adjustment................................... (2,241) 12,192
-------- --------
Other comprehensive loss............................ (56,990) (53,877)
-------- --------
Comprehensive income......................................... $ 3,198 $ 30,343
======== ========
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
March 31, 2004
(Unaudited)
NOTE A. Organization and Nature of Operations
Pioneer is a Delaware corporation whose common stock is listed and traded
on the New York Stock Exchange. The Company is an independent 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 March 31, 2004 and for the three-month
periods ended March 31, 2004 and 2003 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 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 as of and for the year ended December 31, 2003.
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.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record a gain of $15.4 million, net of $1.3 million of deferred
tax, as a cumulative effect adjustment of a change in accounting principle in
the Company's Consolidated Statements of Operations for the three months ended
March 31, 2003. See Notes C and E for additional information regarding the
Company's income taxes and asset retirement obligations, respectively.
Inventories. Inventories are comprised of $15.6 million and $15.3 million
of lease and well equipment and $1.6 million and $2.2 million of commodities as
of March 31, 2004 and December 31, 2003, respectively. Lease and well equipment
is net of lower of cost or market allowances of $.6 million as of March 31, 2004
and December 31, 2003.
Stock-based compensation. The Company has a long-term incentive plan (the
"Long-Term Incentive Plan") under which the Company grants stock-based
compensation. The Company accounts for stock-based compensation granted under
the 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 expense
associated with option grants was not recognized in the Company's net income
during the three-month periods ended March 31, 2004 and 2003, as all options
granted under the Long-Term Incentive Plan 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 and earnings 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-month periods ended
March 31, 2004 and 2003:
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Three months ended
March 31,
------------------------
2004 2003
--------- ---------
(in thousands, except
per share amounts)
Net income, as reported................................. $ 60,188 $ 84,220
Plus: Stock-based compensation expense included
in net income for all awards, net of tax (a)......... 1,257 1,369
Deduct: Stock-based compensation expense determined
under fair value based method for all awards,
net of tax (a)....................................... (3,115) (4,401)
-------- --------
Pro forma net income.................................... $ 58,330 $ 81,188
======== ========
Net income per share:
Basic - as reported.................................. $ .51 $ .72
======== ========
Basic - pro forma.................................... $ .49 $ .70
======== ========
Diluted - as reported................................ $ .50 $ .71
======== ========
Diluted - pro forma.................................. $ .49 $ .68
======== ========
- -----------
(a) For the three months ended March 31, 2004, stock-based compensation expense
included in net income is net of a tax benefit of $722 thousand. Similarly,
stock-based compensation expense determined under the fair value based
method for the three months ended March 31, 2004 is net of a $1.8 million
tax benefit. No tax benefits were recognized for the stock-based
compensation expense amounts during the three months ended March 31, 2003.
See Note C for additional information regarding the Company's income taxes.
NOTE C. Income Tax Assets
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires that the Company continually assess both
positive and negative evidence to determine whether it is more likely than not
that deferred tax assets can be realized prior to their expiration. From 1998
until 2003, the Company maintained a valuation allowance against a portion of
its deferred tax asset position in the United States. During the third quarter
of 2003, the Company concluded that it was more likely than not that it would be
able to realize its gross deferred tax asset position in the United States.
Accordingly, the Company reversed its valuation allowances in the United States.
As a result of the reversal of the valuation allowances against the Company's
United States deferred tax assets, the Company's effective tax rate on future
earnings in the United States will approximate statutory rates.
Pioneer will continue to monitor Company-specific, oil and gas industry and
worldwide economic factors and will assess the likelihood that the Company's net
operating loss carryforwards and other deferred tax attributes in the United
States and foreign tax jurisdictions will be utilized prior to their expiration.
As of March 31, 2004, the Company's valuation allowances related to foreign tax
jurisdictions are $102.1 million.
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
Income tax provision (benefit) attributable to income before cumulative
effect of change in accounting principle consists of the following for the
three-month periods ended March 31, 2004 and 2003:
Three months ended
March 31,
----------------------
2004 2003
--------- ---------
(in thousands)
Current:
U.S. state and local......................... $ 1,003 $ (22)
Foreign...................................... 6,054 2,072
-------- --------
7,057 2,050
-------- --------
Deferred:
U.S. state and local......................... 35,509 -
Foreign...................................... (2,789) 254
-------- --------
32,720 254
-------- --------
$ 39,777 $ 2,304
======== ========
NOTE D. 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 March 2004, the Company entered into interest rate swap contracts on an
aggregate $150 million notional amount to hedge the fair value of its 7-1/2
percent senior notes. The terms of the interest rate swap contracts match the
scheduled maturity of the hedged senior notes, require the counterparties to pay
the Company a 7-1/2 percent fixed annual interest rate and require the Company
to pay the counterparties variable annual interest rates equal to the periodic
six-month LIBOR plus a weighted average annual margin of 3.71 percent. During
February 2003, the Company entered into similar interest rate swap contracts
which were terminated during May 2003 for $11.4 million of cash proceeds. As of
March 31, 2004, the carrying value of the Company's fair value hedges was a
liability of $1.5 million.
As of March 31, 2004, the carrying value of the Company's long-term debt in
the accompanying Consolidated Balance Sheets included $20.1 million of
incremental carrying value attributable to net deferred hedge gains on
terminated interest rate swaps that are being amortized as net reductions to
interest expense over the original terms of the terminated agreements. The
amortization of net deferred hedge gains on terminated interest rate swaps
reduced the Company's reported interest expense by $7.3 million and $5.9 million
during the three-month periods ended March 31, 2004 and 2003, respectively.
Settlements of open fair value hedges reduced the Company's interest expense by
$167 thousand and $867 thousand during the three-month periods ended March 31,
2004 and 2003, respectively.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The following table sets forth, as of March 31, 2004, the scheduled
amortization of net deferred hedge gains and losses on terminated agreements
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
Quarter Quarter Quarter Quarter Total
------- -------- ------- ------- ---------
(in thousands)
2004 net hedge gain amortization...... $ 6,116 $ 5,489 $ 4,555 $ 16,160
2005 net hedge gain amortization...... $ 4,264 $ 2,816 $ 2,313 $ 1,575 10,968
2006 net hedge gain amortization...... $ 1,441 $ 824 $ 676 $ 253 3,194
2007 net hedge gain (loss) amortization $ 123 $ (417) $ (684) $(1,003) (1,981)
2008 net hedge loss amortization...... $ (599) $ (747) $ (755) $ (899) (3,000)
2009 net hedge loss amortization...... $ (879) $(1,070) $(1,082) $(1,135) (4,166)
2010 net hedge loss amortization...... $(1,109) $ - $ - $ - (1,109)
--------
$ 20,066
========
The terms of the fair value hedge agreements described above perfectly
matched the terms of the hedged 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 also utilizes interest rate swap contracts to
reduce the effect of interest rate volatility on the Company's variable rate
line of credit indebtedness and, from time to time, forward currency exchange
agreements to reduce the effect of U.S. dollar to Canadian dollar exchange rate
volatility.
Oil prices. 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 March 31, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
-------- -------- -------- -------- -----------
Daily oil production hedged:
2004 - Swap Contracts
Volume (Bbl)................. 24,000 14,000 14,000 17,309
Price per Bbl................ $ 26.51 $ 24.65 $ 24.65 $ 25.50
2005 - Swap Contracts
Volume (Bbl)................. 17,000 17,000 17,000 17,000 17,000
Price per Bbl................ $ 24.93 $ 24.93 $ 24.93 $ 24.93 $ 24.93
2006 - Swap Contracts
Volume (Bbl)................. 5,000 5,000 5,000 5,000 5,000
Price per Bbl................ $ 26.19 $ 26.19 $ 26.19 $ 26.19 $ 26.19
2007 - Swap Contracts
Volume (Bbl)................. 1,000 1,000 1,000 1,000 1,000
Price per Bbl................ $ 26.00 $ 26.00 $ 26.00 $ 26.00 $ 26.00
2008 - Swap Contracts
Volume (Bbl)................. 5,000 5,000 5,000 5,000 5,000
Price per Bbl................ $ 26.09 $ 26.09 $ 26.09 $ 26.09 $ 26.09
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
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-month periods ended March 31, 2004 and
2003:
Three months ended
March 31,
-------------------
2004 2003
------- -------
Average price reported per Bbl..................... $ 28.31 $ 25.82
Average price realized per Bbl..................... $ 32.12 $ 30.92
Reduction to oil revenue (in millions)............. $ (16.5) $ (14.7)
Natural gas liquids prices. During the three-month periods ended March 31,
2004 and 2003, the Company did not enter into any NGL hedge contracts. There
were no outstanding NGL hedge contracts at March 31, 2004.
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, or
based on NYMEX prices if NYMEX prices are highly correlated with the index
price. The following table sets forth the Company's outstanding gas hedge
contracts and the weighted average index prices for those contracts as of March
31, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
--------- --------- --------- --------- -----------
Daily gas production hedged:
2004 - Swap Contracts
Volume (Mcf)................... 280,000 280,000 280,000 280,000
Index price per MMBtu.......... $ 4.11 $ 4.11 $ 4.11 $ 4.11
2005 - Swap Contracts
Volume (Mcf)................... 60,000 60,000 60,000 60,000 60,000
Index price per MMBtu.......... $ 4.24 $ 4.24 $ 4.24 $ 4.24 $ 4.24
2006 - Swap Contracts
Volume (Mcf)................... 70,000 70,000 70,000 70,000 70,000
Index price per MMBtu.......... $ 4.16 $ 4.16 $ 4.16 $ 4.16 $ 4.16
2007 - Swap Contracts
Volume (Mcf)................... 20,000 20,000 20,000 20,000 20,000
Index price per MMBtu.......... $ 3.51 $ 3.51 $ 3.51 $ 3.51 $ 3.51
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The Company reports average gas prices per Mcf including the effects of Btu
content, gas processing, shrinkage adjustments and the net effect of 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
effect of settlements of gas price hedges on gas revenue for the three-month
periods ended March 31, 2004 and 2003:
Three months ended
March 31,
--------------------
2004 2003
------- -------
Average price reported per Mcf........................ $ 4.41 $ 4.16
Average price realized per Mcf........................ $ 4.64 $ 5.05
Reduction to gas revenue (in millions)................ $ (14.2) $ (35.7)
Hedge ineffectiveness. During the thee-month periods ended March 31, 2004
and 2003, the Company recognized other expense of $44 thousand and $1.8 million,
respectively, related to the ineffective portions of its cash flow hedging
instruments.
Accumulated other comprehensive income (loss) ("AOCI") - net deferred hedge
losses, net of tax. As of March 31, 2004 and December 31, 2003, AOCI - net
deferred hedge losses, net of tax represented net deferred losses of $158.9
million and $104.1 million, respectively. The AOCI - net deferred hedge losses,
net of tax balance as of March 31, 2004 was comprised of $276.3 million of net
deferred hedge losses on the effective portions of open commodity cash flow
hedges, $34.1 million of net deferred gains on terminated cash flow hedges and
$83.2 million of associated net deferred tax benefits. The increase in AOCI -
net deferred hedge losses, net of tax during the three months ended March 31,
2004 was primarily attributable to increases in future commodity prices relative
to the commodity prices stipulated in the hedge contracts, partially offset by
the reclassification of net deferred hedge losses to net income as derivatives
matured by their terms. The net deferred hedge losses associated with open cash
flow hedges remain subject to market price fluctuations until the positions are
either settled under the terms of the hedge contracts or terminated prior to
settlement. The net deferred hedge gains on terminated cash flow hedges are
fixed.
During the twelve months ending March 31, 2005, based on current estimates
of future commodity prices, the Company expects to reclassify $188.5 million of
net deferred losses associated with open cash flow hedges and $33.2 million of
net deferred gains on terminated cash flow hedges from AOCI - net deferred hedge
losses, net of tax to oil and gas revenues. The Company also expects to
reclassify approximately $56.7 million of net deferred income tax benefits
during the twelve months ending March 31, 2005 from AOCI - net deferred hedge
losses, net of tax to income tax provision.
The following table sets forth, as of March 31, 2004, the scheduled
reclassifications of net deferred hedge gains on terminated cash flow hedges
that will be recognized in the Company's future oil and gas revenues:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(in thousands)
2004 net deferred hedge gains..... $10,932 $11,001 $10,954 $32,887
2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249
------
$34,136
======
NOTE E. Asset Retirement Obligations
As referred to in Note B, the Company adopted the provision 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.
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
The Company does not provide for a market risk premium associated with asset
retirement obligations because a reliable estimate cannot be determined. 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-month periods ended March 31, 2004 and 2003:
Three months ended
March 31,
----------------------
2004 2003
--------- --------
(in thousands)
Beginning asset retirement obligations....................... $ 105,036 $ 34,692
Cumulative effect adjustment................................. - 23,393
New wells placed on production and changes in estimates...... 2,732 6,965
Liabilities settled.......................................... (2,597) (2,442)
Accretion expense............................................ 1,966 1,094
Currency translation......................................... (103) 472
-------- -------
Ending asset retirement obligations ......................... $ 107,034 $ 64,174
======== =======
NOTE F. Postretirement Benefit Obligations
As of March 31, 2004 and December 31, 2003, the Company had recorded $15.5
million and $15.6 million, respectively, of unfunded accumulated postretirement
benefit obligations in the accompanying Consolidated Balance Sheets. The
following table reconciles changes in the Company's unfunded accumulated
postretirement benefit obligations during the three-month periods ended March
31, 2004 and 2003:
Three months ended
March 31,
----------------------
2004 2003
-------- --------
(in thousands)
Beginning accumulated postretirement benefit obligations........ $ 15,556 $ 19,743
Benefit payments................................................ (339) (240)
Service costs................................................... 58 51
Accretion of discounts.......................................... 226 372
------- -------
Ending accumulated postretirement benefit obligations........... $ 15,501 $ 19,926
======= =======
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
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 and it now contains two
material claims. First, the plaintiffs assert that they were improperly charged
expenses (primarily field compression), which are a "cost of production", and
for which plaintiffs, as royalty owners, are not responsible. Second, the
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
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 (both for periods covered by the lawsuit and from the last date
covered by the lawsuit to the present - because the deductions continue to be
taken and the plaintiffs continue to be paid for a royalty share of the helium)
could reach $65 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 other
agreements, and intends to vigorously defend itself.
The Company does not believe the costs it has deducted are a "cost of
production". The costs being deducted are post production costs incurred to
transport the gas to the Company's Satanta gas plant for processing, where the
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 and with the parties'
agreements.
The Company has also vigorously defended against the 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. 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.
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).
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
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 the FERC
with respect to that portion of the refund associated with (i) nonrecoupable
royalties, (ii) nonrecoupable Kansas property taxes based, in part, upon the
higher prices collected and (iii) interest for all periods. On September 10,
1997, the 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 March 31, 2004, the Company has settled $21.6 million of the original
claim amounts. As of March 31, 2004 and December 31, 2003, the Company had on
deposit $10.7 million, including accrued interest, in an escrow account and had
a corresponding obligation for the remaining claim recorded in other current
liabilities in the accompanying Consolidated Balance Sheets as of March 31,
2004.
On December 1, 2003, an administrative law judge issued a Partial Initial
Decision denying the Company's request to allow any waiver or set-off from the
refunds and stating that the Company must pay the FERC interest rate on the
refund claims instead of the escrow interest rate. As of December 31, 2003, the
Company had accrued an additional $1.5 million obligation for the difference
between the escrow interest rate and the FERC interest rate. During the first
quarter of 2004, the FERC overruled this administrative law judge's decision as
it relates to the payment of interest and stated that the escrow interest rate
is sufficient. As of March 31, 2004, the Company reversed the additional $1.5
million obligation that had been recorded for the difference between the escrow
interest rate and the FERC interest rate. The Company intends to vigorously
appeal the administrative law judge's decision denying waiver or set-off from
the refunds and believes that the accrued obligations will be sufficient to
resolve the remaining claims.
NOTE H. Income Per Share Before Cumulative Effect of Change in Accounting
Principle
Basic income per share before cumulative effect of change in accounting
principle is computed by dividing income 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 shares outstanding for the three-month periods ended March 31, 2004 and
2003:
Three months ended
March 31,
---------------------
2004 2003
-------- --------
(in thousands)
Weighted average common shares outstanding:
Basic............................................. 118,719 116,743
Dilutive common stock options (a)................. 1,177 1,793
Restricted stock awards........................... 368 139
-------- --------
Diluted........................................... 120,264 118,675
======= ========
- ---------------
(a) Common stock options to purchase 30,712 shares and 1,377,519 shares of
common stock were outstanding but not included in the computations of
diluted income per share before cumulative effect of change in accounting
principle for the three-month periods ended March 31, 2004 and 2003,
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.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(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, Canada and
Africa. Africa is primarily comprised of operations in Gabon, South Africa and
Tunisia.
The following tables provide the Company's interim geographic operating
segment data for the three-month periods ended March 31, 2004 and 2003.
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" table column includes revenues and expenses that are not routinely
included in the earnings measures internally reported to management on a
geographic operating segment basis.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
United Headquarters Consolidated
States Argentina Canada Africa and other Total
-------- --------- -------- -------- ------------ ------------
(in thousands)
Three months ended March 31, 2004:
Revenues and other income:
Oil and gas revenues.............. $357,308 $ 30,883 $ 18,219 $ 40,116 $ - $ 446,526
Interest and other................ - - - - 1,735 1,735
Gain (loss) on disposition
of assets, net.................. 51 - - - (64) (13)
------- ------- ------- ------- ------- --------
357,359 30,883 18,219 40,116 1,671 448,248
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production............ 66,019 6,759 7,949 8,484 - 89,211
Depletion, depreciation and
amortization.................... 97,371 12,542 7,475 16,396 2,715 136,499
Exploration and abandonments...... 53,556 3,550 12,976 10,424 - 80,506
General and administrative........ - - - - 18,329 18,329
Accretion of discount on asset
retirement obligations.......... - - - - 1,966 1,966
Interest.......................... - - - - 21,576 21,576
Other............................. - - - - 196 196
------- ------- ------- ------- ------- --------
216,946 22,851 28,400 35,304 44,782 348,283
------- ------- ------- ------- ------- --------
Income (loss) before income taxes.. 140,413 8,032 (10,181) 4,812 (43,111) 99,965
Income tax benefit (provision)..... (51,251) (2,811) 3,843 (1,162) 11,604 (39,777)
------- ------- ------- ------- ------- --------
Net income (loss).................. $ 89,162 $ 5,221 $ (6,338) $ 3,650 $(31,507) $ 60,188
======= ======= ======= ======= ======= ========
United Headquarters Consolidated
States Argentina Canada Africa and other Total
-------- --------- -------- -------- ------------ ------------
(in thousands)
Three months ended March 31, 2003:
Revenues and other income:
Oil and gas revenues.............. $239,251 $ 23,381 $ 22,367 $ - $ - $ 284,999
Interest and other................ - - - - 2,713 2,713
Gain on disposition of assets,
net............................. 1,246 - 1 - 179 1,426
------- ------- ------- ------- ------- --------
240,497 23,381 22,368 - 2,892 289,138
------- ------- ------- ------- ------- --------
Costs and expenses:
Oil and gas production............ 55,537 5,409 6,921 - - 67,867
Depletion, depreciation and
amortization.................... 52,858 8,326 6,551 - 2,314 70,049
Exploration and abandonments...... 17,787 3,044 11,327 3,709 - 35,867
General and administrative........ - - - - 15,481 15,481
Accretion of discount on asset
retirement obligations.......... - - - - 1,094 1,094
Interest.......................... - - - - 22,491 22,491
Other............................. - - - - 5,178 5,178
------- ------- ------- ------- ------- --------
126,182 16,779 24,799 3,709 46,558 218,027
------- ------- ------- ------- ------- --------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle........... 114,315 6,602 (2,431) (3,709) (43,666) 71,111
Income tax benefit (provision)..... (40,010) (2,311) 960 1,298 37,759 (2,304)
------- ------- ------- ------- ------- --------
Income (loss) before cumulative
effect of change in accounting
principle......................... $ 74,305 $ 4,291 $ (1,471) $ (2,411) $ (5,907) $ 68,807
======= ======= ======= ======= ======= ========
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
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 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 as of
March 31, 2004 and December 31, 2003, and Consolidating Condensed Statements of
Operations and Comprehensive Income and Consolidating Condensed Statements of
Cash Flows for the three-month periods ended March 31, 2004 and 2003 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), financial
information for 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
March 31, 2004
(Unaudited)
CONSOLIDATING CONDENSED BALANCE SHEET
As of March 31, 2004
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $ 19 $ 1,063 $ 7,940 $ - $ 9,022
Other current assets, net................. 1,550,774 (1,248,898) (88,185) - 213,691
--------- ---------- ---------- ---------- ----------
Total current assets................. 1,550,793 (1,247,835) (80,245) - 222,713
--------- ---------- ---------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties...................... - 3,549,681 1,520,052 - 5,069,733
Unproved properties.................... - 24,492 152,088 - 176,580
Accumulated depletion, depreciation and
amortization............................ - (1,302,712) (505,756) - (1,808,468)
--------- ---------- ---------- ---------- ----------
Total property, plant and equipment.. - 2,271,461 1,166,384 - 3,437,845
--------- ---------- ---------- ---------- ----------
Deferred income taxes....................... 193,555 - 5,032 - 198,587
Other property and equipment, net........... - 24,349 4,121 - 28,470
Other assets, net........................... 14,325 18,147 8,197 - 40,669
Investment in subsidiaries.................. 1,708,426 227,547 - (1,935,973) -
--------- ---------- --------- ---------- ----------
$3,467,099 $ 1,293,669 $1,103,489 $(1,935,973) $ 3,928,284
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......................... $ 42,740 $ 349,439 $ 71,399 $ - $ 463,578
Long-term debt.............................. 1,456,695 - - - 1,456,695
Other liabilities........................... 1,546 269,822 (34,016) - 237,352
Deferred income taxes....................... - - 12,832 - 12,832
Stockholders' equity........................ 1,966,118 674,408 1,053,274 (1,935,973) 1,757,827
Commitments and contingencies
--------- ---------- --------- ---------- ----------
$3,467,099 $ 1,293,669 $1,103,489 $(1,935,973) $ 3,928,284
========= ========== ========= ========== ==========
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 2003
(in thousands)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
---------- ----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................. $ 369 $ 4,225 $ 14,705 $ - $ 19,299
Other current assets, net................. 1,654,575 (1,354,256) (114,503) - 185,816
--------- ---------- --------- ---------- ----------
Total current assets................. 1,654,944 (1,350,031) (99,798) - 205,115
--------- ---------- --------- ---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the
successful efforts method of accounting:
Proved properties...................... - 3,508,365 1,475,193 - 4,983,558
Unproved properties.................... - 25,460 154,365 - 179,825
Accumulated depletion, depreciation and
amortization............................ - (1,208,700) (467,436) - (1,676,136)
--------- ---------- --------- ---------- ----------
Total property, plant and equipment.. - 2,325,125 1,162,122 - 3,487,247
--------- ---------- --------- ---------- ----------
Deferred income taxes....................... 190,492 - 1,852 - 192,344
Other property and equipment, net........... - 23,890 4,190 - 28,080
Other assets, net........................... 14,836 17,076 6,874 - 38,786
Investment in subsidiaries.................. 1,604,534 167,515 - (1,772,049) -
--------- ---------- --------- ---------- ----------
$3,464,806 $ 1,183,575 $1,075,240 $(1,772,049) $ 3,951,572
========= ========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......................... $ 29,978 $ 347,720 $ 52,054 $ - $ 429,752
Long-term debt.............................. 1,555,461 - - - 1,555,461
Other liabilities........................... - 226,055 (31,589) - 194,466
Deferred income taxes....................... - - 12,121 - 12,121
Stockholders' equity........................ 1,879,367 609,800 1,042,654 (1,772,049) 1,759,772
Commitments and contingencies
--------- ---------- --------- ---------- ----------
$3,464,806 $ 1,183,575 $1,075,240 $(1,772,049) $ 3,951,572
========= ========== ========= ========== ==========
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2004
(in thousands)
(Unaudited)
Non- Consolidated
Pioneer Guarantor Income Tax Consolidated
Parent USA Subsidiaries Provision Eliminations Total
-------- -------- ------------ ------------ ------------ -------------
Revenues and other income:
Oil and gas................................ $ - $330,303 $ 116,223 $ - $ - $ 446,526
Interest and other......................... 69 811 855 - - 1,735
Gain (loss) on disposition of assets, net.. - 89 (102) - - (13)
------- ------- -------- ------- -------- --------
69 331,203 116,976 - - 448,248
------- ------- -------- ------- -------- --------
Costs and expenses:
Oil and gas production..................... - 60,360 28,851 - - 89,211
Depletion, depreciation and amortization... - 96,309 40,190 - - 136,499
Exploration and abandonments............... - 47,789 32,717 - - 80,506
General and administrative................. 411 14,807 3,111 - - 18,329
Accretion of discount on asset
retirement obligations................... - 1,512 454 - - 1,966
Interest................................... 6,823 14,426 327 - - 21,576
Equity income from subsidiaries............ (103,862) (4,160) - - 108,022 -
Other...................................... - (1,181) 1,377 - - 196
------- ------- -------- ------- -------- --------
(96,628) 229,862 107,027 - 108,022 348,283
------- ------- -------- ------- -------- --------
Income before income taxes.................... 96,697 101,341 9,949 - (108,022) 99,965
Income tax provision.......................... - - (3,268) (36,509) - (39,777)
------- ------- -------- ------- -------- --------
Net income.................................... 96,697 101,341 6,681 (36,509) (108,022) 60,188
Other comprehensive income (loss):
Net deferred hedge losses, net of tax:
Net deferred hedge losses................ - (111,230) (6,162) - - (117,392)
Tax benefits related to net deferred
hedge losses........................... - - 167 31,704 - 31,871
Net hedge losses included in net income.. - 24,367 6,405 - - 30,772
Translation adjustment..................... - - (2,241) - - (2,241)
------- ------- -------- ------ -------- --------
Comprehensive income.......................... $ 96,697 $ 14,478 $ 4,850 $ (4,805) $(108,022) $ 3,198
======= ======= ======== ======= ======== ========
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Eliminations Total
-------- --------- ------------ ------------ ------------
Revenues and other income:
Oil and gas............................... $ - $ 214,715 $ 70,284 $ - $ 284,999
Interest and other........................ - 786 1,927 - 2,713
Gain on disposition of assets, net........ - 1,230 196 - 1,426
------- -------- -------- ------- ---------
- 216,731 72,407 - 289,138
------- -------- -------- ------- ---------
Costs and expenses:
Oil and gas production.................... - 50,529 17,338 - 67,867
Depletion, depreciation and amortization.. - 51,830 18,219 - 70,049
Exploration and abandonments.............. - 19,792 16,075 - 35,867
General and administrative................ 295 12,310 2,876 - 15,481
Accretion of discount on asset
retirement obligations.................. - 857 237 - 1,094
Interest.................................. 5,081 17,192 218 - 22,491
Equity (income) loss from subsidiaries.... (89,626) 5,454 - 84,172 -
Other..................................... 30 813 4,335 - 5,178
------- -------- -------- ------- ---------
(84,220) 158,777 59,298 84,172 218,027
------- -------- -------- ------- ---------
Income before income taxes and cumulative
effect of change in accounting
principle................................. 84,220 57,954 13,109 (84,172) 71,111
Income tax provision......................... - - (2,304) - (2,304)
------- -------- -------- ------- ---------
Income before cumulative effect of change
in accounting principle................... 84,220 57,954 10,805 (84,172) 68,807
Cumulative effect of change in accounting
principle, net of tax..................... - 11,859 3,554 - 15,413
------- -------- -------- ------- ---------
Net income................................... 84,220 69,813 14,359 (84,172) 84,220
Other comprehensive income (loss):
Net deferred hedge losses, net of tax:
Net deferred hedge losses............... - (103,549) (12,615) - (116,164)
Tax benefits related to net deferred
hedge losses.......................... - - (268) - (268)
Net hedge losses included in net income. - 44,444 5,919 - 50,363
Translation adjustment.................... - - 12,192 - 12,192
-------- -------- -------- ------- ---------
Comprehensive income......................... $ 84,220 $ 10,708 $ 19,587 $(84,172) $ 30,343
======= ======== ======== ======= =========
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2004
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Total
--------- --------- ------------ ------------
Cash flows from operating activities:
Net cash provided by operating activities......... $ 86,721 $ 109,212 $ 57,697 $ 253,630
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of assets............... - 285 - 285
Additions to oil and gas properties............... - (106,430) (60,796) (167,226)
Other property additions, net..................... - (3,612) (1,748) (5,360)
-------- -------- -------- --------
Net cash used in investing activities.......... - (109,757) (62,544) (172,301)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt................... 56,083 - - 56,083
Principal payments on long-term debt.............. (146,083) - - (146,083)
Payment of other liabilities...................... - (2,617) (1,738) (4,355)
Purchase of treasury stock........................ (5,566) - - (5,566)
Exercise of long-term incentive plan stock
options......................................... 8,495 - - 8,495
-------- -------- -------- --------
Net cash used in financing activities.......... (87,071) (2,617) (1,738) (91,426)
-------- -------- -------- --------
Net decrease in cash and cash equivalents.......... (350) (3,162) (6,585) (10,097)
Effect of exchange rate changes on cash and
cash equivalents................................. - - (180) (180)
Cash and cash equivalents, beginning of period..... 369 4,225 14,705 19,299
-------- -------- -------- --------
Cash and cash equivalents, end of period........... $ 19 $ 1,063 $ 7,940 $ 9,022
======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2003
(in thousands)
(Unaudited)
Non-
Pioneer Guarantor Consolidated
Parent USA Subsidiaries Total
--------- --------- ------------ ------------
Cash flows from operating activities:
Net cash provided by (used in) operating
activities...................................... $(106,957) $ 198,841 $ 44,905 $ 136,789
-------- -------- -------- ---------
Cash flows from investing activities:
Proceeds from disposition of assets............... - 15,472 81 15,553
Additions to oil and gas properties............... - (204,983) (47,770) (252,753)
Other property (additions) dispositions, net...... - (2,358) 77 (2,281)
-------- -------- -------- ---------
Net cash used in investing activities.......... - (191,869) (47,612) (239,481)
-------- -------- -------- ---------
Cash flows from financing activities:
Borrowings under long-term debt................... 116,628 - - 116,628
Principal payments on long-term debt.............. (15,000) - - (15,000)
Payment of other liabilities...................... - (6,292) (88) (6,380)
Exercise of long-term incentive plan stock
options......................................... 5,346 - - 5,346
-------- -------- -------- ---------
Net cash provided by (used in) financing
activities................................... 106,974 (6,292) (88) 100,594
-------- -------- -------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 17 680 (2,795) (2,098)
Effect of exchange rate changes on cash and
cash equivalents................................. - - 466 466
Cash and cash equivalents, beginning of period..... 6 1,783 6,701 8,490
-------- -------- -------- ---------
Cash and cash equivalents, end of period........... $ 23 $ 2,463 $ 4,372 $ 6,858
========= ======== ======== =========
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)
NOTE K. Subsequent Events
Permian Basin acquisition. On April 1, 2004, the Company completed the
acquisition of various working interests in approximately 600 Spraberry field
oil wells, 400 of which were already operated by the Company. The total purchase
price of this acquisition was $19.7 million, including normal purchase
adjustments.
Proposed merger with Evergreen Resources, Inc. On May 3, 2004, the Company
entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Evergreen Resources, Inc. ("Evergreen"), a publicly traded independent oil and
gas company primarily engaged in the operation, development, production,
exploration and acquisition of North American unconventional natural gas.
Evergreen is based in Denver, Colorado and is one of the leading developers of
coal bed methane reserves in the United States. Evergreen's operations are
principally focused on developing and expanding its coal bed methane project
located in the Raton Basin in southern Colorado and its recently acquired
producing properties in the Piceance Basin in western Colorado, the Uintah Basin
in eastern Utah and the Western Canada Sedimentary. The Merger Agreement
provides for a merger by which Evergreen will become a subsidiary of Pioneer
(the "Proposed Merger").
In accordance with the Merger Agreement, holders of 44 million shares of
Evergreen common stock will have the right to receive an aggregate of
approximately 25 million shares of Pioneer common stock (with related
stockholders rights) and a total of approximately $850 million in cash. This
represents a price per Evergreen share of $39.00 (based on Pioneer's last
reported sale price on May 3, 2004 of $33.52 per share). Holders of Evergreen
common stock will have the option to elect among three types of consideration
for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common
stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common stock and $19.50
in cash. Evergreen stockholders who do not make an election will receive .58175
shares of Pioneer common stock and $19.50 in cash per Evergreen share. All
holders of unvested restricted stock under Evergreen's stock-based employee
plans will be deemed to have elected to receive Pioneer common stock. Holders
who elect all stock consideration or all cash consideration (other than holders
of unvested restricted stock) will be subject to allocation of the stock and
cash so that the aggregate amounts of stock and cash will be as set forth in the
first sentence of this paragraph.
In addition, Evergreen will seek to sell its Kansas assets before the
closing date of the Proposed Merger. Evergreen stockholders will receive an
additional cash payment of the greater of (i) $.35 per share (approximately $15
million) as consideration from Pioneer for the Kansas properties in the Proposed
Merger, or (ii) the gross proceeds less transaction costs from the sale of the
Kansas properties to a third party that closes before the closing date of the
Proposed Merger.
The Company intends to file with the SEC a Registration Statement on Form
S-4 relating to the shares of Pioneer common stock to be issued in the Proposed
Merger. A portion of such registration statement will constitute a proxy
statement/prospectus to be submitted to the stockholders of Evergreen's common
stock and the Company's common stock for special meetings to be held by each
company's stockholders in connection with the Proposed Merger. It is expected
that such proxy statement/prospectus will be mailed to all stockholders during
the third quarter of 2004, and that such meeting will be held, and the Proposed
Merger will be consummated, during the second half of 2004. Since meetings of
both Evergreen's and Pioneer's stockholders are required in connection with the
Proposed Merger, in addition to a number of other conditions, there can be no
assurance that the Proposed Merger will occur.
25
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 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, international operations and
associated international political and economic instability, government
regulation or action, litigation, the costs and results of drilling and
operations, the Company's ability to replace reserves or implement its business
plans, access to and cost of capital, uncertainties about estimates of reserves,
quality of technical data and environmental risks, acts of war and terrorism.
These and other risks are described in the Company's 2003 Annual Report on Form
10-K that is available from the SEC.
Financial and Operating Performance
The Company's financial and operating performance for the first quarter of
2004 included the following highlights:
o A 57% increase in oil and gas revenue over that of the first quarter
of 2003, resulting from increases in commodity prices and volumes
sold, as further described below.
o Growth in the Company's deepwater Gulf of Mexico sales volumes,
including initial production from the Harrier field during January
2004.
o Higher than anticipated Argentine oil and gas sales volumes,
primarily due to strong gas demand throughout their summer season.
o Higher than anticipated South African oil sales due to one
additional cargo shipment during the quarter.
o An 85 percent increase in net cash provided by operating activities,
as compared to the first quarter of 2003, primarily resulting from
increased oil and gas sales.
o A $.10 per common share semiannual dividend declared by the board of
directors, payable on April 13, 2004 to shareholders of record on
March 29, 2004.
o Rating agencies upgrade of the Company to investment grade status in
response to improved financial position and earnings trends, along
with other factors specific to the Company.
The Company recorded net income of $60.2 million ($.50 per diluted share)
for the three months ended March 31, 2004, as compared to net income of $84.2
million ($.71 per diluted share) for the same period in 2003, including a $15.4
million benefit from the cumulative effect of change in accounting principle,
net of tax, associated with the Company's adoption of SFAS 143 on January 1,
2003. See Notes B and E of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for additional information regarding the
Company's adoption of SFAS 143. Income before income taxes and cumulative effect
of change in accounting principle increased by $28.9 million, or 41 percent,
during the first quarter of 2004 as compared to that of the first quarter of
2003. However, as a result of the increase in earnings and the reversal of the
Company's United States deferred tax asset valuation allowances during the third
quarter of 2003, the Company's income tax provision increased by $37.5 million
in the first-quarter-2004 to first-quarter-2003 comparison.
The Company's net cash provided by operating activities was $253.6 million
for the three months ended March 31, 2004, representing an increase of $116.8
million, as compared to net cash provided by operating activities of $136.8
million for the same period in 2003. During the three months ended March 31,
2004, the Company used its net cash provided by operating activities to fund
$167.2 million of additions to oil and gas properties and, together with a
decease in cash on hand, to repay $90.0 million of long-term borrowings under
the Company's $700 million revolving credit agreement (the "Revolving Credit
Agreement").
Proposed Merger with Evergreen Resources, Inc.
As described in Note K of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements", on May 3, 2004, the Company entered
into the Merger Agreement with Evergreen, a publicly traded independent oil and
gas company primarily engaged in the operation, development, production,
exploration and acquisition of North American unconventional natural gas.
26
Evergreen's operations are principally focused on developing and expanding its
coal bed methane project located in the Raton Basin in southern Colorado and its
recently acquired producing properties in the Piceance Basin in western
Colorado, the Uintah Basin in eastern Utah and the Western Canada Sedimentary.
The Merger Agreement provides for a merger by which Evergreen will become a
subsidiary of Pioneer.
Proposed purchase terms. In accordance with the Merger Agreement, holders
of 44 million shares of Evergreen common stock will have the right to receive an
aggregate of approximately 25 million shares of Pioneer common stock (with
related stockholders rights) and a total of approximately $850 million in cash.
This represents a price per Evergreen share of $39.00 (based on Pioneer's last
reported sale price on May 3, 2004 of $33.52 per share). Holders of Evergreen
common stock will have the option to elect among three types of consideration
for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common
stock; (2) $39.00 cash; or (3) .58175 shares of Pioneer common stock and $19.50
in cash. Evergreen stockholders who do not make an election will receive .58175
shares of Pioneer common stock and $19.50 in cash per Evergreen share. All
holders of unvested restricted stock under Evergreen's stock- based employee
plans will be deemed to have elected to receive Pioneer common stock. Holders
who elect all stock consideration or all cash consideration (other than holders
of unvested restricted stock) will be subject to allocation of the stock and
cash so that the aggregate amounts of stock and cash will be as set forth in the
first sentence of this paragraph.