10-Q 1 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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) 654-1414 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No_____ 23,314,000 shares of common stock $0.10 par value, issued and outstanding at October 31, 2001. ================================================================================ PLAINS RESOURCES INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page PART I. FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets: September 30, 2001 and December 31, 2000.................................................................. 3 Consolidated Income Statements: For the three and nine months ended September 30, 2001 and 2000........................................... 4 Condensed Consolidated Statements of Cash Flows: For the nine months ended September 30, 2001 and 2000..................................................... 5 Notes to Consolidated Financial Statements......................................................................... 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................... 21 PART II. OTHER INFORMATION......................................................................................... 31
2 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands of dollars)
September 30, December 31, 2001 2000 -------------- ------------- (unaudited) ASSETS Current Assets Cash and cash equivalents $ 17,345 $ 5,080 Accounts receivable and other 35,199 375,485 Inventories Crude oil 2,614 49,261 Materials and supplies 5,553 5,583 -------------- ------------- 60,711 435,409 -------------- ------------- Property and Equipment Oil and natural gas properties - full cost method 912,210 804,826 Crude oil pipeline, gathering and terminal assets - 470,460 Other property and equipment 3,972 6,453 -------------- ------------- 916,182 1,281,739 Less allowance for depreciation, depletion and amortization (430,024) (437,465) -------------- ------------- 486,158 844,274 -------------- ------------- Investment in Plains All American Pipeline LP 48,658 - -------------- ------------- Other Assets Linefill - 34,312 Deferred income taxes - 47,974 Other 23,677 32,360 -------------- ------------- 23,677 114,646 -------------- ------------- $ 619,204 $ 1,394,329 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities $ 62,998 $ 413,309 Notes payable and other current obligations 511 1,811 -------------- ------------- 63,509 415,120 -------------- ------------- Long-Term Debt Bank debt - 27,300 Bank debt of subsidiary - 320,000 Subordinated debt 277,255 277,543 Other 1,022 1,533 -------------- ------------- 278,277 626,376 Other Long-Term Liabilities 3,709 3,422 Deferred Income Taxes 34,852 - Minority Interest in Plains All American Pipeline LP - 162,271 Cumulative Convertible Preferred Stock - 50,000 Stockholders' Equity 238,857 137,140 -------------- ------------- $ 619,204 $ 1,394,329 ============== =============
See notes to consolidated financial statements. 3 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues Crude oil and liquids $ 50,771 $ 34,866 $ 143,486 $ 100,322 Natural gas 3,352 4,027 26,870 8,586 Other operating revenues 45 - 468 - Midstream revenues - 1,502,881 - 4,892,818 ----------- ----------- ----------- ----------- 54,168 1,541,774 170,824 5,001,726 ----------- ----------- ----------- ----------- Costs and Expenses Production expenses 19,054 15,740 53,084 46,363 Midstream costs and expenses - 1,477,328 - 4,798,755 General and administrative 2,734 11,970 18,294 33,565 Depreciation, depletion and amortization 7,163 10,766 20,547 36,023 Loss (gain) on disposition of assets - - - (48,188) ----------- ----------- ----------- ----------- 28,951 1,515,804 91,925 4,866,518 ----------- ----------- ----------- ----------- Income from Operations 25,217 25,970 78,899 135,208 Other Income (Expense) Equity in earnings of PAA 5,207 - 15,798 - Gain on PAA units 918 - 151,089 - Interest expense (6,313) (13,095) (20,136) (41,912) Interest and other income 93 689 91 7,278 ----------- ----------- ----------- ----------- Income Before Minority Interest, Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change 25,122 13,564 225,741 100,574 Minority interest in PAA - (2,047) - (39,451) Income tax expense Current (1,118) (220) (10,045) (741) Deferred (8,850) (4,271) (79,488) (23,096) ----------- ----------- ----------- ----------- Income Before Extraordinary Item and Cumulative Effect of Accounting Change 15,154 7,026 136,208 37,286 Extraordinary item - - - (4,988) Cumulative effect of accounting change - - (1,986) (121) ----------- ----------- ----------- ----------- Net Income 15,154 7,026 134,222 32,177 Preferred dividend requirement (350) (3,694) (26,896) (11,106) ----------- ----------- ----------- ----------- Income Attributable to Common Shares $ 14,804 $ 3,332 $ 107,326 $ 21,071 =========== =========== =========== =========== Earnings per Share Income Before Extraordinary Item and Cumulative Effect of Accounting Change Basic $ 0.63 $ 0.19 $ 5.41 $ 1.46 Diluted $ 0.58 $ 0.18 $ 4.03 $ 1.26 Net Income Basic $ 0.63 $ 0.19 $ 5.31 $ 1.17 Diluted $ 0.58 $ 0.18 $ 3.95 $ 1.09 Weighted Average Shares Outstanding Basic 23,464 17,970 20,204 17,961 Diluted 26,227 18,938 27,904 29,621
See notes to consolidated financial statements. 4 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) (unaudited)
Nine Months Ended September 30, ------------------------------ 2001 2000 ------------- ------------- Cash Flows from Operating Activities Net income $ 134,222 $ 32,177 Items not affecting cash flows from operating activities: Depreciation, depletion and amortization 20,547 36,023 Equity in earnings of PAA (15,798) - Distributions from PAA 24,596 - Minority interest in income of a subsidiary - 32,484 Gain on sale of PAA units (151,089) - Gain on sale of assets - (48,188) Deferred income taxes 79,488 23,096 Cumulative effect of accounting change 1,986 121 Change in derivative fair value 1,227 - Noncash compensation expense 4,514 - Other noncash items 1,664 9,713 Change in assets and liabilities from operating activities: Current and other assets 15,052 77,252 Current and other liabilities (31,104) (145,204) ------------- ------------- Net cash provided by operating activities 85,305 17,474 ------------- ------------- Cash Flows from Investing Activities Oil and gas properties and equipment 100,097) (49,850) Midstream properties and equipment - (6,859) Other properties and equipment (530) (2,205) Sale of PAA units 106,941 - Sale of assets - 223,859 Investment in PAA (2,816) - ------------- ------------- Net cash provided by investing activities 3,498 164,945 ------------- ------------- Cash Flows from Financing Activities Net change in long-term debt (27,811) (142,911) Net change in short-term debt - (58,719) Costs in connection with financing arrangements - (6,500) Exercise of stock options 5,543 - Treasury stock purchases (42,749) (4,221) Preferred stock dividends paid (7,998) (6,392) Distributions to PAA unitholders - (21,966) Other (98) (72) ------------- ------------- Net cash used in financing activities (73,113) (240,781) ------------- ------------- Net increase (decrease) in cash and cash equivalents 15,690 (58,362) Decrease in cash due to deconsolidation of PAA (3,425) - Cash and cash equivalents, beginning of period 5,080 68,228 ------------- ------------- Cash and cash equivalents, end of period $ 17,345 $ 9,866 ============= =============
See notes to consolidated financial statements. 5 PLAINS RESOURCES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 - Organization and Accounting Policies The consolidated financial statements of income and cash flows for the periods ended September 30, 2000 and the consolidated balance sheet at December 31, 2000 include the accounts of Plains Resources Inc. ("Plains", "our", or "we"), our wholly owned subsidiaries and Plains All American Pipeline, L.P. ("PAA"). In June 2001 we reduced our interest in PAA from 54% to 33% as discussed in Note 2 and as a result we no longer have the ability to exercise control over the operations of PAA. Accordingly, our minority interest investment in PAA is accounted for using the equity method of accounting, presented retroactively to January 1, 2001. Under the equity method, we no longer consolidate the assets, liabilities and operating activities of PAA, but instead record our proportionate share of PAA's results of operations. The accompanying consolidated financial statements and related notes present our consolidated financial position as of September 30, 2001, and December 31, 2000, the results of our operations for the three months and nine months ended September 30, 2001 and 2000, and our cash flows for the nine months ended September 30, 2001 and 2000. The financial statements have been prepared in accordance with the instructions with respect to interim reporting as prescribed by the Securities and Exchange Commission ("SEC"). For further information, refer to our Form 10-K for the year ended December 31, 2000, filed with the SEC. All adjustments, consisting only of normal recurring adjustments, that in the opinion of management were necessary for a fair statement of the results for the interim periods, have been reflected. All significant intercompany transactions have been eliminated. The results for the nine months ended September 30, 2001, are not necessarily indicative of the final results to be expected for the full year. Certain reclassifications have been made to prior periods to conform to the current period presentation. We evaluate the capitalized costs of our oil and natural gas properties on an ongoing basis and have utilized the most recently available information to estimate our reserves at September 30, 2001, in order to determine the realizability of such capitalized costs. Future events, including drilling activities, product prices and operating costs, may affect future estimates of such reserves. Note 2 - Investment in PAA In the second quarter of 2001 PAA issued approximately four million common units in a public equity offering. We recognized a $19.6 million gain 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. In a series of transactions on June 8, 2001, we sold a portion of our interest in PAA to a group of investors and certain members of PAA management for aggregate consideration of approximately $155.2 million (consisting of $110.0 million in cash and $45.2 million in Series F Preferred Stock) and recognized a pre-tax gain of $128.6 million. In addition, certain holders of our Series F Cumulative Convertible Preferred Stock (the "Series F Preferred Stock") and Series H Convertible Preferred Stock (the "Series H Preferred Stock") converted their shares into shares of our common stock. We sold (i) 5.2 million Subordinated Units of PAA (the "Subordinated Units") for $69.5 million in cash and the redemption of 23,108 shares of Series F Preferred Stock, valued at $45.2 million; and (ii) an aggregate 54% ownership interest in the general partner of PAA for $40.5 million in cash. In addition, the investor group and certain other stockholders converted 26,892 shares of Series F Preferred Stock and 132,022 shares of Series H Preferred Stock into a total of 6.6 million shares of our common stock. On September 5, 2001, pursuant to an option granted as part of the June 8, 2001 transactions, certain members of the executive management of PAA acquired an aggregate additional 2% ownership interest in the general partner of PAA for $1.5 million in cash and notes, further reducing our ownership in the general partner of PAA to 44%. We recognized a gain of $0.9 million as a result of this transaction. These transactions in the aggregate are hereinafter referred to as "the Transactions". As a result of the Transactions, all of the Series F Preferred Stock and all but approximately 36,000 shares of the Series H Preferred Stock were retired or converted. The remaining outstanding shares of the Series H Preferred Stock converted to 1.2 million shares of common stock during the third quarter. Also as a result of the Transactions, certain of our employees received transaction-related bonuses and other payments and vested in benefits in accordance with the terms of certain of our employee benefit plans. 6 The excess of the fair value of the Series F Preferred stock as consideration for the PAA Units over the carrying value of the Series F Preferred Stock ($21.4 million) is deemed to be a dividend to preferred stockholders and is deducted in determining the income available to common stockholders for the purpose of determining basic and fully diluted earnings per share. In connection with the conversion of the Series F Preferred Stock into common stock, we made a $2.5 million inducement payment representing a 20% premium to the amount of dividends that would accrue on the Series F Preferred Stock between the closing of the Transactions and the first date we could potentially cause such conversion. The Subordinated Units are subordinated in right to distributions from PAA and are not publicly traded. However, PAA's partnership agreement provides that, if certain financial tests are met, the Subordinated Units (including those retained by us) will convert into common units on a one-for-one basis commencing in 2003. In connection with the Transactions, we entered into Value Assurance Agreements with such purchasers of the Subordinated Units 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 expire upon the earlier of (a) the conversion of the Subordinated Units to common units or (b) June 8, 2006. PAA recently announced a quarterly distribution, payable in the fourth quarter of 2001, of $0.5125 per unit ($2.05 annualized). At March 31, 2001, our aggregate ownership interest in PAA was approximately 54%. Following the sale of common units by PAA in a public equity offering in May 2001 and the Transactions, our aggregate ownership interest in PAA was approximately 33%. At September 30, 2001, our aggregate 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) 28% or approximately 7.9 million of the common units (including approximately 1.3 million Class B common units). As a result of the Transactions, our minority investment in PAA is accounted for using the equity method of accounting presented retroactively to January 1, 2001. Under the equity method, we no longer consolidate the assets, liabilities and operating activities of PAA, but instead record our proportionate share of PAA' s results of operations. Also in connection with the Transactions, we entered into a separation agreement with PAA pursuant to which, among other things, (a) we agreed to indemnify PAA, the general partner of PAA, and the subsidiaries of PAA against any losses or liabilities resulting from (i) the operation of the upstream business or (ii) federal or state securities laws, or the regulations of any self-regulatory authority, or other similar claims resulting from acts or omissions by us, our subsidiaries, PAA, or PAA's subsidiaries on or before the closing of the Transactions; and (b) PAA agreed to indemnify us and our subsidiaries against any losses or liabilities resulting from the operation of the midstream business. We also entered into a pension and employee benefits assumption and transition agreement pursuant to which the general partner of PAA and us agreed to the transition of certain employees to such general partner, the provision of certain benefits with respect to such transfer, and the provision of other transition services by us. In October 2001 PAA issued 4.5 million Common Units in a public offering. As a result of the offering, we made a general partner capital contribution of approximately $1.0 million, and our aggregate ownership interest in PAA was reduced to approximately 29%. In the fourth quarter of 2001 we will report a gain of approximately $18.0 million resulting from the increase in book value of our equity in PAA to reflect our proportionate share of the increase in the underlying net assets of PAA resulting from this public offering. 7 The following table presents summarized financial statement information of PAA (in thousands of dollars):
3 Months Ended 9 Months Ended Sept. 30, 2001 Sept. 30, 2001 ---------------- ---------------- Revenues 2,191,310 5,298,051 Expenses 2,151,666 5,189,288 Gross margin 39,644 108,763 Operating income 22,945 56,861 Income before cumulative effect of accounting change 15,161 34,735 Net income 15,161 35,243 At Sept. 30, 2001 ---------------- Current assets 633,308 Property and equipment, net 589,908 Other assets 75,877 Total assets 1,299,093 Current liabilities 571,285 Long-term debt 434,540 Other long-term liabilities 1,017 Partners' capital 292,251 Total liabilities and partners' capital 1,299,093
Note 3 - Derivative Instruments and Hedging Activities On January 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138 ("SFAS 133"). Under SFAS 133, all derivative instruments are recorded on the balance sheet at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings. 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 ("OCI"), a component of Stockholders' Equity, to the extent the hedge is effective. 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. Gains and losses on hedging instruments related to OCI and adjustments to carrying amounts on hedged volumes are included in oil and gas revenues in the period that the related volumes are delivered. Gains and losses of hedging instruments, which represent hedge ineffectiveness and changes in the time value component of the fair value, are included in oil and gas revenues in the period in which they occur. We utilize various derivative instruments, for purposes other than trading, to hedge our exposure to price fluctuations on crude oil sales. The derivative instruments consist primarily of option contracts traded on the New York Mercantile Exchange and crude oil swap contracts entered into with financial institutions. We do not currently have any natural gas hedges. We also utilize interest rate swaps and collars to manage the interest rate exposure on our long-term debt. 8 On January 1, 2001, in accordance with the transition provisions of SFAS 133, we recorded a gain of $4.5 million in OCI representing the cumulative effect of an accounting change to recognize at fair value all cash flow derivatives, including our equity in the cash flow derivatives of PAA. We recorded cash flow hedge derivative assets and liabilities of $20.6 million and $18.1 million, respectively, and a net-of-tax non-cash charge of $2.0 million was recorded in earnings as a cumulative effect adjustment. During the first nine months of 2001 gains of $0.3 million (which were included in the cumulative effect adjustment) were transferred from OCI and the fair value of open positions increased $0.6 million. At December 31, 2000, we had an interest rate swap arrangement to protect interest rate fluctuations on a portion of our outstanding debt. The position was terminated prior to maturity and as a result $0.9 million related to such position was relieved from OCI at September 30, 2001, and the debt was repaid in June. At September 30, 2001, the unrealized gain on our swaps contracts included in OCI was $6.5 million. The related assets and liabilities were included in other current assets and liabilities ($6.8 million and $0.1 million, respectively), other assets ($4.1 million), and deferred income taxes ($4.3 million). Additionally, OCI includes our $2.2 million net of tax equity in the unrealized OCI losses of PAA. As of September 30, 2001, $4.0 million of deferred net gains on derivative instruments recorded in OCI are expected to be reclassified to earnings during the next twelve-month period. Oil and gas revenues for the nine months ended September 30, 2001 include a $3.4 million non-cash loss related to the ineffective portion of the cash flow hedges representing the fair value change in the time value of options. Assets and liabilities related to the time value component of the fair value of options are included in other current assets and liabilities ($2.0 million and $0.3 million, respectively) and other assets ($0.7 million), 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 on a quarterly basis. This process includes specific identification of the hedging instrument and the hedge transaction, 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. No amounts were excluded from the computation of hedge effectiveness. At September 30, 2001, there were no positions which did not qualify for hedge accounting. At September 30, 2001, we had the following open crude oil hedge positions (barrels per day): Barrels Per Day -------------------------------------- 4th Qtr 2001 2002 2003 ------------ ----------- ----------- Collars Average floor price $20.00/bbl Average cap price $27.00/bbl Average cap limit $30.00/bbl 6,000 - - Puts Average price $20.00/bbl 6,000 - - Average price $20.31/bbl - 4,000 - Calls Average price $35.74/bbl 9,000 - - Average price $35.17/bbl - 9,000 - Swaps Average price $27.15/bbl 10,500 - - Average price $24.42/bbl - 15,000 - Average price $23.16/bbl - - 7,500 Our collars consist of three separate options: a purchased put establishes a floor price, a sold call establishes a cap price and a purchased call gives us participation in price increases above the cap price. 9 Note 4 - Comprehensive Income Comprehensive income includes net income and certain items recorded directly to Stockholders' Equity and classified as OCI. We recorded OCI for the first time in the first quarter of 2001. Upon the adoption of SFAS 133, we recorded a credit to OCI of $4.5 million related to the fair value of certain derivative financial instruments that qualified for cash flow hedge accounting. The following table reflects comprehensive income for the nine months ended September 30, 2001 (in thousands of dollars):
Net Income 134,222 ------------ Other Comprehensive Income (Loss) Cumulative effect of change in accounting principle - January 1, 2001 Plains Resources Inc. 6,856 Equity in PAA (2,340) ------------ 4,516 ------------ Reclassification adjustment for settled contracts (963) Changes in fair value of open hedging positions 636 Equity in OCI changes of PAA 75 ------------ (252) ------------ Comprehensive Income 138,486 ============
Note 5 -- Long-Term Debt and Credit Facilities 10.25% Senior Subordinated Notes Due 2006 In March 2001 we exchanged $75.0 million principal amount of our 10.25% Senior Subordinated Notes Due 2006, Series E, for 10.25% Senior Subordinated Notes Due 2006, Series F. The Series F Notes are substantially identical (including principal amount, interest rate, maturity and redemption rights) to the Series E Notes for which they were exchanged, except for certain transfer restrictions relating to the Series E Notes. Revolving Credit Facility We are currently in compliance with the covenants contained in our revolving credit facility. At September 30, 2001, we could have borrowed the full $225.0 million available under the facility. No amounts were outstanding under the revolving credit facility at September 30, 2001. Effective October 5, 2001, we amended the terms of our revolving credit facility, allowing us to purchase up to $150.0 million of any combination of our own common stock, senior subordinated notes and PAA units. The Board of Directors, subject to the $150.0 million limit, has authorized the purchase of up to five million shares of our common stock, our senior subordinated notes and PAA units in the open market from time to time as market conditions are deemed favorable. 10 Note 6 -- Earnings Per Share The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for income from continuing operations before extraordinary items and cumulative effect of accounting change for the three and nine months ended September 30, 2001 and 2000 (dollar amounts and shares in thousands, except per share data):
For the Three Months Ended September 30, --------------------------------------------------------------------------- 2001 2000 ------------------------------------- ------------------------------------- Income Shares Per Income Shares Per (Numera- (Denomi- Share (Numera- (Denomi- Share tor) nator) Amount tor) nator) Amount ------------ ------------ ----------- ------------ ----------- ------------ Net income before extraordinary item 15,154 7,026 Less: preferred stock dividends (350) (3,694) ----------- ----------- Income available to common stockholders 14,804 23,464 0.63 3,332 17,970 0.19 ========== =========== Effect of dilutive securities: Convertible preferred stock 350 1,790 - - Employee stock options and warrants - 973 - 968 ----------- ----------- ----------- ---------- Income available to common stockholders assuming dilution 15,154 26,227 0.58 3,332 18,938 0.18 =========== =========== ========== =========== ========== ===========
For the Nine Months Ended September 30, --------------------------------------------------------------------------- 2001 2000 ------------------------------------- ------------------------------------- Income Shares Per Income Shares Per (Numera- (Denomi- Share (Numera- (Denomi- Share tor) nator) Amount tor) nator) Amount ------------ ------------ ----------- ------------ ----------- ------------ Net income before extraordinary item 136,208 37,286 Less: preferred stock dividends (26,896) (11,106) ----------- ----------- Income available to common stockholders 109,312 20,204 5.41 26,180 17,961 1.46 ========== =========== Effect of dilutive securities: Convertible preferred stock 3,015 6,790 11,106 10,862 Employee stock options and warrants - 910 - 798 ----------- ----------- ----------- ---------- Income available to common stockholders assuming dilution 112,327 27,904 4.03 37,286 29,621 1.26 =========== =========== ========== =========== ========== ===========
For the three months ended September 30, 2001 our Series F Preferred Stock is not included in the effect of dilutive securities as such shares are antidilutive. For the three months ended September 30, 2000, the effect of each of our preferred stocks is antidilutive Note 7 -- Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, this Standard also establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain, rather than deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible assets after an acquisition and is effective for fiscal years beginning after December 15, 2001. The most significant changes made by SFAS 142 are: (i) goodwill and intangible assets with indefinite lives will no longer be amortized; (ii) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and (iii) 11 the amortization period for intangible assets with finite lives will no longer be limited to forty years. The adoption of SFAS 141 and SFAS 142 will have no effect on our financial statements. We will account for all future business combinations and any related goodwill in accordance with the provisions of SFAS 141 and SFAS 142. In June 2001, the FASB issued SFAS No. 143 "Asset Retirement Obligations". SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including (i) the timing of the liability recognition, (ii) initial measurement of the liability, (iii) allocation of asset retirement cost to expense, (iv) subsequent measurement of the liability and (v) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. We will adopt the statement effective January 1, 2003, as required. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, we cannot reasonably estimate the effect of the adoption of this statement on either our financial position, results of operations, or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. There will be no financial implication related to the adoption of SFAS 144, and the guidance will be applied on a prospective basis. We will adopt the statement effective January 1, 2002. Note 8 -- Contingencies Texas Securities Litigation. In November and December of 1999, class action lawsuits were filed in the United States District Court for the Southern District of Texas alleging that PAA and certain of its general partner's officers and directors violated federal securities laws, primarily in connection with unauthorized trading by a former employee. All of the federal securities claims have been consolidated into two actions: (i) the consolidated class action filed by purchasers of our common stock and options which is captioned Koplovitz v. Plains Resources Inc., et al.; and (ii) the consolidated action filed by purchasers of PAA's common units which is captioned Di Giacomo v. Plains All American Pipeline, L.P., et al. We and PAA reached an agreement with representatives for the plaintiffs for the settlement of all of the class actions, and in January 2001, PAA deposited approximately $30.0 million under the terms of the settlement agreement into an escrow account on behalf of the class. The total cost of the settlement to us and PAA, including interest and expenses and after insurance reimbursements, was $14.9 million. Of that amount, $1.0 million was allocated to us by agreement between special independent committees of our board of directors and the board of directors of Plains All American Inc. ("Plains Holdings"), the then general partner of PAA and now known as Plains Holdings Inc. The settlement is subject to final approval by the court. The settlement agreement does not affect the Texas Derivative Litigation and Delaware Derivative Litigation described below. Delaware Derivative Litigation. Beginning December 3, 1999 derivative lawsuits were filed in the Delaware Chancery Court, New Castle County naming Plains Holdings, the then general partner of PAA, its directors and certain of its officers as defendants alleging that the defendants breached the fiduciary duties that they owed to PAA and its unitholders by failing to monitor properly the activities of its employees. The court has consolidated all of the cases under the caption In Re Plains All American Inc. Shareholders Litigation. A motion to dismiss was filed on behalf of the defendants on August 11, 2000. An agreement in principle has been reached with the plaintiffs, subject to approval by the Delaware court, to settle the Delaware litigation by PAA making an aggregate payment of approximately $1.1 million. Texas Derivative Litigation. On July 11, 2000, a derivative lawsuit was filed in the United States District Court for the Southern District of Texas entitled Fernandez v. Plains All American Inc., et al., naming Plains Holdings the then general partner of PAA, its directors and certain of its officers as defendants. This lawsuit contains the same claims and seeks the same relief as the Delaware derivative litigation described above. A motion to dismiss was filed on behalf of the defendants on August 14, 2000. We intend to vigorously defend the claims made in the Texas derivative litigation. We believe that Delaware court approval of the settlement of the Delaware derivative litigation will effectively preclude prosecution of the Texas derivative litigation. However, there can be no assurance that we will be successful in our defense or that this lawsuit will not have a material adverse effect on our financial position or results of operations or cash flows. 12 We, in the ordinary course of business, are a claimant and/or defendant in various other legal proceedings. Management does not believe that the outcome of these legal proceedings, individually and in the aggregate, will have a materially adverse effect on our financial condition, results of operations or cash flows. Note 9 -- Consolidating Financial Statements The following financial information presents consolidating financial statements which include: . the parent company only ("Parent"); . the guarantor subsidiaries on a combined basis ("Guarantor Subsidiaries"); . the nonguarantor subsidiaries on a combined basis ("Nonguarantor Subsidiaries"); . elimination entries necessary to consolidate the Parent, the Guarantor Subsidiaries and the Nonguarantor Subsidiaries; and . Plains Resources Inc. on a consolidated basis. These statements are presented because our Series A-F subordinated notes are not guaranteed by the Nonguarantor Subsidiaries. Because of the Transactions, our investment in PAA is presented on the equity method of accounting, retroactively to January 1, 2001. 13 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET (unaudited) (in thousands) SEPTEMBER 30, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------ ------------- ------------- ASSETS Current Assets Cash and cash equivalents $ 5,322 $ (5,233) $ 17,256 $ - $ 17,345 Accounts receivable and other 11,555 23,644 - 35,199 Inventory - 8,167 - - 8,167 ------------ ------------ ----------- ------------ ------------ 16,877 26,578 17,256 - 60,711 ------------ ------------ ----------- ------------ ------------ Property and Equipment 242,192 673,990 - - 916,182 Less allowance for depreciation, depletion and amortization (217,504) (212,520) - (430,024) ------------ ------------ ----------- ------------ ------------ 24,688 461,470 - - 486,158 ------------ ------------ ----------- ------------ ------------ Investments in Subsidiaries and Intercompany Advances 675,321 (254,610) (161,200) (210,853) 48,658 ------------ ------------ ----------- ------------ ------------ Other Assets 9,959 13,335 383 - 23,677 ------------ ------------ ----------- ------------ ------------ $ 726,845 $ 246,773 $ (143,561) $ (210,853) $ 619,204 ============ ============ =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities $ 14,437 $ 47,021 $ 1,540 $ - $ 62,998 Notes payable and other current obligations - 511 - - 511 ------------ ------------ ----------- ------------ ------------ 14,437 47,532 1,540 - 63,509 Long-Term Obligations Subordinated debt 277,255 - - - 277,255 Other long-term debt - 1,022 - - 1,022 ------------ ------------ ----------- ------------ ------------ 277,255 1,022 - - 278,277 ------------ ------------ ----------- ------------ ------------ Other Long-Term Liabilities 2,362 1,347 - - 3,709 ------------ ------------ ----------- ------------ ------------ Deferred Income Taxes 193,934 (3,725) (42,216) (113,141) 34,852 ------------ ------------ ----------- ------------ ------------ Stockholders' Equity 238,857 200,597 (102,885) (97,712) 238,857 ------------ ------------ ----------- ------------ ------------ $ 726,845 $ 246,773 $ (143,561) $ (210,853) $ 619,204 ============ ============ =========== ============ ============
14 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET (in thousands) DECEMBER 31, 2000
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- -------------- ------------ -------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 4 $ 597 $ 4,479 $ - $ 5,080 Accounts receivable and other 12,193 15,596 347,696 - 375,485 Inventory - 8,063 46,781 - 54,844 ------------ ------------ ----------- ------------ ------------ 12,197 24,256 398,956 - 435,409 ------------ ------------ ----------- ------------ ------------ Property and Equipment, net of accumulated 237,591 570,677 473,471 - 1,281,739 Less allowance for depreciation, depletion and amortization (215,942) (194,257) (27,266) - (437,465) ------------ ------------ ----------- ------------ ------------ 21,649 376,420 446,205 - 844,274 ------------ ------------ ----------- ------------ ------------ Investments in Subsidiaries and Intercompany Advances 389,467 (237,286) (23,977) (128,204) - ------------ ------------ ----------- ------------ ------------ Other Assets 8,151 16,005 90,490 - 114,646 ------------ ------------ ----------- ------------ ------------ $ 431,464 $ 179,395 $ 911,674 $ (128,204) $ 1,394,329 ============ ============ =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and other current liabilities $ 7,105 $ 46,368 $ 359,823 $ 13 $ 413,309 Notes payable and other current obligations - 511 1,300 - 1,811 ------------ ------------ ----------- ------------ ------------ 7,105 46,879 361,123 13 415,120 Long-Term Obligations Bank debt 27,300 - - - 27,300 Bank debt of a subsidiary - - 320,000 - 320,000 Subordinated debt 277,543 - - - 277,543 Other long-term debt - 1,533 - - 1,533 ------------ ------------ ----------- ------------ ------------ 304,843 1,533 320,000 - 626,376 ------------ ------------ ----------- ------------ ------------ Other Long-Term Liabilities 2,413 - 1,009 - 3,422 ------------ ------------ ----------- ------------ ------------ Minority Interest (70,037) - 232,216 92 162,271 ------------ ------------ ----------- ------------ ------------ Cumulative Convertible Preferred Stock 50,000 - - - 50,000 ------------ ------------ ----------- ------------ ------------ Stockholders' Equity 137,140 130,983 (2,674) (128,309) 137,140 ------------ ------------ ----------- ------------ ------------ $ 431,464 $ 179,395 $ 911,674 $ (128,204) $ 1,394,329 ============ ============ =========== ============ ============
15 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF INCOME (unaudited) (in thousands) THREE MONTHS ENDED SEPTEMBER 30, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- -------------- ------------ -------------- -------------- Revenues Oil and natural gas sales $ - $ 54,123 $ - $ - $ 54,123 Other operating revenues - 45 - - 45 ------------ ------------- ----------- ------------ ------------ - 54,168 - - 54,168 ------------ ------------- ----------- ------------ ------------ Costs and Expenses Production expenses - 19,054 - - 19,054 General and administrative 45 2,694 (5) - 2,734 Depreciation, depletion and amortization 746 6,369 48 - 7,163 791 28,117 43 - 28,951 ------------ ------------- ----------- ------------ ------------ Income from operations (791) 26,051 (43) - 25,217 Other Income (Expense) Equity in earnings of PAA - - 5,207 - 5,207 Equity in earnings of subsidiaries 25,350 - - (25,350) - Gain on PAA units - - 918 - 918 Interest expense (314) (5,999) - - (6,313) Interest and other income (expense) (189) 36 246 - 93 ------------ ------------- ----------- ------------ ------------ Income Before Minority Interest, Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change 24,056 20,088 6,328 (25,350) 25,122 Income tax (expense) benefit: Current (1,118) - - - (1,118) Deferred (14,421) (1,398) (2,510) 9,480 (8,850) ------------ ------------- ----------- ------------ ------------ Income Before Extraordinary Item and Cumulative Effect of Accounting Change 8,517 18,690 3,818 (15,870) 15,154 Cumulative effect of accounting change - - - - - ------------ ------------ ----------- ------------ ------------ Net Income 8,517 18,690 3,818 (15,870) 15,154 Preferred dividend requirement (350) - - - (350) ------------ ------------ ----------- ------------ ------------ Income Attributable to Common Shares $ 8,167 $ 18,690 $ 3,818 $ (15,870) $ 14,804 ============ ============ =========== ============ ============
16 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF INCOME (unaudited) (in thousands) THREE MONTHS ENDED SEPTEMBER 30, 2000
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------- ------------- Revenues Oil and natural gas sales $ 5 $ 38,481 $ - $ 407 $ 38,893 Other operating revenues - - - - - Midstream revenues - - 1,503,288 (407) 1,502,881 Gain on sale of assets - - - - - ------------ ------------ ----------- ------------ ------------ 5 38,481 1,503,288 - 1,541,774 ------------ ------------ ----------- ------------ ------------ Costs and Expenses Production expenses - 15,740 - - 15,740 Midstream costs and expenses - - 1,477,328 - 1,477,328 General and administrative 814 1,238 9,918 - 11,970 Depreciation, depletion and amortization 813 4,496 5,457 - 10,766 1,627 21,474 1,492,703 - 1,515,804 ------------ ------------ ----------- ------------ ------------ Income from operations (1,622) 17,007 10,585 - 25,970 Other Income (Expense) Interest expense (1,413) (5,204) (6,478) - (13,095) Interest and other income (expense) 277 95 317 - 689 ------------ ------------ ----------- ------------ ------------ Income Before Minority Interest, Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change (2,758) 11,898 4,424 - 13,564 Minority interest in PAA - - (2,047) - (2,047) Income tax (expense) benefit: Current 55 (228) (47) - (220) Deferred 833 (4,225) (879) - (4,271) ------------ ------------ ----------- ------------ ------------ Income Before Extraordinary Item and Cumulative Effect of Accounting Change (1,870) 7,445 1,451 - 7,026 Extraordinary item - - - - - Cumulative effect of accounting change - - - - - ------------ ------------ ----------- ------------ ------------ Net Income (1,870) 7,445 1,451 - 7,026 Preferred dividend requirement (3,694) - - - (3,694) ------------ ------------ ----------- ------------ ------------ Income Attributable to Common Shares $ (5,564) $ 7,445 $ 1,451 $ - $ 3,332 ============ ============ =========== ============ ============
17 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF INCOME (unaudited) (in thousands) NINE MONTHS ENDED SEPTEMBER 30, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------ ------------- ------------- Revenues Oil and natural gas sales $ - $ 170,356 $ - $ - $ 170,356 Other operating revenues - 468 - - 468 ------------- ------------- ------------ ------------- ------------- - 170,824 - - 170,824 ------------- ------------- ------------ ------------- ------------- Costs and Expenses Production expenses - 53,084 - - 53,084 General and administrative 10,479 7,807 8 - 18,294 Depreciation, depletion and amortization 2,108 18,293 146 - 20,547 ------------- ------------- ------------ ------------- ------------- 12,587 79,184 154 - 91,925 ------------- ------------- ------------ ------------- ------------- Income from operations (12,587) 91,640 (154) - 78,899 Other Income (Expense) Equity in earnings of PAA - - 15,798 - 15,798 Equity in earnings of subsidiaries 240,718 - - (240,718) - Gain on PAA units - - 151,089 - 151,089 Interest expense (2,580) (17,556) - - (20,136) Interest and other income (expense) (874) 459 506 - 91 ------------- ------------- ------------ ------------- ------------- Income Before Minority Interest, Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change 224,677 74,543 167,239 (240,718) 225,741 Income tax (expense) benefit: Current 670 - (10,715) - (10,045) Deferred (114,492) (4,852) (55,612) 95,469 (79,488) ------------- ------------- ------------ ------------- ------------- Income Before Extraordinary Item and Cumulative Effect of Accounting Change 110,855 69,691 100,912 (145,249) 136,208 Cumulative effect of accounting change (2,129) 143 - (1,986) ------------- ------------- ------------ ------------- ------------- Net Income 110,855 67,562 101,055 (145,249) 134,222 Preferred dividend requirement (26,896) - - - (26,896) ------------- ------------- ------------ ------------- ------------- Income Attributable to Common Shares $ 83,959 $ 67,562 $ 101,055 $ (145,249) $ 107,326 ============= ============= ============ ============= =============
18 PLAINS RESOURCES INC. AND SUBSIDIARIES CONSOLIDATING STATEMENT OF INCOME (unaudited) (in thousands) NINE MONTHS ENDED SEPTEMBER 30, 2000
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------ ------------- ------------- Revenues Oil and natural gas sales $ 5 $ 107,680 $ - $ 1,223 $ 108,908 Other operating revenues - - - - - Midstream revenues - - 4,894,041 (1,223) 4,892,818 ------------- ------------- ------------ ------------- ------------- 5 107,680 4,894,041 - 5,001,726 ------------- ------------- ------------ ------------- ------------- Costs and Expenses Production expenses - 46,363 - - 46,363 Midstream costs and expenses - - 4,798,755 - 4,798,755 General and administrative 1,876 5,125 26,564 - 33,565 Depreciation, depletion and amortization 2,488 13,211 20,324 - 36,023 Gain of sale of assets - - (48,188) - (48,188) ------------- ------------- ------------ ------------- ------------- 4,364 64,699 4,797,455 - 4,866,518 ------------- ------------- ------------ ------------- ------------- Income from operations (4,359) 42,981 96,586 - 135,208 Other Income (Expense) Equity in earnings of subsidiaries 39,203 - - (39,203) - Gain on PAA units - - - - - Interest expense (7,568) (15,828) (21,578) 3,062 (41,912) Interest and other income (expense) (767) 196 10,911 (3,062) 7,278 ------------- ------------- ------------ ------------- ------------- Income Before Minority Interest, Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change 26,509 27,349 85,919 (39,203) 100,574 Minority interest in PAA - - (39,451) - (39,451) Income tax (expense) benefit: Current 203 (383) (561) - (741) Deferred 5,465 (10,283) (18,278) - (23,096) ------------- ------------- ------------ ------------- ------------- Income Before Extraordinary Item and Cumulative Effect of Accounting Change 32,177 16,683 27,629 (39,203) 37,286 Extraordinary item - - (4,988) - (4,988) Cumulative effect of accounting change - (121) - - (121) ------------- ------------- ------------ ------------- ------------- Net Income 32,177 16,562 22,641 (39,203) 32,177 Preferred dividend requirement (11,106) - - - (11,106) ------------- ------------- ------------ ------------- ------------- Income Attributable to Common Shares $ 21,071 $ 16,562 $ 22,641 $ (39,203) $ 21,071 ============= ============= ============ ============= =============
19 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (unaudited) (in thousands) NINE MONTHS ENDED SEPTEMBER 30, 2001
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------ ------------- ------------ Cash Flows from Operating Activities Net income $ 110,855 $ 67,562 $ 101,055 $ (145,249) $ 134,222 Items not affecting cash flows from operating activities: Depreciation, depletion and amortization 2,108 18,293 146 - 20,547 Equity in earnings of PAA - - (15,798) - (15,798) Equity in earnings of subsidiaries (240,718) - - 240,718 - Gain on sale of PAA units - - (151,089) - (151,089) Distributions from PAA - - 24,596 - 24,596 Deferred income taxes 114,492 4,852 55,612 (95,469) 79,488 Cumulative effect of adoption of SFAS 133 - 2,129 (143) - 1,986 Change in derivative fair value - 1,227 - - 1,227 Noncash compensation expense 4,514 - - - 4,514 Other noncash items 918 746 - - 1,664 Change in assets and liabilities from operating activities: Current and other assets (68,807) (4,781) 88,640 - 15,052 Current and other liabilities 7,065 653 (38,822) - (31,104) ------------- ------------- ------------ ------------- ------------ Net cash provided by operating activities (69,573) 90,681 64,197 0 85,305 ------------- ------------- ------------ ------------- ------------ Cash Flows from Investing Activities Properties and equipment (1,987) (98,640) - - (100,627) Sale of PAA units - - 106,941 - 106,941 Investment in PAA - - (2,816) (2,816) ------------- ------------- ------------ ------------- ------------ Net cash provided by (used in) investing activities (1,987) (98,640) 104,125 - 3,498 ------------- ------------- ------------ ------------- ------------ Cash Flows from Financing Activities Net change in long-term debt (27,811) - - - (27,811) Exercise of stock options 5,543 - - - 5,543 Treasury stock purchases (42,749) - - - (42,749) Preferred stock dividends paid (7,998) - - - (7,998) Dividends paid 152,120 - (152,120) - - Other (98) - - - (98) ------------- ------------- ------------ ------------- ------------ Net cash provided by (used in) financing activities 79,007 - (152,120) - (73,113) ------------- ------------- ------------ ------------- ------------ Net increase (decrease) in cash and cash equivalents 7,447 (7,959) 16,202 0 15,690 Decrease in cash due to deconsolidation of PAA - - (3,425) - (3,425) Cash and cash equivalents, beginning of period 4 597 4,479 - 5,080 ------------- ------------- ------------ ------------- ------------ Cash and cash equivalents, end of period $ 7,451 $ (7,362) $ 17,256 $ 0 $ 17,345 ============= ============= ============ ============= ============
20 PLAINS RESOURCES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (unaudited) (in thousands) NINE MONTHS ENDED SEPTEMBER 30, 2000
Guarantor Nonguarantor Intercompany Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ Cash Flows from Operating Activities Net income (loss) $ 32,177 $ 16,562 $ 22,641 $ (39,203) $ 32,177 Items not affecting cash flows from operating activities: Depreciation, depletion and amortization 2,488 13,211 20,324 - 36,023 Equity in earnings of subsidiaries (39,203) - - 39,203 - Gain on sale of assets - - (48,188) - (48,188) Minority interest in income of PAA - - 32,484 - 32,484 Deferred income taxes (5,465) 10,283 18,278 - 23,096 Cumulative effect of accounting change - 121 - - 121 Other noncash items 6,060 - 3,653 - 9,713 Change in assets and liabilities from operating activities: - - - Current and other assets (15,768) (1,406) 94,426 - 77,252 Current and other liabilities 3,054 3,193 (151,451) - (145,204) Advances from (to) affiliates 128,194 3,300 (131,494) - - --------- ------------ ------------ ------------ ------------ Net cash provided by operating activities 111,537 45,264 (139,327) - 17,474 --------- ------------ ------------ ------------ ------------ Cash Flows from Investing Activities Properties and equipment (1,928) (49,499) (7,487) - (58,914) Proceeds from sale of assets - - 223,859 - 223,859 --------- ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities (1,928) (49,499) 216,372 - 164,945 --------- ------------ ------------ ------------ ------------ Cash Flows from Financing Activities Net change in long-term debt (124,300) (511) (18,100) - (142,911) Net change in short-term debt - - (58,719) - (58,719) Purchase of treasury stock (4,221) (4,221) Costs in connection with financing arrangements - - (6,500) - (6,500) Dividends paid (6,392) - - - (6,392) Distributions to PAA unitholders 21,303 - (43,269) - (21,966) Other (72) - - - (72) --------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (113,682) (511) (126,588) - (240,781) --------- ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (4,073) (4,746) (49,543) - (58,362) Cash and cash equivalents, beginning of period 9,241 5,134 53,853 - 68,228 --------- ------------ ------------ ------------ ------------ Cash and cash equivalents, end of period $ 5,168 $ 388 $ 4,310 $ - $ 9,866 ========= ============ ============ ============ ============
21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Prior to the second quarter of 2001 we described Plains Resources Inc. as an independent energy company engaged in two related lines of business within the energy sector industry. The first line of business, referred to as "upstream", acquires, exploits, develops, explores and produces crude oil and natural gas. The second line of business, referred to as "midstream", engaged in the marketing, transportation and terminalling of crude oil. The midstream business was conducted through our majority ownership in Plains All American Pipeline, L.P. ("PAA"). For financial statement purposes, the assets, liabilities and earnings of PAA were included in our consolidated financial statements, with the public unitholders' interest reflected as a minority interest. We have undergone a significant corporate reorganization. In a series of transactions on June 8, 2001, we sold a portion of our interest in PAA to a group of investors and certain members of PAA management for aggregate consideration of approximately $155.2 million (consisting of $110.0 million in cash and $45.2 million in Series F Preferred Stock) and recognized a pre-tax gain of $128.6 million. In addition, certain holders of our Series F Cumulative Convertible Preferred Stock (the "Series F Preferred Stock") and Series H Convertible Preferred Stock (the "Series H Preferred Stock") converted their shares into shares of our common stock. We sold (i) 5.2 million Subordinated Units of PAA (the "Subordinated Units") for $69.5 million in cash and the redemption of 23,108 shares of Series F Preferred Stock, valued at $45.2 million; and (ii) an aggregate 54% ownership interest in the general partner of PAA for $40.5 million in cash. In addition, the investor group and certain other stockholders converted 26,892 shares of Series F Preferred Stock and 132,022 shares of Series H Preferred Stock into a total of 6.6 million shares of our common stock. On September 5, 2001, pursuant to an option granted as part of the June 8, 2001 transactions, certain members of the executive management of PAA acquired an aggregate additional 2% ownership interest in the general partner of PAA for $1.5 million in cash and notes, further reducing our ownership in the general partner of PAA to 44%. We recognized a gain of $0.9 million as a result of this transaction. These transactions in the aggregate are hereinafter referred to as "the Transactions". As a result of the Transactions, all of the Series F Preferred Stock and all but approximately 36,000 shares of the Series H Preferred Stock were retired or converted. The remaining outstanding shares of the Series H Preferred Stock converted to 1.2 million shares of common stock during the third quarter. Also as a result of the Transactions, certain of our employees received transaction-related bonuses and other payments and vested in benefits in accordance with the terms of certain of our employee benefit plans. The excess of the fair value of the Series F Preferred stock redeemed as consideration for the PAA Units over the carrying value of the Series F Preferred Stock ($21.4 million) is deemed to be a dividend to preferred stockholders and is deducted in determining the income available to common stockholders for the purpose of determining basic and fully diluted earnings per share. In connection with the conversion of the Series F Preferred Stock into common stock, we made a $2.5 million inducement payment representing a 20% premium to the amount of dividends that would accrue on the Series F Preferred Stock between the closing of the Transactions and the first date we could potentially cause such conversion. The Subordinated Units are subordinated in right to distributions from PAA and are not publicly traded, however, PAA's partnership agreement provides that, if certain financial tests are met, the Subordinated Units (including those retained by us) will convert into common units on a one-for-one basis commencing in 2003. In connection with the Transactions we entered into Value Assurance Agreements with such purchasers of the Subordinated Units 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. PAA recently announced a quarterly distribution, payable in the fourth quarter of 2001, of $0.5125 per unit ($2.05 annualized). At March 31, 2001, our aggregate ownership interest in PAA was approximately 54%. Following the sale of common units by PAA in a public equity offering in May 2001 and the Transactions, our aggregate ownership interest in PAA was approximately 33%. At September 30, 2001, our aggregate ownership consisted of: (i) a 44% ownership interest in the 2% general partner and incentive distribution rights, (ii) 45%, or approximately 4.5 million, of the Subordinated Units and (iii) 28% or approximately 7.9 million of the common units (including approximately 1.3 million Class B common units). As a result of the Transactions, our minority investment in PAA is accounted for using the equity method of accounting presented 22 retroactively to January 1, 2001. Under the equity method, we no longer consolidate the assets, liabilities and operating activities of PAA, but instead record our proportionate share of PAA's results of operations. As a result of the Transactions, our primary business is upstream. While our 33% ownership in PAA represents a significant investment in the midstream business, because of the reduced ownership and the inability to control the operations of PAA, it is no longer considered to be a segment of our business. PAA continues to be the purchaser of all our crude oil production. Also in connection with the Transactions, we entered into a separation agreement with PAA pursuant to which, among other things, (a) we agreed to indemnify PAA, the general partner of PAA, and the subsidiaries of PAA against any losses or liabilities resulting from (i) the operation of the upstream business or (ii) federal or state securities laws, or the regulations of any self-regulatory authority, or other similar claims resulting from acts or omissions by us, our subsidiaries, PAA, or PAA's subsidiaries on or before the closing of the Transactions; and (b) PAA agreed to indemnify us and our subsidiaries against any losses or liabilities resulting from the operation of the midstream business. We also entered into a pension and employee benefits assumption and transition agreement pursuant to which the general partner of PAA and us agreed to the transition of certain employees to such general partner, the provision of certain benefits with respect to such transfer, and the provision of other transition services by us. Additionally, in conjunction with the Transactions our Board of Directors elected James C. Flores Chairman of the Board and Chief Executive Officer, and also elected a new Chief Operating Officer, Chief Financial Officer and General Counsel/Secretary. We have entered into an employment agreement, a performance stock option agreement and a registration rights agreement with Mr. Flores. In October 2001 PAA issued 4.5 million Common Units in a public offering. As a result of the offering, we made a general partner capital contribution of approximately $1.0 million, and our aggregate ownership interest in PAA was reduced to approximately 29%. In the fourth quarter of 2001 we will report a gain of approximately $18.0 million resulting from the increase in book value of our equity in PAA to reflect our proportionate share of the increase in the underlying net assets of PAA resulting from this public offering. 23 Results of Operations As a result of the change to the equity method of accounting for our investment in PAA, our income statement presentation for 2001 is not comparable to our income statement presentation for 2000. The following table reflects our 2001 income statement compared to our 2000 income statement adjusted to reflect PAA on the equity method of accounting. Our discussion of the results of operations will be based on the income statement presentation reflected herein.
3 Months Ended Sept. 30, 9 Months Ended Sept. 30, -------------------------- -------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ ProForma ProForma Revenues Crude oil and liquids $ 50,771 $ 34,457 $ 143,486 $ 99,098 Natural gas 3,352 4,027 26,870 8,586 Other operating revenues 45 - 468 - ------------ ------------ ------------ ------------ 54,168 38,484 170,824 107,684 ------------ ------------ ------------ ------------ Costs and Expenses Production costs 19,054 15,740 53,084 46,363 General and administrative 2,734 2,058 18,294 7,079 Depletion, depreciation and amortization 7,163 5,416 20,547 15,874 ------------ ------------ ------------ ------------ 28,951 23,214 91,925 69,316 ------------ ------------ ------------ ------------ Income from Operations 25,217 15,270 78,899 38,368 Other Income (Expense) Equity in earnings of PAA 5,207 2,470 15,798 46,429 Gain on PAA Units 918 - 151,089 - Interest expense (6,313) (6,618) (20,136) (23,397) Interest and other income and expense 93 395 91 (277) ------------ ------------ ------------ ------------ Income Before Income Taxes, Extraordinary Items and Cumulative Effect of Accounting Change 25,122 11,517 225,741 61,123 Income Taxes Current expense (1,118) (220) (10,045) (741) Deferred expense (8,850) (4,271) (79,488) (23,096) ------------ ------------ ------------ ------------ Income Before Extraordinary Items and Cumulative Effect of Accounting Change 15,154 7,026 136,208 37,286 Extraordinary item - - - (4,988) Cumulative effect of accounting change - - (1,986) (121) ------------ ------------ ------------ ------------ Net Income 15,154 7,026 134,222 32,177 Preferred dividend requirement (350) (3,694) (26,896) (11,106) ------------ ------------ ------------ ------------ Income Attributable to Common Shares $ 14,804 $ 3,332 $ 107,326 $ 21,071 ============ ============ ============ ============
24 The following table reflects the components of our oil and gas revenues and sets forth our revenues and costs and expenses on a BOE basis:
3 Months Ended Sept 30, 9 Months Ended Sept 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- ProForma ProForma Daily Average Sales Volumes Total Oil and liquids (Bbls) 25,678 23,028 25,001 22,890 Natural Gas (Mcf) 9,482 8,245 9,155 8,040 BOE 27,258 24,402 26,527 24,230 Oil and Liquids (Bbls) Onshore California 16,435 14,063 15,703 13,765 Offshore California 3,954 3,862 3,755 4,140 Illinois 2,684 2,760 2,727 2,817 Florida 2,605 2,343 2,816 2,168 ----------- ----------- ----------- ----------- 25,678 23,028 25,001 22,890 =========== =========== =========== =========== Natural Gas (Mcf) Onshore California 9,482 8,245 9,155 8,040 =========== =========== =========== =========== Unit Economics (in dollars) Average Liquids Sales Price ($/Bbl) Average NYMEX $ 26.78 $ 31.66 $ 27.81 $ 29.72 Hedging gain (loss) 0.36 (10.47) (0.97) (9.04) Differential (5.65) (4.93) (5.82) (4.88) ----------- ----------- ----------- ----------- Net realized $ 21.49 $ 16.26 $ 21.02 $ 15.80 =========== =========== =========== =========== Average Gas Sales Price ($/Mcf) $ 3.84 $ 5.31 $ 10.75 $ 3.90 Average Sales Price per BOE/(1)/ $ 21.58 $ 17.14 $ 23.52 $ 16.22 Average Production Costs per BOE (7.60) (7.01) (7.33) (6.98) ----------- ----------- ----------- ----------- Gross Margin per BOE 13.98 10.13 16.19 9.24 G&A per BOE/(2)/ (1.03) (0.92) (1.29) (1.05) ----------- ----------- ----------- ----------- Gross Profit per BOE $ 12.95 $ 9.21 $ 14.90 $ 8.19 =========== =========== =========== =========== DD&A per BOE (oil and gas properties) $ 2.64 $ 2.21 $ 2.64 $ 2.21
/(1)/ BOE - barrel of oil equivalent /(2)/ Excludes costs associated with corporate reorganization and noncash compensation expense. Three Months Ended September 30, 2001 Compared with Three Months Ended September 30, 2000 Total revenues for 2001 were 41% higher than in 2000, primarily reflecting higher realized prices for crude oil. Realized oil prices increased by 32% from $16.26 per barrel in 2000 to $21.49 per barrel in 2001. The 2000 realized price was significantly impacted by hedges that were put into place in the latter part of 1999 when crude oil prices were considerably lower. Average natural gas sales prices decreased $1.47 per Mcf, from $5.31 per Mcf in 2000 to $3.84 per Mcf in 2001. Oil production volumes averaged 25,678 barrels per day in the third quarter of 2001, a 12% increase over the 23,028 barrels per day in the third quarter of 2000. Onshore California sales increased by approximately 2,400 barrels per day, reflecting the continuing development of our producing properties. Additionally, Florida oil sales volumes were up 262 barrels per day, an 11% increase from the prior period. Production from two new horizontal wells of approximately 400 barrels per day, was offset by normal decline and reductions resulting from the timing of deliveries to purchasers. Due to the location of our Florida properties and the transportation issues involved, reported sales volumes are impacted by the timing of the barges that transport the crude oil. In the third quarter this had little impact, as the increase in sales volumes due to the timing of sales 25 was only 91 barrels per day, or 8,400 barrels. Natural gas sales volumes increased by 15%, again reflecting the continuing development of our California properties. Production costs increased from $7.01 per BOE in 2000 to $7.60 per BOE in 2001. Approximately $2.0 million of the $3.3 million increase was volume related, with the remainder primarily reflecting higher costs for electricity and fuels. General and administrative expense increased 33% to $2.7 million, primarily from increased compensation costs, including noncash compensation expense related to certain stock options. Depletion, depreciation and amortization ("DD&A") increased by $1.7 million, with approximately $1.0 million of the increase due to an increase in the oil and gas DD&A rate, from $2.21 per BOE in 2000 to $2.64 per BOE in 2001. The remainder of the increase is volume related. Equity in earnings of PAA increased 111%, from $2.5 million in 2000 to $5.2 million in 2001. Our equity in PAA' s income for 2000 included 54% of a $6.6 million charge related to unauthorized trading losses. The 2001 amount reflects the reduction in our interest to approximately 33% during the second quarter of 2001 as a result of the Transactions and PAA's May 2001 public offering of approximately 4.0 million Common Units. The gain on PAA units resulted from the sale of a 2% ownership interest in the general partner as discussed in "General". Interest expense decreased from $6.6 million in 2000 to $6.3 million in 2001, reflecting lower bank debt. Preferred dividends decreased 91%, from $3.7 million in 2000 to $0.4 million in 2001, resulting from the elimination and conversion of Series F and Series H Preferred Stock as discussed in "General". Nine Months Ended September 30, 2001 Compared with Nine Months Ended September 30, 2000 Total revenues for 2001 increased 59% from the prior period, to $170.8 million. Higher realized prices for oil and gas accounted for $52.8 million of the increase, with the remainder due to increases in volume and $0.5 million in electricity revenue generated at the Point Arguello processing facility. Realized oil prices increased by 33% from $15.80 per barrel in 2000 to $21.02 per barrel in 2001. The 2000 realized price was significantly impacted by hedges that were put into place in the latter part of 1999 when crude oil prices were considerably lower. Average natural gas sales prices increased significantly, from $3.90 per Mcf in 2000 to $10.75 per Mcf in 2001, reflecting the well-publicized high natural gas prices in California during the first half of the year. Oil sales volumes for 2001 averaged 25,001 barrels per day, a 9% increase from the 22,890 barrels per day average in 2000. Onshore California sales increased by approximately 1,900 barrels per day, reflecting the continuing development of our producing properties. Florida sales increased by approximately 600 barrels per day, with 400 barrels per day of the increase from two horizontal wells drilled during the fourth quarter of 2000. The remainder was due to higher sales in Florida resulting primarily from the timing of deliveries to purchasers. Oil production volumes averaged 24,900 barrels per day for the first nine months of 2001, an 8% increase over the 22,961 barrels per day in the first nine months of 2000. Natural gas sales volumes increased by 14%, again reflecting the continuing development of our California properties. Production costs increased by $6.7 million, from $6.98 per BOE in 2000 to $7.33 per BOE in 2001. Volume increase during 2001 resulted in $4.4 million of the increase, with the remainder primarily reflecting higher costs for electricity and fuels. General and administrative expense increased $11.2 million to $18.3 million. Included in 2001 is approximately $8.6 million of nonrecurring costs associated with the Transaction, of which $4.4 million is noncash compensation cost primarily associated with the vesting of performance-based stock options. DD&A increased 29% to $20.5 million, with $2.8 million of the increase due to an increase in the oil and gas DD&A rate, from $2.21 per BOE in 2000 to $2.64 per BOE in 2001. The remainder of the increase is volume related. We reported equity in earnings of PAA of $15.8 million in 2001 compared to $46.4 million in 2000 (after deducting our $8.2 million equity in PAA's extraordinary item). Equity in earnings of PAA represents our interest in the income before extraordinary items of PAA of $34.7 million in 2001 and $64.3 million in 2000. PAA' s earnings in 2000 included a $48.2 million gain on the sale of assets and $6.6 million in unauthorized trading losses. Our equity in earnings for 2001 was reduced by our $1.9 million share of PAA' s noncash compensation expenses related to the vesting of partnership units in connection with the Transactions. The 2001 amounts reflect the reduction in our interest in PAA to approximately 33% during the second quarter of 2001 as a result of the Transactions and PAA's public offering. The gain on PAA units reflects: (i) a $19.6 million gain 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 resulting from PAA's recent public offering of common units; (ii) a $129.5 million gain resulting from the sale of a portion of our investment in PAA as 26 discussed in "General"; (iii) a $2.0 million gain in the first quarter of 2001 related to the vesting of certain unit grants. Interest expense decreased from $23.4 million in 2000 to $20.1 million in 2001, reflecting lower bank debt. The extraordinary item in 2000 represents our equity in a $15.1 million extraordinary item of PAA (net of related income taxes). The cumulative effect of accounting change in 2001 represents the effect of the adoption, effective January 1, 2001, of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as discussed in Note 3 to the Consolidated Financial Statements. The cumulative effect of accounting change in 2000 represents the effect of the adoption of SEC Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements", which requires that we record revenue from crude oil production in the period it is sold as opposed to when it is produced and carry any unsold production in inventory. Preferred dividends include: (i) a $21.4 million deemed preferred dividend representing the difference between the fair value of the Series F Preferred Stock tendered as consideration in the Transactions and our carrying value of such stock; and (ii) a $2.5 million inducement-to-convert payment made to certain holders of Series F Preferred stock. Liquidity and Capital Resources At September 30, 2001 we had no bank debt (we do still have $275.0 million of subordinated debt), full availability under our $225.0 million senior secured revolving credit facility and $17.3 million in cash. As a result of the Transactions and the September 30, 2001 conversion of all outstanding Series F Preferred Stock to our common stock, our Series F Preferred Stock dividends have been eliminated, saving approximately $5 million a year. In addition, our Standard & Poor's general corporate rating has been increased from BB- to BB with Stable Outlook. Effective October 5, 2001, we amended the terms of our revolving credit facility, allowing us to purchase up to $150.0 million of any combination of our own common stock, senior subordinated notes and PAA units. The Board of Directors, subject to the $150.0 million limit, has authorized the purchase of up to five million shares of our common stock, our senior subordinated notes and PAA units in the open market from time to time as market conditions are deemed favorable. During October, we purchased 1,049,500 shares of our common stock for approximately $24.8 million, and $7.5 million principal amount of our subordinated notes at 99.5% of par. In October we entered into a three-year interest rate swap agreement which fixes the interest rate on $7.5 million of borrowings under our revolving credit facility at 5.62%. We expect capital expenditures for the fourth quarter of 2001 to be in the range of $24-26 million, which will be funded by cash generated by operations and our revolving credit facility. One measure we use to evaluate our performance is recurring earnings before interest, taxes and DD&A ("EBITDA"). Recurring Upstream EBITDA is calculated as Income from Operations plus (i) DD&A (ii) reorganization costs; (iii) noncash compensation; and (iv) the change in the fair value of hedge options [($1.0) million and $3.4 million in the third quarter and first nine months of 2001, respectively]. Combined Recurring EBITDA is calculated as Upstream EBITDA plus distributions received from PAA. The following table sets forth Recurring Upstream and Combined EBITDA for the three months and nine months ended September 31, 2001 and 2000 (in millions of dollars): Recurring Upstream PPA Recurring EBITDA Distribution Combined Three Months Ended: --------- ------------ --------- September 30, 2001 31.5 6.7 38.2 September 30, 2000 20.9 8.6 29.5 Nine Months Ended: September 30, 2001 111.8 24.6 136.4 September 30, 2000 55.0 21.3 76.3 The increases in Recurring Upstream EBITDA in 2001 primarily reflect higher net realized prices for crude oil and natural gas. 27 In the third quarter of 2001 we received a cash distribution from PAA of $6.7 million, including $0.3 million for our 46% interest in the general partner. Based on the $0.5125 per unit distribution recently declared by PAA the distribution we will receive in the fourth quarter of 2001 will be approximately $6.9 million, including $0.4 million for our 44% interest in the general partner. Cash provided by net operating activities for the first nine months of 2001 totaled $85.3 million and proceeds from the Transactions totaled $106.9 million. Our primary expenditures were capital expenditures of $100.6 million, retirement of debt of $27.8 million and purchases of 1.8 million shares of treasury stock for $42.7 million. Cash increased by $15.7 million during the period. Since our announcement in November 1999 of PAA's losses resulting from unauthorized trading by a former employee, numerous class action lawsuits have been filed against PAA, certain of its general partner's officers and directors and in some of these cases, its then general partner and us alleging violations of the federal securities laws. In addition, derivative lawsuits were filed against PAA' s then general partner, its directors and certain of its officers alleging the defendants breached the fiduciary duties owed to PAA and its unitholders by failing to monitor properly the activities of its traders. These suits, for the most part, have been settled. See Part II - "Other Information" - Item 1. - "Legal Proceedings." Although we maintain an inspection program designed to prevent and, as applicable, to detect and address releases of crude oil into the environment from our upstream operations, we may experience such releases in the future, or discover releases that were previously unidentified. Damages and liabilities incurred due to any future environmental releases from our assets may substantially affect our business. Outlook Our activities are affected by changes in crude oil prices, which historically have been volatile. Although we have routinely hedged a substantial portion of our crude oil production and intend to continue this practice, substantial future crude oil price declines would adversely affect our overall results, and therefore our liquidity. Furthermore, low crude oil prices could affect our ability to raise capital on favorable terms. Decreases in the prices of crude oil and natural gas have had, and could have in the future, an adverse effect on the carrying value of our proved reserves and our revenues, profitability and cash flow. To manage our exposure to commodity price risk, we routinely hedge a portion of our crude oil production. For the fourth quarter of 2001, we have entered into various arrangements, using a combination of swaps, collars and purchased puts and calls, which will provide for us to receive an average minimum NYMEX price of approximately $23.34 per barrel on 22,500 barrels per day with full market price participation up to an average of $26.59 per barrel. For 2002, we have entered into various arrangements that provide for us to receive an average minimum NYMEX price of $23.56 per barrel on 19,000 barrels per day with full market price participation on 21% of the hedged barrels up to $35.17 per barrel and 100% upside participation on approximately 68% of the hedged barrels beyond $35.17. For 2003, we have hedged 7,500 barrels per day at an average minimum NYMEX price of $23.16 per barrel. Location and quality differentials attributable to our properties and the cost of the hedges are not included in the foregoing prices for 2001, 2002 and 2003. Because of the quality and location of our crude oil production, these adjustments will reduce our net price per barrel. The fair value of the hedges is included in our balance sheet at September 30, 2001. Our management intends to continue to maintain hedging arrangements for a significant portion of our production. These contracts may expose us to the risk of financial loss in certain circumstances. Our hedging arrangements provide us protection on the hedged volumes if crude oil prices decline below the prices at which these hedges are set. But ceiling prices in our hedges may cause us to receive less revenue on the hedged volumes than we would receive in the absence of hedges. See "Quantitative and Qualitative Disclosures About Market Risk". Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method. For all business combinations for which the date of acquisition is after June 30, 2001, this Standard also establishes specific criteria for the recognition of intangible assets separately from goodwill and requires unallocated negative goodwill to be written off immediately as an extraordinary gain, rather than deferred and amortized. SFAS 142 changes the accounting for goodwill and other intangible assets after an acquisition and is effective for fiscal years beginning after December 15, 2001. The most significant changes made by SFAS 142 are: (i) goodwill and intangible assets with indefinite lives will no longer be 28 amortized; (ii) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and (iii) the amortization period for intangible assets with finite lives will no longer be limited to forty years. The issuance of SFAS 141 and SFAS 142 have no effect on our financial statements. We will account for all future business combinations and any related goodwill in accordance with the provisions of SFAS 141 and SFAS 142. In June 2001, the FASB issued SFAS No. 143 "Asset Retirement Obligations". SFAS 143 establishes accounting requirements for retirement obligations associated with tangible long-lived assets, including (i) the timing of the liability recognition, (ii) initial measurement of the liability, (iii) allocation of asset retirement cost to expense, (iv) subsequent measurement of the liability and (v) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. We will adopt the statement effective January 1, 2003, as required. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, we cannot reasonably estimate the effect of the adoption of this statement on either our financial position, results of operations, or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. There will be no financial implication related to the adoption of SFAS 144, and the guidance will be applied on a prospective basis. We will adopt the statement effective January 1, 2002. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks, including volatility in crude oil commodity prices and interest rates. To manage our exposure, we monitor our expectations of future commodity prices and interest rates when making decisions with respect to risk management. We do not enter into derivative transactions for speculative trading purposes that would expose us to price risk. Substantially all of our derivative contracts are exchanged or traded with major financial institutions and the risk of credit loss is considered remote. On January 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS 137 and SFAS 138 ("SFAS 133"). Under SFAS 133, all derivative instruments are recorded on the balance sheet at fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings. 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 ("OCI"), a component of Stockholders' Equity, to the extent the hedge is effective. We utilize various derivative instruments, for purposes other than trading, to hedge our exposure to price fluctuations on crude oil sales. The derivative instruments consist primarily of option contracts traded on the New York Mercantile Exchange and crude oil swap contracts entered into with financial institutions. We do not currently have any natural gas hedges. We also utilize interest rate swaps and collars to manage the interest rate exposure on our long-term debt. On January 1, 2001, in accordance with the transition provisions of SFAS 133, we recorded a gain of $4.5 million in OCI representing the cumulative effect of an accounting change to recognize at fair value all cash flow derivatives, including our equity in the cash flow derivatives of PAA. We recorded cash flow hedge derivative assets and liabilities of $20.6 million and $18.1 million, respectively, and a net-of-tax non-cash charge of $2.0 million was recorded in earnings as a cumulative effect adjustment. During the first nine months of 2001 gains of $0.3 million (which were included in the cumulative effect adjustment) were transferred from OCI and the fair value of open positions increased $0.5 million. At December 31, 2000, we had an interest rate swap arrangement to protect interest rate fluctuations on a portion of our outstanding debt. The position was terminated prior to maturity and as a result $0.9 million related to such position was relieved from OCI at September 30, 2001, and the debt was repaid in June. At September 30, 2001, the unrealized gain on our swaps contracts included in OCI was $6.5 million. The related assets and liabilities were included in other current assets and liabilities ($6.8 million and $0.1 million, respectively), other assets ($4.1 million) and deferred income taxes ($4.3 million), Additionally, OCI includes our $2.2 million net of tax equity in the unrealized OCI losses of PAA. As of September 30, 2001, $4.0 million of deferred net gains on derivative instruments recorded in OCI are expected to be reclassified to earnings during the next twelve-month period. Oil and gas revenues for the nine months ended September 30, 2001 include a $3.4 million non-cash loss related to the ineffective portion of the cash flow hedges representing the fair value change in the time value of options. Assets and liabilities related to the time value component of the fair value of options are included in other current assets and liabilities ($2.0 million and $0.3 million, respectively) and other assets ($0.7 million). 29 liabilities are included in other current liabilities ($0.4 million). As of September 30, 2001, $6.7 million of deferred net gains on derivative instruments recorded in OCI are expected to be reclassified to earnings during the next twelve-month period. 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 on a quarterly basis. This process includes specific identification of the hedging instrument and the hedge transaction, 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. No amounts were excluded from the computation of hedge effectiveness. At September 30, 2001, there were no positions which did not qualify for hedge accounting. At September 30, 2001, we had the following open crude oil hedge positions (barrels per day):
Barrels Per Day --------------------------------- 4th Qtr 2001 2002 2003 -------- -------- --------- Collars Average floor price $20.00/bbl Average cap price $27.00/bbl Average cap limit $30.00/bbl 6,000 - - Puts Average price $20.00/bbl 6,000 - - Average price $20.31/bbl - 4,000 - Calls Average price $35.74/bbl 9,000 - - Average price $35.17/bbl - 9,000 - Swaps Average price $27.15/bbl 10,500 - - Average price $24.42/bbl - 15,000 - Average price $23.16/bbl - - 7,500
Our collars consist of three separate options: a purchased put establishes a floor price, a sold call establishes a cap price and a purchased call gives us participation in price increases above the cap price. Forward-Looking Statements and Associated Risks All statements, other than statements of historical fact, included in this report are forward-looking statements, including, but not limited to, statements identified by the words "anticipate," "believe," "estimate," "expect," "plan," "intend" and "forecast" and similar expressions and statements regarding our business strategy, plans and objectives of our management for future operations. These statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions. These statements, however, are subject to certain risks, uncertainties and assumptions, including, but not limited to: . uncertainties inherent in the exploration for and development and production of oil and gas and in estimating reserves; . unexpected future capital expenditures (including the amount and nature thereof); . impact of crude oil price fluctuations; . the effects of competition; . the success of our risk management activities; . the availability (or lack thereof) of acquisition or combination opportunities; . the impact of current and future laws and governmental regulations; . environmental liabilities that are not covered by an indemnity or insurance, and . general economic, market or business conditions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those in the forward-looking statements. Except as required by applicable securities laws, we do not intend to update these forward-looking statements and information. 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings Texas Securities Litigation. In November and December of 1999, class action lawsuits were filed in the United States District Court for the Southern District of Texas alleging that Plains All American Pipeline, L.P. ("PAA") and certain of its general partner's officers and directors violated federal securities laws, primarily in connection with unauthorized trading by a former employee. All of the federal securities claims have been consolidated into two actions: (i) the consolidated class action filed by purchasers of our common stock and options which is captioned Koplovitz v. Plains Resources Inc., et al.; and (ii) the consolidated action filed by purchasers of PAA's common units which is captioned Di Giacomo v. Plains All American Pipeline, L.P., et al. We and PAA reached an agreement with representatives for the plaintiffs for the settlement of all of the class actions, and in January 2001, PAA deposited approximately $30.0 million under the terms of the settlement agreement into an escrow account on behalf of the class. The total cost of the settlement to us and PAA, including interest and expenses and after insurance reimbursements, was $14.9 million. Of that amount, $1.0 million was allocated to us by agreement between special independent committees of our board of directors and the board of directors of Plains All American Inc. ("Plains Holdings"), the then general partner of PAA and now known as Plains Holdings Inc. The settlement is subject to final approval by the court. The settlement agreement does not affect the Texas Derivative Litigation and Delaware Derivative Litigation described below. Delaware Derivative Litigation. Beginning December 3, 1999 derivative lawsuits were filed in the Delaware Chancery Court, New Castle County naming Plains Holdings, the then general partner of PAA, its directors and certain of its officers as defendants alleging that the defendants breached the fiduciary duties that they owed to PAA and its unitholders by failing to monitor properly the activities of its employees. The court has consolidated all of the cases under the caption In Re Plains All American Inc. Shareholders Litigation. A motion to dismiss was filed on behalf of the defendants on August 11, 2000. An agreement in principle has been reached with the plaintiffs, subject to approval by the Delaware court, to settle the Delaware litigation by PAA making an aggregate payment of approximately $1.1 million. Texas Derivative Litigation. On July 11, 2000, a derivative lawsuit was filed in the United States District Court for the Southern District of Texas entitled Fernandez v. Plains All American Inc., et al., naming Plains Holdings, the then general partner of PAA, its directors and certain of its officers as defendants. This lawsuit contains the same claims and seeks the same relief as the Delaware derivative litigation described above. A motion to dismiss was filed on behalf of the defendants on August 14, 2000. We intend to vigorously defend the claims made in the Texas derivative litigation. We believe that Delaware court approval of the settlement of the Delaware derivative litigation will effectively preclude prosecution of the Texas derivative litigation. However, there can be no assurance that we will be successful in our defense or that this lawsuit will not have a material adverse effect on our financial position or results of operations or cash flows. We, in the ordinary course of business, are a claimant and/or defendant in various other legal proceedings. Management does not believe that the outcome of these legal proceedings, individually and in the aggregate, will have a materially adverse effect on our financial condition, results of operations or cash flows. Items 2, 3, 4 & 5 are not applicable and have been omitted 31 Item 6 - Exhibits and Reports on Form 8-K A. Exhibits 2.1* Fifth Amended and Restated Credit Agreement dated as of October 5, 2001, by and among Plains Resources Inc., The Chase Manhattan Bank, as Co-Agent for the Lenders, First Union National Bank, as agent for the Lenders, and the Lenders named within, amending and restating the Original Agreement. 2.2* Letter Agreement dated as of October 23, 2001 by and between Plains Marketing, L.P. ("Plains Marketing") and Stocker Resources, L.P. ("Stocker"), regarding the Crude Oil Sales Agreement dated April 1, 2001 between Tosco Refining Co. and Plains Marketing for Stocker's Arroyo Grande Crude Oil. _________________ *Filed herewith. B. Reports on Form 8-K A Current Report on Form 8-K was filed on July 17, 2001 with respect to the approval by the Board of Directors of a five million share common stock repurchase program. A Current Report on Form 8-K was filed on August 8, 2001 with respect to current estimates of certain results for the third quarter of 2001, the fourth quarter of 2001 and the year 2001. A Current Report on Form 8-K was filed on September 10, 2001 with respect to the sale of an additional 2% ownership interest in the general partner of Plains All American Pipeline, L.P. ("PAA") to PAA Management, L.P. ("PAA Management") pursuant to the exercise of an option granted by the Company to PAA Management in connection with the Registrant's recent strategic restructuring, which was consummated on June 8, 2001. A Current Report on Form 8-K was filed on November 8, 2001 with respect to current estimates of certain results for the fourth quarter of 2001. 32 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: November 9, 2001 By: /s/ Cynthia A. Feeback ----------------------------------------- Cynthia A. Feeback Vice President - Accounting and Treasurer (Principal Accounting Officer) 33