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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-9743
EOG RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0684736
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1200 SMITH STREET, SUITE 300, HOUSTON, TEXAS 77002-7361
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 713-651-7000
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of November 1, 1999.
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
<S> <C>
Common Stock, $.01 par value 119,182,078 shares
</TABLE>
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EOG RESOURCES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
ITEM 1. Financial Statements
Consolidated Statements of Income - Three Months Ended September 30, 1999 and 1998
and Nine Months Ended September 30, 1999 and 1998.................................................... 3
Consolidated Balance Sheets - September 30, 1999 and December 31, 1998................................. 4
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998.................. 5
Notes to Consolidated Financial Statements............................................................. 6
ITEM 2. Management's Discussion and Analysis of Financial Conditions and Results of
Operations.............................................................................. 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................................................... 20
ITEM 6. Exhibits and Reports on Form 8-K........................................................... 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EOG RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES
Natural Gas
Trade $ 162,673 $ 142,107 $ 407,448 $ 406,787
Associated Companies 17,299 12,117 58,393 50,650
Crude Oil, Condensate and Natural Gas Liquids
Trade 44,457 32,638 107,714 90,152
Associated Companies (433) 2,005 826 7,559
Gains (Losses) on Sales of Reserves and Related Assets and Other, Net 2,784 2,395 (1,452) 19,252
--------- --------- --------- ---------
TOTAL 226,780 191,262 572,929 574,400
OPERATING EXPENSES
Lease and Well 22,432 24,488 70,039 72,254
Exploration Costs 11,078 16,231 38,169 50,229
Dry Hole Costs 1,427 9,281 3,902 19,443
Impairment of Unproved Oil and Gas Properties 7,839 8,092 23,826 23,795
Depreciation, Depletion and Amortization 198,098 84,376 368,901 229,408
General and Administrative 24,901 15,812 74,921 47,570
Taxes Other Than Income 14,234 13,783 40,309 41,547
--------- --------- --------- ---------
TOTAL 280,009 172,063 620,067 484,246
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (53,229) 19,199 (47,138) 90,154
OTHER INCOME (EXPENSE)
Gain on Share Exchange 575,151 -- 575,151 --
Other, Net (20,716) (1,601) 37,574 (2,644)
--------- --------- --------- ---------
TOTAL 554,435 (1,601) 612,725 (2,644)
--------- --------- --------- ---------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES 501,206 17,598 565,587 87,510
INTEREST EXPENSE, NET 16,925 13,629 45,966 33,162
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 484,281 3,969 519,621 54,348
INCOME TAX PROVISION (BENEFIT) (28,640) (1,975) (19,004) 8,142
--------- --------- --------- ---------
NET INCOME $ 512,921 $ 5,944 $ 538,625 $ 46,206
========= ========= ========= =========
NET INCOME PER SHARE OF COMMON STOCK
Basic $ 3.75 $ 0.04 $ 3.64 $ 0.30
========= ========= ========= =========
Diluted $ 3.68 $ 0.04 $ 3.60 $ 0.30
========= ========= ========= =========
AVERAGE NUMBER OF COMMON SHARES
Basic 136,750 154,083 148,103 154,559
========= ========= ========= =========
Diluted 139,204 154,409 149,758 155,234
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
EOG RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 18,840 $ 6,303
Accounts Receivable
Trade 135,165 176,608
Associated Companies -- 16,980
Inventories 20,500 39,581
Other 27,930 6,878
----------- -----------
TOTAL 202,435 246,350
OIL AND GAS PROPERTIES (SUCCESSFUL EFFORTS METHOD) 4,782,982 4,814,425
Less: Accumulated Depreciation, Depletion and Amortization (2,458,712) (2,138,062)
----------- -----------
Net Oil and Gas Properties 2,324,270 2,676,363
OTHER ASSETS 70,577 95,382
----------- -----------
TOTAL ASSETS $ 2,597,282 $ 3,018,095
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable
Trade $ 153,036 $ 159,690
Associated Companies -- 46,597
Accrued Taxes Payable 20,557 20,087
Dividends Payable 3,686 4,710
Other 34,817 31,550
----------- -----------
TOTAL 212,096 262,634
LONG-TERM DEBT
Trade 1,165,225 942,779
Affiliate -- 200,000
OTHER LIABILITIES
Trade 33,682 21,516
Associated Companies -- 46,327
DEFERRED INCOME TAXES 233,524 260,337
DEFERRED REVENUE 1,049 4,198
SHAREHOLDERS' EQUITY
Common Stock, $.01 Par, 320,000,000 Shares Authorized;
124,730,000 Shares Issued at September 30, 1999 and
160,000,000 Shares Issued at December 31, 1998 201,247 201,600
Additional Paid In Capital -- 401,524
Unearned Compensation (1,262) (4,900)
Cumulative Foreign Currency Translation Adjustment (25,264) (35,848)
Retained Earnings 904,862 838,371
Common Stock Held in Treasury, 5,568,870 shares at
September 30, 1999 and 6,276,156 shares at December 31, 1998 (127,877) (120,443)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 951,706 1,280,304
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,597,282 $ 3,018,095
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS - (CONTINUED)
EOG RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Reconciliation of Net Income to Net Operating Cash Inflows:
Net Income $ 538,625 $ 46,206
Items Not Requiring Cash
Depreciation, Depletion and Amortization 368,901 229,408
Impairment of Unproved Oil and Gas Properties 23,826 23,795
Deferred Income Taxes (17,601) (5,039)
Other, Net 23,849 5,080
Exploration Costs 38,169 50,229
Dry Hole Costs 3,902 19,443
Losses (Gains) on Sales of Reserves and Related Assets and Other, Net 4,608 (13,319)
Gains on Sales of Other Assets (59,647) --
Gain on Share Exchange (575,151) --
Other, Net (15,982) (7,230)
Changes in Components of Working Capital and Other Liabilities
Accounts Receivable (788) 44,319
Inventories 3,496 (3,016)
Accounts Payable (21,252) (25,379)
Accrued Taxes Payable 3,358 (759)
Other Liabilities (18,818) (24,304)
Other, Net (16,376) 2,176
Amortization of Deferred Revenue -- (32,419)
Changes in Components of Working Capital Associated with
Investing and Financing Activities (4,620) 9,782
--------- ---------
NET OPERATING CASH INFLOWS 278,499 318,973
INVESTING CASH FLOWS
Additions to Oil and Gas Properties (294,875) (580,182)
Exploration Costs (38,169) (50,229)
Dry Hole Costs (3,902) (19,443)
Proceeds from Sales of Reserves and Related Assets 7,817 54,780
Proceeds from Sales of Other Assets 82,965 --
Changes in Components of Working Capital Associated with
Investing Activities 758 (9,782)
Other, Net 3,284 (6,390)
--------- ---------
NET INVESTING CASH OUTFLOWS (242,122) (611,246)
FINANCING CASH FLOWS
Long-Term Debt
Trade 222,446 429,312
Affiliate (200,000) (96,200)
Proceeds from Equity Offering 577,939 --
Dividends Paid (13,828) (13,903)
Treasury Stock Purchased -- (25,301)
Proceeds from Sales of Treasury Stock 13,791 2,263
Equity Contribution to Transferred Subsidiaries (608,750) --
Other, Net (15,438) (3,987)
--------- ---------
NET FINANCING CASH INFLOWS (OUTFLOWS) (23,840) 292,184
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,537 (89)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,303 9,330
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,840 $ 9,241
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
EOG RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements of EOG Resources, Inc. and
subsidiaries (the "Company") included herein have been prepared by
management without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods. Certain
information and notes normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However,
management believes that the disclosures are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Enron Oil & Gas Company
(see Note 2 related to the change of the Company name) Annual Report on
Form 10-K and Form 10-K/A for the year ended December 31, 1998 (the
"Company's 1998 Annual Report").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain reclassifications have been made to prior period financial
statements to conform with the current presentation.
As more fully discussed in Notes 1 and 14 to the consolidated financial
statements included in the Company's 1998 Annual Report, the Company
engages in price risk management activities from time to time primarily for
non-trading and to a lesser extent for trading purposes. Derivative
financial instruments (primarily price swaps and costless collars) are
utilized for non-trading purposes to hedge the impact of market
fluctuations on natural gas and crude oil market prices. Hedge accounting
is utilized in non-trading activities when there is a high degree of
correlation between price movements in the derivative and the item
designated as being hedged. Gains and losses on derivative financial
instruments used for hedging purposes are recognized as revenue in the same
period as the hedged item. The gains or losses are recorded in Net
Operating Revenues for Natural Gas - Associated Companies and Crude Oil,
Condensate and Natural Gas Liquids - Associated Companies through August
1999. Gains or losses are currently recorded in Trade as a result of the
Share Exchange Agreement ("Share Exchange") described in Note 2. Gains and
losses on hedging instruments that are closed prior to maturity are
deferred in the consolidated balance sheets. In instances where the
anticipated correlation of price movements does not occur, hedge accounting
is terminated and future changes in the value of the derivative are
recognized as gains or losses using the mark-to-market method of
accounting. Derivative and other financial instruments utilized in
connection with trading activities, primarily price swaps and call options,
are accounted for using the mark-to-market method, under which changes in
the market value of outstanding financial instruments are recognized as
gains or losses in the period of change. The cash flow impact of derivative
and other financial instruments used for non-trading and trading purposes
is reflected as cash flows from operating activities in the consolidated
statements of cash flows.
2. On August 16, 1999, the Company and Enron Corp. completed the Share
Exchange whereby the Company received 62,270,000 shares of the Company's
common stock out of 82,270,000 shares owned by Enron Corp. in exchange for
all the stock of the Company's subsidiary, EOGI-India, Inc. Prior to the
Share Exchange, the Company made an indirect capital contribution of
approximately $600 million in cash, plus certain intercompany receivables,
to EOGI-India, Inc. At the time of completion of this transaction, this
subsidiary owned, through subsidiaries, all of the Company's assets and
operations in India and China. The Company recognized a $575 million
tax-free gain on the Share Exchange based on the fair value of the shares
received, net of transaction fees of $14 million. Immediately following the
Share Exchange, the Company retired the 62,270,000 shares of the Company's
common stock received in the transaction. The weighted average basis in the
treasury shares retired was first deducted from and fully eliminated
existing additional paid in capital with the remaining value deducted from
retained earnings. This transaction is a tax-free exchange to the Company.
On August 30, 1999, the Company changed its corporate name to "EOG
Resources, Inc." from "Enron Oil & Gas Company" and has since made similar
changes to its subsidiaries' names.
On July 23, 1999, the Company filed a registration statement with the
Securities and Exchange Commission for the public offering of 27,000,000
shares of the Company's common stock. The public offering was completed on
August 16, 1999, and the net proceeds were used to fund a significant
portion of the cash capital contribution in connection with the Share
Exchange. As a result of the public offering and the retirement of
62,270,000 shares of the Company's common stock previously mentioned, the
number of shares of the Company's common stock issued was reduced to
124,730,000 from 160,000,000 prior to the Share Exchange. As of November 1,
1999, the Company had in its treasury 5,547,922 shares of its common stock
issued, reducing the number of shares outstanding to 119,182,078 shares.
6
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
EOG RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Immediately prior to the closing of the Share Exchange, Enron Corp. owned
82,270,000 shares of the Company's common stock, representing approximately
53.5 percent of all of the shares of the Company's common stock that were
issued and outstanding. As a result of the closing of the Share Exchange,
the sale by Enron Corp. of 8,500,000 shares of the Company's common stock
as a selling stockholder in the public offering referred to above, and the
completion on August 17, 1999 and August 20, 1999 of the offering of Enron
Corp. notes automatically exchangeable into up to 11,500,000 shares of the
Company's common stock, Enron Corp's maximum remaining interest in the
Company after the automatic conversion of its notes on July 31, 2002, will
be under two percent (assuming the notes are exchanged for less than the
11,500,000 shares of the Company's common stock). As a result, beginning
with the Share Exchange all transactions with Enron Corp. and its
affiliates have been classified as Trade.
Effective as of August 16, 1999, the closing date of the Share Exchange,
the members of the board of directors of the Company who were officers or
directors of Enron Corp. resigned their positions as directors of the
Company.
As a result of the change to the Company's portfolio of assets subsequent
to the Share Exchange, the Company conducted a re-evaluation of its overall
business. As a result of this re-evaluation, some of the Company's projects
were no longer deemed central to its business. The Company incurred
non-cash charges in connection with the impairment and/or the Company's
decision to dispose of such projects of $89 million after-tax. In the
United States operating segment, a pre-tax charge of $78 million was
recorded to depreciation, depletion and amortization expense for
impairment. The carrying values for assets determined to be impaired were
adjusted to estimated fair values based on projected future discounted net
cash flows for such assets. In the Other operating segment, a pre-tax
charge of $36 million was recorded to depreciation, depletion and
amortization expense to fully write-off the Company's basis and a pre-tax
charge of $19 million was recorded to other income (expense) - other, net
for the estimated exit costs related to the Company's decision to dispose
of certain international operations. Net losses for such operations for the
three-month and nine-month periods ended September 30, 1999 excluding these
charges were $1 million and $2 million respectively.
On July 28, 1999, the Company executed a series of new credit agreements
aggregating $1.3 billion (the "Credit Facilities"). At the same time, the
Company cancelled its existing credit facilities totaling $450 million. Of
the $1.3 billion, $500 million was set to expire in 364 days (the "Interim
Facility"), $400 million was structured as a 364-day revolving credit
facility with a one-year term option subsequent to the revolving period and
$400 million was structured as a five-year revolving credit facility. The
Interim Facility was cancelled subsequent to the completion of the equity
issuance mentioned above. The Credit Facilities contain financial covenants
which may restrict to some extent the Company's ability to incur additional
indebtedness. Management of the Company does not view these covenants as
being materially restrictive given current market conditions.
3. Natural gas revenues, trade for the three-month and nine-month periods
ended September 30, 1999 and 1998, are net of costs of natural gas
purchased for sale related to natural gas marketing activities of $13.6
million, $9.3 million, $34.5 million and $33.6 million, respectively.
Natural gas revenues, associated for the three-month and nine-month periods
ended September 30, 1999 and 1998, are net of costs of natural gas
purchased for sale related to natural gas marketing activities of $0.1
million, $12.2 million, $13.5 million and $36.6 million, respectively.
4. Income tax provision (benefit) for the three-month and nine-month periods
ended September 30, 1999 and 1998 includes a tax provision of $1.9 million,
a tax benefit of $5.4 million, a tax benefit of $1.3 million and a tax
benefit of $9.2 million, respectively, related to tight gas sand federal
income tax credit utilization. Income tax provision (benefit) for interim
periods is calculated using the estimated annual effective income tax rate
method. The $1.9 million provision for the three months ended September 30,
1999, in tight gas sand federal income tax credits is the result of this
method which calculated lower year-to-date tight gas sands federal income
tax credits (based on the percentage of estimated pre-tax income for the
year realized) at September 30, 1999 as compared to June 30, 1999.
Additionally, income tax provision (benefit) for the three-month and
nine-month periods ended September 30, 1999 includes a benefit of $16.5
million from the charges related to international assets no longer central
to the Company's business. Income tax provision (benefit) for the
nine-month period ended September 30, 1999 also includes a benefit of $4.4
million from the anticipated disposition of certain international assets.
Income tax provision (benefit) for the nine-month period ended September
30, 1998 includes a benefit of $3.4 million from certain international
costs and other benefits of $5.0 million from the resolution of certain
state and international issues.
7
<PAGE> 8
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
EOG RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. The difference between the average number of common shares outstanding for
basic and diluted net income per share of common stock is due to the
assumed issuance of approximately 2,454,000, 326,000, 1,655,000 and 675,000
common shares relating to employee stock options in the three-month and
nine-month periods ended September 30, 1999 and 1998, respectively.
6. The Company's total comprehensive income (loss) was $513.8 million, $(2.5)
million, $549.2 million and $30.8 million for the three-month and
nine-month periods ended September 30, 1999 and 1998, respectively. The
only adjustment made to net income in the periods was for a foreign
currency translation gain of $0.9 million, loss of $8.4 million, gain of
$10.6 million and loss of $15.4 million for the three-month and nine-month
periods ended September 30, 1999 and 1998, respectively.
7. Selected financial information about operating segments is reported below
for the three-month and nine-month periods ended September 30, 1999 and
1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET OPERATING REVENUES
United States $ 172,692 $ 138,547 $ 414,961 $ 422,560
Canada 27,238 16,099 64,548 48,809
Trinidad 15,474 18,650 48,163 49,430
India(1) 11,289 17,946 51,554 53,592
China(1) -- 10 4 10
Other 87 10 (6,301) (1)
--------- --------- --------- ---------
TOTAL $ 226,780 $ 191,262 $ 572,929 $ 574,400
========= ========= ========= =========
OPERATING INCOME (LOSS)
United States $ (41,297) $ 3,999 $ (57,907) $ 46,128
Canada 12,303 1,474 21,150 6,237
Trinidad 8,312 11,131 27,949 29,827
India(1) 9,869 10,392 25,699 29,844
China(1) (3,461) (2,316) (8,459) (6,220)
Other (38,955) (5,481) (55,570) (15,662)
--------- --------- --------- ---------
TOTAL (53,229) 19,199 (47,138) 90,154
RECONCILING ITEMS
Other Income (Expense), Net 554,435 (1,601) 612,725 (2,644)
Interest Expense, Net 16,925 13,629 45,966 33,162
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES $ 484,281 $ 3,969 $ 519,621 $ 54,348
========= ========= ========= =========
</TABLE>
- ------------------------
(1) See Note 2.
8. On July 21, 1999, two stockholders of the Company filed separate lawsuits
purportedly on behalf of the Company against Enron Corp. and directors of
the Company, alleging that Enron Corp. and directors of the Company
breached their fiduciary duties of good faith and loyalty in approving the
Share Exchange described in Note 2 above. The lawsuits have been
consolidated and seek to temporarily and permanently enjoin the Share
Exchange and seek to rescind the transaction or to receive monetary damages
and costs and expenses, including reasonable attorneys' and experts' fees.
The Company, Enron Corp. and directors of the Company believe the lawsuits
are without merit and intend to vigorously contest them.
There are various other suits and claims against the Company that have
arisen in the ordinary course of business. However, management does not
believe these suits and claims will individually or in the aggregate have a
material adverse effect on the financial condition or results of operations
of the Company. The Company has been named as a potentially responsible
party in certain Comprehensive Environmental Response Compensation and
Liability Act proceedings. However, management does not believe that any
potential assessments resulting from such proceedings will individually or
in the aggregate have a materially adverse effect on the financial
condition or results of operations of the Company.
8
<PAGE> 9
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONCLUDED)
EOG RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 - "Accounting
for Derivative Instruments and Hedging Activities" effective for fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No.
137, which delays the effective date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. SFAS No. 133, as amended by
SFAS No. 137, cannot be applied retroactively and must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
a transition date to be selected by the Company of either December 31, 1997
or December 31, 1998.
The statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statements of income and requires a
company to formally document, designate and assess the effectiveness of
transactions that receive hedge accounting treatment.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements and has not determined the timing of adoption.
Based on the Company's current level of derivative and hedging activities,
the Company does not expect the impact of adoption to be material.
10. During the first and second quarters of 1999, the Company sold its 3.2
million options to purchase common stock of Enron Corp. having a strike
price of $39.1875 per share. In the first quarter of 1999, the Company sold
1.6 million options at an average price of $24.81 ($64.00 Enron Corp. stock
price equivalent), realizing net proceeds of $40 million and a gain of $28
million pre-tax ($18 million after-tax). Early in the second quarter, the
Company sold the remaining 1.6 million options at an average price of
$27.07 ($66.26 Enron Corp. stock price equivalent), realizing net proceeds
of $43 million and a gain of $32 million pre-tax ($21 million after-tax).
The gain on sale of the options is included in the other income (expense) -
other, net on the Consolidated Statements of Income. These transactions
were completed prior to Enron Corp. effecting a two-for-one stock split.
11. As a result of the re-evaluation of the Company's portfolio of assets
following the Share Exchange, on November 12, 1999 senior management
proposed to the Board of Directors ("the Board") of the Company to defer
the development of the Big Piney Madison deep Paleozoic formation methane
reserves in Wyoming for the foreseeable future. The basis for this
recommendation was the substantial capital cost required to develop the
project relative to the Company's anticipated spending budget for the next
several years as well as the project's anticipated rate of return compared
to other investment opportunities currently available to the Company. The
Board approved the recommendation. As a result, the 1.2 trillion cubic feet
of methane reserves in the formation, which are located on acreage owned by
the Company and held by production for the foreseeable future, and are
currently classified as proved undeveloped reserves, will be removed from
that classification. As a result of the value of other proved reserves
existing in this field, no asset value write-off will result from this
reduction of proved undeveloped methane reserves. However the reserve
reduction will have the effect of increasing Big Piney depreciation,
depletion and amortization expense by approximately $6.5 million per
quarter beginning in the fourth quarter of 1999. At December 31, 1998,
these reserves represented approximately $155 million or 7% of the
Company's Standardized Measure of Discounted Future Net Cash Flows as
adjusted for the sale of the India and China reserves discussed in Note 2.
9
<PAGE> 10
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EOG RESOURCES, INC.
The following review of operations for the three-month and nine-month
periods ended September 30, 1999 and 1998 should be read in conjunction with the
consolidated financial statements of EOG Resources, Inc. (the "Company") and
Notes thereto.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998
The Company generated third quarter net income of $513 million compared to
net income of $6 million for the third quarter of 1998. Included in the 1999
third quarter net income are a net gain of $575 million from the Share Exchange
Agreement ("Share Exchange") described in Note 2 of the Notes to the
Consolidated Financial Statements, non-recurring charges of $89 million
primarily related to assets determined no longer central to the company's
business (See Note 2 of the Notes to the Consolidated Financial Statements), and
$6 million of other general and administrative expenses related to the
completion of the Share Exchange. Net operating revenues were $227 million
compared to $191 million for the third quarter of 1998. Following is an
explanation of the variances causing this increase.
Wellhead volume and price statistics are summarized below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
NATURAL GAS VOLUMES (MMcf PER DAY)(1)
United States 642 692(2)
Canada 117 106
--------- ---------
North America 759 798
Trinidad 114 163
India(3) 38 58
--------- ---------
TOTAL 911 1,019
========= =========
AVERAGE NATURAL GAS PRICES ($/Mcf)(4)
United States $ 2.40 $ 1.82(5)
Canada 1.99 1.28
North America Composite 2.34 1.75
Trinidad 1.07 1.03
India(3) 1.94 2.34
COMPOSITE 2.16 1.67
CRUDE OIL/CONDENSATE VOLUMES (MBbl PER DAY)(1)
United States 14.6 16.6
Canada 2.7 2.8
--------- ---------
North America 17.3 19.4
Trinidad 2.4 3.1
India(3) 2.9 5.1
--------- ---------
TOTAL 22.6 27.6
========= =========
AVERAGE CRUDE OIL/CONDENSATE PRICES ($/Bbl)(4)
United States $ 20.33 $ 12.54
Canada 18.88 11.53
North America Composite 20.10 12.39
Trinidad 19.60 11.37
India(3) 17.43 11.59
COMPOSITE 19.71 12.13
NATURAL GAS EQUIVALENT VOLUMES (MMcfe PER DAY)(6)
United States 743 810(2)
Canada 139 129
--------- ---------
North America 882 939
Trinidad 128 181
India(3) 55 89
--------- ---------
TOTAL 1,065 1,209
========= =========
TOTAL Bcfe(6) DELIVERIES 98 111(2)
</TABLE>
- ---------------------
(1) Million cubic feet per day or thousand barrels per day, as applicable.
(2) Includes 48 MMcf per day delivered under the terms of a volumetric
production payment agreement effective October 1, 1992, as amended.
Delivery obligations were terminated in December 1998.
(3) See Note 2 to the Consolidated Financial Statements.
(4) Dollars per thousand cubic feet or per barrel, as applicable.
(5) Includes an average equivalent wellhead value of $1.36 per Mcf for the
volumes described in note (2), net of transportation costs.
(6) Million cubic feet equivalent per day or billion cubic feet equivalent, as
applicable.
10
<PAGE> 11
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
Wellhead revenues increased 19% to $226 million in the third quarter of
1999 compared to $190 million in the third quarter of 1998.
Average wellhead crude oil and condensate prices were approximately 62%
higher than the comparable period in 1998, increasing net operating revenues by
$16 million. Average wellhead natural gas prices were up by 29%, increasing net
operating revenues by $42 million. Third quarter 1999 wellhead natural gas
deliveries were approximately 11% lower than the comparable period in 1998
decreasing net operating revenues by $17 million. The decrease in volumes is
primarily due to the Share Exchange and decreased deliveries in North America
primarily in the South Texas area, and Trinidad primarily due to decreased
nominations and the shut-in of a well in accordance with the terms of a gas
balancing agreement. See Note 2 in the Notes to the Consolidated Financial
Statements for a discussion of the Share Exchange. Wellhead crude oil and
condensate deliveries were 18% lower than the prior year period decreasing net
operating revenues by $6 million. The decrease is primarily attributable to the
Share Exchange and decreased deliveries in North America.
Operating expenses of $280 million for the third quarter of 1999 were
approximately $108 million higher than the third quarter of 1998. Depreciation,
depletion and amortization ("DD&A") expense increased approximately $114 million
compared to the prior year period, primarily reflecting a non-recurring charge
of $114 million related primarily to assets determined no longer central to the
Company's business. General and administrative ("G&A") expense was $9 million
higher than the prior year period primarily due to non-recurring costs of $9
million related to the completion of the Share Exchange. Exploration and dry
hole costs were $13 million lower than the third quarter of 1998 primarily due
to decreased exploratory drilling and other exploration activities.
The per unit operating costs of the Company for lease and well, DD&A, G&A,
interest expense, and taxes other than income averaged $2.82 per Mcfe during the
third quarter of 1999 compared to $1.37 per Mcfe during the third quarter of
1998. The increase is primarily due to a higher per unit rate of interest, G&A
and DD&A expenses. Excluding the previously mentioned non-recurring charges of
$114 million in DD&A and $9 million in G&A, the per unit operating costs of the
Company were $1.56 per Mcfe in the third quarter of 1999. The adjusted per unit
operating costs were $0.19 higher compared to $1.37 per Mcfe for the third
quarter of 1998 primarily due to a higher per unit rate of interest as a result
of higher debt and a higher per unit rate of DD&A in North America.
Other income (expense) for the third quarter of 1999 included a $575
million net gain from the Share Exchange and an $18.7 million charge for
estimated exit costs related to the Company's decision to dispose of certain
international assets. (See Note 2 to the Consolidated Financial Statements).
Income tax benefit for the three-month periods ended September 30, 1999 and
1998 was $28.6 million and $2.0 million, respectively. The increase in tax
benefit is due primarily to the non-recurring charges related primarily to
assets determined no longer central to the Company's business.
Federal income taxes accrued in the three-month periods ended September 30,
1999 and 1998 were calculated using the estimated annual effective income tax
rate.
11
<PAGE> 12
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
In the first nine months of 1999, the Company generated net income of $539
million compared to net income of $46 million for the first nine months of 1998.
Included in the 1999 net income are a net gain of $575 million from the Share
Exchange described in Note 2 of the Notes to the Consolidated Financial
Statements, a gain of $39 million on sale of 3.2 million Enron Corp. common
stock options held by the Company and non-recurring charges of $89 million
related primarily to assets determined no longer central to the company's
business (See Note 2 of the Notes to the Consolidated Financial statements), $3
million related to the potential sale of the Company by Enron Corp. prior to the
Share Exchange, $3 million related to personnel expenses, $5 million pursuant to
a change in strategy related to the pursuit of certain offshore operations by
the Company, and $6 million of other general and administrative expenses related
to the completion of the Share Exchange. Net operating revenues for the first
nine months of 1999 were $573 million compared to $574 million for the
comparable period of 1998.
Wellhead volume and price statistics are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
NATURAL GAS VOLUMES (MMcf PER DAY)
United States 653 653(1)
Canada 112 102
--------- ---------
North America 765 755
Trinidad 132 135
India(2) 61 53
--------- ---------
TOTAL 958 943
========= =========
AVERAGE NATURAL GAS PRICES ($/Mcf)
United States $ 2.00 $ 1.95(3)
Canada 1.68 1.36
North America Composite 1.95 1.87
Trinidad 1.07 1.06
India(2) 1.95 2.52
COMPOSITE 1.83 1.79
CRUDE OIL/CONDENSATE VOLUMES (MBbl PER DAY)
United States 13.6 13.8
Canada 2.7 2.7
--------- ---------
North America 16.3 16.5
Trinidad 2.5 2.9
India(2) 5.4 4.7
--------- ---------
TOTAL 24.2 24.1
========= =========
AVERAGE CRUDE OIL/CONDENSATE PRICES ($/Bbl)
United States $ 16.23 $ 13.35
Canada 15.02 12.34
North America Composite 16.02 13.18
Trinidad 14.32 12.85
India(2) 12.80 13.31
COMPOSITE 15.13 13.17
NATURAL GAS EQUIVALENT VOLUMES (MMcfe PER DAY)
United States 750 753(1)
Canada 132 124
--------- ---------
North America 882 877
Trinidad 147 153
India(2) 94 81
--------- ---------
TOTAL 1,123 1,111
========= =========
TOTAL Bcfe DELIVERIES 307 303(1)
</TABLE>
- ---------------
(1) Includes 48 MMcf per day delivered under the terms of a volumetric
production payment agreement effective October 1, 1992, as amended.
Delivery obligations were terminated in December 1998.
(2) See Note 2 to the Consolidated Financial Statements.
(3) Includes an average equivalent wellhead value of $1.51 per Mcf for the
volumes described in note (1), net of transportation costs.
12
<PAGE> 13
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
Wellhead revenues increased approximately 6% to $587 million in the first
nine months of 1999 compared to $556 million in the first nine months of 1998.
During the first nine months of 1999, average wellhead natural gas prices
were 2% higher than the comparable period of 1998 increasing net operating
revenues by approximately $10 million. Average wellhead crude oil and condensate
prices were up by 15% increasing net operating revenues by approximately $13
million.
Wellhead natural gas volumes were 2% higher than the comparable period in
1998 increasing net operating revenues by approximately $7 million, due
primarily to increased deliveries in India and North America, partially offset
by decreased deliveries in Trinidad and the effects of the Share Exchange,
described in Note 2 of the Notes to the Consolidated Financial Statements.
Other marketing activities associated with sales and purchases of natural
gas, natural gas and crude oil price hedging and trading transactions, and 1998
margins related to the volumetric production payment decreased net operating
revenues by $13 million compared to a revenue decrease of $1 million in the
first nine months of 1998. This variance was primarily due to a $4 million
revenue decrease from natural gas price hedging contracts closed in prior
periods and an $8 million revenue decrease from natural gas marketing activities
in the first nine months of 1999 (see Note 14 to the Consolidated Financial
Statements in the Company's 1998 Annual Report on Form 10-K), as compared to a
$2 million revenue increase related to natural gas price hedging and trading
activities and a $6 million revenue decrease from natural gas marketing
activities in the first nine months of 1998.
Gains (losses) on sales of reserves and related assets and other, net
totaled a loss of $1 million in the first nine months of 1999 compared to a net
gain of $19 million in the comparable prior year period. The difference is due
primarily to a $6 million loss related to the anticipated disposition of certain
international assets in the first nine months of 1999 compared to a $27 million
gain on sale of certain South Texas properties, partially offset by a $14
million provision for loss on certain physical natural gas contracts in the
first nine months of 1998.
During the first nine months of 1999, operating expenses of $620 million
were approximately $136 million higher than the comparable period in 1998. DD&A
increased approximately $139 million compared to the prior year period,
primarily reflecting non-recurring charges of $8 million recorded pursuant to a
change in strategy related to the pursuit of certain offshore operations by the
Company, and $114 million related primarily to assets determined no longer
central to the Company's business and increased production volumes. G&A was $27
million higher than the prior year period primarily due to expanded operations,
settlement of certain commercial disputes with third parties and non-recurring
costs of $5 million related to the potential sale of the Company, $4 million
related to personnel expenses and $9 million related to the completion of the
Share Exchange. Exploration and dry hole costs were $28 million lower than the
first nine months of 1998 primarily due to decreased exploratory drilling and
other exploration activities and improved success on wildcat drilling prospects.
The per unit operating costs of the Company for lease and well, DD&A, G&A,
interest expense and taxes other than income averaged $1.96 per Mcfe for the
first nine months of 1999 compared to $1.40 per Mcfe in 1998. This increase is
primarily due to a higher per unit rate of G&A, interest and DD&A expenses,
partially offset by a lower per unit rate of lease and well expense and taxes
other than income. Excluding the previously mentioned non-recurring charges of
$122 million in DD&A and $18 million in G&A, the per unit operating costs for
the Company were $1.50 per Mcfe in the first nine months of 1999. The adjusted
per unit operating costs were $0.10 higher compared to $1.40 per Mcfe for the
comparable period in 1998 primarily due to a higher per unit rate of interest as
a result of higher debt and a higher per unit rate of DD&A in North America.
Other income (expense), for the first nine months of 1999 included a $575
million net gain from the Share Exchange (See Note 2 to the Consolidated
Financial Statements), a $59.6 million gain on the sale of 3.2 million options
owned by the Company to purchase Enron Corp. common stock (See Note 10 to the
Consolidated Financial Statements), and an $18.7 million charge for estimated
exit costs related to the Company's decision to dispose of certain international
assets.
13
<PAGE> 14
PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
Income tax benefit of $19.0 million for the first nine months of 1999
compares to a provision of $8.1 million for the first nine months of 1998. The
decrease in income taxes was primarily due to the lower taxable income, benefits
related to the Company's decision to dispose of certain international assets and
benefits related to charges associated with assets determined no longer central
to the Company's business.
Federal income taxes accrued in the nine-month interim periods are
calculated using the estimated annual effective income tax rate.
CAPITAL RESOURCES AND LIQUIDITY
The Company's primary sources of cash during the nine months ended
September 30, 1999 included funds generated from operations, proceeds from an
equity offering, proceeds from the sale of options to purchase Enron Corp.
common stock and proceeds from new borrowings. Primary cash outflows included
funds used in operations, exploration and development expenditures, dividends
paid to Company shareholders, funds used in the Share Exchange and the repayment
of debt.
Net operating cash flows of $278 million for the first nine months of 1999
decreased approximately $40 million as compared to the first nine months of 1998
primarily reflecting lower operating revenues, higher interest expense and
higher cash operating expenses, partially offset by the effects of terminating
the volumetric production payment in December of 1998.
Net investing cash outflows of approximately $242 million for the first
nine months of 1999 decreased by $369 million versus the comparable prior year
period due primarily to reduced exploration and development expenditures and
proceeds related to the sale of options to purchase Enron Corp. common stock,
partially offset by lower proceeds from sales of reserves and related assets.
Changes in Components of Working Capital Associated with Investing Activities
included changes in accounts payable associated with the accrual of exploration
and development expenditures and changes in inventories which represent
materials and equipment used in drilling and related activities.
Exploration and development expenditures for the first nine months of 1999
and 1998 are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
United States $246 $523
Canada 51 33
---- ----
North America 297 556
Trinidad 3 20
India(1) 25 38
China(1) 9 2
Other 3 34
---- ----
TOTAL $337 $650
==== ====
</TABLE>
- -----------------
(1) See Note 2 to the Consolidated Financial Statements.
Exploration and development expenditures of $337 million for the first nine
months of 1999 were $313 million lower than the prior year period due primarily
to a reduced level of service industry costs as well as reduced spending on the
North America, Trinidad and India drilling and acquisition programs.
The level of exploration and development expenditures will vary in future
periods depending on energy market conditions and other related economic
factors. The Company has significant flexibility with respect to financing
alternatives and the ability to adjust its exploration and development
expenditure budget as circumstances warrant. There are no material continuing
commitments associated with expenditure plans.
Cash used by financing activities was $24 million for the first nine months
of 1999 versus a cash inflow of $292 million for the comparable prior year
period. Financing activities for 1999 included funds used in the Share Exchange
of $609 million and dividend payments of $14 million, partially offset by net
addition to long-term debt of $22 million, net proceeds from an equity offering
of $578 million and proceeds of $14 million from the exercise of stock options
by employees. Based upon existing economic and market conditions, management
believes net operating cash flow and available financing alternatives will be
sufficient to fund net investing and other cash requirements of the Company for
the foreseeable future.
14
<PAGE> 15
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
YEAR 2000
The Year 2000 problem generally results from the use in computer hardware
and software of two digits rather than four digits to define the applicable
year. When computer systems must process dates both before and after January 1,
2000, two-digit year "fields" may create processing ambiguities that can cause
errors and system failures. For example, a date represented by "00" may be
interpreted as referring to the year 1900, instead of 2000.
The effects of the Year 2000 problem can be exacerbated by the
interdependence of computer and telecommunications systems in the United States
and throughout the world. This interdependence can affect the Company and its
suppliers, trading partners, and customers, as well as governments of countries
around the world where the Company does business.
State of Readiness
The Company Board of Directors has been briefed about the Year 2000
problem. The Board has adopted a Year 2000 Project (the "Project") aimed at
preventing the Company's mission-critical functions from being impaired due to
the Year 2000 problem. "Mission-critical" functions are those critical functions
whose loss would cause an immediate stoppage of or significant impairment to
core business processes (a core business process is one of material importance
to the Company business).
Implementation of the Project is directly supervised by a Year 2000
Oversight Committee, made up of four senior executives of the Company and its
affiliates. Each operating division of the Company is implementing procedures
specific to it that are part of the overall Project. The Company also has
engaged certain outside consultants, technicians and other external resources to
aid in formulating and implementing the Project.
The Company is actively implementing the Project, which will be modified as
events warrant. Under the Project, the Company will continue to inventory
mission-critical computer hardware and software systems and embedded
microprocessors (microprocessors with date-related functions, contained in a
wide variety of devices), and software; assess the effects of Year 2000 problems
on the mission-critical functions of the Company; remedy systems, software and
embedded microprocessors in an effort to avoid material disruptions or other
material adverse effects on mission-critical functions, processes and systems;
verify and test the mission-critical systems to which remediation efforts have
been applied; and attempt to mitigate those mission-critical aspects of the Year
2000 problem that are not remediated by January 1, 2000, including the
development of contingency plans to cope with the mission-critical consequences
of Year 2000 problems that have not been identified or remediated by that date.
The Project recognizes that the computer, telecommunications, and other
systems ("Outside Systems") of outside entities ("Outside Entities") have the
potential for major, mission-critical, adverse effects on the conduct of Company
business. The Company does not have control of these Outside Entities or Outside
Systems. (In some cases, Outside Entities are U.S., state and local governmental
organizations, foreign governments or businesses located in foreign countries.)
However, the Project includes an ongoing process of identifying and contacting
Outside Entities whose systems in the Company's judgment have, or may have, a
substantial effect on the Company's ability to continue to conduct the
mission-critical aspects of Company business without disruption from Year 2000
problems. The Project envisions the Company making an attempt to inventory and
assess the extent to which these Outside Systems may not be "Year 2000 ready" or
"Year 2000 compatible". The Company will attempt reasonably to coordinate with
these Outside Entities in an ongoing effort to obtain assurance that the Outside
Systems that are mission-critical will be Year 2000 compatible well before
January 1, 2000. Consequently, the Company will work with Outside Entities in a
reasonable attempt to inventory, assess, analyze, convert (where necessary),
test, and develop contingency plans for connections to these mission-critical
Outside Systems and to ascertain the extent to which they are, or can be made to
be, Year 2000 ready and compatible with the Company's remediation of its own
mission-critical systems.
15
<PAGE> 16
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
As of October 31, 1999, the Company has substantially completed its
implementation of the Project, as shown in the following tables. Any notation of
"complete" conveys the fact only that the initial iteration of this phase has
been substantially completed. All dates are only relevant for the initial
iteration of the applicable stage of the Project.
YEAR 2000 PROJECT READINESS
<TABLE>
<CAPTION>
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
--------- ---------- -------- ---------- ------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mission-Critical Internal Items C C C C C C C
Mission-Critical Outside Entities C C C C C C C
</TABLE>
Legend: C = Complete
YEAR 2000 PROJECT ESTIMATED COMPLETION DATES
<TABLE>
<CAPTION>
Inventory Assessment Analysis Conversion Testing Y2K-Ready Contingency Plan
--------- ---------- -------- ---------- ------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mission-Critical Internal Items 12/98 3/99 3/99 6/99 9/99 9/99 9/99
Mission-Critical Outside Entities 3/99 6/99 6/99 9/99 9/99 9/99 9/99
</TABLE>
It is important to recognize that the processes of inventorying, assessing,
analyzing, converting (where necessary), testing, and developing contingency
plans for mission-critical items in anticipation of the Year 2000 event are in
many instances iterative processes, requiring a repeat of some or all of these
processes as the Company learns more about the Year 2000 problem and its effects
on internal business information systems and on Outside Systems, and about the
effects of embedded microprocessors on systems and business operations. The
Company anticipates that it will continue with these processes through January
1, 2000 and on into the Year 2000 in order to assess and remediate problems that
reasonably can be identified only after the start of the new century.
The Project envisioned verification and validation of certain
mission-critical facilities and functions by independent consultants. These
consultants participated to varying degrees in many or all of the stages,
including the inventory, assessment, and testing phases. The Company has
utilized Raytheon Engineers & Constructors, Inc. to assist Company personnel in
the inventory and assessment phases of onshore and offshore and domestic and
international operations.
Costs to Address Year 2000 Issues
The Company has not incurred material historical costs for Year 2000
awareness, inventory, assessment, analysis, conversion, testing, or contingency
planning and anticipates that any future costs for these purposes, including
those for implementing Year 2000 contingency plans, are not likely to be
material.
Although management believes that its estimates are reasonable, there can
be no assurance, for the reasons stated in the "Summary" section below, that the
actual costs of implementing the Project will not differ materially from the
estimated costs or that the Company will not be materially adversely affected by
Year 2000 issues.
16
<PAGE> 17
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
YEAR 2000 RISK FACTORS
Regulatory requirements. Certain of the Company's operations are regulated
by governmental authorities. The Company expects to satisfy these regulatory
authority requirements for achieving Year 2000 readiness. If the Company's
reasonable expectations in this regard are in error, and if a regulatory
authority should order the temporary cessation of operations in one or more of
these areas, the adverse effect on the Company could be material. Outside
Entities may face similar problems that materially adversely affect the Company.
Potential Shortcomings. The Company estimates that mission-critical
systems, domestic and international, will be Year 2000-ready substantially
before January 1, 2000. However, there is no assurance that the Project will
succeed in accomplishing its purpose, or that unforeseen circumstances will not
arise during implementation of the Project that would materially adversely
affect the Company.
Cascading Effect. The Company is taking reasonable steps to identify,
assess, and, where appropriate, to replace devices that contain embedded
microprocessors. Despite these reasonable efforts, the Company anticipates that
it will not be able to find and remediate all embedded microprocessors in all
systems. Further, it is anticipated that Outside Entities also will not be able
to find and remediate all embedded microprocessors in their systems. Some of the
embedded microprocessors that fail to operate or that produce anomalous results
may create system disruptions or failures. Some of these disruptions or failures
may spread from the systems in which they are located to other systems causing
adverse effects upon the Company's ability to maintain safe operations, to serve
its customers and otherwise to fulfill certain contractual and other legal
obligations. The embedded microprocessor problem is widely recognized as one of
the more difficult aspects of the Year 2000 problem across industries and
throughout the world. The possible adverse impact of the embedded microprocessor
problem is not, and will not be, unique to the Company.
Third parties. The Company cannot assure that suppliers upon which it
depends for essential goods and services will convert and test their
mission-critical systems and processes in a timely manner. Failure or delay by
all or some of these entities, including the U.S. and state or local governments
and foreign governments, could create substantial disruptions having a material
adverse effect on Company business.
Contingency Plans
As part of the Project, the Company is developing contingency plans that
deal with, among others, two primary aspects of the Year 2000 problem: (1) that
the Company, despite its good-faith, reasonable efforts, may not have
satisfactorily remediated all internal, mission-critical systems; and (2) that
Outside Systems may not be Year 2000 ready, despite the Company's good-faith,
reasonable efforts to work with Outside Entities. These contingency plans are
being designed to mitigate the disruptions or other adverse effects resulting
from Year 2000 incompatibilities regarding these mission-critical functions or
systems, and to facilitate the early identification and remediation of
mission-critical Year 2000 problems that first manifest themselves after January
1, 2000.
These contingency plans will contemplate an assessment of all
mission-critical internal information technology systems and internal
operational systems that use computer-based controls. This process will be
pursued continuously into the Year 2000 as circumstances require. Further, the
Company will in that time frame assess any mission-critical disruptions due to
Year 2000-related failures that are external to the Company.
These contingency plans include the creation, as deemed reasonably
appropriate, of teams that will be standing by on the eve of the new millennium,
prepared to respond rapidly and otherwise as necessary to mission-critical Year
2000-related problems as soon as they become known. The composition of teams
that are assigned to deal with Year 2000 problems will vary according to the
nature, mission-criticality, and location of the problem. Because the Company
operates internationally, some of its Year 2000 contingency teams will be
located at mission-critical facilities overseas.
17
<PAGE> 18
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
EOG RESOURCES, INC.
Worst Case Scenario
The Securities and Exchange Commission requires that public companies must
forecast the most reasonably likely worst case Year 2000 scenario, assuming that
the Company's Year 2000 plan is not effective. Analysis of the most reasonably
likely worst case Year 2000 scenarios the Company may face leads to
contemplation of the following possibilities which, though considered highly
unlikely, must be included in any consideration of worst cases: widespread
failure of electrical, natural gas, and similar supplies by utilities serving
the Company domestically and internationally; widespread disruption of the
services of communications common carriers domestically and internationally;
similar disruption to means and modes of transportation for the Company and its
employees, contractors, suppliers, and customers; significant disruption to the
Company's ability to gain access to, and continue working in, office buildings
and other facilities; the failure of substantial numbers of mission-critical
hardware and software computer systems, including both internal business systems
and systems (such as those with embedded microprocessors) controlling
operational facilities such as electrical generation, transmission, and
distribution systems and crude oil and natural gas plants and pipelines,
domestically and internationally; and the failure, domestically and
internationally, of Outside Systems, the effects of which would have a
cumulative material adverse impact on the Company's mission-critical systems.
Among other things, the Company could face substantial claims by customers for
loss of revenues due to supply interruptions, inability to fulfill contractual
obligations, inability to account for certain revenues or obligations or to bill
or pay customers accurately and on a timely basis, and increased expenses
associated with litigation, stabilization of operations following
mission-critical failures, and the execution of contingency plans. The Company
could also experience an inability by customers, traders, and others to pay, on
a timely basis or at all, obligations owed to the Company. Under these
circumstances, the adverse effect on the Company, and the diminution of Company
revenues, could be material, although not quantifiable at this time. Further in
this scenario, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on the Company, and the diminution of Company revenues, from a domestic
or global recession or depression also could be material, although not
quantifiable at this time.
The Company will continue to monitor business conditions with the aim of
assessing and quantifying material adverse effects, if any, that result or may
result from the Year 2000 problem.
Summary
The Company has a plan to deal with the Year 2000 challenge and believes
that it will be able to achieve substantial Year 2000 readiness with respect to
the mission critical systems that it controls. From a forward-looking
perspective, the extent and magnitude of the Year 2000 problem as it will affect
the Company, both before and for some period after January 1, 2000, are
difficult to predict or quantify for a number of reasons. Among these are: the
difficulty of locating "embedded" microprocessors that may be in a great variety
of mission-critical hardware used for process or flow control, environmental,
transportation, access, communications, and other systems; the difficulty of
inventorying, assessing, remediating, verifying and testing, Outside Systems
connected, and vital, to the Company's computer, telecommunications, or other
mission-critical systems; the difficulty of locating all mission-critical
software (computer code) that is not Year 2000 compatible; and the
unavailability of certain necessary internal or external resources, including
but not limited to trained hardware and software engineers, technicians, and
other personnel to perform adequate remediation, verification, and testing of
mission-critical Company systems or Outside Systems. Year 2000 costs are
difficult to estimate accurately because of unanticipated vendor delays,
technical difficulties, the impact of tests of Outside Systems, and similar
events. There can be no assurance for example that all Outside Systems with a
mission-critical impact will be adequately remediated so that they are Year 2000
ready by January 1, 2000, or by some earlier date, so as not to create a
material disruption to the Company's business. If, despite reasonable efforts
under the Year 2000 Project, there are mission-critical Year 2000-related
failures that create substantial disruptions to Company business, the adverse
impact on the Company could be material. Additionally, Year 2000 costs are
difficult to estimate accurately because of unanticipated vendor delays,
technical difficulties, the impact of tests of Outside Systems and similar
events. Moreover, despite the Company's belief that costs for implementing the
Project will not be material, the estimated costs of implementing the Project do
not take into account the costs, if any, that might be incurred as a result of
Year 2000-related failures that occur despite implementation of the Project.
18
<PAGE> 19
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONCLUDED)
EOG RESOURCES, INC.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements other than statements of
historical facts, including, among others, statements regarding the Company's
future financial position, business strategy, budgets, reserve information,
projected levels of production, projected costs and plans and objectives of
management for future operations, are forward-looking statements. The Company
typically uses words such as "expect", "anticipate", "estimate", "strategy",
"intend", "plan" and "believe" or the negative of those terms or other
variations of them or by comparable terminology to identify its forward-looking
statements. In particular, statements, express or implied, concerning future
operating results or the ability to generate income or cash flows are
forward-looking statements. Although the Company believes its expectations
reflected in forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will be achieved. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements include, among others:
timing and extent of changes in commodity prices for crude oil, natural gas and
related products and interest rates; extent of the Company's success in
discovering, developing, marketing and producing reserves and in acquiring oil
and gas properties; successful implementation of the Company's Year 2000
Project, the effectiveness of its Year 2000 Project, and the readiness of
outside entities; political developments around the world; and financial market
conditions.
In light of these risks, uncertainties and assumptions, the events
anticipated by the Company's forward-looking statements might not occur. The
Company undertakes no obligations to update or revise its forward-looking
statements, whether as a result of new information, future events or otherwise.
19
<PAGE> 20
PART II. OTHER INFORMATION
EOG RESOURCES, INC.
ITEM 1. Legal Proceedings
See Part 1, Item 1, Note 8 to Consolidated Financial Statements, which is
incorporated herein by reference.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K filed on August 31, 1999, to report
the Share Exchange on August 16, 1999, in Item 2 - Acquisition
and Disposition of Assets, the change of the Company's name on
August 30, 1999, in Item 5 - Other Events, and pro forma
financial information in Item 7 - Financial Statements, Pro
Forma Financial Information and Exhibits.
20
<PAGE> 21
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 thereunto duly authorized.
EOG RESOURCES, INC.
(Registrant)
Date: November 12, 1999 By /S/ W. C. WILSON
--------------------------------------
W. C. Wilson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 By /S/ T. K. DRIGGERS
--------------------------------------
T. K. Driggers
Vice President and Controller
(Principal Accounting Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
<PAGE> 1
EXHIBIT 12
EOG RESOURCES, INC.
Computation of Ratio of Earnings to Fixed Charges
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS AVAILABLE FOR
FIXED CHARGES:
Net Income $ 538,625 $ 56,171 $ 121,970 $ 140,008 $ 142,118 $ 147,998
Less: Capitalized Interest Expense (8,637) (12,711) (13,706) (9,136) (6,490) (6,124)
Add: Fixed Charges 54,603 61,290 41,423 21,997 18,414 14,613
Income Tax Provision (Benefit) (19,004) 4,111 41,500 50,954 41,936 5,937
--------- --------- --------- --------- --------- ---------
EARNINGS AVAILABLE $ 565,587 $ 108,861 $ 191,187 $ 203,823 $ 195,978 $ 162,424
========= ========= ========= ========= ========= =========
FIXED CHARGES:
Interest Expense $ 45,966 $ 48,463 $ 27,369 $ 12,370 $ 11,310 $ 8,135
Capitalized Interest 8,637 12,711 13,706 9,136 6,490 6,124
Rental Expense Representative of
Interest Factor -- 116 348 491 614 354
--------- --------- --------- --------- --------- ---------
TOTAL FIXED CHARGES $ 54,603 $ 61,290 $ 41,423 $ 21,997 $ 18,414 $ 14,613
========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO
FIXED CHARGES 10.36 1.78 4.62 9.27 10.64 11.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,840
<SECURITIES> 0
<RECEIVABLES> 135,165
<ALLOWANCES> 0
<INVENTORY> 20,500
<CURRENT-ASSETS> 202,435
<PP&E> 4,782,982
<DEPRECIATION> (2,458,712)
<TOTAL-ASSETS> 2,597,282
<CURRENT-LIABILITIES> 212,096
<BONDS> 0
0
0
<COMMON> 201,247
<OTHER-SE> 750,459
<TOTAL-LIABILITY-AND-EQUITY> 2,597,282
<SALES> 574,381
<TOTAL-REVENUES> 572,929
<CGS> 0
<TOTAL-COSTS> 620,067
<OTHER-EXPENSES> (612,725)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,966
<INCOME-PRETAX> 519,621
<INCOME-TAX> (19,004)
<INCOME-CONTINUING> 538,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 538,625
<EPS-BASIC> 3.64<F1>
<EPS-DILUTED> 3.60
<FN>
<F1>BASIC
</FN>
</TABLE>
