EOG Resources 2004 Annual Report to Shareholders

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Management’s Discussion and Analysis

Management’s Responsibility for Financial Reporting

Report of Independent Registered Public Accountanting Firm

Consolidated Statements of Income & Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Supplemental Information to Consolidated Financial Statements

Selected Financial Data

Quarterly Stock Data and Related Shareholder Matters

Reconciliation Schedules

Certifications & Glossary of Terms

Officers and Directors

Shareholder Information

6. EMPLOYEE BENEFIT PLANS
Pension Plans
    EOG has a non-contributory defined contribution pension plan and a matched defined contribution savings plan in place for most of its employees in the United States. EOG’s contributions to these pension plans are based on various percentages of compensation, and in some instances, are based upon the amount of the employees’ contributions. For 2004, 2003 and 2002, EOG's total contributions to these pension plans amounted to $10.6 million, $8.2 million and $8.0 million, respectively.
    In addition, EOG’s Canadian subsidiary maintains a non-contributory defined contribution pension plan and a matched defined contribution savings plan and EOG’s Trinidadian subsidiary maintains a contributory defined benefit pension plan and a matched savings plan. These pension plans are available to most employees of the Canadian and Trinidadian subsidiaries and EOG’s combined contributions to these pension plans were approximately $860,000, $630,000 and $460,000 for 2004, 2003 and 2002, respectively.
    EOG’s United Kingdom subsidiary introduced a pension plan as of January 2005. The United Kingdom subsidiary will include a defined non-contributory pension plan and a matched defined contribution savings plan. The pension plan will be available to all employees of the United Kingdom subsidiary.

Postretirement Plan
EOG has postretirement medical and dental benefits in place for eligible employees and their eligible dependents. Benefits are provided under the provisions of a contributory defined dollar benefit plan. EOG accrues these postretirement benefit costs over the service lives of the employees expected to be eligible to receive such benefits. The following table summarizes EOG’s postretirement benefit plan as of December 31 of the years indicated as follows (in thousands):

Weighted-average discount rate assumptions used in the determination of benefit obligations at December 31, 2004, 2003 and 2002 were 5.95%, 6.15% and 6.40%, respectively. Weighted-average discount rate assumptions used in the determination of net periodic benefit cost for years ended December 31, 2004, 2003 and 2002 were 6.15%, 6.40% and 7.00%, respectively.

Estimated Future Employer-Paid Benefits. The following benefits, which reflect expected future service, as appropriate, are expected to be paid by EOG in the next 10 years (in thousands):

Postretirement health care trend rates have zero effect on the amounts reported for the postretirement health care plan for both 2004 and 2003. A one-percentage point increase or decrease in EOG’s healthcare cost trend rates would have zero impact on the postretirement benefit obligation, as any increase or decrease in healthcare costs would be borne by the employee.

Stock Plans
    EOG has various stock plans (Plans) under which employees and non-employee members of the Board of Directors of EOG and its subsidiaries have been or may be granted certain equity compensation. Since the inception of the Plans, there have been 31,445,000 shares authorized for grant. At December 31, 2004, 3,708,827 shares remain available for grant.
    Stock Options. Under the Plans, participants have been or may be granted rights to purchase shares of common stock of EOG at a price not less than the market price of the stock at the date of grant. Stock options granted under the Plans vest either immediately at the date of grant or up to four years from the date of grant based on the nature of the grants and as defined in individual grant agreements. Terms for stock options granted under the Plans have not exceeded a maximum term of 10 years.
    Beginning in August 2004, EOG’s stock options contain a feature that limits the potential gain that can be realized by requiring vested options to be exercised if the market price reaches 200% of the grant price for five consecutive trading days.
    The following table sets forth the option transactions for the years ended December 31 (options in thousands):

EOG currently expects to adopt SFAS No. 123(R) effective July 1, 2005 (see Note 1) and as a result, EOG expects the expensing of the stock options would reduce second half 2005 net earnings by a pre-tax amount of approximately $9.5 million.
The following table summarizes certain information for the options outstanding at December 31, 2004 (options in thousands):

During 2004, 2003 and 2002, EOG repurchased approximately 160,000, 626,000 and 1,703,000 of its common shares, respectively. The difference between the cost of the treasury shares and the exercise price of the options, net of federal income tax benefit of $29.4 million, $11.9 million and $5.2 million, for the years 2004, 2003 and 2002, respectively, is reflected as an adjustment to additional paid in capital to the extent EOG has accumulated additional paid in capital relating to treasury stock and to retained earnings thereafter.
Restricted Stock and Units. Under the Plans, employees may be granted restricted stock and/or units without cost to them. The shares and units granted vest to the employee at various times ranging from one to five years from the date of grant based on the nature of the grants and as defined in individual grant agreements. Upon vesting, restricted shares are released to the employee. Upon vesting, restricted units are converted into one share of common stock and released to the employee. The following summarizes shares of restricted stock and units granted for the three years ended December 31 (shares and units in thousands):

    The fair value of the restricted shares and units at date of grant has been recorded in shareholders’ equity as unearned compensation and is being amortized over the vesting period as compensation expense. Related compensation expense for 2004, 2003 and 2002 was $9.6 million, $6.0 million and $4.9 million, respectively.
    Employee Stock Purchase Plan. EOG has an Employee Stock Purchase Plan (ESPP) in place that allows eligible employees to semi-annually purchase, through payroll deductions, shares of EOG common stock at 85 percent of the fair market value at specified dates. Contributions to the ESPP are limited to 10 percent of the employees’ pay (subject to certain ESPP limits) during each of the two six-month offering periods. As of December 31, 2004, approximately 256,600 common shares remained available for issuance under the plan. EOG currently expects to adopt SFAS No. 123(R) effective July 1, 2005 (see Note 1) and as a result, EOG expects the expense associated with the ESPP would reduce second half 2005 net earnings by a pre-tax amount of approximately $0.5 million.
    The following table summarizes ESPP activities for the years ended December 31 (in thousands, except number of participants):

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