10-Q 1 pxd-20130930.htm 10-Q PXD-2013.09.30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
______________________________
FORM 10-Q 
______________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  ________ to ________                     
Commission File Number: 1-13245
______________________________ 
PIONEER NATURAL RESOURCES COMPANY
(Exact name of Registrant as specified in its charter)
______________________________
Delaware
 
75-2702753
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
5205 N. O'Connor Blvd., Suite 200, Irving, Texas
 
75039
(Address of principal executive offices)
 
(Zip Code)
(972) 444-9001
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report) 
______________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨    No  ý
Number of shares of Common Stock outstanding as of November 4, 2013                                 138,667,689



PIONEER NATURAL RESOURCES COMPANY
TABLE OF CONTENTS 
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and 2012
 
 
 
 
Consolidated Statement of Equity for the nine months ended September 30, 2013
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 
 
 

2


PIONEER NATURAL RESOURCES COMPANY
Cautionary Statement Concerning Forward-Looking Statements
The information in this Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements that involve risks and uncertainties. When used in this document, the words "believes," "plans," "expects," "anticipates," "forecasts," "intends," "continue," "may," "will," "could," "should," "future," "potential," "estimate" or the negative of such terms and similar expressions as they relate to Pioneer Natural Resources Company ("Pioneer" or the "Company") are intended to identify forward-looking statements. The forward-looking statements are based on the Company's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates. Although the Company believes that the expectations and assumptions reflected in the forward-looking statements are reasonable as and when made, they involve risks and uncertainties that are difficult to predict and, in many cases, beyond the Company's control.
These risks and uncertainties include, among other things, volatility of commodity prices, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, satisfaction of the conditions to the closing of the Company's agreement to sell its Alaska subsidiary, litigation, the costs and results of drilling and operations, availability of equipment, services, resources and personnel required to complete the Company's operating activities, access to and availability of transportation, processing, fractionation and refining facilities, Pioneer's ability to replace reserves, implement its business plans or complete its development activities as scheduled, access to and cost of capital, the financial strength of counterparties to Pioneer's credit facility and derivative contracts and the purchasers of Pioneer's oil, NGL and gas production, uncertainties about estimates of reserves and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data, environmental and weather risks, including the possible impacts of climate change, the risks associated with the ownership and operation of the Company's industrial sand mining and oilfield services businesses, the risks associated with the proposed merger transaction with Pioneer Southwest Energy Partners L.P. ("Pioneer Southwest"), which is described in more detail in this Report, pursuant to which Pioneer Southwest would become a wholly-owned subsidiary of the Company, including the risks that the merger transaction will not be consummated and the anticipated benefits from the merger transaction cannot be fully realized, and acts of war or terrorism. These and other risks are described in the Company's Annual Report on Form 10-K, this and other Quarterly Reports on Form 10-Q and other filings with the United States Securities and Exchange Commission. In addition, the Company may be subject to currently unforeseen risks that may have a materially adverse effect on it. Accordingly, no assurances can be given that the actual events and results will not be materially different than the anticipated results described in the forward-looking statements. See "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part 1, Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II, Item 1A. Risk Factors" in this Report and "Part I, Item 1. Business — Competition, Markets and Regulations," "Part I, Item 1A. Risk Factors," "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 for a description of various factors that could materially affect the ability of Pioneer to achieve the anticipated results described in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The Company undertakes no duty to publicly update these statements except as required by law.

3


PIONEER NATURAL RESOURCES COMPANY
Definitions of Certain Terms and Conventions Used Herein
Within this Report, the following terms and conventions have specific meanings:
"BBL" means a standard barrel containing 42 United States gallons.
"BOE" means a barrel of oil equivalent and is a standard convention used to express oil and gas volumes on a comparable oil equivalent basis. Gas equivalents are determined under the relative energy content method by using the ratio of six thousand cubic feet of gas to one BBL of oil or natural gas liquid.
"BOEPD" means BOE per day.
"BTU" means British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.
"Conway" means the daily average natural gas liquids components as priced in Oil Price Information Service ("OPIS") in the table "U.S. and Canada LP – Gas Weekly Averages" at Conway, Kansas.
"DD&A" means depletion, depreciation and amortization.
"GAAP" means accounting principles that are generally accepted in the United States of America.
"LIBOR" means London Interbank Offered Rate, which is a market rate of interest.
"MCF" means one thousand cubic feet and is a measure of gas volume.
"MMBTU" means one million BTUs.
"Mont Belvieu" means the daily average natural gas liquids components as priced in OPIS in the table "U.S. and Canada LP – Gas Weekly Averages" at Mont Belvieu, Texas.
"NGL" means natural gas liquid.
"NYMEX" means the New York Mercantile Exchange.
"Pioneer" or the "Company" means Pioneer Natural Resources Company and its subsidiaries.
"Pioneer Southwest" means Pioneer Southwest Energy Partners L.P. and its subsidiaries.
"Proved reserves" mean the quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible – from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations – prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes: (A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons ("LKH") as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil ("HKO") elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.
"U.S." means United States.
With respect to information on the working interest in wells, drilling locations and acreage, "net" wells, drilling locations and acres are determined by multiplying "gross" wells, drilling locations and acres by the Company's working interest in such wells, drilling locations or acres. Unless otherwise specified, wells, drilling locations and acreage statistics quoted herein represent gross wells, drilling locations or acres.
Unless otherwise indicated, all currency amounts are expressed in U.S. dollars.

4


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
 
September 30,
2013
 
December 31,
2012
 
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
744,120

 
$
229,396

Accounts receivable:
 
 
 
 
Trade, net
 
408,240

 
316,854

Due from affiliates
 
5,212

 
3,299

Income taxes receivable
 
10,168

 
7,447

Inventories
 
226,438

 
197,056

Prepaid expenses
 
19,984

 
13,438

Other current assets:
 

 

Derivatives
 
114,166

 
279,119

Other
 
4,933

 
3,746

Total current assets
 
1,533,261

 
1,050,355

Property, plant and equipment, at cost:
 
 
 
 
Oil and gas properties, using the successful efforts method of accounting:
 
 
 
 
Proved properties
 
15,924,526

 
14,259,708

Unproved properties
 
149,782

 
231,555

Accumulated depletion, depreciation and amortization
 
(5,086,258
)
 
(4,412,913
)
Total property, plant and equipment
 
10,988,050

 
10,078,350

Goodwill
 
279,687

 
298,142

Other property and equipment, net
 
1,258,627

 
1,217,694

Other assets:
 
 
 
 
Investment in unconsolidated affiliate
 
235,631

 
204,129

Derivatives
 
86,574

 
55,257

Other, net
 
163,114

 
165,103

 
 
$
14,544,944

 
$
13,069,030








The financial information included as of September 30, 2013 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.


5


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
 
 
 
September 30,
2013
 
December 31,
2012
 
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
Current liabilities:
 
 
 
 
Accounts payable:
 
 
 
 
Trade
 
$
954,311

 
$
729,942

Due to affiliates
 
106,073

 
96,935

Interest payable
 
36,509

 
68,083

Income taxes payable
 
129

 
208

Deferred income taxes
 
60,340

 
86,481

Other current liabilities:
 
 
 
 
Derivatives
 
6,436

 
13,416

Other
 
51,013

 
39,725

Total current liabilities
 
1,214,811

 
1,034,790

Long-term debt
 
2,851,212

 
3,721,193

Derivatives
 
7,719

 
12,307

Deferred income taxes
 
2,415,663

 
2,140,416

Other liabilities
 
292,788

 
293,016

Equity:
 
 
 
 
Common stock, $.01 par value; 500,000,000 shares authorized; 145,828,410 and 134,966,740 shares issued at September 30, 2013 and December 31, 2012, respectively
 
1,458

 
1,350

Additional paid-in capital
 
4,870,566

 
3,683,934

Treasury stock at cost: 7,161,364 and 11,611,093 at September 30, 2013 and December 31, 2012, respectively
 
(323,348
)
 
(510,570
)
Retained earnings
 
3,032,531

 
2,514,640

Total equity attributable to common stockholders
 
7,581,207

 
5,689,354

Noncontrolling interests in consolidating subsidiaries
 
181,544

 
177,954

Total equity
 
7,762,751

 
5,867,308

Commitments and contingencies
 


 


 
 
$
14,544,944

 
$
13,069,030








The financial information included as of September 30, 2013 has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

6


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited) 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues and other income:
 
 
 
 
 
 
 
 
Oil and gas
 
$
908,757

 
$
716,327

 
$
2,541,748

 
$
2,077,020

Interest and other
 
21,087

 
10,256

 
41,561

 
31,450

Derivative gains (losses), net
 
(102,535
)
 
(123,994
)
 
(333
)
 
243,568

Gain (loss) on disposition of assets, net
 
(487
)
 
12,848

 
214,917

 
57,584

 
 
826,822

 
615,437

 
2,797,893

 
2,409,622

Costs and expenses:
 
 
 
 
 
 
 
 
Oil and gas production
 
181,340

 
179,687

 
529,968

 
461,549

Production and ad valorem taxes
 
53,946

 
49,779

 
162,080

 
140,070

Depletion, depreciation and amortization
 
256,260

 
207,398

 
736,613

 
589,737

Impairment of oil and gas properties
 

 

 

 
444,880

Exploration and abandonments
 
31,509

 
27,039

 
83,109

 
117,504

General and administrative
 
73,722

 
62,567

 
204,127

 
180,591

Accretion of discount on asset retirement obligations
 
3,180

 
2,497

 
9,499

 
7,371

Interest
 
45,138

 
54,441

 
138,678

 
150,307

Other
 
24,947

 
32,011

 
65,007

 
86,269

 
 
670,042

 
615,419

 
1,929,081

 
2,178,278

Income from continuing operations before income taxes
 
156,780

 
18

 
868,812

 
231,344

Income tax provision
 
(58,233
)
 
(10,614
)
 
(309,591
)
 
(83,231
)
Income (loss) from continuing operations
 
98,547

 
(10,596
)
 
559,221

 
148,113

Income (loss) from discontinued operations, net of tax
 

 
32,295

 
(465
)
 
55,007

Net income
 
98,547

 
21,699

 
558,756

 
203,120

Net income attributable to noncontrolling interests
 
(7,422
)
 
(2,475
)
 
(29,705
)
 
(39,669
)
Net income attributable to common stockholders
 
$
91,125

 
$
19,224

 
$
529,051

 
$
163,451

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
 
$
0.65

 
$
(0.11
)
 
$
3.87

 
$
0.87

Income (loss) from discontinued operations attributable to common stockholders
 

 
0.26

 

 
0.44

Net income attributable to common stockholders
 
$
0.65

 
$
0.15

 
$
3.87

 
$
1.31

Diluted earnings per share:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common stockholders
 
$
0.65

 
$
(0.11
)
 
$
3.82

 
$
0.85

Income (loss) from discontinued operations attributable to common stockholders
 

 
0.26

 

 
0.43

Net income attributable to common stockholders
 
$
0.65

 
$
0.15

 
$
3.82

 
$
1.28

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
138,586

 
123,111

 
135,057

 
122,874

Diluted
 
138,946

 
123,111

 
136,835

 
126,111

Dividends declared per share
 
$
0.04

 
$
0.04

 
$
0.08

 
$
0.08

 
 
 
 
 
 
 
 
 
Amounts attributable to common stockholders:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
91,125

 
$
(13,071
)
 
$
529,516

 
$
108,444

Income (loss) from discontinued operations, net of tax
 

 
32,295

 
(465
)
 
55,007

Net income
 
$
91,125

 
$
19,224

 
$
529,051

 
$
163,451




The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

7



PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income
 
$
98,547

 
$
21,699

 
$
558,756

 
$
203,120

Other comprehensive activity:
 
 
 
 
 
 
 
 
Net hedge losses included in continuing operations
 

 

 

 
4,855

Income tax benefit
 

 

 

 
(1,725
)
Other comprehensive activity
 

 

 

 
3,130

Comprehensive income
 
98,547

 
21,699

 
558,756

 
206,250

Comprehensive income attributable to the noncontrolling interests
 
(7,422
)
 
(2,475
)
 
(29,705
)
 
(39,669
)
Comprehensive income attributable to common stockholders
 
$
91,125

 
$
19,224

 
$
529,051

 
$
166,581




















The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

8


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENT OF EQUITY
(in thousands, except dividends per share)
(Unaudited)
 
 
 
 
 
Equity Attributable To Common Stockholders
 
 
 
 
 
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total Equity
Balance as of December 31, 2012
 
123,356

 
$
1,350

 
$
3,683,934

 
$
(510,570
)
 
$
2,514,640

 
$
177,954

 
$
5,867,308

Issuance of common stock
 
10,350

 
103

 
1,280,813

 

 

 

 
1,280,916

Dividends declared ($0.08 per share)
 

 

 

 

 
(11,160
)
 

 
(11,160
)
Exercise of long-term incentive plan stock options and employee stock purchases
 
222

 

 
11

 
10,043

 

 

 
10,054

Treasury stock purchases
 
(154
)
 

 

 
(20,053
)
 

 

 
(20,053
)
Conversion of 2.875% senior convertible notes
 
4,381

 

 
(197,240
)
 
197,232

 

 

 
(8
)
Tax benefit related to conversion of 2.875% senior convertible notes
 

 

 
38,415

 

 

 

 
38,415

Tax benefit related to stock-based compensation
 

 

 
12,612

 

 

 

 
12,612

Compensation costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested compensation awards, net
 
512

 
5

 
(5
)
 

 

 

 

Compensation costs included in net income
 

 

 
52,026

 

 

 
838

 
52,864

Cash distributions to noncontrolling interests
 

 

 

 

 

 
(26,953
)
 
(26,953
)
Net income
 

 

 

 

 
529,051

 
29,705

 
558,756

Balance as of September 30, 2013
 
138,667

 
$
1,458

 
$
4,870,566

 
$
(323,348
)
 
$
3,032,531

 
$
181,544

 
$
7,762,751







The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.

9


PIONEER NATURAL RESOURCES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
Net income
 
$
558,756

 
$
203,120

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depletion, depreciation and amortization
 
736,613

 
589,737

Impairment of oil and gas properties
 

 
444,880

Exploration expenses, including dry holes
 
20,238

 
52,574

Deferred income taxes
 
300,312

 
76,180

Gain on disposition of assets, net
 
(214,917
)
 
(57,584
)
Accretion of discount on asset retirement obligations
 
9,499

 
7,371

Discontinued operations
 
(158
)
 
(19,245
)
Interest expense
 
13,039

 
26,812

Derivative related activity
 
122,068

 
93,088

Amortization of stock-based compensation
 
52,789

 
46,899

Amortization of deferred revenue
 

 
(31,494
)
Other noncash items
 
559

 
(20,998
)
Change in operating assets and liabilities, net of effects from acquisitions and dispositions:
 
 
 
 
Accounts receivable, net
 
(88,993
)
 
(7,946
)
Income taxes receivable
 
(2,721
)
 
(8,632
)
Inventories
 
(28,015
)
 
(6,347
)
Prepaid expenses
 
(7,289
)
 
(6,772
)
Other current assets
 
1,778

 
7,898

Accounts payable
 
184,345

 
23,554

Interest payable
 
(31,574
)
 
(16,302
)
Income taxes payable
 
(98
)
 
(9,566
)
Other current liabilities
 
(21,963
)
 
(29,757
)
Net cash provided by operating activities
 
1,604,268

 
1,357,470

Cash flows from investing activities:
 
 
 
 
Proceeds from disposition of assets
 
685,188

 
92,473

Payments for acquisition, net of cash acquired
 

 
(296,959
)
Additions to oil and gas properties
 
(1,987,200
)
 
(2,072,800
)
Additions to other assets and other property and equipment, net
 
(159,896
)
 
(238,803
)
Net cash used in investing activities
 
(1,461,908
)
 
(2,516,089
)
Cash flows from financing activities:
 
 
 
 
Borrowings under long-term debt
 
443,864

 
1,608,618

Principal payments on long-term debt
 
(1,322,771
)
 
(596,000
)
Proceeds from issuance of common stock, net of issuance costs
 
1,280,916

 

Distributions to noncontrolling interests
 
(26,953
)
 
(26,970
)
Borrowings (payments) of other liabilities
 
237

 
(894
)
Exercise of long-term incentive plan stock options and employee stock purchases
 
10,054

 
7,072

Purchases of treasury stock
 
(20,053
)
 
(56,677
)
Excess tax benefits from share-based payment arrangements
 
12,612

 
31,330

Payments of financing fees
 
(8
)
 
(6,430
)
Dividends paid
 
(5,534
)
 
(5,028
)
Net cash provided by financing activities
 
372,364

 
955,021

Net increase (decrease) in cash and cash equivalents
 
514,724

 
(203,598
)
Cash and cash equivalents, beginning of period
 
229,396

 
537,484

Cash and cash equivalents, end of period
 
$
744,120

 
$
333,886

  
The financial information included herein has been prepared by management
without audit by independent registered public accountants.
  
The accompanying notes are an integral part of these consolidated financial statements.

10

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)


NOTE A. Organization and Nature of Operations
Pioneer Natural Resources Company ("Pioneer" or the "Company") is a Delaware corporation whose common stock is listed and traded on the New York Stock Exchange. The Company is a large independent oil and gas exploration and production company operating in the United States, with field operations in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Barnett Shale Combo play in North Texas, the Raton field in southeastern Colorado, the Hugoton field in southwest Kansas, the West Panhandle field in the Texas Panhandle and Alaska.
NOTE B. Basis of Presentation
Presentation. In the opinion of management, the consolidated financial statements of the Company as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.
Certain reclassifications have been made to the 2012 financial statement and footnote amounts in order to conform to the 2013 presentation, including classifying the results of the Company's Barnett Shale operations, previously recorded as discontinued operations for the three and nine months ended September 30, 2012, as income from continuing operations.
Issuance of common stock. In February 2013, the Company issued 10.35 million shares of its common stock and realized $1.3 billion of cash proceeds, net of associated underwriting and offering expenses.
Noncontrolling interest in consolidated subsidiaries. The Company owns a 0.1 percent general partner interest and a 52.4 percent limited partner interest in Pioneer Southwest Energy Partners L.P. ("Pioneer Southwest"). The Company owns and controls Pioneer Natural Resources GP LLC (the "General Partner"), which manages Pioneer Southwest. Pioneer Southwest owns interests in certain oil and gas properties in the Spraberry field in the Permian Basin of West Texas. The financial position, results of operations and cash flows of Pioneer Southwest are consolidated with those of the Company. Noncontrolling interests in consolidated subsidiaries includes $167.9 million attributable to outstanding Pioneer Southwest common units held by unitholders other than Pioneer or its subsidiaries as of September 30, 2013. See Note C for discussion of a pending merger between the Company and Pioneer Southwest.
New accounting pronouncements. In July 2013, the Financial Accounting Standards Boards issued Accounting Standards Update ("ASU") 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which provides guidance on the presentation of unrecognized tax benefits. ASU 2013-11 was adopted by the Company during the third quarter of 2013.

NOTE C. Acquisitions and Divestitures

Premier Silica Business Combination

On April 2, 2012, a wholly-owned subsidiary of the Company acquired an industrial sand mining business that is now named Premier Silica LLC ("Premier Silica"). Premier Silica's primary mine operations are in Brady, Texas. The Brady mine facilities primarily produce, process and provide sand to the Company for use as proppant in its fracture stimulation of oil and gas wells in Texas. Premier Silica's sand production that is in excess of the Company's sand needs for fracture stimulation and sand production that is not usable for fracture stimulation is primarily sold to third parties for industrial and recreational purposes. The aggregate purchase price of Premier Silica was $297.1 million, including closing adjustments.

11

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)


Divestitures Recorded in Continuing Operations
Southern Wolfcamp. In January 2013, the Company signed an agreement with Sinochem Petroleum USA LLC ("Sinochem"), a U.S. subsidiary of the Sinochem Group, an unaffiliated third party, to sell 40 percent of Pioneer's interest in 207,000 net acres leased by the Company in the horizontal Wolfcamp Shale play in the southern portion of the Spraberry field in West Texas for total consideration of $1.8 billion, including normal closing adjustments. In May 2013, the Company completed the sale to Sinochem for net cash proceeds of $621.2 million, including normal closing adjustments, resulting in a pretax gain of $179.7 million. The Company reduced the carrying value of goodwill and the gain recognized associated with the sale by $18.5 million, reflecting the portion of the Company's goodwill that related to the horizontal Wolfcamp Shale assets that were sold. Sinochem is paying the remaining $1.2 billion of the transaction price by carrying 75 percent of Pioneer's portion of ongoing drilling and facilities costs attributable to the Company's joint operations with Sinochem in the horizontal Wolfcamp Shale play.

Sales of unproved oil and gas properties. For the nine months ended September 30, 2013, the Company's pretax gain on disposition of assets from continuing operations of $214.9 million was primarily associated with the Southern Wolfcamp transaction described above. Additionally, the Company sold (i) its interest in unproved oil and gas properties adjacent to the Company's West Panhandle field operations for net cash proceeds of $38.1 million, which resulted in a pretax gain of $22.4 million, and (ii) its interest in certain unproved oil and gas properties in the Barnett Shale for net cash proceeds of $11.6 million, which resulted in a pretax gain of $8.7 million.

For the three months ended September 30, 2012, the Company's pretax gain on disposition of assets was $12.8 million, primarily associated with the sale of the Company's interest in the Cosmopolitan Unit in the Cook Inlet of Alaska to unaffiliated third parties for cash proceeds of $10.1 million, which together with certain Company obligations assumed by the purchasers, resulted in a pretax gain of $12.6 million. Additionally, the Company's pretax gain on the disposition of assets for the nine months ended September 30, 2012 of $57.6 million includes a first quarter 2012 sale of a portion of its interest in an unproved oil and gas properties in the Eagle Ford Shale field for net cash proceeds of $54.7 million, which resulted in a pretax gain of $42.6 million.

Divestitures Recorded as Discontinued Operations

South Africa. During the first quarter of 2012, the Company agreed to sell its assets in South Africa ("Pioneer South Africa"), effective January 1, 2012, for $60.0 million of cash proceeds before normal closing and other adjustments, and the buyer's assumption of certain liabilities associated with the assets. In August 2012, the Company completed the sale of Pioneer South Africa for net cash proceeds of $15.9 million, including normal closing adjustments for cash revenues and costs and expenses from the effective date through the date of the sale, resulting in a third quarter 2012 pretax gain of $28.6 million. The Company classified Pioneer South Africa's results of operations as income from discontinued operations, net of tax, in the accompanying consolidated statements of operations.

For the three and nine months ended September 30, 2012, the Company recognized revenues and other income of $38.1 million and $77.9 million, respectively, and pretax earnings of $37.2 million and $71.2 million, respectively, associated with discontinued operations, principally related to the results of operations and gain from the sale of Pioneer South Africa prior to its divestiture in August 2012.

Pending Merger
On August 9, 2013, the Company entered into an Agreement and Plan of Merger with Pioneer Natural Resources USA, Inc., a wholly-owned subsidiary of the Company ("Pioneer USA"), PNR Acquisition Company, LLC, a wholly-owned subsidiary of the Company ("MergerCo"), Pioneer Southwest and the General Partner, which was amended on October 25, 2013 (as amended, the "Merger Agreement").
Pursuant to the Merger Agreement, MergerCo will merge with and into Pioneer Southwest with Pioneer Southwest surviving the merger (the "Merger"), such that following the Merger, the General Partner will remain a wholly-owned subsidiary of the Company and the sole general partner of Pioneer Southwest, and Pioneer USA will be the sole limited partner of Pioneer Southwest. Except for the common units owned by the Company, all of the common units outstanding as of the closing of the Merger will be cancelled and, except for the dissenting units (as defined in the next paragraph), converted into the right to receive 0.2325 of a share of common stock of the Company per common unit.

12

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

Pursuant to the terms and conditions of the Merger Agreement, common units that are owned by a unitholder (a) other than Pioneer Southwest or its subsidiaries or the Company or its subsidiaries, (b) who does not vote at the special meeting of Pioneer Southwest in favor of the proposal to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and (c) who is entitled to demand and properly demands appraisal of such common units (the "dissenting units") pursuant to, and who complies in all respects with, the provisions of the Merger Agreement regarding appraisal rights (the "dissenting unitholders") will not be converted into the right to receive the merger consideration, but instead will be entitled to payment of the fair value of such dissenting units pursuant to and in accordance with the provisions of the Merger Agreement, unless and until such dissenting unitholder shall have failed to perfect or shall have effectively withdrawn or lost the appraisal rights. If a dissenting unitholder fails to perfect or effectively withdraws or loses the appraisal rights, then, as of the occurrence of such event or the closing of the Merger, whichever occurs later, each of such dissenting unitholder's dissenting units will be converted into the right to receive 0.2325 of a share of common stock of the Company per common unit.
The Merger Agreement provides that regular quarterly distributions on the Pioneer Southwest's common units, not to exceed $0.52 per common unit per quarter (which $0.52 per common unit is equivalent to the most recent distribution declared for the quarter ended September 30, 2013), are to continue until the closing of the Merger. Regular distributions for a quarter are declared late in the first month following such quarter, and no distribution will be paid for a quarter if the Merger closes prior to the normal record date for such distribution. No fractional shares of the Company's common stock will be issued in the Merger. In lieu of receiving any fractional share of common stock to which any holder of the Pioneer Southwest's common units would otherwise have been entitled, after aggregating all fractions of shares to which such holder would be entitled, any fractional share will be rounded up to a whole share of common stock of the Company. The closing of the Merger is subject to certain closing conditions, including the approval of the Merger Agreement and the transactions contemplated thereby by the affirmative vote of holders of a majority of the outstanding common units entitled to vote at a special meeting of the unitholders of Pioneer Southwest. Pursuant to a voting agreement, the Company has agreed to cause the common units owned by it and its subsidiaries to be voted in favor of the Merger, which units represent 52.4 percent of Pioneer Southwest's outstanding common units and therefore constitute a sufficient number of common units to approve the Merger at the special meeting of the unitholders of Pioneer Southwest. The parties anticipate that the Merger will close in the fourth quarter of 2013, pending the satisfaction of certain conditions thereto. See Note J for a description of the litigation contingencies associated with the Merger.
NOTE D. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable.
Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
Level 1 – quoted prices for identical assets or liabilities in active markets.
Level 2 – quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – unobservable inputs for the asset or liability.

13

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
 
The following table presents the Company's assets and liabilities that are measured at fair value as of September 30, 2013: 
 
 
Fair Value Measurement at the End of the
Reporting Period Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value at September 30, 2013
 
 
(in thousands)
Recurring fair value measurements
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
149

 
$
147

 
$

 
$
296

Commodity derivatives
 

 
191,226

 

 
191,226

Interest rate derivatives
 

 
9,514

 


9,514

Deferred compensation plan assets
 
59,939

 

 

 
59,939

Total assets
 
60,088

 
200,887

 

 
260,975

Liabilities:
 
 
 
 
 
 
 
 
Commodity derivatives
 

 
11,028

 

 
11,028

Interest rate derivatives
 

 
3,127

 

 
3,127

Total liabilities
 

 
14,155

 

 
14,155

Total recurring fair value measurements
 
$
60,088

 
$
186,732

 
$

 
$
246,820

Trading securities and deferred compensation plan assets. The Company's trading securities are comprised of securities that are both actively traded and not actively traded on major exchanges. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of September 30, 2013, substantially all of the significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs. Inputs for certain trading securities that are not actively traded on major exchanges were classified as Level 2 inputs.
Commodity derivatives. The Company's commodity derivatives represent oil, natural gas liquids ("NGL") and gas swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Company's commodity derivative contracts represent Level 2 inputs in the hierarchy. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.

The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.
Interest rate derivatives. The Company's interest rate derivative assets as of September 30, 2013 represent interest rate swap contracts. The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The net derivative values attributable to the Company's interest rate derivative contracts as of September 30, 2013 are based on (i) the contracted notional amounts, (ii) active market-quoted London Interbank Offered Rate ("LIBOR") yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative asset measurements represent Level 2 inputs in the hierarchy.

Assets and liabilities measured at fair value on a nonrecurring basis. The Company reviews its long-lived assets for impairment, including oil and gas properties, whenever events or circumstances indicate their carrying values may not be fully recoverable. During the six months ended June 30, 2012, reductions in management's longer-term commodity price outlooks ("Management's Price Outlooks") provided indications of possible impairment of the Company's dry gas properties in the Barnett

14

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

Shale field in North Texas. As a result of management's assessments, during the second quarter of 2012, the Company recognized a pretax noncash impairment charge of $444.9 million to reduce the carrying value of the Barnett Shale field to its estimated fair value. The Company calculated the estimated fair value of the Barnett Shale field as of June 30, 2012 using a discounted cash flow model. Significant Level 3 assumptions associated with the calculation of Barnett Shale field's discounted future cash flows as of June 30, 2012 included Management's Price Outlooks for (i) oil and gas prices of $87.09 per barrel ("BBL") for oil and $4.64 per million British thermal units ("MMBTU") for gas, (ii) production costs, (iii) capital expenditures, (iv) production and (v) estimated proved reserves and risk-adjusted probable reserves. Management's commodity price outlooks represent longer-term outlooks that are developed based on third-party futures price outlooks as of a measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine estimated fair value.
Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheet as of September 30, 2013 and December 31, 2012 are as follows: 

 
 
September 30, 2013
 
December 31, 2012
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(in thousands)
Long-term debt
 
$
2,851,212

 
$
3,247,459

 
$
3,721,193

 
$
4,555,770

Long-term debt includes the Company's credit facility, the Pioneer Southwest credit facility and the Company's senior notes. The fair value of debt is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy.
Credit facilities. The fair values of the Company's and Pioneer Southwest's credit facilities are calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rates (in the case of the Company's credit facility) or LIBOR (in the case of the Pioneer Southwest credit facility) and (iii) the applicable credit-adjustments.
Senior notes. The Company's senior notes represent debt securities that are not actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.
The Company has other financial instruments consisting primarily of cash equivalents, receivables, prepaid expenses, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities. Non-financial assets and liabilities initially measured at fair value include certain assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.
NOTE E. Derivative Financial Instruments
The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.
Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company uses derivative contracts to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and actual index prices at which the oil is sold.

15

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

The following table sets forth the volumes per day in BBLs associated with the Company's outstanding oil derivative contracts as of September 30, 2013 and the weighted average oil prices per BBL for those contracts: 
 
 
Three Months Ending December 31,
 
Year Ending December 31,
 
 
2013
 
2014
 
2015
 
2016
Collar contracts with short puts:
 
 
 
 
 
 
 
 
Volume (BBL)
 
69,000

 
69,000

 
85,000

 
25,000

Price per BBL:
 
 
 
 
 
 
 
 
Ceiling
 
$
120.55

 
$
114.05

 
$
98.98

 
$
93.30

Floor
 
$
91.39

 
$
93.70

 
$
88.06

 
$
85.00

Short put
 
$
74.22

 
$
77.61

 
$
73.06

 
$
70.00

Swap contracts:
 
 
 
 
 
 
 
 
Volume (BBL)
 
9,750

 
10,000

 

 

Price per BBL
 
$
95.57

 
$
93.87

 
$

 
$

Rollfactor swap contracts:
 
 
 
 
 
 
 
 
Volume (BBL)
 
11,000

 
19,000

 

 

NYMEX roll price (a)
 
$
0.85

 
$
0.45

 
$

 
$

Basis swap contracts:
 
 
 
 
 
 
 
 
Cushing to LLS index swap volume (BBL)
 
3,000

 

 

 

Price per BBL (b)
 
$
8.53

 
$

 
$

 
$

 ____________________
(a)
Represents swaps that fix the difference between (i) each day's price per BBL of WTI for the first nearby month less (ii) the price per BBL of WTI for the second nearby NYMEX month, multiplied by .6667; plus (iii) each day's price per BBL of WTI for the first nearby month less (iv) the price per BBL of WTI for the third nearby NYMEX month, multiplied by .3333.
(b)
Basis differential price between Cushing WTI and Louisiana Light Sweet crude ("LLS").

16

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities' NGL product component prices.
The following table sets forth the volumes per day in BBLs associated with the Company's outstanding NGL derivative contracts as of September 30, 2013 and the weighted average NGL prices per BBL for those contracts: 
 
 
Three Months Ending December 31,
 
Year Ending December 31,
 
 
2013
 
2014
Collar contracts with short puts (a):
 
 
 
 
Volume (BBL)
 
1,064

 
1,000

Price per BBL:
 
 
 
 
Ceiling
 
$
105.28

 
$
109.50

Floor
 
$
89.30

 
$
95.00

Short put
 
$
75.20

 
$
80.00

Collar contracts (b):
 
 
 
 
Volume (BBL)
 
2,500

 
3,000

Price per BBL:
 
 
 
 
Ceiling
 
$
12.68

 
$
13.72

Floor
 
$
10.50

 
$
10.78

____________________
(a)
Represent collar contracts with short puts that reduce the price volatility of natural gasoline forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
(b)
Represent collar contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.
Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to NYMEX Henry Hub ("HH") gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and actual index prices at which the gas is sold.

17

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

The following table sets forth the volumes per day in MMBTUs associated with the Company's outstanding gas derivative contracts as of September 30, 2013 and the weighted average gas prices per MMBTU for those contracts: 
 
 
Three Months Ending December 31,
 
Year Ending December 31,
 
 
2013
 
2014
 
2015
 
2016
Collar contracts with short puts:
 
 
 
 
 
 
 
 
Volume (MMBTU)
 

 
115,000

 
285,000

 
20,000

Price per MMBTU:
 
 
 
 
 
 
 
 
Ceiling
 
$

 
$
4.70

 
$
5.07

 
$
5.36

Floor
 
$

 
$
4.00

 
$
4.00

 
$
4.00

Short put
 
$

 
$
3.00

 
$
3.00

 
$
3.00

Collar contracts:
 
 
 
 
 
 
 
 
Volume (MMBTU)
 
152,500

 

 

 

Price per MMBTU:
 
 
 
 
 
 
 
 
Ceiling
 
$
6.22

 
$

 
$

 
$

Floor
 
$
4.98

 
$

 
$

 
$

Swap contracts:
 
 
 
 
 
 
 
 
Volume (MMBTU)
 
165,870

 
175,000

 
20,000

 

Price per MMBTU
 
$
5.10

 
$
4.02

 
$
4.31

 
$

Basis swap contracts:
 
 
 
 
 
 
 
 
Volume (MMBTU) (a)
 
162,500

 
75,082

 
30,000

 

Price per MMBTU
 
$
(0.22
)
 
$
(0.19
)
 
$
(0.18
)
 
$

____________________
(a)
Subsequent to September 30, 2013, the Company entered into additional basis swap contracts for 10,000 MMBTU per day of the Company's 2014 production with a negative price differential of $0.26 per MMBTU between the relevant index price and the NYMEX price.
 Interest rate derivative activities. During the second quarter of 2013, the Company terminated its interest rate derivative contracts that locked in a fixed forward annual interest rate of 3.21 percent, for a 10-year period ending in December 2025, on a notional amount of $250 million and received cash proceeds of $482 thousand.
As of September 30, 2013, the Company was a party to interest rate derivative contracts whereby the Company will receive a fixed interest rate of 3.95 percent in exchange for paying a floating interest rate comprised of the three-month LIBOR plus an average rate of 1.11 percent on a notional amount of $400 million through July 15, 2022.
Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives as of September 30, 2013 and December 31, 2012 and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company classifies the fair value amounts of derivative assets and liabilities as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

18

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

The aggregate fair value of the Company's derivative instruments reported in the consolidated balance sheets by type and counterparty, including the classification between current and noncurrent assets and liabilities, consists of the following:
 
Fair Value of Derivative Instruments as of September 30, 2013
Type
 
Consolidated Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
117,191

 
$
(12,368
)
 
$
104,823

Interest rate derivatives
 
Derivatives - current
 
$
9,342

 
$

 
$
9,342

Commodity price derivatives
 
Derivatives - noncurrent
 
$
96,371

 
$
(9,968
)
 
86,403

Interest rate derivatives
 
Derivatives - noncurrent
 
$
15,767

 
$
(15,595
)
 
$
172

 
 
 
 
 
 
 
 
$
200,740

Liability Derivatives:
 

 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
18,804

 
$
(12,368
)
 
$
6,436

Commodity price derivatives
 
Derivatives - noncurrent
 
$
14,560

 
$
(9,968
)
 
4,592

Interest rate derivatives
 
Derivatives - noncurrent
 
$
18,722

 
$
(15,595
)
 
$
3,127

 
 
 
 
 
 
 
 
$
14,155


Fair Value of Derivative Instruments as of December 31, 2012
Type
 
Consolidated Balance Sheet
Location
 
Fair
Value
 
Gross Amounts Offset in the Consolidated Balance Sheet
 
Net Fair Value Presented in the Consolidated Balance Sheet
 
 
 
 
(in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Asset Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
286,805

 
$
(7,686
)
 
$
279,119

Commodity price derivatives
 
Derivatives - noncurrent
 
$
61,618

 
$
(6,361
)
 
55,257

 
 
 
 
 
 
 
 
$
334,376

Liability Derivatives:
 
 
 
 
 
 
Commodity price derivatives
 
Derivatives - current
 
$
21,102

 
$
(7,686
)
 
$
13,416

Commodity price derivatives
 
Derivatives - noncurrent
 
$
8,944

 
$
(6,361
)
 
2,583

Interest rate derivatives
 
Derivatives - noncurrent
 
$
9,724

 
$

 
9,724

 
 
 
 
 
 
 
 
$
25,723


The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.


19

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

The following table details the location of gains and losses recognized on the Company's derivative contracts in the accompanying consolidated statements of operations:
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging
 
Location of Gain / (Loss) Recognized in
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Instruments
 
Earnings on Derivatives
 
2013
 
2012
 
2013
 
2012
 
 
 
 
(in thousands)
Commodity price derivatives
 
Derivative gains (losses), net
 
$
(108,922
)
 
$
(118,795
)
 
$
(16,926
)
 
$
267,806

Interest rate derivatives
 
Derivative gains (losses), net
 
6,387

 
(5,199
)
 
16,593

 
(24,238
)
Total
 
 
 
$
(102,535
)
 
$
(123,994
)
 
$
(333
)
 
$
243,568

NOTE F. Exploratory Costs
The Company capitalizes exploratory well and project costs until a determination is made that the well or project has either found proved reserves, is impaired or is sold. After an exploratory well has been completed and found oil and gas reserves, a determination may be pending as to whether the oil and gas reserves can be classified as proved. In those circumstances, the Company continues to capitalize the well or project costs pending the determination of proved status if (i) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (ii) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. The Company's capitalized exploratory well and project costs are presented in proved properties in the accompanying consolidated balance sheets. If the exploratory well or project is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The following table reflects the Company's capitalized exploratory well and project activity during the three and nine months ended September 30, 2013:
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
(in thousands)
Beginning capitalized exploratory costs
$
255,001

 
$
212,670

Additions to exploratory costs pending the determination of proved reserves
252,884

 
945,001

Reclassification due to determination of proved reserves
(168,299
)
 
(720,338
)
Disposition of assets
(5,251
)
 
(92,955
)
Exploratory well costs charged to exploration expense
433

 
(9,610
)
Ending capitalized exploratory costs
$
334,768

 
$
334,768


The following table provides an aging, as of September 30, 2013 and December 31, 2012, of capitalized exploratory costs and the number of projects for which exploratory costs have been capitalized for a period greater than one year based on the date drilling was completed:
 
September 30, 2013
 
December 31, 2012
 
(in thousands, except project counts)
Capitalized exploratory costs that have been suspended:
 
 
 
One year or less
$
188,511

 
$
190,678

More than one year
146,257

 
21,992

 
$
334,768

 
$
212,670

 
 
 
 
Number of projects with exploratory costs that have been suspended for a period greater than one year
2

 
1

Alaska - Oooguruk. As of September 30, 2013 and December 31, 2012, the Company had $30.8 million and $22.0 million, respectively, of suspended well costs recorded for the K-13 well in the Alaska Oooguruk field. Drilling on the K-13 well was completed during September 2011. During well completion operations, subsurface damages were sustained. The Company

20

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

performed repairs and recompleted the well during the third quarter of 2013. The well is currently undergoing production tests and may require additional stimulation work that, if required, is expected to be completed during the first quarter of 2014.
Alaska - Nuna. The Company's Nuna project, which has $115.5 million of suspended project costs as of September 30, 2013, includes the Nuna-1 exploration well that was drilled during 2012 to test the Torok formation and a second appraisal well that was drilled and logged during the first quarter of 2013. The Company flow-tested the Nuna-1 well during the second quarter of 2012 and again in the first quarter of 2013. The second appraisal well encountered a mechanical problem and could not be flow-tested before the end of the winter drilling season. The results of the flow tests on the Nuna-1 well and the log data from the second Nuna well are both very encouraging. The Company is currently conducting a front-end engineering design ("FEED") study to evaluate the potential for onshore production facilities to support the project.
See Note O for information regarding the Company's October 2013 agreement to sell its Alaskan subsidiary.
NOTE G. Long-term Debt
The Company's long-term debt consists of senior notes and revolving credit facilities, including the effects of net deferred fair value hedge losses and issuance discounts. As of September 30, 2013, the Company and Pioneer Southwest were in compliance with all of their debt covenants.
Corporate credit facility. The Company maintains a corporate credit facility (the "Credit Facility") with a syndicate of financial institutions that has aggregate loan commitments of $1.5 billion that expires in December 2017. As of September 30, 2013, the Company had no outstanding borrowings under the Credit Facility.
Pioneer Southwest credit facility. Pioneer Southwest maintains a Credit Agreement (the "Pioneer Southwest Credit Facility") with a syndicate of financial institutions that has aggregate loan commitments of $300 million that expires in March 2017. As of September 30, 2013, Pioneer Southwest had outstanding borrowings of $201.0 million under the Pioneer Southwest Credit Facility. Pioneer Southwest's borrowing capacity under the Pioneer Southwest Credit Facility is subject to a covenant requiring that Pioneer Southwest maintain a specified ratio of the net present value of Pioneer Southwest's projected future cash flows from its oil and gas assets to total debt, with the variables on which the calculation of net present value is based (including assumed commodity prices and discount rates) being subject to adjustment by the lenders. The net present value covenant limits Pioneer Southwest's available borrowing capacity under the Pioneer Southwest Credit Facility to $68.6 million as of September 30, 2013.
Convertible senior notes. As of December 31, 2012, the Company had $479.9 million of 2.875% Convertible Senior Notes due 2038 ("Convertible Senior Notes") outstanding. During December 2012 and March 2013, the Company's stock price met the price threshold that caused the Convertible Senior Notes to be convertible during the six months ended June 30, 2013 at the option of the holders into a combination of cash and the Company's common stock based on a formula set forth in the indenture supplement pursuant to which the Convertible Senior Notes were issued. In addition, on April 15, 2013, the Company announced that it would exercise its option to redeem all Convertible Senior Notes that had not been converted by the holders before May 16, 2013. Associated therewith, during the six months ended June 30, 2013, holders of $479.1 million principal amount of the Convertible Senior Notes exercised their right to convert their Convertible Senior Notes into cash and shares of the Company's common stock. The Company paid the tendering holders $479.1 million of cash and issued to the tendering holders 4.4 million shares of the Company's common stock during the six months ended June 30, 2013, in accordance with the terms of the Convertible Senior Notes indenture agreement. On May 16, 2013, the Company paid $845 thousand in principal and interest to redeem all Convertible Senior Notes that remained outstanding.
NOTE H. Incentive Plans
Stock-based compensation
For the three and nine months ended September 30, 2013, the Company recorded $32.5 million and $85.3 million, respectively, of stock-based compensation expense for all plans, as compared to $22.8 million and $66.0 million, respectively, for the same periods of 2012. As of September 30, 2013, there was $178.1 million of unrecognized compensation expense related to unvested share- and unit-based compensation plan awards, including $56.6 million attributable to stock-based awards that are expected to be settled on their vesting date in cash, rather than in equity shares ("Liability Awards"). This compensation will be recognized over the remaining vesting periods of the awards, which is a period of less than three years on a weighted average basis. As of

21

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

September 30, 2013 and December 31, 2012, accounts payable – due to affiliates includes $24.5 million and $18.8 million, respectively, of liabilities attributable to Liability Awards.
The following table summarizes the activity that occurred during the nine months ended September 30, 2013, for each type of share-based incentive award issued by Pioneer or Pioneer Southwest: 
 
 
Restricted
Stock Equity
Awards
 
Restricted
Stock
Liability
Awards
 
Performance
Units
 
Stock
Options
 
Pioneer
Southwest
LTIP
Restricted
Units
 
Pioneer
Southwest
LTIP
Phantom
Units
Outstanding as of December 31, 2012
 
1,512,762

 
405,916

 
91,370

 
467,486

 
7,496

 
102,644

Awards granted
 
433,311

 
250,641

 
94,917

 

 

 
32,242

Awards vested
 
(509,659
)
 
(197,769
)
 

 

 
(7,496
)
 
(35,118
)
Options exercised
 

 

 

 
(166,474
)
 

 

Awards forfeited
 
(65,950
)
 
(29,664
)
 
(10,842
)
 
(11,085
)
 

 

Outstanding as of September 30, 2013
 
1,370,464

 
429,124

 
175,445

 
289,927

 

 
99,768

Postretirement Benefit Obligations
As of September 30, 2013 and December 31, 2012, the Company had $8.3 million and $9.7 million, respectively, of unfunded accumulated postretirement benefit obligations, the current and noncurrent portions of which are included in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. These obligations are comprised of five unfunded plans, of which four relate to predecessor entities that the Company acquired in prior years, and one funded plan for which the Company assumed sponsorship in conjunction with the acquisition of Premier Silica.
The unfunded plans had no assets as of September 30, 2013 or December 31, 2012. The Company's funding policy for the Premier Silica plan is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that the Company may determine to be appropriate considering the funded status of the plan, tax deductibility, the cash flow generated by the Company and other factors. The Company continually reassesses the amount and timing of any discretionary contributions and may elect to make such contributions in future periods.

22

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

NOTE I. Asset Retirement Obligations
The Company's asset retirement obligations primarily relate to the future plugging and abandonment of wells and facilities. The following table summarizes the Company's asset retirement obligation activity during the three and nine months ended September 30, 2013 and 2012: 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Beginning asset retirement obligations
 
$
191,129

 
$
145,457

 
$
197,754

 
$
136,742

Liabilities assumed in acquisitions
 

 

 

 
8,515

New wells placed on production
 
1,234

 
1,251

 
3,682

 
3,662

Changes in estimates (a)
 

 
48

 
(5,597
)
 
1,651

Dispositions
 

 
(2,536
)
 
(4,310
)
 
(2,536
)
Liabilities settled
 
(4,721
)
 
(4,507
)
 
(10,218
)
 
(13,249
)
Accretion of discount
 
3,180

 
2,497

 
9,499

 
7,371

Accretion of discount from integrated services (b)
 
1

 
23

 
13

 
77

Ending asset retirement obligations
 
$
190,823

 
$
142,233

 
$
190,823

 
$
142,233

_____________________
(a)
The changes in estimates during the nine months ended September 30, 2013 are attributable to lengthening the economic lives of certain wells, which reduced the present values of the associated asset retirement obligations.
(b)
Accretion of discount from integrated services includes Premier Silica accretion expense, which is recorded as a reduction in third-party income from vertical integration services in interest and other income in the Company's accompanying consolidated statements of operations. See Note K for more information about interest and other income.
The Company records the current and noncurrent portions of asset retirement obligations in other current liabilities and other liabilities, respectively, in the accompanying consolidated balance sheets. As of September 30, 2013 and December 31, 2012, the current portions of the Company's asset retirement obligations were $13.4 million and $13.3 million, respectively.
NOTE J. Commitments and Contingencies
The Company is a party to proceedings and claims incidental to its business. While many of these matters involve inherent uncertainty, the Company believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Company's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Company records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Lawsuits filed in state and federal courts in Texas relating to the Merger. On May 15, 2013, David Flecker, a purported unitholder of Pioneer Southwest, filed a class action petition on behalf of Pioneer Southwest's unitholders and a derivative suit on behalf of Pioneer Southwest against the Company, Pioneer USA, the General Partner and the directors of the General Partner, in the 134th Judicial District of Dallas County, Texas (the "Flecker Lawsuit"). A similar class action petition and derivative suit was filed against the same defendants on May 20, 2013, in the 160th Judicial District of Dallas County, Texas, by purported unitholder Vipul Patel (the "Patel Lawsuit"). On August 27, 2013, the plaintiff in the Flecker Lawsuit filed an amended petition. On September 3, 2013, the court consolidated the Patel Lawsuit into the Flecker Lawsuit (as consolidated, the "Texas State Court Lawsuit"), and the plaintiffs filed a consolidated derivative and class action petition on September 5, 2013.
The Texas State Court Lawsuit alleges, among other things, that the consideration offered by the Company in the Merger is unfair and inadequate and that, by pursuing a transaction that is the result of an allegedly conflicted and unfair process, the defendants have breached their duties under Pioneer Southwest's partnership agreement as well as the implied covenant of good faith and fair dealing, and are engaging in self-dealing. Specifically, the lawsuit alleges that the director defendants: (i) engaged in self-dealing, failed to act in good faith toward Pioneer Southwest, and breached their duties owed to Pioneer Southwest; (ii) failed to properly value Pioneer Southwest and its various assets and operations and ignored or failed to protect against the numerous conflicts of interest arising out of the proposed transaction; and (iii) breached the implied covenant of good faith and fair dealing by engaging

23

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

in a flawed merger process. The Texas State Court Lawsuit also alleges that the Company, Pioneer USA and the General Partner aided and abetted the director defendants in their purported breach of fiduciary duties.
Based on these allegations, the plaintiffs in the Texas State Court Lawsuit seek to enjoin the defendants from proceeding with or consummating the proposed transaction. To the extent that the Merger is implemented before relief is granted, the plaintiffs seek to have the Merger rescinded. The plaintiffs also seek money damages and attorneys' fees. The defendants have filed a motion to dismiss the Texas State Court Lawsuit based on improper forum.
On August 21, 2013, Allan H. Beverly, a purported unitholder, filed a class action complaint against Pioneer Southwest, the Company, Pioneer USA, MergerCo and the directors of the General Partner in the United States District Court for the Northern District of Texas (the "Beverly Lawsuit"). The Beverly Lawsuit alleges that the defendants breached their fiduciary duties by agreeing to the Merger by means of an unfair process and for an unfair price. Specifically, the lawsuit alleges that the director defendants: (i) failed to maximize the value of Pioneer Southwest to its public unitholders and took steps to avoid competitive bidding; (ii) failed to properly value Pioneer Southwest; and (iii) ignored or failed to protect against the numerous conflicts of interest arising out of the proposed transaction. The Beverly Lawsuit also alleges that the Company, Pioneer USA and MergerCo aided and abetted the director defendants in their purported breach of fiduciary duties.
On September 13, 2013, Douglas Shelton, another purported unitholder, filed a class action complaint against the same defendants in the Beverly Lawsuit (as well as the General Partner) in the same court as the Beverly Lawsuit (the "Shelton Lawsuit"). The Shelton Lawsuit makes similar allegations to the Beverly Lawsuit, and also alleges that Section 7.9 of Pioneer Southwest's partnership agreement fails to alter or eliminate the defendants' common law fiduciary duties owed to unitholders in the context of the Merger. Specifically, the lawsuit alleges: (i) that the Company, as controlling unitholder, failed to fulfill its fiduciary duties in connection with the Merger because it purportedly cannot establish that the proposed Merger is the result of a fair process that will return a fair price to the unaffiliated unitholders of Pioneer Southwest; (ii) that the director defendants breached their fiduciary duties by failing to exercise due care and diligence in connection with the proposed Merger because the proposed Merger is purportedly not the result of a fair process that will return a fair price to the unaffiliated unitholders; and (iii) that the non-director defendants aided and abetted the director defendants in their purported breach of fiduciary duties. The plaintiffs in the Beverly Lawsuit and the Shelton Lawsuit (together, the "Federal Lawsuits") seek the same remedies as the plaintiffs in the Texas State Court Lawsuit.
On September 26, 2013, representatives of the plaintiffs in the Texas State Court Lawsuit and the Federal Lawsuits and representatives of the defendants in such lawsuits entered into a memorandum of understanding ("the memorandum of understanding") to settle the claims and allegations made in such lawsuits. The memorandum of understanding provides the plaintiffs with a period of confirmatory discovery during which the plaintiffs can confirm the fairness and reasonableness of the settlement contemplated by the memorandum of understanding. The parties agreed to use their reasonable best efforts to agree upon, execute and present to the Dallas County, Texas District Court a stipulation of settlement, which will provide for, among other things, a certification, for settlement purposes only, of the applicable class of unitholders to which the settlement will apply. Furthermore, the stipulation of settlement will provide for a full and complete discharge, dismissal with prejudice, settlement and release of all claims, suits and causes of action by the plaintiffs (other than appraisal rights under the Merger Agreement) against the defendants and their representatives arising out of or relating to the allegations made in the Texas State Court Lawsuit and the Federal Lawsuits, the Merger or any deliberations, negotiations, disclosures, omissions, press releases, statements or misstatements in connection therewith, any fiduciary or other obligations in respect of the Merger or any alternative transaction or under Pioneer Southwest's partnership agreement, or any costs and expenses associated with settlement other than as provided in the stipulation. All proceedings relating to the allegations made in the Texas State Court Lawsuit other than with respect to the settlement have been stayed. As part of the consideration for the settlement, the Merger Agreement was amended to provide for contractual appraisal rights for the unitholders. The parties to the memorandum of understanding have agreed to use their reasonable best efforts to obtain the agreement of any plaintiffs filing similar lawsuits to the Texas State Court Lawsuit or the Federal Lawsuits (whether filed in any state or federal court) to become party to the memorandum of understanding and the related settlement, and it is a condition to the consummation of the final settlement that any such plaintiffs join the settlement or such similar lawsuits otherwise be dismissed with prejudice prior to the final approval of the settlement. On October 15, 2013, the plaintiffs in the Beverly Lawsuit voluntarily dismissed all claims in the lawsuit in accordance with the memorandum of understanding. On October 16, 2013, the plaintiffs in the Shelton Lawsuit likewise voluntarily dismissed all claims in the lawsuit in accordance with the memorandum of understanding. There can be no assurance that a final settlement will be consummated.

24

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

Lawsuit filed in the Delaware Court of Chancery relating to the Merger. On September 23, 2013, Patrick Wilson, another purported unitholder, filed a class action petition on behalf of the unitholders against Pioneer USA, MergerCo, Pioneer Southwest, the General Partner and the directors of the General Partner in the Court of Chancery of the State of Delaware (the "Wilson Lawsuit"). The Wilson Lawsuit alleges that the director defendants breached their purported fiduciary obligations to the unitholders by engaging in a process that undervalued Pioneer Southwest and which allegedly constitutes gross negligence, recklessness, willful misconduct, bad faith or knowing violations of law. Additionally, the Wilson Lawsuit alleges that the non-director defendants aided and abetted the purported breaches of fiduciary duties of the director defendants. The Wilson Lawsuit seeks the same remedies as the plaintiffs in the Texas State Court Lawsuit and the Federal Lawsuits. As of the date of this Report, the plaintiffs in the Wilson Lawsuit have not joined the memorandum of understanding.
The Company cannot predict the outcome of these or any other lawsuits that might be filed subsequent to the date of the filing of this Report, nor can the Company predict the amount of time and expense that will be required to resolve these lawsuits. See Note C for a description of the Merger Agreement.
NOTE K. Interest and Other Income
The following table provides the components of the Company's interest and other income for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Alaskan Petroleum Production Tax credits and refunds (a)
 
$
12,864

 
$
3,979

 
$
38,633

 
$
15,825

Equity interest in income of unconsolidated affiliate (b)
 
3,941

 
1,151

 
10,024

 
2,696

Other income
 
1,554

 
1,373

 
5,119

 
3,608

Deferred compensation plan income
 
381

 
204

 
2,363

 
1,727

Interest income
 
81

 
84

 
256

 
1,400

Income (loss) from vertical integration services (c)
 
2,266

 
3,465

 
(14,834
)
 
6,194

Total interest and other income
 
$
21,087

 
$
10,256

 
$
41,561

 
$
31,450

 ____________________
(a)
The Company earns Alaskan Petroleum Production Tax ("PPT") credits on qualifying capital expenditures. The Company recognizes income from PPT credits when they are realized through cash refunds or as reductions in production and ad valorem taxes if realizable as offsets to PPT expense.
(b)
The Company, along with its joint venture partner, formed EFS Midstream LLC ("EFS Midstream") in 2010 to operate gathering facilities in the Eagle Ford Shale area. The Company accounts for its investment in EFS Midstream using the equity method. EFS Midstream is providing gathering, treating and transportation services for the Company during a 20-year contractual term.
(c)
Income (loss) from vertical integration services represent net margins that result from Company-provided fracture stimulation, drilling and related service operations, which are ancillary to and supportive of the Company's oil and gas joint operating activities, and do not represent intercompany transactions. For the three and nine months ended September 30, 2013, these net margins include $103.1 million and $206.3 million of gross vertical integration revenues, respectively, and $100.8 million and $221.1 million of total vertical integration costs and expenses, respectively. For the same periods in 2012, these net margins include $61.9 million and $223.6 million of gross vertical integration revenues, respectively, and $58.4 million and $217.4 million of total vertical integration costs and expenses, respectively.


25

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

 NOTE L. Other Expense
The following table provides the components of the Company's other expense for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Transportation commitment charge (a)
 
$
13,482

 
$
9,694

 
$
31,228

 
$
27,374

Other
 
2,825

 
2,586

 
11,138

 
12,709

Above market and idle drilling and well services equipment rates (b)
 
1,293

 
12,808

 
9,744

 
23,553

Contingency and environmental accrual adjustments
 
4,701

 
70

 
6,782

 
772

Inventory impairment (c)
 
2,646

 
46

 
5,096

 
6,093

Terminated drilling rig contract charges (d)
 

 
6,807

 
1,019

 
15,768

Total other expense
 
$
24,947

 
$
32,011

 
$
65,007

 
$
86,269

 ____________________
(a)
Primarily represents firm transportation payments on excess pipeline capacity commitments.
(b)
Primarily represents expenses attributable to the portion of Pioneer's contracted drilling rig rates that are above current market rates and idle drilling rig fees, neither of which are charged to joint operations.
(c)
Represents valuation charges on excess or damaged materials and supplies inventories.
(d)
Primarily represents charges to terminate drilling rig contracts that are not required to meet planned activities.
NOTE M. Income Taxes
The Company's income tax benefits or provisions attributable to income from continuing operations consisted of the following for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in thousands)
Current
 
$
8,341

 
$
8,275

 
$
(9,279
)
 
$
(7,051
)
Deferred
 
(66,574
)
 
(18,889
)
 
(300,312
)
 
(76,180
)
Income tax provision
 
$
(58,233
)
 
$
(10,614
)
 
$
(309,591
)
 
$
(83,231
)
    
For the three and nine months ended September 30, 2013, the Company's effective tax rate, excluding income attributable to the noncontrolling interest, was 39 percent and 37 percent, respectively, as compared to effective rates of (432) percent and 43 percent for the same respective periods in 2012. The Company's effective tax rates differ from the U.S. statutory rate of 35 percent primarily due to state income tax apportionments and nondeductible expenses.
At September 30, 2013, the Company had unrecognized tax benefits of $21.2 million resulting from net operating loss carryovers and alternative minimum tax credits obtained from the acquisition of Premier Silica.  The unrecognized tax benefit is recorded as a reduction of the associated deferred tax asset and, if recognized, would affect the annual effective tax rate.  The Company expects to resolve uncertainties regarding the unrecognized tax benefit within twelve months of September 30, 2013.  There were no unrecognized tax benefits as of December 31, 2012.

The Company files income tax returns in the U.S. federal and various state and foreign jurisdictions. The Internal Revenue Service has closed examinations of the 2011 and prior tax years and, with few exceptions, the Company believes that it is no longer subject to examinations by state and foreign tax authorities for years before 2008. As of September 30, 2013, no adjustments had been proposed in any jurisdiction that would have a significant effect on the Company's liquidity, future results of operations or financial position.

26

PIONEER NATURAL RESOURCES COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)

NOTE N. Net Income Per Share
The Company uses the two-class method of calculating net income per share because certain of the Company's and its consolidated subsidiaries' unvested share-based awards qualify as participating securities. Participating securities participate in the Company's dividend or partnership distributions and are assumed to participate in the Company's undistributed income proportionate to their share of the weighted average outstanding common shares, but are not assumed to participate in the Company's net losses because they are not contractually obligated to do so. Accordingly, allocations of earnings to participating securities are included in the Company's calculations of basic and diluted earnings per share from continuing operations, discontinued operations and net income attributable to common stockholders.
During periods in which the Company realizes a loss from continuing operations attributable to common stockholders, securities or other contracts to issue common stock would be dilutive to loss per share from continuing operations; therefore, conversion into common stock is assumed not to occur.
The following tables reconcile the Company's net income (loss) attributable to common stockholders to basic net income (loss) attributable to common stockholders and diluted net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2013 and 2012:
 
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2013
 
 
Continuing
Operations
 
Discontinued
Operations
 
Total
 
Continuing
Operations