10-Q 1 h96348e10-q.txt BURLINGTON RESOURCES INC - QUARTER ENDED 03/31/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9971 BURLINGTON RESOURCES INC. (Exact name of registrant as specified in its charter) Delaware 91-1413284 (State or other jurisdiction of (I.R.S. Employer incorporation ororganization) Identification Number) 5051 Westheimer, Suite 1400, Houston, Texas 77056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 624-9500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------------------- ------------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding Common Stock, par value $.01 per share, as of March 31, 2002 201,154,419 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements BURLINGTON RESOURCES INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

FIRST QUARTER --------------------- 2002 2001 ------ ------ (In Millions, Except per Share Amounts) Revenues........................................................................ $ 683 $ 1,152 ------- ------- Costs and Expenses Taxes Other than Income Taxes................................................. 33 67 Transportation Expense........................................................ 67 72 Production and Processing..................................................... 136 118 Depreciation, Depletion and Amortization...................................... 220 170 Exploration Costs............................................................. 57 70 Administrative................................................................ 38 44 ------- ------- Total Costs and Expenses........................................................ 551 541 ------- ------- Operating Income................................................................ 132 611 Interest Expense................................................................ 72 45 Other Expense (Income) - Net.................................................... (1) 9 ------- ------- Income Before Income Taxes...................................................... 61 557 Income Tax Expense.............................................................. 13 224 ------- ------- Income Before Cumulative Effect of Change in Accounting Principle............... 48 333 Cumulative Effect of Change in Accounting Principle - Net....................... - 3 ------- ------- Net Income...................................................................... $ 48 $ 336 ======= ======= Earnings per Common Share Basic Before Cumulative Effect of Change in Accounting Principle................. $ 0.24 $ 1.56 Cumulative Effect of Change in Accounting Principle - Net.................. - 0.01 ------- ------- Net Income................................................................. $ 0.24 $ 1.57 ======= ======= Diluted Before Cumulative Effect of Change in Accounting Principle................. $ 0.24 $ 1.55 Cumulative Effect of Change in Accounting Principle - Net.................. - 0.01 ------- ------- Net Income................................................................. $ 0.24 $ 1.56 ======= ======= See accompanying Notes to Consolidated Financial Statements.

2 BURLINGTON RESOURCES INC. CONSOLIDATED BALANCE SHEET (UNAUDITED)

March 31, December 31, 2002 2001 ----------- ------------- (In Millions, Except Share Data) ASSETS Current Assets Cash and Cash Equivalents....................................... $ 56 $ 116 Accounts Receivable............................................. 399 398 Commodity Hedging Contracts and Other Derivatives............... 20 118 Inventories..................................................... 56 50 Other Current Assets............................................ 43 33 -------- -------- 574 715 -------- -------- Oil & Gas Properties (Successful Efforts Method).................. 16,668 16,038 Other Properties.................................................. 1,449 1,416 -------- -------- 18,117 17,454 Accumulated Depreciation, Depletion and Amortization............ 8,804 8,623 -------- -------- Properties - Net.............................................. 9,313 8,831 -------- -------- Goodwill.......................................................... 782 782 -------- -------- Other Assets...................................................... 247 254 -------- -------- Total Assets................................................ $ 10,916 $ 10,582 ======== ======== LIABILITIES Current Liabilities Accounts Payable................................................ $ 552 $ 599 Taxes Payable................................................... 55 6 Accrued Interest................................................ 80 61 Dividends Payable............................................... 28 28 Other Current Liabilities....................................... 23 17 -------- -------- 738 711 -------- -------- Long-term Debt.................................................... 4,692 4,337 -------- -------- Deferred Income Taxes............................................. 1,379 1,403 -------- -------- Other Liabilities and Deferred Credits............................ 611 606 -------- -------- Commitments and Contingencies STOCKHOLDERS' EQUITY Preferred Stock, Par Value $.01 Per Share (Authorized 75,000,000 Shares; One Share Issued)............... - - Common Stock, Par Value $.01 Per Share (Authorized 325,000,000 Shares; Issued 241,188,688 Shares)..... 2 2 Paid-in Capital................................................... 3,942 3,944 Retained Earnings................................................. 1,352 1,332 Deferred Compensation - Restricted Stock.......................... (15) (9) Accumulated Other Comprehensive Loss.............................. (161) (106) Cost of Treasury Stock (40,034,269 and 40,395,695 Shares for 2002 and 2001, respectively) (1,624) (1,638) -------- -------- Stockholders' Equity.............................................. 3,496 3,525 -------- -------- Total Liabilities and Stockholders' Equity.................. $ 10,916 $ 10,582 ======== ======== See accompanying Notes to Consolidated Financial Statements.

3 BURLINGTON RESOURCES INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

FIRST QUARTER --------------- 2002 2001 ------ ------ (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income....................................................... $ 48 $ 336 Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities Depreciation, Depletion and Amortization......................... 220 170 Deferred Income Taxes............................................ (1) 110 Exploration Costs................................................ 57 70 Changes in Derivative Fair Values................................ 25 (11) Working Capital Changes Accounts Receivable.............................................. - 108 Inventories...................................................... (6) (19) Other Current Assets............................................. (10) 4 Accounts Payable................................................. (25) 25 Taxes Payable.................................................... 50 94 Accrued Interest................................................. 19 8 Other Current Liabilities........................................ (4) (5) Changes in Other Assets and Liabilities........................... (12) (17) ------- ------- Net Cash Provided By Operating Activities...................... 361 873 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Properties........................................... (762) (371) Other............................................................. 5 (1) ------- ------- Net Cash Used In Investing Activities.......................... (757) (372) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Borrowings.......................................... 355 400 Reduction in Borrowings........................................... - (320) Dividends Paid.................................................... (28) (30) Common Stock Purchases............................................ - (224) Common Stock Issuances............................................ 4 31 Other............................................................. 5 14 ------- ------- Net Cash Provided by (Used In) Financing Activities............ 336 (129) ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (60) 372 CASH AND CASH EQUIVALENTS Beginning of Year................................................. 116 132 ------- ------- End of Period..................................................... $ 56 $ 504 ======= ======= See accompanying Notes to Consolidated Financial Statements.

4 BURLINGTON RESOURCES INC. Notes TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The 2001 Annual Report on Form 10-K (Form 10-K) of Burlington Resources Inc. (the Company), includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Quarterly Report on Form 10-Q (Quarterly Report). The financial statements for the periods presented herein are unaudited and do not contain all information required by generally accepted accounting principles to be included in a full set of financial statements. In the opinion of management, all material adjustments necessary to present fairly the results of operations have been included. All such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of the results of operations for the entire year. The consolidated financial statements include certain reclassifications that were made to conform to current period presentation. Basic earnings per common share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The weighted average number of common shares outstanding for computing basic EPS was 201 million and 214 million for the first quarter of 2002 and 2001, respectively. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The weighted average number of common shares outstanding for computing diluted EPS, including dilutive stock options, was 202 million and 215 million for the first quarter of 2002 and 2001, respectively. No adjustments were made to reported net income in the computation of EPS. 5 2. COMPREHENSIVE INCOME (LOSS) The following table presents comprehensive income (loss).

FIRST QUARTER FIRST QUARTER --------------------------------------------- (In Millions) 2002 2001 --------------- --------------------------------------------- Accumulated other comprehensive loss - Beginning of Period........... $ (106) $ (70) Net income........................................................... $ 48 $ 336 --------- ---------- Other comprehensive loss - net of tax Hedging activities Cumulative effect of change in accounting principle - January 1, 2001................................................. - (366) Current period changes in fair value of settled contracts.......... 14 54 Reclassification adjustments for settled contracts................. (43) 186 Changes in fair value of outstanding hedging positions............. (31) (17) --------- ---------- Hedging activities........................................ (60) (143) Foreign currency translation Foreign currency translation adjustments........................... 5 (42) --------- ---------- Total other comprehensive loss....................................... (55) (55) (185) (185) --------- -------- ---------- --------- Comprehensive income ................................................ $ (7) $ 151 ========= ========== Accumulated other comprehensive loss - End of Period................. $ (161) $ (255) ============ ===========

3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company enters into gas swap agreements to fix the prices of anticipated future natural gas production and enters into gas swap agreements that convert its production back to market sensitive positions when matched against fixed-price gas sales. The Company enters into natural gas basis swap agreements to fix the sales price differential between the Company's marketing locations and Henry Hub. The Company enters into natural gas option agreements to establish floor and ceiling prices on anticipated future natural gas production. The Company also enters into natural gas option agreements to establish floor and ceiling prices on anticipated future natural gas production while allowing the Company to participate in upward price movements above a specified non-participation range. There were no net premiums received on the hedging contracts that allow the Company to participate in upward price movements above a specified non-participation price range. 6 The Company also enters into crude oil swap agreements to fix the price of anticipated future crude oil production and purchases call options agreements that allow the Company to participate in market price increases that exceed hedge prices established when the Company enters into a swap. As of March 31, 2002, the Company had the following natural gas volumes hedged. Natural Gas Fixed-price Swaps

Average Fair Value Production Volumes Fixed Liability Period (MMBTU) Price (In Millions) --------------- ------------------ ---------------- -------------------- 2002 33,422,560 $2.70 $(3) 2003 15,570,630 3.11 (8) 2004 15,613,289 3.23 (6) 2005 10,513,930 3.18 (4) 2006 to 2007 1,672,500 $3.21 $(1) Natural Gas Basis Swaps Average Fair Value Production Volumes Basis Asset Period (MMBTU) Differential (In Millions) --------------- ------------------ ---------------- -------------------- 2002 33,422,560 $(.25) $1 2003 15,570,630 (.28) - 2004 15,613,289 (.27) - 2005 10,513,930 (.28) - 2006 to 2007 1,672,500 $(.15) $- Natural Gas Options Average Fair Value Production Volumes Strike Asset/(Liability) Period Option Type (MMBTU) Price (In Millions) --------------- ------------------- ------------------- --------------- --------------------- 2002 Puts purchased 139,670,000 $2.82 $ 38 2002 Puts sold 113,795,000 2.09 (4) 2002 Calls sold 139,670,000 4.42 (20) 2002 Calls purchased 9,100,000 10.80 - 2003 Puts Purchased 91,250,000 2.84 27 2003 Puts Sold 91,250,000 2.08 (7) 2003 Call Sold 91,250,000 $4.71 $(20)

As of March 31, 2002, the fair value of the swap agreements the Company had entered into in order to convert the Company's fixed-price gas sales contracts to market sensitive positions was a $4 million asset offset by a $4 million liability basis adjustment to the carrying value of the fixed-price gas sales contracts. 7 Crude Oil Options

Average Fair Value Production Volumes Strike Asset Period Option Type (Barrels) Price (In Millions) --------------- ------------------- ------------------- --------------- ---------------------- 2002 Puts purchased 910,000 $25.00 $1 2002 Puts sold 910,000 20.00 - 2002 Calls sold 910,000 32.17 - 2002 Calls purchased 910,000 $38.00 $-

The derivative assets and liabilities represent the difference between hedged prices and market prices on hedged volumes of the commodities as of March 31, 2002. Hedging activities increased natural gas and crude oil revenues by $69 million and $3 million, respectively, in the first quarter of 2002. In addition, during the quarter, non-cash losses of $25 million were recorded in revenues associated with ineffectiveness of cash-flow and fair-value hedges and changes in the fair value of derivative instruments that do not qualify for hedge accounting. In addition to hedges of commodity prices, the Company also has foreign currency swaps to hedge its exposure to exchange rate fluctuations related to its Canadian subsidiaries. As of March 31, 2002, the Company had $10 million of liabilities related to foreign currency exchange rate hedges. Based on commodity prices and foreign exchange rates as of March 31, 2002, the Company expects to reclassify gains of $4 million ($3 million after tax) to earnings from the balance in accumulated other comprehensive loss during the next twelve months. As of March 31, 2002, the Company had cash-flow hedge derivative assets of $19 million and derivative liabilities of $26 million. The Company also had liabilities and assets related to fair-value hedges of $6 million and $8 million, respectively. 4. COMMITMENTS AND CONTINGENCIES The Company and numerous other oil and gas companies have been named as defendants in various lawsuits alleging violations of the civil False Claims Act. These lawsuits have been consolidated by the United States Judicial Panel on Multidistrict Litigation for pre-trial proceedings in the matter of In re Natural Gas Royalties Qui Tam Litigation, MDL-1293, United States District Court for the District of Wyoming (MDL-1293). The plaintiffs contend that defendants underpaid royalties on natural gas and NGLs produced on federal and Indian lands through the use of below-market prices, improper deductions, improper measurement techniques and transactions with affiliated companies. Plaintiffs allege that the royalties paid by defendants were lower than the royalties required to be paid under federal regulations and that the forms filed by defendants with the Minerals Management Service (MMS) reporting these royalty payments were false, thereby violating the civil False Claims Act. The United States has intervened in certain of the MDL-1293 cases as to some of the defendants, including the Company. Various administrative proceedings are also pending before the MMS of the United States Department of the Interior with respect to the valuation of natural gas produced by the Company on federal and Indian lands. In general, these proceedings stem from regular MMS audits of the Company's royalty payments over various periods of time and involve the interpretation of the relevant federal regulations. 8 Based on the Company's present understanding of the various governmental and False Claims Act proceedings described above, the Company believes that it has substantial defenses to these claims and intends to vigorously assert such defenses. However, in the event that the Company is found to have violated the civil False Claims Act, the Company could be subject to monetary damages and a variety of sanctions, including double damages, substantial monetary fines, civil penalties and a temporary suspension from entering into future federal mineral leases and other federal contracts for a defined period of time. While the ultimate outcome and impact on the Company cannot be predicted with certainty, management believes that the resolution of these proceedings through settlement or adverse judgment will not have a material adverse effect on the consolidated financial position of the Company, although results of operations and cash flow could be significantly impacted in the reporting periods in which such matters are resolved. The Company has also been named as a defendant in the lawsuit styled UNOCAL Netherlands B.V., et al v. Continental Netherlands Oil Company B.V., et al, No. 98-854, in the Court of Appeal in The Hague in the Netherlands. Plaintiffs, who are working interest owners in the Q-1 Block in the North Sea, have alleged that the Company and other former working interest owners in the adjacent Logger Field in the L16a Block unlawfully trespassed or were otherwise unjustly enriched by producing part of the oil from the adjoining Q-1 Block. The plaintiffs claim that the defendants infringed upon plaintiffs' right to produce the minerals present in its license area and acted in violation of generally accepted standards by failing to inform plaintiffs of the overlap of the Logger Field into the Q-1 Block. For all relevant periods, the Company owned a 37.5% working interest in the Logger Field. Following a trial, the District Court in The Hague rendered a Judgment in favor of the defendants, including the Company, dismissing all claims. Plaintiffs thereafter appealed. On October 19, 2000, the Court of Appeal in The Hague issued an interim Judgment in favor of the plaintiffs and ordered that additional evidence be presented to the court relating to issues of both liability and damages. The Company and the other defendants are continuing to vigorously assert defenses against these claims. The Company has also asserted claims of indemnity against two of the defendants from whom it had acquired a portion of its working interest share. The Company is unable at this time to reasonably predict the outcome, or, in the event of an unfavorable outcome, to reasonably estimate the possible loss or range of loss, if any, in this lawsuit. In addition to the foregoing, the Company and its subsidiaries are named defendants in numerous other lawsuits and named parties in numerous governmental and other proceedings arising in the ordinary course of business. While the outcome of these other lawsuits and proceedings cannot be predicted with certainty, management believes these other matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 5. LONG-TERM DEBT In February 2002, Burlington Resources Finance Company (BRFC) issued $350 million of 5.7% Notes due March 1, 2007. During the first quarter of 2002, the Company also issued $5 million of net commercial paper. Commercial paper outstanding at March 31, 2002 was $680 million at an average interest rate of approximately 2 percent. 6. PROPERTY TRANSACTIONS On January 3, 2002, the Company consummated a property acquisition from ATCO Gas and Pipeline Ltd., a Canadian regulated gas utility, for approximately $344 million. 9 During the fourth quarter of 2001, the Company announced its intent to sell certain non-core, non-strategic properties in order to improve the overall quality of its portfolio. The Company intends to complete property sales by the end of 2002 and expects to use the estimated proceeds of over $750 million generated from property sales to repay debt. Included in these property sales are assets recorded as held for sale at December 31, 2001. In connection with the divestiture program, in the fourth quarter of 2001, the Company also recorded restructuring liabilities of $10 million. As of March 31, 2002, $5 million of the restructuring liabilities remained outstanding as Accounts Payable on the Consolidated Balance Sheet. 7. SEGMENT AND GEOGRAPHIC INFORMATION The Company's reportable segments are USA, Canada and Other International. The segments are engaged principally in the exploration, development, production and marketing of oil and gas. The accounting policies for the segments are the same as those disclosed in Note 1 of Notes to Consolidated Financial Statements included in the Company's Form 10-K. Intersegment sales were $14 million and $72 million during the first quarter of 2002 and 2001, respectively. The following tables present information about reported segment operations.

First Quarter 2002 -------------------------------------------------- Other USA Canada International Total -------------------------------------------------- (In Millions) Revenues.............................. $ 392 $ 243 $ 48 $ 683 Operating income...................... $ 137 $ 34 $ 4 $ 175 First Quarter 2001 -------------------------------------------------- Other USA Canada International Total -------------------------------------------------- (In Millions) Revenues.............................. $ 752 $ 345 $ 55 $1,152 Operating income...................... $ 397 $ 238 $ 24 $ 659 The following is a reconciliation of segment operating income to consolidated income before income taxes. First Quarter --------------------------- 2002 2001 ----------- ------------ (In Millions) Total operating income for reportable segments......... $ 175 $ 659 Corporate expenses..................................... 43 48 Interest expense....................................... 72 45 Other expense (income)- net............................ (1) 9 ----------- ------------ Consolidated income before income taxes................ $ 61 $ 557 =========== ============

10 8. ACCOUNTING PRONOUNCEMENT In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-live asset. Subsequently, the asset retirement cost should be allocated to expense using a systematic and rational method. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of SFAS No. 143 and therefore, at this time, cannot reasonably estimate the effect of this statement on its consolidated financial position, results of operations or cash flows. 9. PRO FORMA SUMMARY FINANCIAL INFORMATION The following table presents the unaudited pro forma results of the Company as though the acquisition of Canadian Hunter Exploration Ltd. had occurred on January 1, 2001. Pro forma results are not necessarily indicative of actual results. First Quarter 2001 ---------------- (In Millions, Except per Share Amounts) Revenues................................................. $ 1,393 Net income............................................... 414 Basic earnings per share................................. 1.93 Diluted earnings per share............................... $ 1.92 ITEM 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Financial Condition and Liquidity --------------------------------- The Company's long-term debt to total capital (total capital is defined as long-term debt and stockholders' equity) ratio at March 31, 2002 and December 31, 2001 was 57 percent and 55 percent, respectively. In February 2002, BRFC issued $350 million of 5.7 % Notes due March 1, 2007 (February Notes). This issuance reduced the Company's amount available under its shelf registration statement on file with the Securities and Exchange Commission to $397 million. On October 8, 2001, the Company's Board of Directors authorized the Company to restore its shelf registration statement to $1,500 million. The Company expects to file such registration statement in the second quarter of 2002. Effective January 2, 2002, the Company entered into a $350 million bridge revolving credit facility (Facility) in order to finance the acquisition of certain assets from ATCO Gas and Pipelines Ltd. On January 2, 2002, the Company issued commercial paper under the Facility to fund the acquisition. The proceeds from the February Notes were used to retire such commercial paper and the Company terminated the Facility. During the first quarter of 2002, the Company also issued $5 million of net commercial paper. Commercial paper outstanding at March 31, 2002 was $680 million at an average interest rate of approximately 2 percent. 11 The Company had credit commitments in the form of revolving credit facilities (revolvers) as of March 31, 2002. The revolvers, which are comprised of agreements for $600 million, $400 million and $300 million, are available to cover debt due within one year. Therefore, commercial paper, credit facility notes and fixed-rate debt due within one year are classified as long-term debt. Currently, there are no amounts outstanding under the revolvers, however, the Company's outstanding commercial paper reduces the amount of credit available under the revolvers. The $600 million revolver expires in December 2006 and the $400 million and $300 million revolvers expire in December 2002 unless renewed by mutual consent. The Company has the option to convert the outstanding balances on the $400 million and $300 million revolvers to one-year and five-year plus one day term notes, respectively. Under the covenants of the revolvers, Company debt cannot exceed 60 percent of capitalization (as defined in the agreements). Net cash provided by operating activities during the first quarter of 2002 was $361 million compared to $873 million in 2001. The decrease was primarily due to lower operating income and higher working capital needs. Lower operating income is principally the result of lower commodity prices partially offset by higher natural gas production sales volumes. The Company and its subsidiaries are named defendants in numerous lawsuits and named parties in numerous governmental and other proceedings arising in the ordinary course of business. While the outcome of lawsuits and other proceedings cannot be predicted with certainty, management believes these matters will not have a material adverse effect on the consolidated financial position of the Company, although results of operations and cash flows could be significantly impacted in the reporting periods in which such matters are resolved. The Company has certain other commitments and uncertainties related to its normal operations. Management believes that there are no other commitments or uncertainties that will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. Capital Expenditures -------------------- Capital expenditures for the first quarter of 2002 totaled $736 million compared to $413 million in 2001. The Company invested $285 million on internal development and exploration of oil and gas properties during the first quarter of 2002 compared to $278 million in 2001. The Company invested $405 million for property acquisitions in first quarter 2002 compared to $90 million in 2001. Property acquisitions include the purchase of certain assets on January 3, 2002 from ATCO Gas and Pipelines Ltd., a Canadian regulated gas utility, for approximately $344 million. During the fourth quarter of 2001, the Company announced its intent to sell certain non-core, non-strategic properties in order to improve the overall quality of its portfolio. The Company intends to complete property sales by the end of 2002 and expects to use the estimated proceeds of over $750 million generated from property sales to repay debt. Included in these property sales are assets recorded as held for sale at December 31, 2001. In connection with the divestiture program, in the fourth quarter of 2001, the Company also recorded restructuring liabilities of $10 million. As of March 31, 2002, $5 million of the restructuring liabilities remained outstanding as Accounts Payable on the Consolidated Balance Sheet. 12 Dividends --------- On April 17, 2002, the Board of Directors declared a quarterly common stock cash dividend of $0.1375 per share, with record and payment dates of June 7, 2002 and July 2, 2002, respectively. Results of Operations - First Quarter 2002 Compared to First Quarter 2001 ------------------------------------------------------------------------- The Company reported net income of $48 million or $0.24 diluted earnings per common share in first quarter 2002 compared to net income of $336 million or $1.56 diluted earnings per common share in 2001. Net income in first quarter 2001 included a non-cash after tax gain of $7 million or $0.03 per diluted share consisting of the cumulative effect of change in accounting principle, ineffectiveness related to cash-flow and fair-value hedges and changes in the fair value of derivative instruments that do not qualify for hedge accounting. Revenues decreased $469 million to $683 million in 2002 compared to $1,152 million in 2001. Revenues in 2002 decreased $585 million compared to 2001 as a result of lower commodity prices. Including a $0.38 realized gain per MCF related to hedging activities, average gas prices decreased $2.83 per MCF in 2002 to $2.88 per MCF from $5.71 per MCF in 2001 which decreased revenues $514 million. Including a $0.58 realized gain per barrel related to hedging activities, average oil prices decreased $4.13 per barrel in 2002 to $21.68 per barrel from $25.81 per barrel in 2001 resulting in reduced revenues of $22 million. Average NGL prices decreased $9.60 per barrel in 2002 to $12.45 per barrel from $22.05 per barrel in 2001, resulting in reduced revenues of $49 million. In first quarter 2002, revenues also included a $25 million loss related to ineffectiveness of cash-flow and fair-value hedges and changes in the fair value of derivative instruments that do not qualify for hedge accounting. An increase in gas and NGL sales volumes, partially offset by a decline in oil sales volumes, resulted in higher revenues of $151 million in 2002 compared to 2001. Gas sales volumes increased 263 MMCF per day in 2002 to 2,019 MMCF per day from 1,756 MMCF per day in 2001 resulting in increased revenues of $135 million. NGL sales volumes increased to 56.3 MBbls per day in 2002 from 41.4 MBbls per day in 2001, resulting in higher revenues of $30 million from quarter to quarter. Oil sales volumes decreased 6.1 MBbls per day in 2002 to 59.9 MBbls per day from 66.0 MBbls per day in 2001 reducing revenues $14 million. Gas sales volumes increased primarily due to the acquisition of Canadian Hunter Exploration Ltd. (Hunter) in late 2001. Oil sales volumes decreased primarily due to natural declines in the Gulf of Mexico and North Sea. Costs and Expenses were $551 million in 2002 compared to $541 million in 2001. The $10 million increase was primarily due to a $50 million increase in depreciation, depletion and amortization (DD&A) and an $18 million increase in production and processing expenses partially offset by a $34 million decrease in taxes other than income taxes, a $13 million decrease in exploration costs, a $6 million decrease in transportation expenses and a $5 million decrease in general and administrative (G&A) expenses. DD&A increased primarily due to a higher unit-of-production rate related to changes in production mix and higher gas production volumes. Production and processing expenses increased primarily due to higher gas volumes. Taxes other than income taxes decreased primarily due to lower oil and gas revenues. Exploration costs decreased primarily due to lower exploratory dry hole costs of $32 million partially offset by higher amortization of undeveloped lease costs 13 of $13 million. Transportation expenses decreased primarily due to lower contract rates and G&A expenses were lower in 2002 compared to 2001 due to non-recurring payroll related costs recorded in 2001. Interest Expense was $72 million in first quarter 2002 compared to $45 million in 2001. The increase was primarily due to higher debt balances during 2002 resulting from the Hunter acquisition in late 2001 and other property acquisitions made in early 2002. Other Expense (Income) -- Net was income of $1 million in first quarter 2002 compared to expense of $9 million in 2001. The change was primarily related to foreign currency exchange rate transactions and lower miscellaneous expenses. Income taxes were an expense of $13 million in first quarter 2002 as compared to $224 million in 2001. The decrease in tax expense was primarily due to lower pretax income. The Company also recorded benefits of $13 million in first quarter 2002 compared to $2 million in 2001 related to interest deductions associated with structured debt financing. Section 29 Tax Credits were $3 million in 2002 compared to $5 million in 2001. Accounting Pronouncement ------------------------ In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-live asset. Subsequently, the asset retirement cost should be allocated to expense using a systematic and rational method. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of SFAS No. 143 and therefore, at this time, cannot reasonably estimate the effect of this statement on its consolidated financial position, results of operations or cash flows. ITEM 3. Quantitative and Qualitative Disclosures about Commodity Risk ------------------------------------------------------------- Substantially all of the Company's crude oil and natural gas production is sold on the spot market or under short-term contracts at market sensitive prices. Spot market prices for domestic crude oil and natural gas are subject to volatile trading patterns in the commodity futures market, including among others, the New York Mercantile Exchange (NYMEX). Quality differentials, worldwide political developments and the actions of the Organization of Petroleum Exporting Countries also affect crude oil prices. There is also a difference between the NYMEX futures contract price for a particular month and the actual cash price received for that month in a U.S. producing basin or at a U.S. market hub, which is referred to as the "basis differential." The Company utilizes over-the-counter price and basis swaps as well as options to hedge its production in order to decrease its price risk exposure. The gains and losses realized as a result of these price and basis derivative transactions are substantially offset when the hedged commodity is delivered. In order to accommodate the needs of its customers, the Company also uses variable price swaps to convert natural gas sold under fixed-price contracts to market sensitive prices. 14 The Company uses a sensitivity analysis technique to evaluate the hypothetical effect that changes in the market value of crude oil and natural gas may have on the fair value of the Company's derivative instruments. For example, at March 31, 2002, the potential decrease in fair value of derivative instruments assuming a 10 percent adverse movement (an increase in the underlying commodities prices) would result in an $85 million increase in the fair value of the net liabilities related to commodity hedging activities. For purposes of calculating the hypothetical change in fair value, the relevant variables include the type of commodity, the commodity futures prices, the volatility of commodity prices and the basis and quality differentials. The hypothetical change in fair value is calculated by multiplying the difference between the hypothetical price (adjusted for any basis or quality differentials) and the contractual price by the contractual volumes. Based on commodity prices and foreign exchange rates as of March 31, 2002, the Company expects to reclassify gains of $4 million ($3 million after tax) to earnings from the balance in accumulated other comprehensive loss during the next twelve months. As of March 31, 2002, the Company had cash-flow hedge derivative assets of $19 million and derivative liabilities of $26 million. The Company also had liabilities and assets related to fair-value hedges of $6 million and $8 million, respectively. Forward-looking Statements -------------------------- This Quarterly Report contains projections and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These projections and statements reflect the Company's current views with respect to future events and financial performance. No assurances can be given, however, that these events will occur or that these projections will be achieved and actual results could differ materially from those projected as a result of certain factors. A discussion of these factors is included in the Company's 2001 Form 10-K. 15 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings ----------------- See Note 4 of Notes to Consolidated Financial Statements. ITEM 6. Exhibits and Reports on Form 8-K --------------------------------- A. Exhibits The following exhibits are filed as part of this report. Exhibit Nature of Exhibit ------- ----------------- 4.1* The Company and its subsidiaries either have filed with the Securities and Exchange Commission or upon request will furnish a copy of any instrument with respect to long-term debt of the Company. 10.1 Amendment No.1, dated January 9, 2002 to Burlington Resources Inc. Incentive Compensation Plan 10.2 Amendment No.1, dated January 9, 2002, to Burlington Resources Inc. 2001 Performance Share Unit Plan 10.3* Burlington Resources Inc. 2002 Stock Incentive Plan (Exhibit A to the Proxy Statement, filed March 2002) * Exhibit incorporated by reference. B. Reports on Form 8-K On February 21, 2002, the Company filed Form 8-K in connection with its February 2002 issuance of $350 million of 5.7% Notes. Items 2, 3, 4 and 5 of Part II are not applicable and have been omitted. 16 Pursuant to the requirements of Section 13 or 15(d) 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. BURLINGTON RESOURCES INC. ------------------------- (Registrant) By /s/ STEVEN J. SHAPIRO ------------------------------------ Steven J. Shapiro Senior Vice President and Chief Financial Officer By /s/JOSEPH P. McCOY ------------------------------------ Joseph P. McCoy Vice President, Controller and Chief Accounting Officer Date: April 26, 2002 17 EXHIBIT INDEX Exhibit Nature of Exhibit ------- ----------------- 4.1* The Company and its subsidiaries either have filed with the Securities and Exchange Commission or upon request will furnish a copy of any instrument with respect to long-term debt of the Company. 10.1 Amendment No.1, dated January 9, 2002 to Burlington Resources Inc. Incentive Compensation Plan 10.2 Amendment No.1, dated January 9, 2002, to Burlington Resources Inc. 2001 Performance Share Unit Plan 10.3* Burlington Resources Inc. 2002 Stock Incentive Plan (Exhibit A to the Proxy Statement, filed March 2002)