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:
Oil and gas production........... 210,656 24,092 22,190 21,052 - 277,990
Depletion, depreciation and
amortization.................. 308,674 44,666 22,112 35,466 8,322 419,240
Impairment of oil and gas
properties.................... - - - 34,825 - 34,825
Exploration and abandonments..... 83,933 14,295 18,448 36,478 - 153,154
General and administrative....... - - - - 55,008 55,008
Accretion of discount on asset
retirement obligations........ - - - - 6,012 6,012
Interest......................... - - - - 67,805 67,805
Other............................ - - - - 10,982 10,982
--------- ------- ------- -------- -------- ---------
603,263 83,053 62,750 127,821 148,129 1,025,016
--------- ------- ------- -------- -------- ---------
Income (loss) before income taxes... 482,239 14,732 (6,529) (21,172) (143,401) 325,869
Income tax benefit (provision)...... (176,017) (5,156) 2,465 8,669 54,976 (115,063)
--------- ------- ------- -------- -------- ---------
Net income (loss)................... $ 306,222 $ 9,576 $ (4,064) $ (12,503) $ (88,425) $ 210,806
========= ======= ======= ======== ======== =========
Nine months ended September 30, 2003:
Revenues and other income:
Oil and gas...................... $ 819,758 $ 79,632 $ 65,799 $ 523 $ - $ 965,712
Interest and other............... - - - - 4,321 4,321
Gain on disposition of assets,
net............................ 1,319 - 1 - 256 1,576
--------- ------- ------- -------- -------- ---------
821,077 79,632 65,800 523 4,577 971,609
--------- ------- ------- -------- -------- ---------
Costs and expenses:
Oil and gas production........... 177,377 18,204 21,848 45 - 217,474
Depletion, depreciation and
amortization.................. 211,457 33,970 21,458 161 7,096 274,142
Exploration and abandonments..... 57,665 10,847 14,949 23,969 - 107,430
General and administrative....... - - - - 44,332 44,332
Accretion of discount on asset
retirement obligations......... - - - - 3,656 3,656
Interest......................... - - - - 69,526 69,526
Other............................ - - - - 12,205 12,205
--------- ------- ------- -------- -------- ---------
446,499 63,021 58,255 24,175 136,815 728,765
--------- ------- ------- -------- -------- ---------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle ......... 374,578 16,611 7,545 (23,652) (132,238) 242,844
Income tax benefit (provision)...... (136,721) (5,814) (2,979) 8,278 232,197 94,961
--------- ------- ------- -------- -------- ---------
Income (loss) before cumulative
effect of change in accounting
principle........................ $ 237,857 $ 10,797 $ 4,566 $ (15,374) $ 99,959 $ 337,805
========= ======= ======= ======== ======== =========
26
PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE L. Impairment of Oil and Gas Properties
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
the Company reviews its long-lived assets to be held and used, including proved
oil and gas properties, whenever events or circumstances indicate that the
carrying value of those assets may not be recoverable. An impairment loss is
indicated if the sum of the expected future cash flows is less than the carrying
amount of the assets. In this circumstance, the Company recognizes an impairment
loss for the amount by which the carrying amount of the asset exceeds the
estimated fair value of the asset.
On October 19, 2004, the Company concluded that a material charge for
impairment was required under SFAS 144 for its Gabonese Olowi field as
development of the discovery was canceled. Due to significant increases in
projected field development costs, primarily due to recent increases in steel
costs, the project does not offer competitive returns. The Olowi field was the
Company's only Gabonese investment. The Company has requested a six-month
extension to its Gabonese permit to evaluate strategic options; however, no
assurance can be given that the extension will be granted or, if granted, that
any strategic alternatives will develop other than the permit expiring and the
Company exiting Gabon. In September 2004, the Company recorded an associated
impairment charge to eliminate the carrying value of the Company's Gabonese
Olowi field of $34.8 million and a $24.8 million tax benefit associated with the
expected deduction of the Company's investment in Gabon.
27
PIONEER NATURAL RESOURCES COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial and Operating Performance
The Company's financial and operating performance for the first nine months
of 2004, as compared to the first nine months of 2003, included the following
highlights and events:
o A 23 percent increase in average daily production on a BOE basis,
with relatively balanced contributions from domestic and foreign
operations.
o A 39 percent increase in oil, NGL and gas revenues due to increased
sales volumes and commodity price levels.
o A 34 percent increase in income before income taxes and cumulative
effect of change in accounting principle.
o A change in the Company's effective income tax rate from a 39
percent benefit to a 35 percent provision primarily due to the
third quarter 2003 reversal of the Company's United States deferred
tax asset valuation allowances.
o A 39 percent increase in net cash provided by operating activities.
o The declaration of two $.10 per common share semiannual dividends.
o A loss of approximately 400 MBOE of third quarter 2004 deepwater
Gulf of Mexico production, and platform rig damage at the Devils
Tower field from Hurricane Ivan. See "Acquisition and Drilling
Highlights" for more information regarding damage and delays
incurred as a result of Hurricane Ivan.
o A $34.8 million impairment charge and $24.8 million of related tax
benefit recorded during the third quarter of 2004 as a result of an
October 2004 decision to cancel Gabonese Olowi field development
plans. See Note L of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements" for more information
pertaining to this matter.
During the first nine months of 2004, the Company also announced the
following financial and operating achievements:
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.
o Merger with Evergreen. See Note C of Notes to Consolidated
Financial Statements included in "Item 1. Financial Statements" and
"Merger with Evergreen Resources, Inc." for information regarding
this important business combination.
o The exchange of portions of the Company's Old Notes for the New
Notes and cash. See Note E of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" and "Capital
Commitments, Capital Resources and Liquidity" for information
regarding this $526.9 million debt exchange that was completed in
July 2004.
o Completion of the First Amendment which removed Pioneer USA as a
guarantor of the Revolving Credit Agreement and had the effect of
removing Pioneer USA as a guarantor of the Company's senior notes.
See Note E of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for information regarding the
First Amendment.
o First production from the Company's deepwater Gulf of Mexico
Harrier field during January 2004, the Devils Tower field during
May 2004 and the Raptor and Tomahawk fields during mid-June 2004.
o The acquisition of a 40 percent interest in Block H offshore
Equatorial Guinea, West Africa.
o The announced agreement to participate in a joint exploration
program with ConocoPhillips and Anadarko Petroleum Corporation in
the National Petroleum Reserve on the North Slope of Alaska.
The Company recorded net income of $80.9 million ($.67 per diluted share)
and $210.8 million ($1.75 per diluted share) for the three and nine months ended
September 30, 2004, respectively, as compared to net income of $191.8 million
($1.62 per diluted share) and $353.2 million ($2.99 per diluted share),
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, for the same respective periods of 2003. See Note G of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for additional information regarding the Company's asset retirement
28
PIONEER NATURAL RESOURCES COMPANY
obligations. Income before income taxes and cumulative effect of change in
accounting principle increased by $12.5 million (14 percent) and $83.0 million
(34 percent) during the three and nine months ended September 30, 2004,
respectively, as compared to the same respective periods of 2003. However,
primarily as a result of 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 $123.4 million and $210.0 million during the
three and nine months ended September 30, 2004, respectively, as compared to the
same respective periods of 2003.
The Company's net cash provided by operating activities was $239.1 million
and $757.5 million for the three and nine months ended September 30, 2004,
respectively, representing increases of $16.7 million and $210.8 million,
respectively, as compared to the same respective periods of 2003. During the
three months ended September 30, 2004, the Company used its net cash provided by
operating activities to fund $116.9 million of additions to oil and gas
properties and to purchase $21.0 million of treasury stock. During the nine
months ended September 30, 2004, the Company used its net cash provided by
operating activities to fund $467.8 million of additions to oil and gas
properties, to purchase $36.2 million of treasury stock and to fund $12.0
million of dividends on common stock.
Merger with Evergreen Resources, Inc.
On September 28, 2004, Pioneer completed its merger with Evergreen with
Pioneer being the surviving corporation for accounting purposes. 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.
Although the Evergreen merger has resulted in an increase in the Company's
ratio of debt to book capitalization, the Company has targeted a ratio of debt
to book capitalization of 40 percent or less by the end of 2005. To achieve this
target, the Company implemented an aggressive commodity hedging program of its
2004 and 2005 forecasted oil and gas production, utilizing commodity swap and
collar contracts entered into with highly-rated financial institution
counterparties. The Company has hedged approximately 35 percent of its
forecasted fourth quarter 2004 worldwide liquids, approximately 55 percent of
its forecasted fourth quarter 2004 North American gas production, approximately
40 percent of its forecasted 2005 worldwide liquids and North American gas
production. See Note F of Notes to Consolidated Financial Statements included in
"Item 1. Financial Statements" and "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" for more information regarding the Company's
commodity hedge positions. See Note C of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" for additional information
regarding the merger.
Acquisition and Drilling Highlights
During the first nine months of 2004, the Company incurred $3.0 billion in
finding and development costs including $201.3 million for development
activities, $202.2 million for exploration activities and $2.6 billion on
acquisitions. The majority of the Company's development and exploration
expenditures were spent on drilling wells, acquiring seismic data and
constructing infrastructure for the Company's development projects. The majority
of the Company's acquisition costs were spent on the Evergreen merger. The
following tables summarize the Company's development and exploration/extension
drilling activities for the nine months ended September 30, 2004:
29
PIONEER NATURAL RESOURCES COMPANY
Development Drilling
------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast..... 3 19 16 - 6
Permian Basin................. - 91 79 - 12
Mid-Continent................. 25 72 84 - 13
------ ------ ------ ------ ------
Total Domestic.......... 28 182 179 - 31
------ ------ ------ ------ ------
Argentina..................... 3 32 32 1 2
Canada........................ 6 3 9 - -
Africa........................ - 2 2 - -
------ ------ ------ ------ ------
Total Worldwide......... 37 219 222 1 33
====== ====== ====== ====== ======
Exploration/Extension Drilling
------------------------------------------------------------------------
Beginning Wells Wells Successful Unsuccessful Ending Wells
in Progress Spud Wells Wells In Progress
--------------- ------- ---------- ------------ ------------
Gulf of Mexico/Gulf Coast.... 6 3 5 3 1
Mid-Continent................ 2 - - 2 -
Alaska....................... 3 - - - 3
------ ------ ------ ------ ------
Total Domestic.......... 11 3 5 5 4
------ ------ ------ ------ ------
Argentina.................... 10 22 16 3 13
Canada....................... 11 35 21 24 1
Africa....................... 2 6 2 4 2
------ ------ ------ ------ ------
Total Worldwide......... 34 66 44 36 20
====== ====== ====== ====== ======
Domestic. The Company spent $2.8 billion during the first nine months of
2004 on acquisition, drilling and seismic activities in the Gulf of Mexico/Gulf
Coast, Alaska, Permian Basin, Mid-Continent and Rocky Mountain areas of the
United States.
Gulf of Mexico/Gulf Coast Area. In the Gulf of Mexico/Gulf Coast area, the
Company spent $181.4 million (82 percent of which was spent in the Gulf of
Mexico) of drilling, construction, acquisition and seismic capital during the
first nine months of 2004. In the deepwater Gulf of Mexico, the Company
completed three Falcon Corridor development projects, had ongoing development
activities at Devils Tower, with initial production beginning in May 2004, and
drilled three significant exploration wells during the first nine months of
2004. During the second quarter, the Company was also awarded leases on 19 Gulf
of Mexico blocks covering approximately 102,000 acres, of which 14 are located
in the deepwater. During the third quarter the Company was awarded leases on
seven Gulf of Mexico blocks covering approximately 40,000 acres, of which two
are located in the deepwater.
o Falcon Corridor - During the first quarter of 2003, the Company drilled its
Harrier discovery, which was completed as a one-well subsea tie-back to the
Falcon field facilities and placed on production in January 2004. In
addition, during the third quarter of 2003, the Company successfully
drilled the Tomahawk and Raptor prospects, which were also developed as
single-well subsea tie-backs to the Falcon field facilities and placed on
production in June 2004. To accommodate the incremental production from
Harrier, Tomahawk and Raptor as well as potential throughput associated
with additional planned exploration, an additional parallel pipeline
connecting the Falcon field to the Falcon Nest platform on the Gulf of
Mexico shelf was added, doubling its capacity. In early September 2004, the
Company shut in production from the Harrier field as a result of early
water encroachment. The Company initiated a sidetrack well in late
September to access an adjacent fault block in the field which was
successful, encountering over 400 feet of gas-bearing sand. While Harrier
was temporarily offline, system pressures were lower allowing production
from the Raptor and Tomahawk fields to strengthen. In order to capture the
maximum reserves from the Raptor and Tomahawk fields, the Company is
evaluating an intentional delay of the Harrier sidetrack start-up until
30
PIONEER NATURAL RESOURCES COMPANY
December 2004 or January 2005. The Company holds a 100 percent working
interest and operates all four fields in the Falcon Corridor. In addition,
the Company plans to drill one or two Falcon Corridor exploration prospects
during the first half of 2005.
o Devils Tower Area - The Dominion-operated Devils Tower development project
was sanctioned in 2001 as a spar development project with the owners
leasing a spar from a third party for the life of the field. The spar has
slots for eight dry tree wells and up to two subsea tie-back risers and is
capable of handling 60 MBbls of oil per day and 60 MMcf of gas per day.
Three Devils Tower wells were completed and placed on production prior to
being shut-in mid-September due to Hurricane Ivan. The Devils Tower spar
sustained significant damage during the hurricane, and production from
three wells resumed late October 2004. A fourth well is expected to begin
producing by the end of November. The damage to the platform rig sustained
during Hurricane Ivan is expected to delay completion activities related to
the four additional wells previously drilled to develop the field. Rig
repairs were expected to take 90 to 120 days, and completion activities to
span four to six months. However, the time frame for resuming completion
activities has improved, with potential for continued field development to
begin by year- end. Pioneer maintains business interruption insurance
designed to restore, after a 45-day waiting period, the expected cash flow
from the project, particularly from the four wells that are not yet on
production. In addition, three subsea tie-back wells in the Goldfinger and
Triton satellite discoveries to the Devils Tower field are expected to be
jointly tied back to the Devils Tower spar with first production expected
in 2005. Once the platform rig is repaired, production is expected to
continue to increase as additional wells are individually completed from
the spar. The Company holds a 25 percent working interest in each of the
above projects.
In addition to the development and exploration projects in the deepwater
Gulf of Mexico described above, the Company participated in three subsalt
deepwater prospects during the first half of 2004, of which one well was
successful and two were noncommercial. A sidetrack well in the Dominion-operated
Thunder Hawk discovery at Mississippi Canyon Block 734 encountered in excess of
300 feet of net oil pay in two high-quality reservoir zones, and the partners
are currently evaluating appraisal and development options, with an additional
well to further delineate the field likely to commence in the first half of
2005. The Company owns a 12.5 percent working interest in the discovery. The
Company also anticipates drilling an appraisal well during the first half of
2005 on its Ozona Deep discovery.
Alaska area. The Company spent $27.9 million of acquisition and seismic
capital during the first nine months of 2004 to add to its leasehold position
and expand its North Slope seismic data coverage. In June 2004, Pioneer
announced that it agreed to a joint exploration program in the National
Petroleum Reserve-Alaska ("NPR-A") located on the North Slope with
ConocoPhillips and Anadarko Petroleum Corporation. At the federal lease sale
held June 3, 2004 in Anchorage, Pioneer was the apparent high co-bidder on 63
tracts covering approximately 717,000 acres in the NPR-A Northwest Planning
Area. Pioneer will participate with a 20 percent to 30 percent working interest
in the acreage operated by ConocoPhillips. Pioneer also acquired a 20 percent
interest in 167,000 total acres in the adjacent NPR-A Northeast Planning Area
and in federal offshore blocks, including seismic and geologic data.
During 2002, the Company acquired a 70 percent working interest and
operatorship in ten state leases on Alaska's North Slope. Associated therewith,
the Company drilled three exploratory wells during 2003 to test a possible
extension of the productive sands in the Kuparuk River field into the shallow
waters offshore. Although all three of the wells found the sands filled with
oil, they were too thin to be considered commercial on a stand-alone basis.
However, the wells also encountered thick sections of oil-bearing Jurassic-aged
sands, and the first well flowed at a rate of approximately 1,300 barrels per
day. In January 2004, the Company farmed-into a large acreage block to the
southwest of the Company's discovery. The Company is currently analyzing the
seismic data and technical information from other wells drilled southwest of its
discovery and is evaluating the feasibility of potential development options.
Permian Basin area. The Company spent $59.4 million of capital during the
first nine months of 2004 primarily on development drilling in the Spraberry oil
trend where the Company plans to drill approximately 100 total wells during
2004. Also included in the capital spent during the first nine months of 2004
was a $20.8 million acquisition of various working interests in approximately
600 Spraberry oil wells, 400 of which were already operated by the Company.
31
PIONEER NATURAL RESOURCES COMPANY
Mid-Continent area. The Company spent $33.7 million of capital during the
first nine months of 2004 primarily in the West Panhandle field in Texas where
the Company plans to drill approximately 110 total wells during 2004. The
Company also plans to drill approximately 20 total wells during 2004 in the
Hugoton field in Kansas.
Rocky Mountain area. The Company spent $2.5 billion of capital during the
first nine months of 2004 on acquisition costs associated with the Evergreen
merger. The properties acquired are primarily located in the Raton Basin in
southern Colorado, the Piceance Basin in western Colorado and the Uintah Basin
in eastern Utah. The Company plans to drill approximately 47 wells in the Rocky
Mountain area during the fourth quarter of 2004.
Argentina. The Company spent $76.7 million of acquisition, drilling and
seismic capital during the first nine months of 2004. With the economic
environment stabilizing and improvements in gas prices, the Company increased
its capital budget for 2004 to approximately $100 million.
During the second quarter of 2004, the Company completed the expansion of
its Loma Negra gas plant in Neuquen and a 20-mile pipeline to deliver gas from
the Company's development projects in the Portezuelos and Anticlinal Campamento
fields located west of the plant. The Company also acquired additional 3-D
seismic in support of future drilling plans.
Canada. The Company spent $94.7 million of acquisition, drilling and
seismic capital during the first nine months of 2004, primarily in the
Chinchaga, Martin Creek and Lookout Butte areas that are mainly accessible for
drilling during the winter months. During October 2004, the Company decided to
divest three nonstrategic gas fields in Canada (the Martin Creek, Conroy Black
and Lookout Butte fields) which are currently producing approximately 3,200 BOEs
per day. The Company spent $50.7 million on the Evergreen acquisition for their
Canadian properties.
Africa. The Company spent $59.5 million of acquisition, drilling and
seismic capital during the first nine months of 2004 primarily in South Africa,
Tunisia, Gabon and Equatorial Guinea.
South Africa. The Company spent $6.5 million of capital during the first
nine months of 2004 primarily to drill a water injection well at the Sable field
which has successfully enhanced production. The Company also continues to
evaluate the feasability of developing its gas reserves and is pursuing
commercial agreements to deliver gas to an existing synthetic fuels plant.
Tunisia. The Company spent $14.3 million of capital during the first nine
months of 2004 primarily on the Adam concession where the Company placed its
Hawa #2 development well on production and drilled the Dalia #1 exploration
well, which was successful. The Company has 28 percent working interest in the
Adam concession. The Company plans to drill an Adam #3 development well during
the fourth quarter of 2004 and, during the fourth quarter of 2004 or early 2005,
the Company plans to drill an exploration well on the Company-operated El Hamra
permit and a development well at Hawa, which is located on the ENI-operated Adam
concession. In addition, the Company plans to drill another exploration well and
perform additional tests on the discovery on its Anadarko-operated Anaguid
permit during the first half of 2005.
Gabon. The Company spent $15.8 million of capital during the first nine
months of 2004 to drill five exploration wells, one of which was initially
evaluated as successful in extending the planned development area to the south.
The remaining four wells were expensed as dry holes. Despite the successful
extension well, in October 2004, the Company canceled the development of the
Olowi field due to a substantial increase in projected development costs which
resulted in the project not offering competitive returns.
Equatorial Guinea. The Company spent $13.0 million of acquisition and
drilling capital during the first nine months of 2004 to acquire a 40 percent
working interest in 400,000 acres of Block H offshore Equatorial Guinea, West
Africa. The Bravo 1 well was drilled in June 2004 and determined to be
noncommercial. The Company has several other prospects on the blocks that are
being evaluated for future drilling.
32
PIONEER NATURAL RESOURCES COMPANY
Results of Operations
Oil and gas revenues. Revenues from oil and gas operations totaled $452.8
million and $1.3 billion for the three and nine months ended September 30, 2004,
respectively, compared to $336.5 million and $965.7 million for the same
respective periods of 2003. The increases in oil and gas revenues during the
three and nine months ended September 30, 2004, as compared to the same
respective periods of 2003, were primarily attributable to increases in sales
volumes in the United States, Argentina, South Africa and Tunisia and increases
in realized oil, NGL and gas prices.
The following table provides the Company's average daily production
volumes, by geographic area and in total, 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 daily production:
Oil (Bbls):
United States.................. 27,780 24,130 26,268 24,128
Argentina...................... 9,316 9,126 8,827 8,200
Canada......................... 95 93 97 118
Africa......................... 8,733 211 10,986 71
Worldwide...................... 45,924 33,560 46,178 32,517
NGLs (Bbls):
United States.................. 18,873 20,254 19,869 20,157
Argentina...................... 1,727 1,584 1,549 1,387
Canada......................... 859 820 940 907
Worldwide...................... 21,459 22,658 22,358 22,451
Gas (Mcf):
United States.................. 499,012 487,000 535,740 435,275
Argentina...................... 137,971 114,326 119,440 94,916
Canada......................... 38,837 41,253 40,045 42,468
Worldwide...................... 675,820 642,579 695,225 572,659
Total (BOE):
United States.................. 129,822 125,550 135,427 116,830
Argentina...................... 34,039 29,764 30,283 25,407
Canada......................... 7,426 7,789 7,711 8,103
Africa......................... 8,733 211 10,986 71
Worldwide...................... 180,020 163,314 184,407 150,411
Per BOE average daily production for the third quarter of 2004 as compared
to the third quarter of 2003 increased by ten percent worldwide, by three
percent in the United States, by 14 percent in Argentina and the Company
realized first production from Africa during the third quarter of 2003. Third
quarter 2004 average daily production in Canada decreased by five percent as
compared to the third quarter of 2003 due to normal production decline rates.
During the first nine months of 2004 as compared to the first nine months
of 2003, per BOE average daily production increased by 23 percent worldwide, by
16 percent in the United States, by 19 percent in Argentina and the Company
realized first production from Africa during the third quarter of 2003. Average
daily production declined by five percent in Canada during the first nine months
of 2004 as compared to the first nine months of 2003 due to normal decline
rates.
Oil and gas sales from the Company's deepwater Gulf of Mexico Harrier
field, Devils Tower project and Raptor and Tomahawk fields were first realized
during January, May and mid-June 2004, respectively, and oil sales were first
realized from the Company's Tunisian and South African oil projects during
August and October of 2003, respectively. Argentine oil and gas sales volumes
were higher than anticipated during the first nine months of 2004 primarily due
to strong energy demand during their summer and fall seasons.
33
PIONEER NATURAL RESOURCES COMPANY
Fourth quarter 2004 production is expected to average 190,000 to 205,000
BOEs per day, including the production from the Evergreen assets, current
production expectations for Devils Tower and the Falcon Corridor, the
variability of oil cargo shipments in Tunisia and South Africa and the seasonal
decrease in gas demand during Argentina's summer season.
The following table provides the Company's average reported prices,
including the results of hedging activities, and average realized prices,
excluding the results of hedging activities, by geographic area and in total,
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 reported prices:
Oil (per Bbl):
United States.................. $ 30.51 $ 25.04 $ 28.35 $ 25.06
Argentina...................... $ 32.25 $ 26.10 $ 26.96 $ 25.31
Canada......................... $ 38.70 $ 28.97 $ 37.69 $ 28.67
Africa......................... $ 42.17 $ 26.94 $ 35.43 $ 26.94
Worldwide...................... $ 33.10 $ 25.35 $ 29.79 $ 25.14
NGLs (per Bbl):
United States.................. $ 26.51 $ 18.29 $ 23.37 $ 18.98
Argentina...................... $ 29.62 $ 21.63 $ 28.71 $ 22.86
Canada......................... $ 32.24 $ 23.62 $ 29.18 $ 26.10
Worldwide...................... $ 26.99 $ 18.71 $ 23.98 $ 19.51
Gas (per Mcf):
United States.................. $ 5.15 $ 4.38 $ 5.14 $ 4.64
Argentina...................... $ .63 $ .54 $ .62 $ .55
Canada......................... $ 4.34 $ 4.62 $ 4.37 $ 5.04
Worldwide...................... $ 4.18 $ 3.71 $ 4.32 $ 3.98
Average realized prices:
Oil (per Bbl):
United States.................. $ 41.04 $ 29.10 $ 36.85 $ 29.73
Argentina...................... $ 32.25 $ 26.10 $ 29.22 $ 26.25
Canada......................... $ 38.70 $ 28.97 $ 37.69 $ 28.67
Africa......................... $ 42.94 $ 26.94 $ 36.06 $ 26.94
Worldwide...................... $ 39.61 $ 28.27 $ 35.21 $ 28.84
NGLs (per Bbl):
United States.................. $ 26.51 $ 18.29 $ 23.37 $ 18.98
Argentina...................... $ 29.62 $ 21.63 $ 28.71 $ 22.86
Canada......................... $ 32.24 $ 23.62 $ 29.18 $ 26.10
Worldwide...................... $ 26.99 $ 18.71 $ 23.98 $ 19.51
Gas (per Mcf):
United States.................. $ 5.68 $ 4.79 $ 5.57 $ 5.16
Argentina...................... $ .63 $ .54 $ .62 $ .55
Canada......................... $ 5.38 $ 4.76 $ 5.39 $ 5.52
Worldwide...................... $ 4.63 $ 4.03 $ 4.71 $ 4.43
As discussed above, oil and gas revenues for the three and nine months
ended September 30, 2004 were positively impacted by commodity price increases.
Comparing the third quarter of 2004 to the same period in 2003, the Company's
average reported worldwide oil price increased 31 percent, average reported
worldwide NGL prices increased 44 percent and average reported worldwide gas
prices increased 13 percent.
Beginning in May 2004, realized Argentine oil prices decreased due to the
implementation of a new formula for domestic oil prices to bring them in
approximate parity with oil exports that are subject to a floating rate export
tax. In general, the formula provides that if the average NYMEX price for crude
oil exceeds $37 per Bbl, Argentine producers will receive approximately $32 per
Bbl and if the average NYMEX price is below $37 per Bbl, Argentine producers
will receive approximately 86 percent of the NYMEX price, less normal quality
differentials.
34
PIONEER NATURAL RESOURCES COMPANY
Comparing the first nine months of 2004 to the same period in 2003, the
Company's average reported worldwide oil price increased 18 percent, average
reported worldwide NGL prices increased 23 percent and average reported
worldwide gas prices increased nine percent.
Hedging activities. The oil and gas prices that the Company reports are
based on the market price received for the commodities adjusted by the results
of the Company's cash flow hedging activities. The Company utilizes commodity
swap and collar contracts in order 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. During the three and nine months
ended September 30, 2004, the Company's commodity price hedges decreased oil and
gas revenues by $55.8 million and $142.7 million, respectively, as compared to
$28.0 million and $100.9 million during the same respective periods in 2003. See
Note F of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for specific information regarding the Company's hedging
activities during the three and nine months ended September 30, 2004 and 2003.
Oil and gas production costs. During the three and nine months ended
September 30, 2004, total production costs per BOE averaged $5.63 and $5.50,
respectively, representing increases of $.59 per BOE (12 percent) and $.20 per
BOE (four percent), respectively, as compared to total production costs per BOE
of $5.04 and $5.30 during the same respective periods of 2003. Lease operating
expenses and workover costs represent the components of production costs for
which the Company has management control, while production and ad valorem taxes
and field fuel expenses are directly related to commodity price changes.
The increase in total production costs per BOE during the three and nine
months ended September 30, 2004, as compared to the same respective periods in
2003, is primarily due to (i) higher lease operating expenses associated with
the Company's Devils Tower project in the Gulf of Mexico and Tunisian and South
African oil production, (ii) increased workover costs and (iii) increased
production costs in Argentina.
The following tables provide the components of the Company's total
production costs per BOE and total production costs per BOE by geographic area
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
------- ------- ------- -------
Lease operating expenses.............. $ 3.74 $ 3.29 $ 3.59 $ 3.30
Taxes:
Production......................... .57 .55 .57 .65
Ad valorem......................... .47 .37 .46 .41
Field fuel expenses................... .67 .68 .66 .79
Workover costs........................ .18 .15 .22 .15
------ ------ ------ ------
Total production costs.......... $ 5.63 $ 5.04 $ 5.50 $ 5.30
====== ====== ====== ======
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2004 2003 2004 2003
------- ------- ------- -------
Total production costs:
United States...................... $ 6.14 $ 5.32 $ 5.68 $ 5.56
Argentina.......................... $ 2.85 $ 2.42 $ 2.90 $ 2.62
Canada (a)......................... $ 9.79 $ 10.67 $ 10.50 $ 9.88
Africa............................. $ 5.25 $ 2.34 $ 6.99 $ 2.34
Worldwide.......................... $ 5.63 $ 5.04 $ 5.50 $ 5.30
- ------------
(a) Includes per BOE costs to transport the Company's Canadian gas to the
Chicago City Gate sales point of $4.97 and $5.52 for the three months ended
September 30, 2004 and 2003, respectively, and $4.98 and $5.46 for the nine
months ended September 30, 2004 and 2003, respectively.
35
PIONEER NATURAL RESOURCES COMPANY
Based on market-quoted commodity prices during October 2004, the Company
expects fourth quarter 2004 production costs per BOE to average $6.40 to $7.00,
based on current gas price outlooks. The increase is attributable to lower
estimated production from low-cost Falcon Corridor properties and the impact of
higher costs associated with the acquired Evergreen assets when accounting for
field fuel usage in accordance with Pioneer's accounting practices.
Depletion, depreciation and amortization expense. The Company's total
depletion, depreciation and amortization expense per BOE was $8.45 and $8.30 for
the three and nine months ended September 30, 2004, respectively, as compared to
$6.89 and $6.68 during the same respective periods of 2003. Depletion expense
per BOE, the largest component of depletion, depreciation and amortization
expense, was $8.28 and $8.13 during the three and nine months ended September
30, 2004, respectively, as compared to $6.73 and $6.50 during the same
respective periods of 2003. The increases in per BOE depletion expense during
the three and nine months ended September 30, 2004, as compared to the same
respective periods of 2003, are primarily due to a greater proportion of the
Company's production being derived from higher cost-basis deepwater Gulf of
Mexico and South African developments.
The following table provides the Company's depletion expense per BOE by
geographic area 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
------- ------- ------- -------
Depletion expense:
United States................... $ 8.81 $ 6.94 $ 8.32 $ 6.63
Argentina....................... $ 5.53 $ 4.99 $ 5.38 $ 4.90
Canada.......................... $ 10.61 $ 9.99 $ 10.47 $ 9.70
Africa.......................... $ 9.13 $ 8.30 $ 11.78 $ 8.30
Worldwide....................... $ 8.28 $ 6.73 $ 8.13 $ 6.50
The Company expects fourth quarter 2004 depletion, depreciation and
amortization expense per BOE to average $8.50 to $9.25, reflecting the higher
depletion, depreciation and amortization rate associated with the assets
acquired from Evergreen.
Impairment of oil and gas properties. On October 19, 2004, the Company
concluded that a material charge for impairment was required under SFAS 144 for
its assets in the Gabonese Olowi field as development of the discovery was
canceled. The Company recorded an associated impairment charge of $34.8 million
in September 2004 to eliminate the carrying value of the Company's Gabonese
Olowi field. See Note L of Notes to Consolidated Financial Statements included
in "Item 1. Financial Statements" for more information regarding the impairment
of the Company's Gabonese Olowi field assets.
Exploration, abandonments, geological and geophysical costs. Exploration,
abandonments, geological and geophysical costs were $33.0 million and $153.2
million during the three and nine months ended September 30, 2004, respectively,
as compared to $24.5 million and $107.4 million during the same respective
periods in 2003. The increase in exploration, abandonments, geological and
geophysical costs during the third quarter of 2004 as compared to the third
quarter of 2003 is primarily comprised of a $13.4 million increase in geological
and geophysical expense, partially offset by a $5.5 million decrease in dry hole
expense. The increase in exploration, abandonments, geological and geophysical
costs during the first nine months of 2004 as compared to the first nine months
of 2003 is primarily comprised of a $27.4 million increase in geological and
geophysical expenses and a $16.0 million increase in dry hole expense.
Significant components of the Company's dry hole expense during the first nine
months of 2004 included $27.3 million and $11.1 million on the Company's
deepwater Gulf of Mexico Juno and Myrtle Beach prospects, respectively, $18.9
million on the Company's Gabonese Olowi prospect and $5.8 million on the
Company's Bravo prospect offshore Equatorial Guinea. During the first nine
months of 2004, the Company drilled and evaluated 80 exploration/extension
wells, 44 of which were successfully completed as discoveries. During the same
period in 2003, the Company drilled and evaluated 84 exploration/extension
wells, 41 of which were successfully completed as discoveries.
36
PIONEER NATURAL RESOURCES COMPANY
The following table provides the Company's geological and geophysical
costs, exploratory dry hole expense, lease abandonments expense and other
exploration expense by geographic area for the three and nine months ended
September 30, 2004 and 2003:
Africa
United and
States Argentina Canada Other Total
-------- --------- --------- --------- ---------
(in thousands)
Three months ended September 30, 2004:
Geological and geophysical.............. $ 15,144 $ 216 $ 783 $ 7,220 $ 23,363
Exploratory dry holes................... 878 2,664 3,227 85 6,854
Leasehold abandonments and other........ 2,521 18 208 1 2,748
------- ------- ------- ------- -------
$ 18,543 $ 2,898 $ 4,218 $ 7,306 $ 32,965
======= ======= ======= ======= =======
Three months ended September 30, 2003:
Geological and geophysical.............. $ 8,110 $ 458 $ 619 $ 774 $ 9,961
Exploratory dry holes................... 7,127 778 1,069 3,403 12,377
Leasehold abandonments and other........ 2,038 39 101 - 2,178
------- ------- ------- ------- -------
$ 17,275 $ 1,275 $ 1,789 $ 4,177 $ 24,516
======= ======= ======= ======= =======
Nine months ended September 30, 2004:
Geological and geophysical.............. $ 40,251 $ 10,884 $ 2,618 $ 12,066 $ 65,819
Exploratory dry holes................... 38,741 3,356 11,809 24,404 78,310
Leasehold abandonments and other........ 4,941 55 4,021 8 9,025
------- ------- ------- ------- -------
$ 83,933 $ 14,295 $ 18,448 $ 36,478 $153,154
======= ======= ======= ======= =======
Nine months ended September 30, 2003:
Geological and geophysical.............. $ 25,797 $ 6,966 $ 2,534 $ 3,102 $ 38,399
Exploratory dry holes................... 28,306 2,209 10,939 20,859 62,313
Leasehold abandonments and other........ 3,562 1,672 1,476 8 6,718
------- ------- ------- ------- -------
$ 57,665 $ 10,847 $ 14,949 $ 23,969 $107,430
======= ======= ======= ======= =======
The Company expects fourth quarter 2004 exploration, abandonments,
geological and geophysical costs to be $40 million to $60 million, of which the
majority is expected to be comprised of seismic expenditures.
General and administrative expense. General and administrative expense for
the three and nine months ended September 30, 2004 was $19.5 million and $55.0
million, respectively, as compared to $15.2 million and $44.3 million during the
same respective periods in 2003. The increases in general and administrative
expense are primarily due to increases in administrative staff,
performance-related compensation costs and increases in the amortization of
restricted stock awards of $1.3 million and $3.5 million during the three and
nine months ended September 30, 2004, respectively, as compared to the same
respective periods of 2003.
The Company expects fourth quarter 2004 general and administrative expense
to increase to $21 million to $23 million due to incremental costs of
administration associated with expanded operations resulting from the Evergreen
merger.
Accretion of discount on asset retirement obligations. During the three and
nine months ended September 30, 2004, accretion of discount on asset retirement
obligations was $2.0 million and $6.0 million, respectively, as compared to $1.3
million and $3.7 million during the same respective periods of 2003. The
increases in accretion of discount on asset retirement obligations are primarily
due to the increase in future plugging and abandonment obligations related to
new wells in the deepwater Gulf of Mexico, Tunisia and South Africa. See
"Cumulative effect of change in accounting principle" and Notes B and G of Notes
to Consolidated Financial Statements included in "Item 1. Financial Statements"
for additional information regarding the Company's asset retirement obligations.
The Company expects fourth quarter 2004 accretion of discount on asset
retirement obligations to be approximately $2 million to $3 million.
37
PIONEER NATURAL RESOURCES COMPANY
Interest expense. Interest expense was $24.8 million and $67.8 million for
the three and nine months ended September 30, 2004, respectively, as compared to
$23.2 million and $69.5 million for the same respective periods in 2003. The
increase in interest expense during the third quarter of 2004 as compared to the
third quarter of 2003 is primarily attributable to a $4.0 million decrease in
recorded interest rate hedge gains partially offset by $3.3 million of interest
savings associated with the lower rate New Notes issued in the Company's July
2004 debt exchange as more fully described below. The decrease in interest
expense during the first nine months of 2004 as compared to the first nine
months of 2003 is primarily attributable to reduced borrowings under the
Company's lines of credit and interest savings from the lower rate New Notes
issued in the debt exchange, partially offset by a $2.5 million decrease in
interest rate hedge gains and a $2.4 million decrease in capitalized interest as
the Company has completed its major development projects in the Gulf of Mexico
and South Africa. The weighted average interest rates on the Company's
indebtedness for the three and nine months ended September 30, 2004 were 6.0
percent and 5.5 percent, respectively, as compared to 5.2 percent and 5.3
percent for the same respective periods in 2003, including the effects of the
Company's interest rate swaps.
As further described in Note E of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements," the Company exchanged
$526.9 million of the Old Notes for a like principal amount of the New Notes and
cash during July 2004. The aggregate exchange price paid to the holders of the
tendered Old Notes exceeded their aggregate principal balances by $109.0
million. In accordance with GAAP, the Company accounted for the debt exchange
during the third quarter of 2004 as a replacement of the exchanged debt and
began amortizing the $109.0 million associated payment of the trading premium or
market value of the exchanged Old Notes in excess of their stated value, along
with the unamortized carrying values attributable to the issuance costs,
discounts and deferred hedge gains and losses of the exchanged debt, as
adjustments of interest expense over the term of the New Notes.
The Company expects fourth quarter 2004 interest expense to be $31 million
to $34 million, reflecting the incremental interest cost associated with the
Evergreen merger financing and assumed Evergreen debt.
Other expenses. Other expenses for the three and nine months ended
September 30, 2004 were $2.5 million and $11.0 million, respectively, as
compared to $1.4 million and $12.2 million for the same respective periods in
2003. The increase in other expenses during the three months ended September 30,
2004, as compared to the same period of 2003, is attributable to a $1.3 million
increase in foreign currency exchange losses, the majority of which is
associated with United States dollar denominated Canadian gas sales that were
converted to Canadian dollars while the Canadian dollar was strengthening, and
other aggregate expense fluctuations. The decrease in other expenses during the
nine months ended September 30, 2004, as compared to the same period of 2003, is
primarily attributable to a $1.1 million decrease in commodity hedge
ineffectiveness charges and other aggregate expense fluctuations.
Income tax benefit (provision). During the three and nine months ended
September 30, 2004, the Company recognized income tax provisions of $23.5
million and $115.1 million, respectively, as compared to income tax benefits of
$99.9 million and $95.0 million for the same respective periods in 2003. The
Company's effective tax rate is lower than the combined United States federal
and state statutory rate of approximately 36.5 percent primarily due to the
deferred tax benefit recognized associated with the Company's cancellation of
the development of its Olowi field in Gabon. See Notes D and L of Notes to
Consolidated Financial Statements included in "Item 1. Financial Statements" for
a discussion regarding the Company's reversal of its United States deferred tax
valuation allowances during the third quarter of 2003 and the Company's decision
to cancel its development of the Olowi field in Gabon.
During the fourth quarter of 2004, the Company estimates that its cash
income taxes will be $5 million to $10 million principally related to Argentine
and Tunisian income taxes and nominal alternative minimum tax in the United
States. The Company's effective income tax rate is expected to range from 36
percent to 39 percent based on current capital spending plans.
Cumulative effect of change in accounting principle. As previously
discussed, the Company adopted the provisions of SFAS 143 on January 1, 2003 and
recognized a $15.4 million benefit from the cumulative effect of change in
accounting principle, net of $1.3 million of deferred income taxes. See Notes B
and G of Notes to Consolidated Financial Statements included in "Item 1.
Financial Statements" for additional information regarding the Company's
adoption of SFAS 143.
38
PIONEER NATURAL RESOURCES COMPANY
Capital Commitments, Capital Resources and Liquidity
Capital commitments. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, repayment
of contractual obligations and working capital obligations. Funding for the
repayment of principal and interest on outstanding debt and the Company's
capital expenditure program may be provided by any combination of
internally-generated cash flow, proceeds from the disposition of non-strategic
assets or alternative financing sources as discussed in "Capital resources"
below. Funding for the Company's working capital obligations is provided by
internally-generated cash flow.
Oil and gas properties. The Company's cash expenditures for additions to
oil and gas properties during the three and nine months ended September 30, 2004
totaled $116.9 million and $467.8 million, respectively, as compared to $134.9
million and $522.0 million during the same respective periods of 2003. During
the three and nine months ended September 30, 2004, the Company's additions to
oil and gas properties were funded by $239.1 million and $757.5 million of net
cash provided by operating activities, respectively. The Company's 2003
additions to oil and gas properties were funded by $222.5 million and $546.7
million of net cash provided by operating activities during the three and nine
months ended September 30, 2003, respectively.
Contractual obligations, including off-balance sheet obligations. The
Company's contractual obligations include long-term debt, operating leases,
drilling commitments, derivative obligations and other liabilities. From
time-to-time, the Company enters into off-balance sheet arrangements and
transactions that can give rise to material off-balance sheet obligations of the
Company. As of September 30, 2004, the material off-balance sheet arrangements
and transactions that the Company has entered into include (i) undrawn letters
of credit, (ii) operating lease agreements, (iii) drilling commitments and (iv)
contractual obligations for which the ultimate settlement amounts are not fixed
and determinable such as derivative contracts that are sensitive to future
changes in commodity prices and gas transportation commitments. Since December
31, 2003, the material changes in the Company's contractual obligations were
changes in the Company's derivative obligations, the aforementioned exchange of
the Old Notes during July 2004, the execution of the 364-Day Credit Agreement
and the Evergreen merger financing, including assumed Evergreen Convertible
Notes and Subordinated Notes (which are no longer subordinated). See Note E of
Notes to Consolidated Financial Statements included in "Item 1. Financial
Statements" for more information regarding the Company's changes in long-term
debt. There have been no other material changes in the Company's contractual
obligations since December 31, 2003. See "Item 3. Quantitative and Qualitative
Disclosures About Market Risk" for a table of changes in the fair value of the
Company's open derivative contract liabilities during the nine months ended
September 30, 2004.
Capital resources. The Company's primary capital resources are net cash
provided by operating activities, proceeds from financing activities and
proceeds from sales of nonstrategic assets. The Company expects that these
resources will be sufficient to fund its capital commitments during the fourth
quarter of 2004.
Operating activities. Net cash provided by operating activities during the
three and nine months ended September 30, 2004 was $239.1 million and $757.5
million, respectively, as compared to $222.5 million and $546.7 million for the
same respective periods in 2003. The increases in net cash provided by operating
activities were primarily due to higher production volumes and higher commodity
prices.
Investing activities. Net cash used in investing activities during the
three and nine months ended September 30, 2004 was $975.8 million and $1.3
billion, respectively, as compared to $127.4 million and $495.1 million for the
same respective periods of 2003. The increase in net cash used in investing
activities during the three and nine months ended September 30, 2004, as
compared to the same respective periods of 2003, was primarily due to the $849.5
million of net cash paid to acquire Evergreen.
Financing activities. Net cash provided by financing activities during the
three and nine months ended September 30, 2004 was $723.7 million and $566.2
million, respectively, as compared to net cash used in financing activities of
$94.4 million and $48.6 million during the same respective periods of 2003.
During the three and nine months ended September 30, 2004, the Company had net
borrowings on long-term debt of $767.0 million and $631.0 million, respectively,
as compared to net repayments of $92.0 million and $47.5 million during the same
respective periods of 2003. The borrowings on long-term debt were used to fund
the $849.5 million of net cash paid to acquire Evergreen. During the three and
39
PIONEER NATURAL RESOURCES COMPANY
nine months ended September 30, 2004, the Company also used $21.0 million to
purchase 641,123 shares of treasury stock and $36.2 million to purchase
1,144,423 shares of treasury stock, respectively.
During March 2004, the Company's board of directors declared a semiannual
dividend of $.10 per common share, payable on April 13, 2004 to shareholders of
record on March 29, 2004. Associated therewith, the Company distributed $12.0
million of aggregate dividends during April 2004. During August 2004, the
Company's board of directors declared its second semiannual dividend of $.10 per
common share payable on October 15, 2004 to shareholders of record on September
29, 2004. Associated therewith, the Company distributed $14.6 million of
aggregate dividends during October 2004.
The Company's operating, investing and financing activities during the
fourth quarter of 2004 will be materially impacted by the aforementioned July
2004 debt exchange and by the Evergreen merger. The debt exchange extended the
maturities on $526.9 million of the Company's long-term debt until 2016, reduced
the coupon interest rate on the New Notes as compared to the exchanged Old Notes
and used $109.0 million of cash for exchange price payments, which represented
the trading premium or market value of the exchanged Old Notes in excess of
their stated value. The Evergreen merger was accounted for as a purchase
business combination and materially expanded the Company's assets, liabilities,
shareholders' equity, outstanding common shares, forecasted production volumes
and general scope of operations.
As the Company pursues its strategy, it may utilize various financing
sources, including fixed and floating rate debt, convertible securities,
preferred stock or common stock. The Company may also issue securities in
exchange for oil and gas properties, stock or other interests in other oil and
gas companies or related assets. Additional securities may be of a class
preferred to common stock with respect to such matters as dividends and
liquidation rights and may also have other rights and preferences as determined
by the Company's board of directors.
Liquidity. The Company's principal source of short-term liquidity are its
lines of credit. Outstanding borrowings under the lines of credit totaled $900
million as of September 30, 2004. Including $49.3 million of undrawn and
outstanding letters of credit under the lines of credit, the Company has $650.7
million of unused borrowing capacity as of September 30, 2004.
Book capitalization and current ratio. The Company's book capitalization at
September 30, 2004 was $5.1 billion, consisting of debt of $2.5 billion and
stockholders' equity of $2.6 billion. Consequently, the Company's debt to book
capitalization increased to 48 percent at September 30, 2004 from 47 percent at
December 31, 2003. The Company's ratio of current assets to current liabilities
was .41 at September 30, 2004 and .48 at December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative disclosures about market risk
are supplementary to the quantitative and qualitative disclosures provided in
the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
As such, the information contained herein should be read in conjunction with the
related disclosures in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
40
PIONEER NATURAL RESOURCES COMPANY
The following table reconciles the changes that occurred in the fair values
of the Company's open derivative contracts during the first nine months of 2004:
Derivative Contract Net Liabilities
-------------------------------------
Interest
Commodities Rate Total
----------- -------- ----------
(in thousands)
Fair value of contracts outstanding
as of December 31, 2003............... $ (201,422) $ - $ (201,422)
Fair value of Evergreen contracts assumed (52,115) - (52,115)
Changes in contract fair value (a)....... (502,640) (10,638) (513,278)
Contract maturities...................... 180,604 (2,167) 178,437
Contract terminations.................... (5,515) 12,805 7,290
--------- ------- ---------
Fair value of contracts outstanding
as of September 30, 2004.............. $ (581,088) $ - $ (581,088)
========= ======= =========
- ---------------
(a) At inception, new derivative contracts entered into by the Company have no
intrinsic value.
The following disclosures provide specific information about material
changes that have occurred since December 31, 2003 in the Company's portfolio of
financial instruments. The Company will recognize gains or losses in future
earnings on these instruments from changes in commodity prices or interest
rates.
Interest rate sensitivity. 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 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 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 June 2004, the Company entered into costless collar contracts to
hedge the yield on the benchmark 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. See Note E of Notes to Consolidated Financial
Statements included in "Item 1. Financial Statements" and Capital Commitments,
Capital Resources and Liquidity included in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
information regarding the July 15, 2004 debt exchange.
The following table provides information about the debt obligations and
derivative financial instruments of the Company that are sensitive to changes in
interest rates as of September 30, 2004. For debt obligations, the table
presents maturities by expected maturity dates, the weighted average interest
rates expected to be paid on the debt given current contractual terms and market
conditions and the debt's estimated fair value. For fixed rate debt, the
weighted average interest rate represents the contractual fixed rates that the
Company was obligated to periodically pay on the debt as of September 30, 2004.
For variable rate debt, the average interest rate represents the average rates
being paid on the debt projected forward proportionate to the forward yield
curve for the six-month LIBOR.
41
PIONEER NATURAL RESOURCES COMPANY
Interest Rate Sensitivity
Debt Obligations and Derivative Financial Instruments as of September 30, 2004
Three months Liability
ending Year ending December 31, Fair Value at
December 31, ------------------------------------------------------ September 30,
2004 2005 2006 2007 2008 Thereafter Total 2004
----------- -------- -------- -------- -------- ---------- ---------- ------------
(in thousands, except interest rates)
Total Debt:..................
Fixed rate maturities...... $ - $132,461 $ - $ 32,638 $351,092 $1,048,711 $1,564,902 $(1,849,237)
Weighted average
interest rate (%)........ 6.58 6.44 6.38 6.56 7.00 7.00
Variable rate maturities... $ - $ - $900,000 $ - $ - $ - $ 900,000 $ (900,000)
Average interest rate (%).. 2.83 3.28 3.97 - - -
Commodity price sensitivity. During the first nine months of 2004, the
Company entered into certain oil and gas hedge derivatives and terminated other
oil and gas hedge derivatives. The following tables provide information about
the Company's oil and gas derivative financial instruments that were sensitive
to oil or gas price changes as of September 30, 2004. As of September 30, 2004,
all of the Company's oil and gas derivative financial instruments qualified as
hedges.
See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for information regarding the terms of the Company's
derivative financial instruments that are sensitive to changes in oil and gas
prices.
Oil Price Sensitivity
Derivative Financial Instruments as of September 30, 2004
Three months Liability
ending Year ending December 31, Fair Value at
December 31, ----------------------------------------- September 30,
2004 2005 2006 2007 2008 2004
----------- -------- -------- -------- -------- ------------
(in thousands)
Oil Hedge Derivatives (a):
Average daily notional Bbl volumes:
Swap contracts.......................... 24,000 28,000 11,500 13,000 17,000 $(301,111)
Weighted average fixed price per Bbl... $ 29.65 $ 28.47 $ 32.52 $ 30.89 $ 29.21
Collar contracts........................ - 1,000 4,500 - - $ (2,931)
Weighted average ceiling price
per Bbl.............................. $ - $ 51.10 $ 41.93 $ - $ -
Weighted average floor price per Bbl... $ - $ 35.00 $ 35.00 $ - $ -
Average forward NYMEX oil prices (b)..... $ 50.92 $ 48.24 $ 43.92 $ 41.84 $ 39.68
- ---------------
(a) See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(b) The average forward NYMEX oil prices are based on October 29, 2004 market
quotes.
42
PIONEER NATURAL RESOURCES COMPANY
Gas Price Sensitivity (a)
Derivative Financial Instruments as of September 30, 2004
Three months Liability
ending Year ending December 31, Fair Value at
December 31, ----------------------------------------- September 30,
2004 2005 2006 2007 2008 2004
----------- -------- -------- -------- -------- ------------
(in thousands)
Gas Hedge Derivatives (b):
Average daily notional MMBtu volumes:
Swap contracts........................... 426,163 274,904 70,000 25,000 5,000 $(276,812)
Weighted average fixed price per MMBtu.. $ 4.54 $ 5.19 $ 4.16 $ 3.94 $ 5.38
Collar contracts......................... - - 5,000 - - $ (234)
Weighted average ceiling price
per MMBtu............................. $ - $ - $ 7.15 $ - $ -
Weighted average ceiling price
per MMBtu............................. $ - $ - $ 5.25 $ - $ -
Average forward NYMEX gas prices (c)...... $ 8.68 $ 7.78 $ 6.92 $ 6.30 $ 5.95
- ---------------
(a) To minimize basis risk, the Company enters into basis swaps for a portion
of its gas hedges to connect the index price of the hedging instrument from
a NYMEX index to an index which reflects the geographic area of production.
The Company considers these basis swaps as part of the associated swap
contract and, accordingly, the effects of the basis swaps have been
presented together with the associated contracts.
(b) See Note F of Notes to Consolidated Financial Statements included in "Item
1. Financial Statements" for hedge volumes and weighted average prices by
calendar quarter.
(c) The average forward NYMEX gas prices are based on October 29, 2004 market
quotes.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company's principal
executive officer and principal financial officer have evaluated, as required by
Rule 13a-15(b) under the Securities Exchange Act of 1934 (the "Exchange Act"),
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this quarterly report on
Form 10-Q. Based on that evaluation, the principal executive officer and
principal financial officer concluded that the design and operation of the
Company's disclosure controls and procedures are effective in ensuring that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Changes in internal control over financial reporting. There have been no
changes in the Company's internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) that occurred during the Company's
last fiscal quarter that have materially affected or are reasonably likely to
materially affect the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As discussed in Note I of Notes to Consolidated Financial Statements
included in "Item 1. Financial Statements," the Company is a party to various
legal actions incidental to its business. Except for the specific legal actions
described in Note I, the Company believes that the probable damages from such
other legal actions will not be in excess of ten percent of the Company's
current assets.
43
PIONEER NATURAL RESOURCES COMPANY
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of stockholders on September 28, 2004 in
Irving, Texas. At the meeting, two proposals were submitted for vote of
stockholders (as described in the Company's Proxy Statement dated August 27,
2004). The following is a brief description of the proposals and results of the
stockholders' votes.
Evergreen Merger. The issuance of the Company's common stock in connection
with the merger of BC Merger Sub, Inc., a wholly-owned subsidiary of the Company
("BC Merger Sub"), with and into Evergreen, whereby Evergreen will become a
wholly-owned subsidiary of the Company pursuant to the Merger Agreement, was
submitted to the stockholders for approval. Such issuance was approved, with the
results of the stockholder voting having been as follows:
For 91,202,600
Against 263,175
Abstain 111,235
Broker non-votes -
In the event that there were not enough votes received in favor of the
above proposal, a second proposal was submitted to approve the adjournment of
the special meeting to solicit additional proxies in favor of the above
proposal. Such adjournment was approved, although unnecessary based on the votes
received above, with the results of the stockholder voting having been as
follows:
For 54,630,892
Against 30,811,495
Abstain 6,134,623
Broker non-votes -
At the board of directors meeting following the special meeting of
stockholders, pursuant to the Merger Agreement, Mark S. Sexton and Andrew D.
Lundquist were appointed as directors. Mr. Sexton was designated as a Class I
director with his terms to expire at the annual meeting in 2007. Mr. Lundquist
was designated as a Class III director with his terms to expire at the annual
meeting in 2006.
44
PIONEER NATURAL RESOURCES COMPANY
Item 6. Exhibits
Exhibits
2.1 Agreement and Plan of Merger, dated May 3, 2004, among the Company,
Evergreen and BC Merger Sub, Inc. (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K, File No. 1-13245,
filed with the SEC on May 5, 2004).
4.1 Fourth Supplemental Indenture, dated as of July 15, 2004, among the
Company and The Bank of New York, as Trustee, with respect to the
indenture, dated January 13, 1998, between the Company and The Bank of
New York, as Trustee (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with the
SEC on July 19, 2004).
4.2 Fifth Supplemental Indenture, dated as of July 15, 2004, among the
Company, Pioneer Natural Resources USA, Inc., as Guarantor, and The
Bank of New York, as Trustee, with respect to the indenture, dated
January 13, 1998, between the Company and The Bank of New York, as
Trustee (incorporated by reference to Exhibit 99.2 to the Company's
Current Report on Form 8-K, File No. 1-13245, filed with the SEC on
July 19, 2004).
4.3 Form of 5.875% Senior Notes due 2016 of Pioneer Natural Resources
Company (incorporated by reference to Exhibit 99.3 to the Company's
Current Report on Form 8-K, File No. 1-13245, filed with the SEC on
July 19, 2004).
4.4 Indenture dated as of March 10, 2004, among Evergreen and Wachovia
Bank, National Association, as trustee, relating to Evergreen's 5.875%
Senior Subordinated Notes due 2012 (incorporated by reference to
Exhibit 4.1 to Evergreen's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004, File No. 1-13171, filed with the SEC on
May 10, 2004).
4.5 Form of Evergreen's 5.875% Senior Subordinated Notes due 2012
(incorporated by reference to Exhibit 4.3 to Evergreen's Registration
Statement on Form S-4, dated June 28, 2004, Registration No.
333-116201).
4.6 Indenture dated as of December 18, 2001, among Evergreen and First
Union National Bank, as trustee, relating to Evergreen's 4.75% Senior
Convertible Notes due December 15, 2021 (incorporated by reference to
Exhibit 4.3 to Evergreen's Annual Report on Form 10-K for the year
ended December 31, 2001, File No. 1-13171, filed with the SEC on March
11, 2002).
4.7 Form of Evergreen's 4.75% Senior Convertible Notes due December 15,
2021 (included as Exhibit A to the indenture identified above as
Exhibit 4.6).
4.8 First Supplemental Indenture dated as of September 28, 2004, among
Pioneer Evergreen Properties, LLC (as successor to Evergreen) and
Wachovia Bank, National Association, as trustee, with respect to the
indenture identified above as Exhibit 4.4 (incorporated by reference to
Exhibit 4.5 to the Company's Current Report on Form 8-K, File No.
1-13245, filed with the SEC on October 1, 2004).
4.9 First Supplemental Indenture dated as of September 28, 2004, among the
Company, Evergreen and Wachovia Bank, National Association (as
successor to First Union National Bank), as trustee, with respect to
the indenture identified above as Exhibit 4.6 (incorporated by
reference to Exhibit 4.1 to the Company's Amendment to the Current
Report on Form 8-K/A, File No. 1-13245, filed with the SEC on November
5, 2004).
4.10 Second Supplemental Indenture dated as of September 28, 2004, among the
Company, Pioneer Evergreen Properties, LLC (as successor to Evergreen)
and Wachovia Bank, National Association (as successor to First Union
National Bank), as trustee, with respect to the indenture identified
above as Exhibit 4.6 (incorporated by reference to Exhibit 4.7 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with the
SEC on October 1, 2004).
4.11 Third Supplemental Indenture dated as of September 30, 2004, among the
Company, Pioneer Debt Sub, LLC and Wachovia Bank, National Association
(as successor to First Union National Bank), as trustee, with respect
to the indenture identified above as Exhibit 4.6 (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K,
File No. 1-13245, filed with the SEC on November 5, 2004).
4.12 Fourth Supplemental Indenture dated as of September 30, 2004, among the
Company and Wachovia Bank, National Association (as successor to First
Union National Bank), as trustee, with respect to the indenture
identified above as Exhibit 4.6 (incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K, File No. 1-13245,
filed with the SEC on November 5, 2004).
45
PIONEER NATURAL RESOURCES COMPANY
Exhibits (continued)
4.13 Second Supplemental Indenture dated as of September 30, 2004, among
Pioneer Debt Sub, LLC and Wachovia Bank, National Association, as
trustee, with respect to the indenture identified above as Exhibit 4.4
(incorporated by reference to Exhibit 4.3 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the SEC on November 5,
2004).
4.14 Third Supplemental Indenture dated as of September 30, 2004, among the
Company and Wachovia Bank, National Association, as trustee, with
respect to the indenture identified above as Exhibit 4.4 (incorporated
by reference to Exhibit 4.4 to the Company's Current Report on Form
8-K, File No. 1-13245, filed with the SEC on November 5, 2004).
4.15 Fourth Supplemental Indenture dated as of November 1, 2004, among the
Company, Pioneer USA, as guarantor, and Wachovia Bank, National
Association, as trustee, with respect to the indenture identified above
as Exhibit 4.4 (incorporated by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K, File No. 1-13245, filed with the
SEC on November 5, 2004).
10.1 364-Day Credit Agreement dated as of September 28, 2004 among the
Company, as the Borrower; JPMorgan Chase Bank as the Administrative
Agent; Bank of America, N.A., Barclays Bank PLC, Wells Fargo Bank,
National Association and Wachovia Bank, National Association as the
Co-Documentation Agents and certain other lenders (incorporated by
reference to Exhibit 99.2 to the Company's Current Report on Form 8-K,
File No. 1-13245, filed with the SEC on October 1, 2004).
31.1 Chief Executive Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
31.2 Chief Financial Officer certification under Section 302 of Sarbanes-
Oxley Act of 2002.
32.1 Chief Executive Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
32.2 Chief Financial Officer certification under Section 906 of Sarbanes-
Oxley Act of 2002.
46
PIONEER NATURAL RESOURCES COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
PIONEER NATURAL RESOURCES COMPANY
Date: November 5, 2004 By: /s/ Timothy L. Dove
----------------------------------
Timothy L. Dove
Executive Vice President and Chief
Financial Officer
Date: November 5, 2004 By: /s/ Richard P. Dealy
----------------------------------
Richard P. Dealy
Vice President and Chief
Accounting Officer
47
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index
Page
2.1 Agreement and Plan of Merger, dated May 3, 2004,
among the Company, Evergreen and BC Merger Sub, Inc.
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, File No. 1-13245,
filed with the SEC on May 5, 2004).
4.1 Fourth Supplemental Indenture, dated as of July 15,
2004, among the Company and The Bank of New York, as
Trustee, with respect to the indenture, dated January
13, 1998, between the Company and The Bank of New York,
as Trustee (incorporated by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K, File No.
1-13245, filed with the SEC on July 19, 2004).
4.2 Fifth Supplemental Indenture, dated as of July 15,
2004, among the Company, Pioneer Natural Resources USA,
Inc., as Guarantor, and The Bank of New York, as
Trustee, with respect to the indenture, dated January
13, 1998, between the Company and The Bank of New York,
as Trustee (incorporated by reference to Exhibit 99.2
to the Company's Current Report on Form 8-K, File No.
1-13245, filed with the SEC on July 19, 2004).
4.3 Form of 5.875% Senior Notes due 2016 of Pioneer Natural
Resources Company (incorporated by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K, File
No. 1-13245, filed with the SEC on July 19, 2004).
4.4 Indenture dated as of March 10, 2004, among Evergreen
and Wachovia Bank, National Association, as trustee,
relating to Evergreen's 5.875% Senior Subordinated
Notes due 2012 (incorporated by reference to Exhibit
4.1 to Evergreen's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004, File No. 1-13171,
filed with the SEC on May 10, 2004).
4.5 Form of Evergreen's 5.875% Senior Subordinated Notes
due 2012 (incorporated by reference to Exhibit 4.3 to
Evergreen's Registration Statement on Form S-4, dated
June 28, 2004, Registration No. 333-116201).
4.6 Indenture dated as of December 18, 2001, among
Evergreen and First Union National Bank, as trustee,
relating to Evergreen's 4.75% Senior Convertible Notes
due December 15, 2021 (incorporated by reference to
Exhibit 4.3 to Evergreen's Annual Report on Form 10-K
for the year ended December 31, 2001, File No. 1-13171,
filed with the SEC on March 11, 2002).
4.7 Form of Evergreen's 4.75% Senior Convertible Notes due
December 15, 2021 (included as Exhibit A to the
indenture identified above as Exhibit 4.6).
4.8 First Supplemental Indenture dated as of September 28,
2004, among Pioneer Evergreen Properties, LLC (as
successor to Evergreen) and Wachovia Bank, National
Association, as trustee, with respect to the indenture
identified above as Exhibit 4.4 (incorporated by
reference to Exhibit 4.5 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the
SEC on October 1, 2004).
4.9 First Supplemental Indenture dated as of September 28,
2004, among the Company, Evergreen and Wachovia Bank,
National Association (as successor to First Union
National Bank), as trustee, with respect to the
indenture identified above as Exhibit 4.6 (incorporated
by reference to Exhibit 4.1 to the Company's Amendment
to the Current Report on Form 8-K/A, File No. 1-13245,
filed with the SEC on November 5, 2004).
4.10 Second Supplemental Indenture dated as of September 28,
2004, among the Company, Pioneer Evergreen Properties,
LLC (as successor to Evergreen) and Wachovia Bank,
National Association (as successor t o First Union
National Bank), as trustee, with respect to the
indenture identified above as Exhibit 4.6 (incorporated
by reference to Exhibit 4.7 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the
SEC on October 1, 2004).
48
PIONEER NATURAL RESOURCES COMPANY
Exhibit Index (continued)
Page
4.11 Third Supplemental Indenture dated as of September 30,
2004, among the Company, Pioneer Debt Sub, LLC and
Wachovia Bank, National Association (as successor to
First Union National Bank), as trustee, with respect to
the indenture identified above as Exhibit 4.6
(incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, File No. 1-13245,
filed with the SEC on November 5, 2004).
4.12 Fourth Supplemental Indenture dated as of September 30,
2004, among the Company and Wachovia Bank, National
Association (as successor to First Union National
Bank), as trustee, with respect to the indenture
identified above as Exhibit 4.6 (incorporated by
reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the
SEC on November 5, 2004).
4.13 Second Supplemental Indenture dated as of September 30,
2004, among Pioneer Debt Sub, LLC and Wachovia Bank,
National Association, as trustee, with respect to the
indenture identified above as Exhibit 4.4 (incorporated
by reference to Exhibit 4.3 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the
SEC on November 5, 2004).
4.14 Third Supplemental Indenture dated as of September 30,
2004, among the Company and Wachovia Bank, National
Association, as trustee, with respect to the indenture
identified above as Exhibit 4.4 (incorporated by
reference to Exhibit 4.4 to the Company's Current
Report on Form 8-K, File No. 1-13245, filed with the
SEC on November 5, 2004).
4.15 Fourth Supplemental Indenture dated as of November 1,
2004, among the Company, Pioneer USA, as guarantor, and
Wachovia Bank, National Association, as trustee, with
respect to the indenture identified above as Exhibit
4.4 (incorporated by reference to Exhibit 4.5 to the
Company's Current Report on Form 8-K, File No. 1-13245,
filed with the SEC on November 5, 2004).
10.1 364-Day Credit Agreement dated as of September 28, 2004
among the Company, as the Borrower; JP Morgan Chase
Bank as the Administrative Agent; Bank of America,
N.A., Barclays Bank PLC, Wells Fargo Bank, National
Association and Wachovia Bank, National Association as
the Co-Documentation Agents and certain other lenders
(incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K, File No.
1-13245, filed with the SEC on October 1, 2004).
31.1(a) Chief Executive Officer certification under Section 302
of Sarbanes-Oxley Act of 2002.
31.2(a) Chief Financial Officer certification under Section 302
of Sarbanes-Oxley Act of 2002.
32.1(b) Chief Executive Officer certification under Section 906
of Sarbanes-Oxley Act of 2002.
32.2(b) Chief Financial Officer certification under Section 906
of Sarbanes-Oxley Act of 2002.
- ---------------
(a) filed herewith.
(b) furnished herewith.
49