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, 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
November 4, 2004................................................ 145,805,173
PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS
Page
Definitions of Oil and Gas Terms and Conventions Used Herein....... 3
Forward-looking Statements......................................... 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003........................... 4
Consolidated Statements of Operations for the
three and nine months ended September 30,
2004 and 2003................................... 5
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2004.... 6
Consolidated Statements of Cash Flows for the
three and nine months ended September 30,
2004 and 2003................................... 7
Consolidated Statements of Comprehensive Income
(Loss) for the three and nine months ended
September 30, 2004 and 2003..................... 8
Notes to Consolidated Financial Statements......... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 40
Item 4. Controls and Procedures............................ 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 43
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 44
Item 6. Exhibits........................................... 45
Signatures ................................................... 47
Exhibit Index ................................................... 48
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 and "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.
Forward-looking Statements
The information included in 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 that may cause the Company's actual results in future periods to
differ materially from the forward-looking statements. These risks and
uncertainties include, among other things, volatility of oil and gas prices,
product supply and demand, competition, government regulation or action,
international operations and associated international political and economic
instability, litigation, the costs and results of drilling and operations, the
Company's ability to replace reserves, implement its business plans, or complete
its development projects as scheduled, access to and cost of capital,
uncertainties about estimates of reserves, quality of technical data,
environmental and weather risks, acts of war or terrorism. These and other risks
are described in the Company's 2003 Annual Report on Form 10-K and other filings
with the SEC.
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,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 2,949 $ 19,299
Accounts receivable:
Trade, net of allowance for doubtful accounts of $7,330 and $4,727
as of September 30, 2004 and December 31, 2003, respectively....... 173,343 111,033
Due from affiliates.................................................. 557 447
Inventories............................................................. 35,576 17,509
Prepaid expenses........................................................ 13,117 11,083
Deferred income taxes................................................... 18,143 40,514
Other current assets:
Derivatives.......................................................... 565 423
Other, net of allowance for doubtful accounts of $4,486 as
of September 30, 2004 and December 31, 2003........................ 14,969 4,807
---------- ----------
Total current assets............................................ 259,219 205,115
---------- ----------
Property, plant and equipment, at cost:
Oil and gas properties, using the successful efforts method of
accounting:
Proved properties.................................................... 7,477,175 4,983,558
Unproved properties.................................................. 487,037 179,825
Accumulated depletion, depreciation and amortization.................... (2,083,735) (1,676,136)
---------- ----------
Total property, plant and equipment............................. 5,880,477 3,487,247
---------- ----------
Deferred income taxes..................................................... 3,300 192,344
Goodwill.................................................................. 333,203 -
Other property and equipment, net......................................... 69,480 28,080
Other assets:
Derivatives............................................................. 52 209
Other, net of allowance for doubtful accounts of $92 as of
September 30, 2004 and December 31, 2003............................. 50,492 38,577
---------- ----------
$ 6,596,223 $ 3,951,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade................................................................ $ 169,500 $ 177,614
Due to affiliates.................................................... 8,085 8,804
Interest payable........................................................ 25,152 37,034
Income taxes payable.................................................... 13,101 5,928
Other current liabilities:
Derivatives.......................................................... 348,326 161,574
Other................................................................ 72,696 38,798
---------- ----------
Total current liabilities....................................... 636,860 429,752
---------- ----------
Long-term debt............................................................ 2,464,902 1,555,461
Derivatives............................................................... 235,258 48,825
Deferred income taxes..................................................... 438,236 12,121
Other liabilities......................................................... 180,059 145,641
Stockholders' equity:
Common stock, $.01 par value; 500,000,000 shares authorized;
145,560,377 and 119,665,784 shares issued as of
September 30, 2004 and December 31, 2003, respectively............... 1,456 1,197
Additional paid-in capital.............................................. 3,682,540 2,734,403
Treasury stock, at cost; 331,339 and 378,012 shares as of
September 30, 2004 and December 31, 2003, respectively............... (10,774) (5,385)
Deferred compensation................................................... (25,509) (9,933)
Accumulated deficit..................................................... (711,993) (887,848)
Accumulated other comprehensive income (loss):
Net deferred hedge losses, net of tax................................ (332,465) (104,130)
Cumulative translation adjustment.................................... 37,653 31,468
---------- ----------
Total stockholders' equity...................................... 2,640,908 1,759,772
Commitments and contingencies
---------- ----------
$ 6,596,223 $ 3,951,572
========== ==========
The financial information included as of September 30, 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 Nine months ended
September 30, September 30,
---------------------- ------------------------
2004 2003 2004 2003
--------- --------- ---------- ----------
Revenues and other income:
Oil and gas...................................... $ 452,839 $ 336,473 $1,346,358 $ 965,712
Interest and other............................... 1,212 348 4,557 4,321
Gain (loss) on disposition of assets, net........ 215 46 (30) 1,576
-------- -------- --------- ---------
454,266 336,867 1,350,885 971,609
-------- -------- --------- ---------
Costs and expenses:
Oil and gas production........................... 93,214 75,764 277,990 217,474
Depletion, depreciation and amortization......... 139,991 103,534 419,240 274,142
Impairment of oil and gas properties............. 34,825 - 34,825 -
Exploration and abandonments..................... 32,965 24,516 153,154 107,430
General and administrative....................... 19,485 15,207 55,008 44,332
Accretion of discount on asset retirement
obligations.................................... 2,030 1,327 6,012 3,656
Interest......................................... 24,827 23,212 67,805 69,526
Other............................................ 2,486 1,389 10,982 12,205
-------- -------- --------- ---------
349,823 244,949 1,025,016 728,765
-------- -------- --------- ---------
Income before income taxes and cumulative effect
of change in accounting principle................ 104,443 91,918 325,869 242,844
Income tax benefit (provision)..................... (23,527) 99,895 (115,063) 94,961
-------- -------- --------- ---------
Income before cumulative effect of change in
accounting principle............................. 80,916 191,813 210,806 337,805
Cumulative effect of change in accounting
principle, net of tax............................ - - - 15,413
-------- -------- --------- ---------
Net income......................................... $ 80,916 $ 191,813 $ 210,806 $ 353,218
======== ======== ========= =========
Basic earnings per share:
Income before cumulative effect of change
in accounting principle....................... $ .68 $ 1.64 $ 1.78 $ 2.89
Cumulative effect of change in accounting
principle, net of tax......................... - - - .13
-------- -------- --------- ---------
Net income....................................... $ .68 $ 1.64 $ 1.78 $ 3.02
======== ======== ========= =========
Diluted earnings per share:
Income before cumulative effect of change
in accounting principle....................... $ .67 $ 1.62 $ 1.75 $ 2.86
Cumulative effect of change in accounting
principle, net of tax......................... - - - .13
-------- -------- --------- ---------
Net income....................................... $ .67 $ 1.62 $ 1.75 $ 2.99
======== ======== ========= =========
Weighted average shares outstanding:
Basic......................................... 118,663 117,216 118,745 116,990
======== ======== ========= =========
Diluted....................................... 120,297 118,457 120,321 118,283
======== ======== ========= =========
Dividends declared per share....................... $ .10 $ - $ .20 $ -
======== ======== ========= =========
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
Acquisition of Evergreen
Resources, Inc............... 254 928,667 - (6,027) - - - 922,894
Dividends declared............. - - - - (26,558) - - (26,558)
Exercise of long-term
incentive plan stock
options and employee
stock purchases.............. - (2,186) 30,860 - (8,393) - - 20,281
Purchase of treasury stock..... - - (36,249) - - - - (36,249)
Tax benefits related to
stock-based compensation..... - 4,318 - - - - - 4,318
Deferred compensation:
Compensation deferred........ 5 17,338 - (17,343) - - - -
Deferred compensation
included in net income..... - - - 7,794 - - - 7,794
Net income..................... - - - - 210,806 - - 210,806
Other comprehensive income (loss):
Net deferred hedge losses,
net of tax:
Net deferred hedge losses.. - - - - - (505,522) - (505,522)
Net hedge losses included
in net income............. - - - - - 142,735 - 142,735
Tax benefits related to
net hedge losses.......... - - - - - 134,452 - 134,452
Translation adjustment....... - - - - - - 6,185 6,185
----- --------- ------- -------- --------- --------- -------- ----------
Balance as of September 30, 2004. $1,456 $3,682,540 $(10,774) $ (25,509) $ (711,993) $ (332,465) $ 37,653 $ 2,640,908
===== ========= ======= ======== ========= ========= ======== ==========
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,
------------------------ -------------------------
2004 2003 2004 2003
---------- ---------- ----------- ----------
Cash flows from operating activities:
Net income...................................... $ 80,916 $ 191,813 $ 210,806 $ 353,218
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion, depreciation and amortization..... 139,991 103,534 419,240 274,142
Impairment of oil and gas properties......... 34,825 - 34,825 -
Exploration expenses, including dry holes.... 14,058 15,677 126,336 83,204
Deferred income taxes........................ 16,011 (103,691) 95,875 (103,938)
Loss (gain) on disposition of assets, net.... (215) (46) 30 (1,576)
Accretion of discount on asset retirement
obligations................................ 2,030 1,327 6,012 3,656
Interest related amortization................ (1,094) (4,781) (12,457) (13,960)
Commodity hedge related amortization......... (11,311) (18,132) (33,844) (54,119)
Cumulative effect of change in accounting
principle, net of tax...................... - - - (15,413)
Amortization of stock-based compensation..... 2,928 1,609 7,794 4,321
Other noncash items.......................... 788 (11) 6,492 4,259
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable, net..................... 13,450 17,932 (45,090) 3,287
Inventories.................................. (5,572) (4,678) (9,752) (8,895)
Prepaid expenses............................. (6,881) 1,102 (2,034) (8,404)
Other current assets, net.................... 380 (2,712) 1,137 (3,276)
Accounts payable............................. (23,019) 23,281 (27,773) 28,951
Interest payable............................. (14,526) 850 (14,440) 581
Income taxes payable......................... (1,460) 1,740 2,995 3,916
Other current liabilities.................... (2,160) (2,349) (8,679) (3,278)
--------- --------- ---------- ---------
Net cash provided by operating activities.. 239,139 222,465 757,473 546,676
--------- --------- ---------- ---------
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired.. (849,450) - (849,450) -
Proceeds from disposition of assets............. 510 9,294 1,050 35,006
Additions to oil and gas properties............. (116,922) (134,889) (467,753) (521,985)
Other property additions, net................... (9,894) (1,814) (24,137) (8,170)
--------- --------- ---------- ---------
Net cash used in investing activities...... (975,756) (127,409) (1,340,290) (495,149)
--------- --------- ---------- ---------
Cash flows from financing activities:
Borrowings under long-term debt................. 876,000 50,913 1,032,477 222,725
Principal payments on long-term debt............ (109,002) (142,913) (401,479) (270,262)
Payment of other liabilities.................... (28,059) (4,869) (36,178) (11,097)
Exercise of long-term incentive plan stock
options and employee stock purchases......... 6,273 2,481 20,281 12,342
Purchase of treasury stock...................... (20,963) - (36,249) (2,349)
Payment of financing fees....................... (510) - (642) -
Dividends paid.................................. - - (12,005) -
--------- --------- ---------- ---------
Net cash provided by (used in)
financing activities................... 723,739 (94,388) 566,205 (48,641)
--------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... (12,878) 668 (16,612) 2,886
Effect of exchange rate changes on cash and
cash equivalents................................ 615 (173) 262 1,275
Cash and cash equivalents, beginning of period.... 15,212 12,156 19,299 8,490
--------- --------- ---------- ---------
Cash and cash equivalents, end of period.......... $ 2,949 $ 12,651 $ 2,949 $ 12,651
========= ========= ========== =========
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,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income.......................................... $ 80,916 $ 191,813 $ 210,806 $ 353,218
-------- -------- -------- --------
Other comprehensive income (loss):
Net deferred hedge gains (losses), net of tax:
Net deferred hedge gains (losses).............. (267,926) 47,015 (505,522) (188,043)
Deferred income tax valuation reserve
adjustment related to hedging................ - 23,288 - 23,288
Net hedge losses included in net income........ 55,850 27,911 142,735 100,872
Tax benefits (provisions) related to net
hedge gains and losses....................... 77,873 (447) 134,452 (715)
Translation adjustment............................ 12,005 (1,017) 6,185 28,808
-------- -------- -------- --------
Other comprehensive income (loss)............ (122,198) 96,750 (222,150) (35,790)
-------- -------- -------- --------
Comprehensive income (loss)......................... $ (41,282) $ 288,563 $ (11,344) $ 317,428
======== ======== ======== ========
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, 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 a large independent oil and gas
exploration and production company with operations in the United States,
Argentina, Canada, Equatorial Guinea, South Africa and Tunisia.
On September 28, 2004, the Company completed a merger with Evergreen
Resources, Inc. ("Evergreen"), as set forth in the Agreement and Plan of Merger
dated May 3, 2004 (the "Merger Agreement"), that added to the Company's United
States asset base and expanded its portfolio of development and exploration
opportunities in North America. Evergreen's operations were primarily focused on
developing and expanding its coal bed methane production from the Raton Basin in
southern Colorado.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141"), the merger has been
accounted for as a purchase of Evergreen by Pioneer. As a result, the historical
financial statements for the Company are those of Pioneer, and the Company's
Consolidated Balance Sheets present the addition of Evergreen's assets and
liabilities as of September 28, 2004. The accompanying Consolidated Statements
of Operations and Consolidated Statements of Cash Flows do not include any
financial results of Evergreen for the periods presented. Financial results of
the acquired assets and liabilities will be included in Pioneer's reported
results beginning October 1, 2004. See Note C for additional information
regarding the Evergreen merger.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the unaudited consolidated
financial statements of the Company as of September 30, 2004 and for the three
and nine months ended September 30, 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
("GAAP") 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 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" 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. See Note G for additional
information regarding the Company's asset retirement obligations.
9
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Inventories. Inventories were comprised of $31.5 million and $15.3 million
of lease and well equipment and $4.1 million and $2.2 million of commodities as
of September 30, 2004 and December 31, 2003, respectively. Lease and well
equipment inventories were net of valuation reserve allowances of $.5 million
and $.6 million as of September 30, 2004 and December 31, 2003, respectively.
Goodwill. As is described in Note C, the Company recorded $333.2 million of
goodwill associated with the Evergreen merger. The goodwill was recorded to the
Company's United States reporting unit and will be subject to change during the
twelve-month period following the merger if the settlement values of monetary
assets acquired and liabilities assumed in the merger differ from their
estimated values as of September 28, 2004. In accordance with Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
goodwill is not amortized to earnings but is assessed for impairment whenever
events or circumstances indicate that impairment of the carrying value of
goodwill is likely, but no less often than annually. If the carrying value of
goodwill is determined to be impaired, it is reduced for the impaired value with
a corresponding charge to pretax earnings in the period in which it is
determined to be impaired.
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. The Company did not grant any stock
options under the Long-Term Incentive Plan during the nine months ended
September 30, 2004. Stock-based compensation expense associated with option
grants was not recognized in the determination of the Company's net income
during the three and nine months ended September 30, 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.
In accordance with the Merger Agreement, on September 28, 2004, the Company
assumed 200,051 restricted stock units, associated with which the Company
recorded $6.0 million of deferred compensation that will be amortized as charges
to compensation expense over the periods in which their restrictions lapse, and
fully-vested options to purchase 2,383,434 shares of the Company's common stock
at various exercise prices, the weighted average price per share of which was
$11.18. The assumed restricted stock units and options were outstanding awards
to Evergreen employees when the Evergreen merger occurred.
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 and
nine months ended September 30, 2004 and 2003:
10
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- -----------------------
2004 2003 2004 2003
-------- --------- --------- ----------
(in thousands, except per share amounts)
Net income, as reported...................... $ 80,916 $ 191,813 $ 210,806 $ 353,218
Plus: Stock-based compensation expense
included in net income for all awards,
net of tax (a)............................. 1,859 1,022 4,949 2,744
Deduct: Stock-based compensation expense
determined under fair value based method
for all awards, net of tax (a)............. (3,273) (3,027) (9,809) (8,700)
------- -------- -------- --------
Pro forma net income......................... $ 79,502 $ 189,808 $ 205,946 $ 347,262
======= ======== ======== ========
Net income per share:
Basic - as reported........................ $ .68 $ 1.64 $ 1.78 $ 3.02
======= ======== ======== ========
Basic - pro forma.......................... $ .67 $ 1.62 $ 1.73 $ 2.97
======= ======== ======== ========
Diluted - as reported...................... $ .67 $ 1.62 $ 1.75 $ 2.99
======= ======== ======== ========
Diluted - pro forma........................ $ .66 $ 1.60 $ 1.71 $ 2.94
======= ======== ======== ========
- -----------
(a) For the three and nine months ended September 30, 2004, stock-based
compensation expense included in net income is net of tax benefits of $1.1
million and $2.8 million, respectively. Similarly, stock-based compensation
expense determined under the fair value based method for the three and nine
months ended September 30, 2004 is net of tax benefits of $1.9 million and
$5.6 million, respectively. For the three and nine months ended September
30, 2003, stock-based compensation expense included in net income is net of
tax benefits of $.6 million and $1.6 million, respectively. Similarly,
stock-based compensation expense determined under the fair value based
method for the three and nine months ended September 30, 2003 is net of tax
benefits of $1.7 million and $5.0 million, respectively. See Note D for
additional information regarding the Company's income taxes.
NOTE C. Evergreen Merger
On September 28, 2004, Pioneer completed its merger with Evergreen with
Pioneer being the surviving corporation for accounting purposes. The transaction
was accounted for as a purchase of Evergreen by Pioneer in accordance with SFAS
141. The merger with Evergreen was accomplished through the issuance of 25.4
million shares of Pioneer common stock and $850.5 million of cash to the
Evergreen shareholders. The value of each share of Pioneer was based on the
five-day average closing price of Pioneer's common stock surrounding the May 3,
2004 announcement date of the merger. In addition, as consideration for
Evergreen's Kansas assets, which were sold to a third party for net proceeds of
$20.9 million on September 27, 2004, Evergreen stockholders received an
additional cash payment equal to $.48 per Evergreen common share. In total, the
aggregate purchase consideration for the assets acquired and liabilities assumed
from Evergreen was $1,756.3 million. The cash consideration paid in the merger
was financed through borrowings on the Company's new $900 million, 364-day
senior unsecured revolving credit facility (the "364-Day Credit Agreement"). See
Note E for additional information on the 364-Day Credit Agreement.
11
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
The following table represents the allocation of the total purchase price
of Evergreen to the acquired assets and assumed liabilities based upon the fair
values assigned to each of the significant assets acquired and liabilities
assumed. Any future adjustments to the allocation of the purchase price are not
anticipated to be material to the Company's financial statements.
(in thousands)
-------------
Fair value of Evergreen's net assets:
Net working capital..................................................... $ (44,307)
Proved oil and gas properties........................................... 2,222,393
Unproved oil and gas properties......................................... 284,732
Other assets............................................................ 40,522
Goodwill................................................................ 333,203
Long-term debt.......................................................... (305,500)
Net deferred income tax liabilities..................................... (679,558)
Other noncurrent liabilities, including minority interest
in subsidiaries....................................................... (37,724)
Deferred compensation associated with unvested restricted stock awards.. 6,027
Additional paid-in capital (excess fair value of convertible debt
attributable to equity conversion rights)............................. (63,500)
----------
$ 1,756,288
==========
Consideration paid for Evergreen's net assets:
Pioneer common stock issued............................................. $ 826,514
Cash consideration paid................................................. 871,423
----------
Aggregate purchase consideration issued to Evergreen stockholders....... 1,697,937
Plus:
Pioneer common stock issuable to holders of unvested restricted
stock awards upon lapse of restrictions........................... 6,435
Proceeds from the sale of Kansas properties to be paid to holders
of unvested restricted stock awards upon lapse of restrictions.... 83
Exchange of Evergreen employee stock options........................ 32,389
Estimated direct merger costs incurred.............................. 19,444
----------
Total purchase price.............................................. $ 1,756,288
==========
Evergreen was a publicly-traded independent oil and gas company primarily
engaged in the production, development, exploration and acquisition of North
American unconventional natural gas. Evergreen was based in Denver, Colorado and
was one of the leading developers of coal bed methane reserves in the United
States. Evergreen's operations were principally focused on developing and
expanding its coal bed methane project located in the Raton Basin in southern
Colorado. Evergreen also had operations in the Piceance Basin in western
Colorado, the Uintah Basin in eastern Utah and the Western Canada Sedimentary
Basin as a result of Evergreen's acquisition of Carbon Energy Corporation on
October 29, 2003 (the "Carbon acquisition").
The merger with Evergreen provided an opportunity for the Company to
rebalance its portfolio of long-lived foundation assets by adding Evergreen's
long-lived onshore producing asset base and significant low-risk development and
extension drilling opportunities. Additionally, the Company's decision to
complete the merger was positively impacted by the compatible technical and
corporate cultures of Pioneer and Evergreen, Evergreen's substantial acreage
position in key growth basins of the United States Rockies area and the
opportunity to leverage Evergreen's technical expertise in the area of coal bed
methane operations. These strategic opportunities were among the factors
considered when the Company determined its offering price for the Evergreen net
assets.
12
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Included in working capital and other assets in the table above is $6.4
million of intangible assets attributable to noncompete agreements executed with
three former executive officers of Evergreen, including Mr. Mark Sexton, a
director of the Company since the merger and formerly Evergreen's President,
Chief Executive Officer and Chairman of the board of directors. The noncompete
agreements will be amortized on a straight-line basis as charges to the
Company's net income during the two-year period subsequent to the merger.
Additionally, the Company recorded $333.2 million of goodwill associated with
the Evergreen merger, which amount represents the excess of the purchase
consideration over the net fair value of the identifiable net assets acquired.
The goodwill has been recorded as an asset of the Company's United States
reporting unit and is not expected to be deductible for income tax purposes. The
fair values of the monetary assets acquired and liabilities assumed will be
monitored during the twelve-month period following the merger and adjusted if
their settlement values differ from the estimated fair values assigned to them
as of September 28, 2004. Forthcoming adjustments of the fair values assigned to
acquired monetary assets and liabilities, if required, will change the value
assigned to goodwill in the merger.
The following unaudited pro forma combined condensed financial data for the
three and nine months ended September 30, 2004 was derived from the historical
financial statements of Pioneer and Evergreen giving effect to the Evergreen
merger as if it had occurred on January 1, 2004. The following unaudited pro
forma combined condensed financial data for the three and nine months ended
September 30, 2003 was derived from the historical financial statements of
Pioneer and Evergreen giving effect to the merger as if the merger and the
Carbon acquisition had each occurred on January 1, 2003. The unaudited pro forma
combined condensed financial data have been included for comparative purposes
only and are not necessarily indicative of the results that might have occurred
had the transactions taken place as of the dates indicated and are not intended
to be a projection of future results.
Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------------
2004 2003 2004 2003
-------- -------- ---------- ----------
(in thousands, except per share amounts)
Revenues.............................................. $528,108 $402,907 $1,567,861 $1,157,977
======= ======= ========= =========
Income before cumulative effect of change in
accounting principle............................... $ 78,382 $196,010 $ 222,065 $ 347,505
Cumulative effect of change in accounting principle,
net of tax......................................... - - - 15,036
------- ------- --------- ---------
Net income............................................ $ 78,382 $196,010 $ 222,065 $ 362,541
======= ======= ========= =========
Basic earnings per share:
Income before cumulative effect of change
in accounting principle.......................... $ .54 $ 1.37 $ 1.54 $ 2.44
Cumulative effect of change in accounting
principle, net of tax............................ - - - .11
------- ------- --------- ---------
Net income......................................... $ .54 $ 1.37 $ 1.54 $ 2.55
======= ======= ========= =========
Diluted earnings per share:
Income before cumulative effect of change
in accounting principle.......................... $ .53 $ 1.33 $ 1.50 $ 2.37
Cumulative effect of change in accounting
principle, net of tax............................ - - - .11
------- ------- --------- ---------
Net income......................................... $ .53 $ 1.33 $ 1.50 $ 2.48
======= ======= ========= =========
13
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE D. Income Taxes
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 valuation allowances 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.
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 September 30, 2004, the Company's valuation allowances related to foreign
tax jurisdictions were $84.2 million.
During the three and nine months ended September 30, 2004, the Company
recorded a $24.8 million tax benefit associated with the expected deduction of
the Company's investment in Gabon resulting from the impairment of the Olowi
field. See Note L for additional discussion regarding the impairment of the
Gabonese Olowi field.
The Company's effective tax rate on future earnings in the United States
will approximate statutory rates.
Income tax provision (benefit) attributable to income before cumulative
effect of change in accounting principle consisted of the following for the
three and nine months ended September 30, 2004 and 2003:
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ----------
(in thousands)
Current:
U.S. state and local.......... $ 293 $ 201 $ 3,094 $ 839
Foreign....................... 7,223 3,595 16,094 8,138
-------- -------- -------- --------
7,516 3,796 19,188 8,977
-------- -------- -------- --------
Deferred:
U.S. state and local.......... 15,925 (104,670) 99,095 (104,670)
Foreign....................... 86 979 (3,220) 732
-------- -------- -------- --------
16,011 (103,691) 95,875 (103,938)
-------- -------- -------- --------
$ 23,527 $ (99,895) $ 115,063 $ (94,961)
======== ======== ======== ========
NOTE E. Long-term Debt
Lines of credit. During June 2004, the Company entered into a first
amendment (the "First Amendment") to its $700 million, five-year revolving
credit agreement (the "Revolving Credit Agreement"). As a result of the First
Amendment, Pioneer Natural Resources USA, Inc., a wholly-owned subsidiary of the
Company ("Pioneer USA"), is no longer a guarantor of the Revolving Credit
Agreement. The indentures for the Company's senior notes provide for subsidiary
guarantees equivalent to any such guarantees provided under the Revolving Credit
Agreement. Accordingly, the First Amendment also has the effect of removing
Pioneer USA as a guarantor of the Company's senior notes.
The Company financed the cash costs of the Evergreen merger by entering
into the 364-Day Credit Agreement, the terms of which essentially mirror those
of the Company's Revolving Credit Agreement. The 364-Day Credit Agreement bears
14
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
a variable annual rate of interest equal to the six-month LIBOR rate plus a 75
basis point LIBOR margin and matures on September 28, 2005, at which time
outstanding borrowings thereunder may be converted to one-year term loans.
Senior notes. On July 15, 2004, the Company accepted tenders to exchange
$117.9 million, $275.1 million and $133.8 million in principal amount of its 8
1/4% Senior Notes due 2007 (the "8 1/4% Notes"), 9-5/8% Senior Notes due April
1, 2010 (the "9-5/8% Notes") and 7.50% Senior Notes due 2012 (the "7.50% Notes"
and collectively with the 8 1/4% Notes and the 9-5/8% Notes, the "Old Notes"),
respectively, for a like principal amount of a new series of 5.875% Senior Notes
due 2016 (the "New Notes") and cash. The aggregate exchange price paid to the
holders of the tendered Old Notes exceeded their aggregate principal balances by
$109.0 million, which amount was paid in cash to the holders of the New Notes.
In accordance with Financial Accounting Standards Board Emerging Issues Task
Force Abstract Issue No. 96-19, "Debtors Accounting for a Modification or
Exchange of Debt Instruments," this amount is being amortized as an increase to
the Company's interest expense over the term of the New Notes. In connection
with the tenders of the 9-5/8% Notes and the 7.50% Notes, the Company received
consents which permanently remove substantially all of the operating
restrictions with respect to those notes once certain investment grade ratings
are achieved. Associated with the tenders to exchange the Old Notes, the Company
incurred direct transaction costs of $.5 million and $2.0 million during the
three and nine month periods ended September 30, 2004, respectively, which were
recorded as charges to other expense in the accompanying Consolidated Statements
of Operations.
Interest on the New Notes is payable semiannually on January 15 and July 15
of each year, commencing January 15, 2005. The New Notes are governed by an
indenture between the Company and The Bank of New York dated January 13, 1998.
The New Notes are general unsecured obligations of the Company ranking equally
in right of payment with all other senior unsecured indebtedness of the Company
and are senior in right of payment to all existing and future subordinated
indebtedness of the Company.
In connection with the Evergreen merger, the Company assumed the position
of Evergreen as the issuer of $100 million of 4.75% Senior Convertible Notes due
2021 (the "Convertible Notes") and $200 million of 5.875% Senior Subordinated
Notes due 2012 (the "Subordinated Notes"). In addition to a 4.75 percent fixed
annual rate of interest, the Company is required to pay contingent interest to
the holders of the Convertible Notes if the average trading price of the
Convertible Notes for an established number of days exceeds 120 percent or more
of the principal amount of the Convertible Notes. The rate of contingent
interest payable in respect to any six-month period will equal the greater of
(1) a per annum rate equal to five percent of the Company's estimated per annum
borrowing rate for senior nonconvertible fixed-rate debt with a maturity date
comparable to the Convertible Notes or (2) .30 percent per annum. In no event
may the contingent interest rate exceed .40 percent per annum. Evergreen paid
contingent interest of $.2 million on the Convertible Notes in June 2004.
The Convertible Notes are due on December 15, 2021 but are redeemable at
either the Company's option or the holder's option on other specified dates. The
Company may redeem the Convertible Notes at its option in whole or in part
beginning on December 20, 2006, at 100 percent of their principal amount plus
accrued and unpaid interest (including contingent interest). Holders of the
Convertible Notes may require the Company to repurchase the Convertible Notes as
a result of the Evergreen merger. Holders may also require the Company to
repurchase all or part of the Convertible Notes on December 20, 2006, December
15, 2011 or December 15, 2016 at a repurchase price of 100 percent of the
principal amount of the Convertible Notes plus accrued and unpaid interest
(including contingent interest). On December 20, 2006, the Company may pay the
repurchase price in cash, in shares of common stock, or in any combination of
cash and common stock. On December 15, 2011 or December 15, 2016, the Company
must pay the repurchase price in cash.
The Convertible Notes are convertible into .58175 shares of the Company's
common stock plus $19.98, which includes Evergreen Kansas properties proceeds,
at a conversion price of $25.00 under certain circumstances as discussed below.
The Convertible Notes can be converted at the option of the holder if, for a
specified period of time, the closing price of .58175 shares of the Company's
15
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
common stock plus $19.98 exceeds 110 percent of the $25.00 conversion price, or
if the average trading value of the Convertible Notes for a specified period of
time is less than 105 percent of an average conversion value as defined by the
indenture governing the Convertible Notes. Given that the Convertible Notes are
eligible for conversion, they are currently considered potential common shares
in the computation of the Company's future fully diluted shares. The Convertible
Notes may also be converted at the election of the holder upon notice of
redemption, or at any time the Convertible Notes are rated by either Moody's
Investors Service, Inc. or Standard & Poor's Rating Group and the credit rating
initially assigned to the Convertible Notes by either such rating agency is
reduced by two or more ratings levels, or upon the occurrence of certain
corporate transactions including a change in control or the distribution to
current holders of the Company's common stock certain purchase rights or any
other asset that has a value exceeding ten percent of the sale price of the
common stock on the day preceding the declaration date of the distribution of
such assets.
The Subordinated Notes assumed in the Evergreen merger are due on March 15,
2012 with interest payable on March 15 and September 15 of each year. The
Subordinated Notes were unsecured senior subordinated indebtedness, were
subordinated in right of payment to all of the Company's existing and future
senior indebtedness, and ranked equally in right of payment with all of the
Company's future senior unsecured subordinated indebtedness. Prior to March 15,
2007, the Company may redeem up to 35 percent of the original principle amount
of the Subordinated Notes with the net cash proceeds of one or more equity
offerings at a redemption price of 105.875 percent of the principal amount of
the Subordinated Notes, plus accrued and unpaid interest. On or after March 15,
2008, the Company may redeem all or a portion of the Subordinated Notes at
redemption prices ranging from 102.938 percent to 100 percent of the principal
amount, as provided by the indenture for the Subordinated Notes. The
Subordinated Notes also contain provisions for mandatory redemption upon the
occurrence of certain future events, including a change in control. During
October 2004, the Company, pursuant to the indenture for the Subordinated Notes,
commenced an offer, in connection with the change of control of Evergreen (the
"Change of Control Offer"), to repurchase any or all of the Subordinated Notes
at a purchase price in cash equal to 101 percent of the principal amount of the
Subordinated Notes, plus accrued and unpaid interest. The Change of Control
Offer expires on November 10, 2004. In addition to the Change of Control Offer,
during October 2004 the Company solicited consents to proposed amendments to the
Subordinated Notes indenture to:
o eliminate the subordination of the right of payment on the Subordinated
Notes to the payment in full of all existing and future senior
indebtedness of Pioneer;
o amend restrictive covenants applicable to the Subordinated Notes so
that they are the same as the restrictive covenants in Pioneer's senior
notes that were originally issued as high-yield notes; and
o amend the provisions of the Subordinated Notes that suspend the
restrictive covenants when the Subordinated Notes have certain
investment grade ratings so that those provisions are the same as the
suspension and permanent-elimination provisions in Pioneer's senior
notes that were originally issued as high-yield notes.
Holders of a majority in outstanding principal amount of the Subordinated Notes
approved the proposed amendments on October 29, 2004. As a result, the
Subordinated Notes are no longer subordinated.
NOTE F. 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 7.50%
Notes. The terms of the interest rate swap contracts matched the scheduled
maturity of the hedged senior notes, required the counterparties to pay the
Company a 7.50 percent fixed annual interest rate and required 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
the third quarter of 2004, the Company terminated these interest rate swap
16
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
contracts for $8.5 million of cash payments. During April 2004, the Company
entered into interest rate swap contracts on an aggregate $150 million notional
amount to hedge the fair value of its 9-5/8% Notes. The terms of the 9-5/8
percent interest rate swap contracts matched the scheduled maturity of the
hedged senior notes, required the counterparties to pay the Company a 9-5/8
percent fixed annual interest rate and required the Company to pay the
counterparties variable annual interest rates equal to the periodic six-month
LIBOR plus a weighted average annual margin of 5.66 percent. During the third
quarter of 2004, the Company terminated these interest rate swap contracts for
$1.8 million of cash payments. During August and February 2003, the Company
entered into similar interest rate swap contracts which were terminated during
September and May 2003 for $10.1 million and $11.4 million of cash proceeds,
respectively. Settlements of open fair value hedges reduced the Company's
interest expense by $.2 million and $1.3 million during the three-month periods
ended September 30, 2004 and 2003, respectively, and by $2.2 million and $3.2
million during the nine-month periods then ended, respectively. As of September
30, 2004, the Company was not a party to any open fair value hedges.
As of September 30, 2004, the carrying value of the Company's long-term
debt in the accompanying Consolidated Balance Sheets included a $1.0 million
reduction in the carrying value attributable to net deferred hedge losses on
terminated fair value hedges that are being amortized as net increases 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 $3.4 million and $6.3 million
during the three-month periods ended September 30, 2004 and 2003, respectively,
and by $16.7 million and $18.1 million during the nine-month periods then ended,
respectively.
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 interest rate swaps' gains or losses from the measurement of
hedge effectiveness. Accordingly, the Company did not realize any hedge
ineffectiveness associated with its fair value hedges during the three and nine
months ended September 30, 2004 or 2003.
The following table sets forth, as of September 30, 2004, the scheduled
amortization of net deferred hedge gains (losses) on terminated interest rate
hedges, including $3.4 million of deferred losses on terminated cash flow
interest rate hedges, 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 deferred hedge gains......... $ 2,460 $ 2,460
2005 net deferred hedge gains......... $ 2,213 $ 1,300 $ 880 $ 569 4,962
Thereafter............................ (11,799)
-------
$ (4,377)
=======
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, from time to time, utilized interest
rate contracts to reduce the effect of interest rate volatility on the Company's
indebtedness and forward currency exchange agreements to reduce the effect of
U.S. dollar to Canadian dollar exchange rate volatility.
17
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
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 September 30, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
------------- ------------- ------------- ------------- -------------
Average daily oil production
hedged:
2004 - Swap Contracts
Volume (Bbl)........... 24,000 24,000
Price per Bbl.......... $ 29.65 $ 29.65
2005 - Swap Contracts
Volume (Bbl)........... 28,000 28,000 28,000 28,000 28,000
Price per Bbl.......... $ 28.47 $ 28.47 $ 28.47 $ 28.47 $ 28.47
2005 - Collar Contracts
Volume (Bbl)........... 1,000 1,000 1,000 1,000 1,000
Price per Bbl.......... $35.00-$51.10 $35.00-$51.10 $35.00-$51.10 $35.00-$51.10 $35.00-$51.10
2006 - Swap Contracts
Volume (Bbl)........... 11,500 11,500 11,500 11,500 11,500
Price per Bbl.......... $ 32.52 $ 32.52 $ 32.52 $ 32.52 $ 32.52
2006 - Collar Contracts
Volume (Bbl)........... 4,500 4,500 4,500 4,500 4,500
Price per Bbl.......... $35.00-$41.93 $35.00-$41.93 $35.00-$41.93 $35.00-$41.93 $35.00-$41.93
2007 - Swap Contracts
Volume (Bbl)........... 13,000 13,000 13,000 13,000 13,000
Price per Bbl.......... $ 30.89 $ 30.89 $ 30.89 $ 30.89 $ 30.89
2008 - Swap Contracts
Volume (Bbl)........... 17,000 17,000 17,000 17,000 17,000
Price per Bbl.......... $ 29.21 $ 29.21 $ 29.21 $ 29.21 $ 29.21
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 months ended September 30,
2004 and 2003:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Average price reported per Bbl............. $ 33.10 $ 25.35 $ 29.79 $ 25.14
Average price realized per Bbl............. $ 39.61 $ 28.27 $ 35.21 $ 28.84
Reduction to oil revenue (in millions)..... $ (27.6) $ (9.1) $ (68.6) $ (32.9)
Natural gas liquids prices. During the three and nine months ended
September 30, 2004 and 2003, the Company did not enter into any NGL hedge
contracts. There were no outstanding NGL hedge contracts at September 30, 2004.
18
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
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
September 30, 2004:
Yearly
First Second Third Fourth Outstanding
Quarter Quarter Quarter Quarter Average
----------- ----------- ----------- ----------- ------------
Average daily gas production
hedged:
2004 - Swap Contracts
Volume (Mcf).............. 426,163 426,163
Index price per MMBtu..... $ 4.54 $ 4.54
2005 - Swap Contracts
Volume (Mcf).............. 290,000 280,000 280,000 250,000 274,904
Index price per MMBtu..... $ 5.30 $ 5.16 $ 5.16 $ 5.14 $ 5.19
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
2006 - Collar Contracts
Volume (Mcf).............. 5,000 5,000 5,000 5,000 5,000
Index price per MMBtu..... $5.25-$7.15 $5.25-$7.15 $5.25-$7.15 $5.25-$7.15 $5.25-$7.15
2007 - Swap Contracts
Volume (Mcf).............. 25,000 25,000 25,000 25,000 25,000
Index price per MMBtu..... $ 3.94 $ 3.94 $ 3.94 $ 3.94 $ 3.94
2008 - Swap Contracts
Volume (Mcf).............. 5,000 5,000 5,000 5,000 5,000
Index price per MMBtu..... $ 5.38 $ 5.38 $ 5.38 $ 5.38 $ 5.38
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 and nine
months ended September 30, 2004 and 2003:
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
Average price reported per Mcf............ $ 4.18 $ 3.71 $ 4.32 $ 3.98
Average price realized per Mcf............ $ 4.63 $ 4.03 $ 4.71 $ 4.43
Reduction to gas revenue (in millions).... $ (28.2) $ (18.9) $ (74.1) $ (68.0)
Interest rate. During June 2004, the Company entered into costless collar
contracts and designated the contracts as cash flow hedges of the forecasted
interest rate risk attributable to the yield on the benchmark 4.75 percent U.S.
Treasury Notes due May 15, 2014 (the "U.S. Treasuries"). The terms of the collar
contracts fixed the annual yield on $250 million notional amount of U.S.
Treasuries within a yield collar having a ceiling rate of 4.70 percent and a
floor rate of 4.65 percent. The yield on the U.S. Treasuries as of July 7, 2004
was the benchmark rate used to determine the coupon rate on the Company's New
Notes, which were issued on July 15, 2004 in exchange for portions of the Old
Notes. During July 2004, the Company terminated these costless collar contracts
for $3.4 million of cash payments. The Company did not realize any
ineffectiveness in connection with the costless collar contracts during the
three and nine months ended September 30, 2004. See Note E for information
regarding the July 15, 2004 debt exchange.
19
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Hedge ineffectiveness. During the three-month periods ended September 30,
2004 and 2003, the Company recognized other income and other expense of $.3
million, respectively, related to the ineffective portions of its cash flow
hedging instruments. During the nine-month periods ended September 30, 2004 and
2003, the Company recognized other expense of $1.5 million and $2.6 million,
respectively, related to the ineffective portions of its cash flow hedging
instruments.
Accumulated other comprehensive income (loss) - net deferred hedge losses,
net of tax ("AOCI - Hedging"). As of September 30, 2004 and December 31, 2003,
AOCI - Hedging represented net deferred losses of $332.5 million and $104.1
million, respectively. The AOCI - Hedging balance as of September 30, 2004 was
comprised of $527.1 million of net deferred losses on the effective portions of
open cash flow hedges, $8.8 million of net deferred gains on terminated cash
flow hedges and $185.8 million of associated net deferred tax benefits. The
increase in AOCI - Hedging during the nine months ended September 30, 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 hedge contracts
matured by their terms. The net deferred 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 gains on terminated cash flow hedges are fixed.
During the twelve months ending September 30, 2005, based on current
estimates of future commodity prices, the Company expects to reclassify $344.7
million of net deferred losses associated with open commodity hedges and $11.9
million of net deferred gains on terminated commodity hedges from AOCI - Hedging
to oil and gas revenues. The Company also expects to reclassify approximately
$121.5 million of net deferred income tax benefits during the twelve months
ending September 30, 2005 from AOCI - Hedging to income tax provision.
The following table sets forth, as of September 30, 2004, the scheduled
amortization of net deferred gains on terminated commodity hedges that will be
recognized as increases to the Company's future oil and gas revenues:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
(in thousands)
2004 net deferred hedge gains..... $10,954 $ 10,954
2005 net deferred hedge gains..... $ 307 $ 310 $ 315 $ 317 1,249
-------
$ 12,203
=======
NOTE G. 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 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 and nine months ended September 30, 2004 and 2003:
20
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ----------
(in thousands)
Beginning asset retirement obligations......... $ 108,820 $ 65,223 $ 105,036 $ 34,692
Cumulative effect adjustment................... - - - 23,393
Fair value of Evergreen liabilities assumed.... 14,541 - 14,541 -
New wells placed on production and
changes in estimates........................ 170 7,740 3,238 14,755
Liabilities settled............................ (1,082) (907) (4,060) (4,283)
Accretion of discount.......................... 2,030 1,327 6,012 3,656
Currency translation........................... 619 (36) 331 1,134
-------- -------- -------- --------
Ending asset retirement obligations ........... $ 125,098 $ 73,347 $ 125,098 $ 73,347
======== ======== ======== ========
The Company records the current and noncurrent portions of asset retirement
obligations in other current liabilities and other liabilities, respectively, in
the accompanying Consolidated Balance Sheets.
NOTE H. Postretirement Benefit Obligations
As of September 30, 2004 and December 31, 2003, the Company had recorded
$15.7 million and $15.6 million, respectively, of unfunded accumulated
postretirement benefit obligations, the current and noncurrent portions of which
are included in other current liabilities and other liabilities, respectively,
in the accompanying Consolidated Balance Sheets. The following table reconciles
changes in the Company's unfunded accumulated postretirement benefit obligations
during the three and nine months ended September 30, 2004 and 2003:
Three months ended Nine months ended
September 30, September 30,
---------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ----------
(in thousands)
Beginning accumulated postretirement benefit
obligations.................................. $ 15,611 $ 20,009 $ 15,556 $ 19,743
Benefit payments............................... (244) (423) (758) (1,005)
Service costs.................................. 59 51 176 154
Accretion of discounts......................... 226 372 678 1,117
-------- -------- -------- --------
Ending accumulated postretirement benefit
obligations.................................. $ 15,652 $ 20,009 $ 15,652 $ 20,009
======== ======== ======== ========
NOTE I. 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
21
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
Company's Satanta gas plant. The case was relatively inactive for several years.
In early 2000, the plaintiffs amended their pleadings, and the case 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 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 $68 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).
22
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2004, the Company has settled $29.9 million of the
original claim amounts. As of September 30, 2004 and December 31, 2003, the
Company had on deposit $.6 million and $10.7 million, respectively, 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 September 30, 2004 and December 31, 2003.
Subsequent to September 30, 2004, the Company paid the remaining $.3 million of
the original claims, plus accrued interest, and believes it has fully settled
all of the claims.
NOTE J. 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 and nine months ended September 30,
2004 and 2003:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
(in thousands)
Weighted average common shares outstanding (a):
Basic ....................................... 118,663 117,216 118,745 116,990
Dilutive common stock options (b)............. 1,067 1,006 1,108 1,106
Restricted stock awards....................... 567 235 468 187
------- ------- ------- -------
Diluted....................................... 120,297 118,457 120,321 118,283
======= ======= ======= =======
- ---------------
(a) Associated with the Evergreen merger, on September 28, 2004, the Company
issued approximately 25.4 million shares of common stock, assumed 2.4
million in-the-money stock options and assumed the Convertible Notes. These
and other transactions will affect the Company's weighted average common
shares outstanding of future periods.
(b) Common stock options to purchase 761,313 shares and 1,179,766 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 September 30, 2004 and 2003,
respectively, and common stock options to purchase 274,246 shares and
1,308,582 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 nine-month periods ended September 30, 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.
23
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE K. 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 Equatorial Guinea, Gabon,
South Africa and Tunisia.
The following tables provide the Company's interim geographic operating
segment data for the three and nine months ended September 30, 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.
24
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
United Headquarters Consolidated
States Argentina Canada Africa and Other Total
---------- --------- -------- --------- ------------ ------------
(in thousands)
Three months ended September 30, 2004:
Revenues and other income:
Oil and gas...................... $ 360,300 $ 40,288 $ 18,375 $ 33,876 $ - $ 452,839
Interest and other............... - - - - 1,212 1,212
Gain on disposition of
assets, net.................... - - - - 215 215
--------- ------- ------- -------- ------- ---------
360,300 40,288 18,375 33,876 1,427 454,266
--------- ------- ------- -------- ------- ---------
Costs and expenses:
Oil and gas production........... 73,389 8,917 6,689 4,219 - 93,214
Depletion, depreciation and
amortization.................. 105,216 17,304 7,245 7,333 2,893 139,991
Impairment of oil and gas
properties.................... - - - 34,825 - 34,825
Exploration and abandonments..... 18,543 2,898 4,218 7,306 - 32,965
General and administrative....... - - - - 19,485 19,485
Accretion of discount on asset
retirement obligations........ - - - - 2,030 2,030
Interest......................... - - - - 24,827 24,827
Other............................ - - - - 2,486 2,486
--------- ------- ------- -------- ------- ---------
197,148 29,119 18,152 53,683 51,721 349,823
--------- ------- ------- -------- ------- ---------
Income (loss) before income taxes... 163,152 11,169 223 (19,807) (50,294) 104,443
Income tax benefit (provision)...... (59,550) (3,909) (84) 7,876 32,140 (23,527)
--------- ------- ------- -------- ------- ---------
Net income (loss)................... $ 103,602 $ 7,260 $ 139 $ (11,931) $(18,154) $ 80,916
========= ======= ======= ======== ======= =========
Segment assets (as of
September 30, 2004)............... $5,426,683 $703,438 $293,346 $ 140,722 $ 32,034 $6,596,223
========= ======= ======= ======== ======= =========
Three months ended September 30, 2003:
Revenues and other income:
Oil and gas...................... $ 285,623 $ 30,777 $ 19,550 $ 523 $ - $ 336,473
Interest and other............... - - - - 348 348
Gain (loss) on disposition of
assets, net.................... (2) - - - 48 46
--------- ------- ------- -------- ------- ---------
285,621 30,777 19,550 523 396 336,867
--------- ------- ------- -------- ------- ---------
Costs and expenses:
Oil and gas production........... 61,456 6,616 7,647 45 - 75,764
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 16,592 4,383 43,541 244,949
--------- ------- ------- -------- ------- ---------
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
========= ======= ======= ======== ======= =========
Segment assets (as of
September 30, 2003)............... $2,547,904 $685,558 $212,002 $ 153,323 $242,823 $3,841,610
========= ======= ======= ======== ======= =========
25
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
United Headquarters Consolidated
States Argentina Canada Africa and Other Total
---------- --------- -------- --------- ------------ ------------
(in thousands)
Nine months ended September 30, 2004:
Revenues and other income:
Oil and gas...................... $1,085,451 $ 97,785 $ 56,473 $ 106,649 $ - $1,346,358
Interest and other............... - - - - 4,557 4,557
Gain (loss) on disposition of
assets, net.................... 51 - (252) - 171 (30)
--------- ------- ------- -------- -------- ---------
1,085,502 97,785 56,221 106,649 4,728 1,350,885
--------- ------- ------- -------- -------- ---------
Costs and expenses:
Oi