CONFORMED COPY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the period ended March 31, 2001 OR [ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities and Exchange Act of 1934 For the transition period from to Commission file number 0-7246 I.R.S. Employer Identification Number 95-2636730 PETROLEUM DEVELOPMENT CORPORATION (A Nevada Corporation) 103 East Main Street Bridgeport, WV 26330 Telephone: (304) 842-6256 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 XX No Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 16,244,044 shares of the Company's Common Stock ($.01 par value) were outstanding as of March 31, 2001. PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements Independent Auditors' Review Report 1 Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 2 Condensed Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows-Three Months Ended March 31, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosure About Market Risk 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
PART I - FINANCIAL INFORMATION
Independent Auditors' Review Report The Board of Directors Petroleum Development Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Petroleum Development Corporation and subsidiaries as of March 31, 2001, and the related condensed consolidated statements of income and cash flows for the three-month periods ended March 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Petroleum Development Corporation and subsidiaries as of December 31, 2000 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 8, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000 is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. KPMG LLP Pittsburgh, Pennsylvania May 7, 2001
<PAGE> PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets March 31, 2001 and December 31, 2000
<TABLE> <C> <C> <C> ASSETS 2001 2000 (Unaudited) Current assets: Cash and cash equivalents $ 44,594,000 $ 46,872,000 Accounts and notes receivable 19,817,000 23,648,000 Inventories 1,090,500 1,097,900 Prepaid expenses 5,554,500 7,134,800 Total current assets 71,056,000 78,752,700 Properties and equipment 142,277,700 141,298,600 Less accumulated depreciation, depletion, and amortization 37,328,200 35,344,700 104,949,500 105,953,900 Other assets 2,976,200 2,977,900 $178,981,700 $187,684,500 </TABLE>
<PAGE> PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets, Continued March 31, 2001 and December 31, 2000
<TABLE> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 (Unaudited) Current liabilities: Accounts payable and accrued expenses $ 40,106,000 $ 31,722,500 Advances for future drilling contracts 22,711,100 43,809,400 Funds held for future distribution 5,564,900 2,440,100 Total current liabilities 68,382,000 77,972,000 Long-term debt 15,000,000 17,350,000 Other liabilities 4,021,800 4,396,800 Deferred income taxes 6,612,800 5,708,800 Stockholders' equity: Common stock 162,400 162,400 Additional paid-in capital 32,918,400 32,917,000 Retained earnings 54,802,500 49,177,500 Accumulated other comprehensive income (2,918,200) - Total stockholders' equity 84,965,100 82,256,900 $178,981,700 $187,684,500 </TABLE>
See accompanying notes to condensed consolidated financial statements. -3-
<PAGE> PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Income Three Months ended March 31, 2001 and 2000 (Unaudited)
<TABLE> <C> <C> <C> 2001 2000 Revenues: Oil and gas well drilling operations $21,422,300 17,757,800 Gas sales from marketing activities 28,814,100 11,684,200 Oil and gas sales 7,540,900 3,637,800 Well operations and pipeline income 1,307,600 1,287,800 Other income 456,500 136,800 59,541,400 34,504,400 Costs and expenses: Cost of oil and gas well drilling operations 18,482,500 14,403,700 Cost of gas marketing activities 28,168,500 11,649,600 Oil and gas production costs 1,689,300 2,057,900 General and administrative expenses 961,400 679,200 Depreciation, depletion, and amortization 1,990,100 1,489,700 Interest 213,900 14,600 51,505,700 30,294,700 Income before income taxes 8,035,700 4,209,700 Income taxes 2,410,700 968,300 Net income $ 5,625,000 3,241,400 Basic earnings per common share $ .35 $ .20 Diluted earnings per share $ .34 $ .20 </TABLE>
See accompanying notes to condensed consolidated financial statements -4-
<PAGE> PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 (Unaudited)
<TABLE> <C> <C> <C> 2001 2000 Cash flows from operating activities: Net income $ 5,625,000 3,241,400 Adjustments to net income to reconcile to cash provided by (used in) operating activities: Deferred federal income taxes 904,000 248,200 Depreciation, depletion & amortization 1,990,100 1,489,700 Leasehold acreage expired or surrendered - 71,100 Amortization of stock award 1,400 1,400 Decrease (increase) in current assets 7,364,200 (1,959,500) (Increase) decrease in other assets (4,900) 242,300 Decrease in current liabilities (14,453,700) (17,419,200) (Decrease) increase in other liabilities (375,000) 342,000 Total adjustments (4,573,900) (16,984,000) Net cash provided by (used in) operating activities 1,051,100 (13,742,600) Cash flows from investing activities: Capital expenditures (1,709,100) (2,319,900) Proceeds from sale of leases 730,000 141,400 Net cash used in investing activities (979,100) (2,178,500) Cash flows from financing activities: Net (retirement of) proceeds from long-term debt (2,350,000) 700,000 Net cash (used in) provided by financing activities (2,350,000) 700,000 Net decrease in cash and cash equivalents (2,278,000) (15,221,100) Cash and cash equivalents, beginning of period 46,872,000 29,059,200 Cash and cash equivalents, end of period $ 44,594,000 13,838,100 </TABLE>
See accompanying notes to condensed consolidated financial statements. -5-
<PAGE> PETROLEUM DEVELOPMENT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements March 31, 2001 (Unaudited) 1. Accounting Policies Reference is hereby made to the Company's Annual Report on Form 10-K for 2000, which contains a summary of significant accounting policies followed by the Company in the preparation of its consolidated financial statements. These policies were also followed in preparing the quarterly report included herein. 2. Basis of Presentation The Management of the Company believes that all adjustments (consisting of only normal recurring accruals) necessary to a fair statement of the results of such periods have been made. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the full year. 3. Oil and Gas Properties Oil and Gas Properties are reported on the successful efforts method. 4. Earnings Per Share Computation of earnings per common and common equivalent share are as follows for the three months ended March 31,
<TABLE> <C> <C> <C> 2001 2000 Weighted average common shares outstanding 16,244,044 15,966,250 Weighted average common and common equivalent shares outstanding 16,666,639 16,276,659 Net income $ 5,625,000 $ 3,241,400 Basic earnings per common share $ .35 $ .20 Diluted earnings per share $ .34 $ .20 </TABLE>
<PAGE> 5. Business Segments (Thousands) PDC's operating activities can be divided into three major segments: drilling and development, natural gas sales, and well operations. The Company drills natural gas wells for Company-sponsored drilling partnerships and retains an interest in each well. The Company also engages in oil and gas sales to residential, commerical and industrial end-users. The Company charges Company-sponsored partnerships and other third parties competitive industry rates for well operations and gas gathering. Segment information for the three months ended March 31, 2001 and 2000 is as follows:
<TABLE> <C> <C> <C> 2001 2000 REVENUES Drilling and Development $21,422 17,758 Natural Gas Sales 36,355 15,322 Well Operations 1,308 1,288 Unallocated amounts (1) 456 137 Total $ 59,541 34,505 </TABLE>
(1) Includes interest on investments and partnership management fees which are not allocated in assessing segment performance.
<TABLE> <C> <C> <C> 2001 2000 SEGMENT INCOME BEFORE INCOME TAXES Drilling and Development $2,940 3,354 Natural Gas Sales 5,454 1,176 Well Operations 400 276 Unallocated amounts (2) General and Administrative expenses (961) (679) Interest expense (214) (15) Other (1) 417 98 Total $ 8,036 4,210 </TABLE>
(2) Items which are not allocated in assessing segment performance.
<TABLE> <C> <C> <C> March 31, 2001 December 31, 2000 SEGMENT ASSETS Drilling and Development $ 12,878 31,592 Natural Gas Sales 144,639 139,116 Well Operations 8,987 8,490 Unallocated amounts Cash 3,390 1,567 Other 7,142 6,920 Total $177,036 187,685 </TABLE>
<PAGE> 6. Derivative Instruments and Hedging Activities The Company utilizes commodity based derivative instruments as hedges to manage a portion of its exposure to price volatility stemming from its integrated natural gas production and marketing activities. These instruments consist of natural gas futures and option contracts traded on the New York Mercantile Exchange. The futures and option contracts hedge committed and anticipated natural gas purchases and sales, generally forecasted to occur within a 12 month period. The Company does not hold or issue derivatives for trading or speculative purposes. Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on variable rate long-term debt. Statement of Accounting Standards No. 133 and No. 138, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133/138), was issued by the Financial Accounting Standards Board. SFAS No. 133/138 standardized the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. The Company adopted the provisions of the SFAS 133/138 effective January 1, 2001. The natural gas futures and options and the interest rate swap are derivatives pursuant to SFAS 133/138. The Company's derivatives are treated as hedges of committed and/or anticipated transactons and have a total estimated fair value of ($2,918,200) on March 31, 2001. On adoption of this Statement on January 1, 2001, the Company recorded a net transition adjustment of ($12,079,100) (net of related income tax benefit of $8,052,700) which was recorded in accumulated other comprehensive income (AOCI). During the quarter ended March 31, 2001, the Company reclassified $4,363,500 from AOCI into cost of gas marketing activities and oil and gas sales relating to the transition adjustment included in AOCI on January 1, 2001. Changes in fair value related to qualifying hedges of firm commitments or anticipated transactions through the use of natural gas futures and option contracts and the interest rate swap agreement are deferred and recorded in AOCI and subsequently recognized in income when the underlying hedged transaction occurs. In order for the contracts to qualify as a hedge, there must be sufficient hedging effectiveness. The change in the fair value of derivative instruments which do not qualify for hedging are recognized into imcome currently. 7. Comprehensive Income Comprehensive income includes net income and certain items recorded directly to shareholders' equity and classified as Other Comprehensive Income. The Company recorded Other Comprehensive Income for the first time in the first quarter of 2001. The following table illustrates the calculation of comprehensive income for the quarter ended March 31, 2001.
<TABLE> <C> <C> Net Income $ 5,625,000 Other Comprehensive Loss (net of tax) Cumulative effect of change in accounting principle - January 1, 2001 (net of tax of $8,052,700) (12,079,100) Reclassification adjustment for settled contracts included in net income (net of tax of $2,909,000) 4,363,500 Changes in fair value of outstanding hedging positions (net of tax of $3,198,300) 4,797,400 Other Comprehensive Loss (2,918,200) Comprehensive Income $ 2,706,800 </TABLE>
There were no items in Other Comprehensive Income/Loss during 2000. - 8 -
<PAGE> 8. Commitments and Contingencies The nature of the independent oil and gas industry involves a dependence on outside investor drilling capital and involves a concentration of gas sales to a few customers. The Company sells natural gas to various public utilities and industrial customers. Substantially all of the Company's drilling programs contain a repurchase provision where Investors may tender their partnership units for repurchase at any time beginning with the third anniversary of the first cash distribution. The provision provides that the Company is obligated to purchase an aggregate of 10% of the initial subscriptions per calendar year (at a minimum price of four times the most recent 12 months' cash distributions), only if such units are tendered, subject to the Company's financial ability to do so. The maximum annual 10% repurchase obligation, if tendered by investors, is currently approximately $1,188,000. The Company has adequate capital to meet this obligation. The Company is not party to any legal action that would materially affect the Company's results of operations or financial condition. I
tem 2.Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended March 31, 2001 Compared With March 31, 2000 Revenues. Total revenues for the three months ended March 31, 2001 were $59.5 million compared to $34.5 million for the three months ended March 31, 2000, an increase of approximately $25.0 million, or 72.5 percent. Such increase was primarily a result of increased drilling revenues, gas marketing activities and oil and gas sales. Drilling revenues for the three months ended March 31, 2001 were $21.4 million compared to $17.8 for the three months ended March 31, 2000, an increase of approximately $3.6 million or 20.2%. Such increase was due to an increase in drilling and completion activities, which was a direct result of an increase in drilling funds from the Company's public drilling programs. Natural gas sales from the marketing activities of Riley Natural Gas (RNG), the Company's natural gas marketing subsidiary, for the three months ended March 31, 2001 were $28.8 million compared to $11.7 million for the three months ended March 31, 2000, an increase of approximately $17.1 million or 146.2% Such increase was due to increased volumes of gas sold with higher average sales prices. Oil and gas sales from the Company's producing properties for the three months ended March 31, 2001 were $7.5 million compared to $3.6 million for the three months ended March 31, 2000, an increase of approximately $3.9 million, or 108.3 percent. Such increase was due to increased production which resulted from acquisitions of producing properties along with new wells drilled and higher average sales prices of natural gas and oil from the Company's producing properties. Financial results depend upon many factors, particularly the price of natural gas and our ability to market our production on economically attractive terms. Price volatility in the natural gas market has remained prevalent in the last few years. From the third quarter of 1998 through the first quarter of 1999, we experienced a decline in energy commodity prices. However, in the summer of 1999 and continuing into early 2000, prices improved. For the months of April, 2000 through March, 2001, we had certain natural gas hedges in place that prevented us from realizing the full impact of this price environment. Despite this limitation, our realized natural gas price for each month in the first quarter of 2001 was higher than the previous year. In the final months of 2000 and the first quarter of 2001, the NYMEX futures market reported unprecendented natural gas contract prices. During the three months ended March 31, 2001, the hedging activities resulted in oil and gas sales being $3.8 million lower than if the Company had not -9-
<PAGE> hedged. Well operations and pipeline income for the three months ended March 31, 2001 was $1.3 million, approximately the same for the comparable period last year. Other income for the three months ended March 31, 2001 was $456,000 compared to $137,000 for the three months ended March 31, 2000, an increase of approximately $319,000 or 232.8%. Such increase resulted from a greater amount of interest earned on higher average cash balances. Costs and expenses. Costs and expenses for the three months ended March 31, 2001 were $51.5 million compared to $30.3 million for the three months ended March 31, 2000, an increase of approximately $21.2 million or 70.0 percent. Oil and gas well drilling operations costs for the three months ended March 31, 2001 were $18.5 million compared to $14.4 million for the three months ended March 31, 2000, an increase of approximately $4.1 million or 28.5% percent. Such increase was due to the increased drilling activity referred to above. The cost of gas marketing activities for the three months ended March 31, 2001 were $28.2 million compared to $11.6 million for the three months ended March 31, 2000, an increase of $16.6 million or 143.1%. Such increase was due to the increased gas marketing activity of RNG with increased volumes purchased at higher average sales prices. Based on the nature of the Company's gas marketing activities, hedging did not have a significant impact on the Company's net margins from marketing activities during either period. Oil and gas production costs from the Company's producing properties for the three months ended March 31, 2001 were $1.7 million compared to $2.1 million for the three months ended March 31, 2000, a decrease of approximately $400,000 or 19.0%. General and administrative expenses for the three months ended March 31, 2001 increased to $961,000 compared with $679,000 for the three months ended March 31, 2000, an increase of $282,000 or 41.5 percent. Such increase was due to higher personnel costs experienced during the quarter. Depreciation, depletion, and amortization costs for the three months ended March 31, 2001 were $1,990,000 compared to $1,489,000 for the three months ended March 31, 2000, an increase of $501,000 or 33.6 percent. Such increase was due to the increased amount of investment in oil and gas properties owned by the Company. Interest costs for the three months ended March 31, 2001 were $214,000 compared to $15,000 for the three months ended March 31, 2000, an increase of approximately $199,000. The increase was due to the Company utilizing its credit agreement to purchase oil and gas properties. Net income. Net income for the three months ended March 31, 2001 was $5.6 million compared to a net income of $3.2 million for the three months ended March 31, 2000, an increase of approximately $2.4 million or 75.0 percent. Liquidity and Capital Resources The Company funds its operations through a combination of cash flow from operations, capital raised through drilling partnerships, and use of the Company's credit facility. Operational cash flow is generated by sales of natural gas from the Company's well interests, well drilling and operating activities for the Company's investor partners, natural gas gathering and transportation, and natural gas marketing. Cash payments from Company- sponsored partnerships are used to drill and complete wells for the partnerships, with operating cash flow accruing to the Company to the extent payments exceed drilling costs. The Company utilizes its revolving credit arrangement to meet the cash flow requirements of its operating and investment activities. Sales volumes of natural gas have continued to increase while natural gas prices fluctuate monthly. The Company's natural gas sales prices are subject to increase and decrease based on various market-sensitive indices. A major factor in the variability of these indices is the seasonal variation of demand for the natural gas, which typically peaks during the winter months. The volumes of natural gas sales -10-
<PAGE> are expected to continue to increase as a result of continued drilling activities and additional investment by the Company in oil and gas properties. The Company utilizes commodity-based derivative instruments (natural gas futures and option contracts traded on the NYMEX) as hedges to manage a portion of its exposure to this price volatility. The futures contracts hedge committed and anticipated natural gas purchases and sales, generally forecasted to occur within a three to twelve-month period. The Company has a bank credit agreement with Bank One, formerly First National Bank of Chicago, which provides a borrowing base of $30.0 million, subject to adequate oil and natural gas reserves. As of March 31, 2001, the outstanding balance was $15.0 million. Interest accrues at prime, with LIBOR (London Interbank Market Rate) alternatives available at the discretion of the Company. No principal payments are required until the credit agreement expires on December 31, 2004. The Company has commenced sales of units in its first partnership in its registered PDC 2003 public drilling program which has twelve partnerships which are scheduled to close during 2001, 2002 and 2003. The first partnership is scheduled to close in May, 2001, with drilling planned in the second and third quarters of 2001. Additional programs are scheduled to close in September, November and December of 2001. The Company generally invests, as its equity contribution to each drilling partnership, an additional sum approximating 20% of the aggregate subscriptions received for that particular drilling partnership. As a result, the Company is subject to substantial cash commitments at the closing of each drilling partnership. The funds received from these programs are restricted to use in future drilling operations. No assurance can be made that the Company will continue to receive this level of funding from these or future programs. The Company continues to pursue capital investment opportunities in producing natural gas properties as well as its plan to participate in its sponsored natural gas drilling partnerships, while pursuing opportunities for operating improvements and costs efficiencies. Management believes that the Company has adequate capital to meet its operating requirements.
tem 3.Quantitative and Qualititive Disclosure About Market Rate Risk Interest Rate Risk There have been no material changes in the reported market risks faced by the Company since December 31, 2000. Commodity Price Risk The Company utilizes commodity-based derivative instruments as hedges to manage a portion of its exposure to price risk from its natural gas sales and marketing activities. These instruments consist of NYMEX-traded natural gas futures contracts and option contracts. These hedging arrangements have the effect of locking in for specified periods (at predetermined prices or ranges of prices) the prices the Company will receive for the volume to which the hedge relates. As a result, while these hedging arrangements are structured to reduce the Company's exposure to decreases in price associated with the hedging commodity, they also limit the benefit the Company might otherwise have received from price increases associated with the hedged commodity. The Company's policy prohibits the use of natural gas future and option contracts for speculative purposes. As of March 31, 2001, PDC had entered into a series of natural gas future contracts and options contracts. Open future contracts maturing in 2001 are for the sale of 2,916,400 dt of natural gas with a weighted average price of $3.79 dt resulting in a total contract amount of $11,065,900, and a fair market value of $(4,420,800). Open option contracts maturing in 2001 are for the sale of 1,596,400 dt with a weighted average floor price of $3.75 dt. -11-
<PAGE> CONFORMED COPY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings The Company is not a party to any legal actions that would materially affect the Company's operations or financial statements.
Item 6. Exhibits and Reports on Form 8-K (a) None. (b) No reports on Form 8-K have been filed during the quarter ended March 31, 2001.
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. Petroleum Development Corporation (Registrant) Date: May 10, 2001 /s/ Steven R. Williams Steven R. Williams President Date: May 10, 2001 /s/ Dale G. Rettinger Dale G. Rettinger Executive Vice President and Treasurer -12-