-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J/XEUACLfY07M1ONJ9CT8hlAh1wddShOmdxuJOSsrxe3Fr+0Fw/hqA4xI4o2l7Nc dSBlx3gaFYko1d9DUUjbSw== 0001038357-02-000015.txt : 20020514 0001038357-02-000015.hdr.sgml : 20020514 ACCESSION NUMBER: 0001038357-02-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER NATURAL RESOURCES CO CENTRAL INDEX KEY: 0001038357 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 752702753 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13245 FILM NUMBER: 02644610 BUSINESS ADDRESS: STREET 1: 1400 WILLIAMS SQUARE WEST STREET 2: 5205 N OCONNOR BLVD CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 9724449001 MAIL ADDRESS: STREET 1: 1400 WILLIAMS SQUARE WEST STREET 2: 5205 N OCONNOR BLVD CITY: IRVING STATE: TX ZIP: 75039 10-Q 1 m02pnr.txt PNR 3/31/02 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q / x / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2002 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to ________ Commission File No. 1-13245 PIONEER NATURAL RESOURCES COMPANY ----------------------------------- (Exact name of Registrant as specified in its charter) Delaware 75-2702753 ----------------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5205 N. O'Connor Blvd., Suite 1400, Irving, Texas 75039 - ------------------------------------------------- ----------- (Address of principal executive offices) (Zip code) Registrant's Telephone Number, including area code : (972) 444-9001 Not applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / x / No / / Number of shares of Common Stock outstanding as of April 30, 2002....115,908,657 PIONEER NATURAL RESOURCES COMPANY TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 ........................................ 4 Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001...................... 5 Consolidated Statement of Stockholders' Equity for the three months ended March 31, 2002......................... 6 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001...................... 7 Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2002 and 2001................ 8 Notes to Consolidated Financial Statements................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................ 32 Item 6. Exhibits and Reports on Form 8-K............................. 32 Signatures................................................... 33 Exhibit Index................................................ 34 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; "Bcf" means one billion cubic feet; "Tcf" means one trillion cubic feet; "Bcfe" means a billion cubic feet equivalent and is a standard convention used to express oil and gas volumes on a comparable gas equivalent basis; "BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis; "Btu" means British thermal unit and is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit; "MMBtu" means one million Btu's; "MBbl" means one thousand Bbls; "MBOE" means one thousand BOE; "MMBOE" means one million BOE; "Mcf" means one thousand cubic feet and is a measure of natural gas volume; "MMcf" means one million cubic feet; "NGL" means natural gas liquid; "NYMEX" means The New York Mercantile Exchange; "proved reserves" mean the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (B) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (A) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (C) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. Gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl of oil or NGL. With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by Pioneer Natural Resources Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres; and, all dollar amounts are expressed in U.S. dollars. 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) March 31, December 31, 2002 2001 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents...................................... $ 16,757 $ 14,334 Accounts receivable: Trade, net of reserves for doubtful accounts of $5,570 and $5,553 as of March 31, 2002 and December 31, 2001, respectively.............................................. 88,476 81,616 Affiliates.................................................. 386 595 Inventories.................................................... 11,974 14,549 Deferred income taxes.......................................... 6,400 6,400 Other current assets: Derivative assets, net of valuation reserves of $3,153 as of March 31, 2002 and December 31, 2001................ 32,446 127,074 Other....................................................... 10,802 11,075 ---------- ---------- Total current assets...................................... 167,241 255,643 ---------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties........................................... 3,783,934 3,691,783 Unproved properties......................................... 187,475 187,785 Accumulated depletion, depreciation and amortization........... (1,143,441) (1,095,310) ---------- ---------- 2,827,968 2,784,258 ---------- ---------- Deferred income taxes............................................ 84,319 84,319 Other property and equipment, net................................ 21,158 21,560 Other assets, net: Derivative assets, net of valuation reserves of $1,069 as of March 31, 2002 and December 31, 2001.................. 486 54,486 Other.......................................................... 62,078 70,787 ---------- ---------- $ 3,163,250 $ 3,271,053 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade....................................................... $ 98,399 $ 92,760 Affiliates.................................................. 1,728 6,405 Interest payable............................................... 37,115 37,410 Other current liabilities: Derivative obligations...................................... 22,898 36,830 Other....................................................... 53,969 54,804 ---------- ---------- Total current liabilities................................. 214,109 228,209 ---------- ---------- Long-term debt................................................... 1,587,853 1,577,304 Noncurrent derivative obligations................................ 37,337 32,438 Other noncurrent liabilities..................................... 126,507 133,945 Deferred income taxes............................................ 5,633 13,768 Stockholders' equity: Preferred stock, $.01 par value; 100,000,000 shares authorized; one share issued and outstanding................ - - Common stock, $.01 par value; 500,000,000 shares authorized; 107,422,542 and 107,422,467 shares issued as of March 31, 2002 and December 31, 2001, respectively.................... 1,074 1,074 Additional paid-in-capital..................................... 2,462,273 2,462,272 Treasury stock, at cost; 3,074,714 and 3,486,073 shares as of March 31, 2002 and December 31, 2001, respectively....... (42,338) (48,002) Accumulated deficit............................................ (1,326,528) (1,323,343) Accumulated other comprehensive income: Deferred hedge gains, net................................... 105,122 201,046 Cumulative translation adjustment........................... (7,792) (7,658) ---------- ---------- Total stockholders' equity................................ 1,191,811 1,285,389 Commitments and contingencies ---------- ---------- $ 3,163,250 $ 3,271,053 ========== ==========
The financial information included as of March 31, 2002 has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 4 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) Three months ended March 31, ---------------------- 2002 2001 --------- --------- Revenues: Oil and gas....................................... $ 165,539 $ 257,986 Interest and other................................ 1,193 5,167 Gain (loss) on disposition of assets, net......... (74) 7,293 -------- -------- 166,658 270,446 -------- -------- Costs and expenses: Oil and gas production............................ 51,018 55,802 Depletion, depreciation and amortization.......... 50,388 52,161 Exploration and abandonments...................... 21,120 22,883 General and administrative........................ 11,918 10,448 Interest.......................................... 26,317 35,616 Other............................................. 8,266 25,217 -------- -------- 169,027 202,127 -------- -------- Income (loss) before income taxes..................... (2,369) 68,319 Income tax (provision) benefit........................ 410 (400) -------- -------- Net income (loss)..................................... $ (1,959) $ 67,919 ======== ======== Net income (loss) per share: Basic............................................. $ (.02) $ .69 ======== ======== Diluted........................................... $ (.02) $ .68 ======== ======== Weighted average shares outstanding: Basic............................................. 104,055 98,379 ======== ======== Diluted........................................... 104,055 99,708 ======== ========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 5 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands) (Unaudited) Accumulated Other Comprehensive Income (Loss) Common ---------------------- Stock Additional Hedge Total Shares Common Paid-in Treasury Accumulated Gains Translation Stockholders' Outstanding Stock Capital Stock Deficit (Losses) Adjustment Equity ----------- ------- ---------- -------- ----------- ---------- ----------- ------------- Balance as of January 1, 2002........ 103,936 $ 1,074 $2,462,272 $(48,002) $(1,323,343) $201,046 $(7,658) $1,285,389 Stock options exercised............. 412 - 1 5,664 (1,226) - - 4,439 Net loss............................ - - - - (1,959) - - (1,959) Other comprehensive income (loss): Deferred hedge gains and losses: Deferred hedge losses, net of tax. - - - - - (64,082) - (64,082) Net gains included in net income.. - - - - - (31,842) - (31,842) Translation adjustment............ - - - - - - (134) (134) ------- ------ --------- ------- ---------- ------- ------ --------- Balance as of March 31, 2002......... 104,348 $ 1,074 $2,462,273 $(42,338) $(1,326,528) $105,122 $(7,792) $1,191,811 ======= ====== ========= ======= ========== ======= ====== =========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 6 PIONEER NATURAL RESOURCES COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Three months ended March 31, ------------------- 2002 2001 -------- -------- Cash flows from operating activities: Net income (loss)............................................... $ (1,959) $ 67,919 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization...................... 50,388 52,161 Exploration expenses, including dry holes..................... 18,666 21,847 Deferred income taxes......................................... (684) (4,800) (Gain) loss on disposition of assets, net..................... 74 (7,293) Interest related amortization................................. (992) 2,998 Other noncash items........................................... 12,984 10,559 Changes in operating assets and liabilities: Accounts receivable........................................... (13,721) 26,449 Inventory..................................................... 2,239 1,124 Other current assets.......................................... (7) (5,954) Accounts payable.............................................. (14,456) (25,607) Interest payable.............................................. (295) 720 Other current liabilities..................................... (2,201) (8,389) ------- ------- Net cash provided by operating activities.................. 50,036 131,734 ------- ------- Cash flows from investing activities: Proceeds from disposition of assets............................. 51,644 11,903 Additions to oil and gas properties............................. (88,262) (97,720) Other property additions, net................................... (2,154) (2,984) ------- ------- Net cash used in investing activities...................... (38,772) (88,801) ------- ------- Cash flows from financing activities: Borrowings under long-term debt................................. 33,290 60,175 Principal payments on long-term debt............................ (15,290) (99,175) Payment of noncurrent liabilities............................... (30,504) (6,650) Exercise of long-term incentive plan stock options.............. 4,439 2,172 Purchase of treasury stock...................................... - (7,070) ------- ------- Net cash used in financing activities...................... (8,065) (50,548) ------- ------- Net increase (decrease) in cash and cash equivalents................ 3,199 (7,615) Effect of exchange rate changes on cash and cash equivalents........ (776) (239) Cash and cash equivalents, beginning of period...................... 14,334 26,159 ------- ------- Cash and cash equivalents, end of period............................ $ 16,757 $ 18,305 ======= =======
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 LOSS (in thousands) (Unaudited) Three months ended March 31, --------------------- 2002 2001 --------- --------- Net income (loss)...................................................... $ (1,959) $ 67,919 -------- -------- Other comprehensive income (loss): Deferred hedge gains and losses: Transition adjustment............................................ - (197,444) Deferred hedge gains (losses), net of tax........................ (64,082) 53,066 Net (gains) losses included in net income........................ (31,842) 33,871 Unrealized gains (losses) on available for sale securities: Unrealized holding losses........................................ - (58) Gains included in net income..................................... - (7,042) Cumulative translation adjustment.................................. (134) (9,347) -------- -------- Other comprehensive loss...................................... (96,058) (126,954) -------- -------- Comprehensive loss..................................................... $ (98,017) $ (59,035) ======== ========
The financial information included herein has been prepared by management without audit by independent public accountants. The accompanying notes are an integral part of these consolidated financial statements. 8 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) NOTE A. Organization and Nature of Operations Pioneer Natural Resources Company (the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange and the Toronto Stock Exchange. The Company is an oil and gas exploration and production company with ownership interests in oil and gas properties located principally in the Mid Continent, Southwestern and onshore and offshore Gulf Coast regions of the United States and in Argentina, Canada, Gabon, South Africa and Tunisia. NOTE B. Basis of Presentation and Use of Estimates Basis of presentation. In the opinion of management, the unaudited consolidated financial statements of the Company as of March 31, 2002 and for the three month periods ended March 31, 2002 and 2001 include all adjustments and accruals, consisting only of normal, recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Use of estimates. As of March 31, 2002, the Company used an exchange rate of 3.0 pesos to $1 to remeasure the peso-denominated monetary assets and liabilities of the Company's Argentine subsidiaries. NOTE C. Derivative Financial Instruments Hedge Derivatives Fair value hedges. During the three month periods ended March 31, 2002 and 2001, settlement receipts associated with the Company's interest rate swaps that are designated as hedges of the fair value of the Company's 8-7/8 percent senior notes due April 15, 2005, 8-1/4 percent senior notes due August 15, 2007 and 6-1/2 percent senior notes due January 15, 2008 reduced the Company's reported interest expense by $3.2 million and $258 thousand, respectively. During those same respective periods, there were no ineffective changes in the fair value of the Company's interest rate swaps. During September 2001, the Company terminated interest rate swaps that were designated as hedges of the fair value of the Company's 8-7/8 percent senior notes due April 15, 2005 and 8-1/4 percent senior notes due August 15, 2007. Associated therewith, the Company recognized deferred hedge gains that have a remaining unamortized carrying value of $15.5 million as of March 31, 2002. Amortization of these deferred hedge gains reduced the Company's reported interest expense by $2.9 million during the three months ended March 31, 2002. Cash flow hedges. The Company, from time to time, uses derivative instruments as cash flow hedges of its commodity price, interest rate and currency exchange rate risks. Oil price hedges. All material sales contracts governing the Company's oil production have been tied directly or indirectly to the New York Mercantile Exchange ("NYMEX") prices. The following table sets forth the Company's outstanding oil hedge contracts and the associated weighted average NYMEX prices for those contracts as of March 31, 2002: 9 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ------------ ------------- ------------ ------------ ------------- Daily oil production: 2002 - Swap Contracts Volume (Bbl).................. 14,341 21,000 19,000 18,127 Price per Bbl................. $ 25.57 $ 23.88 $ 23.72 $ 24.27 2002 - Collar Contracts Volume (Bbl).................. 6,000 - - 1,985 Price per Bbl................. $25.00-$28.61 $ - $ - $25.00-$28.61 2003 - Swap Contracts Volume (Bbl).................. 6,000 6,000 - - 2,975 Price per Bbl................. $ 24.02 $ 24.02 $ - $ - $ 24.02
The Company reports average oil prices per Bbl including the effects of oil quality, gathering and transportation costs and the net effect of the oil hedges. The following table sets forth the Company's oil prices, both reported (including hedge results) and realized (excluding hedge results), and the net effect of settlements of oil price hedges to revenue: Three months ended March 31, ------------------ 2002 2001 ------- ------- Average price reported per Bbl....................... $ 23.17 $ 25.03 Average price realized per Bbl....................... $ 18.54 $ 26.70 Addition (reduction) to revenue (in millions)........ $ 14.4 $ (5.3)
Natural gas liquids prices. During the three month periods ended March 31, 2002 and 2001, the Company did not enter into any NGL hedge contracts. Gas prices hedges. The Company employs a policy of hedging a portion of its gas production based on the index price upon which the gas is actually sold in order to mitigate the basis risk between NYMEX prices and actual index prices. The following table sets forth the Company's outstanding gas hedge contracts and the associated weighted average prices for those contracts as of March 31, 2002: Yearly First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Average ----------- ----------- ----------- ----------- ----------- Daily gas production: 2002 - Swap Contracts Volume (Mcf)..................... 140,000 190,000 190,000 173,455 Index price per MMBtu............ $ 4.28 $ 4.13 $ 4.14 $ 4.17 2002 - Collar Contracts Volume (Mcf)..................... 70,000 103,152 120,000 97,818 Index price per MMBtu............ $3.00-$3.91 $2.84-$3.70 $2.79-$3.64 $2.86-$3.73 2003 - Swap Contracts Volume (Mcf)..................... 40,000 40,000 40,000 40,000 40,000 Index price per MMBtu............ $ 3.55 $ 3.55 $ 3.55 $ 3.55 $ 3.55 2004 - Swap Contracts Volume (Mcf)..................... 95,000 95,000 95,000 95,000 95,000 Index price per MMBtu............ $ 3.68 $ 3.68 $ 3.68 $ 3.68 $ 3.68 2005 - Swap Contracts Volume (Mcf)..................... 70,000 70,000 70,000 70,000 70,000 Index price per MMBtu............ $ 3.73 $ 3.73 $ 3.73 $ 3.73 $ 3.73
10 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) The Company reports average gas prices per Mcf including the effects of Btu content, gathering and transportation costs, gas processing and shrinkage and the net effect of the gas hedges. The following table sets forth the Company's gas prices, both reported (including hedge results) and realized (excluding hedge results), and the net effect of settlements of gas price hedges to revenue: Three months ended March 31, ------------------ 2002 2001 ------- ------- Average price reported per Mcf....................... $ 2.47 $ 4.58 Average price realized per Mcf....................... $ 1.87 $ 5.17 Addition (reduction) to revenue (in millions)........ $ 17.8 $ (17.7)
Interest rates. During the three months ended March 31, 2002, the Company recognized settlement losses of $290 thousand associated with interest rate swap agreements that are designated as cash flow hedges. The settlement losses increased the Company's reported interest expense. The Company recognized no ineffectiveness associated with these interest rate swaps during the three months ended March 31, 2002. These interest rate swaps were initiated during the second quarter of 2001. Foreign currency rates. During the fourth quarter of 2001, the Company entered into forward agreements to exchange an aggregate $24.8 million U.S. dollars during 2002 for Canadian dollars at a weighted average exchange rate of ...6266 U.S. dollars for 1.0 Canadian dollar. These agreements are designated as hedges of the exchange rate risk associated with forecasted Canadian sales of gas under U.S. dollar denominated sales agreements. The Company recognized settlement losses of $38 thousand associated with these forward agreements during the three months ended March 31, 2002, which decreased the Company's reported gas sales price. The Company did not recognize any ineffectiveness associated with changes in the fair values of these derivative instruments during the three months ended March 31, 2002. Hedge ineffectiveness and excluded items. During the three month periods ended March 31, 2002 and 2001, the Company recognized other expense of $78 thousand and $10.9 million, respectively, related to the ineffective portions of its cash flow commodity price hedges. Additionally, based on Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" interpretive guidance that was in effect prior to April 2001, the Company excluded changes in the time and volatility value components of collar contracts designated as cash flow hedges from the measurement of hedge effectiveness. Associated therewith, the Company recorded other expense of $2.4 million during the three months ended March 31, 2001. In April 2001, the Company discontinued the exclusion of time value and volatility fair value components from the measurement of hedge effectiveness. Accumulated other comprehensive income - deferred hedge gains, net. During the twelve month period ending March 31, 2003, the Company expects to reclassify $22.7 million of net deferred gains associated with open cash flow hedges and $15.0 million of net deferred losses on terminated cash flow hedges from "Accumulated other comprehensive income - deferred hedge gains, net" to oil and gas revenue. 11 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) The following table sets forth the scheduled reclassifications of deferred hedge gains and (losses) on terminated cash flow hedges that will be recognized in the Company's future oil and gas revenues: First Second Third Fourth Outstanding Quarter Quarter Quarter Quarter Total --------- --------- --------- --------- ----------- (in thousands) 2002: Oil revenue........... $ 1,640 $ - $ - $ 1,640 Gas revenue........... (11,517) (11,643) (11,643) (34,803) ------- ------- ------- ------- $ (9,877) $(11,643) $(11,643) $(33,163) 2003 gas revenue........ $ 18,122 $ 18,167 $ 18,207 $ 18,049 $ 72,545 2004 gas revenue........ $ 10,826 $ 10,776 $ 10,841 $ 10,788 $ 43,231 2005 gas revenue........ $ 301 $ 305 $ 307 $ 307 $ 1,220
Non-hedge Derivatives Btu swap agreements. The Company is a party to certain Btu swap agreements that mature at the end of 2004. The Btu swap agreements do not qualify for hedge accounting treatment. During the second quarter of 2001, the Company entered into offsetting Btu swap agreements that eliminated the future market risk associated with the agreements and fixed the Company's remaining obligations for them. Other expense for the three months ended March 31, 2001 includes a $6.6 million charge associated with the mark-to-market increase to the liabilities recognized for the Btu swap agreements. NOTE D. Commitments and Contingencies Legal actions. The Company is party to various legal actions incidental to its business, including, but not limited to, the proceedings described below. The majority of these lawsuits primarily involve claims for damages arising from oil and gas leases and ownership interest disputes. The Company believes that the ultimate disposition of these legal actions will not have a material adverse effect on the Company's consolidated financial position, liquidity, capital resources or future results of operations. The Company will continue to evaluate its litigation matters on a quarter-by-quarter basis and will adjust its litigation reserves as appropriate to reflect the then current status of litigation. Alford. The Company is party to a 1993 class action lawsuit filed in the 26th Judicial District Court of Stevens County, Kansas by two classes of royalty owners, one for each of the Company's gathering systems connected to the Company's Satanta gas plant. The case was relatively inactive for several years. In early 2000, the plaintiffs amended their pleadings to add claims regarding the field compression installed by the Company in the 1990's. The lawsuit now has two material claims. First, the plaintiffs assert that the expenses related to the field compression are a "cost of production" for which plaintiffs cannot be charged their proportionate share under the applicable oil and gas leases. Second, the plaintiffs claim they are entitled to 100 percent of the value of the helium extracted at the Company's Satanta gas plant. If the plaintiffs were to prevail on the above two claims in their entirety, it is possible that the Company's liability could reach $25 million, plus prejudgment interest. However, the Company believes it has valid defenses to plaintiffs' claims, has paid the plaintiffs properly under their respective oil and gas leases, and intends to vigorously defend itself. The Company believes the cost of the field compression is not a "cost of production", but is rather an expense of transporting the gas to the Company's Satanta gas plant for processing, where valuable hydrocarbon liquids and helium are extracted from the gas. The plaintiffs benefit from such extractions and the Company believes that charging the plaintiffs with their proportionate share of such transportation and processing expenses is consistent with Kansas law. The Company has also vigorously defended against plaintiffs' claims to 100 percent of the value of the helium extracted, and believes that in accordance with applicable law, it has properly accounted to the plaintiffs for their fractional royalty share of the helium under the specified royalty clauses of the respective oil and gas leases. 12 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) The factual evidence in the case was presented to the 26th Judicial District Court without a jury in December 2001. Oral arguments were heard by the court in April 2002, and although the court has not yet entered a judgment or findings, it could do so at any time. The Company strongly denies the existence of any material underpayment to plaintiffs and believes it presented strong evidence at trial to support its positions. The Company has not yet determined the amount of damages, if any, that would be payable if the lawsuit was determined adversely to the Company. However, the amount of any resulting liability could have a material adverse effect on the Company's results of operations for the period in which such liability is recorded, but the Company does not expect that any such liability will have a material adverse effect on its consolidated financial position as a whole or on its liquidity, capital resources or future results of operations. Kansas ad valorem tax. The Natural Gas Policy Act of 1978 ("NGPA") allows a "severance, production or similar" tax to be included as an add-on, over and above the maximum lawful price for gas. Based on a Federal Energy Regulatory Commission ("FERC") ruling that Kansas ad valorem tax was such a tax, the Company collected the Kansas ad valorem tax in addition to the otherwise maximum lawful price. The FERC's ruling was appealed to the United States Court of Appeals for the District of Columbia ("D.C. Circuit"), which held in June 1988 that the FERC failed to provide a reasoned basis for its findings and remanded the case to the FERC for further consideration. On December 1, 1993, the FERC issued an order reversing its prior ruling, but limiting the effect of its decision to Kansas ad valorem taxes for sales made on or after June 28, 1988. The FERC clarified the effective date of its decision by an order dated May 18, 1994. The order clarified that the effective date applies to tax bills rendered after June 28, 1988, not sales made on or after that date. Numerous parties filed appeals on the FERC's action in the D.C. Circuit. Various gas producers challenged the FERC's orders on two grounds: (1) that the Kansas ad valorem tax, properly understood, does qualify for reimbursement under the NGPA; and (2) the FERC's ruling should, in any event, have been applied prospectively. Other parties challenged the FERC's orders on the grounds that the FERC's ruling should have been applied retroactively to December 1, 1978, the date of the enactment of the NGPA and producers should have been required to pay refunds accordingly. The D.C. Circuit issued its decision on August 2, 1996, which holds that producers must make refunds of all Kansas ad valorem tax collected with respect to production since October 4, 1983, as opposed to June 28, 1988. Petitions for rehearing were denied on November 6, 1996. Various gas producers subsequently filed a petition for writ of certiori with the United States Supreme Court seeking to limit the scope of the potential refunds to tax bills rendered on or after June 28, 1988 (the effective date originally selected by the FERC). Williams Natural Gas Company filed a cross-petition for certiori seeking to impose refund liability back to December 1, 1978. Both petitions were denied on May 12, 1997. The Company and other producers filed petitions for adjustment with the FERC on June 24, 1997. The Company was seeking waiver or set-off from FERC with respect to that portion of the refund associated with (i) non-recoupable royalties, (ii) non-recoupable Kansas property taxes based, in part, upon the higher prices collected, and (iii) interest for all periods. On September 10, 1997, FERC denied this request, and on October 10, 1997, the Company and other producers filed a request for rehearing. Pipelines were given until November 10, 1997 to file claims on refunds sought from producers and refund claims totaling approximately $30.2 million were made against the Company. Through March 31, 2002, the Company has settled $9.8 million of the original claim amounts. As of March 31, 2002 and December 31, 2001, the Company had on deposit $24.6 million and $24.5 million, respectively, including accrued interest, in an escrow account and had corresponding obligations for the remaining claim recorded in other current liabilities in the accompanying Consolidated Balance Sheets. The Company is unable at this time to predict the amount that will ultimately be refunded, but believes the escrowed amounts, plus accrued interest, will be sufficient to settle all claims. 13 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) NOTE E. Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The computation of diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock that are dilutive to net income were exercised or converted into common stock or resulted in the issuance of common stock. The following table is a reconciliation of the basic and diluted net income (loss) per share computations for the three months ended March 31, 2002 and 2001: Three months ended March 31, ---------------------- 2002 2001 --------- --------- (in thousands, except per share amounts) Basic and diluted net income (loss)................... $ (1,959) $ 67,919 Weighted average common shares outstanding (a): Basic............................................... 104,055 98,379 Dilutive common stock options (b)................... - 1,329 -------- -------- Diluted............................................. 104,055 99,708 ======== ======== Net income (loss) per share: Basic............................................... $ (.02) $ .69 Diluted............................................. $ (.02) $ .68 - --------------- (a) On April 22, 2002, the Company completed a public offering of 11.5 million new shares of its common stock. See Note H for additional information regarding this offering. (b) Common stock options to purchase 4,998,951 shares and 3,205,578 shares of common stock were outstanding but not included in the computations of diluted net income (loss) per share for the three months ended March 31, 2002 and 2001, respectively, because the exercise prices of the options were greater than the average market price of the common shares and would be anti-dilutive to the computations. In-the-money options representing 1,226,746 weighted average equivalent shares of common stock were not included in the computation of diluted net loss per share for the three months ended March 31, 2002, since they have a dilutive effect to net loss per share.
NOTE F. Geographic Operating Segment Information The Company has operations in only one industry segment, that being the oil and gas exploration and production industry; however, the Company is organizationally structured along geographic operating segments, or regions. The Company has reportable operations in the United States, Argentina and Canada. Other foreign is primarily comprised of operations in Gabon, South Africa and Tunisia. The following table provides the Company's interim geographic operating segment data. Geographic operating segment income tax benefits (provisions) have been determined based on statutory rates existing in the various tax jurisdictions where the Company has oil and gas producing activities. The "Headquarters and Other" 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. 14 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) United Other Headquarters Consolidated States Argentina Canada Foreign and other Total -------- --------- -------- ----------- ------------ ------------ (in thousands) Three months ended March 31, 2002: Oil and gas revenue............... $131,461 $ 23,259 $ 10,819 $ - $ - $ 165,539 Interest and other................ - - - - 1,193 1,193 Loss on disposition of assets..... - - (11) - (63) (74) ------- ------- ------- ------- ------- -------- 131,461 23,259 10,808 - 1,130 166,658 ------- ------ ------- ------- ------- -------- Production costs.................. 44,844 3,585 2,589 - - 51,018 Depletion, depreciation and amortization................... 31,674 10,099 6,464 - 2,151 50,388 Exploration and abandonments...... 13,311 2,140 2,303 3,366 - 21,120 General and administrative........ - - - - 11,918 11,918 Interest.......................... - - - - 26,317 26,317 Other ............................ - - - - 8,266 8,266 ------- ------- ------- ------- ------- -------- 89,829 15,824 11,356 3,366 48,652 169,027 ------- ------- ------- ------- ------- -------- Income (loss) before income taxes. 41,632 7,435 (548) (3,366) (47,522) (2,369) Income tax benefit (provision).... (14,571) (2,602) 231 1,178 16,174 410 ------- ------- ------- ------- ------- -------- Net income (loss)................. $ 27,061 $ 4,833 $ (317) $ (2,188) $(31,348) $ (1,959) ======= ======= ======= ======= ======= ========
United Other Headquarters Consolidated States Argentina Canada Foreign and other Total -------- --------- -------- ----------- ------------ ------------ (in thousands) Three months ended March 31, 2001: Oil and gas revenue............... $199,421 $ 31,602 $ 26,963 $ - $ - $ 257,986 Interest and other................ - - - - 5,167 5,167 Gain on disposition of assets..... 69 - - - 7,224 7,293 ------- ------- ------- ------- ------- -------- 199,490 31,602 26,963 - 12,391 270,446 ------- ------- ------- ------- ------- -------- Production costs.................. 46,268 6,555 2,979 - - 55,802 Depletion, depreciation and amortization................... 29,228 12,135 6,682 - 4,116 52,161 Exploration and abandonments...... 5,215 6,610 6,613 4,445 - 22,883 General and administrative........ - - - - 10,448 10,448 Interest.......................... - - - - 35,616 35,616 Other ............................ - - - - 25,217 25,217 ------- ------- ------- ------- ------- -------- 80,711 25,300 16,274 4,445 75,397 202,127 ------- ------- ------- ------- ------- -------- Income (loss) before income taxes. 118,779 6,302 10,689 (4,445) (63,006) 68,319 Income tax benefit (provision).... (41,573) (2,206) (4,769) 1,556 46,592 (400) ------- ------- ------- ------- ------- -------- Net income (loss)................. $ 77,206 $ 4,096 $ 5,920 $ (2,889) $(16,414) $ 67,919 ======= ======= ======= ======= ======= ========
NOTE G. Pioneer USA Pioneer Natural Resources USA, Inc. ("Pioneer USA") is a wholly-owned subsidiary of the Company that has fully and unconditionally guaranteed certain debt securities of the Company. In accordance with practices accepted by the SEC, the Company has prepared Consolidating Condensed Financial Statements in order to quantify the assets and results of operations of Pioneer USA as a subsidiary guarantor. The following Consolidating Condensed Balance Sheets, Consolidating Condensed Statements of Operations and Comprehensive Income (Loss) and Consolidating Condensed Statements of Cash Flows present financial information for Pioneer Natural Resources Company as the Parent on a stand- alone basis (carrying any investments in subsidiaries under the equity method), financial information for Pioneer USA on a stand-alone basis (carrying any investment in non-guarantor subsidiaries under the equity method), the non-guarantor subsidiaries of the Company on a consolidated basis, the consolidation and elimination entries necessary to arrive at the information for the Company on a consolidated basis, and the financial information for the Company on a consolidated basis. Pioneer USA is not restricted from making distributions to the Company. 15 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) CONSOLIDATING CONDENSED BALANCE SHEET As of March 31, 2002 (in thousands) (Unaudited) ASSETS Non- Pioneer Guarantor The Parent USA Subsidiaries Eliminations Company ---------- ----------- ------------ ------------ ---------- Current assets: Cash and cash equivalents............. $ 60 $ 15,953 $ 744 $ $ 16,757 Other current assets.................. 1,415,680 (1,200,221) (64,975) 150,484 --------- ---------- --------- ---------- Total current assets............. 1,415,740 (1,184,268) (64,231) 167,241 --------- ---------- --------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................. - 2,748,200 1,035,734 3,783,934 Unproved properties................ - 25,485 161,990 187,475 Accumulated depletion, depreciation and amortization........................ - (845,708) (297,733) (1,143,441) --------- ---------- --------- ----------- - 1,927,977 899,991 2,827,968 --------- ---------- --------- ---------- Deferred income taxes................... 82,811 - 1,508 84,319 Other property and equipment, net....... - 17,492 3,666 21,158 Other assets, net....................... 15,336 29,158 18,070 62,564 Investment in subsidiaries.............. 1,191,553 83,890 - (1,275,443) - --------- ---------- --------- ---------- $2,705,440 $ 874,249 $ 859,004 $ 3,163,250 ========= ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities..................... $ 29,459 $ 158,987 $ 25,663 $ $ 214,109 Long-term debt.......................... 1,587,853 - - 1,587,853 Other noncurrent liabilities............ 23,835 119,978 20,031 163,844 Deferred income taxes................... - - 5,633 5,633 Stockholders' equity.................... 1,064,293 595,284 807,677 (1,275,443) 1,191,811 Commitments and contingencies --------- ---------- --------- ---------- $2,705,440 $ 874,249 $ 859,004 $ 3,163,250 ========= ========== ========= ==========
CONSOLIDATING CONDENSED BALANCE SHEET As of December 31, 2001 (in thousands) ASSETS Non- Pioneer Guarantor The Parent USA Subsidiaries Eliminations Company ---------- ----------- ------------ ------------ ---------- Current assets: Cash and cash equivalents............. $ 79 $ 10,900 $ 3,355 $ $ 14,334 Other current assets.................. 1,540,985 (1,125,968) (173,708) 241,309 --------- ---------- --------- ---------- Total current assets............. 1,541,064 (1,115,068) (170,353) 255,643 --------- ---------- --------- ---------- Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting: Proved properties.................. - 2,688,962 1,002,821 3,691,783 Unproved properties................ - 25,222 162,563 187,785 Accumulated depletion, depreciation and amortization........................ - (815,323) (279,987) (1,095,310) --------- --------- --------- ----------- - 1,898,861 885,397 2,784,258 --------- --------- --------- ---------- Deferred income taxes................... 82,811 - 1,508 84,319 Other property and equipment, net....... - 17,881 3,679 21,560 Other assets, net....................... 15,911 81,356 28,006 125,273 Investment in subsidiaries.............. 1,060,457 87,636 - (1,148,093) - --------- ---------- --------- ---------- $2,700,243 $ 970,666 $ 748,237 $ 3,271,053 ========= ========== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities..................... $ 30,745 $ 176,442 $ 21,022 $ $ 228,209 Long-term debt.......................... 1,577,304 - - 1,577,304 Other noncurrent liabilities............ 19,582 124,552 22,249 166,383 Deferred income taxes................... - - 13,768 13,768 Stockholders' equity.................... 1,072,612 669,672 691,198 (1,148,093) 1,285,389 Commitments and contingencies --------- ---------- --------- ---------- $2,700,243 $ 970,666 $ 748,237 $ 3,271,053 ========= ========== ========= ==========
16 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS For the Three Months Ended March 31, 2002 (in thousands) (Unaudited) Non- Consolidated Pioneer Guarantor Income The Parent USA Subsidiaries Tax Benefit Eliminations Company --------- -------- ------------ ------------ ------------ ---------- Revenues: Oil and gas........................ $ - $ 125,921 $ 39,618 $ - $ $ 165,539 Interest and other................. - 741 452 - 1,193 Loss on disposition of assets, net. - - (74) - (74) ------- -------- ------- ------- --------- - 126,662 39,996 - 166,658 ------- -------- ------- ------- --------- Costs and expenses: Oil and gas production............. - 44,541 6,477 - 51,018 Depletion, depreciation and amortization..................... - 32,266 18,122 - 50,388 Exploration and abandonments....... - 13,950 7,170 - 21,120 General and administrative......... 263 9,501 2,154 - 11,918 Interest........................... 22,301 4,008 8 - 26,317 Equity income from subsidiaries.... (2,822) 2,766 - - 56 - Other.............................. (17,783) 14,229 11,820 - 8,266 ------- -------- ------- ------- --------- 1,959 121,261 45,751 - 169,027 ------- -------- ------- ------- --------- Income (loss) before income taxes..... (1,959) 5,401 (5,755) - (2,369) Income tax benefit................... - - 410 - 410 ------- -------- ------- ------- --------- Net income (loss)..................... (1,959) 5,401 (5,345) - (1,959) Other comprehensive income (loss): Deferred hedge gains and losses: Deferred hedge losses, net of tax........................ (138) (50,485) (13,459) - (64,082) Net (gains) losses included in net income.................... 290 (26,547) (5,585) - (31,842) Cumulative translation adjustment.. - - (134) - (134) ------- -------- ------- ------- --------- Comprehensive loss.................... $ (1,807) $ (71,631) $(24,523) $ - $ (98,017) ======= ======== ======= ======= =========
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) For the Three Months Ended March 31, 2001 (in thousands) (Unaudited) Non- Consolidated Pioneer Guarantor Income The Parent USA Subsidiaries Tax Benefit Eliminations Company --------- -------- ------------ ------------ ------------ ---------- Revenues: Oil and gas........................ $ - $ 192,794 $ 65,192 $ - $ $ 257,986 Interest and other................. - 3,022 2,145 - 5,167 Gain on disposition of assets, net. - 7,231 62 - 7,293 ------- -------- ------- ------- --------- - 203,047 67,399 - 270,446 ------- -------- ------- ------- --------- Costs and expenses: Oil and gas production............. - 45,782 10,020 - 55,802 Depletion, depreciation and amortization..................... - 31,495 20,666 - 52,161 Exploration and abandonments....... - 5,925 16,958 - 22,883 General and administrative......... 177 7,188 3,083 - 10,448 Interest........................... (10,396) 32,120 13,892 - 35,616 Equity income from subsidiaries.... (57,717) (571) - - 58,288 - Other.............................. - 7,067 18,150 - 25,217 ------- -------- ------- ------- --------- (67,936) 129,006 82,769 - 202,127 ------- -------- ------- ------- --------- Income (loss) before income taxes..... 67,936 74,041 (15,370) 68,319 Income tax benefit.................... - 17 (400) (17) (400) ------- -------- ------- ------- --------- Net income (loss)..................... 67,936 74,058 (15,770) (17) 67,919 Other comprehensive income (loss): Deferred hedge losses: Transition adjustment............ - (172,007) (25,437) - (197,444) Deferred hedge gains............. - 49,992 3,074 - 53,066 Net losses included in net income......................... - 22,455 11,416 - 33,871 Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses)..................... - (58) - - (58) Gains included in net income... - (7,042) - - (7,042) Cumulative translation adjustment.. - - (9,347) - (9,347) ------- -------- ------- ------- --------- Comprehensive income (loss)........... $ 67,936 $ (32,602) $(36,064) $ (17) $ (59,035) ======= ======== ======= ======= =========
17 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the Three Months Ended March 31, 2002 (in thousands) (Unaudited) Non- Pioneer Guarantor The Parent USA Subsidiaries Company --------- --------- ------------ ---------- Cash flows from operating activities: Net cash provided by operating activities............... $ (73,878) $ 93,313 $ 30,601 $ 50,036 -------- -------- -------- -------- Cash flows from investing activities: Proceeds from disposition of assets..................... 51,420 162 62 51,644 Additions to oil and gas properties..................... - (57,342) (30,920) (88,262) Other property (additions) dispositions, net............ - (1,092) (1,062) (2,154) -------- -------- -------- -------- Net cash provided by (used in) investing activities.. 51,420 (58,272) (31,920) (38,772) -------- -------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt......................... 33,290 - - 33,290 Principal payments on long-term debt.................... (15,290) - - (15,290) Payment of noncurrent liabilities....................... - (29,988) (516) (30,504) Exercise of long-term incentive plan stock options........................................ 4,439 - - 4,439 -------- -------- -------- -------- Net cash provided by (used in) financing activities.. 22,439 (29,988) (516) (8,065) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................................ (19) 5,053 (1,835) 3,199 Effect of exchange rate changes on cash and cash equivalents.............................. - - (776) (776) Cash and cash equivalents, beginning of period.................................... 79 10,900 3,355 14,334 -------- -------- -------- -------- Cash and cash equivalents, end of period.............................................. $ 60 $ 15,953 $ 744 $ 16,757 ======== ======== ======== ========
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS For the Three Months Ended March 31, 2001 (in thousands) (Unaudited) Non- Pioneer Guarantor The Parent USA Subsidiaries Company --------- --------- ------------ ---------- Cash flows from operating activities: Net cash provided by operating activities............... $ 43,930 $ 45,680 $ 42,124 $ 131,734 -------- -------- -------- -------- Cash flows from investing activities: Proceeds from disposition of assets..................... - 11,725 178 11,903 Additions to oil and gas properties..................... - (59,445) (38,275) (97,720) Other property (additions) dispositions, net............ - (1,541) (1,443) (2,984) -------- -------- -------- -------- Net cash used in investing activities................ - (49,261) (39,540) (88,801) -------- -------- -------- -------- Cash flows from financing activities: Borrowings under long-term debt......................... 60,175 - - 60,175 Principal payments on long-term debt.................... (99,175) - - (99,175) Payment of noncurrent liabilities....................... - (6,140) (510) (6,650) Exercise of long-term incentive plan stock options........................................ 2,172 - - 2,172 Purchase of treasury stock.............................. (7,070) - - (7,070) -------- -------- -------- -------- Net cash used in financing activities................ (43,898) (6,140) (510) (50,548) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................................ 32 (9,721) 2,074 (7,615) Effect of exchange rate changes on cash and cash equivalents.............................. - - (239) (239) Cash and cash equivalents, beginning of period.................................... 15 18,387 7,757 26,159 -------- -------- -------- -------- Cash and cash equivalents, end of period.............................................. $ 47 $ 8,666 $ 9,592 $ 18,305 ======== ======== ======== ========
18 PIONEER NATURAL RESOURCES COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (Unaudited) NOTE H. Subsequent Events Acquisitions of assets. On April 9, 2002, the Company announced that it had purchased through two transactions an additional 30 percent working interest in the Falcon field development and a 25 percent working interest in associated acreage in the deepwater Gulf of Mexico for a combined purchase price of $55 million before normal closing adjustments. The acquisition of five percent of this incremental interest in the Falcon field development was completed during March 2002. As a result of these transactions, the Company will own a 75 percent working interest and operate the Falcon field development and related exploration blocks. The Company has also signed agreements to purchase the remaining 23 percent of the rights that the Company does not already own in its core area West Panhandle gas field, 100 percent of the West Panhandle reserves attributable to field fuel, 100 percent of the related West Panhandle field gathering system and ten blocks surrounding the Falcon discovery. The total purchase price for these transactions is $138 million before normal closing adjustments. These transactions are expected to close in the third quarter of 2002. Common stock offering. On April 22, 2002, the Company completed a public offering of 11.5 million shares of its common stock at $21.50 per share. Associated therewith, the Company received $236.1 million of net proceeds after the payment of issuance costs. The Company used the net proceeds from the public offering to fund the acquisition of Falcon assets and associated acreage in the deepwater Gulf of Mexico and to reduce outstanding borrowings under its $575 million corporate credit facility pending the closing of the West Panhandle transactions. Senior notes offering. On April 29, 2002, the Company sold $150 million of 7.5 percent senior notes that will mature on April 15, 2012. The 7.5 percent senior notes were sold at a price equal to 100 percent of their principal amount and resulted in net proceeds to the Company, after payment of issuance costs, of $146.6 million. The net proceeds from this offering will be used to reduce outstanding borrowings under the Company's corporate credit facility. Interest is payable to holders of the 7.5 percent senior notes on April 15 and October 15 of each year. The first interest payment will be made on October 15, 2002 and will consist of interest from the closing date of this offering through October 15, 2002. 19 PIONEER NATURAL RESOURCES COMPANY Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The information included in Item 2 and Item 3 of this document includes forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, and the business prospects of Pioneer Natural Resources Company ("Pioneer" or the "Company"), are subject to a number of risks and uncertainties which may cause the Company's actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties include, among other things, volatility of oil and gas prices, product supply and demand, competition, international operations and associated international political and economic instability, government regulation or action, litigation, the costs and results of drilling and operations, the Company's ability to replace reserves or implement its business plans, access to and cost of capital, uncertainties about estimates of reserves, quality of technical data and environmental risks. These and other risks are described in the Company's 2001 Annual Report on Form 10-K that is available from the United States Securities and Exchange Commission. Financial and Operating Performance During the three months ended March 31, 2002, as compared to the same period in 2001, commodity price declines and continued weakening of the Argentine peso negatively impacted the Company's financial and operating results. The Company reported a net loss of $2.0 million ($.02 per share) for the three months ended March 31, 2002, as compared to net income of $67.9 million ($.68 per diluted share) for the same period in 2001. During the three months ended March 31, 2002, the Company recorded a $5.4 million ($.05 per share) noncash charge for the remeasurement of Argentine peso-denominated net monetary assets. The Company's results for the three months ended March 31, 2001 were impacted by favorable commodity prices, a $7.3 million gain on the disposition of assets and $8.8 million of derivative mark-to-market charges to other expenses. The Company's net cash provided by operating activities was $50.0 million during the three months ended March 31, 2002, representing a decrease of 62 percent, as compared to net cash provided by operating activities of $131.7 million for the same period in 2001. The decrease in net cash provided by operating activities was primarily a result of lower commodity prices. During the three months ended March 31, 2002, the Company used its net cash provided by operating activities, together with proceeds from the disposition of assets, to fund additions to oil and gas properties and for other general corporate needs. The Company strives to maintain its outstanding indebtedness at a moderate level in order to provide sufficient financial flexibility to fund future opportunities. The Company's total book capitalization at March 31, 2002 was $2.8 billion, consisting of total debt of $1.6 billion and stockholders' equity of $1.2 billion. Debt as a percentage of total book capitalization was 57 percent at March 31, 2002, as compared to 55 percent at December 31, 2001. The increase in the ratio of the Company's debt to total book capitalization during the three months ended March 31, 2002 is primarily due to a $95.9 million reduction in the fair value of the Company's cash flow hedge derivatives which are recorded in the "Accumulated other comprehensive income - deferred hedge gains, net" component of stockholders' equity. Recent Activities During April 2002, the Company announced the following transactions: o the purchase through two transactions of an additional 30 percent working interest in the Falcon field development and a 25 percent working interest in associated acreage in the deepwater Gulf of Mexico for a combined purchase price of $55 million before normal closing adjustments. As a result of these transactions, the Company will own a 75 percent working interest in, and operate, the Falcon field development and related exploration blocks. o agreements to purchase the remaining 23 percent of the rights that the Company does not already own in its core area West Panhandle gas field, 100 percent of the West Panhandle reserves attributable to field fuel, 100 percent of the related West Panhandle field gathering system and ten blocks surrounding the Falcon discovery. 20 PIONEER NATURAL RESOURCES COMPANY The total purchase price for these transactions is $138 million before normal closing adjustments. These transactions are expected to close in the third quarter of 2002; o the completion, on April 22, 2002, of a public offering of 11.5 million new shares of the Company's common stock at $21.50 per share, which resulted in net proceeds to the Company of $236.1 million (the "Stock Offering"); and, o the completion, on April 29, 2002, of a public offering of $150 million of 7.5 percent senior notes that will mature on April 15, 2012 (the "Debt Offering"). The Company realized net proceeds, after payment of issuance costs, of $146.6 million from the Debt Offering. Through these transactions, the Company has increased its ownership in and control over certain of its core assets and significantly improved its financial flexibility and ratio of debt to total book capitalization. Drilling Highlights During the first three months of 2002, the Company continued progress on its development projects at Canyon Express, Devils Tower and Falcon in the deepwater Gulf of Mexico and Sable in South Africa and successfully extended the oil accumulation previously established by the Olowi Marin-1 discovery well in the shallow water offshore Gabon. In total, the Company spent $88.3 million on capital expenditures during the first quarter of 2002 including $56.1 million for development activities, $24.2 million for exploration activities and $8.0 million on acquisitions. The majority of the Company's capital expenditures was spent on drilling wells and fabricating infrastructure for the Company's significant development projects. The following tables summarize the Company's development drilling and exploration and extension drilling activities for the three months ended March 31, 2002: Development Drilling -------------------------------------------------------------------------- Beginning Wells Wells Successful Unsuccessful Ending Wells in Progress Spud Wells Wells In Progress --------------- ------------ ----------- ------------ ------------ Gulf of Mexico/Gulf Coast..... 3 2 5 - - Permian Basin................. 17 17 32 1 1 Mid-Continent................. 1 3 4 - - ------ ------ ------ ------ ------ Total Domestic......... 21 22 41 1 1 ------ ------ ------ ------ ------ Argentina..................... 1 - - - 1 South Africa.................. - 1 1 - - Canada........................ 5 12 13 3 1 ------ ------ ------ ------ ------ Total Worldwide........ 27 35 55 4 3 ====== ====== ====== ====== ======
Exploration/Extension Drilling -------------------------------------------------------------------------- Beginning Wells Wells Successful Unsuccessful Ending Wells in Progress Spud Wells Wells In Progress --------------- ------------ ----------- ------------ ------------ Gulf of Mexico/Gulf Coast.... 3 - 2 - 1 ------ ------ ------ ------ ------ Total Domestic.......... 3 - 2 - 1 ------ ------ ------ ------ ------ Argentina.................... 3 - - - 3 Canada....................... 1 12 8 3 2 Gabon........................ - 1 1 - - ------ ------ ------ ------ ------ Total Worldwide......... 7 13 11 3 6 ====== ====== ====== ====== ======
21 PIONEER NATURAL RESOURCES COMPANY Domestic. The Company spent $56.8 million during the first three months of 2002 on acquisition, drilling and seismic activities in the Gulf Coast, Permian Basin and Mid-Continent areas of the United States. Gulf of Mexico/Gulf Coast Area. In the Gulf of Mexico/Gulf Coast area, the Company spent $50.6 million of acquisition, drilling and seismic capital primarily in the deepwater Gulf of Mexico, the Gulf of Mexico shelf, the Pawnee field in South Texas and in an exploration play in North Louisiana. In the deepwater Gulf of Mexico, the Company has three major development projects that remain in progress as of March 31, 2002: o Canyon Express - The TotalFinaElf-operated Aconcagua and the Marathon-operated Camden Hills discoveries in Mississippi Canyon are being jointly developed as part of the Canyon Express gas project. The Company s pent $8.4 million during the first quarter 2002 on facilities construction, well completions and gathering system installation. The TotalFinaElf-operated Canyon Express subsea gathering system is scheduled to begin flowing gas during the third quarter of 2002. Once completed, production is expected to be approximately 110 MMcf of gas per day and 180 Bbls of condensate per day net to the Company's 37.5 percent working interest in Aconcagua and 33 percent working interest in Camden Hills. o Devils Tower - At the Dominion-operated Devils Tower development project in Mississippi Canyon, the Company spent $3.9 million during the first quarter to finish drilling three wells that were in progress at year end and to drill one additional development well. The Company has drilled seven wells to date and an eighth well was spud subsequent to quarter end which will fill all eight slots on the spar. Construction of the spar is underway with plans to commence production during the second quarter of 2003. The Company plans to bring on wells sequentially with peak production expected to exceed 15,000 BOEs per day net to the Company's 25 percent working interest by the end of 2003. The Company also plans to drill its Triton prospect during the second quarter of 2002, which is on a block adjacent to Devils Tower. If successful, this prospect could be brought on production via a subsea tieback to Devils Tower. In addition, Dominion and the Company were the high bidder on another adjacent Mississippi Canyon block at the most recent lease sale where the Company has identified its Goldfinger prospect that, if successful, could also be brought on production via a subsea tieback to Devils Tower. o Falcon - As previously discussed, the Company now has a 75 percent working interest in the Falcon project and surrounding exploration blocks and became the operator of these projects in April 2002. The Company spent $10.2 million, in addition to the acquisition costs discussed above, on the Falcon project during the first quarter. Two development wells are planned for Falcon during 2002. The wells will be subsea tiebacks flowing to a production platform owned and operated by El Paso Energy Partners, L.P. 10 miles away on the shelf. The flowlines and umbilicals are being fabricated as well as the production platform and related facilities. All work is on schedule with initial production anticipated for March 2003 at expected rates of 130 MMcf of gas per day and 350 Bbls of condensate per day net to the Company's 75 percent working interest. In addition to the development projects described above in the deepwater Gulf of Mexico, the Company spud an appraisal well on the Marathon-operated Ozona Deep discovery subsequent to quarter end. Depending on the results of this well, a second appraisal well could be drilled this year. In the deepwater Gulf of Mexico, the Company also has plans to drill two to three prospects near its Falcon project during the remainder of 2002. On the Gulf of Mexico shelf, the Company is a participant in three significant development projects: o Stirrup - The Spinnaker-operated Stirrup project in Mustang Island began production in early April 2002 at initial rates of 2.3 MMcf of gas and 12 Bbls of condensate per day net to the Company's 25 percent working interest. Three wells have been drilled with one being completed and put on production. Production on the initial well is curtailed at this time until certain additional facilities can be installed at the onshore delivery point. Once the additional facilities are installed, the initial well can be allowed to flow 22 PIONEER NATURAL RESOURCES COMPANY at capacity and the Stirrup #2 well can be completed and connected. The Stirrup #3 well is currently being tested. The Company has a 25 percent working interest in this project. o Oneida - The Aviara-operated Oneida project in East Cameron has an estimated initial production date of August 2002 and will be developed with a tripod platform. Initial production rates from this prospect are anticipated to be 1.1 MMcf of gas and 10 Bbls of condensate per day net to the Company's 13.7 percent working interest. Once production begins, well performance will be evaluated and the Company will determine if a second well will be drilled in 2003. o Cyrus - The ChevronTexaco-operated Cyrus project in High Island, where the platform is currently being installed, is on schedule to begin production during the third quarter of 2002. The Company anticipates initial production from this project to approximate 2.3 MMcf of gas and 340 Bbls of condensate per day, net to the Company's 5.7 percent working interest. Other activities on the Gulf of Mexico shelf during 2002 will be concentrated on evaluating the developed properties in the Company's inventory to determine if there are any untapped zones in existing wellbores. In addition, the Company plans to drill one to three prospects during 2002, one of which is Gallop, a look-alike prospect to the Stirrup discovery. In the onshore Gulf Coast region of the United States, the Company has concentrated its drilling efforts in the Pawnee field in South Texas, where two wells were successfully drilled during the first quarter of 2002. In addition, the Company drilled its first exploration well in its recently acquired acreage in North Louisiana. Post-drilling evaluations are underway with results expected during the second quarter of 2002. Permian Basin area. In the Permian Basin area, the Company spent $4.1 million during the first three months of 2002 primarily on development drilling in the Spraberry oil trend. The Company is evaluating its West Texas drilling program for the remainder of 2002. If drilling costs continue to decline and align more favorably with commodity prices, the Company may drill as many as 80 to 100 wells during the remainder of 2002. Mid-Continent area. In the Mid-Continent area, the Company spent $1.5 million during the first three months of 2002 primarily on completing the wells that were either in progress at year end or spud shortly thereafter. Shortly after year end, the Company shut down its drilling in the West Panhandle field with the downturn in gas prices. As previously discussed, the Company recently announced that it had entered into agreements to purchase the remaining West Panhandle assets that it does not already own. The acquisition, once completed, will greatly enhance the economics of future drilling, offer the Company greater flexibility and provide operational efficiencies in the field. The acquisition, along with the recent increase in gas prices and the favorable long-term outlook for gas prices in the United States has caused the Company to reevaluate its drilling plans and the Company may drill as many as 25 to 30 West Panhandle wells this year. Argentina. In Argentina, the Company spent $5.4 million of acquisition, drilling and seismic capital during the first three months of 2002. The majority of costs was spent on the construction of the Company's Loma Negra gas plant and on seismic activities that were in progress at December 31, 2001. Other significant capital projects during the first quarter of 2002 were suspended due to the economic instability in Argentina. However, the Company may resume oil drilling activities in Argentina during the third quarter of 2002 as a result of improved oil prices, reductions in drilling costs and lease operating expenses and the improving economic stability within the oil industry (see "Argentina Update", below). Canada. In Canada, the Company spent $16.6 million of acquisition, drilling and seismic capital during the first three months of 2002, primarily in the Chinchaga, North Chinchaga and Martin Creek areas that are only accessible for drilling during the winter months. The Company completed 21 wells in Canada during the 2002 winter drilling season. Daily production from the new wells is anticipated to be 12 MMcf per day. Capital dollars for the remainder of the year will be primarily be in preparation for next winter's drilling campaign. 23 PIONEER NATURAL RESOURCES COMPANY Africa. In Africa, the Company spent $8.7 million of acquisition, drilling and seismic capital during the first three months of 2002 in South Africa, Gabon and Tunisia. South Africa. In South Africa, the Company spent $4.8 million of capital on the development of its Sable field that is expected to begin production during December 2002 or January 2003. Development drilling is continuing, floating production facility upgrades are in progress and subsea trees are being manufactured. Production for the first year is expected to average approximately 11,600 Bbls of oil per day net to the Company's 40 percent working interest. The Company is also evaluating its recently acquired seismic data and anticipates drilling two exploration wells during the second half of 2002. Gabon. In Gabon, the Company spent $2.2 million drilling its second exploratory well, the Awena Marin-1, that successfully extended the oil accumulation previously established by the Olowi Marin-1 discovery to a total depth of approximately 3,600 feet and found nine feet of net oil pay in its primary target, the Lower Gamba sand, and 41 feet of higher quality reservoir sand in the Upper Gamba. As expected, the reservoir thickness and quality of the Lower Gamba sands were less than in the previous discovery, and, while the gravity was similar to the Olowi Marin-1 (34 degree API), the well flowed oil at non-commercial rates from this zone. However, in the Upper Gamba, the quality of the reservoir sand significantly improved, but the sands were penetrated in the gas cap of the field, producing approximately 12 MMcf of gas per day during a two hour test. Most significantly, the Lower Gamba oil rim was found at the same depth as the discovery well 13 kilometers away as predicted by the Company's seismic model and could be an indicator that the oil rim is in communication between the two discoveries. The Company plans to use the well data to further refine its seismic model to target the location of the oil column within the Upper Gamba sand and is also evaluating the potential to commercialize the significant gas reservoir. The Awena Marin-1 well was the first of at least three wells the Company plans to drill during 2002 to evaluate the size of the oil and gas field on its Olowi block offshore Gabon. In May, the Company plans to drill two wells approximately five kilometers north and south of the first discovery, Olowi Marin-1, to further appraise the extent of the oil rim in that area. Tunisia. In Tunisia, the Company spent $1.7 million of capital during the first three months of 2002 primarily on shooting 3-D seismic data on its blocks located in Tunisia. Plans for the remainder of 2002 include analyzing the data acquired and drilling one to two Silurian and TAGI sand prospects in Tunisia during the last half of the year. Argentina Update The Company continues to monitor the political and economic environment in Argentina. During 2002, the Argentine government has continued to implement reforms that are intended to stabilize the economy, including the imposition of a 20 percent tax on oil exports effective March 1, 2002. The Company's oil and gas revenues will be reduced as a result of the Argentine peso devaluation and recent export tax; however, the reduction will be mitigated by decreases in the costs of Argentine operations and administration as a result of the peso devaluation. The Company is also continuing to monitor the banking industry in Argentina. The Company currently has $1.5 million in an account at a local Argentine bank in which the Central Bank of Argentina has suspended banking activities for 30 days. The continuing devaluation of the Argentine peso during the first quarter of 2002 resulted in a noncash charge to other expense of that period of $5.4 million. This charge reflects the remeasurement of the peso-denominated monetary assets and liabilities of the Company's Argentine subsidiaries, based on an exchange rate of 3.0 pesos to $1 as of March 31, 2002. Once the exchange rate of Argentine pesos to U.S. dollars stabilizes, the effect of future remeasurement assessments should be minimal. 24 PIONEER NATURAL RESOURCES COMPANY Results of Operations Oil and gas revenues. Revenues from oil and gas operations totaled $165.5 million for the three months ended March 31, 2002, compared to $258.0 million for the same period in 2001. The decline in revenues is principally attributable to commodity price decreases. The following table provides the Company's volumes and average reported prices, including the results of hedging activities, for the three months ended March 31, 2002 and 2001: Three months ended March 31, --------------------- 2002 2001 -------- -------- Production: Oil (MBbls)........................... 3,109 3,163 NGLs (MBbls).......................... 1,939 1,838 Gas (MMcf)............................ 29,496 29,942 Total (MBOE).......................... 9,963 9,991 Average daily production: Oil (Bbls)............................ 34,541 35,140 NGLs (Bbls)........................... 21,539 20,426 Gas (Mcf)............................. 327,736 332,686 Total (BOE)........................... 110,703 111,014 Average reported prices: Oil (per Bbl): United States....................... $ 24.27 $ 25.25 Argentina........................... $ 20.61 $ 24.59 Canada.............................. $ 17.55 $ 23.83 Worldwide........................... $ 23.17 $ 25.03 NGLs (per Bbl): United States....................... $ 10.70 $ 22.51 Argentina........................... $ 8.97 $ 27.04 Canada.............................. $ 12.41 $ 24.33 Worldwide........................... $ 10.73 $ 22.71 Gas (per Mcf): United States....................... $ 3.05 $ 5.61 Argentina........................... $ .68 $ 1.25 Canada.............................. $ 2.27 $ 5.81 Worldwide........................... $ 2.47 $ 4.58
As discussed above, oil and gas revenues for the quarter ended March 31, 2002 were negatively impacted by commodity price decreases. Comparing the first quarter of 2002 to the same period in 2001, the Company's average worldwide oil price decreased seven percent; the Company's average worldwide NGL price decreased 53 percent; and the Company's average worldwide gas price decreased 46 percent. On a BOE basis, worldwide average daily production remained relatively constant during the three months ended March 31, 2002, as compared to the same period in 2001. Per BOE average daily production, on a first-quarter to first- quarter comparison, increased by two percent in the United States, while production in Argentina and Canada decreased by eight percent and three percent, respectively. Production volumes in Argentina declined primarily due to the Company's curtailment of drilling activities in 2002 as the Company monitors developing political and economic reforms. Second quarter 2002 production volumes are expected to average 110,000 to 115,000 BOE per day. Gas production is expected to rise as a result of first production from the Stirrup project on the Gulf of Mexico shelf, the successful winter drilling program in Canada and increased winter demand for gas in Argentina. 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 derivative instruments (swaps and collar contracts) in order to (i) reduce the effect of the volatility of price changes on the commodities the Company 25 PIONEER NATURAL RESOURCES COMPANY produces and sells, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) lock in prices to protect the economics related to certain capital projects. During the first quarter of 2002, the Company's commodity price hedges increased oil and gas revenues by $32.2 million as compared to $23.0 million of commodity price hedge losses during the same period in 2001. See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for specific information regarding the Company's hedging activities during the three month periods ended March 31, 2002 and 2001. During the second quarter of 2002, the Company has entered into the following new oil and gas price hedges: (i) 12,000 Bbls per day of 2003 oil price swap contracts with average per Bbl fixed prices of $24.11; (ii) 12,000 Bbls per day of 2004 oil price swap contracts with average per Bbl fixed prices of $22.97; (iii) 170,000 MMBtu per day of 2003 gas price swap contracts with average per MMBtu fixed prices of $3.86; (iv) 75,000 MMBtu per day of 2004 gas price swap contracts with average per MMBtu fixed prices of $3.93; and, (v) 20,000 MMBtu per day of 2005, 2006 and 2007 gas price swap contracts with average per MMBtu fixed prices of $3.75. Gain (loss) on disposition of assets. During the three months ended March 31, 2002, the Company recorded $.1 million of net losses on the disposition of assets, as compared to $7.3 million of gains on the disposition of assets during the same period in 2001. The gain recognized during the first quarter of 2001 is primarily comprised of a $7.0 million gain from the sale of 532,500 shares of a non-affiliated entity's common stock. Production costs. During the three month period ended March 31, 2002, total production costs per BOE averaged $5.12, representing a decrease of $.47 per BOE (eight percent), as compared to production costs per BOE of $5.59 during the same period in 2001. Lease operating expenses and workover expenses 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 decrease in production costs per BOE during the first quarter of 2002, as compared to the first quarter of 2001, is primarily due to decreases in production taxes and field fuel expenses as a result of lower gas prices, offset by declines in third party gas processing and treating income which is a component of lease operating expenses. Three months ended March 31, ------------------- 2002 2001 ------- ------- (per BOE) Lease operating expense.................. $ 3.29 $ 2.36 Taxes: Production............................ .50 1.08 Ad valorem............................ .54 .40 Field fuel expenses...................... .49 1.54 Workover costs........................... .30 .21 ------ ------ Total production costs................ $ 5.12 $ 5.59 ====== ======
Based on market-quoted commodity prices in mid-April 2002, the Company expects second quarter 2002 production costs to average $5.15 to $5.30 per BOE. Depletion, depreciation and amortization expense. The Company's total depletion, depreciation and amortization expense per BOE was $5.06 and $5.22 for the three month periods ended March 31, 2002 and 2001, respectively. Depletion expense per BOE, the largest component of depletion, depreciation and amortization, remained relatively constant at $4.84 per BOE during the three months ended March 31, 2002, as compared to $4.81 per BOE during the same period in 2001. The Company expects second quarter 2002 depletion, depreciation and amortization expense to average $5.00 to $5.20 per BOE. Exploration and abandonments/geological and geophysical costs. Exploration and abandonments/geological and geophysical costs were $21.1 million during the three months ended March 31, 2002, as compared to $22.9 million 26 PIONEER NATURAL RESOURCES COMPANY during the same period in 2001. During the three months ended March 31, 2002, the Company's exploratory dry holes in the United States are primarily comprised of the Turnberry exploratory well that was drilled during 2001 in the Gulf of Mexico and has now been determined to be noncommercial. The following table provides the Company's geological and geophysical costs, exploratory dry hole expense, lease abandonments expense and other exploration expense for the three month periods ended March 31, 2002 and 2001: United Other States Argentina Canada Foreign Total ------- --------- -------- -------- -------- (in thousands) Three months ended March 31, 2002: Geological and geophysical costs...... $ 4,300 $ 1,570 $ 1,003 $ 3,332 $ 10,205 Exploratory dry holes................. 7,840 399 1,159 26 9,424 Leasehold abandonments and other...... 1,171 171 141 8 1,491 ------ ------ ------- ------ ------- $13,311 $ 2,140 $ 2,303 $ 3,366 $ 21,120 ====== ====== ======= ====== ======= Three months ended March 31, 2001: Geological and geophysical costs...... $ 4,024 $ 653 $ 226 $ 3,616 $ 8,519 Exploratory dry holes................. 159 582 4,955 821 6,517 Leasehold abandonments and other...... 1,032 5,375 1,432 8 7,847 ------ ------ ------- ------ ------- $ 5,215 $ 6,610 $ 6,613 $ 4,445 $ 22,883 ====== ====== ======= ====== =======
The Company expects second quarter 2002 exploration and abandonment expense to be $15 million to $30 million, dependent largely on exploratory drilling results. Interest expense. Interest expense for the quarter ended March 31, 2002 was $26.3 million as compared to $35.6 million for the same period in 2001. The $9.3 million (or 26 percent) decrease in interest expense during the first quarter of 2002, as compared to the first quarter of 2001, is primarily reflective of a $5.5 million benefit from the Company's interest rate hedging program, the retirement of the Company's 10-5/8% and 11-5/8% senior notes during the third quarter of 2001 and an $.9 million increase in interest capitalized during the first quarter of 2002 as compared to the first quarter of 2001. The Company expects second quarter 2002 interest expense to be $24 million to $26 million. Other expenses. Other expenses for the three months ended March 31, 2002 and 2001 were $8.3 million and $25.2 million, respectively. The decrease in other expense is primarily attributable to a $13.2 million decrease in recognized hedge ineffectiveness under the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". During the quarter ended March 31, 2001, the Company's mark-to-market provisions included a $6.6 million increase in the liabilities associated with the Company's Btu swap agreements (see Note C included in "Item 1. Financial Statements" for information regarding the Company's derivative instruments). During the second quarter of 2001, the Company entered into offsetting Btu swap agreements that eliminated the future market risk associated with the agreements. Partially offsetting the decreases in other expense referred to above was a $5.4 million charge to other expense during the three months ended March 31, 2002 for the remeasurement of Argentine peso-denominated net monetary assets (see "Argentina Update", above). Income tax provision (benefit). During the three month periods ended March 31, 2002, the Company recognized an income tax benefit of $.4 million as compared to an income tax provision of $.4 million during the three months ended March 31, 2001. Due to uncertainties regarding the Company's utilization of net operating loss carryforwards and other credit carryforwards, the Company has established valuation reserves to reduce the carrying value of its deferred tax assets. The Company's deferred tax valuation reserves are reduced when the Company's financial results establish that it is more likely than not that deferred tax assets previously reserved will be used prior to their expiration. 27 PIONEER NATURAL RESOURCES COMPANY During the second quarter of 2002, the Company estimates that its income tax provision will be approximately $1 million to $2 million as the Company benefits from its net operating loss carryforwards in the United States and Canada. 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. Oil and gas properties. The Company's cash expenditures for additions to oil and gas properties during the three months ended March 31, 2002 and 2001 totaled $88.3 million and $97.7 million, respectively. The Company's first quarter 2002 expenditures were internally funded by $50.0 million of net cash provided by operating activities and a portion of the Company's $51.6 million of proceeds from disposition of assets. The Company's first quarter 2001 capital expenditures were internally funded by net cash provided by operating activities. The Company strives to maintain its indebtedness at moderate levels in order to provide sufficient financial flexibility to take advantage of future opportunities. The Company's 2002 capital expenditures, excluding acquisitions, are expected to exceed internally generated cash flows by a nominal amount. The Company will use the $236.1 million of net proceeds from the Stock Offering to fund the Falcon field and West Panhandle field acquisitions and to reduce outstanding borrowings under its credit facility. Contractual obligations. The Company's contractual obligations include long-term debt, operating leases, Btu swap agreements, terminated commodity hedges and other contracts. During the three months ended March 31, 2002, the Company increased its long-term debt by $10.5 million, reduced its obligations under the Btu swap agreements by $1.5 million and settled terminated commodity hedge obligations for $22.9 million. Contractual obligations for which the ultimate settlement amounts are not fixed and determinable include derivative contracts that are sensitive to future changes in commodity prices, currency exchange rates and interest rates. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for a table of changes in the fair value of the Company's derivative contract assets and liabilities during the three months ended March 31, 2002. Working capital. Funding for the Company's working capital obligations is provided by internally-generated cash flow. 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. Capital resources. The Company's primary capital resources are net cash provided by operating activities, proceeds from financing activities and proceeds from sales of non-strategic assets. The Company expects that these resources will be sufficient to fund its capital commitments in 2002. Operating activities. Net cash provided by operating activities during the three months ended March 31, 2002 and 2001 were $50.0 million and $131.7 million, respectively. The decrease in net cash provided by operating activities during the three months ended March 31, 2002, as compared to the same period in 2001, is primarily due to lower commodity prices. Financing activities. During the three months ended March 31, 2002 and 2001, the Company used $8.1 million and $50.5 million, respectively, of net cash in financing activities. During April 2002, the Company completed the Stock Offering and Debt Offering for aggregate net proceeds of $382.7 million. The net proceeds were utilized to fund the acquisition of the Falcon assets and associated acreage in the deepwater Gulf of Mexico and to reduce outstanding borrowings under the Company's $575 million corporate credit facility pending the closing of the West Panhandle transactions. During April 2002, the Company entered into interest rate swap contracts to hedge the fair value of its 8-7/8 percent senior notes due in 2005. The terms of these swap contracts obligate the Company to pay the counterparties a 28 PIONEER NATURAL RESOURCES COMPANY variable annual rate equal to the six-month London Interbank Offered Rate plus 3.97 percent; obligate the counterparties to pay the Company a fixed rate of 8.875 percent; and, provide for a notional debt amount of $150 million. The interest rate swap contracts mature on April 15, 2005. Outstanding borrowings under the credit facility totaled $312 million as of March 31, 2002. The weighted average interest rate on the Company's indebtedness for the three months ended March 31, 2002 was 6.11 percent as compared to 8.41 percent for the three months ended March 31, 2001, taking into account the effect of lower market interest rates and the Company's interest rate swaps. 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. Sales of assets. During the three months ended March 31, 2002 and 2001, proceeds from the sale of assets totaled $51.6 million and $11.9 million, respectively. The Company's 2002 asset divestitures were primarily comprised of hedge derivatives. During the three months ended March 31, 2001, the sale of 532,500 shares of a non-affiliated entity's common stock for $11.0 million was the primary source of the Company's proceeds from asset dispositions. Book capitalization and liquidity. Total debt remained constant at $1.6 billion as of March 31, 2002, as compared to total debt of $1.6 billion on December 31, 2001. The Company's total book capitalization at March 31, 2002 was $2.8 billion, consisting of total debt of $1.6 billion and stockholders' equity of $1.2 billion. Consequently, the Company's debt to total capitalization increased to 57 percent at March 31, 2002 from 55 percent at December 31, 2001. The Company's ratio of current assets to current liabilities was .78 at March 31, 2002 and 1.12 at December 31, 2001. Including $27.9 million of undrawn and outstanding letters of credit, the Company has $235.1 million of unused borrowing capacity available under its credit facility as of March 31, 2002. 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 fiscal year ended December 31, 2001. 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 fiscal year ended December 31, 2001. The following table reconciles the changes that occurred in the fair values of the Company's open derivative contracts during the first quarter of 2002: Derivative Contract Assets (Liabilities) ----------------------------------------------- Foreign Interest Exchange Commodity Rate Rate Total --------- -------- --------- --------- in thousands) Fair value of contracts outstanding as of December 31, 2001............... $ 180,554 $(19,637) $ 61 $ 160,978 Changes in contract fair value........... (66,738) (1,618) (99) (68,455) Contract realizations: Maturities........................... (41,304) (2,872) 38 (44,138) Termination - cash settlements....... (51,420) - - (51,420) -------- ------- ---- -------- Fair value of contracts outstanding as of March 31, 2002.................. $ 21,092 $(24,127) $ - $ (3,035) ======== ======= ==== ========
The following disclosures provide specific information about material changes that have occurred since December 31, 2001 in the Company's portfolio of financial instruments. The Company may recognize future earnings gains or losses on these instruments from changes in market commodity prices, interest rates or foreign exchange rates. 29 PIONEER NATURAL RESOURCES COMPANY Commodity price sensitivity. During the first quarter of 2002, 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 the Company was a party to as of March 31, 2002. The tables segregate hedge derivative contracts from those that do not qualify as hedges. See Note C 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 gas and oil commodity prices. Pioneer Natural Resources Company Oil Price Sensitivity Derivative Financial Instruments as of March 31, 2002(3) Asset (Liability) 2002 2003 Fair Value -------- -------- ----------- (in thousands, except volumes and prices) Oil Hedge Derivatives: Average daily notional Bbl volumes (1): Swap contracts.............................. 18,127 2,975 $ (7,587) Weighted average per Bbl fixed price.................................. $ 24.27 $ 24.02 Collar contracts............................ 1,985 $ 106 Weighted average short call per Bbl ceiling price.......................... $ 28.61 Weighted average long put per Bbl floor price............................ $ 25.00 Average forward NYMEX oil prices (2).................................. $ 25.49 $ 23.83 - --------------- (1) See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for hedge volumes and weighted average prices by calendar quarter. (2) The average forward NYMEX oil and gas prices are based on May 2, 2002 market quotes. (3) During the second quarter of 2002, the Company entered into 12,000 Bbls per day of 2003 swap contracts with average per Bbl fixed prices of $24.11 and 12,000 Bbls per day of 2004 swap contracts with average per Bbl fixed prices of $22.97. These financial instruments are not included in the table.
30 PIONEER NATURAL RESOURCES COMPANY Pioneer Natural Resources Company Gas Price Sensitivity Derivative Financial Instruments as of March 31, 2002(4) Asset (Liability) 2002 2003 2004 2005 Fair Value -------- -------- -------- -------- ----------- (in thousands, except volumes and prices) Gas Hedge Derivatives (1): Average daily notional MMBtu volumes (2): Swap contracts............................. 173,455 40,000 95,000 70,000 $ 32,930 Weighted average MMBtu fixed price................................. $ 4.17 $ 3.55 $ 3.68 $ 3.73 Collar contracts........................... 97,818 $ (4,357) Weighted average short call MMBtu ceiling price......................... $ 3.73 Weighted average long put MMBtu contingent floor price............... $ 2.86 Average forward NYMEX gas prices (3)................................. $ 3.84 $ 3.93 $ 3.85 $ 3.81 - --------------- (1) 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 and option contracts and, accordingly, the effects of the basis swaps have been presented together with the associated contracts. (2) See Note C of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for hedge volumes and weighted average prices by calendar quarter. (3) The average forward NYMEX oil and gas prices are based on May 2, 2002 market quotes. (4) During the second quarter of 2002, the Company entered into 170,000 MMBtu per day of 2003 swap contracts with average per MMBtu fixed prices of $3.86, 75,000 MMBtu per day of 2004 swap contracts with average per MMBtu fixed prices of $3.93 and 20,000 MMBtu per day of 2005, 2006 and 2007 swap contracts with average per MMBtu fixed prices of $3.75. These financial instruments are not included in the table.
Interest rate sensitivity. As of March 31, 2002, the fair market value of the Company's interest rate swap agreements was a liability of $24.1 million. Foreign exchange rate sensitivity. As of March 31, 2002, the fair market value of the Company's foreign exchange rate forward contracts was nominal. 31 PIONEER NATURAL RESOURCES COMPANY PART II. OTHER INFORMATION Item 1. Legal Proceedings As discussed in Note D 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 D, the Company believes that the probable damages from such other legal actions will not be in excess of 10 percent of the Company's current assets and that these actions are not material. Item 6. Exhibits and Reports on Form 8-K Exhibits 10.1 Underwriting Agreement dated April 16, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc. and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 17, 2002). 10.2 Terms Agreement dated April 16, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc., Credit Suisse First Boston Corporation, Banc of America Securities LLC, J.P. Morgan Securities Inc. and Lehman Brothers Inc. as representatives of the underwriters (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 17, 2002). 10.3 Underwriting Agreement dated April 25, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc., Credit Suisse First Boston Corporation and J.P. Morgan Securities Inc. as the underwriters, and Raymond James & Associates, Inc. as the qualified independent underwriter (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002). 10.4* Third Supplemental Indenture dated as of April 30, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc. as the subsidiary guarantor and The Bank of New York, as Trustee. 10.5 Form of 7.50% Senior Notes due 2012 of Pioneer Natural Resources Company (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002). 10.6* Guarantee dated April 30, 2002 of Pioneer Natural Resources USA, Inc. - -------------- * filed herewith Reports on Form 8-K During the three months ended March 31, 2002, the Company filed with the SEC current reports on Form 8-K on January 10 and on February 6. The Company's January 10 Form 8-K provides, as an exhibit thereto, the Company's news release dated January 9, 2002, which (i) updated the Company's fourth quarter 2001 outlook, (ii) outlined recent developments in Argentina and other areas of operation, and (iii) provided information on the status of the Company's hedging program. The January 10 Form 8-K also included disclosures pertaining to the Company's commodity hedge positions as of January 9, 2002. The Company's February 6 Form 8-K provides, as exhibits thereto, two news releases issued by the Company on February 5, reporting (i) the Company's financial and operating results for the three and twelve month periods ended December 31, 2001, (ii) the Company's proved reserves as of December 31, 2001 and related reserve replacement statistics for the one- and three-year periods ended December 31, 2001 and (iii) the Company's first quarter 2002 outlook. 32 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: May 13, 2002 By: /s/ Timothy L. Dove --------------------------------- Timothy L. Dove Executive Vice President and Chief Financial Officer Date: May 13, 2002 By: /s/ Richard P. Dealy --------------------------------- Richard P. Dealy Vice President and Chief Accounting Officer 33 PIONEER NATURAL RESOURCES COMPANY Exhibit Index Page 10.1 Underwriting Agreement dated April 16, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc. and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 17, 2002). 10.2 Terms Agreement dated April 16, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc., Credit Suisse First Boston Corporation, Banc of America Securities LLC, J.P. Morgan Securities Inc. and Lehman Brothers Inc. as representatives of the underwriters (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 17, 2002). 10.3 Underwriting Agreement dated April 25, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc., Credit Suisse First Boston Corporation and J.P. Morgan Securities Inc. as the underwriters, and Raymond James & Associates, Inc. as the qualified independent underwriter (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002). 10.4* Third Supplemental Indenture dated as of April 30, 2002, among Pioneer Natural Resources Company, Pioneer Natural Resources USA, Inc. as the subsidiary guarantor and The Bank of New York, as Trustee. 10.5 Form of 7.50% Senior Notes due 2012 of Pioneer Natural Resources Company (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, File No. 001-13245, filed with the SEC on April 29, 2002). 10.6* Guarantee dated April 30, 2002 of Pioneer Natural Resources USA, Inc. - --------------- * filed herewith 34 EX-10 3 exh104.txt PNR 3/31/02 10-Q EXH. 10.4 EXHIBIT 10.4 THIRD SUPPLEMENTAL INDENTURE THIS THIRD SUPPLEMENTAL INDENTURE dated as of April 30, 2002 (this "Supplemental Indenture"), among Pioneer Natural Resources Company, a Delaware corporation (the "Company"), Pioneer Natural Resources USA, Inc., a Delaware corporation, as the subsidiary guarantor (the "Guarantor"), and The Bank of New York, a New York banking association, as trustee (the "Trustee"). Capitalized terms used herein and not otherwise defined have the meanings set forth in the Indenture referred to below. RECITALS A. The Company and the Trustee are parties to that certain Indenture, dated as of January 13, 1998 (the "Indenture"), pursuant to which the Company may from time to time issue its debentures, notes, bonds or other evidences of indebtedness (collectively, the "Debt Securities"). B. Article IX of the Indenture provides that the Company, when authorized by a resolution of the Board of Directors of the Company, and the Trustee may, without the consent of the holders of the Debt Securities, enter into a supplemental indenture to establish the form or terms of Debt Securities of any series as permitted by Sections 2.01 and 2.03 of the Indenture. C. The Company desires to issue, and the Guarantor desires to guarantee, $150,000,000 aggregate principal amount of 7.50% Senior Notes Due 2012 (the "Notes") and in connection therewith, the Company and the Guarantor have duly determined to make, execute and deliver to the Trustee this Supplemental Indenture to set forth the terms and provisions of the Notes and the Guarantor's guarantee thereof (the "Guarantee") as required by the Indenture. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, the parties hereto agree, subject to the terms and conditions hereinafter set forth, as follows for the benefit of the Trustee and the Holders of the Notes: Section 1. Notes. Pursuant to Section 2.03 of the Indenture, the terms and provisions of the Notes are as follows: (a) The title of the Notes shall be "7.50% Senior Notes Due 2012." (b) The Notes shall be initially limited to $150,000,000 aggregate principal amount. The Company may, without the consent of the Holders of the Notes, increase such aggregate principal amount in the future, on the same terms and conditions and with the same CUSIP numbers as the Notes. The Company shall not issue any such additional Notes unless the additional Notes are fungible with the Notes for United States federal income tax purposes. (c) The Notes shall not require any principal or premium payments prior to maturity on April 15, 2012. (d) The rate at which the Notes shall bear interest shall be 7.50% per annum; interest on the notes shall accrue from April 30, 2002, for the first interest payment and from the most recent interest payment date thereafter; the interest payment dates on which such interest shall be payable shall be April 15 and October 15, beginning October 15, 2002; and the record dates for the determination of the holders of the Notes to whom such interest is payable shall be the immediately preceding April 1 (for April 15 payment dates) and October 1 (for October 15 payment dates); the rate at which the overdue principal shall bear interest shall be 1% per annum in excess of the rate stated initially in this clause; and the rate at which overdue installments of interest shall bear interest shall be 1% per annum in excess of the rate stated initially in this clause to the extent lawful. (e) Payments of principal of and interest on the Notes represented by one or more Global Senior Notes initially registered in the name of The Depository Trust Company (the "Depositary") or its nominee with respect to the Notes shall be made by the Company through the Trustee in immediately available funds to the Depositary or its nominee, as the case may be. 1 (f) The Notes shall be redeemable at any time, at the option of the Company, in whole or from time to time in part, at the price, and otherwise in accordance with the terms and provisions, set forth in Section 2 of this Supplemental Indenture and (to the extent they do not conflict with Section 2 of this Supplemental Indenture) the terms and provisions of Sections 3.03 and 3.04 of the Indenture. (g) The Notes shall be represented by one or more Global Senior Notes deposited with the Depositary and registered in the name of the nominee of the Depositary. (h) There shall be no mandatory sinking fund for the payments of the Notes. (i) In addition to the Events of Default set forth in Section 6.01 of the Indenture, failure on the part of the Guarantor to comply with Section 3(c) of this Supplemental Indenture shall be an Event of Default with respect to the Notes. (j) The obligations of the Guarantor with respect to the Notes shall be defeased if the Notes are defeased or if the Company's covenants under the Indenture are defeased. (k) As long as the Depositary or its nominee, or a successor Depositary or its nominee, is the registered owner of the Global Senior Notes relating to the Notes, owners of the beneficial interests in such Global Senior Notes shall not be entitled to have the Notes registered in their names and shall not receive or be entitled to receive physical delivery of Notes in definitive form except (i) as provided in Section 2.15(c) of the Indenture or (ii) if an Event of Default with respect to the Notes has occurred and is continuing. (l) The Bank of New York shall be the Trustee for the Notes under the Indenture. (m) Article X of the Indenture shall apply to the Notes. (n) The Guarantor shall execute and deliver its guarantee, substantially in the form attached hereto as Exhibit A (the "Guarantee"), of the payment of principal of, and premium, if any, and interest on the Notes in accordance with Section 3 hereof. (o) The Notes shall not be subordinated pursuant to the provisions of Article XII of the Indenture. The Notes shall be senior unsecured obligations of the Company ranking pari passu with other existing and future senior unsecured indebtedness of the Company. (p) The Company shall be subject to all the covenants set forth in Article IV of the Indenture with respect to the Notes. (q) To the extent not set forth herein, the provisions of Section 2.03 of the Indenture are not applicable. Section 2. Optional Redemption of Notes. The Notes will be redeemable at any time, at the option of the Company, in whole or from time to time in part, upon not less than 30 and not more than 60 days' notice as provided in the Indenture, on any date prior to maturity (the "Redemption Date") at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant record date to receive interest due on any interest payment date that is on or prior to the Redemption Date) plus a Make-Whole Premium, if any (the "Redemption Price"). In no event will a Redemption Price ever be less than 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, to the Redemption Date. The amount of the Make-Whole Premium with respect to any of the Notes (or portion thereof) to be redeemed will be equal to the excess, if any, of: (a) the sum of the present values, calculated as of the Redemption Date, of: (i) each interest payment that, but for such redemption, would have been payable on such Note (or portion thereof) being redeemed on each interest payment date occurring after the Redemption Date (excluding any accrued interest for the period prior to the Redemption Date); and 2 (ii) the principal amount that, but for such redemption, would have been payable at the final maturity of such Note (or portion thereof) being redeemed; over (b) the principal amount of such Note (or portion thereof) being redeemed. The present values of interest and principal payments referred to in clause (a) above will be determined in accordance with generally accepted principles of financial analysis. Such present values will be calculated by discounting the amount of each payment of interest or principal from the date that each such payment would have been payable, but for the redemption, to the Redemption Date at a discount rate equal to the Treasury Yield (as defined below) plus 50 basis points. The Make-Whole Premium will be calculated by an independent investment banking institution of national standing appointed by the Company; provided that if the Company fails to make such appointment at least 45 business days prior to the Redemption Date, or if the institution so appointed is unwilling or unable to make such calculation, such calculation will be made by Credit Suisse First Boston Corporation (or its successor) or, if such firm is unwilling or unable to make such calculation, by an independent investment banking institution of national standing appointed by the Trustee (in any such case, an "Independent Investment Banker"). For purposes of determining the Make-whole Premium, "Treasury Yield" means a rate of interest per annum equal to the weekly average yield to maturity of United States Treasury Notes that have a constant maturity that corresponds to the remaining term to maturity of the applicable Notes, calculated to the nearest 1/12th of a year (the "Remaining Term"). The Treasury Yield will be determined as of the third business day immediately preceding the applicable Redemption Date. The weekly average yields of United States Treasury Notes will be determined by reference to the most recent statistical release published by the Federal Reserve Bank of New York and designated "H.15 (519) Selected Interest Rates" or any successor release (the "H.15 Statistical Release"). If the H.15 Statistical Release sets forth a weekly average yield for United States Treasury Notes having a constant maturity that is the same as the Remaining Term, then the Treasury Yield will be equal to such weekly average yield. In all other cases, the Treasury Yield will be calculated by interpolation, on a straight-line basis, between the weekly average yields on the United States Treasury Notes that have a constant maturity closest to and greater than the Remaining Term and the United States Treasury Notes that have a constant maturity closest to and less than the Remaining Term (in each case as set forth in the H.15 Statistical Release). Any weekly average yields so calculated by interpolation will be rounded to the nearest 1/100th of 1%, with any figure of 1/200th of 1% or above being rounded upward. If weekly average yields for United States Treasury Notes are not available in the H.15 Statistical Release or otherwise, then the Treasury Yield will be calculated by interpolation of comparable rates selected by the Independent Investment Banker. In the case of any partial redemption, selection of the Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no such Note of $1,000 in original principal amount or less shall be redeemed in part. If any Note is to be redeemed in part only, the notice of redemption relating to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Section 3. Guarantee. (a) The Guarantee. The Guarantor hereby unconditionally guarantees to each Holder of the Notes authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Supplemental Indenture, the Indenture, the Notes or the obligations of the Company hereunder or thereunder, that: (i) the principal of and premium, if any, and interest, on the Notes shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal of and interest on premium, if any, and interest, on the Notes if any, if lawful, and all other obligations of the Company to the Holders of the Notes or the Trustee hereunder or thereunder shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (ii) in case of any extension of time of payment or renewal of any of the Notes or any of such other obligations, that the same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantor shall be obligated to pay or perform the same immediately. The Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or 3 enforceability of the Notes, this Supplemental Indenture or the Indenture, the absence of any action to enforce the same, any amendment or modification of or waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same, any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor, or any change in the ownership of the Guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event f insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that the Guarantor's guarantee under this Section shall not be discharged except by complete performance of the obligations of the Company and the Guarantor contained in the Notes, this Supplemental Indenture and the Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Guarantor or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Guarantor any amount paid by any thereof to the Trustee or such Holder, the Guarantor's guarantee under this Section, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders of the Notes in respect of any obligations guaranteed hereby until payment in full in cash of all obligations with respect to the Notes guaranteed hereby. The Guarantor further agrees that, as between itself as guarantor, on the one hand, and the Holders of the Notes and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in Article VI of the Indenture for the purposes of the Guarantor's guarantee hereunder, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations with respect to the Notes guaranteed hereby and (y) in the event of any declaration of acceleration of such obligations as provided in Article VI of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantor for the purposes of its guarantee hereunder. The Guarantor also agrees to pay any and all costs and expenses (including reasonable attorney's fees and expenses) incurred by the Trustee or any Holder in enforcing any rights under this Section. (b) Execution and Delivery of Guarantee. To evidence its Guarantee, set forth in Section 3(a), the Guarantor may, but is not required, to endorse a notation of such Guarantee by an officer of the Guarantor on each of the Notes authenticated and delivered by the Trustee, that this Supplemental Indenture shall be executed on behalf of the Guarantor by its President or one of its Vice Presidents and that the Company on behalf of the Guarantor shall deliver to the Trustee an Opinion of Counsel that the foregoing have been duly authorized, executed and delivered by the Guarantor and that such Guarantee is a valid and legally binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms. The Guarantor hereby agrees that its Guarantee, set forth in Section 3(a), shall remain in full force and effect notwithstanding any failure to endorse on each of the Notes a notation of the Guarantee. If an officer of the Guarantor whose signature is on this Supplemental Indenture or on the Guarantee no longer holds that office at the time the Trustee authenticates the Notes on which the Guarantee is endorsed, the Guarantee shall be valid nevertheless. The delivery of any of the Notes by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee set forth in this Supplemental Indenture on behalf of the Guarantor. (c) Guarantor May Consolidate, etc., on Certain Terms. The Guarantor shall not consolidate with or merge with or into any Person, or sell all or substantially all its assets, unless the following conditions have been satisfied: (i) Either (1) the Guarantor shall be the continuing Person in the case of a merger, or (2) the resulting, surviving or transferee Person, if other than the Guarantor (the "Successor Guarantor"), shall be a corporation organized and existing under the laws of the United States, any State thereof, or the District of Columbia and the Successor Guarantor shall expressly assume all of the obligations of the Guarantor under the Guarantee; (ii) Immediately after giving effect to the transaction (and treating any Indebtedness that becomes an obligation of the Successor Guarantor or any Subsidiary of the Guarantor as a result of the transaction as having been Incurred by the Successor Guarantor or the Subsidiary at the time of the transaction), no Default or Event of Default would occur or be continuing; and (iii) The Guarantor shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that the consolidation, merger or sale complies with this Supplemental Indenture. Upon any consolidation by the Guarantor with, or merger by the Guarantor into, any other person or any sale of the properties and assets of the Guarantor as an entirety or virtually as an entirety as described in the preceding paragraph, the successor resulting from such consolidation or into which the Guarantor is merged or the transferee of such sale, will succeed to, and be substituted for, and may exercise every right and power of, the Guarantor under 4 this Supplemental Indenture, and thereafter the predecessor (if still in existence) will be released from its obligations and covenants under this Supplemental Indenture and all outstanding Notes. (d) Release and Reinstatement of Guarantee. The Guarantor shall be released and relieved of any obligations under its Guarantee upon release or other termination of that certain Guaranty dated as of May 31, 2000 (the "Credit Facility Guarantee"), by the Subsidiary Guarantor with respect to the $575,000,000 Credit Agreement dated as of May 31, 2000 (the "Credit Facility"), among the Company, as the borrower, Bank of America, N.A., as the administrative agent, Credit Suisse First Boston, as the documentation agent, J.P. Morgan Chase, as the syndication agent, and certain lenders. The obligations of the Guarantor under its Guarantee shall be reinstated upon the reinstatement of the obligations of the Guarantor under the Credit Facility Guarantee and the Guarantor hereby agrees to execute a guarantee substantially in the form of the Guarantee upon such reinstatement. Any refinancing, refunding, extension, renewal or replacement (or successive refinancings, refundings, extensions, renewals or replacements), as a whole, or in part, of the Credit Facility shall not be deemed a release or other termination of the Credit Facility Guarantee if the Guarantor provides a guarantee with respect to such refinancing, refunding, extension, renewal or replacement in substantially the same form, and on substantially the same terms, as the Credit Facility Guarantee. It is hereby understood and agreed that the Credit Facility may be refinanced, refunded, extended, renewed or replaced (through one or refinancings, refundings, extensions, renewals or replacements), as a whole, or in part, from time to time after the termination of the Credit Facility. (e) Contribution. The Company agrees that, in the event a payment shall be made by the Guarantor under the Guarantee, the Company shall indemnify the Guarantor in an amount equal to the amount of such payment multiplied by a fraction, the numerator of which shall be the net worth of the Company on the date hereof and the denominator of which shall be the aggregate net worth of the Company and the Guarantor on the date hereof. Section 4. Amendments to Sections 1.01, 2.07 and 2.15 and Article IV. (a) Section 1.01. Section 1.01 is hereby amended, solely with respect to the Notes, by: (i) adding the definitions specified in Schedule I hereto; (ii) amending and restating the definitions specified in Schedule II hereto; and (iii) deleting clause (a)(iv)(A) of the definition of "Adjusted Consolidated Net Tangible Assets" and substituting therefor the following language "the net book value of other tangible assets of the Company and its Subsidiaries, as of a date no earlier than the date of the Company's latest annual or quarterly financial statement, and"; deleting the following language "Issue Date (including, without limitation, under the Credit Agreements)" at the end of clause (e) of the definition of "Permitted Liens" and substituting therefor the following language "date on which the 6.50% Senior Notes due 2008 and the 7.20% Senior Notes due 2028 of the Company were originally issued"; adding the following language "and Liens securing Non-Recourse Indebtedness; provided, however, that the related purchase money Indebtedness and Non-Recourse Indebtedness, as applicable, shall not be secured by any Property or assets of the company or any Restricted Subsidiary other than the Property acquired by the Company with the proceeds of such purchase money Indebtedness or Non-Recourse Indebtedness, as applicable" after "Purchase Money Liens" in clause (i) of the definition of "Permitted Liens"; and deleting the definition of "Credit Agreements" and substituting therefor the definition "Credit Facility" specified in Schedule I hereto. (b) Sections 2.07 and 2.15. Section 2.07 is hereby amended, solely with respect to the Notes, by adding "the Underwriters," before "the Company" in the last sentence of Section 2.07, and Section 2.15 is hereby amended, solely with respect to the Notes, by adding "the Underwriters," before "the Company" in the third sentence of subclause (v) of Section 2.15(c). (c) Article IV. Article IV is hereby amended, solely with respect to the Notes, by adding the Sections specified in Schedule III hereto. Section 5. Ratification. This Supplemental Indenture is executed and shall be construed as an indenture supplemental to the Indenture and, as provided in the Indenture, this Supplemental Indenture forms a part of the Indenture. Except to the extent amended by or supplemented by this Supplemental Indenture, the Company, the Guarantor and the Trustee hereby ratify, confirm and reaffirm the Indenture in all respects. 5 Section 6. Counterparts. This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 7. Governing Law. The laws of the State of New York shall govern the construction and interpretation of this Supplemental Indenture, without regard to principles of conflicts of laws. 6 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be signed on their behalf by their duly authorized representatives as of the date first above written: Pioneer Natural Resources Company By: /s/ Richard P. Dealy ----------------------------------- Name: Richard P. Dealy Title: Vice President and Chief Accounting Officer Pioneer Natural Resources USA, Inc. By: /s/ Richard P. Dealy ----------------------------------- Name: Richard P. Dealy Title: Vice President and Chief Accounting Officer The Bank of New York, as Trustee By: /s/ Remo J. Reale ----------------------------------- Name: Remo J. Reale Title: Vice President Exhibit A - Form of Guarantee 7 SCHEDULE I "Additional Assets" means (1) any Property (other than Indebtedness or Capital Stock) used in Oil and Gas Business; (2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (3) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (2) or (3) above is primarily engaged in the Oil and Gas Business. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (1) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary), (2) all or substantially all the assets of any division or line of business of the Company or any Restricted Subsidiary or (3) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of (1), (2) and (3) above, (A) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Restricted Subsidiary; (B) for purposes of Section 4.15 only, a disposition that constitutes a Restricted Payment permitted by Section 4.14 or a Permitted Investment (including transfers of assets to an oil and gas royalty trust); (C) a disposition of assets with a fair market value of less than $5,000,000; (D) the sale or transfer (whether or not in the ordinary course of business) of crude oil and natural gas properties or direct or indirect interests in real property; provided, however, that at the time of such sale or transfer such properties do not have associated with them any proved reserves;(E) the abandonment, farm-out, lease or sublease of developed or undeveloped crude oil and natural gas properties in the ordinary course of business; (F) the trade or exchange by the Company or any Restricted Subsidiary of any crude oil and natural gas Property owned or held by the Company or such Restricted Subsidiary for any crude oil and natural gas Property owned or held by another Person; (G) the sale or transfer of mineral products or surplus or obsolete equipment, in each case in the ordinary course of business; and (H) any disposition that constitutes a Change of Control. "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (1) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of or redemption or similar payment with respect to such Indebtedness multiplied by the amount of such payment by (2) the sum of all such payments. "Change of Control" means the occurrence of any of the following events: (1) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (1) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders do not have the right or ability by contract or otherwise to elect or designate for election a majority of the Board of Directors (for the purposes of this clause (1), such other person shall be deemed to beneficially own any Voting Stock of a Person (the "specified person") held by any other Person (the "parent entity"), if such other person is the beneficial owner (as defined above in this clause (1)), directly, of more than 50% of the voting power of the Voting Stock of such parent entity and the Permitted Holders do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the board of directors of such parent entity); (2) individuals who on the date the Notes are issued constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of 66-2/3% of the directors of the Company then still in office who were either directors on the date the Notes are issued or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; Schedule I - 1 (3) the adoption of a plan relating to the liquidation or dissolution of the Company; or (4) the sale of all or substantially all the assets of the Company (determined on a consolidated basis) to another Person (other than, in all such cases, a Person that is controlled by the Permitted Holders), other than a transaction following which the transferee Person becomes the obligor in respect of the Notes and a Subsidiary of the transferor of such assets. "Consolidated Coverage Ratio" as of any date of determination means the ratio of: (x) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days prior to the date of such determination to (y) Consolidated Interest Expense for such four fiscal quarters; provided, however, that: (1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period, (2) if the Company or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Company or such Restricted Subsidiary has not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for such period, or increased by an amount equal to the EBITDA (if negative), directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (4) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period and (5) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition, any Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition occurred on the first day of such period. Schedule I - 2 For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest of such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Protection Agreement applicable to such Indebtedness if such Interest Rate Protection Agreement has a remaining term in excess of 12 months). "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred by the Company or its Restricted Subsidiaries, without duplication, (1) interest expense attributable to capital leases and the interest expense attributable to leases constituting part of a Sale and Leaseback Transaction, (2) amortization of debt discount or premium and debt issuance cost, (3) capitalized interest, (4) non-cash interest expenses, (5) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (6) net payments or receipts pursuant to Interest Rate Protection Agreements, (7) Disqualified Stock dividends in respect of all Disqualified Stock held by Persons other than the Company or a Wholly Owned Subsidiary (other than dividends payable solely in Capital Stock (other than Disqualified Stock) of the issuer of such Disqualified Stock), (8) interest incurred in connection with Investments in discontinued operations, (9) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Company or any Restricted Subsidiary and (10) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust; provided, however, "Consolidated Interest Expense" shall not include (a) any Consolidated Interest Expense with respect to any Production Payments and Reserve Sales, (b) to the extent included in total interest expense, amortization or write-off of deferred financing costs of such Person or (c) accretion of interest charges on future plugging and abandonment obligations, future retirement benefits and other obligations that do not constitute Indebtedness. "Consolidated Net Income" means, for any period, the net income of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income: (1) any net income of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that subject to the exclusion contained in clause (4) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (3) below); Schedule I - 3 (2) any net income (or loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition; (3) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A) subject to the exclusion contained in clause (4) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (4) any gain or loss net of taxes realized upon the sale or other disposition of any assets of the Company, its consolidated Subsidiaries or any other Person (including pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise disposed of in the ordinary course of business and any gain or loss realized upon the sale or other disposition of any Capital Stock of any Person; (5) extraordinary gains or losses net of taxes; (6) any non-cash mark-to-market adjustments to assets or liabilities or write-downs of non-current assets net of taxes, provided, however, that any ceiling limitation write-downs in accordance with GAAP shall be treated as capitalized costs, as if such write-downs had not occurred; and (7) the cumulative effect of a change in accounting principles net of taxes. Notwithstanding the foregoing, for the purpose of Section 4.14 only, there shall be excluded from Consolidated Net Income any repurchases, repayments or redemptions of Investments, proceeds realized on the sale of Investments or return of capital to the Company or a Restricted Subsidiary to the extent such repurchases, repayments, redemptions, proceeds or returns increase the amount of Restricted Payments permitted under such Section pursuant to Section 4.14(a)(3)(D). "Credit Facility" means, with respect to the Company, the credit facility made available to the Company pursuant to the $575,000,000 Credit Agreement dated as of May 31, 2000, among the Company and the lenders named therein, together with any Refinancings thereof by a lender or a syndicate of lenders. It is understood and agreed that the Credit Facility may be refinanced, refunded, extended, renewed or replaced (through one or more such refinancings, refundings, extensions, renewals or replacements), as a whole, or in part, from time to time after the termination of the applicable Credit Facility. "EBITDA" for any period means the sum of Consolidated Net Income, plus the following to the extent deducted in calculating such Consolidated Net Income: (1) all income tax expense of the Company and its consolidated Restricted Subsidiaries, (2) Consolidated Interest Expense, (3) depreciation and amortization expense of the Company and its consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid operating activity item that was paid in cash in a prior period), (4) exploration and abandonments expense (if applicable) and (5) all other non-cash charges of the Company and its consolidated Restricted Subsidiaries (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period); and in each case for such period, and less, to the extent included in calculating such Consolidated Net Income and in excess of any costs or expenses attributable thereto and deducted in calculating such Consolidated Net Income, the sum of (x) Schedule I - 4 the amount of deferred revenues that are amortized during such period and are attributable to reserves that are subject to Volumetric Production Payments, and (y) amounts recorded in accordance with GAAP as repayments of principal and interest pursuant to Dollar-Denominated Production Payments. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Guarantor" means Pioneer Natural Resources USA, Inc. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and Section 4.14, (1) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary equal to an amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time of such redesignation; and (2) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors. "Investment Grade Rating" means a rating equal to or higher than Baa3 (or the equivalent) by Moody's Investors Services, Inc. or BBB- (or the equivalent) by Standard & Poor's Ratings Group, Inc. "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of (1) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Disposition, (2) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law, be repaid out of the proceeds from such Asset Disposition, (3) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and (4) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property or other assets disposed in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. Schedule I - 5 "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Non-Recourse Indebtedness" means Indebtedness or that portion of Indebtedness of the Company or a Restricted Subsidiary incurred in connection with the acquisition by the Company or a Restricted Subsidiary of any Property and as to which: (1) the holders of such Indebtedness agree in writing that they will look solely to the Property so acquired and securing such Indebtedness for payment on or in respect of such Indebtedness and (2) no default with respect to such Indebtedness would permit (after notice or passage of time or both), according to the terms of any other Indebtedness of the Company or a Restricted Subsidiary, any holder of such other Indebtedness to declare a default under such other Indebtedness or cause the payment of such other Indebtedness to be accelerated or payable prior to its stated maturity. "Permitted Business Investment" means any investment made in the ordinary course of, and of a nature that is or shall have become customary in, the Oil and Gas Business including investments or expenditures for actively exploiting, exploring for, acquiring, developing, producing, processing, gathering, marketing or transporting oil and gas through agreements, transactions, interests or arrangements which permit one to share risks or costs, comply with regulatory requirements regarding local ownership or satisfy other objectives customarily achieved through the conduct of Oil and Gas Business jointly with third parties, including (i) ownership interests in oil and gas properties, processing facilities, gathering systems, pipelines or ancillary real property interests and (ii) Investments in the form of or pursuant to operating agreements, processing agreements, farm-in agreements, farm-out agreements, development agreements, area of mutual interest agreements, unitization agreements, pooling agreements, joint bidding agreements, service contracts, joint venture agreements, partnership agreements (whether general or limited), subscription agreements, stock purchase agreements and other similar agreements (including for limited liability companies) with third parties, excluding, however, Investments in corporations other than Restricted Subsidiaries. "Permitted Holders" means Southeastern Asset Management Inc. and its Affiliates; provided, however, that a Person shall cease to be a Permitted Holder upon making a filing with the Securities and Exchange Commission that indicates such Person has acquired or holds the Company's Voting Stock with a purpose or effect of changing or influencing control of the Company or in connection with or as a participant in any transaction having that purpose or effect. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in: (1) the Company, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; (2) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; (3) cash and Temporary Cash Investments; (4) receivables owing to the Company or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (5) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (6) loans or advances to employees made in the ordinary course of business consistent with past practices of the Company or such Restricted Subsidiary; Schedule I - 6 (7) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments; (8) any Person to the extent such Investment represents the non-cash portion of the consideration received for an Asset Disposition as permitted pursuant to Section 4.15; (9) Permitted Business Investments; (10) Investments intended to promote the Company's strategic objectives in the Oil and Gas Business in an aggregate amount not to exceed $50.0 million at any one time outstanding, measured as of the date such Investments are made, without giving effect to any subsequent changes in value (which Investments shall be deemed no longer outstanding only upon the return of capital thereof); (11) Investments in any units of any oil and gas royalty trust; and (12) Investments made pursuant to Hedging Obligations of the Company and the Restricted Subsidiaries. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock and other securities issued by any other Person (but excluding Capital Stock or other securities issued by such first mentioned Person). "Rating Agency" means Standard & Poor's Ratings Group, Inc. and Moody's Investors Services, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's Investors Services, Inc. or both shall not make a rating on the Notes publicly available, a nationally recognized statistical rating agency or agencies, as the case may be, selected by the Company (as certified by a resolution of the Board of Directors) which shall be substituted for Standard & Poor's Ratings Group, Inc. or Moody's Investors Services, Inc. or both, as the case may be. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with this Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that: (1) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced; (2) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced, and (3) such Refinancing Indebtedness has an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding or committed (plus fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (A) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Restricted Payment" with respect to any Person means (1) the declaration or payment of any dividends or any other distributions of any sort in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving such Person) or similar payment to the direct or indirect holders of its Capital Stock (other than dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and dividends or distributions payable solely to the Company or a Restricted Subsidiary, and other than pro rata dividends or other distributions made by a Subsidiary that is not a Wholly Owned Subsidiary to Schedule I - 7 minority stockholders (or owners of an equivalent interest in the case of a Subsidiary that is an entity other than a corporation)), (2) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any Person or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the Company (other than a Restricted Subsidiary), including the exercise of any option to exchange any Capital Stock (other than into Capital Stock of the Company that is not Disqualified Stock), provided, however, that the Company may purchase, redeem or otherwise acquire or retire for value common stock of the Company in an amount not to exceed $10.0 million in the aggregate in any fiscal year for all such transactions after April 11, 2000, made pursuant to this proviso and the amount of such purchase, redemption or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (3) the purchase, repurchase, redemption, defeasance or other acquisition or retirement for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment of any Subordinated Obligations of such Person (other than the purchase, repurchase, or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such purchase, repurchase or other acquisition) or (4) the making of any Investment (other than a Permitted Investment) in any Person. "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary. "Subordinated Obligation" means, with respect to a Person, any Indebtedness of such Person (whether outstanding on the date the Notes are issued or thereafter Incurred) which is subordinate or junior in right of payment to the Notes or a Subsidiary Guaranty of such Person, as the case may be, pursuant to a written agreement to that effect. "Subsidiary Guarantor" means any Subsidiary of the Company, including the Guarantor, which incurs a Guarantee under Section 4.13(b)(12) hereof. "Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor permitted under Section 4.13(b)(12). "Underwriters" means Credit Suisse First Boston Corporation and J.P. Morgan Securities Inc. "Unrestricted Subsidiary" means: (1) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.14. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (A) the Company could Incur $1.00 of additional Indebtedness under Section 4.13(a) and (B) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Company or a Restricted Subsidiary) is owned by the Company or one or more Wholly Owned Subsidiaries." Schedule I - 8 SCHEDULE II "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Sections 4.14 and 4.15 only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. For purposes of Section 4.16 only, "Affiliate" shall not include Prize Energy Corp. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder) or upon the happening of any event: (1) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise; (2) is convertible or exchangeable at the option of the holder for Indebtedness or Disqualified Stock; or (3) is mandatorily redeemable or must be purchased upon the occurrence of certain events or otherwise, in whole or in part, in each case on or prior to the first anniversary of the Stated Maturity of the Notes; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Notes shall not constitute Disqualified Stock if (1) the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the terms applicable to the Debt Securities in Sections 4.15 and 4.17 of this Indenture and (2) any such requirement only becomes operative after compliance with such terms applicable to the Notes, including the purchase of any Debt Securities tendered pursuant thereto. "Indebtedness" means, with respect to any Person, at any date, any of the following, without duplication: (1) any liability, contingent or otherwise, of such Person (A) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (B) evidenced by a note, bond, debenture or similar instrument or (C) for the payment of money relating to a Capitalized Lease Obligation or other obligation (whether issued or assumed) relating to the deferred purchase price of property; (2) all conditional sale obligations and all obligations under any title retention agreement (even if the rights and remedies of the seller under such agreement in the event of default are limited to r epossession or sale of such property); (3) all obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction other than as entered into in the ordinary course of business; (4) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock of such Person or, with respect to any Preferred Stock of any Subsidiary of such Person, the principal amount of such Preferred Stock to be determined in accordance with the Indenture (but excluding, in each case, any accrued dividends); (5) all indebtedness of others of the type referred to in clauses (i) through (iv) hereof secured by (or for which the holder of such indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on Schedule II - 1 any asset or property (including, without limitation, leasehold interests and any other tangible or intangible property) of such Person, whether or not such indebtedness is assumed by such Person or is not otherwise such Person's legal liability; provided that if the obligations so secured have not been assumed in full by such Person or are otherwise not such Person's legal liability in full, the amount of such indebtedness for the purposes of this definition shall be limited to the lesser of the amount of such indebtedness secured by such Lien or the fair market value of the assets or the property securing such lien; (6) all indebtedness of others of the type referred to in clauses (i) through (v) hereof (including all interest and dividends on any Indebtedness or Preferred Stock of any other Person the payment of which is) guaranteed, directly or indirectly, by such Person or that is otherwise its legal liability or which such Person has agreed to purchase or repurchase or in respect of which such Person has agreed contingently to supply or advance funds; and (7) to the extent not otherwise included in this definition, obligations in respect of Hedging Obligations. Notwithstanding the preceding, Indebtedness shall not include (a) accounts payable arising in the ordinary course of business, (b) any obligations in respect of prepayments for gas or oil production or gas or oil imbalances, (c) estimated asset retirement obligations required to be recorded as liabilities under GAAP, and (d) Production Payments and Reserve Sales. "Oil and Gas Business" means (a) the acquisition, exploration, exploitation, development, production, operation and disposition of interests in oil, gas and other hydrocarbon properties, (b) the gathering, marketing, treating, processing, storage, refining, selling and transporting of any production from such interests or properties and products produced in association therewith, (c) any power generation and electrical transmission business and (d) any business or activity relating to, arising from, or necessary, appropriate or incidental to the activities described in the foregoing clauses (a) through (c) of this definition. "Senior Indebtedness" means, with respect to a Person, (1) Indebtedness of such Person, whether outstanding on the Issue Date or thereafter Incurred, and (2) accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to such Person to the extent post-filing interest is allowed in such proceeding) in respect of (A) indebtedness of such Person for money borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable unless, in the case of (1) and (2), in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such obligations are subordinate in right of payment to the Debt Securities; provided, however, that Senior Indebtedness of such Person shall not include: (1) any obligation of such Person to any Subsidiary, (2) any liability for Federal, state, local or other taxes owed or owing by such Person, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including guarantees thereof or instruments evidencing such liabilities), (4) any Indebtedness of such Person (and any accrued and unpaid interest in respect thereof) which is subordinate or junior in any respect to any other Indebtedness or other obligation of such Person or (5) that portion of any Indebtedness which at the time of Incurrence is Incurred in violation of this Indenture. "Temporary Cash Investments" means any of the following: (1) any investment in direct obligations of the United States of America or any agency thereof or obligations guaranteed by the United States of America or any agency thereof, (2) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of Schedule II - 2 the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50,000,000 (or the foreign currency equivalent thereof) and has outstanding debt that is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (3) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (1) above entered into with a bank meeting the qualifications described in clause (2) above, (4) investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Services, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Group, and (5) investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Services, Inc. Schedule II - 3 SCHEDULE III Section 4.13. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Company and its Restricted Subsidiaries shall be entitled to Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto on a pro forma basis, no Default has occurred and is continuing and the Consolidated Coverage Ratio exceeds 2.0 to 1. (b) Notwithstanding the foregoing paragraph (a), so long as no Default has occurred and is continuing, the Company and the Restricted Subsidiaries shall be entitled to Incur any or all of the following Indebtedness: (1) Indebtedness Incurred pursuant to the Credit Facility, including any amendment, modification, supplement, extension, restatement, replacement (including replacement after the termination of such Credit Facility), restructuring, increase, renewal, or Refinancing thereof from time to time in one or more agreements or instruments; provided, however, that, after giving effect to any such Incurrence, the aggregate principal amount of such Indebtedness then outstanding does not exceed the greater of (i) $675.0 million less the sum of all principal payments since April 11, 2000, with respect to such Indebtedness pursuant to Section 4.16(a)(3)(A) and (ii) the sum of (x) $100 million and (y) 20% of the Adjusted Consolidated Net Tangible Assets determined as of the date of the Incurrence of such Indebtedness; (2) Indebtedness owed to and held by the Company or a Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the obligor thereon; (3) the Debt Securities; (4) Indebtedness outstanding on April 11, 2000 (other than Indebtedness described in clause (1), (2) or (3) of this Section 4.13(b)); (5) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Company (other than Indebtedness Incurred in connection with, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Company); (6) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant to Section 4.13(a) or pursuant to clause (3), (4) or (5) of this Section 4.13(b) or this clause (6); provided, however, that to the extent such Refinancing Indebtedness directly or indirectly Refinances Indebtedness of a Subsidiary Incurred pursuant to clause (5), such Refinancing Indebtedness shall be Incurred only by such Subsidiary; (7) Hedging Obligations consisting of Interest Rate Protection Agreements directly related to Indebtedness permitted to be Incurred by the Company pursuant to this Indenture; (8) Non-Recourse Indebtedness; (9) Indebtedness in respect of bid, performance, reimbursement or surety obligations issued by or for the account of the Company or any Restricted Subsidiary in the ordinary course of business, including Guarantees and letters of credit functioning as or supporting such bid, performance, reimbursement or surety obligations (in each case other than for an obligation for money borrowed); (10) Indebtedness consisting of obligations in respect of purchase price adjustments, indemnities or Guarantees of the same or similar matters in connection with the acquisition or disposition of Property; Schedule III - 1 (11) Indebtedness under Commodity Price Protection Agreements and Currency Exchange Protection Agreements entered into in the ordinary course of business for the purpose of limiting risks that arise in the ordinary course of business of the Company and its Restricted Subsidiaries; (12) Indebtedness consisting of the Subsidiary Guarantee of the Guarantor (including any reinstatement of such Subsidiary Guarantee) and any Subsidiary Guarantee by the Company or a Subsidiary Guarantor of Indebtedness Incurred pursuant to paragraph (a) or pursuant to clause (1), (2), (3), (4), (7), (11) or (13) or pursuant to clause (6) to the extent the Refinancing Indebtedness Incurred thereunder directly or indirectly Refinances Indebtedness Incurred pursuant to paragraph (a) or pursuant to clauses (3) or (4); and (13) Indebtedness in an aggregate principal amount which, when taken together with all other Indebtedness of the Company outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (1) through (12) of this Section 4.13(b) or Section 4.13(a)), does not exceed $50 million. (c) Notwithstanding the foregoing, neither the Company nor any Subsidiary Guarantor shall Incur any Indebtedness pursuant to Section 4.13(b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations of the Company or a Subsidiary Guarantor unless such Indebtedness shall be subordinated to the Debt Securities or to the Subsidiary Guaranty of such Subsidiary Guarantor to at least the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with this Section 4.13, (1) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described herein, the Company, in its sole discretion, shall classify such item of Indebtedness at the time of Incurrence and only be required to include the amount and type of such Indebtedness in one of the above clauses and (2) the Company shall be entitled at the time of such Incurrence to divide and classify an item of Indebtedness in more than one of the types of Indebtedness described herein. (e) For purposes of determining compliance with any U.S. dollar denominated restriction on the Incurrence of Indebtedness where the Indebtedness Incurred is denominated in a different currency, the amount of such Indebtedness will be the U.S. Dollar Equivalent determined on the date of the Incurrence of such Indebtedness, provided, however, that if any such Indebtedness denominated in a different currency is subject to a Currency Exchange Protection Agreement with respect to U.S. dollars covering all principal, premium, if any, and interest payable on such Indebtedness, the amount of such Indebtedness expressed in U.S. dollars will be as provided in such Currency Exchange Protection Agreement. The principal amount of any Refinancing Indebtedness Incurred in the same currency as the Indebtedness being Refinanced will be the U.S. Dollar Equivalent of the Indebtedness Refinanced, except to the extent that (1) such U.S. Dollar Equivalent was determined based on a Currency Exchange Protection Agreement, in which case the Refinancing Indebtedness will be determined in accordance with the preceding sentence, and (2) the principal amount of the Refinancing Indebtedness exceeds the principal amount of the Indebtedness being Refinanced, in which case the U.S. Dollar Equivalent of such excess, will be determined on the date such Refinancing Indebtedness is Incurred. Section 4.14. Limitation on Restricted Payments. (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); (2) the Company is not entitled to Incur an additional $1.00 of Indebtedness under Section 4.13(a); or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments since April 11, 2000, would exceed the sum of (without duplication): (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from July 1, 2000, to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); plus Schedule III - 2 (B) 100% of the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) after April 11, 2000 (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees) and 100% of any cash capital contribution received by the Company from its shareholders after April 11, 2000; plus (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) after April 11, 2000, of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any other property, distributed by the Company upon such conversion or exchange); plus (D) an amount equal to the sum of (x) the net reduction in the Investments (other than Permitted Investments) made by the Company or any Restricted Subsidiary in any Person resulting from repurchases, repayments or redemptions of such Investments by such Person, proceeds realized on the sale of such Investment, proceeds representing the return of capital (excluding dividends and distributions), in each case received by the Company or any Restricted Subsidiary and (y) to the extent such Person is an Unrestricted Subsidiary, the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any such Person or Unrestricted Subsidiary, the amount of Investments (excluding Permitted Investments) previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary; plus (E)$25 million. (b) The provisions of Section 4.14(a) shall not prohibit: (1) any Restricted Payment (other than a Restricted Payment described in clause (1) of the definition of "Restricted Payment") made out of the Net Cash Proceeds of the substantially concurrent sale of, or made by exchange for, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or to a trust established by the Company or any of its Subsidiaries for the benefit of their employees) or a substantially concurrent cash capital contribution received by the Company from its shareholders; provided, however, that (A) such Restricted Payment shall be excluded in the calculation of the amount of Restricted Payments and (B) the Net Cash Proceeds from such sale or such cash capital contribution (to the extent so used for such Restricted Payment) shall be excluded from the calculation of amounts under Section 4.14(a)(3)(B); (2) any purchase, repurchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Obligations of the Company or a Subsidiary Guarantor made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness which is permitted to be Incurred pursuant to Section 4.13; provided, however, that such purchase, repurchase, redemption, defeasance or other acquisition or retirement for value shall be excluded in the calculation of the amount of Restricted Payments; (3) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this Section 4.14; provided, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; or (4) so long as no Default has occurred and is continuing the repurchase or other acquisition of shares of or options to purchase shares of, Capital Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of the agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such Capital Stock; provided, however, that the aggregate amount of such repurchases and other acquisitions shall not exceed $3 million in any calendar year; provided further, however, that such repurchases and other acquisitions shall be excluded in the calculation of the amount of Restricted Payments. Schedule III - 3 Section 4.15. Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless (1) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (including as to the value of all non-cash consideration), as determined in good faith by the Board of Directors, of the shares and assets subject to such Asset Disposition; (2) at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash, cash equivalents, Additional Assets or any combination thereof ("Permitted Consideration"); provided, however, that the Company and its Restricted Subsidiaries shall be permitted to receive Property other than Permitted Consideration, so long as the aggregate fair market value, as determined in the good faith of the Board of Directors, of all such Property other than Permitted Consideration received from Asset Dispositions and held by the Company and the Restricted Subsidiaries at any one time shall not exceed 10% of Adjusted Consolidated Net Tangible Assets; and (3) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) (A) first, to the extent the Company elects (or is required by the terms of any Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness of the Company or Indebtedness (other than any Disqualified Stock) of a Restricted Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company) within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to the extent the Company elects, to acquire Additional Assets within one year from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; and (C) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an Offer to the holders of the Debt Securities (and to holders of other Senior Indebtedness of the Company designated by the Company) to purchase Debt Securities (and such other Senor Indebtedness) pursuant to and subject to the conditions of Section 4.15(b); provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or (C) above, the Company or such Restricted Subsidiary shall permanently retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of this Section 4.15, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this Section 4.15(a) except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this Section 4.15(a) exceeds $20.0 million. Pending application of Net Available Cash pursuant to this Section 4.15(a), such Net Available Cash shall be invested in Temporary Cash Investments or applied to temporarily reduce revolving credit indebtedness. For the purposes of this Section 4.15(a), the following are deemed to be cash or cash equivalents: (1) the assumption of Indebtedness of the Company or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition and (2) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of Debt Securities (and other Senior Indebtedness) pursuant to Section 4.15(a)(3)(C), the Company shall purchase Debt Securities tendered pursuant to an offer by the Company for the Debt Securities and such other Senior Indebtedness (the "Offer") at a purchase price of 100% of their principal amount (or, in the event such other Senior Indebtedness was issued with significant original issue discount, 100% of the accreted value thereof), without premium, plus accrued but unpaid interest (or, in respect of such other Senior Indebtedness, such lesser price, if any, as may be provided for by the terms of such Senior Indebtedness in accordance with the procedures (including prorationing in the event of over subscription) set forth in Section 4.15(c). If the aggregate purchase price of Debt Securities (and any other Senior Indebtedness tendered pursuant to the Offer) exceeds the Net Available Cash allotted to their purchase, the Company shall select the Debt Securities and other Senior Indebtedness to be purchased on a pro rata basis but in round denominations, which in the case of the Debt Securities will be denominations of $1,000 principal amount or multiples thereof. The Company shall not be required to make an Offer to purchase Debt Securities (and other Senior Indebtedness pursuant to this Section 4.15 if the Net Available Cash available therefor is less than $20.0 million (which lesser amount shall be carried forward for purposes of determining whether such an Offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). (c) (1) Promptly, and in any event within 10 days after the Company becomes obligated to make an Offer, the Company shall deliver to the Trustee and send, by first-class mail to each Holder, a written notice stating that the Holder may elect to have his Debt Securities purchased by the Company either in whole or in part (subject to prorating as described in Section 4.15(b) in the event the Offer is oversubscribed) in integral multiples of $1,000 of principal amount, at the applicable Schedule III - 4 purchase price. The notice shall specify a purchase date not less than 30 days nor more than 60 days after the date of such notice (the "Purchase Date") and shall contain such information concerning the business of the Company which the Company in good faith believes will enable such Holders to make an informed decision (which at a minimum will include (A) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report, other than Current Reports describing Asset Dispositions otherwise described in the offering materials (or corresponding successor reports), (B) a description of material developments in the Company's business subsequent to the date of the latest of such Reports, and (C) if material, appropriate pro forma financial information) and all instructions and materials necessary to tender Debt Securities pursuant to the Offer, together with the information contained in clause (3). (2) Not later than the date upon which written notice of an Offer is delivered to the Trustee as provided below, the Company shall deliver to the Trustee an Officers' Certificate as to (A) the amount of the Offer (the "Offer Amount"), including information as to any other Senior Indebtedness included in the Offer, (B) the allocation of the Net Available Cash from the Asset Dispositions pursuant to which such Offer is being made and (C) the compliance of such allocation with the provisions of Section 4.15(a) and (b). On such date, the Company shall also irrevocably deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust) in Temporary Cash Investments, maturing on the last day prior to the Purchase Date or on the Purchase Date if funds are immediately available by open of business, an amount equal to the Offer Amount to be held for payment in accordance with the provisions of this Section. If the Offer includes other Senior Indebtedness, the deposit described in the preceding sentence may be made with any other paying agent pursuant to arrangements satisfactory to the Trustee. Upon the expiration of the period for which the Offer remains open (the "Offer Period"), the Company shall deliver to the Trustee for cancellation the Debt Securities or portions thereof which have been properly tendered to and are to be accepted by the Company. The Trustee shall, on the Purchase Date, mail or deliver payment (or cause the delivery of payment) to each tendering Holder in the amount of the purchase price. In the event that the aggregate purchase price of the Debt Securities delivered by the Company to the Trustee is less than the Offer Amount applicable to the Debt Securities, the Trustee shall deliver the excess to the Company immediately after the expiration of the Offer Period for application in accordance with this Section 4.15. (3) Holders electing to have a Debt Security purchased shall be required to surrender the Debt Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the Purchase Date, a telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Debt Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Debt Security purchased. Holders whose Debt Securities are purchased only in part shall be issued new Debt Securities equal in principal amount to the unpurchased portion of the Debt Securities surrendered. (4) At the time the Company delivers Debt Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Debt Section. A Debt Security shall be deemed to have been accepted for purchase at the time the Trustee, directly or through an agent, mails or delivers payment therefor to the surrendering Holder. (d) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Debt Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue of its compliance with such securities laws or regulations. Section 4.16. Limitation on Affiliate Transactions. (a) The Company shall not, and shall not permit any Restricted Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless (1) the terms thereof are no less favorable to the Company or such Restricted Subsidiary than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not an Affiliate; (2) if such Affiliate Transaction involves an amount in excess Schedule III - 5 of $1.0 million but less than $5.0 million, an officer of the Company certifies that such Affiliate Transaction complies with clause (1) of this paragraph, evidenced by an Officer's Certificate delivered to the Trustee; (3) if such Affiliate Transaction involves an amount equal to or in excess of $5.0 million but less than $20.0 million, the terms of the Affiliate Transaction are set forth in writing and a majority of the non-employee directors of the Company disinterested with respect to such Affiliate Transactions have determined in good faith that the criteria set forth in clause (1) are satisfied and have approved the relevant Affiliate Transaction as evidenced by a Board of Directors resolution; and (4) if such Affiliate Transaction involves an amount equal to or in excess of $20.0 million, the Board of Directors shall also have received a written opinion from an investment banking firm of national prominence that is not an Affiliate of the Company to the effect that such Affiliate Transaction is fair, from a financial standpoint, to the Company and its Restricted Subsidiaries. (b) The provisions of Section 4.16(a) shall not prohibit (1) any Investment or other Restricted Payment, in each case permitted to be made pursuant to Section 4.14; (2) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (3) loans or advances to officers, directors or employees in the ordinary course of business of the Company or its Restricted Subsidiaries; (4) the payment of reasonable fees to directors of the Company and its Restricted Subsidiaries who are not employees of the Company or its Restricted Subsidiaries; (5) any transaction with a Restricted Subsidiary or joint venture or similar entity which would constitute an Affiliate Transaction solely because the Company or a Restricted Subsidiary owns an equity interest in or otherwise controls such Restricted Subsidiary, joint venture or similar entity; (6) the issuance or sale of any Capital Stock (other than Disqualified Stock) of the Company; (7) indemnities of officers, directors or employees of the Company or any Subsidiary consistent with such Person's charter, bylaws and applicable statutory provisions; (8) any severance or employment agreement entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business; and (9) any transaction or series of transactions pursuant to any agreement or obligation of the Company or any of its Restricted Subsidiaries in effect on the Issue Date. Section 4.17. Change of Control. (a) Upon the occurrence of a Change of Control, each Holder shall have the right to require that the Company purchase such Holder's Debt Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date), in accordance with the terms contemplated in Section 4.17(b). (b) Within 30 days following any Change of Control, the Company shall mail a notice to each Holder with a copy to the Trustee (the "Change of Control Offer") stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase such Holder's Debt Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income and capitalization, each after giving effect to such Change of Control); (3) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with this Section, that a Holder must follow in order to have its Debt Securities purchased. (c) Holders electing to have a Debt Security purchased will be required to surrender the Debt Security, with an appropriate form duly completed, to the Company at the address specified in the notice at least three Business Days prior to the purchase date. Holders will be entitled to withdraw their election if the Trustee or the Company receives not later than one Business Day prior to the purchase date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Debt Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Debt Security purchased. Schedule III - 6 (d) On the purchase date, all Debt Securities purchased by the Company under this Section shall be delivered by the Company to the Trustee for cancellation, and the Company shall pay the purchase price plus accrued and unpaid interest, if any, to the Holders entitled thereto. (e) Notwithstanding the foregoing provisions of this Section, the Company shall not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in Section applicable to a Change of Control Offer made by the Company and purchases all Debt Securities validly tendered and not withdrawn under such Change of Control Offer. (f) The Company shall comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Debt Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section by virtue of its compliance with such securities laws or regulations. Section 4.18. Suspension of Covenants. During any period time that (a) the Notes have an Investment Grade Rating from either of the Rating Agencies and (b) no Default or Event of Default has occurred and is continuing under the Indenture, the Company and the Restricted Subsidiaries will not be subject to the provisions in Sections 4.13, 4.14, 4.15 and 4.16 of the Indenture (collectively, the "Suspended Covenants"). In the event that the Company and the Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence and, subsequently, one or both of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the Notes below the required Investment Grade Ratings so that the Notes do not have an Investment Grade Rating from either Rating Agency, or a Default or Event of Default occurs and is continuing, then the Company and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants and compliance with the Suspended Covenants with respect to Restricted Payments made after the time of such withdrawal, downgrade, Default or Event of Default will be calculated in accordance with the terms of Section 4.14 as though such covenant had been in effect during the entire period of time from the date the Notes are issued. Schedule III - 7 EX-10 4 exh106.txt PNR 3/31/02 10-Q EXH. 10-6 EXHIBIT 10.6 GUARANTEE THIS GUARANTEE dated as of April 30, 2002 (this "Guarantee"), is entered into by Pioneer Natural Resources USA, Inc., a Delaware corporation (the "Subsidiary Guarantor"). Capitalized terms used herein but not otherwise defined have the meanings set forth in the Indenture referred to below. RECITALS: A. The Subsidiary Guarantor is a wholly-owned subsidiary of Pioneer Natural Resources Company, a Delaware corporation (the "Company"). B. The Company and The Bank of New York, a New York banking association, as trustee (the "Trustee"), have entered into that certain Indenture, dated as of January 13, 1998, as supplemented by that certain Third Supplemental Indenture dated as of April 30, 2002 (the "Supplemental Indenture" and collectively, the "Indenture"), among the Company, the Subsidiary Guarantor and the Trustee, pursuant to which the Company has issued, among other things, $150,000,000 in aggregate principal amount of 7.50% Senior Notes Due 2012 (the "Notes"). NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Subsidiary Guarantor hereby agrees as follows: ARTICLE 1 GUARANTEE 1.1 Guarantee. The Subsidiary Guarantor hereby unconditionally guarantees to each Holder of the Notes authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Notes or the obligations of the Company thereunder, that: (a) the principal of, premium, if any, and interest on the Notes shall be promptly paid in full when due, whether at maturity, by acceleration or otherwise, and interest on the overdue principal of and interest, if any, on any premium and interest on the Notes, if lawful, and all other obligations of the Company to the Holders or the Trustee thereunder shall be promptly paid in full or performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other obligations, that same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at stated maturity, by acceleration or otherwise. Failing payment when due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Subsidiary Guarantor shall be obligated to pay or perform the same immediately. The Subsidiary Guarantor hereby agrees that its obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes, the Supplemental Indenture or the Indenture, the absence of any action to enforce the same, any amendment or modification of or waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same, any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor, or any change in the ownership of the Subsidiary Guarantor. The Subsidiary Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that the Subsidiary Guarantor's guarantee under this Section shall not be discharged except by complete performance of the obligations of the Company and the Subsidiary Guarantor contained in the Notes, the Supplemental Indenture and the Indenture. If any Holder or the Trustee is required by any court or otherwise to return to the Company, the Subsidiary Guarantor or any custodian, trustee, liquidator or other similar official acting in relation to either the Company or the Subsidiary Guarantor any amount paid by any thereof to the Trustee or such Holder, the Subsidiary Guarantor's guarantee under this Section, to the extent theretofore discharged, shall be reinstated in full force and effect. The Subsidiary Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders of the Notes in respect of any obligations guaranteed hereby until payment in full in cash of all obligations with respect to the Notes guaranteed hereby. The Subsidiary Guarantor further agrees that, as between itself as guarantor, on the one hand, and the Holders of the Notes and the Trustee, on the other hand, (x) the maturity of the obligations guaranteed hereby may be accelerated as provided in 1 Article VI of the Indenture for the purposes of the Subsidiary Guarantor's guarantee hereunder, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the obligations with respect to the Notes guaranteed hereby and (y) in the event of any declaration of acceleration of such obligations as provided in Article VI of the Indenture, such obligations (whether or not due and payable) shall forthwith become due and payable by the Subsidiary Guarantor for the purposes of its guarantee hereunder. The Subsidiary Guarantor also agrees to pay any and all costs and expenses (including reasonable attorney's fees and expenses) incurred by the Trustee or any Holde in enforcing any rights under this Section. 1.2 Continuing Guarantee; Release; Reinstatement. This is a continuing guarantee and shall remain in full force and effect and shall be binding upon the Subsidiary Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's obligations under the Notes and the Indenture with respect to the Notes and shall inure to the benefit of the Trustee and the Holders of Notes and their successors and assigns and, in the event of any transfer or assignment of rights by any Holder of Notes or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. The Subsidiary Guarantor shall be released and relieved of any obligations under this Guarantee upon release or other termination of that certain Guaranty dated as of May 31, 2000 (the "Credit Facility Guarantee"), by the Subsidiary Guarantor with respect to the $575,000,000 Credit Agreement dated as of May 31, 2000 (the "Credit Facility"), among the Company, as the borrower, Bank of America, N.A., as the administrative agent, Credit Suisse First Boston, as the documentation agent, J.P. Morgan Chase, as the syndication agent, and certain lenders. The obligations of the Subsidiary Guarantor under this Guarantee shall be reinstated upon the reinstatement of the obligations of the Subsidiary Guarantor under the Credit Facility Guarantee and the Subsidiary Guarantor hereby agrees to execute a guarantee substantially in the form of this Guarantee upon such reinstatement. Any refinancing, refunding, extension, renewal or replacement (or successive refinancings, refundings, extensions, renewals or replacements), as a whole, or in part, of the Credit Facility shall not be deemed a release or other termination of the Credit Facility Guarantee if the Subsidiary Guarantor provides a guarantee with respect to such refinancing, refunding, extension, renewal or replacement in substantially the same form, and on substantially the same terms, as the Credit Facility Guarantee. It is hereby understood and agreed that the Credit Facility may be refinanced, refunded, extended, renewed or replaced (through one or more such refinancings, refundings, extensions, renewals or replacements), as a whole, or in part, from time to time after the termination of the Credit Facility. ARTICLE 2 MISCELLANEOUS 2.1 Headings. The headings contained in this Guarantee are for reference purposes only and shall not affect in any way the meaning or interpretation of this Guarantee. 2.2 Severability. If any provision in this Guarantee shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 2.3 Governing Law. This Guarantee shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. 2 IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be signed by its duly authorized officer as of the date first above written. PIONEER NATURAL RESOURCES USA, INC. By: /s/ Richard P. Dealy --------------------------------------- Richard P. Dealy Vice President and Chief Accounting Officer 3 -----END PRIVACY-ENHANCED MESSAGE-----