-----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, JE0851k54QFD2pR0GvBhAp/G/9WdecpGpMl8v7GakudEkE8aQjOSLnACPcHaLZ2A 1hIRHVhDVfCx4XXnOYeRrw== 0000899243-02-001493.txt : 20020510 0000899243-02-001493.hdr.sgml : 20020510 ACCESSION NUMBER: 0000899243-02-001493 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLAINS RESOURCES INC CENTRAL INDEX KEY: 0000350426 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 132898764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10454 FILM NUMBER: 02640393 BUSINESS ADDRESS: STREET 1: 500 DALLAS STREET 2: STE 700 CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7136541414 MAIL ADDRESS: STREET 1: 1600 SMITH STREET STREET 2: SUITE 1500 CITY: HOUSTON STATE: TX ZIP: 77002 10-Q 1 d10q.txt FORM 10Q FOR THE PERIOD 03/31/2002 ================================================================================ 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 Commission file number: 0-9808 PLAINS RESOURCES INC. (Exact name of registrant as specified in its charter) Delaware 13-2898764 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Dallas Street, Suite 700 Houston, Texas 77002 (Address of principal executive offices) (Zip Code) (713) 739-6700 (Registrant's telephone number, including area code) 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____ --- 23,851,000 shares of common stock, $0.10 par value, issued and outstanding at April 30, 2002. ================================================================================ PLAINS RESOURCES INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets: March 31, 2002 and December 31, 2001.................................... 3 Consolidated Income Statements: For the three months ended March 31, 2002 and 2001...................... 4 Condensed Consolidated Statements of Cash Flows: For the three months ended March 31, 2002 and 2001...................... 5 Condensed Consolidated Statements of Changes in Stockholders' Equity For the three months ended March 31, 2002............................... 6 Notes to Consolidated Financial Statements................................ 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 17 PART II. OTHER INFORMATION................................................ 24
2 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of dollars)
March 31, December 31, 2002 2001 ----------- ------------ (unaudited) ASSETS Current Assets Cash and cash equivalents $ 1,018 $ 1,179 Accounts receivable 29,196 20,039 Commodity hedging contracts 896 23,257 Inventory 7,580 6,721 Other current assets 1,107 1,527 ----------- ------------ 39,797 52,723 ----------- ------------ Property and Equipment Oil and natural gas properties - full cost method 967,035 941,404 Other property and equipment 4,040 4,003 ----------- ------------ 971,075 945,407 Less allowance for depreciation, depletion and amortization (445,667) (437,982) ----------- ------------ 525,408 507,425 ----------- ------------ Investment in Plains All American Pipeline, L.P. 61,112 64,626 ----------- ------------ Other Assets 16,743 24,014 ----------- ------------ $ 643,060 $ 648,788 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities $ 49,131 $ 53,895 Commodity hedging contracts 10,139 - Interest payable 1,532 8,286 Notes payable 511 511 ----------- ------------ 61,313 62,692 ----------- ------------ Long-Term Debt Bank debt 31,000 11,500 Subordinated debt 269,434 269,539 Other 1,022 1,022 ----------- ------------ 301,456 282,061 ----------- ------------ Other Long-Term Liabilities 6,651 4,889 ----------- ------------ Deferred Income Taxes 34,658 44,294 ----------- ------------ Stockholders' Equity 238,982 254,852 ----------- ------------ $ 643,060 $ 648,788 =========== ============
See notes to consolidated financial statements. 3 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) Three Months Ended March 31, ------------------ 2002 2001 ------- -------- Revenues Crude oil and liquids $41,802 $ 47,060 Natural gas 1,988 11,172 ------- -------- 43,790 58,232 ------- -------- Costs and Expenses Production expenses 18,725 16,180 General and administrative 4,119 4,081 Depreciation, depletion and amortization 7,850 6,799 ------- -------- 30,694 27,060 ------- -------- Income from Operations 13,096 31,172 Other Income (Expense) Equity in earnings of Plains All American Pipeline, L.P. 4,350 6,836 Gain on Plains All American Pipeline, L.P. units - 1,958 Interest expense (6,379) (6,996) Interest and other income 37 667 ------- -------- Income Before Income Taxes and Cumulative Effect of Accounting Change 11,104 33,637 Income tax benefit (expense) Current 2,522 (478) Deferred (7,030) (12,207) ------- -------- Income Before Cumulative Effect of Accounting Change 6,596 20,952 Cumulative effect of accounting change, net of tax benefit - (1,986) ------- -------- Net Income 6,596 18,966 Preferred dividend requirement (350) (1,599) ------- -------- Income Attributable to Common Shares $ 6,246 $ 17,367 ======= ======== Earnings per Share Income Before Cumulative Effect of Accounting Change Basic $ 0.26 $ 1.11 Diluted $ 0.26 $ 0.72 Net Income Basic $ 0.26 $ 1.00 Diluted $ 0.26 $ 0.66 Weighted Average Shares Outstanding Basic 23,635 17,452 Diluted 25,092 28,928 See notes to consolidated financial statements. 4 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited)
Three Months Ended March 31, ------------------------- 2002 2001 -------- -------- Cash Flows from Operating Activities Net income $ 6,596 $ 18,966 Items not affecting cash flows from operating activities: Depreciation, depletion and amortization 7,850 6,799 Equity in earnings of Plains All American Pipeline, L.P. (4,350) (6,836) Distributions from Plains All American Pipeline, L.P. 6,958 8,829 Gain on sale of Plains All American Pipeline, L.P. units - (1,958) Deferred income taxes 7,030 12,207 Cumulative effect of accounting change - 1,986 Change in derivative fair value - 1,227 Other 673 1,081 Change in assets and liabilities from operating activities: Current and other assets (7,806) 4,433 Current and other liabilities (13,346) (16,413) -------- -------- Net cash provided by operating activities 3,605 30,321 -------- -------- Cash Flows from Investing Activities Oil and gas properties and equipment (24,497) (29,624) Other properties and equipment (37) (272) -------- -------- Net cash used in investing activities (24,534) (29,896) -------- -------- Cash Flows from Financing Activities Net change in long-term debt 19,500 16,608 Exercise of stock options 1,618 1,806 Treasury stock purchases - (6,956) Preferred stock dividends paid (350) (2,318) Other - (68) -------- -------- Net cash provided by financing activities 20,768 9,072 -------- -------- Net increase (decrease) in cash and cash equivalents (161) 9,497 Decrease in cash due to deconsolidation of Plains All American Pipeline, L.P. - (3,425) Cash and cash equivalents, beginning of period 1,179 5,080 -------- -------- Cash and cash equivalents, end of period $ 1,018 $ 11,152 ======== ========
See notes to consolidated financial statements. 5 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (unaudited)
Three Months Ended March 31, 2002 ----------------------- Shares Amount ------- -------- Series D Cumulative Convertible Preferred Stock Balance, beginning and end of period 47 $ 23,300 ======= -------- Common Stock Balance, beginning of period 27,677 2,768 Common stock issued upon exercise of stock options and other 49 5 ------- -------- Balance, end of period 27,726 2,773 ======= -------- Additional Paid-in Capital Balance, beginning of period 268,520 Common stock issued upon exercise of stock options and other 1,136 -------- Balance, end of period 269,656 -------- Retained Earnings Balance, beginning of period 37,676 Net income 6,596 Preferred stock dividends (350) Treasury stock issued for less than cost (548) -------- Balance, end of period 43,374 -------- Accumulated Other Comprehensive Income Balance, beginning of period 13,930 Other comprehensive income (24,347) -------- Balance, end of period (10,417) -------- Treasury Stock Balance, beginning of period (4,121) (91,342) Treasury stock issued upon exercise of stock options 110 1,638 ------- -------- Balance, end of period (4,011) (89,704) ======= -------- Total $238,982 ========
6 PLAINS RESOURCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Organization and Accounting Policies These consolidated financial statements include the accounts of Plains Resources Inc. ("Plains", "our", or "we") and our wholly owned subsidiaries. In June 2001 we reduced our interest in Plains All American Pipeline, L.P. ("PAA") and as a result we no longer have the ability to exercise control over the operations of PAA. Accordingly, effective January 1, 2001, our minority interest investment in PAA is accounted for using the equity method of accounting. Under the equity method, we no longer consolidate the assets, liabilities and operating activities of PAA, but instead record our proportionate share of PAA's net assets and results of operations. The consolidated statements of income and cash flows for the three months ended March 31, 2001 have been restated to reflect our investment in PAA on the equity method of accounting. These consolidated financial statements and related notes present our consolidated financial position as of March 31, 2002 and December 31, 2001, the results of our operations and our cash flows for the three months ended March 31, 2002 and 2001 and the changes in our stockholders' equity for the three months ended March 31, 2002. The results for the three months ended March 31, 2002, are not necessarily indicative of the final results to be expected for the full year. These financial statements have been prepared in accordance with the instructions with respect to interim reporting as prescribed by the Securities and Exchange Commission ("SEC"). For further information, refer to our Form 10-K for the year ended December 31, 2001, filed with the SEC. All adjustments, consisting only of normal recurring adjustments, that in the opinion of management were necessary for a fair statement of the results for the interim periods, have been reflected. All significant intercompany transactions have been eliminated. We are an independent energy company that is engaged in the "Upstream" oil and gas business. The Upstream business acquires, exploits, develops, explores for and produces crude oil and natural gas. Our Upstream activities are all located in the United States. We participate in the "Midstream" oil and gas business, which consists of the marketing, transportation and terminalling of crude oil, through our investment in PAA. All of PAA's Midstream activities are conducted in the United States and Canada. We evaluate the capitalized costs of our oil and natural gas properties on an ongoing basis and have utilized the most recently available information to estimate our reserves at March 31, 2002, in order to determine the realizability of such capitalized costs. Future events, including drilling activities, product prices and operating costs, may affect future estimates of such reserves. Inventories. Crude oil inventories are carried at cost. Materials and supplies inventories are stated at the lower of cost or market, with cost determined on the average cost method. Crude oil inventories totaled $1.8 million at March 31, 2002 and $1.5 million at December 31, 2001. Materials and supplies inventories totaled $5.8 million at March 31, 2002 and $5.2 million at December 31, 2001. 7 Note 2 - Investment in PAA Our investment in PAA is accounted for using the equity method of accounting, under which we record only our proportionate share of PAA' s results of operations and other comprehensive income. The following table presents unaudited summarized financial statement information of PAA (in thousands of dollars):
Three Months Ended March 31, ------------------------------------------ 2002 2001 ------------------- ------------------- Revenues $ 1,545,323 $ 1,520,124 Expenses 1,506,935 1,487,394 Gross margin 38,388 32,730 Net income 14,281 13,015 At At March 31, 2002 December 31, 2001 ------------------- ------------------- Current assets $ 643,405 $ 588,082 Property and equipment, net 616,478 604,919 Other assets 104,959 98,250 Total assets 1,364,842 1,291,251 Current liabilities 581,263 505 160 Long-term debt 390,995 351,677 Other long-term liabilities 1,617 1,617 Partners' capital 390,967 402,797 Total liabilities and partners' capital 1,364,842 1,261,251
Note 3 - Derivative Instruments and Hedging Activities Derivative instruments are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138 ("SFAS 133"). Under SFAS 133, all derivative instruments are recorded on the balance sheet at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings. If the derivative qualifies for hedge accounting, the unrealized gain or loss on the derivative is deferred in accumulated Other Comprehensive Income ("OCI"), a component of Stockholders' Equity. At March 31, 2002 all open positions qualified for hedge accounting. Gains and losses on crude oil hedging instruments related to OCI and adjustments to carrying amounts on hedged volumes are included in oil and gas revenues in the period that the related volumes are delivered. Gains and losses on crude oil hedging instruments representing hedge ineffectiveness, which is measured on a quarterly basis, are included in oil and gas revenues in the period in which they occur. During the first three months of 2002 gains of $3.6 million were relieved from OCI and the fair value of open positions decreased $20.3 million. At March 31, 2002, the unrealized loss on our swaps contracts included in OCI was $7.2 million. The related assets and liabilities were included in current assets and liabilities [($0.3) and $10.1 million, respectively), other assets and liabilities ($0.1 million and $1.8 million, respectively), and deferred income taxes [($4.9) million]. Additionally, OCI includes our $2.8 million net of tax equity in the unrealized OCI losses of PAA. As of March 31, 2002, $6.2 million of deferred net losses on derivative instruments recorded in OCI are expected to be reclassified to earnings during the next twelve-month period. Oil and gas revenues for the three months ended March 31, 2002 include $3.6 million of cash gains on hedging instruments, and a $0.3 million non-cash loss related to the amortization of time value in existence when 8 Derivative Information Group Issue G20 was implemented in the fourth quarter of 2001. Assets related to the time value component of the fair value of options are included in current assets ($1.2 million). We utilize various derivative instruments to hedge our exposure to price fluctuations on crude oil sales. The derivative instruments consist primarily of cash-settled crude oil option and swap contracts entered into with financial institutions. We do not currently have any natural gas hedges. We also utilize interest rate swaps to manage the interest rate exposure on our long-term debt. We currently have a three-year interest rate swap agreement, fixing at 5.3% the interest rate on $7.5 million of borrowing under our revolving credit facility. At March 31, 2002 we had the following open crude oil hedge positions (barrels per day):
Barrels Per Day -------------------------------------------------------- 2002 ----------------------------------------- 2nd Qtr 3rd Qtr 4th Qtr 2003 ----------- ----------- ----------- ----------- Puts Average price $20.00/bbl 2,000 2,000 2,000 - Calls Average price $35.17/bbl 9,000 9,000 9,000 - Swaps Average price $24.14/bbl 19,000 - - - Average price $24.10/bbl - 19,000 - Average price $24.09/bbl - - 19,000 - Average price $23.12/bbl - - - 12,500
Note 4 - Comprehensive Income Comprehensive income includes net income and certain items recorded directly to Stockholders' Equity and classified as OCI. The following table reflects comprehensive income for the three months ended March 31, 2002 and 2001 (in thousands of dollars):
Three Months Ended March 31, -------------------------- 2002 2001 -------- ------- Net Income $ 6,596 $18,966 Other Comprehensive Income (Loss) Cumulative effect of change in accounting principle - January 1, 2001 - 6,856 Reclassification adjustment for settled contracts (3,552) (804) Change in fair value of open hedging positions (20,348) (6,040) Equity in OCI changes of PAA (447) (895) -------- ------- Other Comprehensive Income (Loss) (24,347) (883) -------- ------- Comprehensive Income (Loss) $(17,751) $18,083 ======== =======
9 Note 5 -- Earnings Per Share The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for income from continuing operations before the cumulative effect of accounting change for the three months ended March 31, 2002 and 2001 (dollar amounts and shares in thousands, except per share data):
For the Three Months Ended March 31, ----------------------------------------------------------------------- 2002 2001 ---------------------------------- ------------------------------------ Income Shares Per Income Shares Per (Numera- (Denomi- Share (Numera- (Denomi- Share tor) nator) Amount tor) nator) Amount ---------- ---------- -------- ---------- ---------- -------- Income before cumulative effect of accounting change $ 6,596 $ 20,952 Less: preferred stock dividends (350) (1,599) -------- -------- Income available to common stockholders 6,246 23,635 $ 0.26 19,353 17,452 $ 1.11 Effect of dilutive securities: Convertible preferred stock 350 932 1,599 10,699 Employee stock options and warrants - 525 - 777 -------- -------- -------- -------- Income available to common stockholders assuming dilution $ 6,596 25,092 $ 0.26 $ 20,952 28,928 $ 0.72 ======== ======== ======== ========
Note 6 -- Commitments and Contingencies In connection with the sale of a portion of our interest in PAA in June 2001, we entered into a value assurance agreement with each of the purchasers of PAA subordinated units. In the event PAA's annual distribution is less than $1.85 per unit, the value assurance agreements require us to pay to the holders an amount per fiscal year, payable on a quarterly basis, equal to the difference between $1.85 per unit and the actual amount distributed during that period. The value assurance agreements will expire upon the earlier of the conversion of the subordinated units to common units, or June 8, 2006. Also in connection with the June 2001 sale of a portion of our interest in PAA, we entered into a separation agreement with PAA whereby, among other things, (1) we agreed to indemnify PAA, its general partner, and its subsidiaries against (a) any claims related to the upstream business, whenever arising, and (b) any claims related to federal or state securities laws or the regulations of any self-regulatory authority, or other similar claims, resulting from alleged acts or omissions by us, our subsidiaries, PAA, or PAA's subsidiaries occurring on or before June 8, 2001, and (2) PAA agreed to indemnify us and our subsidiaries against any claims related to the midstream business, whenever arising; We, in the ordinary course of business, are a claimant and/or defendant in various legal proceedings. Management does not believe that the outcome of these legal proceedings, individually and in the aggregate, will have a materially adverse effect on our financial condition, results of operations or cash flows. Note 7 -- Consolidating Financial Statements The following financial information presents consolidating financial statements which include: . the parent company only ("Parent"); . the guarantor subsidiaries on a combined basis ("Guarantor Subsidiaries"); . the nonguarantor subsidiaries on a combined basis ("Nonguarantor Subsidiaries"); . elimination entries necessary to consolidate the Parent, the Guarantor Subsidiaries and the Nonguarantor Subsidiaries; and . Plains Resources Inc. on a consolidated basis. These statements are presented because our Series A-F subordinated notes are not guaranteed by the Nonguarantor Subsidiaries. 10 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET (in thousands) (unaudited) MARCH 31, 2002
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,015 $ 1 $ 2 $ - $ 1,018 Accounts receivable 8,612 20,584 - - 29,196 Commodity hedging contracts 896 - - - 896 Inventory - 7,580 - - 7,580 Other current assets 205 902 - - 1,107 --------- --------- -------- --------- --------- 10,728 29,067 2 - 39,797 --------- --------- -------- --------- --------- PROPERTY AND EQUIPMENT, AT COST Oil and natural gas properties - full cost method 242,159 725,025 - (149) 967,035 Other property and equipment 2,477 1,563 - - 4,040 --------- --------- -------- --------- --------- 244,636 726,588 - (149) 971,075 Less allowance for depreciation, depletion and amortization (218,005) (172,276) - (55,386) (445,667) --------- --------- -------- --------- --------- 26,631 554,312 - (55,535) 525,408 --------- --------- -------- --------- --------- INVESTMENT IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 565,855 (281,311) 88,823 (312,255) 61,112 --------- --------- -------- --------- --------- OTHER ASSETS 4,473 12,325 396 (451) 16,743 --------- --------- -------- --------- --------- $ 607,687 $ 314,393 $ 89,221 $(368,241) $ 643,060 ========= ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities $ 9,201 $ 38,844 $ 1,086 $ - $ 49,131 Commodity hedging contracts 10,139 - - - 10,139 Interest payable 1,460 72 - - 1,532 Notes payable - 511 - - 511 --------- --------- -------- --------- --------- 20,800 39,427 1,086 - 61,313 --------- --------- -------- --------- --------- LONG-TERM DEBT Bank debt 31,000 - - - 31,000 Subordinated debt 269,434 - - - 269,434 Other - 1,022 - - 1,022 --------- --------- -------- --------- --------- 300,434 1,022 - - 301,456 --------- --------- -------- --------- --------- OTHER LONG-TERM LIABILITIES 4,866 1,413 372 - 6,651 --------- --------- -------- --------- --------- DEFERRED INCOME TAXES 42,605 8,680 (16,627) - 34,658 --------- --------- -------- --------- --------- STOCKHOLDERS' EQUITY 238,982 263,851 104,390 (368,241) 238,982 --------- --------- -------- --------- --------- $ 607,687 $ 314,393 $ 89,221 $(368,241) $ 643,060 ========= ========= ======== ========= =========
11 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET (in thousands) DECEMBER 31, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,013 $ 13 $ 153 $ $ 1,179 Accounts receivable 3,222 16,817 - - 20,039 Commodity hedging contracts 23,257 - - - 23,257 Inventory - 6,721 - - 6,721 Other current assets 294 1,233 - - 1,527 --------- --------- -------- --------- --------- 27,786 24,784 153 - 52,723 --------- --------- -------- --------- --------- PROPERTY AND EQUIPMENT, AT COST Oil and natural gas properties - full cost method 241,509 700,044 - (149) 941,404 Other property and equipment 2,460 1,543 - - 4,003 --------- --------- -------- --------- --------- 243,969 701,587 - (149) 945,407 Less allowance for depreciation, depletion and amortization (217,801) (164,795) - (55,386) (437,982) --------- --------- -------- --------- --------- 26,168 536,792 - (55,535) 507,425 --------- --------- -------- --------- --------- INVESTMENT IN SUBSIDIARIES AND INTERCOMPANY ADVANCES 546,988 (265,834) 85,389 (301,917) 64,626 --------- --------- -------- --------- --------- OTHER ASSETS 10,313 13,769 383 (451) 24,014 --------- --------- -------- --------- --------- $ 611,255 $ 309,511 $ 85,925 $(357,903) $ 648,788 ========= ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and other current liabilities $ 10,255 $ 42,581 $ 1,059 $ - $ 53,895 Interest payable 8,286 - - - 8,286 Notes payable - 511 - - 511 --------- --------- -------- --------- --------- 18,541 43,092 1,059 - 62,692 --------- --------- -------- --------- --------- LONG-TERM DEBT Bank debt 11,500 - - - 11,500 Subordinated debt 269,539 - - - 269,539 Other - 1,022 - - 1,022 --------- --------- -------- --------- --------- 281,039 1,022 - - 282,061 --------- --------- -------- --------- --------- OTHER LONG-TERM LIABILITIES 3,013 1,413 463 - 4,889 --------- --------- -------- --------- --------- DEFERRED INCOME TAXES 53,810 8,415 (17,931) - 44,294 --------- --------- -------- --------- --------- STOCKHOLDERS' EQUITY 254,852 255,569 102,334 (357,903) 254,852 --------- --------- -------- --------- --------- $ 611,255 $ 309,511 $ 85,925 $(357,903) $ 648,788 ========= ========= ======== ========= =========
12 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF INCOME (in thousands)(unaudited) THREE MONTHS ENDED MARCH 31, 2002
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ REVENUES Crude oil and liquids $ - $41,802 $ $ $41,802 Natural gas - 1,988 - - 1,988 ------- ------- ------- -------- ------- - 43,790 - - 43,790 ------- ------- ------- -------- ------- EXPENSES Production expenses - 18,725 - - 18,725 General and administrative 1,343 2,769 7 - 4,119 Depreciation, depletion and amortization 461 7,389 - - 7,850 ------- ------- ------- -------- ------- 1,804 28,883 7 - 30,694 ------- ------- ------- -------- ------- INCOME (LOSS) FROM OPERATIONS (1,804) 14,907 (7) - 13,096 OTHER INCOME (EXPENSE) Equity in earnings of subsidiary 10,786 - 4,350 (10,786) 4,350 Interest expense - (6,379) - - (6,379) Interest and other income 4 19 14 - 37 ------- ------- ------- -------- ------- INCOME BEFORE INCOME TAXES 8,986 8,547 4,357 (10,786) 11,104 Income tax benefit (expense): Current 2,680 - (158) - 2,522 Deferred (5,070) (265) (1,695) - (7,030) ------- ------- ------- -------- ------- NET INCOME 6,596 8,282 2,504 (10,786) 6,596 Preferred dividend requirement (350) - - - (350) ------- ------- ------- -------- ------- INCOME ATTRIBUTABLE TO COMMON SHARES $ 6,246 $ 8,282 $ 2,504 $(10,786) $ 6,246 ======= ======= ======= ======== =======
13 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF INCOME (in thousands)(unaudited) THREE MONTHS ENDED MARCH 31, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ REVENUES Crude oil and liquids $ - $ 47,060 $ - $ - $ 47,060 Natural gas - 11,172 - - 11,172 ------- -------- ------- --------- -------- - 58,232 - - 58,232 ------- -------- ------- --------- -------- EXPENSES Production expenses 2 16,178 - - 16,180 General and administrative 1,047 3,021 13 - 4,081 Depreciation, depletion and amortization (89) 6,839 49 - 6,799 ------- -------- ------- --------- -------- 960 26,038 62 - 27,060 ------- -------- ------- --------- -------- INCOME (LOSS) FROM OPERATIONS (960) 32,194 (62) - 31,172 OTHER INCOME (EXPENSE) Equity in earnings of subsidiary 19,740 - 6,836 (19,740) 6,836 Gain on PAA units - - 1,958 - 1,958 Interest expense (1,321) (5,675) - - (6,996) Interest and other income 22 559 86 - 667 ------- -------- ------- --------- -------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 17,481 27,078 8,818 (19,740) 33,637 Income tax benefit (expense): Current 1,788 - (2,266) - (478) Deferred (303) (10,731) (1,173) - (12,207) ------- -------- ------- --------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 18,966 16,347 5,379 (19,740) 20,952 Cumulative effect of accounting change, net of tax benefit - (2,129) 143 - (1,986) ------- -------- ------- --------- -------- NET INCOME 18,966 14,218 5,522 (19,740) 18,966 Preferred dividend requirement (1,599) - - - (1,599) ------- -------- ------- --------- -------- INCOME ATTRIBUTABLE TO COMMON SHARES $17,367 $ 14,218 $ 5,522 $ (19,740) $ 17,367 ======= ======== ======= ========= ========
14 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in thousands)(unaudited) THREE MONTHS ENDED MARCH 31, 2002
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 6,596 $ 8,282 $ 2,504 $(10,786) $ 6,596 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 461 7,389 - - 7,850 Equity in earnings of subsidiaries (10,786) - (4,350) 10,786 (4,350) Distributions from subsidiaries - - 6,958 - 6,958 Deferred income taxes 5,070 265 1,695 - 7,030 Other 673 - - - 673 Change in assets and liabilities resulting from operating activities: Current and other assets (4,942) (2,851) (13) - (7,806) Current and other liabilities (14,213) 1,413 (546) - (13,346) Advances from (payments to) affiliates (3,538) 9,937 (6,399) - - -------- -------- ------- -------- -------- Net cash provided by (used in) operating activities (20,679) 24,435 (151) - 3,605 -------- -------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Oil and gas properties and equipment (70) (24,427) - - (24,497) Other properties and equipment (17) (20) - (37) -------- -------- ------- -------- -------- Net cash used in investing activities (87) (24,447) - - (24,534) -------- -------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in long-term debt 19,500 - - - 19,500 Exercise of stock options 1,618 - - - 1,618 Preferred stock dividends paid (350) - - - (350) -------- -------- ------- -------- -------- Net cash provided by financing activities 20,768 - - - 20,768 -------- -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents 2 (12) (151) - (161) Cash and cash equivalents, beginning of period $ 1,013 $ 13 $ 153 $ - 1,179 -------- -------- ------- -------- -------- Cash and cash equivalents, end of period $ 1,015 $ 1 $ 2 $ - $ 1,018 ======== ======== ======= ======== ========
15 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (in thousands)(unaudited) THREE MONTHS ENDED MARCH 31, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 18,966 $ 14,218 $ 5,522 $(19,740) $ 18,966 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization (89) 6,839 49 - 6,799 Equity earnings in subsidiary (19,740) - (6,836) 19,740 (6,836) Distributions from subsidiary - - 8,829 - 8,829 Gain on sale of PAA units - - (1,958) - (1,958) Deferred income tax 303 10,731 1,173 - 12,207 Cumulative effect of accounting change - 2,129 (143) - 1,986 Change in derivative fair value 1,227 - - - 1,227 Other noncash items 1,081 - - - 1,081 Change in assets and liabilities resulting from operating activities: Current and other assets 4,109 23,217 (22,893) - 4,433 Current and other liabilities (5,963) (20,014) 9,564 - (16,413) Advances from (payments to) affiliates (8,431) (7,175) 15,606 - - --------- --------- --------- -------- -------- Net cash provided by (used in) operating activities (8,537) 29,945 8,913 - 30,321 --------- --------- --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Oil and gas properties and equipment (352) (29,272) - - (29,624) Other properties and equipment (184) (88) - - (272) --------- --------- --------- -------- -------- Net cash used in investing activities (536) (29,360) - - (29,896) --------- --------- --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in long-term debt 16,608 - - - 16,608 Exercise of stock options 1,806 - - - 1,806 Treasury stock purchases (6,956) - - - (6,956) Preferred stock dividends paid (2,318) - - - (2,318) Other (68) - - - (68) --------- --------- --------- -------- -------- Net cash provided by financing activities 9,072 - - - 9,072 --------- --------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents (1) 585 8,913 - 9,497 Decrease in cash due to deconsolidation of PAA - - (3,425) - (3,425) Cash and cash equivalents, beginning of period 4 597 4,479 - 5,080 --------- --------- --------- -------- -------- Cash and cash equivalents, end of period $ 3 $ 1,182 $ 9,967 $ - $ 11,152 ========= ========= ========= ======== ========
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General In June 2001 we reduced our interest in Plains All American Pipeline, L.P. ("PAA") and as a result we no longer have the ability to exercise control over the operations of PAA. Accordingly, effective January 1, 2001, our minority interest investment in PAA is accounted for using the equity method of accounting. Under the equity method, we no longer consolidate the assets, liabilities and operating activities of PAA, but instead record our proportionate share of PAA's net assets and results of operations. The consolidated statements of income and cash flows for the three months ended March 31, 2001 have been restated to reflect our investment in PAA on the equity method of accounting. The following updates information as to our financial condition provided in our Form 10-K for the year ended December 31, 2001, and analyses the changes in the results of operations between the three month period ended March 31, 2002 and the comparable period in 2001. There have been no significant changes in our business or properties during the first three months of 2002. Results of Operations We reported net income of $6.6 million, or $0.26 per share on a fully diluted basis for the three months ended March 31, 2002, compared to $19.0 million, or $0.66 per fully diluted share for the same period in 2001. The decrease in earnings resulted primarily from lower realized prices for crude oil and natural gas, higher production costs and an approximate 46% decrease in our aggregate ownership interest in PAA. The following tables reflect our oil and gas production and sales volumes, the components of our oil and gas revenues and set forth our revenues and costs and expenses on a BOE basis: Three Months Ended March 31, ------------------------- 2002 2001 ----------- ----------- Production Volumes Oil and liquids (MBbls) 2,280 2,175 Natural Gas (MMcf) 877 745 MBOE 2,426 2,299 Sales Volumes Oil and liquids (MBbls) 2,249 2,307 Natural Gas (MMcf) 877 745 MBOE 2,395 2,431 (tables continued on following page) 17
Three Months Ended March 31, -------------------------- 2002 2001 --------- --------- Daily Average Sales Volumes Total Oil and liquids (Bbls) 24,986 25,633 Natural Gas (Mcf) 9,743 8,276 BOE 26,610 27,012 Oil and Liquids (Bbls) Onshore California 16,215 14,716 Offshore California 3,731 3,819 Illinois 2,640 2,795 Florida 2,400 4,303 --------- ------- 24,986 25,633 ========= ======= Natural Gas (Mcf) Onshore California 9,743 8,276 ========= ======= Unit Economics (in dollars) Average Liquids Sales Price ($/Bbl) Average NYMEX $ 21.63 $ 28.67 Hedging gain (loss) 1.48 (1.78) Differential (4.52) (6.50) --------- ------- Net realized $ 18.59 $ 20.39 ========= ======= Average Gas Sales Price ($/Mcf) $ 2.27 15.00 Average Sales Price per BOE/(1)/ $ 18.28 23.95 Average Production Costs per BOE (7.82) (6.65) --------- ------- Gross Margin per BOE 10.46 17.30 G&A per BOE/(2)/ (1.48) (1.23) --------- ------- Gross Profit per BOE $ 8.98 $ 16.07 ========= ======= DD&A per BOE (oil and gas properties) $ 3.10 $ 2.64
/(1)/ BOE - barrel of oil equivalent /(2)/ Excludes costs associated with corporate reorganization and noncash compensation expense. Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001 Total revenues for 2002 were 25% lower than in 2001, primarily reflecting lower realized prices for crude oil and natural gas. Realized oil prices decreased by 9%, from $20.39 per barrel in 2001 to $18.59 per barrel in 2002. The average NYMEX crude oil price fell 25%, from $28.67 per barrel in 2001 to $21.63 per barrel in 2002. Partially offsetting the NYMEX decrease was a $3.26 per barrel increase in our hedging margin and a $1.98 per barrel improvement in location and quality differentials. Average natural gas sales prices decreased $12.73 per Mcf, from $15.00 per Mcf in 2001 to $2.27 per Mcf in 2002. The high 2001 prices were due to the well-publicized high natural gas prices in California during the first half of 2001. Oil sales volumes averaged 24,986 barrels per day for the three months ended March 31, 2002, a 3% decrease from the 25,633 barrels per day in the same period in 2001. Onshore California sales volumes increased by approximately 1,500 barrels per day, a 10% increase, reflecting the continuing development of our producing properties. Florida oil sales volumes were down 1,900 barrels per day, a 44% decrease from the prior period. The location of our Florida properties and the timing of the barges that transport the crude oil to market cause reported 18 sales volumes to often differ substantially from production volumes. On an as- produced basis, Florida volumes for 2002 declined 3% from their 2001 levels. Our total crude oil production was 25,334 barrels per day for the three months ended March 31, 2002, a 5% increase from the 24,163 barrels per day for the year earlier period. Natural gas sales volumes increased by 18%, again reflecting the continuing development of our California properties. Production costs were $18.7 million for the three months ended March 31, 2002, a 16% increase from the $16.2 million for the same period in 2001. On a barrel equivalent basis, costs increased from $6.65 per BOE in 2001 to $7.82 per BOE in 2002. Production costs for 2001 were reduced by approximately $0.90 per BOE as a result of nonrecurring credits (primarily the sale of certain California emission credits). Excluding these credits, production costs increased $0.27 per BOE primarily due to increased electric costs. First quarter general and administrative expense ("G&A") was $4.1 million in 2002 and 2001. G&A for 2002 includes $0.3 million of one-time noncash charges related to certain employees who resigned during the period. G&A for 2001 includes $1.1 million of costs related to our June 2001 strategic restructuring; in addition 2001 G&A benefited from $0.2 million billed to PAA for executive management time. Excluding such items, 2002 G&A was approximately $0.6 million higher than 2001, primarily reflecting increased personnel costs related to expanded staffing. Depletion, depreciation and amortization ("DD&A") increased by $1.1 million, from $6.8 million for the three months ended March 31, 2001 to $7.9 million for the same period in 2002. An increase in the oil and gas DD&A rate from $2.64 per BOE in 2001 to $3.10 per BOE in 2002 was the primary reason for the increase. Our equity in the earnings of PAA decreased 36%, from $6.8 million for the three months ended March 31, 2001, to $4.4 million for the same period in 2002. Our aggregate ownership interest in PAA was 29% for the first quarter of 2002, as compared to 54% for the same period in 2001. Our decrease in ownership interest was partially offset by a 10% increase in PAA's net income, from $13.0 million for the three months ended March 31, 2001 to $14.3 million for the same period in 2002. The 2001 gain on PAA units resulted from the transfer of PAA units upon the vesting of unit grants during the first quarter of 2001. Interest expense decreased from $7.0 million in 2001 to $6.4 million in 2002, reflecting lower bank debt. Our effective income tax rate increased from 37.7% for the three months ended March 31, 2001 to 40.6% for the same period in 2002. The rate increase is primarily the result of increased state income taxes and Canadian income taxes on our equity in the earnings of PAA. Current income tax expense for the first quarter includes a benefit of approximately $2.9 million representing taxes paid in 2001 that will be refunded to us under terms of recent legislation. Such legislation allows us to offset 100% of alternative minimum taxable income with net operating loss carryforwards ("NOL's") for 2001 and 2002. Previously, we could only offset 90% of AMT income with NOL's. The current income tax expense benefit is offset by a corresponding charge to deferred income tax expense. This change in the regulations did not change our overall effective tax rate and had no effect on net income. Preferred dividends decreased 78%, from $1.6 million for the three months ended March 31, 2001 to $0.4 million in 2002, resulting from the 2001 elimination and conversion of Series F and Series H Preferred Stock. Liquidity and Capital Resources General Cash generated from our upstream operations, PAA distributions and our revolving credit facility are our primary sources of liquidity. We believe that we have sufficient liquid assets, cash from operations and borrowing capacity under our credit facility to meet our short term normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures. We also believe that we have sufficient liquid assets, cash from operations and borrowing capacity under our credit facility to meet our long term normal recurring operating needs, contingencies and anticipated capital expenditures. We expect capital expenditures for the remainder of 2002 to be in the range of $49-51 million, which will be funded by cash generated by operations and our revolving credit facility. In the first quarter of 2002 we received a cash distribution from PAA of $7.0 million, including $0.4 million for our 44% interest in the general partner. Based on the $0.525 per unit distribution recently declared by PAA, the distribution we will receive in the second quarter of 2002 will be approximately $7.2 million, including $0.5 million for our 44% interest in the general partner. 19 Cash provided by operating activities for the first three months of 2002 totaled $3.6 million. Investing activities consisted of capital expenditures of $24.5 million. Cash provided by financing activities included $19.5 million in net borrowings under our revolving credit facility, $1.6 million in proceeds from the exercise of stock options, and ($0.4) million in preferred stock dividends. Cash decreased by $0.2 million during the period. Debt At March 31, 2002, $31.0 million was outstanding under our $225.0 million senior secured revolving credit facility. At such date we were in compliance with the covenants contained in the facility and could have borrowed the full $225.0 million available under the facility. We also have $267.5 million principal amount of 10.25% Senior Subordinated Notes due 2006 outstanding. Investment in PAA As of March 31, 2002, our aggregate ownership interest in PAA was approximately 29%, which was comprised of (1) a 44% interest in the general partner of PAA, (2) 45%, or approximately 4.5 million, of the subordinated units and (3) 24%, or approximately 7.9 million, of the common units, including approximately 1.3 million class B common units. Based on PAA's current annual distribution rate of $2.10 per unit, we would receive an annual distribution from PAA of approximately $28.7 million. Commitments and Contingencies In exchange for the significant value we received for the PAA subordinated units (which are subordinated in right to distributions from PAA and are not publicly traded) we sold in June 2001 relative to the then current market price of the publicly traded common units, we entered into a value assurance agreement with each of the purchasers of the subordinated units. In the event PAA's annual distribution is less than $1.85 per unit, the value assurance agreements require us to pay to the holders an amount per fiscal year, payable on a quarterly basis, equal to the difference between $1.85 per unit and the actual amount distributed during that period. The value assurance agreements will expire upon the earlier of the conversion of the subordinated units to common units, or June 8, 2006. In connection with the June 2001 sale of a portion of our interest in PAA we entered into a separation agreement with PAA whereby, among other things, (1) we agreed to indemnify PAA, its general partner, and its subsidiaries against (a) any claims related to the upstream business, whenever arising, and (b) any claims related to federal or state securities laws or the regulations of any self-regulatory authority, or other similar claims, resulting from alleged acts or omissions by us, our subsidiaries, PAA, or PAA's subsidiaries occurring on or before June 8, 2001, and (2) PAA agreed to indemnify us and our subsidiaries against any claims related to the midstream business, whenever arising. At March 31, 2002, the aggregate amounts of contractually obligated payment commitments for the next five years are as follows (in thousands):
2002 2003 2004 2005 2006 Thereafter ---- ----- ------ ------ ------- ---------- Long-term debt 511 4,386 16,011 11,625 267,450 - Operating leases 452 593 595 573 143 - --- ----- ------ ------ ------- ---------- 963 4,979 16,606 12,198 267,593 - === ===== ====== ====== ======= ==========
20 The long-term debt amounts consist principally of amounts due under our revolving credit facility and 10.25% senior subordinated notes. Historically, we have renewed and/or extended our revolving credit facility prior to commencing scheduled payments. There can be no assurance, however, that we will be able to do so in the future. We believe that we will refinance the 10.25% senior subordinated notes before they mature, however, there can be no assurance that we will be able to do so. Although we maintain an inspection program designed to prevent and, as applicable, to detect and address releases of crude oil into the environment from our upstream operations, we may experience such releases in the future, or discover releases that were previously unidentified. Damages and liabilities incurred due to any future environmental releases from our assets may substantially affect our business. We, in the ordinary course of business, are a claimant and/or defendant in various legal proceedings. Management does not believe that the outcome of these legal proceedings, individually and in the aggregate, will have a materially adverse effect on our financial condition, results of operations or cash flows. Critical Accounting Policies and Factors That May Affect Future Results Based on the accounting policies we have in place certain factors may affect our future financial results. The most significant of these factors are: ... Commodity pricing and risk management activities; ... Write-downs under full cost ceiling test rules; ... Oil and gas reserves; ... Operating risks and insurance coverage; and ... Environmental matters. Commodity pricing and our risk management activities are discussed in "Quantitative and Qualitative Disclosures About Market Risk". The other factors are fully discussed in our Form 10-K for the year ended December 31, 2001. Quantitative and Qualitative Disclosures About Market Risk Our activities are affected by changes in crude oil prices, which historically have been volatile. Although we have routinely hedged a substantial portion of our crude oil production and intend to continue this practice, substantial future crude oil price declines would adversely affect our overall results, and therefore our liquidity. Furthermore, low crude oil prices could affect our ability to raise capital on favorable terms. Decreases in the prices of crude oil and natural gas have had, and could have in the future, an adverse effect on the carrying value of our proved reserves and our revenues, profitability and cash flow. To manage our exposure, we monitor our expectations of future commodity prices and interest rates when making decisions with respect to risk management. We do not enter into derivative transactions for speculative trading purposes that would expose us to price risk. Substantially all of our derivative contracts are exchanged or traded with major financial institutions and the risk of credit loss is considered remote. Derivative instruments are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138 ("SFAS 133"). Under SFAS 133, all derivative instruments are recorded on the balance sheet at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings. If the derivative qualifies for hedge accounting, the unrealized gain or loss on the derivative is deferred in accumulated Other Comprehensive Income ("OCI"), a component of Stockholders' Equity. At March 31, 2002 all open positions qualified for hedge accounting. Gains and losses on crude oil hedging instruments related to OCI and adjustments to carrying amounts on hedged volumes are included in oil and gas revenues in the period that the related volumes are delivered. Gains and losses on crude oil hedging instruments representing hedge ineffectiveness, which is measured on a quarterly basis, are included in oil and gas revenues in the period in which they occur. We utilize various derivative instruments to hedge our exposure to price fluctuations on crude oil sales. The derivative instruments consist primarily of cash-settled crude oil option and swap contracts entered into with 21 financial institutions. We do not currently have any natural gas hedges. We also utilize interest rate swaps to manage the interest rate exposure on our long- term debt. During the first three months of 2002 gains of $3.6 million were relieved from OCI and the fair value of open positions decreased $20.3 million. At March 31, 2002, the unrealized loss on our swaps contracts included in OCI was $7.2 million. The related assets and liabilities were included in current assets and liabilities [($0.3) and $10.1 million, respectively), other assets and liabilities ($0.1 million and $1.8 million, respectively), and deferred income taxes [($4.9) million]. Additionally, OCI includes our $2.8 million net of tax equity in the unrealized OCI losses of PAA. As of March 31, 2002, $6.2 million of deferred net losses on derivative instruments recorded in OCI are expected to be reclassified to earnings during the next twelve-month period. Commodity Price Risk. At May 1, 2002 we had the following open crude oil hedge positions (barrels per day):
Barrels Per Day ------------------------------------ 2002 ------------------------------------ 2nd Qtr 3rd Qtr 4th Qtr 2003 ------- ------- ------- ---- Puts Average price $20.00/bbl 2,000 2,000 2,000 - Calls Average price $35.17/bbl 9,000 9,000 9,000 - Swaps Average price $24.14/bbl 19,000 - - - Average price $24.10/bbl - 19,000 - Average price $24.09/bbl - - 19,000 - Average price $23.21/bbl - - - 13,750
These positions provide for us to receive, for the nine months ended December 31, 2002 an average minimum NYMEX price of approximately $23.72 per barrel on 21,000 barrels per day with full upside participation above $20.00 per barrel on 10% of those hedged barrels, and upside participation above $35.17 per barrel on 52% of those hedged barrels. For example, if the NYMEX index averages $20.00 during the remainder of 2002, we will receive $23.72 per barrel; if the NYMEX index averages $25.00 per barrel, we will receive $24.19 per barrel; if the NYMEX index averages $30.00 per barrel, we will receive $24.67 per barrel; and if the NYMEX index average were to fall to $15.00 per barrel we would receive $23.72 per barrel, all on the hedged barrels. For 2003, we have entered into various arrangements that provide for us to receive an average fixed NYMEX price of $23.21 per barrel on 13,750 barrels per day regardless of the NYMEX index average. Location and quality differentials attributable to our properties and the cost of the hedges are not included in the foregoing prices. Because of the quality and location of our crude oil production, these adjustments will reduce our net price per barrel. The agreements provide for monthly cash settlement based on the differential between the agreement price and the actual NYMEX price. Gains or losses are recognized in the month of related production and are included in crude oil and natural gas sales revenues. Such contracts resulted in an increase in revenues of $3.3 million in the first quarter of 2002 and a reduction in revenues of $4.1 million in the first quarter of 2001. The fair value of outstanding derivative commodity instruments at March 31, 2002 was ($11.1) million, and a 10% price decrease would result in a $23.5 million increase in such fair value. The contract counterparties for our current derivative commodity contracts are all major financial institutions with Standard & Poor's ratings of A or better. Three of the financial institutions are participating lenders in our revolving credit facility, with one such counterparty holding contracts that represent approximately 34% of the fair value of all open positions at March 31, 2002. Our management intends to continue to maintain hedging arrangements for a significant portion of our production. These contracts may expose us to the risk of financial loss in certain circumstances. Our hedging arrangements provide us protection on the hedged volumes if crude oil prices decline below the prices at which these hedges are set, but ceiling prices in our hedges may cause us to receive less revenue on the hedged volumes than we would receive in the absence of hedges. 22 Interest Rate Risk. Our debt instruments are sensitive to market fluctuations in interest rates. Interest rate swaps are used to hedge underlying debt obligations. These instruments hedge specific debt issuances and qualify for hedge accounting. The interest rate differential is reflected as an adjustment to interest expense over the life of the instruments. At March 31, 2002, we had an interest rate swap for an aggregate notional principal amount of $7.5 million, for which we would receive approximately $0.1 million if such arrangement were terminated as of such date. The swap is based on LIBOR margins and fixes the interest rate on $7.5 million of borrowing under our revolving credit facility at 5.3% thru October 2004. Forward-Looking Statements and Associated Risks All statements, other than statements of historical fact, included in this report are forward-looking statements, including, but not limited to, statements identified by the words "anticipate," "believe," "estimate," "expect," "plan," "intend" and "forecast" and similar expressions and statements regarding our business strategy, plans and objectives of our management for future operations. These statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions. These statements, however, are subject to certain risks, uncertainties and assumptions, including, but not limited to: ... uncertainties inherent in the exploration for and development and production of oil and gas and in estimating reserves; ... unexpected future capital expenditures (including the amount and nature thereof); ... impact of crude oil price fluctuations; ... the effects of competition; 1 the success of our risk management activities; ... the availability (or lack thereof) of acquisition or combination opportunities; ... the impact of current and future laws and governmental regulations; ... environmental liabilities that are not covered by an indemnity or insurance, and ... general economic, market or business conditions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those in the forward-looking statements. Except as required by applicable securities laws, we do not intend to update these forward-looking statements and information. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings. We, in the ordinary course of business, are a claimant and/or defendant in various legal proceedings. Management does not believe that the outcome of these legal proceedings, individually and in the aggregate, will have a materially adverse effect on our financial condition, results of operations or cash flows. Items 2, 3, 4 & 5 are not applicable and have been omitted Item 6 - Exhibits and Reports on Form 8-K A. Exhibits - None B. Reports on Form 8-K A Current Report on Form 8-K was filed on May 8 2002 with respect to current estimates of certain results for the second quarter of 2002. 24 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 and thereunto duly authorized. PLAINS RESOURCES INC. Date: May 9, 2002 By: /s/ Cynthia A. Feeback ------------------------------------------------ Cynthia A. Feeback Senior Vice President - Accounting and Treasurer (Principal Accounting Officer) 25 -----END PRIVACY-ENHANCED MESSAGE-----