-----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, Hw6zhIUFR792IPAQlbHedMkgSpMYLM5e6+t/ATQujYCHyUNnB7zdKuPo/d5Zk39Q GnWlBPdakcYMAkH9K/QFHw== 0000950129-03-004248.txt : 20030814 0000950129-03-004248.hdr.sgml : 20030814 20030814150131 ACCESSION NUMBER: 0000950129-03-004248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03846768 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 h08394e10vq.txt PLAINS RESOURCES INC. - DATED 6/30/2003 =============================================================================== 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 JUNE 30, 2003 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes [X] No [ ] 23.6 million shares of common stock, $0.10 par value, issued and outstanding at July 31, 2003. =============================================================================== PLAINS RESOURCES INC. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements: Consolidated Balance Sheets (Unaudited) June 30, 2003 and December 31, 2002.............................................................................. 3 Consolidated Statements of Income (Unaudited) For the three months and six months ended June 30, 2003 and 2002................................................. 4 Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30, 2003 and 2002.................................................................. 5 Consolidated Statements of Comprehensive Income (Unaudited) For the six months ended June 30, 2003 and 2002.................................................................. 6 Consolidated Statements of Changes in Stockholders' Equity (Unaudited) For the six months ended June 30, 2003........................................................................... 7 Notes to Consolidated Financial Statements (Unaudited)................................................................ 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 17 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 29 ITEM 4. Controls and Procedures....................................................................................... 31 PART II. OTHER INFORMATION............................................................................................ 32
2 PLAINS RESOURCES INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2003 2002 --------------- --------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,778 $ 8,807 Accounts receivable - Plains All American Pipeline, L.P. 2,938 - Other accounts receivable 41 1,589 Inventory 1,788 2,305 Other current assets 1,645 1,515 --------------- -------------- 8,190 14,216 --------------- -------------- PROPERTY AND EQUIPMENT, AT COST Oil and gas properties - full cost method Subject to amortization 352,062 349,517 Other property and equipment 27 27 --------------- -------------- 352,089 349,544 Less allowance for depreciation, depletion and amortization (298,403) (299,214) --------------- -------------- 53,686 50,330 --------------- -------------- INVESTMENT IN PLAINS ALL AMERICAN PIPELINE, L.P. 82,202 70,042 --------------- -------------- OTHER ASSETS Deferred income taxes 8,460 16,957 Other 10,294 9,867 --------------- -------------- 18,754 26,824 --------------- -------------- $ 162,832 $ 161,412 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,327 $ 1,361 Taxes payable 2,881 1,878 Current maturities of long-term debt 20,000 18,000 Other current liabilities 5,161 4,948 --------------- -------------- 29,369 26,187 --------------- -------------- LONG-TERM BANK DEBT 40,000 27,000 --------------- -------------- ASSET RETIREMENT OBLIGATION 1,957 - --------------- -------------- OTHER LONG-TERM LIABILITIES 2,937 2,716 --------------- -------------- STOCKHOLDERS' EQUITY Series D cumulative convertible preferred stock - 23,300 Common stock 2,823 2,806 Additional paid-in capital 275,781 273,162 Retained earnings (deficit) (96,066) (103,882) Accumulated other comprehensive income 2,023 (2,862) Treasury stock, at cost (95,992) (87,015) --------------- -------------- 88,569 105,509 --------------- -------------- $ 162,832 $ 161,412 =============== ==============
See notes to consolidated financial statements. 3 PLAINS RESOURCES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------ ---------------------------- REVENUES 2003 2002 2003 2002 -------------- ------------ ------------- ------------ Oil sales to Plains All American Pipeline, L.P. $ 4,347 $ 4,787 $ 11,624 $ 8,966 Hedging - (128) (307) (251) -------------- ------------ ------------- 4,347 4,659 11,317 8,715 -------------- ------------ ------------- ------------ COSTS AND EXPENSES Production expenses 1,520 1,304 3,378 2,697 Production and ad valorem taxes 233 125 637 228 Oil transportation expenses 910 891 2,028 1,830 General and administrative 1,595 1,708 3,407 3,375 Depreciation, depletion and amortization 1,028 1,168 2,433 2,327 Accretion of asset retirement obligation 57 - 113 - Other operating expenses 137 - 137 - -------------- ------------ ------------- ------------ 5,480 5,196 12,133 10,457 -------------- ------------ ------------- ------------ OTHER INCOME (EXPENSE) Equity in earnings of Plains All American Pipeline, L.P. 5,397 5,256 11,722 9,606 Gain on Plains All American Pipeline, L.P. unit offering - - 6,108 - Gain (loss) on derivatives Change in fair value (1,299) - (633) - Cash settlements (382) - (1,114) - Interest expense (508) (1,790) (1,009) (3,477) Interest and other income 31 8 106 27 -------------- ------------ ------------- ------------ 3,239 3,474 15,180 6,156 -------------- ------------ ------------- ------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,106 2,937 14,364 4,414 Income tax benefit (expense) Current (210) (363) (2,601) 2,405 Deferred (800) (1,118) (4,276) (4,631) -------------- ------------ ------------- ------------ INCOME FROM CONTINUING OPERATIONS 1,096 1,456 7,487 2,188 Income from discontinued operations, net of tax - 8,218 - 14,082 -------------- ------------ ------------- ------------ INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,096 9,674 7,487 16,270 Cumulative effect of accounting change, net of tax - - 933 - -------------- ------------ ------------- ------------ NET INCOME 1,096 9,674 8,420 16,270 Preferred dividends (253) (350) (603) (700) -------------- ------------ ------------- ------------ INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 843 $ 9,324 $ 7,817 $ 15,570 ============== ============ ============= ============ EARNINGS PER SHARE (IN DOLLARS) Basic Income from continuing operations $ 0.04 $ 0.05 $ 0.29 $ 0.06 Discontinued operations - 0.34 - 0.60 Change in accounting policy - - 0.04 - -------------- ------------ ------------- ------------ $ 0.04 $ 0.39 $ 0.33 $ 0.66 ============== ============ ============= ============ Diluted Income from continuing operations $ 0.04 $ 0.04 $ 0.28 $ 0.06 Discontinued operations - 0.33 - 0.58 Change in accounting policy - - 0.04 - -------------- ------------ ------------- ------------ $ 0.04 $ 0.37 $ 0.32 $ 0.64 ============== ============ ============= ============ Weighted average shares outstanding Basic 23,475 23,883 23,727 23,759 Diluted 25,151 24,585 24,172 24,373
See notes to consolidated financial statements. 4 PLAINS RESOURCES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------------------- 2003 2002 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 8,420 $ 16,270 Items not affecting cash flows from continuing operating activities Income from discontinued operations, net of tax - (14,082) Depreciation, depletion and amortization 2,433 2,327 Accretion of asset retirement obligation 113 - Equity in earnings of Plains All American Pipeline, L.P. (11,722) (9,606) Gain on Plains All American Pipeline, L.P. unit offering (6,108) - Distributions received from Plains All American Pipeline, L.P. 15,298 14,140 Deferred income taxes 4,276 4,631 Cumulative effect of adoption of SFAS 143, net of tax (933) - Change in derivative fair value 633 - Noncash compensation expense 1,307 - Other noncash items 147 721 Change in assets and liabilities from operating activities (1,602) 2,768 ----------- ------------ Net cash provided by (used in) continuing activities 12,262 17,169 Net cash provided by (used in) discontinued activities - 19,776 ----------- ------------ Net cash provided by (used in) operating activities 12,262 36,945 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to oil and gas properties (1,494) (4,720) Additions to other property and equipment - (31) Investment in Plains All American Pipeline, L.P. (589) - ----------- ------------ Net cash provided by (used in) continuing activities (2,083) (4,751) Net cash provided by (used in) discontinued activities - (42,358) ----------- ------------ Net cash provided by (used in) investing activities (2,083) (47,109) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net change in credit facility 15,000 6,000 Proceeds from exercise of stock options 1,382 4,411 Retirement of Series D preferred stock (23,300) - Treasury stock purchases (8,977) - Costs incurred in connection with financing arrangements (710) - Preferred stock dividends (603) (350) ----------- ------------ Net cash provided by (used in) continuing activities (17,208) 10,061 Net cash provided by (used in) discontinued activities - - ----------- ------------ Net cash provided by (used in) financing activities (17,208) 10,061 ----------- ------------ Net increase (decrease) in cash and cash equivalents (7,029) (103) Cash and cash equivalents, beginning of period 8,807 1,179 ----------- ------------ Cash and cash equivalents, end of period $ 1,778 $ 1,076 =========== ============
See notes to consolidated financial statements 5 PLAINS RESOURCES INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ------------------------ 2003 2002 2003 2002 ------------ ------------ ----------- ----------- NET INCOME $ 1,096 $ 9,674 $ 8,420 $ 16,270 ------------ ------------ ----------- ----------- OTHER COMPREHENSIVE INCOME (LOSS): From continuing operations: Commodity hedging contracts, net of tax: Change in fair value - 145 (956) (597) Reclassification adjustment for settled contracts 317 - 785 (10) Interest rate swap, net of tax - (105) - (75) Equity in other comprehensive income changes of Plains All American Pipeline, L.P. , net of tax 2,082 2,451 5,056 2,004 ------------ ------------ ----------- ----------- 2,399 2,491 4,885 1,322 From discontinued operations - (1,861) - (25,039) ------------ ------------ ----------- ----------- 2,399 630 4,885 (23,717) ------------ ------------ ----------- ----------- COMPREHENSIVE INCOME $ 3,495 $ $ 10,304 $ 13,305 $ (7,447) ============ ============ =========== ===========
See notes to consolidated financial statements. 6 PLAINS RESOURCES INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2003 ---------------------------------------------------------- SHARES AMOUNT -------------------------- ------------------------------ SERIES D CUMULATIVE CONVERTIBLE PREFERRED STOCK Balance, beginning of period 46,600 $ 23,300 Shares retired (46,600) (23,300) -------------------------- ------------------------------ Balance, end of period - - ========================== ------------------------------ COMMON STOCK Balance, beginning of period 28,048 2,806 Common stock issued upon exercise of stock options and other 173 17 -------------------------- ------------------------------ Balance, end of period 28,221 2,823 ========================== ------------------------------ ADDITIONAL PAID-IN CAPITAL Balance, beginning of period 273,162 Common stock issued upon exercise of stock options and other 2,619 ------------------------------ Balance, end of period 275,781 ------------------------------ RETAINED EARNINGS (DEFICIT) Balance, beginning of period (103,882) Net income 8,419 Preferred stock dividends (603) ------------------------------ Balance, end of period (96,066) ------------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of period (2,862) Other comprehensive income 4,885 ------------------------------ Balance, end of period 2,023 ------------------------------ TREASURY STOCK Balance, beginning of period 3,854 (87,015) Purchase of treasury shares 820 (8,977) -------------------------- ------------------------------ Balance, end of period 4,674 (95,992) ========================== ------------------------------ TOTAL $ 88,569 ==============================
See notes to consolidated financial statements. 7 PLAINS RESOURCES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The consolidated financial statements of Plains Resources Inc. ("Plains", "our", or "we") include the accounts of all wholly owned subsidiaries. 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. Certain reclassifications have been made to prior year statements to conform to the current year presentation. We are an independent energy company. We are principally engaged in the "midstream" activities of marketing, gathering, transporting, terminalling, and storage of oil through our equity ownership in Plains All American Pipeline, L.P. ("PAA"), a publicly traded master limited partnership that is actively engaged in the midstream energy markets. All of PAA's midstream activities are conducted in the United States and Canada. We also participate in the "upstream" activities of acquiring, exploiting, developing, exploring for and producing oil through our wholly-owned subsidiary, Calumet Florida L.L.C., which has producing properties in the Sunniland Trend in south Florida. These consolidated financial statements and related notes present our consolidated financial position as of June 30, 2003 and December 31, 2002, the results of our operations for the three months and six months ended June 30, 2003 and 2002, our cash flows, comprehensive income and the changes in our stockholders' equity for the six months ended June 30, 2003. The results for the six months ended June 30, 2003, are not necessarily indicative of the final results to be expected for the full year. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. On December 18, 2002 we distributed 100 percent of the common shares of Plains Exploration & Production Company ("PXP"), our wholly-owned subsidiary that owned oil and gas properties offshore and onshore California and in Illinois, to our stockholders (the "spin-off"). As a result of the spin-off, the historical results of the operations of PXP are reflected in our financial statements as "discontinued operations". In connection with the spin-off we entered into certain agreements with PXP, see Note 8. ACCOUNTING POLICIES Asset Retirement Obligations. Effective January 1, 2003 we adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires entities to record the fair value of a liability for a legal obligation to retire an asset in the period in which the liability is incurred. A legal obligation is a liability that a party is required to settle as a result of an existing or enacted law, statute, ordinance or contract. When the liability is initially recorded, the entity should capitalize the retirement cost of the related long-lived asset. Each period the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized at the time of settlement. In prior periods we included estimated future costs of abandonment and dismantlement in our full cost amortization base and these costs were amortized as a component of our depletion expense. At January 1, 2003 the present value of our future Asset Retirement Obligation for oil and gas properties and equipment was $2.6 million. The cumulative effect of our adoption of SFAS No. 143 and the change in accounting principle resulted in an increase in income in 2003 of $0.9 million (reflecting a $2.8 million decrease in accumulated DD&A, partially offset by $1.3 million in accretion expense, and $0.6 million deferred income tax expense). We recorded a liability of $2.6 million and an asset of $1.2 million in connection with the adoption of SFAS 143. Adopting SFAS No. 143 does not effect our cash flows. 8 The following table illustrates the changes in our asset retirement obligation during the period (in thousands):
SIX MONTHS ENDED JUNE 30, ---------------------------------- 2003 2002 ------------ ------------ Pro forma Asset retirement obligation - beginning of period $ 2,556 $ 2,403 Accretion expense 113 107 Asset retirement costs incurred (174) - ------------ ------------ Asset retirement obligation - end of period $ 2,495(1) $ 2,510 ============ ============
(1) $538 included in other current liabilities On a pro forma basis the effect of the adoption of SFAS 143 on our income from continuing operations, our net income and our earnings per share for the three months and six months ended June 30, 2002 is not material. Inventory. Our oil inventory is stated at the lower of cost to produce or market value. Materials and supplies inventory is carried at the lower of cost or market with cost determined on an average cost method. Inventory consists of the following (in thousands): JUNE 30, DECEMBER 31, 2003 2002 --------- --------- Oil $ 1,202 $ 1,482 Materials and supplies 586 823 --------- --------- $ 1,788 2,305 ========= ========= Other Assets. Other assets consists of the following (in thousands): JUNE 30, DECEMBER 31, 2003 2002 --------- --------- Restricted cash $ 5,027 $ 5,000 Debt issue costs, net 1,115 612 Receivable from PXP 3,202 3,202 Other 950 1,053 --------- --------- $ 10,294 $ 9,867 ========= ========= Stock-Based Employee Compensation. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") established financial accounting and reporting standards for stock-based employee compensation. SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. SFAS 123 also allows an entity to continue to measure compensation cost for those instruments using the intrinsic value-based method of accounting prescribed by Accounting Principles Bulletin No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). We have elected to follow APB 25 and related interpretations in accounting for our employee stock options. Under APB 25, if the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the financial statements. The compensation expense recorded under APB 25 for our restricted stock awards is the same as that determined under SFAS 123. 9 Set forth below is a summary of our net income and earnings per share as reported and pro forma as if the fair value based method of accounting defined in SFAS 123 had been applied (in thousands, except per share data).
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2003 2002 2003 2002 --------- ----------- ----------- ----------- Income available to common stockholders, as reported $ 843 $ 9,324 $ 7,817 $ 15,570 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 346 114 697 313 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (662) (270) (1,477) (691) --------- ----------- ----------- ----------- Pro forma net income $ 527 $ 9,168 $ 7,037 $ 15,192 ========= =========== =========== =========== Earnings per share: Basic-as reported $ 0.04 $ 0.39 $ 0.33 $ 0.66 ========= =========== =========== =========== Basic-pro forma $ 0.02 $ 0.38 $ 0.30 $ 0.64 ========= =========== =========== =========== Diluted-as reported $ 0.04 $ 0.37 $ 0.32 $ 0.64 ========= =========== =========== =========== Diluted-pro forma $ 0.02 $ 0.37 $ 0.29 $ 0.62 ========= =========== =========== ===========
The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for grants in 2002: risk-free interest rate of 3.0%; a volatility factor of the expected market price of our common stock of 0.33; no expected dividends; and weighted average expected option life of 4.4 years. No options were granted during the six months ended June 30, 2003. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Recent Accounting Pronouncements. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149") on April 30, 2003. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 will have no effect on either our financial position or results of operations. In May 2003, the FASB issued Statement No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 will not have an impact on our financial statements. 10 NOTE 2 -- INVESTMENT IN PLAINS ALL AMERICAN PIPELINE, L.P. In March 2003, PAA issued 2.6 million common units in a public equity offering. We recognized a gain of $6.1 million resulting from the increase in the book value of our equity in PAA to reflect our proportionate share of the increase in the underlying net assets of PAA due to the sale of the units. As a result of the offering, we made a general partner capital contribution of approximately $0.6 million. At June 30, 2003, our aggregate 24% ownership in PAA consisted of: (i) a 44% ownership interest in the 2% general partner interest and incentive distribution rights, (ii) 45%, or approximately 4.5 million, of the subordinated units and (iii) 19%, or approximately 7.9 million, of the common units (including approximately 1.3 million Class B common units). PAA FINANCIAL STATEMENT INFORMATION The following table presents summarized financial statement information of PAA (in thousands of dollars):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------- ---------------------------------- 2003 2002 2003 2002 --------------------------------- ---------------------------------- Revenues $ 2,709,189 $ 1,985,347 $ 5,991,097 $ 3,530,670 Cost of sales and operations 2,653,884 1,943,640 5,878,240 3,450,575 Gross margin, excluding depreciation 55,305 41,707 112,857 80,095 Operating income 31,839 23,411 65,448 44,074 Net income 23,398 16,951 47,749 31,232
JUNE 30, DECEMBER 31, 2003 2002 --------------- -------------- Current assets $ 497,120 $ 602,935 Property and equipment, net 1,070,339 952,753 Other assets 142,962 110,887 Total assets 1,710,421 1,666,575 Current liabilities 560,924 637,249 Long-term debt 526,495 509,736 Other long-term liabilities 22,207 7,980 Partners' capital 600,795 511,610 Total liabilities and partners' capital 1,710,421 1,666,575
11 NOTE 3 -- DISCONTINUED OPERATIONS The results of operations of PXP, which have been reclassified as discontinued operations for the three months and six months ended June 30, 2002, are summarized as follows (in thousands): THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2002 JUNE 30, 2002 ------------- ------------- Revenues $ 45,140 $ 85,813 Costs and expenses (26,943) (53,315) ------------ ------------ Income from operations 18,197 32,498 Other income (expense) (4,708) (9,382) ------------ ------------ Income before income taxes 13,489 23,116 Income tax expense (5,271) (9,034) ------------ ------------ Income from discontinued operations $ 8,218 $ 14,082 ============ ============ NOTE 4 -- DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We have entered into various derivative instruments to reduce our exposure to fluctuations in the market price of oil. The derivative instruments consist primarily of oil swap and option contracts entered into with financial institutions. Derivative instruments are accounted for in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137, SFAS 138 and SFAS 149, or 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 gain or loss on the derivative is deferred in Accumulated Other Comprehensive Income ("OCI"), a component of our stockholders' equity, to the extent the hedge is effective. Gains and losses on oil hedging instruments related to OCI and adjustments to carrying amounts on hedged volumes are included in oil revenues in the period that the related volumes are delivered. The relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. Hedge accounting is discontinued prospectively when a hedge instrument becomes ineffective. Gains and losses deferred in OCI related to cash flow hedges that become ineffective remain unchanged until the related product is delivered. If it is determined that it is probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategy for undertaking the hedge. Hedge effectiveness is measured at least on a quarterly basis. This process includes specific identification of the hedging instrument and the hedged item, the nature of the risk being hedged and how the hedging instrument's effectiveness will be assessed. Both at the inception of the hedge and on an ongoing basis, we assess whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. In the first quarter of 2003, the NYMEX oil price and the price we received for our Florida oil production did not correlate closely enough for the hedges to qualify for hedge accounting. As a result, we were required to discontinue hedge accounting effective February 1, 2003 and reflect the mark-to-market value of the hedges in earnings prospectively from that date. In the first six months of 2003 we recorded a $0.6 million loss for the decrease in the fair value of our derivatives and recognized a $1.4 million loss on cash settlements of such derivatives. Cash settlements of $0.3 million for January 2003 are reflected as a reduction of revenues. At June 30, 2003 Accumulated OCI consisted of unrealized losses of $0.8 million ($0.4 million, net of tax) on our oil 12 hedging instruments, $0.5 million ($0.3 million, net of tax) related to pension liabilities and an unrealized gain of $5.3 million ($2.7 million, net of tax) related to our equity in the OCI gains of PAA. At June 30, 2003, the liability related to our open oil hedging instruments was included in current liabilities ($1.2 million), other long-term liabilities ($0.2 million), and deferred income taxes (a tax benefit of $0.4 million). During the first six months of 2002 oil sales revenues were reduced by $0.3 million for non-cash expense related to the amortization of option premiums. As of June 30, 2003, $0.8 million ($0.4 million, net of tax) of deferred net losses on our oil derivative instruments recorded in OCI are expected to be reclassified to earnings during the following twelve months. At June 30, 2003 we had the following open oil derivative positions: BARRELS PER DAY ------------------------- 2003 2004 ------------------------- Swaps Average price $26.10/bbl 1,500 - Average price $24.07/bbl - 1,000 Location and quality differentials attributable to our properties are not included in the foregoing prices. Because of the quality and location of our oil production, these adjustments will reduce our net price per barrel. NOTE 5 -- LONG-TERM DEBT AND CREDIT FACILITIES SECURED TERM LOAN FACILITY In June 2003 we restructured our secured term loan facility with a group of banks. The restructured $60.0 million term loan is repayable in twelve quarterly installments of $5.0 million commencing in August 2003 with a final maturity of May 31, 2006. Amounts outstanding under the term loan bear an annual interest rate, at our election, equal to either the Base Rate (as defined in the agreement) plus 1.5%, or LIBOR plus 3%. The term loan requires that we maintain $5.0 million on deposit in a debt service reserve account with one of the lending banks. At June 30, 2003 $60.0 million was outstanding under the secured term loan facility. Our average borrowing rate for the six months ended June 30, 2003 was 4.4% (4.3% at June 30, 2003). To secure the term loan, we pledged 100% of the shares of stock of our subsidiaries and pledged 5.2 million of our PAA common units. To the extent that the outstanding principal under the term loan exceeds the balance in the debt service reserve account plus 50% of the fair market value of the pledged common units, we are required to repay the excess. The fair market value of the pledged units is determined based on the closing price of PAA common units as reported on the New York Stock Exchange. The term loan contains covenants that limit our ability, as well as the ability of our subsidiaries, to incur additional debt, make investments, create liens, enter into leases, sell assets, change the nature of our business or operations, guarantee other indebtedness, enter into certain types of hedge agreements, enter into take-or-pay arrangements, merge or consolidate and enter into transactions with affiliates. In addition, if an event of default exists, the term loan prohibits us from paying dividends or repurchasing or redeeming shares of any class of capital stock. The term loan requires us to maintain a minimum consolidated tangible net worth (as defined) and a consolidated debt service coverage ratio (as defined in the agreement) of 1.0 to 1.0. At June 30, 2003 we were in compliance with the covenants contained in the term loan facility. 13 NOTE 6 -- EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income from continuing operations before the cumulative effect of accounting changes for the three months and six months ended June 30, 2003 and 2002 (in thousands, except per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------------- ------------------------------------------ 2003 2002 2003 2002 ------------------------------------------- ------------------------------------------ BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED ------------------------------------------- ------------------------------------------ Income from continuing operations $ 1,096 $ 1,096 $ 1,456 $ 1,456 $ 7,487 $ 7,487 $ 2,188 $ 2,188 Preferred dividends (253) (253) (350) (350) (603) (603) (700) (700) ------- ------- -------- -------- -------- -------- -------- -------- Income from continuing operations available to common stockholders 843 843 1,106 1,106 6,884 6,884 1,488 1,488 Income from discontinued operations, net of tax - - 8,218 8,218 - - 14,082 14,082 Effect of accounting changes, net of tax - - - - 933 933 - ------- ------- -------- -------- -------- -------- -------- -------- Income available to common stockholders $ 843 $ 843 $ 9,324 $ 9,324 $ 7,817 $ 7,817 $ 15,570 $ 15,570 ======= ======= ======== ======== ======== ======== ======== ======== Weighted average number of shares of common stock outstanding 23,475 23,475 23,883 23,883 23,727 23,727 23,759 23,759 Effect of dilutive securities Convertible preferred stock - 1,176 - - - - - - Stock options and restricted stock - 500 - 702 - 445 - 614 ------- ------- -------- -------- -------- -------- -------- -------- Weighted average common shares, including dilutive effect 23,475 25,151 23,883 24,585 23,727 24,172 23,759 24,373 ======= ======= ======== ======== ======== ======== ======== ======== Earnings per share Continuing operations $ 0.04 $ 0.04 $ 0.05 $ 0.04 $ 0.29 $ 0.28 $ 0.06 0.06 Discontinued operations - - 0.34 0.33 - - 0.60 0.58 Effect of accounting changes - - - - 0.04 0.04 - ------- ------- -------- -------- -------- -------- -------- -------- Income available to common stockholders $ 0.04 $ 0.04 $ 0.39 $ 0.37 $ 0.33 $ 0.32 $ 0.66 $ 0.64 ======= ======= ======== ======== ======== ======== ======== ========
In the six months ended June 30, 2003 and the three months and six months ended June 30, 2002 our cumulative convertible preferred stock was not included in the computation of diluted earnings per share because the effect was antidilutive. NOTE 7 -- STOCKHOLDERS' EQUITY In June 2003 we paid $23.3 million to retire the 46,600 outstanding shares of our Series D Cumulative Convertible Preferred Stock, or Series D Preferred. The Series D Preferred was convertible into 1,671,416 shares of common stock at a price of $13.94 per share and paid an annual dividend of $30.00 per share. Our Board of Directors has authorized the repurchase of up to eight million shares of our common stock. Through December 31, 2002, we had repurchased a total of 4.1 million shares at a total cost of approximately $91.3 million. In the first six months of 2003 we have repurchased an additional 0.8 million shares at a total cost of $9.0 million. NOTE 8 -- RELATED PARTY TRANSACTIONS GOVERNANCE OF PAA 14 We, along with Sable Investments, L.P. (which is owned by Mr. Flores, our Chairman, and Mr. Raymond, our Chief Executive Officer and President), Kafu Holdings, L.P. (which is controlled by Kayne Anderson Capital Advisors, L.P. and Kayne Anderson Investment Management, Inc., of which Mr. Sinnott, our director, is Senior Vice President), and E-Holdings III, L.P. (which is controlled by EnCap Investments L.L.C. and of which Mr. Phillips, our director, is a managing director and principal) are parties to agreements governing Plains All American GP LLC, which is the general partner of Plains AAP, L.P., and Plains AAP, L.P., which is the general partner of PAA. These agreements govern the ongoing management of PAA. In addition, the general partner of PAA is owned as follows: Plains Resources 44.00% Sable Investments, L.P. 20.00% Kafu Holdings, L.P. 16.42% E-Holdings, L.P. 9.00% Others 10.58% --------------- 100.00% =============== Also, each of we, Sable Investments, Kafu Holdings, and E-Holdings may appoint one member of the Plains All American GP LLC board of directors. VALUE ASSURANCE AGREEMENTS We entered into value assurance agreements with Sable Investments, Kafu Holdings, E-Holdings and other parties with respect to the 5.2 million subordinated units they acquired from us in our June 2001 strategic restructuring. The value assurance agreements require us to pay to them 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. OIL MARKETING AGREEMENT PAA is the exclusive marketer/purchaser for all of our equity oil production. The marketing agreement provides that PAA will purchase for resale at market prices all of our equity oil production for which PAA charges a fee of $0.20 per barrel. For the six months ended June 30, 2003 and 2002, sales of oil to PAA under the agreement totalled approximately $13.7 million and $10.4 million, respectively, including the royalty share of production. For the six months ended June 30, 2003 and 2002, PAA charged us $0.1 million in each period in marketing fees. We are currently negotiating a new marketing agreement with PAA to, among other things, add a definitive term to the agreement and provide that PAA will use its reasonable best efforts to obtain the best price for our oil production. AGREEMENTS WITH PXP In connection with the reorganization and the spin-off we entered into certain agreements with PXP, including a master separation agreement; an intellectual property agreement; the Plains Exploration & Production transition services agreement; the Plains Resources transition services agreement; and a technical services agreement. For the six months ended June 30, 2003 PXP billed us $272,000 for services provided to us under these agreements and we billed PXP $86,000 for services we provided under these agreements. OTHER From time to time we charter private aircraft from Gulf Coast Aviation Inc. ("Gulf Coast"), which is not affiliated with us or our employees. On certain occasions, the aircraft that Gulf Coast charters is owned by our Chairman of the Board. In the six months ended June 30, 2003 and 2002 we paid Gulf Coast $10,000 and $214,000, respectively, for aircraft 15 chartering services provided by Gulf Coast using an aircraft owned by our Chairman. The charters were arranged through arms-length dealings with Gulf Coast and the rates were market based. NOTE 9 -- COMMITMENTS AND CONTINGENCIES On September 18, 2002 Stocker Resources Inc., or Stocker, the general partner of PXP before it was converted from a limited partnership to a corporation, filed a declaratory judgment action against Commonwealth Energy Corporation, or Commonwealth, in the Superior Court of Orange County, California relating to the termination of an electric service contract. Stocker is seeking a declaratory judgment that it was entitled to terminate the contract and that Commonwealth has no basis for proceeding against Stocker's related $1.5 million performance bond. Also on September 18, 2002, Stocker was named a defendant in an action brought by Commonwealth in the Superior Court of Orange County, California for breach of the electric service contract. Commonwealth is seeking unspecified damages. The two cases have been consolidated and set for trial in December 2003. Stocker was merged into us in December 2002. Under our master separation agreement with PXP, we are indemnified for damages we incur as a result of this action. We intend to defend our rights vigorously in this matter. We, in the ordinary course of business, are a claimant and/or defendant in various other legal proceedings. We do 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 10 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Selected cash payments and noncash activities were as follows (in thousands):
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------- ----------------------- 2003 2002 2003 2002 -------- -------- -------- --------- Cash paid for interest $ 440 $ 456 $ 884 $ 14,893 -------- -------- -------- --------- Cash paid for taxes $ 867 $ 528 $ 1,532 $ 3,272 ======== ======== ======== ========= Noncash sources of investing and financing activities: Tax benefit from exercise of employee stock options $ 3 $ 1,191 $ 118 $ 1,736 ======== ======== ======== =========
16 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in connection with the information contained in the consolidated financial statements and notes thereto included elsewhere in this report. We are an independent energy company. We are principally engaged in the "midstream" activities of marketing, gathering, transporting, terminalling, and storage of oil through our equity ownership in Plains All American Pipeline, L.P., or PAA. PAA is a publicly traded master limited partnership actively engaged in the midstream energy markets. As of June 30, 2003 we owned 44% of the general partner of PAA and 12.4 million limited partner units of PAA, which represented approximately 24% aggregate ownership interest in PAA. We also participate in the "upstream" activities of acquiring, exploiting, developing, exploring for and producing oil through our wholly-owned subsidiary, Calumet Florida L.L.C., which has producing properties in the Sunniland Trend in south Florida. The book value of our investment in PAA represents 50% of our total assets as of June 30, 2003 and the book value of our Florida oil properties represents 33%. As of December 31, 2002, the present value of our proved oil reserves was approximately $87.9 million. We own 6.6 million common units, 1.3 million Class B common units and 4.5 million subordinated units of PAA. The closing price of publicly traded PAA common units, as reported on the New York Stock Exchange, was $31.48 on June 30, 2003. The Class B common units and the subordinated units are not publicly traded but do receive cash distributions from PAA. PAA's partnership agreement contains provisions which, upon the occurrence of certain future events, will result in the conversion of the subordinated units to common units. During the first six months of 2003 we had oil revenues of $11.3 million and distributions received from PAA attributable to our general and limited partner interests totaled $15.3 million. PAA's financial performance directly impacts our financial performance and the market value performance of PAA's limited partner interests directly impacts the value of our assets. As a result, we encourage you to review PAA's SEC filings, including its Annual Report on Form 10-K for the year ended December 31, 2002 and it Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, to review and assess, among other things, PAA's financial performance and financial condition, PAA's business, operations, and competition, and risk factors associated with PAA's business. SPIN-OFF OF PLAINS EXPLORATION & PRODUCTION COMPANY On December 18, 2002 we distributed 100 percent of the common shares of Plains Exploration & Production Company, or PXP, our wholly-owned subsidiary that owned oil and gas properties offshore and onshore California and in Illinois, to our stockholders, the spin-off. As a result of the spin-off, the historical results of the operations of PXP are reflected in our financial statements as "discontinued operations". Except where noted, discussions in this Form 10-Q with respect to oil and gas operations relate to our activities other than the discontinued operations. GENERAL UPSTREAM OPERATIONS We follow the full cost method of accounting whereby all costs associated with property acquisition, exploration, exploitation and development activities are capitalized. Our revenues are derived from the sale of oil. We recognize revenues when our production is sold and title is transferred. Our revenues are highly dependent upon the prices of, and demand for oil. Historically, the markets for oil have been volatile and are likely to continue to be volatile in the future. The prices we receive for our oil and our levels of production are subject to wide fluctuations and depend on numerous factors beyond our control, including supply and demand, economic conditions, foreign imports, the actions of OPEC, political conditions in other oil-producing countries, and governmental regulation, legislation and policies. Under the SEC's full cost accounting rules, we review the carrying value of our proved oil and gas properties each quarter. These rules generally require that we price our future oil and gas production at the oil and gas prices in effect at the end of each fiscal quarter to determine a ceiling value of our properties. The rules require a write-down if our capitalized costs exceed the allowed "ceiling." We have had no write-downs due to these ceiling test limitations since 1998. Given the volatility of oil prices, it is likely that our estimate of discounted future net revenues from proved oil and gas reserves will fluctuate in the near term. If oil prices decline in the future, write-downs of our oil and gas properties could occur. Write-downs required by these rules do not directly impact our cash flows from operating activities. Decreases in oil and gas prices have had, and will likely have in the future, an adverse effect on the carrying value of our proved reserves and our revenues, profitability and cash flow. 17 To manage our exposure to commodity price risks, we use various derivative instruments to hedge our exposure to oil sales price fluctuations. Our hedging arrangements provide us protection on the hedged volumes if oil prices decline below the prices at which these hedges are set. However, if oil prices increase, ceiling prices in our hedges may cause us to receive lower revenues on the hedged volumes than we would receive in the absence of hedges. Gains and losses from hedging transactions are recognized as revenues when the associated production is sold. The relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. Hedge accounting is discontinued prospectively when a hedge instrument becomes ineffective and changes in value are reflected in earnings prospectively from the date the hedge becomes ineffective. Gains and losses deferred in other comprehensive income, or OCI, related to cash flow hedges that become ineffective remain unchanged until the related product is delivered. In the first quarter of 2003, the NYMEX oil price and the price we received for our Florida oil production did not correlate closely enough for the hedges to qualify for hedge accounting. As a result, we were required to discontinue hedge accounting effective February 1, 2003 and reflect the mark-to-market value of the hedges in earnings prospectively from that date. Our oil production expenses include salaries and benefits of personnel involved in production activities, electric costs, maintenance costs, and other costs necessary to operate our producing properties. Depletion of capitalized costs of producing oil and gas properties is provided using the units of production method based upon proved reserves. For the purposes of computing depletion, proved reserves are redetermined as of the end of each year and on an interim basis when deemed necessary. General and administrative expenses consist primarily of salaries and related benefits of administrative personnel, office rent, systems costs and other administrative costs. MIDSTREAM OPERATIONS We account for our investment in PAA using the equity method of accounting. We record equity in earnings of PAA based on our aggregate ownership interest, as adjusted for general partner incentive distributions. Equity in earnings for our general partner interest is based on our 44% share of 2% of PAA's net income plus the amount of the general partner incentive distribution. Equity in earnings for our limited partner units is based on our ownership percentage of limited partner units (24% at June 30, 2003) multiplied by 98% of PAA's net income less the general partner incentive distribution. Increased earnings attributable to the general partner incentive distributions will be somewhat offset because of our ownership of limited partner units. Cash distributions received from PAA are not reflected in earnings, but reduce our investment in PAA. When PAA sells additional limited partner units and we do not purchase additional units, our ownership interest in PAA is reduced, creating an "implied sale" of a portion of our investment. We have recognized gains from PAA equity issuances representing the difference between our carrying cost and the fair value of the interest deemed sold. 18 RESULTS OF OPERATIONS The following table reflects the components of our oil revenues from continuing operations and sets forth our revenues and costs and expenses from continuing operations on a BOE basis:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ---------- ---------- Production (MBbls) 206 230 438 477 Sales (MBbls) 203 202 479 418 Average NYMEX price per bbl $ 28.91 $ 26.27 $ 31.32 $ 24.02 Hedging and derivative cash settlements (1.88) (0.63) (2.97) (0.60) Differential (7.50) (2.58) (7.05) (2.57) ------- ------- ------- ------- Average realized price per bbl 19.53 23.06 21.30 20.85 Production expenses per bbl (7.49) (6.46) (7.05) (6.45) Production and ad valorem taxes per bbl (1.15) (0.62) (1.33) (0.55) Oil transportation expenses per bbl (4.48) (4.41) (4.23) (4.38) ------- ------- ------- ------- Gross margin per bbl $ 6.41 $ 11.57 $ 8.69 $ 9.47 ======= ======= ======= ======= DD&A per bbl (oil & gas properties) $ 4.68 $ 4.02 $ 4.68 $ 3.87
In the first quarter of 2003, the NYMEX oil price and the price we receive for our Florida oil production did not correlate closely enough for our hedges to qualify for hedge accounting. As a result, we were required to discontinue hedge accounting effective February 1, 2003 and reflect the mark-to-market value of the derivatives in earnings prospectively from that date. The $2.1 million ($1.0 million, net of tax) net loss in OCI at January 31, 2003 related to these hedges will be recognized in earnings as the related production is delivered. We will continue to include the cash settlements from the hedges in our realized price calculations but will not consider the fair value gains and losses in the realized price calculations. Derivative instruments that we enter into in the future may or may not qualify for hedge accounting. COMPARISON OF THREE MONTHS ENDED JUNE 30, 2003 TO THREE MONTHS ENDED JUNE 30, 2002 We reported net income of $1.1 million for the second quarter of 2003 compared to income from continuing operations of $1.5 million for the second quarter of 2002. Including income from discontinued operations we reported net income of $9.7 million in the second quarter of 2002. Oil revenues. Our oil revenues, excluding the effect of hedging, decreased 10%, or $0.5 million, from $4.8 million for the second quarter of 2002 to $4.3 million for the second quarter of 2003. The decrease was due to lower realized prices. We reported sales volumes from our Florida properties of 203 MBbls in 2003 compared to 202 MBbls in 2002. In accordance with SEC Staff Accounting Bulletin 101 we reflect revenue from oil production in the period it is sold as opposed to when it is produced. Oil volumes decreased 10% on an "as produced" basis, with production volumes of 206 MBbls in 2003 compared to 230 MBbls in 2002. The location of our Florida properties and the timing of the barges that transport the oil to market cause reported sales volumes to differ from production volumes. Actual timing of sales volumes is difficult to predict. In addition, our Florida properties consist of a relatively low number of higher volume wells and downtime due to equipment failures and other operational issues can cause production from this area to be volatile. Our average realized price for oil decreased 15%, or $3.53, to $19.53 per Bbl for the second quarter of 2003 from $23.06 per Bbl for the second quarter of 2002. The decrease primarily reflects an increase in the differential to the NYMEX oil price which averaged $7.50 per Bbl in the second quarter of 2003 compared to $2.58 per Bbl in the second quarter of 2002. The NYMEX oil price averaged $28.91 per Bbl in 2003 versus $26.27 per Bbl in 2002. Hedging and derivatives had the effect of decreasing our average price per Bbl by $1.88 in 2003 and $0.63 in 2002. Production expenses. Our production expenses increased 15%, or $0.2 million, to $1.5 million ($7.49 per Bbl) for the 19 second quarter of 2003 from $1.3 million ($6.46 per Bbl) for the second quarter of 2002. The increase is primarily attributable to increased fuel and electricity costs. Production and ad valorem taxes. Our production and ad valorem taxes increased 100%, or $0.1 million, to $0.2 million for the second quarter of 2003 from $0.1 million for the second quarter of 2002 primarily due to the expiration of severance tax exemptions for several wells in the second quarter of 2002. Unit production and ad valorem taxes for 2003 were $1.15 per Bbl compared to $0.62 per Bbl in 2002. Depreciation, depletion and amortization. Our depreciation, depletion and amortization, or DD&A expense decreased 17%, or $0.2 million, to $1.0 million for the second quarter of 2003 from $1.2 million for the second quarter of 2002. The decrease is due to a decrease in the per unit DD&A rate ($4.68 per Bbl in 2003 versus $4.02 per Bbl in 2002). Accretion of asset retirement obligation. Accretion expense for the second quarter of 2003 was $0.1 million. Accretion expense represents the adjustment of our asset retirement obligation to its present value at the end of the period based on our credit adjusted risk free rate. Other operating expenses. Other operating expenses include a $0.1 million loss on the disposition of materials and supplies inventory. Equity in earnings of Plains All American Pipeline, L.P. Our equity in earnings of PAA increased $0.1 million to $5.4 million for the second quarter of 2003 from $5.3 million for the second quarter of 2002. PAA reported net income of $23.4 million in the second quarter of 2003 compared to $17.0 million in the second quarter of 2002. Our ownership interest in PAA was 24% at June 30, 2003 and 29% at June 30, 2002. Gain (loss) on derivatives. As previously discussed, we were required to discontinue hedge accounting effective February 1, 2003. As a result, in the second quarter of 2003 we recorded a $1.3 million loss reflecting the decrease in the fair value of our derivatives and recognized a $0.4 million loss on cash settlements of such derivatives. Interest expense. Our interest expense decreased $1.3 million, to $0.5 million for the second quarter of 2003 from $1.8 million for the second quarter of 2002, primarily reflecting lower outstanding debt. Income tax expense. Our income tax expense decreased $0.5 million to $1.0 million for the second quarter of 2003 from $1.5 million for the second quarter of 2003. The decrease was due to lower pre-tax income from continuing operations and a lower effective tax rate. Our effective tax rate was 47.9% in the second quarter of 2003 compared to 50.4% in the second quarter of 2002. Our effective tax rate reflects the Canadian taxes attributable to our share of PAA's earnings related to their Canadian operations. For U.S. federal income tax purposes, we utilize net operating loss carryforwards, or NOLs, to reduce our currently payable taxes. As a result, we receive a deduction rather than a credit for Canadian income taxes. Income from discontinued operations. Income from discontinued operations of $8.2 million in the second quarter of 2002 reflects the net after tax earnings of PXP, which was spun off in the fourth quarter of 2002. COMPARISON OF SIX MONTHS ENDED JUNE 30, 2003 TO SIX MONTHS ENDED JUNE 30, 2002 We reported net income of $8.4 million for the first six months of 2003 compared to income from continuing operations of $2.2 million for the first six months of 2002. Including income from discontinued operations we reported net income of $16.3 million in the first six months of 2002. Oil revenues. Our oil revenues, excluding the effect of hedging, increased 29%, or $2.6 million, from $9.0 million for the first half of 2002 to $11.6 million for the first half of 2003. The increase was primarily due to higher sales volumes that increased revenues by $1.5 million and higher realized prices that increased revenues by $1.1 million. We reported sales volumes from our Florida properties of 479 MBbls in 2003 compared to 418 MBbls in 2002. In accordance with SEC Staff Accounting Bulletin 101 we reflect revenue from oil production in the period it is sold as opposed to when it is produced. Oil volumes decreased 8% on an "as produced" basis, with production volumes of 438 MBbls in 2003 compared to 477 MBbls in 2002. 20 Our average realized price for oil increased 2%, or $0.45, to $21.30 per Bbl for the first half of 2003 from $20.85 per Bbl for the first half of 2002. The increase primarily reflects an improvement in the NYMEX oil price, which averaged $31.32 per Bbl in 2003 versus $24.02 per Bbl in 2002, offset by an increase in the average differential for location and quality from $2.57 per Bbl in 2002 to $7.05 per Bbl in 2003. Hedging and derivatives had the effect of decreasing our average price per Bbl by $2.97 in 2003 and $0.60 in 2002. Production expenses. Our production expenses increased 26%, or $0.7 million, to $3.4 million ($7.05 per Bbl) for the first half of 2003 from $2.7 million ($6.45 per Bbl) for the first half of 2002. The per Bbl increase is primarily attributable to increased fuel and electricity costs. Production and ad valorem taxes. Our production and ad valorem taxes increased 200%, or $0.4 million, to $0.6 million for the first half of 2003 from $0.2 million for the first half of 2002 primarily due to increased sales prices and the expiration of severance tax exemptions for several wells in the second quarter of 2002. Unit production and ad valorem taxes for 2003 were $1.33 per Bbl compared to $0.55 per Bbl in 2002. Oil transportation expenses. Oil transportation expenses increased 11%, or $0.2 million, from $1.8 million in the first half of 2002 to $2.0 million in the first half of 2003. On a per Bbl basis, oil transportation expenses decreased from $4.38 per Bbl in 2002 to $4.23 per Bbl in 2003. Accretion of asset retirement obligation. Accretion expense for the first half of 2003 was $0.1 million. Accretion expense represents the adjustment of our asset retirement obligation to its present value at the end of the period based on our credit adjusted risk free rate. Other operating expenses. Other operating expenses include $0.1 million loss on the disposition of materials and supplies inventory. Equity in earnings of Plains All American Pipeline, L.P. Our equity in earnings of PAA increased $2.1 million to $11.7 million for the first half of 2003 from $9.6 million for the first half of 2002. PAA reported net income of $47.7 million in the first half of 2003 compared to $31.2 million in the first half of 2002. Our ownership interest in PAA was 24% at June 30, 2003 and 29% at June 30, 2002. Gain on Plains All American Pipeline, L.P. unit offerings. In the first half of 2003 we recognized a noncash gain of $6.1 million due to the increase in the book value of our equity in PAA to reflect our proportionate share of the increase in the underlying net assets of PAA resulting from PAA's public equity offering. Gain (loss) on derivatives. As previously discussed, we were required to discontinue hedge accounting effective February 1, 2003. As a result, in the first half of 2003 we recorded a $0.6 million loss for the decrease in the fair value of our derivatives and recognized a $1.1 million loss on cash settlements of such derivatives. Interest expense. Our interest expense decreased $2.5 million, to $1.0 million for the first half of 2003 from $3.5 million for the first half of 2002, primarily reflecting lower outstanding debt. Income tax expense. Our income tax expense increased $4.7 million to $6.9 million for the first half of 2003 from $2.2 million for the first half of 2003. The increase was primarily due to higher pre-tax income from continuing operations as our effective tax rate was 47.9% in the first half of 2003 compared to 50.4% in the first half of 2002. Our effective tax rate reflects the Canadian taxes attributable to our share of PAA's earnings related to their Canadian operations. For U.S. federal income tax purposes, we utilize net operating loss carryforwards, or NOLs, to reduce our currently payable taxes. As a result, we receive a deduction rather than a credit for Canadian income taxes. Current income tax expense for the first half of 2002 includes a benefit of approximately $2.9 million representing tax paid in 2001 that was refunded to us as the result of certain legislation that allowed us to offset 100% of alternative minimum taxable income with NOLs. Previously, we could only offset 90% of AMT income with NOLs. The current income tax 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. Cumulative effect of accounting change. In the first quarter of 2003 we recognized a $0.9 million net of tax gain related to the adoption of Statement of Accounting Standards, or SFAS, No. 143, "Accounting for Asset Retirement Obligations". See "Recent Accounting Pronouncements" for a discussion of the adoption of SFAS No. 143. Income from discontinued operations. Income from discontinued operations of $14.1 million in the first half of 2002 reflects the net after tax earnings of PXP, which was spun off in the fourth quarter of 2002. 21 LIQUIDITY AND CAPITAL RESOURCES GENERAL At June 30, 2003 we had negative working capital of $21.2 million, primarily reflecting $20.0 million of current maturities of long-term debt. Cash generated from our upstream operations and PAA distributions are our primary sources of liquidity. We believe that we have sufficient liquid assets and cash from operations and PAA distributions to meet our short term and long-term normal recurring operating needs, debt service obligations, contingencies and anticipated capital expenditures. If PAA could not, for any reason, make its minimum quarterly distribution payments on its limited partnership interests, this would impair our cash flows and our ability to meet our short and long-term cash needs. In addition, this would trigger our payment obligations under the value assurance agreements (see "-- Related Party Transactions - Value Assurance Agreements"), which would compound the negative impact on our cash flows and our ability to meet our short and long-term cash needs. Thus, PAA's financial and operational performance directly affects our financial and operational performance. We encourage you to review PAA's SEC filings, including its Annual Report on Form 10-K for the year ended December 31, 2002 and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. PAA CASH DISTRIBUTIONS PAA's partnership agreement requires that it distribute 100% of available cash within 45 days after the end of each quarter to unitholders of record and to its general partner. Available cash is generally defined as all cash and cash equivalents on hand at the end of each quarter less reserves established by PAA's general partner for future requirements. Distributions to holders of subordinated units are subject to the rights of holders of common units to receive the minimum quarterly distribution, or MQD, of $0.45 per unit ($1.80 per unit on an annual basis). Common units accrue arrearages with respect to distributions for any quarter during the subordination period and subordinated units do not accrue any arrearages. The subordination period will end if PAA meets certain financial tests for three consecutive four-quarter periods. If PAA meets certain financial requirements, 25% of the subordinated units will convert in the fourth quarter of 2003 and the remainder will convert in the first quarter of 2004. Class B common units are initially pari passu with common units with respect to distributions, and are convertible into common units upon approval of a majority of the common unitholders. If we request that PAA call a meeting of common unitholders to consider approval of the conversion of Class B units into common units and the approval is not obtained within 120 days, each Class B common unitholder will be entitled to receive distributions, on a per unit basis, equal to 110% of the amount of distributions paid on a common unit, with such distribution right increasing to 115% if such approval is not secured within 90 days after the end of the 120-day period. Except for the vote to approve the conversion, Class B common units have the same voting rights as the common units. PAA's general partner is entitled to receive incentive distributions if the amount distributed with respect to any quarter exceeds levels specified in its partnership agreement. Generally the general partner is entitled, without duplication, to 15% of amounts PAA distributes in excess of $0.450 per unit, 25% of the amounts PAA distributes in excess of $0.495 per unit and 50% of amounts PAA distributes in excess of $0.675 per unit. Based on PAA's recently declared distribution of $0.55 per unit (an annual distribution rate of $2.20 per unit), which will be paid on August 14 2003, we would receive an annual distribution from PAA of approximately $31.2 million, including $3.3 million for our general partner distribution (including $2.2 million for the general partner incentive distribution). 22 Cash distributions per unit on PAA's outstanding common units, Class B common units and subordinated units and the portion of the distributions representing an excess over the MQD in 2003, 2002 and 2001 were as follows:
YEAR ----------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------ ------------------------------ ------------------------------ DISTRIBUTION EXCESS DISTRIBUTION EXCESS DISTRIBUTION EXCESS OVER MQD OVER MQD OVER MQD -------------- -------------- -------------- ------------- -------------- -------------- First Quarter $ 0.5375 $ 0.0875 $ 0.5250 $ 0.0750 $ 0.4750 $ 0.0250 Second Quarter $ 0.5500 $ 0.1000 $ 0.5375 $ 0.0875 $ 0.5000 $ 0.0500 Third Quarter $ 0.5500 $ 0.1000 $ 0.5375 $ 0.0875 $ 0.5125 $ 0.0625 Fourth Quarter $ 0.5375 $ 0.0875 $ 0.5125 $ 0.0625
FINANCING ACTIVITIES In December 2002 we entered into a $45 million secured term loan facility with a group of banks. We used proceeds from the term loan and cash on hand to make a $40 million capital contribution and repay a $7.2 million note payable to PXP. In June 2003 the facility was restructured to allow us to borrow an additional $24 million that was used to repurchase the 46,600 outstanding shares of our Series D Cumulative Convertible Preferred Stock and pay accrued dividends and related expenses. At June 30, 2003, $60.0 million was outstanding under the secured term loan facility. The term loan is repayable in twelve quarterly installments of $5.0 million each, commencing on August 31, 2003 with a final maturity of May 31, 2006. Amounts outstanding under the term loan bear an annual interest rate, at our election, equal to either the Base Rate (as defined in the agreement) plus 1.5%, or LIBOR plus 3%. The term loan requires that we maintain $5.0 million on deposit in a debt service reserve account with one of the lending banks. Our average borrowing rate for the first six months of 2003 was 4.4% (4.3% at June 30, 2003). To secure the term loan, we pledged 100% of the shares of stock of our subsidiaries and pledged 5.2 million of our PAA common units. To the extent the outstanding principal under the term loan exceeds the balance in the debt service reserve account plus 50% of the fair market value of the pledged common units, we are required to repay the excess. The fair market value of the pledged units is determined based on the closing price of PAA common units as reported on the New York Stock Exchange. The term loan contains covenants that limit our ability, as well as the ability of our subsidiaries, to incur additional debt, make investments, create liens, enter into leases, sell assets, change the nature of our business or operations, guarantee other indebtedness, enter into certain types of hedge agreements, enter into take-or-pay arrangements, merge or consolidate and enter into transactions with affiliates. In addition, if an event of default exists, the term loan prohibits us from paying dividends or repurchasing or redeeming shares of any class of capital stock. The term loan requires us to maintain a minimum consolidated tangible net worth (as defined) and a consolidated debt service coverage ratio (as defined in the agreement) of 1.0 to 1.0. CASH FLOWS FROM CONTINUING OPERATIONS SIX MONTHS ENDED JUNE 30, ----------------------------------- 2003 2002 ----------------------------------- (IN MILLIONS) Cash provided by (used in): Operating activities $ 12.3 $ 17.2 Investing activities (2.1) (4.8) Financing activities (17.2) 10.1 Operating Activities. Net cash provided by operating activities in the first half of 2003 totaled $12.3 million compared to 23 $17.2 million in the first half of 2003. The decrease was primarily due to lower realized oil prices and higher production expenses. Investing Activities. In the first half of 2003 net cash used in investing activities totaled $2.1 million compared to $4.8 million in the first half of 2002. Oil and gas capital expenditures were $1.5 million in the first half of 2003 compared to $4.7 million in the first half of 2002. In the first half of 2003 we made capital contributions to PAA of $0.6 million to maintain our proportionate general partner share interest as a result of an equity offering by PAA. Financing activities. Cash used in financing activities in the first half of 2003 included a net increase in long-term debt of $15.0 million, $1.4 million in proceeds from issuances of our common stock, expenditures of $9.0 million for the repurchase of $0.8 million shares of our common stock, $23.3 million to redeem our outstanding Series D preferred stock, $0.6 million for the payment of costs incurred in connection with our term loan and $0.6 million for the payment of preferred stock dividends. Cash used in financing activities in the first half of 2002 included a net increase in long-term debt of $6.0 million, $4.4 million in proceeds from issuances of our common stock and $0.3 million for the payment of preferred stock dividends. CAPITAL EXPENDITURES We have made and will continue to make capital expenditures with respect to our oil properties. In the first six months of 2003 we made aggregate capital expenditures of $1.5 million for exploitation of our existing properties and expect such expenditures to total $3.5 to $4.0 million in 2003. When PAA issues equity, the general partner is required to contribute cash to maintain its 2% general partner interest. In March 2003, PAA issued 2.6 million shares in a public equity offering. We were required to make a cash capital contribution to the general partner of PAA in the amount of $0.6 million for our 44% interest in the general partner. If PAA issues equity in the future, we will be required to make additional cash capital contributions. We also have an active treasury share repurchase program. Our Board of Directors has authorized the repurchase of up to eight million shares of our common stock. Through December 31, 2001, we had repurchased a total of 4.1 million shares at a total cost of approximately $91.3 million. No shares were repurchased in 2002. We have resumed making purchases under the treasury share program and through June 30, 2003 we have repurchased an additional 0.8 million shares at a total cost of $9.0 million. We intend to make additional repurchases in 2003 and expect to fund the repurchases from cash flows. CONTRACTUAL OBLIGATIONS At June 30, 2003, the aggregate amounts of contractually obligated payment commitments for the next five years are as follows (in thousands):
2003 2004 2005 2006 2007 THEREAFTER ---------- ---------- ----------- ---------- --------- ---------- Long-term debt $ 10,000 $ 20,000 $ 20,000 $ 10,000 $ - $ - Operating leases 12 23 23 6 - - ---------- ---------- ----------- ---------- --------- --------- $ 10,012 $ 20,023 $ 20,023 $ 10,006 $ - $ - ========== ========== =========== ========== ======== ========
COMMITMENTS AND CONTINGENCIES In connection with our June 2001 strategic restructuring, we entered into value assurance agreements with the purchasers of the subordinated units in the restructuring, under the terms of which we will pay the purchasers an amount per fiscal year, payable on a quarterly basis, equal to $1.85 per unit less the actual amount distributed during that year. The value assurance agreements will expire upon the earlier of (a) the conversion of all of the subordinated units to common units or (b) June 8, 2006. In the second quarter of 2003 PAA paid a quarterly distribution of $0.55 per unit ($2.20 annualized). Also in connection with the June 2001 strategic restructuring, 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 24 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. In connection with the reorganization and the spin-off we entered into certain agreements with PXP, including a master separation agreement; an intellectual property agreement; the Plains Exploration & Production transition services agreement; the Plains Resources transition services agreement; and a technical services agreement. The master separation agreement provides for cross-indemnities intended to place sole financial responsibility on PXP for all liabilities associated with the current and historical businesses and operations PXP conducts after giving effect to the spin off (and related reorganization), regardless of the time those liabilities arise, and to place sole financial responsibility for liabilities associated with our businesses with us and our subsidiaries. We agree to indemnify PXP and PXP agreed to indemnify us against liabilities arising from misstatements or omissions in the various offering documents for the exchange offer related to PXP's 8.75% notes or the spin-off, if such information was prepared by us or PXP, as the case may be. In the ordinary course of business, we are a claimant and/or defendant in various legal proceedings. In particular, we are a party to a lawsuit (as a result of Stocker Resources, Inc.'s merger into us) regarding an electric services contract with Commonwealth Energy Corporation. In this lawsuit, we are seeking a declaratory judgment that we are entitled to terminate the contract and that Commonwealth has no basis for proceeding against a related $1.5 million performance bond. In a countersuit against us, Commonwealth is seeking unspecified damages. The two cases have been consolidated and set for trial in December 2003. We intend to defend our rights vigorously in this matter. Under the spin-off agreements, PXP will indemnify us against this lawsuit. We do not believe that the outcome of these legal proceedings, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows. PAA'S COMMITMENTS AND CONTINGENCIES For a discussion of PAA's commitments and contingencies, we recommend you review PAA's Annual Report on Form 10-K for the year ended December 31, 2002 and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, and other applicable SEC filings by PAA. RELATED PARTY TRANSACTIONS GOVERNANCE OF PAA We, along with Sable Investments, L.P. (which is owned by Mr. Flores, our Chairman, and Mr. Raymond, our Chief Executive Officer and President), Kafu Holdings, L.P. (which is controlled by Kayne Anderson Capital Advisors, L.P. and Kayne Anderson Investment Management, Inc., of which Mr. Sinnott, our director, is Senior Vice President), and E-Holdings III, L.P. (which is controlled by EnCap Investments L.L.C. and of which Mr. Phillips, our director, is a managing director and principal) are parties to agreements governing Plains All American GP LLC, which is the general partner of Plains AAP, L.P., and Plains AAP, L.P., which is the general partner of PAA. These agreements govern the ongoing management of PAA. In addition, the general partner of PAA is owned as follows: Plains Resources 44.00% Sable Investments, L.P. 20.00% Kafu Holdings, L.P. 16.42% E-Holdings, L.P. 9.00% Others 10.58% ------------- 100.00% ============= Also, each of we, Sable Investments, Kafu Holdings, and E-Holdings may appoint one member of the Plains All American GP LLC board of directors. 25 VALUE ASSURANCE AGREEMENTS We entered into value assurance agreements with Sable Investments, Kafu Holdings, E-Holdings and other parties with respect to the 5.2 million subordinated units they acquired from us in our June 2001 strategic restructuring. The value assurance agreements require us to pay to them 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. OUR RELATIONSHIP WITH PAA We have ongoing relationships with PAA, including: o a marketing agreement that provides that PAA will purchase all of our equity oil production at market prices for a fee of $.20 per barrel. In the first six months of 2003, sales to PAA under the agreement totalled $13.7 million, including the royalty share of production, and PAA charged us $0.1 million in marketing fees; and o a separation agreement 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 are currently negotiating a new marketing agreement with PAA to, among other things, add a definitive term to the agreement and provide that PAA will use its reasonable best efforts to obtain the best price for our oil production. There can be no assurance, however, that we will enter into a new marketing agreement with PAA. SPIN-OFF AGREEMENTS In connection with the reorganization and the spin-off we entered into certain agreements with PXP, including a master separation agreement; an intellectual property agreement; the Plains Exploration & Production transition services agreement; the Plains Resources transition services agreement; and a technical services agreement. For the six months ended June 30, 2003 PXP billed us $272,000 for services provided to us under these agreements and we billed PXP $86,000 for services we provided under these agreements. The master separation agreement provides that for a period of three years, (1) we and our subsidiaries will be prohibited from engaging in or acquiring any business engaged in any of the "upstream" activities of acquiring, exploiting, developing, exploring for and producing oil and gas in any state in the United States (except Florida), and (2) PXP will be prohibited from engaging in any of the "midstream" activities of marketing, gathering, transporting, terminalling and storing oil and gas (except to the extent any such activities are ancillary to, or in support of, any of PXP's upstream activities). CRITICAL ACCOUNTING POLICIES AND FACTORS THAT MAY AFFECT FUTURE RESULTS Based on the accounting policies that we have in place, certain factors may impact our future financial results. The most significant of these factors relate to our commodity pricing and risk management activities, write-downs under full cost ceiling test rules and oil and gas reserves. These policies and their effect on certain of our accounting policies are discussed in our Annual Report on Form 10-K for the year ended December 31, 2002. Write-downs under full cost ceiling test rules. Based on the book value of our proved oil and gas properties (including related deferred income taxes) and our estimated proved reserves as of June 30, 2003, we believe that we would have a write-down under the full cost ceiling test rules at a net realized price for our oil production of approximately $16.00 per barrel. Based on an estimated oil differential for 2003 plus oil transportation of $11.00 to $12.75 per barrel, we would have a write-down at a NYMEX crude oil index price of $27.00 to $28.75 per barrel. PAA's Critical Accounting Policies. For a discussion of PAA's critical accounting policies, we recommend you review PAA's Annual Report on Form 10-K for the year ended December 31, 2002 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, and other applicable SEC filings by PAA. 26 RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149) on April 30, 2003. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No.149 will have no effect on either our financial position or results of operations. In May 2003, the FASB issued Statement No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." (SFAS 150). SFAS 150 establishes standards for how an issuer classified and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 will not have an impact on our financial statements. STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward-looking statements based on our current expectations and projections about future events. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "will", "would", "should", "plans", "likely", "expects", "anticipates", "intends", "believes", "estimates", "thinks", "may", and similar expressions, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, among other things: o the consequences of any potential change in the relationship between us and PXP; o the consequences of our and PXP's officers and employees providing services to both us and PXP and not being required to spend any specified percentage or amount of time on our business; o risks, uncertainties and other factors that could have an impact on PAA which could in turn impact the value of our holdings in PAA (for a discussion of these risks, uncertainties and other factors, see PAA's filings with the SEC); o the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a competitive disadvantage compared to our competitors that have less debt, and could have other adverse consequences; o uncertainties inherent in the development and production of oil and gas and in estimating reserves; o unexpected future capital expenditures (including the amount and nature thereof); o impact of oil and gas price fluctuations; o the effects of competition; o the success of our risk management activities; o the availability (or lack thereof) of acquisition or combination opportunities; o the impact of current and future laws and governmental regulations; o environmental liabilities that are not covered by an effective indemnity or insurance, and o general economic, market, industry or business conditions. 27 All forward-looking statements in this report are made as of the date hereof, and you should not place undue certainty on these statements without also considering the risks and uncertainties associated with these statements and our business that are discussed in this report. Moreover, although we believe the expectations reflected in the forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as required by applicable securities laws, we do not intend to update these forward-looking statements and information. See "Critical Accounting Policies and Factors That May Affect Future Results" in this report for additional discussions of risks and uncertainties. 28 ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are exposed to various market risks, including volatility in oil commodity prices and interest rates. To manage our exposure, we monitor current economic conditions and 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. We utilize various derivative instruments to hedge our exposure to price fluctuations on oil sales. The derivative instruments consist primarily of cash-settled oil option and swap contracts entered into with financial institutions. Derivative instruments are accounted for in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137, SFAS 138 and SFAS 149, or 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. To qualify for hedge accounting, the derivative must qualify either as a fair value hedge, cash flow hedge or foreign currency hedge. Currently, we use only cash flow hedges and the remaining discussion will relate exclusively to this type of derivative instrument. If the derivative qualifies for hedge accounting, the gain or loss on the derivative is deferred in Accumulated Other Comprehensive Income, or OCI, a component of our stockholders' equity, to the extent the hedge is effective. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives and strategy for undertaking the hedge. Hedge effectiveness is measured at least on a quarterly basis. This process includes specific identification of the hedging instrument and the hedged item, the nature of the risk being hedged and how the hedging instrument's effectiveness will be assessed. The relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. Hedge accounting is discontinued prospectively when a hedge instrument becomes ineffective. Gains and losses deferred in OCI related to cash flow hedges that become ineffective remain unchanged until the related product is delivered. If it is determined that it is probable that a hedged forecasted transaction will not occur, deferred gains or losses on the hedging instrument are recognized in earnings immediately. In the first quarter of 2003, the NYMEX oil price and the price we received for our Florida oil production did not correlate closely enough for the hedges to qualify for hedge accounting. As a result, we were required to discontinue hedge accounting effective February 1, 2003 and reflect the mark-to-market value of the hedges in earnings prospectively from that date. In the first six months of 2003 we recorded a $0.6 million loss for the decrease in the fair value of our derivatives and recognized a $1.4 million loss on cash settlements of such derivatives. Cash settlements of $0.3 million for January 2003 are reflected as a reduction of revenues. At June 30, 2003 Accumulated OCI consisted of unrealized losses of $0.8 million ($0.4 million, net of tax) on our oil hedging instruments, $0.5 million ($0.3 million, net of tax) related to pension liabilities and an unrealized gain of $5.3 million ($2.7 million, net of tax) related to our equity in the OCI gains of PAA. At June 30, 2003, the liability related to our open oil hedging instruments was included in current liabilities ($1.2 million), other long-term liabilities ($0.2 million), and deferred income taxes (a tax benefit of $0.4 million). During the first six months of 2002 oil sales revenues were reduced by $0.3 million for non-cash expense related to the amortization of option premiums. As of June 30, 2003, $0.8 million ($0.4 million, net of tax) of deferred net losses on our oil hedging instruments recorded in OCI are expected to be reclassified to earnings during the following twelve months. Commodity Price Risk. At July 31, 2003, we had the following open oil derivative positions:
BARRELS PER DAY --------------------------------------------------- 2003 2004 2005 2006 ------------------------- ------------------------- Swaps Average price $26.10/bbl 1,500 - - - Average price $24.07/bbl - 1,000 - - Average price $24.30/bbl - - 500 - Average price $23.85/bbl - - - 500
29 Assuming our second quarter 2003 production volumes are held constant in subsequent periods, these positions represent approximately 66%, 44%, 22%, and 22% of oil production in 2003, 2004, 2005 and 2006, respectively. Location and quality differentials attributable to our properties are not included in the foregoing prices. Because of the quality and location of our oil production, these adjustments will reduce our net realized price per barrel. The agreements provide for monthly cash settlement based on the differential between the agreement price and the actual NYMEX price. For periods prior to February 1, 2003 gains or losses were recognized in the month of related production and were included in oil sales revenues. Such contracts resulted in a reduction of oil sales revenues of $0.3 million and $0.3 million in the first six months of 2003 and 2002, respectively. Our management intends to continue to maintain derivative arrangements for a significant portion of our production. These contracts may expose us to the risk of financial loss in certain circumstances. Such arrangements provide us protection if oil prices decline below the prices at which the derivatives are set, but ceiling prices in our derivatives may cause us to receive less revenue on the specified volumes than we would receive in the absence of the derivatives. Such arrangements may or may not qualify for hedge accounting. The contract counterparties for our current derivative commodity contracts are all major financial institutions with Standard & Poor's ratings of A or better. Interest Rate Risk. Our debt instruments are sensitive to market fluctuations in interest rates. At June 30, 2003 we had $60.0 million outstanding under our term loan, repayable $10.0 million in 2003, $20.0 million in 2004, $20.0 million in 2005 and $10.0 million in 2006. Our term loan bears interest at a base rate (as defined) or LIBOR plus 3%. The carrying value of our term loan approximates fair value because interest rates are variable, based on prevailing market rates. 30 ITEM 4. - CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2003 are effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 31 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. We do 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. We are a party to a lawsuit (as a result of Stocker Resources, Inc.'s merger into us) regarding an electric services contract with Commonwealth Energy Corporation. In this lawsuit, we are seeking a declaratory judgment that we are entitled to terminate the contract and that Commonwealth has no basis for proceeding against a related $1.5 million performance bond. In a countersuit against us, Commonwealth is seeking unspecified damages. The two cases have been consolidated and set for trial in December 2003. We intend to defend our rights vigorously in this matter. Under the spin-off agreements, PXP will indemnify us against this lawsuit. We do not believe that the outcome of these legal proceedings, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following items were presented for approval to stockholders of record on March 21, 2003 at the Company's 2003 annual meeting of stockholders which was held on May 15, 2003 in Houston, Texas: (i) Election of Directors: Abstained or For Against Withheld --- ------- ------------ James C. Flores 19,054,666 - 917,171 William H. Hitchcock 15,432,087 - 4,539,750 William C. O'Malley 19,054,626 - 917,211 D. Martin Phillips 19,054,551 - 917,286 Robert V. Sinnott 19,054,626 - 917,211 J. Taft Symonds 19,054,591 - 917,246 (ii)Ratification of PricewaterhouseCoopers LLP, independent certified public accountants, as auditors of the Company's financial statements for the fiscal year ended December 31, 2003. 18,921,195 1,047,726 2,917 Of the 24,197,902 shares of common stock issued and outstanding on March 22, 2002, 19,971,837 were voted. All matters received the required number of votes for approval. 32 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 First Amendment to Secured Term Loan Agreement dated as of May 9, 2003, by and among Plains Resources Inc., Bank of Montreal as Administrative Agent, Bank One, NA, as Syndication Agent, Wells Fargo Bank Texas, NA, as Collateral Agent and Documentation Agent, and the Lenders named therein. 10.2 Second Amendment to Secured Term Loan Agreement dated as of June 6, 2003, by and among Plains Resources Inc., Bank of Montreal as Administrative Agent, Bank One, NA, as Syndication Agent, Wells Fargo Bank Texas, NA, as Collateral Agent and Documentation Agent, and the Lenders named therein. 31.1 Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K A Current Report on Form 8-K was filed on May 2, 2003 with respect to (i) estimates of certain results for the three months ended June 30, 2003 and the year ended December 31, 2003; and (ii) the Company's press release reporting first quarter 2003 earnings. ITEMS 2, 3 & 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 33 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: August 14, 2003 By: /s/ Stephen A. Thorington --------------------------------- Stephen A. Thorington Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 34 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.1 First Amendment to Secured Term Loan Agreement dated as of May 9, 2003, by and among Plains Resources Inc., Bank of Montreal as Administrative Agent, Bank One, NA, as Syndication Agent, Wells Fargo Bank Texas, NA, as Collateral Agent and Documentation Agent, and the Lenders named therein. 10.2 Second Amendment to Secured Term Loan Agreement dated as of June 6, 2003, by and among Plains Resources Inc., Bank of Montreal as Administrative Agent, Bank One, NA, as Syndication Agent, Wells Fargo Bank Texas, NA, as Collateral Agent and Documentation Agent, and the Lenders named therein. 31.1 Certification of Chief Executive Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-10.1 3 h08394exv10w1.txt 1ST AMEND. TO SECURED TERM LOAN AGREEMENT EXHIBIT 10.1 FIRST AMENDMENT TO SECURED TERM LOAN AGREEMENT This First Amendment to Secured Term Loan Agreement dated as of May 9, 2003 ("First Amendment"), is by and among PLAINS RESOURCES INC., a Delaware corporation (the "Borrower"), BANK OF MONTREAL, acting through certain of its U.S. branches or agencies, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), BANK ONE, NA, as syndication agent (in such capacity, the "Syndication Agent"), WELLS FARGO BANK TEXAS, NA, as collateral agent (in such capacity, the "Collateral Agent") and documentation agent (in such capacity, the "Documentation Agent", and together with the Administrative Agent, the Syndication Agent, and the Collateral Agent, collectively, the "Agents") and the various commercial lending institutions as are or may become parties to the Loan Agreement (collectively, the "Lenders"). This First Amendment amends that certain Secured Term Loan Agreement dated as of December 6 2002 (the "Loan Agreement"), by and among the Borrower, the Agents and the Lenders. W I T N E S S E T H: WHEREAS, pursuant to a certificate of conversion filed with the Secretary of State of Delaware, effective as of May 2, 2003, Plains Holdings LLC, a Delaware limited liability company and an indirect subsidiary of the Borrower (the "LLC"), was converted to Plains Holdings II Inc., a Delaware corporation; WHEREAS, the LLC is party to several Loan Documents described in the Loan Agreement; and WHEREAS, in order to reflect the change in the LLC's name and corporate status, the Lenders, the Borrower and the other parties to the Loan Agreement desire to amend the Loan Agreement in certain respects as specifically set forth herein: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration received by each party hereto, and each intending to be legally bound hereby, the parties hereto agree as follows: 1. Amendments to Loan Agreement. All references in the Loan Agreement to the term "Plains Holdings LLC" are hereby amended to read, in each instance, "Plains Holdings II". 2. Amendment to Section 1.1 of the Loan Agreement. The definition of "Plains Holdings LLC" is hereby deleted from Section 1.1 of the Loan Agreement and replaced in its entirety by the following: "Plains Holdings II" means Plains Holdings II Inc., a Delaware corporation and a wholly-owned Subsidiary of Plains Holdings Inc. 3. Defined Terms. Unless otherwise defined herein, terms used herein that are defined in the Loan Agreement shall have the same meanings herein as in the Loan Agreement. 1 4. Reaffirmation of Loan Agreement. This First Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other Loan Document shall hereafter be deemed to refer to the Loan Agreement as amended hereby. 5. Governing Law; Entire Agreement, etc. THIS FIRST AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS. The Loan Agreement, as hereby amended, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. 6. Severability. Any provision of this First Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this First Amendment affecting the validity or enforceability of such provision in any other jurisdiction. 7. Execution in Counterparts, Effectiveness, etc. This First Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This First Amendment shall become effective when counterparts hereof executed on behalf of the Borrower, the Administrative Agent and each Lender (or notice thereof satisfactory to the Administrative Agent) shall have been received by the Administrative Agent and notice thereof shall have been given by the Administrative Agent to the Borrower and each Lender. 8. Section Captions. The various headings of this First Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this First Amendment or any provisions hereof. 9. Successors and Assigns. This First Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. THE LOAN AGREEMENT, AS HEREBY AMENDED, TOGETHER WITH THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 2 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by its officers thereunto duly authorized as of the date first above written. PLAINS RESOURCES INC., as Borrower By: /s/ John Raymond --------------------------------- Name: John Raymond --------------------------------- Title: CEO & President --------------------------------- BANK OF MONTREAL, acting through its U.S. branches and agencies, including initially its Chicago, Illinois branch, as Administrative Agent By: /s/ Joseph A. Bliss --------------------------------- Name: Joseph A. Bliss --------------------------------- Title: Vice President --------------------------------- BANK OF MONTREAL, as a Lender By: /s/ James V. Ducote --------------------------------- Name: James V. Ducote --------------------------------- Title: Director --------------------------------- BANK ONE, NA (MAIN OFFICE CHICAGO), as Syndication Agent and a Lender By: /s/ Charles Kingswell-Smith --------------------------------- Name: Charles Kingswell-Smith --------------------------------- Title: Director --------------------------------- WELLS FARGO BANK TEXAS, NA, as Collateral Agent, Documentation Agent and a Lender By: /s/ Paul A. Squires --------------------------------- Name: Paul A. Squires --------------------------------- Title: Vice President --------------------------------- EX-10.2 4 h08394exv10w2.txt 2ND AMEND. TO SECURED TERM LOAN AGREEMENT EXHIBIT 10.2 SECOND AMENDMENT TO SECURED TERM LOAN AGREEMENT THIS SECOND AMENDMENT TO SECURED TERM LOAN AGREEMENT dated as of June 6, 2003 (this "Amendment"), is by and among PLAINS RESOURCES INC., a Delaware corporation (the "Borrower"), BANK OF MONTREAL, acting through certain of its U.S. branches or agencies, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"), BANK ONE, NA, as syndication agent (in such capacity, the "Syndication Agent"), WELLS FARGO BANK TEXAS, NA, as collateral agent (in such capacity, the "Collateral Agent") and documentation agent (in such capacity, the "Documentation Agent", and together with the Administrative Agent, the Syndication Agent, and the Collateral Agent, collectively, the "Agents") and the various commercial lending institutions as are or may become parties to the Loan Agreement (collectively, the "Lenders"). This Amendment amends that certain Secured Term Loan Agreement dated as of December 6, 2002, by and among the Borrower, the Agents and the Lenders, as previously amended by that certain First Amendment to Secured Term Loan Agreement, dated as of May 9, 2003, by and among the Borrower, the Agents and the Lenders (the "Loan Agreement"). W I T N E S S E T H: WHEREAS, the Borrower has requested that the Agents and the Lenders make certain amendments to the Loan Agreement and the other Loan Documents to permit the Borrower to borrow additional amounts to repurchase all amounts outstanding under the Borrower's Series D Cumulative Convertible Preferred Stock (the "Preferred Stock"); and WHEREAS, in order to permit the Borrower to borrow additional amounts to repurchase all amounts outstanding under the Preferred Stock and to make certain other amendments, the Lenders, the Borrower and the other parties to the Loan Agreement desire to amend the Loan Agreement in certain respects as specifically set forth herein: NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration received by each party hereto, and each intending to be legally bound hereby, the parties hereto agree as follows: 1. Amendments to the Loan Agreement. (a) Section 1.1 of the Loan Agreement is hereby amended by inserting the following definition of "Additional Loans" and "Preferred Stock" in appropriate alphabetical order: " "Additional Loans" is defined in Section 2.7." " "Preferred Stock" means the shares of capital stock described on Schedule 3 hereto." (b) The definitions of "Commitment Amount", "Pledged Common Units", "Stated Maturity Date" and "Total Commitment Amount" in Section 1.1 of the Loan Agreement are amended in their entirety to read as follows: " "Commitment Amount" means, relative to any Lender, the amount set forth on Schedule 2 hereto or set forth in the applicable Lender Assignment Agreement, as such amount may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to Section 10.11." " "Pledged Common Units" means the 5,200,000 Common Units beneficially owned by Plains Holdings II and pledged pursuant to a Pledge Agreement hereunder, as such number may be adjusted from time to time." " "Stated Maturity Date" means May 31, 2006." " "Total Commitment Amount" means, on any date, $60,000,000, as such amount may be reduced from time to time pursuant to Section 2.2." (c) Section 2.7 of the Loan Agreement is amended in its entirety to read as follows: " SECTION 2.7 Additional Loan; Termination of Commitments. In addition to the Loans first advanced under this Agreement, on or before June 30, 2003, the Borrower may request that the Lenders make Loans in an aggregate amount of $24,000,000 (the "Additional Loans") and, upon such request, the Additional Loans shall be made by the Lenders ratably in accordance with their respective Percentages; provided, however, that any Additional Loans may only be made in connection with, and on the date of, the consummation of the acquisition by the Borrower of the Preferred Stock for the sole purpose of funding the acquisition of the Preferred Stock and related expenses. No Lender shall have any further Commitment from or after the earlier to occur of (a) the date on which its Additional Loan is advanced to the Borrower or (b) June 30, 2003." (d) Section 3.1(b) of the Loan Agreement is amended in its entirety to read as follows: " (b) shall repay the original outstanding principal amount of all Loans (i) in equal installments of four million five hundred thousand dollars ($4,500,000) on February 28, 2003 and May 31, 2003, and (ii) in twelve equal installments of five million dollars ($5,000,000) on each Quarterly Payment Date beginning August 31, 2003, with the final installment payable on the Stated Maturity Date;". (e) Section 7.1 of the Loan Agreement is amended by adding the following Section 7.1.12 immediately after Section 7.1.11 thereof: " SECTION 7.1.12 Agreement to Deliver Certificate of Good Standing. The Borrower will deliver to the Administrative Agent, within thirty (30) days following June 6, 2003, certificates of the appropriate government officials of the state of organization of the Borrower as to the 2 existence and good standing of the Borrower, each dated within thirty (30) days prior to the date of delivery pursuant to this Section 7.1.12." (f) Section 7.2.4(a) of the Loan Agreement is amended in its entirety to read as follows: " (a) its Consolidated Tangible Net Worth at any time to be less than the sum of (i) $65,000,000 plus (ii) fifty percent (50%) of any net income earned after December 31, 2002, plus (iii) seventy-five percent (75%) of the net proceeds of any future equity offerings by the Borrower, excluding any future asset impairment write-downs required by GAAP or SEC guidelines and hedging adjustments relating to FAS 133; and" (g) Section 7.2.6(a) of the Loan Agreement is amended in its entirety to read as follows: " (a) the Borrower will not declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower (other than dividends or distributions payable in its common stock or warrants to purchase its common stock or splitups or reclassifications of its stock into additional or other shares of its common stock) or apply, or permit any of its Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of, or agree or permit any of its Subsidiaries to purchase or redeem, any shares of any class of capital stock (now or hereafter outstanding) of the Borrower, or warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower; provided, however, that, without otherwise limiting the generality of the foregoing, the Borrower may repurchase the Preferred Stock;" (h) The Loan Agreement is hereby amended by attaching Schedule 2 hereto as Schedule 2 to the Loan Agreement, which schedule is made a part thereof in all respects. (i) The Loan Agreement is hereby amended by attaching Schedule 3 hereto as Schedule 3 to the Loan Agreement, which schedule is made a part thereof in all respects. 2. Defined Terms. Unless otherwise defined herein, terms used herein that are defined in the Loan Agreement shall have the same meanings herein as in the Loan Agreement. In addition, it is expressly understood that the term Loan Documents as used herein or in any other Loan Document includes this Amendment and the Second Amendment to Pledge Agreement and Irrevocable Proxy made by Plains Holdings II Inc. dated as of even date herewith for all purposes, including for the purposes of Section 3. 3. Representations and Warranties. To induce the Administrative Agent and each Lender to enter into this Amendment, the Borrower, as of the date hereof and as of the date of any Additional Loan, hereby reaffirms to the Administrative Agent and each Lender that each of 3 its representations and warranties contained in Article VI of the Loan Agreement (as amended hereby) other than Section 6.1 thereof with respect to the Borrower and in the other Loan Documents (except to the extent such representations and warranties relate solely to an earlier date) are true and correct, and additionally represents and warrants to the Administrative Agent and each Lender as follows: (a) The execution, delivery and performance by each Obligor of this Amendment and each other Loan Document executed or to be executed by it in connection herewith are within such Obligor's powers, have been duly authorized by all necessary action, and do not (a) violate any Obligor's Organic Documents; (b) violate any other contractual restriction, law or governmental regulation or court decree or order binding on or affecting any Obligor or its Assets; or (c) result in, or require the creation or imposition of, any Lien on any of any Obligor's properties except for Liens granted under the Loan Documents. (b) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body or other Person is required for the due execution, delivery or performance by any Obligor of this Amendment or any other Loan Document to which it is a party executed in connection herewith other than recording of Security Documents with appropriate Governmental Authorities. (c) This Amendment and each other Loan Document executed by each Obligor in connection herewith will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of such Obligor, enforceable in accordance with their respective terms. Without limiting the foregoing, each Security Document executed by an Obligor in connection with this Amendment constitutes the legal, valid and binding obligation of such Obligor enforceable in accordance with its respective terms, and, subject to Permitted Liens upon proper filing and recording, it will create a valid and perfected first priority security interest in the Assets of such Obligor as provided therein to the extent a first priority security interest can be perfected in such Assets by filing and recording. (d) Since the date of the financial statements described in Section 6.5 of the Loan Agreement, there has been no material adverse change in the business, condition (financial or otherwise), operations, assets, properties or prospects of the Borrower and its Subsidiaries. (e) As of the date hereof, no Default or Event of Default has occurred and is continuing. 4. Reaffirmation of Loan Agreement. This Amendment shall be deemed to be an amendment to the Loan Agreement, and the Loan Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Loan Agreement herein and in any other Loan Document shall hereafter be deemed to refer to the Loan Agreement as amended hereby. 4 5. Governing Law; Entire Agreement, etc. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS. The Loan Agreement, as hereby amended, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. 6. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment affecting the validity or enforceability of such provision in any other jurisdiction. 7. Execution in Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. 8. Effectiveness. This Amendment shall become effective upon the Administrative Agent receiving the following and notice thereof shall have been given by the Administrative Agent to the Borrower and each Lender: (a) counterparts hereof executed on behalf of the Borrower, the Agents and each Lender (or, in the case of any party as to which an executed counterpart shall have not been received, facsimile, telegraphic, telex or other written confirmation, satisfactory to the Administrative Agent, from such party of execution of the counterpart hereof by such party); (b) for the account of each Lender, a Note, reflecting the increase in such Lender's Commitment Amount pursuant to this Amendment, duly executed and delivered by the Borrower; (c) (i) counterparts of the Second Amendment to Pledge Agreement and Irrevocable Proxy, dated the date hereof ("Second Amendment to Pledge"), executed on behalf of Plains Holdings II and the Collateral Agent (or, in the case of any party as to which an executed counterpart shall have not been received, facsimile, telegraphic, telex or other written confirmation, satisfactory to the Administrative Agent, from such party of execution of the counterpart hereof by such party); (ii) certificates representing the Pledged Common Units owned by Plains Holdings II as of the date of this Amendment, and stock powers and instruments of transfer, endorsed in blank, with respect to such certificates; (iii) all documents and instruments, including Uniform Commercial Code Financing Statements (Form UCC-3), required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create or perfect the Liens intended to be created under the Pledge Agreement by Plains Holdings II, as amended by the Second Amendment to Pledge; and (iv) certified copies of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or a similar search report certified by a party acceptable to the Administrative Agent, dated a date reasonably near to the date of this Amendment, listing all effective financing statements that name Plains 5 Holdings II (under its present name and any previous names) as the debtor and that are filed in the jurisdictions in which filings will be made pursuant to clause (iii) above, together with copies of such financing statements; (d) from each of the Borrower and Plains Holdings II, a certificate, dated the date hereof, of a duly authorized officer thereof with knowledge of the certifications and statements therein certifying that attached thereto are true, correct and complete copies of: (i) resolutions of its Board of Directors or other governing body then in full force and effect authorizing the execution, delivery and performance of this Amendment, the Notes and each other Loan Document to be executed by it pursuant to this Amendment; (ii) the incumbency and signatures of those of its officers authorized to act with respect to each Loan Document executed by it, upon which certificate each Lender may conclusively rely until it shall have received a further certificate of the Secretary of the Borrower or Plains Holdings II canceling or amending such prior certificate; and (iii) all its Organic Documents; (e) from Plains Holdings II, certificates of the appropriate government officials of the state of organization of Plains Holdings II as to the existence and good standing of Plains Holdings II, each dated within thirty (30) days prior to the date of delivery pursuant hereto; (f) (i) for the account of the Administrative Agent, all fees, costs and expenses due and payable pursuant to that certain Fee Letter dated June 6, 2003 from the Administrative Agent to the Borrower, and pursuant to Section 10.3 of the Loan Agreement, if then invoiced and (ii) for the account of each Lender, all fees, costs and expenses due and payable pursuant to that certain Fee Letter dated June 6, 2003 from the Administrative Agent on behalf of each Lender to the Borrower, if then invoiced; (g) a legal opinion, dated the date of this Amendment and addressed to the Administrative Agent and all Lenders, from Bracewell & Patterson, L.L.P, special counsel to the Borrower, regarding the enforceability of this Amendment and related Loan Documents and the perfection of the Liens under the Security Documents, in form and substance acceptable to the Administrative Agent in its reasonable discretion; and (h) evidence of the contemporaneous acquisition by the Borrower of the Preferred Stock. 9. Section Captions. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof. 10. Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. THE LOAN AGREEMENT, AS HEREBY AMENDED, TOGETHER WITH THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, 6 CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by its officers thereunto duly authorized as of the date first above written. PLAINS RESOURCES INC., as Borrower By: /s/ Stephen A. Thorington ---------------------------------------- Name: Stephen A. Thorington Title: Executive Vice President & CFO RATIFICATION BY GUARANTORS Each Subsidiary Guarantor acknowledges that the Guaranty to which it is a party remains in full force and effect and under its terms guarantees the Obligations of the Borrower pursuant to the Loan Agreement as amended by this Amendment, and that such Guaranty is hereby ratified, approved and confirmed in each and every respect. PLAINS HOLDINGS INC., as a Subsidiary Guarantor By: /s/ John T. Raymond ---------------------------------------- Name: John T. Raymond Title: President PLAINS HOLDINGS II INC., as a Subsidiary Guarantor By: /s/ John T. Raymond ---------------------------------------- Name: John T. Raymond Title: President CALUMET FLORIDA, L.L.C., as a Subsidiary Guarantor By: /s/ John T. Raymond ---------------------------------------- Name: John T. Raymond Title: President S-1 BANK OF MONTREAL, acting through its U.S. branches and agencies, including initially its Chicago, Illinois branch, as Administrative Agent By: /s/James V. Ducote ---------------------------------------- Name: James V. Ducote Title: Director S-2 BANK OF MONTREAL, as a Lender By: /s/James V. Ducote ---------------------------------------- Name: James V. Ducote Title: Director S-3 BANK ONE, NA (MAIN OFFICE CHICAGO), as Syndication Agent and a Lender By: /s/Jeanie Gonzales ---------------------------------------- Name: Jeanie Gonzales Title: Director S-4 WELLS FARGO BANK TEXAS, NA, as Collateral Agent, Documentation Agent and a Lender By: /s/ Paul Squires ---------------------------------------- Name: Paul Squires Title: Vice President S-5 EX-31.1 5 h08394exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION I, John T. Raymond, Chief Executive Officer and President of Plains Resources Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Plains Resources Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ John T. Raymond -------------------------------------------- Name: John T. Raymond Title: Chief Executive Officer and President Date: August 14, 2003 EX-31.2 6 h08394exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Stephen A. Thorington, Executive Vice President and Chief Financial Officer of Plains Resources Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Plains Resources Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ Stephen A. Thorington ----------------------------------------- Name: Stephen A. Thorington Title: Executive Vice President and Chief Financial Officer Date: August 14, 2003 EX-32.1 7 h08394exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 SECTION 906 CERTIFICATION - CEO In connection with the Quarterly Report of Plains Resources Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John T. Raymond, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: To the best of my knowledge, after reasonable investigation: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 14, 2003. /s/ John T. Raymond ------------------------------------- John T. Raymond Chief Executive Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 8 h08394exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 SECTION 906 CERTIFICATION - CFO In connection with the Quarterly Report of Plains Resources Inc.. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen A. Thorington, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: To the best of my knowledge, after reasonable investigation: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: August 14, 2003. /s/ Stephen A. Thorington -------------------------------------- Stephen A. Thorington Chief Financial Officer The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Report or as a separate disclosure document. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----