ITEM 1. Business
Parker & Parsley 85-A, Ltd. (the "Partnership") is a limited partnership organized in 1985 under the laws of the State of Texas. As of August 8, 1997, Pioneer Natural Resources USA, Inc. ("Pioneer USA") became the managing general partner of the Partnership. Prior to August 8, 1997, the Partnership's managing general partner was Parker & Parsley Development L.P. ("PPDLP"), a wholly-owned subsidiary of Parker & Parsley Petroleum Company ("Parker & Parsley"). On August 7, 1997, Parker & Parsley and Mesa Inc. ("Mesa") received shareholder approval to merge and create Pioneer Natural Resources Company ("Pioneer"). On August 8, 1997, PPDLP was merged with and into Pioneer USA, a wholly-owned subsidiary of Pioneer, resulting in Pioneer USA becoming the managing general partner of the Partnership as PPDLP's successor by merger.
A Registration Statement, as amended, filed pursuant to the Securities Act of 1933, registering limited partnership interests aggregating $40,000,000 in a series of Texas limited partnerships formed under the Parker & Parsley 85 Development Drilling Program, was declared effective by the Securities and Exchange Commission on August 28, 1985. On October 26, 1985, the offering of limited partnership interests in the Partnership, the first partnership formed under such registration statement, was closed, with interests aggregating $9,613,000 being sold to 828 subscribers.
The Partnership engages in oil and gas development and production and is not involved in any industry segment other than oil and gas. See "Item 6. Selected Financial Data" for a summary of the Partnership's oil and gas sales, net income and identifiable assets.
The principal markets during 1999 for the oil produced by the Partnership were refineries and oil transmission companies that have facilities near the Partnership's oil producing properties. During 1999, Pioneer USA marketed the Partnership's gas to a variety of purchasers. Of the Partnership's total oil and gas revenues for 1999, approximately 49% and 10% were attributable to sales made to Plains All American Inc. and NGTS LLC, respectively. Pioneer USA is of the opinion that the loss of any one purchaser would not have an adverse effect on its ability to sell its oil and gas production or natural gas products.
The Partnership's revenues, profitability, cash flow and future rate of growth are highly dependent on the prevailing prices of oil and gas, which are affected by numerous factors beyond the Partnership's control. Oil and gas prices historically have been very volatile. A substantial or extended decline in the prices of oil or gas could have a material adverse effect on the Partnership's revenues, profitability and cash flow and could, under certain circumstances, result in a reduction in the carrying value of the Partnership's oil and gas properties.
Federal and state regulation of oil and gas operations generally includes the fixing of maximum prices for regulated categories of natural gas, the imposition of maximum allowable production rates, the taxation of income and other items, and the protection of the environment. Although the Partnership believes that its business operations do not impair environmental quality and that its costs of complying with any applicable environmental regulations are not currently significant, the Partnership cannot predict what, if any, effect these environmental regulations may have on its current or future operations.
The Partnership does not have any employees of its own. Pioneer USA employs 687 persons, many of whom dedicated a part of their time to the conduct of the Partnership's business during the period for which this report is filed. Pioneer USA is responsible for all management functions.
Numerous uncertainties exist in estimating quantities of proved reserves and future net revenues therefrom. The estimates of proved reserves and related future net revenues set forth in this report are based on various assumptions, which may ultimately prove to be inaccurate. Therefore, such estimates should not be construed as estimates of the current market value of the Partnership's proved reserves.
No material part of the Partnership's business is seasonal and the Partnership conducts no foreign operations.
ITEM 2.
ITEM 2. Properties
The Partnership's properties consist of leasehold interests in properties on which oil and gas wells are located. Such property interests are often subject to landowner royalties, overriding royalties and other oil and gas leasehold interests.
Fractional working interests in developmental oil and gas prospects located primarily in the Spraberry Trend Area of West Texas were acquired by the Partnership, resulting in the Partnership's participation in the drilling of 25 productive oil and gas wells. At December 31, 1999, 21 wells were producing with four wells sold during 1996.
For information relating to the Partnership's estimated proved oil and gas reserves at December 31, 1999, 1998 and 1997 and changes in such quantities for the years then ended, see Note 7 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" below. Such reserves have been estimated by the engineering staff of Pioneer USA with a review by Williamson Petroleum Consultants, Inc., an independent petroleum consultant.
ITEM 3.
ITEM 3. Legal Proceedings
The Partnership from time to time is a party to various legal proceedings incidental to its business involving claims in oil and gas leases or interests, other claims for damages in amounts not in excess of 10% of its current assets and other matters, none of which Pioneer USA believes to be material to the Partnership.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter 1999.
PART II
ITEM 5.
ITEM 5. Market for Partnership's Common Equity and Related Stockholder Matters
At March 8, 2000, the Partnership had 9,613 outstanding limited partnership interests held of record by 823 subscribers. There is no established public trading market for the limited partnership interests. Under the limited partnership agreement, Pioneer USA has made certain commitments to purchase partnership interests at a computed value.
Revenues which, in the sole judgement of the managing general partner, are not required to meet the Partnership's obligations are distributed to the partners at least quarterly in accordance with the limited partnership agreement. During the years ended December 31, 1999 and 1998, distributions of $161,988 and $92,435 respectively, were made to the limited partners.
ITEM 6.
ITEM 6. Selected Financial Data
The following table sets forth selected financial data for the years ended December 31:
- --------------- (a) Including litigation settlement per limited partnership interest of $3.37 in 1996.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of operations
1999 compared to 1998
The Partnership's 1999 oil and gas revenues increased 42% to $526,325 from $371,098 in 1998. The increase in revenues resulted from higher average prices received and an increase in production from 1998 to 1999. In 1999, 17,451 barrels of oil, 13,795 barrels of natural gas liquids ("NGLs") and 55,226 mcf of gas were sold, or 40,450 barrel of oil equivalents ("BOEs"). In 1998, 18,178 barrels of oil, 9,630 barrels of NGLs and 43,021 mcf of gas were sold, or 34,978 BOEs. Due to the decline characteristics of the Partnership's oil and gas properties, management expects a certain amount of decline in production in the future until the Partnership's economically recoverable reserves are fully depleted.
The average price received per barrel of oil increased $3.84, or 29%, from $13.27 in 1998 to $17.11 in 1999. The average price received per barrel of NGLs increased $3.20, or 49%, from $6.51 in 1998 to $9.71 in 1999. The average price received per mcf of gas increased 9% from $1.56 in 1998 to $1.70 in 1999. The market price received for oil and gas has been extremely volatile in the past decade and management expects a certain amount of volatility in the foreseeable future. The Partnership may therefore sell its future oil and gas production at average prices lower or higher than that received in 1999.
The volatility of commodity prices has had, and continues to have, a significant impact on the Partnership's revenues and operating cash flow and could result in additional decreases to the carrying value of the Partnership's oil and gas properties.
Total costs and expenses decreased in 1999 to $350,830 as compared to $649,476 in 1998, a decrease of $298,646, or 46%. The decrease was primarily due to declines in depletion, the impairment of oil and gas properties and production costs, offset by an increase in general and administrative expenses ("G&A").
Production costs were $284,086 in 1999 and $304,333 in 1998, resulting in a decrease of $20,247, or 7%. The decrease was the combination of declines in well maintenance costs and ad valorem taxes, offset by an increase in production taxes due to an increase in oil and gas revenues.
G&A's components are independent accounting and engineering fees and managing general partner personnel and operating costs. During this period, G&A increased, in aggregate, 42% from $11,133 in 1998 to $15,790 in 1999. The Partnership paid the managing general partner $9,794 in 1999 and $8,231 in 1998 for G&A incurred on behalf of the Partnership. G&A is allocated, in part, to the Partnership by the managing general partner. Allocated expenses are determined by the managing general partner based upon the level of activity of the Partnership relative to the non-partnership activities of the managing general partner. The method of allocation has been consistent over the past several years with certain modifications incorporated to reflect changes in Pioneer USA's overall business activities.
In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the managing general partner reviews the Partnership's oil and gas properties for impairment whenever events or circumstances indicate a decline in the recoverability of the carrying value of the Partnership's assets may have occurred. As a result of the review and evaluation of its long-lived assets for impairment, the Partnership recognized a non-cash charge of $22,031 related to its oil and gas properties during 1998.
Depletion was $50,954 in 1999 compared to $311,979 in 1998. This represented a decrease of $261,025, or 84%. This decrease was the result of a combination of factors that included an increase in proved reserves during 1999 due to higher commodity prices and a reduction in the Partnership's net depletable basis from charges taken in accordance with SFAS 121 during the fourth quarter of 1998 and a decline in oil production of 727 barrels for the period ended December 31, 1999 compared to the same period in 1998.
1998 compared to 1997
The Partnership's 1998 oil and gas revenues decreased 32% to $371,098 from $548,786 in 1997. The decrease in revenues resulted from lower average prices received. In 1998, 18,178 barrels of oil, 9,630 barrels of NGLs and 43,021 mcf of gas were sold, or 34,978 BOEs. In 1997, 19,067 barrels of oil, 3,804 barrels of NGLs and 57,213 mcf of gas were sold, or 32,407 BOEs.
Consistent with the managing general partner, the Partnership has historically accounted for processed natural gas production as wellhead production on a wet gas basis. Effective September 30, 1997, as a result of the merger with Mesa, the managing general partner accounts for processed natural gas production in two components: natural gas liquids and dry residue gas. As a result of the change in the managing general partner's policy, the Partnership now accounts for processed natural gas production as processed natural gas liquids and dry residue gas. Consequently, separate product volumes will not be comparable for periods prior to September 30, 1997. Also, prices for gas products will not be comparable as the price per mcf for natural gas for the year ended December 31, 1998 is the price received for dry residue gas and the price per mcf for natural gas produced prior to October 1997 was presented as a price for wet gas (i.e., natural gas liquids combined with dry residue gas).
The average price received per barrel of oil decreased $6.21, or 32%, from $19.48 in 1997 to $13.27 in 1998. The average price received per barrel of NGLs decreased $4.50, or 41%, from $11.01 in 1997 to $6.51 in 1998. The average price received per mcf of gas decreased 34% from $2.37 in 1997 to $1.56 in 1998.
Total costs and expenses decreased in 1998 to $649,476 as compared to $712,497 in 1997, a decrease of $63,021, or 9%. The decrease was primarily due to declines in the impairment of oil and gas properties and G&A, offset by an increase in depletion.
Production costs were $304,333 in 1998 and $304,651 in 1997, resulting in a slight decrease of $318. The decrease was the combination of a decline in production taxes due to the decrease in oil and gas revenues, offset by an increase in well maintenance costs incurred to stimulate well production.
During this period, G&A decreased, in aggregate, 36% from $17,403 in 1997 to $11,133 in 1998. The Partnership paid the managing general partner $8,231 in 1998 and $14,081 in 1997 for G&A incurred on behalf of the Partnership.
The Partnership recognized non-cash SFAS 121 charges of $22,031 and $270,187 related to its oil and gas properties during 1998 and 1997, respectively.
Depletion was $311,979 in 1998 compared to $120,256 in 1997. This represented an increase of $191,723. This increase was the result of a decline in proved reserves during 1998 due to lower commodity prices, offset by a reduction in the Partnership's net depletable basis from charges taken in accordance with SFAS 121 during the fourth quarter of 1997 and a decline in oil production of 889 barrels for the period ended December 31, 1998 compared to the same period in 1997.
Impact of inflation and changing prices on sales and net income
Inflation generally does not impact revenues in the oil and gas industry. However, inflation generally does impact expenses, the most significant for the Partnership is lease operating expenses.
The petroleum industry has been characterized by volatile oil, NGL and natural gas commodity prices and relatively stable supplier costs during the three years ended December 31, 1999. During 1997 and 1998, weather patterns, regional economic recessions and political matters combined to cause worldwide crude oil supplies to exceed demand. As a result, crude oil prices declined substantially from the price levels of 1996. Also during 1997 and 1998, but to a lesser extent, market prices for natural gas declined. During 1999, the price per barrel for oil production similar to the Partnership's ranged from approximately $11.00 to $24.00. The decrease in crude oil exports during 1999 by members of the Organization of Petroleum Exporting Countries ("OPEC") and other crude oil exporting nations has resulted in higher Partnership revenues and operating cash flow as compared to 1998.
Prices for natural gas are subject to ordinary seasonal fluctuations, and this volatility of natural gas prices may result in production being curtailed and, in some cases, wells being completely shut-in.
Liquidity and capital resources
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased $125,928 during the year ended December 31, 1999 from 1998. The increase was primarily attributable to an increase of $99,950 in oil and gas sales receipts and reductions in operating costs paid of $24,251 that have resulted from the managing general partner's cost containment measures and a decline in G&A expenses paid of $1,727.
Net Cash Used in Investing Activities
The Partnership's investing activities during 1999 and 1998 were related to expenditures for equipment upgrades on various oil and gas properties.
Proceeds from asset dispositions of $279 and $323 in 1999 and 1998, respectively, were from equipment credits received on active properties.
Net Cash Used in Financing Activities
In 1999, cash distributions to the partners were $163,624, of which $1,636 was distributed to the managing general partner and $161,988 to the limited partners. In 1998, cash distributions to the partners were $93,368, of which $933 was distributed to the managing general partner and $92,435 to the limited partners.
Since the first quarter of 1999, world crude oil prices have increased, primarily as a result of decreases in crude oil supplies made available by OPEC and other crude oil exporting nations. During the period from the third quarter of 1997 through the first quarter of 1999, there was a significant declining trend in world oil prices and, to a lesser extent, natural gas prices. During the first quarter of 1999, OPEC and certain other crude oil exporting nations announced reductions in their planned export volumes. These announcements, together with the enactment of announced reductions in export volumes, have had a positive impact on world crude oil prices. No assurances can be given that the reductions in export volumes or the positive trend in oil and gas commodity prices can be sustained for an extended period of time.
Proposal to acquire partnerships
On September 8, 1999, Pioneer USA filed a preliminary proxy statement with the SEC proposing an agreement and plan of merger to the limited partners of 25 publicly-held Parker & Parsley limited partnerships. The preliminary proxy statement is non-binding and is subject to, among other things, consideration of offers from third parties to purchase any partnership or its assets, the majority approval of the limited partners in each partnership and the resolution of SEC review comments. Pioneer is continuing to evaluate the feasibility of the proposed agreement and plan of merger; however, the current commodity price outlook has diminished the likelihood that the proposed agreement and plan of merger will be consummated.
Year 2000 project readiness
As the year 2000 was approaching, the inability of some computer programs and embedded technologies to distinguish between "1900" and "2000" gave rise to the "Year 2000" problem. Such computer programs and related technology were at risk to fail outright or communicate inaccurate data, if not remediated or replaced. With the proliferation of electronic data interchange, the Year 2000 problem represented a significant exposure to the entire global community, the full extent of which could not be accurately assessed prior to the year 2000.
In proactive response to the Year 2000 problem, the managing general partner established a "Year 2000" project that assessed, to the extent possible, the Partnership's and the managing general partner's internal Year 2000 problem; took remedial actions necessary to minimize the Year 2000 risk exposure to the managing general partner and significant third parties with whom it has data interchange; and, tested the managing general partner's systems and processes once remedial actions were taken. The managing general partner contracted with
IBM Global Services to perform the assessment and remedial phases of its Year 2000 project. The managing general partner's total costs related to the Year 2000 problem were $2.5 million.
The managing general partner has closely monitored its information and non-information technology systems since the beginning of 2000 and has identified no significant Year 2000 failures or problems. The managing general partner will continue to monitor Year 2000 risks and issues. There can be no assurances that unforeseen problems will not be encountered in the future.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Page
Financial Statements of Parker & Parsley 85-A, Ltd: Independent Auditors' Report - Ernst & Young LLP.................... 12 Independent Auditors' Report - KPMG LLP............................. 13 Balance Sheets as of December 31, 1999 and 1998..................... 14 Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997............................................... 15 Statements of Partners' Capital for the Years Ended December 31, 1999, 1998 and 1997.................................. 16 Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997............................................... 17 Notes to Financial Statements....................................... 18
INDEPENDENT AUDITORS' REPORT
The Partners Parker & Parsley 85-A, Ltd. (A Texas Limited Partnership):
We have audited the balance sheets of Parker & Parsley 85-A, Ltd. as of December 31, 1999 and 1998, and the related statements of income, partners' capital and cash flows for the years then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Parker & Parsley 85-A, Ltd. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Dallas, Texas March 10, 2000
INDEPENDENT AUDITORS' REPORT
The Partners Parker & Parsley 85-A, Ltd. (A Texas Limited Partnership):
We have audited the statement of operations, partners' capital and cash flows of Parker & Parsley 85-A, Ltd. for the year ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly, in all material respects, the results of operations and cash flows of Parker & Parsley 85-A, Ltd. for the year ended December 31, 1997, in conformity with generally accepted accounting principles.
KPMG LLP
Midland, Texas March 20, 1998
PARKER & PARSLEY 85-A, LTD. (A Texas Limited Partnership)
BALANCE SHEETS December 31
1999 1998 ----------- ----------- ASSETS
Current assets: Cash $ 73,810 $ 41,498 Accounts receivable - oil and gas sales 72,517 42,116 ---------- ---------- Total current assets 146,327 83,614 ---------- ---------- Oil and gas properties - at cost, based on the successful efforts accounting method 7,396,111 7,388,678 Accumulated depletion (6,839,838) (6,788,159) ---------- ---------- Net oil and gas properties 556,273 600,519 ---------- ---------- $ 702,600 $ 684,133 ========== ========== LIABILITIES AND PARTNERS' CAPITAL
Current liabilities: Accounts payable - affiliate $ 13,487 $ 10,323
Partners' capital: Managing general partner 6,903 6,750 Limited partners (9,613 interests) 682,210 667,060 ---------- ---------- 689,113 673,810 ---------- ---------- $ 702,600 $ 684,133 ========== ==========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 85-A, LTD. (A Texas Limited Partnership)
STATEMENTS OF OPERATIONS For the years ended December 31
1999 1998 1997 --------- ---------- ---------- Revenues: Oil and gas $ 526,325 $ 371,098 $ 548,786 Interest 3,432 3,609 4,907 -------- --------- --------- 529,757 374,707 553,693 -------- --------- --------- Costs and expenses: Oil and gas production 284,086 304,333 304,651 General and administrative 15,790 11,133 17,403 Impairment of oil and gas properties - 22,031 270,187 Depletion 50,954 311,979 120,256 -------- --------- --------- 350,830 649,476 712,497 -------- --------- --------- Net income (loss) $ 178,927 $ (274,769) $ (158,804) ======== ========= ========= Allocation of net income (loss): Managing general partner $ 1,789 $ (2,747) $ (1,588) ======== ========= ========= Limited partners $ 177,138 $ (272,022) $ (157,216) ======== ========= ========= Net income (loss) per limited partnership interest $ 18.43 $ (28.30) $ (16.35) ======== ========= =========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 85-A, LTD. (A Texas Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Managing general Limited partner partners Total ---------- ---------- ----------
Partners' capital at January 1, 1997 $ 14,472 $1,431,583 $1,446,055 Distributions (2,454) (242,850) (245,304) Net loss (1,588) (157,216) (158,804) --------- --------- ---------
Partners' capital at December 31, 1997 10,430 1,031,517 1,041,947 Distributions (933) (92,435) (93,368) Net loss (2,747) (272,022) (274,769) --------- --------- ---------
Partners' capital at December 31, 1998 6,750 667,060 673,810 Distributions (1,636) (161,988) (163,624) Net income 1,789 177,138 178,927 --------- --------- ---------
Partners' capital at December 31, 1999 $ 6,903 $ 682,210 $ 689,113 ========= ========= =========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 85-A, LTD. (A Texas Limited Partnership)
STATEMENTS OF CASH FLOWS For the years ended December 31
1999 1998 1997 --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 178,927 $(274,769) $(158,804) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Impairment of oil and gas properties - 22,031 270,187 Depletion 50,954 311,979 120,256 Changes in assets and liabilities: Accounts receivable (30,401) 24,699 33,332 Accounts payable 3,164 (7,224) 3,194 -------- -------- -------- Net cash provided by operating activities 202,644 76,716 268,165 -------- -------- -------- Cash flows from investing activities: Additions to oil and gas properties (6,987) (12,611) (2,702) Proceeds from asset dispositions 279 323 - -------- -------- -------- Net cash used in investing activities (6,708) (12,288) (2,702) -------- -------- -------- Cash flows used in financing activities: Cash distributions to partners (163,624) (93,368) (245,304) -------- -------- -------- Net increase (decrease) in cash 32,312 (28,940) 20,159 Cash at beginning of year 41,498 70,438 50,279 -------- -------- -------- Cash at end of year $ 73,810 $ 41,498 $ 70,438 ======== ======== ========
The accompanying notes are an integral part of these financial statements.
PARKER & PARSLEY 85-A, LTD. (A Texas Limited Partnership)
NOTES TO FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
Note 1. Organization and nature of operations
Parker & Parsley 85-A, Ltd. (the "Partnership") is a limited partnership organized in 1985 under the laws of the State of Texas. As of August 8, 1997, Pioneer Natural Resources USA, Inc. ("Pioneer USA") became the managing general partner of the Partnership. Prior to August 8, 1997, the Partnership's managing general partner was Parker & Parsley Development L.P. ("PPDLP"), a wholly-owned subsidiary of Parker & Parsley Petroleum Company ("Parker & Parsley"). On August 7, 1997, Parker & Parsley and Mesa Inc. received shareholder approval to merge and create Pioneer Natural Resources Company ("Pioneer"). On August 8, 1997, PPDLP was merged with and into Pioneer USA, a wholly-owned subsidiary of Pioneer, resulting in Pioneer USA becoming the managing general partner of the Partnership as PPDLP's successor by merger.
The Partnership engages in oil and gas development and production in Texas and is not involved in any industry segment other than oil and gas.
Note 2. Summary of significant accounting policies
A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
Oil and gas properties - The Partnership utilizes the successful efforts method of accounting for its oil and gas properties and equipment. Under this method, all costs associated with productive wells and nonproductive development wells are capitalized while nonproductive exploration costs are expensed. Capitalized costs relating to proved properties are depleted using the unit-of- production method on a property-by-property basis based on proved oil (dominant mineral) reserves as determined by the engineering staff of Pioneer USA, the Partnership's managing general partner, and reviewed by independent petroleum consultants. The carrying amounts of properties sold or otherwise disposed of and the related allowances for depletion are eliminated from the accounts and any gain or loss is included in operations.
Impairment of long-lived assets - In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Partnership reviews its long-lived assets to be held and used on an individual property basis, including oil and gas properties accounted for under the successful efforts method of accounting, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable. An impairment loss is indicated if the sum of the expected future cash flows is less than the carrying amount of the assets. In this circumstance, the Partnership recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Use of estimates in the preparation of financial statements - Preparation of the accompanying financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reporting amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Net income (loss) per limited partnership interest - The net income (loss) per limited partnership interest is calculated by using the number of outstanding limited partnership interests.
Income taxes - A Federal income tax provision has not been included in the financial statements as the income of the Partnership is included in the individual Federal income tax returns of the respective partners.
Statements of cash flows - For purposes of reporting cash flows, cash includes depository accounts held by banks.
General and administrative expenses - General and administrative expenses are allocated, in part, to the Partnership by the managing general partner or its affiliates. Allocated expenses are determined by the managing general partner based upon the level of activity of the Partnership relative to the non-partnership activities of the managing general partner. The method of allocation has been consistent over the past several years with certain modifications incorporated to reflect changes in Pioneer USA's overall business activities.
Reclassifications - Certain reclassifications may have been made to the 1998 and 1997 financial statements to conform to the 1999 financial statement presentation.
Environmental - The Partnership is subject to extensive federal, state and local environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Partnership to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed or capitalized depending on their future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefits are expensed. Liabilities for expenditures of a noncapital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments for the liability or component are fixed or reliably determinable. No such liabilities have been accrued as of December 31, 1999.
Revenue recognition - The Partnership uses the entitlements method of accounting for crude oil and natural gas revenues.
Note 3. Impairment of long-lived assets
In accordance with SFAS 121, the Partnership reviews its proved oil and gas properties for impairment whenever events and circumstances indicate a
decline in the recoverability of the carrying value of the Partnership's oil and gas properties. The Partnership has estimated the expected future cash flows of its oil and gas properties as of December 31, 1999, 1998 and 1997, based on proved reserves, and compared such estimated future cash flows to the respective carrying amount of the oil and gas properties to determine if the carrying amounts were likely to be recoverable. For those proved oil and gas properties for which the carrying amount exceeded the estimated future cash flows, an impairment was determined to exist; therefore, the Partnership adjusted the carrying amount of those oil and gas properties to their fair value as determined by discounting their expected future cash flows at a discount rate commensurate with the risks involved in the industry. As a result, the Partnership recognized non-cash impairment provisions of $22,031 and $270,187 related to its proved oil and gas properties during 1998 and 1997, respectively.
Note 4. Income Taxes
The financial statement basis of the Partnership's net assets and liabilities was $461,626 less than the tax basis at December 31, 1999.
The following is a reconciliation of net income (loss) per statements of operations with the net income per Federal income tax returns for the years ended December 31: 1999 1998 1997 --------- --------- --------- Net income (loss) per statements of operations $ 178,927 $(274,769) $(158,804) Depletion and depreciation provisions for tax reporting purposes less than amounts for financial reporting purposes 45,239 307,564 116,807 Impairment of oil and gas properties for financial reporting purposes - 22,031 270,187 Other, net (817) 1,515 (1,436) -------- -------- -------- Net income per Federal income tax returns $ 223,349 $ 56,341 $ 226,754 ======== ======== ========
Note 5. Oil and gas producing activities
The following is a summary of the costs incurred, whether capitalized or expensed, related to the Partnership's oil and gas producing activities for the years ended December 31: 1999 1998 1997 --------- --------- --------- Development costs $ 6,987 $ 12,611 $ 2,702 ======== ======== ========
Capitalized oil and gas properties consist of the following:
1999 1998 ----------- ----------- Proved properties: Property acquisition costs $ 488,509 $ 488,509 Completed wells and equipment 6,907,602 6,900,169 ---------- ---------- 7,396,111 7,388,678 Accumulated depletion (6,839,838) (6,788,159) ---------- ---------- Net capitalized costs $ 556,273 $ 600,519 ========== ==========
Note 6. Related party transactions
Pursuant to the limited partnership agreement, the Partnership had the following related party transactions with the managing general partner or its affiliates during the years ended December 31:
1999 1998 1997 --------- --------- --------- Payment of lease operating and supervision charges in accordance with standard industry operating agreements $ 148,638 $ 144,020 $ 138,188
Reimbursement of general and administrative expenses $ 9,794 $ 8,231 $ 14,081
The Partnership participates in oil and gas activities through an income tax partnership (the "Program") pursuant to the Program agreement. In addition, Pioneer USA and the Partnership are parties to the Program agreement.
The costs and revenues of the Program are allocated to Pioneer USA and the Partnership as follows:
Pioneer USA (1) Partnership --------------- ----------- Revenues: Proceeds from disposition of depreciable properties 9.09091% 90.90909% All other revenues 24.242425% 75.757575% Costs and expenses: Lease acquisition costs, drilling and completion costs 9.09091% 90.90909% Operating costs, direct costs and general and administrative expenses 24.242425% 75.757575%
(1) Excludes Pioneer USA's 1% general partner ownership which is allocated at the Partnership level and 187 limited partner interests owned by Pioneer USA.
Note 7. Oil and gas information (unaudited)
The following table presents information relating to the Partnership's estimated proved oil and gas reserves at December 31, 1999, 1998 and 1997 and changes in such quantities during the years then ended. Due to a change in the accounting policy of the managing general partner in 1997, the Partnership began
accounting for processed natural gas production in two components: processed natural gas liquids ("NGLs") and dry residue gas. NGLs are reflected in "Oil and NGLs" in the table below. All of the Partnership's reserves are proved developed and located within the United States. The Partnership's reserves are based on an evaluation prepared by the engineering staff of Pioneer USA and reviewed by Williamson Petroleum Consultants, Inc., an independent petroleum consulta nt, using criteria established by the Securities and Exchange Commission. Reserve value information is available to limited partners pursuant to the partnership agreement and, therefore, is not presented.
Oil and NGLs Gas (bbls) (mcf) ------------ ---------- Net proved reserves at January 1, 1997 297,922 1,130,095 Revisions 43,614 (649,459) Production (22,871) (57,213) ------------ ---------- Net proved reserves at December 31, 1997 318,665 423,423 Revisions (154,837) (135,041) Production (27,808) (43,021) ------------ ---------- Net proved reserves at December 31, 1998 136,020 245,361 Revisions 304,597 520,701 Production (31,246) (55,226) ------------ ---------- Net proved reserves at December 31, 1999 409,371 710,836 ============ ==========
As of December 31, 1999, the estimated present value of future net revenues of proved reserves, calculated using December 31, 1999 prices of $25.36 per barrel of oil, $16.37 per barrel of NGLs and $1.72 per mcf of gas, discounted at 10% was approximately $2,219,000 and undiscounted was $4,098,000.
Numerous uncertainties exist in estimating quantities of proved reserves and future net revenues therefrom. The estimates of proved reserves and related future net revenues set forth in this report are based on various assumptions, which may ultimately prove to be inaccurate. Therefore, such estimates should not be construed as estimates of the current market value of the Partnership's proved reserves. The Partnership emphasizes that reserve estimates are inherently imprecise and, accordingly, the estimates are expected to change as future information becomes available.
Note 8. Major customers
The following table reflects the major customers of the Partnership's oil and gas sales (a major customer is defined as a customer whose sales exceed 10% of total sales) during the years ended December 31:
1999 1998 1997 -------- -------- --------
Plains All American Inc. 49% - - NGTS LLC 10% 3% - Genesis Crude Oil, L.P. - 60% 64% Western Gas Resources, Inc. 7% 19% 17%
At December 31, 1999, the amounts receivable from Plains All American Inc. and NGTS LLC were $26,577 and $3,096, respectively, which are included in the caption "Accounts receivable - oil and gas sales" in the accompanying Balance Sheet.
Pioneer USA is of the opinion that the loss of any one purchaser would not have an adverse effect on the ability of the Partnership to sell its oil and gas production or natural gas products.
Note 9. Organization and operations
The Partnership was organized October 26, 1985 as a limited partnership under the Texas Uniform Limited Partnership Act for the purpose of acquiring and developing oil and gas properties. The following is a brief summary of the more significant provisions of the limited partnership agreement:
Managing general partner - The managing general partner of the Partnership is Pioneer USA. Pioneer USA has the power and authority to manage, control and administer all Partnership affairs. As managing general partner and operator of the Partnership's properties, all production expenses are incurred by Pioneer USA and billed to the Partnership and a portion of revenue is initially received by Pioneer USA prior to being paid to the Partnership. Under the limited partnership agreement, the managing general partner pays 1% of the Partnership's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, it is allocated 1% of the Partnership's revenues.
Limited partner liability - The maximum amount of liability of any limited partner is the total contributions of such partner plus his share of any undistributed profits.
Initial capital contributions - The limited partners entered into subscription agreements for aggregate capital contributions of $9,613,000. Pioneer USA is required to contribute amounts equal to 1% of initial Partnership capital less commission and offering expenses allocated to the limited partners and to contribute amounts necessary to pay costs and expenses allocated to it under the partnership agreement to the extent its share of revenues does not cover such costs.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Partnership
The Partnership does not have any officers or directors. Under the limited partnership agreement, the Partnership's managing general partner, Pioneer USA, is granted the exclusive right and full authority to manage, control and administer the Partnership's business.
Set forth below are the names, ages and positions of the directors and executive officers of Pioneer USA. Directors of Pioneer USA are elected to serve until the next annual meeting of stockholders or until their successors are elected and qualified. During June 1999, Mr. Lon C. Kile resigned as an officer of Pioneer USA. During January 2000, Mr. M. Garrett Smith also resigned his position as Director and Chief Financial Officer of Pioneer USA. Mr. Timothy L. Dove assumed the responsibility of Chief Financial Officer of Pioneer USA after Mr. Smith's resignation. Age at December 31, Name 1999 Position - -------------------- ------------ ---------------------------------- Scott D. Sheffield 47 President
Timothy L. Dove 43 Executive Vice President, Chief Financial Officer and Director
Dennis E. Fagerstone 50 Executive Vice President and Director
Mark L. Withrow 52 Executive Vice President, General Counsel and Director
Rich Dealy 33 Vice President and Chief Accounting Officer
Scott D. Sheffield. Mr. Sheffield is a graduate of The University of Texas with a B.S. in Petroleum Engineering. Since August 1997, he has served as President, Chief Executive Officer and a director of Pioneer and President of Pioneer USA. Mr. Sheffield assumed the position of Chairman of the Board of Pioneer in August 1999. He served as a director of Pioneer USA from August 1997 until his resignation from the board in June 1999. Mr. Sheffield was the President and a director of Parker & Parsley from May 1990 until August 1997 and was the Chairman of the Board and Chief Executive Officer of Parker & Parsley from October 1990 until August 1997. He was the sole director of Parker & Parsley from May 1990 until October 1990. Mr. Sheffield joined Parker & Parsley Development Company ("PPDC"), a predecessor of Parker & Parsley, as a petroleum engineer in 1979. He served as Vice President - Engineering of PPDC from September 1981 until April 1985 when he was elected President and a director. In March 1989, Mr. Sheffield was elected Chairman of the Board and Chief Executive Officer of PPDC. Before joining PPDC's predecessor, Mr. Sheffield was employed as a production and reservoir engineer for Amoco Production Company.
Timothy L. Dove. Mr. Dove earned a B.S. in Mechanical Engineering from Massachusetts Institute of Technology in 1979 and received his M.B.A. in 1981 from the University of Chicago. He became Executive Vice President - Business Development of Pioneer and Pioneer USA in August 1997 and was also appointed a director of Pioneer USA in August 1997. Mr. Dove assumed the position of Chief Financial Officer of Pioneer and Pioneer USA effective February 1, 2000. Mr. Dove joined Parker & Parsley in May 1994 as Vice President - International and was promoted to Senior Vice President - Business Development in October 1996, in which position he served until August 1997. Prior to joining Parker & Parsley, Mr. Dove was employed with Diamond Shamrock Corp., and its successor, Maxus Energy Corp, in various capacities in international exploration and production, marketing, refining and marketing and planning and development.
Dennis E. Fagerstone. Mr. Fagerstone, a graduate of the Colorado School of Mines with a B.S. in Petroleum Engineering, became an Executive Vice President of Pioneer and Pioneer USA in August 1997. He was also appointed a director of Pioneer USA in August 1997. He served as Executive Vice President and Chief Operating Officer of Mesa from March 1, 1997 until August 1997. From October 1996 to February 1997, Mr. Fagerstone served as Senior Vice President and Chief Operating Officer of Mesa and from May 1991 to October 1996, he served as Vice President - Exploration and Production of Mesa. From June 1988 to May 1991, Mr. Fagerstone served as Vice President - Operations of Mesa.
Mark L. Withrow. Mr. Withrow, a graduate of Abilene Christian University with a B. S. in Accounting and Texas Tech University with a Juris Doctorate degree, became Executive Vice President, General Counsel and Secretary of Pioneer and Pioneer USA in August 1997. He was also appointed a director of Pioneer USA in August 1997. Mr. Withrow was Vice President - General Counsel of Parker & Parsley from January 1991, when he joined Parker & Parsley, to January 1995, when he was appointed Senior Vice President - General Counsel. He was Parker & Parsley's Secretary from August 1992 until August 1997. Prior to joining Parker & Parsley, Mr. Withrow was the managing partner of the law firm of Turpin, Smith, Dyer, Saxe & MacDonald, Midland, Texas.
Rich Dealy. Mr. Dealy is a graduate of Eastern New Mexico University with a B.B.A. in Accounting and Finance and is a Certified Public Accountant. He became Vice President and Chief Accounting Officer of Pioneer and Pioneer USA in February 1998. Mr. Dealy served as Controller of Pioneer USA from August 1997 to February 1998. He served as Controller of Parker & Parsley from August 1995 to August 1997. Mr. Dealy joined Parker & Parsley as an Accounting Manager in July, 1992. He was previously employed with KPMG Peat Marwick as an Audit Senior, in charge of Parker & Parsley's audit.
ITEM 11.
ITEM 11. Executive Compensation
The Partnership does not have any directors or officers. Management of the Partnership is vested in Pioneer USA, the managing general partner. The Partnership participates in oil and gas activities through an income tax partnership (the "Program") pursuant to the Program agreement. Under the Program agreement, Pioneer USA pays approximately 10% of the Program's acquisition, drilling and completion costs and approximately 25% of its operating and general and administrative expenses. In return, Pioneer USA is allocated approximately 25% of the Program's revenues. See Notes 6 and 9 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data" for
information regarding fees and reimbursements paid to the managing general partner or its affiliates by the Partnership.
The Partnership does not directly pay any salaries of the executive officers of Pioneer USA, but does pay a portion of Pioneer USA's general and administrative expenses of which these salaries are a part. See Note 6 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data".
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
(a) Beneficial owners of more than five percent
The Partnership is not aware of any person who beneficially owns 5% or more of the outstanding limited partnership interests of the Partnership. Pioneer USA owned 187 limited partner interests at January 1, 2000.
(b) Security ownership of management
The Partnership does not have any officers or directors. The managing general partner of the Partnership, Pioneer USA, has the exclusive right and full authority to manage, control and administer the Partnership's business. Under the limited partnership agreement, limited partners holding a majority of the outstanding limited partnership interests have the right to take certain actions, including the removal of the managing general partner or any other general partner. The Partnership is not aware of any current arrangement or activity which may lead to such removal. The Partnership is not aware of any officer or director of Pioneer USA who beneficially owns limited partnership interests in the Partnership.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
Transactions with the managing general partner or its affiliates
Pursuant to the limited partnership agreement, the Partnership had the following related party transactions with the managing general partner or its affiliates during the years ended December 31:
1999 1998 1997 --------- --------- --------- Payment of lease operating and supervision charges in accordance with standard industry operating agreements $ 148,638 $ 144,020 $ 138,188
Reimbursement of general and administrative expenses $ 9,794 $ 8,231 $ 14,081
Under the limited partnership agreement, the managing general partner pays 1% of the Partnership's acquisition, drilling and completion costs and 1% of its operating and general and administrative expenses. In return, it is allocated 1% of the Partnership's revenues. Also, see Notes 6 and 9 of Notes to Financial Statements included in "Item 8. Financial Statements and Supplementary Data", regarding the Partnership's participation with the managing general partner in oil and gas activities of the Partnership.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements
The following are filed as part of this annual report:
Independent Auditors' Report - Ernst & Young LLP
Independent Auditors' Report - KPMG LLP
Balance sheets as of December 31, 1999 and 1998
Statements of operations for the years ended December 31, 1999, 1998 and 1997
Statements of partners' capital for the years ended December 31, 1999, 1998 and 1997
Statements of cash flows for the years ended December 31, 1999, 1998 and 1997
Notes to financial statements
2. Financial statement schedules
All financial statement schedules have been omitted since the required information is in the financial statements or notes thereto, or is not applicable nor required.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference as part of this annual report.
S I G N A T U R E S
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.
PARKER & PARSLEY 85-A, LTD.
Dated: March 22, 2000 By: Pioneer Natural Resources USA, Inc. Managing General Partner
By: /s/ Scott D. Sheffield ----------------------------- Scott D. Sheffield, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ Scott D. Sheffield President of Pioneer USA March 22, 2000 - ------------------------ Scott D. Sheffield
/s/ Timothy L. Dove Executive Vice President, Chief March 22, 2000 - ------------------------ Financial Officer and Director of Timothy L. Dove Pioneer USA
/s/ Dennis E. Fagerstone Executive Vice President and March 22, 2000 - ------------------------ Director of Pioneer USA Dennis E. Fagerstone
/s/ Mark L. Withrow Executive Vice President, General March 22, 2000 - ------------------------ Counsel and Director of Pioneer USA Mark L. Withrow
/s/ Rich Dealy Vice President and Chief Accounting March 22, 2000 - ------------------------ Officer of Pioneer USA Rich Dealy
PARKER & PARSLEY 85-A, LTD.
INDEX TO EXHIBITS
The following documents are incorporated by reference in response to Item 14(c):
Exhibit No. Description Page - ----------- ----------- ----
3(a) Amended and Restated Certificate of - Limited Partnership of Parker & Parsley 85-A, Ltd. incorporated by reference to Exhibit A of the Partnership's Registration Statement on Form S-1 (Registration No. 2-99079) (hereinafter called the Partnership's Registration Statement)
4(b) Agreement of Limited Partnership of - Parker & Parsley 85-A, Ltd. incorporated
by reference to an Exhibit of the Partnership's Registration Statement
4(c) Form of Subscription Agreement and Power - of Attorney incorporated by reference to an Exhibit of the Partnership's Registration Statement
4(d) Specimen Certificate of Limited Partnership - Interest incorporated by reference to an Exhibit of the Partnership's Registration Statement
27.1* Financial Data Schedule -
99.1 Mutual Release and Indemnity Agreement - dated May 25, 1993 incorporated by reference to Exhibit 99.1 of the Partnership's Annual Report on Form 10-K for the year ended December 31, 1993
* filed herewith